Tiger Global Eight Holdings (TGH), a Mauritius company, sold a portion of its shares of an Indian company that were acquired prior to April 1, 2017 and claimed capital gains tax exemption under the double taxation avoidance agreement between India and Mauritius (Mauritius DTAA) on the basis of a valid tax residency certificate (TRC). 

The Indian tax authorities (ITA) questioned the genuineness of the transaction entered into by TGH and concluded that TGH had no commercial substance in Mauritius. Therefore, TGH was not eligible for the capital gains tax exemption under the Mauritius DTAA.  Further the ITA held that a TRC is not “sufficient” evidence of residency and not binding on the ITA, unless such a conclusion is independently reached.  Aggrieved, TGH filed an appeal before the Delhi Income-tax Appellate Tribunal (Tribunal). 

The Tribunal followed the CBDT circulars no. 682/1994 and 789/2000 and relied on the Supreme Court judgements in the Azadi Bachao and Vodafone cases to rule that a TRC is statutory evidence of an entity’s residential status, and even if it is not considered as conclusive evidence, the onus shifts on the ITA to establish by evidence that except for holding the TRC, the entity is a conduit, created and run for treaty shopping. 

The ITA failed to rebut the statutory evidence of the TRC with cogent evidence, and merely on the basis of suspicion and adverse inferences, TGH was held to be engaged in treaty shopping.  On this basis, the Tribunal ruled in favour of TGH.

Eligibility to claim tax treaty benefits based on a TRC has frequently been the subject matter of litigation in India, particularly in the context of capital gains tax, where the right to tax a capital gain is allocated under the terms of an applicable tax treaty to the state in which the taxpayer is resident.  Our recommendation is to build commercial substance in the Holdco jurisdiction, in addition to having a valid TRC.