India-Mauritius Tax Treaty Benefits Denied – Controversy Continues

India-Mauritius Tax Treaty Benefits Denied – Controversy Continues

By Nishit Parikh (Partner, Sudit K Parekh & Co LLP, India)

India-Mauritius Tax Treaty has had its fair share of controversy in India. This saga continues even today, as recently Authority for Advance Ruling (‘AAR’) in India rejected a Foreign Private Equity player’s claim for Tax Treaty benefit considering the entire arrangement to be for tax avoidance.

Factual Background

Tiger Global, USA (‘TG USA’) had made investments in three Mauritius entities (namely Tiger Global International II Holdings, Tiger Global International III Holdings & Tiger Global International IV Holdings) through a multi-layered structure. These Mauritius entities in turn had investments in Flipkart Private Limited, Singapore which had made investment into various Indian entities (including Flipkart India). Investments in Flipkart Singapore were made in tranches over a period from 2011 to 2015. In August 2018, Mauritius entities sold its holdings in Flipkart Singapore to a Luxembourg entity.

The Mauritius entities had approached the AAR to determine changeability to tax on capital gains arising on sale of shares of Flipkart Singapore to Luxembourg entity as per the provisions of India-Mauritius Tax Treaty. On the other hand, revenue authorities objected the admissibility of the application itself, inter-alia, on the ground that the transaction was prima facie, designed for avoidance of tax.


In terms of Indian domestic tax laws, as a first step, AAR has to determine the admissibility of the application before giving its ruling. The tax laws empower the AAR to reject an application if the subject transaction has been designed, prima facie for avoidance of tax. Tax avoidance has been defined to mean the transactions which are fairly legal and within the four corners of the law but have been designed primarily for non-payment of tax.

The AAR held that transaction was a device to avoid payment of tax in India and hence denied the Tax Treaty benefits. Key reasoning given by the AAR for denial of Tax Treaty benefits, are as follows:

  • As per financial statements and relevant documents submitted, the primary purpose for making investments in Mauritius entities was to act as an investment vehicle;
  • While mere acting as an investment vehicle is not sufficient to treat the transaction as sham, one also needs to identify the ‘control and management’ of the investment company. ‘Control and management’ does not mean the routine affairs of the company but the overall control, ‘head and brains’ of the company;
  • Mauritius Entities did not have a commercial substance of their own. Their control and management was with the beneficial owner of TG USA;
  • Key decisions involving the ‘head & brain’ of the business were taken by the beneficial owner of TG USA/ other non-resident directors of the applicants;
  • Resident directors of Mauritius entities did not have substantial role to play in the decision-making process of the company;
  • Also, the beneficial owner of TG USA held the signing authority for the cheques and not the resident directors of Mauritius;
  • There is no substance in making a US resident the ‘authorized signatory’ in place of Mauritius resident directors. The signing authority has been given to the beneficial owner in view of his ‘significant influence’ over the group, so that he could control Mauritius entities’ funds;
  • The fact that the non-resident directors had substantial role in the decision making process, coupled with exercise of significant influence of the non-resident ‘beneficial owner’ to the extent that he had the signing authority in the bank account, clearly indicated that investment in Mauritius entities was for the purposes of ‘avoidance of tax’.

Apart from rejecting the application, the authority also held that Mauritius Entities were not entitled to the capital gains exemption under the tax treaty as the shares of a Singaporean company have been transferred and not the shares of an Indian company. It was also highlighted that objective of
India-Mauritius tax treaty was to allow exemption of capital gains on transfer of shares of Indian company only and the treaty partners never intended any such exemption on transfer of shares of a company not resident in India/ Mauritius.

Way Forward

Investment in India through investment company in countries like Mauritius, Singapore, Cyprus, etc. is a common thing. Further, most of these companies are managed/administered by local administration companies in these jurisdictions and professional directors are also appointed from these companies.

This decision is of significant importance as it reignites the entire controversy on tax planning vs tax avoidance. Also, this decision would have a far-reaching impact on many corporate houses which have holding company/investment companies in a tax efficient jurisdiction. 

Earlier there have been rulings especially the ruling of Apex Court wherein it has been held that tax treaties should be interpreted keeping in mind that there are several political and economic considerations while negotiating the tax treaties. Tax treaties are essentially a bargain between two treaty countries in respect of income falling within their jurisdiction. In order to attract foreign investments, countries do permit ‘treaty shopping’ etc., but for how long it should be permitted to be continued should be best left to the executive/ government. To this effect it would be pertinent to note that that India-Mauritius Tax Treaty has been recently amended and exemption of sale of shares has been removed.

Also, recently Andhra Pradesh High Court in the case of Sanofi has held that in cases of indirect transfer (i.e. transfer of shares of a foreign company deriving value from India) should be eligible to claim tax treaty benefits.

However, in the current scenario, with introduction of specific anti-avoidance provisions like GAAR (from 2017) and changes in Tax Treaties (from 2020) on account of implementation of Multilateral Instrument (MLI) would lead to lot of cases being examined for tax avoidance or treaty abuse.

GAAR provision empowers the tax authorities to deny tax treaty benefits or re-characterize transaction if the main object of the arrangement is to claim tax benefits. On the other hand, Principal Purpose Test provided under MLI provisions is even more stricter as it provides for denying tax treaty benefits even in case where one of the main propose of the arrangement is to claim tax treaty benefits.

It becomes imperative for corporate houses to re-look at their existing structure and identify whether they meet the commercial purpose test or not. It seems the debate on Tax Planning v Tax Avoidance would intensify in future.

India-Mauritius Tax Treaty Benefits Denied

The author is Partner at Sudit K Parekh & Co LLP, India.