(2003) 263 ITR 706 (SC)
Agreements with foreign countries for double taxation relief (DTAA)
The certificate is to be accepted as evidence of residence for treaty purposes. Treaty shopping is not by itself unlawful, and a treaty benefit cannot be denied merely because the structure was chosen for its tax advantages.
Is a tax residency certificate issued by a treaty partner conclusive of residence and beneficial ownership, and is treaty shopping impermissible?
The Central Board of Direct Taxes had issued a circular directing that a certificate of residence issued by the Mauritius authorities would constitute sufficient evidence of residence and beneficial ownership for the purpose of applying the India–Mauritius treaty. Assessing Officers had begun to look behind such certificates, examining whether the Mauritius entities had real substance or were conduits for investors resident elsewhere, and denying treaty benefits on capital gains. The circular was challenged by public interest litigants as being beyond the Board's powers and as facilitating avoidance.
The Delhi High Court struck down the circular. The Union appealed to the Supreme Court, which reversed and upheld the circular.
For the assessee
The Board is empowered to issue circulars for the proper administration of the Act, and such circulars bind the Revenue. The treaty allocates taxing rights between the two states as a matter of negotiated bargain, and residents of the treaty partner holding valid certificates are entitled to its benefits. The motive for choosing a jurisdiction does not defeat an entitlement conferred by the treaty.
For the Revenue
Entities with no real presence in Mauritius were being interposed purely to obtain treaty benefits on Indian capital gains, which amounts to abuse. The circular prevented Assessing Officers from examining the true position and effectively surrendered the revenue base.
The Court upheld the circular. It held that the Board has statutory authority to issue directions for the proper administration of the Act, that such circulars are binding on the Revenue, and that the direction to accept residence certificates was within that authority. On the wider question, it held that a double taxation treaty represents a negotiated allocation of taxing rights between sovereign states, and that developing countries may consciously accept a degree of treaty shopping as the price of attracting foreign investment and technology. The Court declined to import a general anti-abuse doctrine into the treaty in the absence of a provision to that effect, observing that it is for the contracting states to negotiate limitation of benefits provisions if they wish to restrict access. It held that the motive of a taxpayer in selecting a jurisdiction through which to invest does not by itself disentitle it from a benefit the treaty confers, and that so long as the entity is a resident of the treaty partner as certified, the benefit follows.
Still the starting point for treaty entitlement, now under Section 159 of the IT Act 2025. Its reach has narrowed considerably since — through renegotiation of the Mauritius and Singapore treaties, the insertion of limitation of benefits provisions, the multilateral instrument's principal purpose test, and the general anti-avoidance rules. Read it as establishing the baseline entitlement rather than as the complete answer in any current dispute.