Idea tax verdict a blow for Mauritian shell users

The Bombay High Court’s ruling in the tax case involving Aditya Birla Group, Tata Industries and New Cingular Wireless may spell a huge blow for companies using shell entities in Mauritius to claim capital gains tax exemption under the Indo-Mauritius double tax avoidance agreement (DTAA).

The tax case pertains to the $150 million deal between AT&T and Aditya Birla Nuvo in 2005 under which AT&T sold about 16% stake in Idea Cellular India to Aditya Birla Nuvo through its holding company AT&T Mauritius. New Cingular Wireless was the holding company of AT&T Mauritius. Later on, Tata Industries acquired AT&T’s remaining 17% stake in Idea Cellular India from AT&T Mauritius.

“Though the equity shares were issued in the name of AT&T Mauritius under the JVA (joint venture agreement) as a permitted transferee of AT&T USA, all rights in respect of the said equity shares of the JVC (JV company), like voting rights, rights of management, right of sale or alienation etc absolutely vested in AT&T USA,” Justice J P Devadhar said in the 97-page order.

In a second blow to these companies, the judge said the landmark ruling of the Supreme Court in the case of Azaadi Bachao Andolan (2003) would not apply to the Birla-AT&T transaction. The apex court had in Azaadi Bachao case permitted ‘treaty shopping’ via Mauritius, as long as the investor had a valid tax residency certificate issued by Mauritius revenue authorities.

But in the Birla case, Justice Devadhar has concluded that even though AT&T Mauritius had a Mauritius tax residency certificate, it would still not enjoy the tax treaty benefits. “In our opinion, the CBDT circulars explaining the DTAA between India and Mauritius as also the decision of the apex court in the case of Azadi Bachao Andolan (supra) have no relevance to the facts of the present case for the following reasons: (a) The CBDT circulars relied upon by Indian Rayon were issued in the context of extending the benefits of the DTAA between India and Mauritius to the investments made in India by the entities incorporated in Mauritius. The said circulars would not apply where the investments are made in India by entities other than the entities incorporated in Mauritius. In the present case, the investments in India are made by AT&T USA under the JVA dated December 5, 1995 (as modified by the shareholders agreement) and not by a company incorporated in Mauritius,” the judge said.

Additional solicitor Mohan Parasaran, who argued the case for the income-tax department, welcomed the ruling, saying, “One cannot take the refuge of SC ruling in Azaadi Bachao when the transaction has been effected through a ‘colourable device’ to avoid tax. This ruling will go a long way in stopping the abuse of Mauritius treaty, which is the need of the hour.”

Tax experts, however, fear the ruling will create a lot of uncertainty for foreign investors.

“The saga of Mauritius continues. On the one hand, we have the revenue authority unable to make up their mind on whether they want to continue to permit use of Mauritius on account of the fact that it is beneficial for investments into India. On the other hand, we have PILs (public interest litigations) and we now have judiciary expressing different facets of views on the interpretation of treaty. Very clearly, the SC in Azaadi Bachao Andolan has expressly blessed treaty shopping and has stated that it is for the legislature to decide on whether or not the treaty should continue to be applicable. We do hope that some clarity emerges because the current state of flux is certainly not conducive to foreign investments in the country,” said Dinesh Kanabar, deputy CEO, KPMG India.

PwC India tax head Ketan Dalal also expressed apprehensions. “There are two non-technical dimensions of this ruling... one from the Indian paying party (Birla) and one from the perspective of the foreign recipient. When seen along with the otherwise volatile Indian environment, the larger issue to consider is that international investors get very alarmed by the uncertainty of Indian tax laws and the fact that issues which seem to be closed resurface with alarming regularity, and the consequential impact on cross-border transaction,” said Dalal.