The Central Board of Direct Taxes (CBDT) issued a circular No 789 dated April 13, ‘00 (the circular) clarifying that a ‘tax residence certificate’ (TRC) issued by the tax authorities in Mauritius would be regarded as conclusive evidence regarding residential status and the treaty would apply.

This circular was challenged before the Delhi High Court on the ground that it was not valid and not in accordance with the provisions of the Income-Tax Act, 1961 (I-T Act). In May ‘02, the High Court quashed the circular, holding it to be beyond the powers of the CBDT. The government filed a special leave petition (SLP) before the Supreme Court (SC) against the High Court judgment. The SC delivered its judgment on October 7 ‘03 reversing the decision of the High Court.

The SC held that in relation to a resident of Mauritius, the circular will prevail even if it is inconsistent with the provisions of the I-T Act. The court also held that the circular did not take away or curtail the jurisdiction of the Assessing Officers (AO) to assess the income of the assessees before them. Rather, it merely formulated broad guidelines to be applied in the matter of assessment of assessees covered by the Tax Treaty.

It was argued before the SC that Foreign Institutional Investors (FIIs) are not “liable to taxation” in Mauritius; hence they are not ‘residents’ of Mauritius within the meaning of Article 4 of the Tax Treaty. The SC rejected this argument holding that merely because exemption has been granted in respect of taxability of a particular source of income, it cannot be said that the entity is not ‘liable to tax’ at all.

Referring to the Advance Ruling in the case of Cyril Pereira (239 ITR 650), the SC observed that it does not agree with the view that ‘liability to tax’ means ‘actual tax payment’ and unless tax is actually paid in the foreign country, the Treaty would not apply.

The SC also dealt with the issue of treaty shopping and held that if it was intended that a national of a third state should be precluded from the benefits of the Indo-Mauritius Treaty, then a suitable `limitation of benefit’ clause would have been incorporated therein.

This is a landmark judgment of the SC clearing various doubts and uncertainties concerning interpretation of the Indo-Mauritius Tax Treaty, especially issues like necessity to pay tax in a foreign country to avail of a purpose and consequences of a Tax Treaty.

It may be mentioned that the CBDT had issued another Circular No 1/2003 dated February 10, ‘03 in the context of the Indo-Mauritius Treaty clarifying that if a company is a resident of both the countries, it will be taxable in the country from where it is effectively managed and controlled. Therefore, where an entity of Mauritius has its place of effective management in Mauritius, the Tax Treaty should apply. This ruling, welcomed by the international community, provides clarity on issues of Tax Treaty interpretation and will set such controversies at rest.