Reviewing scope Beneficial Ownership as discretion of Tax Authorities with Respect to International Tax Treaties

Reviewing scope Beneficial Ownership as discretion of Tax Authorities with Respect to International Tax Treaties

This article aims to examine in light of the judicial precedent laid by Income Tax Appellate Tribunal (ITAT) in the case of Blackstone FP Capital Partners Mauritius v DCIT (1725/Mum/2021), the scope of Beneficial Ownership with respect to the discretion of tax authorities applying the concept for assessment with respect to International Tax Treaties.

Blackstone FP Capital Partners, was a SEBI registered Foreign Venture Capital Investor and had Tax Residence Certificate of Mauritius Tax Authorities. Blackstone acquired shares of an Indian Company with help of a loan from a company incorporated in Netherlands. After a few months, it sold the shares and earned Short Term Capital Gains of Rs. 905 Million, which Blackstone contended could not be taxed in India in accordance with Article 13 (4) of India Maurities Tax Treaty.

The Indian Tax Authorities on the other hand found that the taxpayer company was a wholly owned subsidiary of Cayman Islands and had no independent existence, furthermore its operating expenses were negligible and that the finances were obtained from a group company of Netherlands, therefore it was merely a conduit company and that it never held any beneficial ownership in the shares it sold. By virtue of this logic, the tax authorities lifted the corporate veil and held that India Mauritius Tax Treaty would not be applicable in toto.

Remarkably, the issue arises whether the concept of beneficial ownership can be looked at by the tax authorities and can it be read into Article 13 (4) of the India Mauritius Tax Treaty, since the tax treaty does not expressly stipulate the beneficial ownership requirement.

ITAT observed that Income Tax authorities had erroneously read the concept of Beneficial Ownership into Article 13 of the Treaty. It compared Article 10, which relates to dividends and Article 11 which relates to Interest, whereby these articles specifically and expressly provide for beneficial ownership, whereas Article 13 of the Treaty does not mention of the same.

Therefore, ITAT vacated the assessment order and remitted the matter back to the Indian Tax Authorities; interestingly it can be seen that since the matter itself was purely a question of law, ITAT itself had the jurisdiction to definitively decide on the issue than to remit it to tax authorities.

Comparative International Analysis

ITAT reffered to the judgement of Queen v Alta Energy Luxembourg SARL, 2021 SCC 49. In this case, where Alta US LLC a shareholding entity of Alta Energy Partners Canada, transferred its shares of Canadian company to Luxembourg company, owned by it. Further the Luxembourg vehicle was used to sell the shares for a capital gain of $380 Million.

Supreme Court of Canada held that the principles of certainty, predictability and fairness require a robust analysis of the intentions of the two sovereign states who have carefully negotiated the treaty instrument and that Canadian courts may not use the general anti-avoidance rule (GAAR) in section 245 of the Income Tax Act (Canada) (ITA) to rewrite tax statutes or tax treaties to prevent alleged treaty shopping where the treaty itself clearly does not do so.

On the contrary, it can be noted that Supreme Administrative Courts in Bulgaria, Czech Republic, France and Switzerland have impliedly read into the treaty  the concept of beneficial ownership even when the same was not expressly mentioned for. Which provides for backing of the contentions of Indian Tax Authorities.

As rightly noted by ITAT, there is need for exactitude in treaties with reference to discretionary aspects like that of Beneficial Ownership.

This article has been authored by Varun Matlani, student of law at Gujarat National Law University and CA (Intermediate) at Institute of Chartered Accountants of India, and can be contacted at varun20bcl018@gnlu.ac.in