India’s Tax Tribunal recently held that the concept of beneficial ownership cannot be read into article 13 (capital gains) of the India Mauritius double tax agreement if no such provision has been provided in the article’s language.
This article analyzes the ruling in light of established treaty interpretation principles and explains how, in the wake of the OECD base erosion and profit-shifting project, beneficial ownership may still be read into treaty provisions.
The taxpayer was a Mauritius company with a valid Mauritian tax residency certificate (TRC). The case addresses the taxation of capital gains generated by the taxpayer’s transfer of an Indian company’s shares. The taxpayer claimed protection from capital gains tax under article 13(4) of the DTA, which exempts a Mauritius entity’s gains derived through the transfer of Indian company shares.
However, the tax officer denied the exemption on the grounds that the taxpayer was not the beneficial owner of the capital gains derived from the sale. The tax officer claimed that the taxpayer was entirely controlled by its parent entity in the Cayman Islands and did not have any independent existence. Therefore, the Cayman parent entity was the beneficial owner, and the taxpayer cannot claim protection under article 13(4) of the treaty. The taxpayer appealed before the Tax Tribunal.
The Tax Tribunal held that in the absence of a specific provision, beneficial ownership cannot be read into article 13 of the treaty. It relied in part on the Canadian Supreme Court ruling in Alta Energy  in which the Court declined to read in the requirement of “sufficient substantive economic connection” when it was not included in article 13 of the Canada-Luxembourg DTA.
The Tax Tribunal observed that the omission of the concept of beneficial ownership in article 13 cannot be unintentional (a position in line with Alta Energy). It relied on observations of the subcommittee formed by the U.N. Committee of Experts on International Cooperation in Tax Matters on inclusion of beneficial ownership under article 13. The subcommittee referenced a consulting paper by Philip Baker:
The inclusion of a beneficial ownership limitation in the capital gains article of specific bilateral conventions is not part of the current tax treaty practice of any State. . . . There was ultimately only limited support for inserting beneficial ownership in article 13.
The Tax Tribunal concluded that reading beneficial ownership into article 13, because it is not specifically included, would amount to rewriting the treaty provision.
In its decision, the Tax Tribunal also reiterated key principles of treaty interpretation. It acknowledged that DTAs are the result of negotiations between the states and represent choices made by each state; they cannot therefore be modified unilaterally by tax authorities. The Tax Tribunal acknowledged the principle of pacta sunt servanda, incorporated under article 26 of the Vienna Convention on the Law of Treaties (VCLT), which provides that treaties should be followed in good faith to ensure tax predictability.
Although the Tax Tribunal decided in favor of the taxpayer, it took the unusual step of remanding the matter back to the tax officer to decide whether the requirement of beneficial ownership can be read into article 13 of the treaty. The Tax Tribunal held that if that were the case, the tax officer can determine the question of beneficial ownership of shares in the present case.
Neither the Indian Income Tax Act, 1961, nor the OECD’s Model Tax Convention on Income and on Capital (model tax convention) define beneficial ownership. Commentary on the model tax convention for articles 10 (dividends), 11 (interest), and 12 (royalties) provides that beneficial ownership has not been used in a narrow technical sense. According to the commentary, beneficial ownership should be interpreted in light of the object and purpose of the model tax convention, including the avoidance of double taxation and the prevention of tax evasion.
In a 2006 ruling, the English Court of Appeal observed that the term “beneficial ownership” should not be defined by the domestic laws of the contracting countries; it should be given an “international fiscal” meaning that does not vary from one jurisdiction to another.
For article 11 (interest) of the Cyprus-India DTA, the tribunal earlier discussed the scope of beneficial ownership. The tribunal held that because the taxpayer had exclusive control over the amount of interest and sole discretion on how to use it (no constraints from any contractual, legal, or economic arrangements with a third party), the taxpayer was the beneficial owner of such interest.
Historically, treaty benefits (especially the capital gains tax exemption under the IndiaMauritius DTA) have been the subject of disputes over lack of substance and beneficial ownership. In response, tax authorities issued a circular clarifying the question of beneficial ownership in light of the India-Mauritius DTA. The circular said a TRC issued by Mauritian tax authorities will constitute sufficient evidence of residence and beneficial ownership for the DTA. Later, the circular was challenged before the Delhi High Court on the grounds that the TRC requirement is not part of the ITA or the DTA and is therefore ultra vires.
However, the Supreme Court, in the appeal, upheld the validity of the circular on the grounds that the Indian government has the power to issue notifications and circulars for the implementation of treaties that supersede ITA provisions. In the current case, the Tax Tribunal — relying on the Supreme Court’s ruling in Azadi Bachao — could have held the taxpayer, with its valid TRC, as the beneficial owner under article 13 of the treaty. But the circular was not discussed by the Tax Tribunal in the ruling. Nevertheless, given that the taxpayer held a valid TRC, it should have been eligible to receive the benefits according to the circular, which is binding on the tax authority.
The ruling becomes significant on two important counts.
First, it reiterates the VCLT principle of treaty interpretation. The VCLT deals with internationally recognized principles of treaty interpretation — pacta sunt servanda — under which every in-force treaty is binding on the parties and must be performed in good faith. Further, the VCLT provides that a treaty should be interpreted in good faith in accordance with the ordinary meaning of the treaty terms in the context and light of its object and purpose. The Tax Tribunal, in Blackstone, based its reasoning on these principles.
The decision is also supported by the Canadian Supreme Court’s majority decision in Alta Energy, in which it was held that:
respect for negotiated bargains between contracting states is fundamental to ensure tax certainty and predictability and to uphold the principle of pacta sunt servanda, pursuant to which parties to a treaty must keep their sides of the bargain.
Second, it provides a basis for arguing that in cases in which the provision does not provide for beneficial ownership, the tax authorities should not read it in, thereby maintaining certainty over the availability of treaty benefits.
Has the Door Been Left Open?
The Tax Tribunal diluted its position when it remanded the matter back to the tax officer after very clearly laying down that beneficial ownership cannot be read in when no specific provision has been provided in the article’s language. The tribunal is the final fact-finding authority with jurisdiction to decide the question of facts, as well as law. However, by remanding the matter back to the tax officer, the Tax Tribunal in this case seems to have left the position open. The approach the tax officer takes while deciding on the applicability of beneficial ownership on article 13 will be interesting.
Going forward, an important issue will be the interplay between the domestic general anti avoidance rules and the principal purpose test (PPT) with other tax treaty provisions.
Domestic GAAR potentially gives tax authorities the option to read beyond the words of a treaty and deny tax benefits if the underlying commercial considerations of a transaction do not align with the rationale or objective of the treaty provisions. Further, some bilateral tax treaties have adopted the PPT  as a basis for denying benefit under a treaty, if one of the principal purposes of a transaction is to obtain tax benefits. Regardless of whether a provision of a bilateral tax treaty specifically includes the requirement for beneficial ownership, the tax authorities can potentially use a GAAR or the PPT to lift the corporate veil and deny treaty benefits. However, the outcome of such an attempt to deny treaty benefit would depend on the facts of each case; as a matter of policy, the provisions (especially GAAR) do not give unbridled power to tax authorities to question a genuine commercial transaction or potentially override a treaty.
Going forward, application of domestic GAAR or the PPT would be better served if the tax regulators were to pay heed to the observations made by the Canadian Supreme Court in Alta Energy, in which the majority observed that bargains struck between contracting states to a treaty must be respected while construing the provisions of the treaty to ensure predictability and certainty in tax laws. Further, the Court said that the contracting states could have foreseen potential tax planning opportunities and chosen to include a requirement in the treaty to check such planning. If the contracting states deliberately chose not to include this kind of requirement, then a treaty should be interpreted to reflect that intention.  The Court also noted that while invoking a GAAR, the text of the treaty provisions chosen by the contracting states, and the intention behind providing exemptions, should be considered over broad treaty objectives, such as “avoiding double taxation.” 
The intention of the parties to a bilateral tax treaty remains sacrosanct when interpreting beneficial treaty provisions. In the context of the India-Mauritius DTA, one important fact reflecting the intent of the parties (India and Mauritius) is that the treaty was amended in 2017.
However, the contracting states (India and Mauritius) chose not to include a beneficial ownership requirement under article 13. They were aware of the absence of a beneficial ownership test (which is otherwise included for dividend and interest income); if the intention had been otherwise, they could have included the test under article 13.
Going forward, more than domestic GAAR, the PPT potentially can be viewed by tax authorities as an easier tool for going beyond the text of a tax treaty provision and the intention behind providing a benefit, using the claim for the benefit itself as a broad basis to invoke the PPT. Even in that case (and as provided under article 7(1) of the MLI), the principles discussed in this article should be preserved, given that the PPT itself states that a benefit provided under a treaty cannot be denied by applying the PPT if the benefit is in accordance with the object and purpose of the treaty.
In other words, the MLI has made the applicability of the PPT as an anti abuse mechanism subject to the text of treaty provisions that represent the negotiated bargains between the contracting states. This, in our view (and that of the majority in Alta Energy), continues to be significant in the case of interpretation of a bilateral treaty.
 Blackstone FP Capital Partners Mauritius V Ltd. v. Deputy Commissioner of Income Tax, ITA nos. 981 and 1725/Mum/2021.14
 Canada v. Alta Energy Luxembourg SARL, 2021 SCC 49.
 The report by Baker, “Possible Extension of the Beneficial Owner Concept” (2008), was submitted to the Subcommittee on Improper Use of Treaties formed by the U.N. Committee of Experts on International Cooperation in Tax Matters.
 Indofood International Finance Ltd. v. JP Morgan Chase Bank NA,  EWCA Civ 158.
 Baker, “Beneficial Ownership: After Indofood,” 6(1) GITC Rev. 15, 23 (2007).
 M/s Golden Bella Holdings Ltd. v. Deputy Commissioner of Income Tax, TS-523-ITAT-2019 (Mum).
 The Central Board of Direct Taxes issued Circular No. 789, dated April 13, 2000, giving clarification regarding taxation of income from dividends and capital gains under the India-Mauritius DTA.
 India v. Azadi Bachao Andolan, (2004) 10 SCC 1.
 VCLT, section 26 (1969).
 Crown Forest Industries Ltd. v. Canada,  2 SCR 802.
 Alta Energy, 2021 SCC 49, at 1.
 The PPT has been introduced by article 7 of the multilateral instrument as one of the mechanisms to address treaty abuse.
 Alta Energy, 2021 SCC 49, at 1.
 Id. at 82.
 Id. at 49.