Having an effective management in India is not a sufficient ground to deny exemption from capital gains tax to a company that is based in Mauritius, ruled a Delhi bench of the Income-Tax Appellate Tribunal (ITAT).

The ITAT held that under the India-Mauritius double taxation avoidance agreement (DTAA), being a resident of Mauritius is the ground for claiming exemption. The ITAT relied on an earlier judgement of the Supreme Court that related to the UOI Vs Azadi Bachao Andolan case.

The recent ITAT ruling was in the case of Saraswati Holding Corporation, an entity registered in Mauritius. The company was registered for the purpose of investing in the capital market in India.

The ITAT held that the final decision on the taxability of a Mauritius-based company was made by the apex court in the case of UOI Vs Azadi Bachao Andolan.

Here, the Supreme Court held that under the India-Mauritius DTAA, capital gains tax is exempt in India. It also held that since this DTAA is legal, any attempt to take advantage of these provisions is fully in accordance with the law.

The ITAT also agreed with the argument of the Mauritius-based company that its stand on this issue was in tune with the CBDT circular No-789, which stipulated that a certificate of residence from the Mauritius government is a sufficient proof of residency.

The ITAT, therefore, held that the I-T department cannot deny the tax benefit that arises on account of being a resident of Mauritius.

The ITAT made this decision on an appeal filed by the I-T department against the commissioner (appeal) who had reversed the departments decision to deny the benefit of tax exemption from capital gains in India. Consequently, the company was asked to pay additional tax of Rs 18 lakh.

The department claimed that since effective management of the company was is in India during the relevant assessment year, the company could not be considered as Mauritius-based.

It also cited circulars from the CBDT with instructions to levy tax in India in cases where the management of the company is situated in two countries.

The ITAT pointed out that its ruling in this case is in line with the SCs decision in the Azadi Bachao Andolan case.