The Protocol signed between India and Mauritius on March 7, 2024 to amend the DTAA to include the Principal Purpose Test (PPT) clause and also to amend the preamble which is yet to be ratified and notified. The Protocol has been a subject of heated discussions due to the huge ramifications that emerge and further vindicated by the jurisprudence on treaty abuse, treaty shopping and GAAR.

Mr. Mukund Madhusudhan (Director, Taxation, Harman India) discusses the implications of the said Protocol to India – Mauritius DTAA and the amended preamble especially its interplay with the Blackstone judgment of Delhi HC, which is subjudice before Supreme Court, from a dividend perspective. The amended DTAA strives to eliminate double taxation and prevent non-taxation. Delhi HC held that benefit allowed under India-Singapore DTAA with respect to capital gains based on TRC of Blackstone and held that Revenue cannot go behind TRC to deny treaty benefits as the TRC issued by the other tax jurisdiction is sufficient evidence for claiming eligibility for DTAA benefit, residency and legal ownership. The author discusses the implications under both the scenarios – (i) if SC upholds the Delhi HC judgment (ii) if SC reverses the Delhi HC judgment. The author emphasises the all pervasiveness of PPT as it does not spare any stream of income including dividend income. Author opines that a plain reading of Article 3 of the said Protocol indicates that the amendment could be retroactive.

The author concludes, “one could ponder if the Blackstone ruling would lend any support to the taxability of dividend income at the lower rates in the hands of Mauritius entities as per the treaty, if the taxman decides to invoke the PPT (amended preamble would support this as well). In other words, is the SC’s verdict as to whether TRC is conclusive for beneficial ownership, only theoretical? Not only from a Mauritius perspective, but in the case of all treaties where a PPT has been included?"

“Blackstone Decision and Mauritius PPT – Dividend Perspective!”

On the 7^th of March 2024, India and Mauritius signed off on the Protocol amending the DTAA (Protocol) between these two countries (“the treaty”) to include the much discussed “Principal Purpose Test” (PPT) clause. In addition to the inclusion of PPT, the preamble to the treaty was also amended to state that the purpose of the treaty is to eliminate double taxation and opportunities for non-taxation or reduced taxation achieved through treaty shopping arrangements. The pre-amended treaty’s objective from the preamble was to avoid double taxation, prevent fiscal evasion and encourage trade and investment. It is now clear that the treaty strives to only eliminate double taxation and even more prevent non-taxation.  

The inclusion of PPT has raised concerns amongst the companies that have invested into India through Mauritius. The fear is that the taxman would question the capital gains exemption under the treaty, despite the grandfathering, by invoking PPT.

While the debate rages on the “Capital Gains” side of things, this article muses about the interplay between the Blackstone case (currently before the Supreme Court (SC)) and the newly introduced PPT in the India-Mauritius treaty from a dividend perspective.

Dividend received by a Mauritius entity from an Indian entity would be taxable in India at the rates of 5%/15% (depending on the shareholding) as per Article 10 of the treaty. However, these rates can be applied only if the Mauritius entity is the beneficial owner. The subject of beneficial owner has always been debatable, even more when the jurisdiction involved has been Mauritius. This is despite Circular 789 dated 13^th April 2000 clarifying that TRC will constitute sufficient evidence for the purpose of residential status as well as beneficial ownership. The government in the past had kicked the hornet’s nest by calling out in the explanatory memorandum to the Finance Act, 2012 that TRC would only be a necessary but not sufficient condition for availing treaty benefits. A press release was later issued to clarify that revenue would not go after or question the validity of the TRC issued by the other jurisdiction. Hence there is always a doubt in the mind of the taxpayer on the revenue’s acceptance of TRC for claiming treaty benefits.

The issue of whether TRC is conclusive to claim the treaty benefits from a tax residency and beneficial owner standpoint is currently pending before the Supreme Court (SC) in the case of Blackstone. SC was supposed to hear during the last week of April 2024 but has now listed for September 2024.

The Delhi HC in the case of Blackstone had adjudicated that TRC is conclusive evidence for both residency as well as beneficial ownership by relying on the SC’s decision in the case of Azadi Bachao Andolan. It also called out that Section 90(5) wasn’t implemented in its original form i.e., TRC is only a necessary and not a sufficient condition. Now the SC’s decision on this controversy is eagerly awaited.

If the SC upholds the decision of the Delhi HC, would that be good enough for the taxpayers to claim the beneficial rate under Article 10 of India Mauritius treaty? The newly introduced PPT in the treaty could bring in any item of income (so it includes dividend too) if obtaining the tax benefit was one of the principal purposes of any arrangement or transaction. So based on the plain reading of the Protocol’s text, it seems as though the taxman can still proceed to question the beneficial ownership and demand taxes based on rates under Income Tax Act even if SC decides in the case of Blackstone in taxpayer’s favour.

The Article 3 of the Protocol complicates this even more. It states that the Protocol shall have effect from the date of entry into force without regard to the date on which taxes are levied or the years to which they relate. Again, a plain reading indicates this amendment could be retroactive.

 So, from the above, one could ponder if the Blackstone ruling would lend any support to the taxability of dividend income at the lower rates in the hands of Mauritius entities as per the treaty, if the taxman decides to invoke the PPT (amended preamble would support this as well). In other words, is the SC’s verdict as to whether TRC is conclusive for beneficial ownership, only theoretical? Not only from a Mauritius perspective, but in the case of all treaties where a PPT has been included?

The tax department in its official handle on “X” clarified that all concerns about the Protocol as premature and they would address the queries, wherever necessary. With this note ends this “premature” rant!