Some recent reports have pointed out that the Authority for Authority for Advance Rulings has once again sanctified the “Mauritius route”. While the law since Azadi Bachao Andolan’s case has upheld the sanctity of a tax residency certificate (TRC), the Revenue has not given up its efforts to find the “hidden reality” or “true facts”. The Revenue has also met with some success in its attempts, before the High Court (Aditya Birla Nuvo) and also the AAR (for example, see Re Groupe Industrial Marcel Dassault). Two recent rulings of the AAR – while on facts ruling in favour of assessee – do not really forestall the Revenue’s attempt to go behind a TRC.
In the case of Dynamic India Fund (AAR 1016/2010 dated 18th July, 2012), it was contended that sale of shares in an Indian company by a company having a Mauritius TRC was not taxable in India. The Revenue’s objections were that the use of the Mauritius Company was for evading tax. Further, only 2 directors were from Mauritius, and three were from India. These objections were rejected not by a straight forward reference to the TRC, but because “there is no adequate (factual material to support this contention (that control vests in a non-Mauritius jurisdiction).”
Another ruling is in the case of Moody’s Analytic (AAR 1186 to 1189/2011 dated 31st July 2012). In this case, the Revenue contended that the beneficial owner of shareholding was in Jersey, and not Mauritius. Accordingly, Mauritius treaty benefits were not permissible. Additionally, the Revenue argued that management and control of seller companies did not lay in Mauritius. It was argued that the decision of the Supreme Court in Vodafone has modified the ratio on the decision in Azadi Bachao Andolan. The AAR answered this contention not by rejecting it outright as a matter of principle, but only on the facts. The AAR held, “… on the conclusiveness of a tax residency certificate, it cannot be said that it has been shown that the effective management of the companies is not from where their Board of Directors function. Normally, the management of a company vests in its Board of Directors as authorized by the General Body. The role of Rishi Khosla highlighted by the Revenue is in respect of the sale transactions undertaken and in pushing them through. It does not appear to be a role in connection with the running of the businesses of the companies concerned. It is not shown that the management of the companies in Mauritius in general, is not with a Board of Directors of those companies sitting in Mauritius Khosla is a resident. Even if one were to take the Business Advisory Agreement relied on by the applicants with a pinch of salt, it cannot be said that the role played by Rishi Khosla in these transactions establish that the management and control of the Mauritian companies is with Rishi Khosla. It is therefore not possible to accept the contention of learned counsel for the Revenue that by applying the place of management test, the seller companies could be held to be non-Mauritian companies…”
The AAR then held, “There may be some substance in the argument of the learned counsel that this Authority has to consider only the negative, namely that the control of the companies is not in Mauritius and it is not necessary for this Authority to find positively that the control and management is with Rishi Khosla, before coming to a conclusion that the applicants are not entitled to claim the benefit of the India-Mauritius DTAC. But on the available fact, the presumption that the control and management of the companies rest with the Board of Directors cannot be said to have been rebutted by sufficient or cogent material I overrule the arguments in this behalf….” In other words, a TRC creates at best a rebuttable presumption, and is not conclusive. On the aspect that beneficial ownership of shares was in Jersey and not in Mauritius, the AAR rejected the argument clearly: “As things now stand, in such cases the theory of beneficial ownership has not prevailed over the apparent legal ownership. Company law also recognized the recorded owner of the shares and not’ the person on whose behalf it may have been held (even if, possible). I am, therefore, satisfied that this attempt of counsel for the Revenue must also fail.” In this background, the issues were answered in favour of the assessee.
Thus, while the importance of a TRC must be acknowledged, it is still not clear whether a TRC is absolutely conclusive. The rulings of the AAR would suggest that it is not. To what extent Vodafone has affected the correctness of the decision in Azadi on this point is a matter which will require further judicial examination, particularly in light of the arguments of the Revenue before the AAR in these two cases.