Taxpayers who claim exemption from capital gains tax by furnishing a residency certificate of Mauritius had better watch out. Now, income tax (I-T) authorities can ask for evidence from the Mauritius government to examine the authenticity of a taxpayer who claims exemption on capital gains tax provided under the Indo-Mauritius Double Taxation Avoidance Agreement (DTAA).

This is a departure from the practice of furnishing a tax residency certificate from Mauritius for claiming exemption from capital gains tax.

According to an Income-Tax Appellate Tribunal (ITAT) Delhi order on March 26, more documents will be needed from the Mauritius government to support the claim of the taxpayer, as in the case of SMR Investments.

The ITAT order was released last week. If the order is not rejected by the high court, it will have bearing on similar cases. Nearly five years ago, SMR Investments, a company registered in Mauritius, had sold shares of HCL Technologies and BFL Software and generated over Rs 9 crore as capital gains.

The taxpayer claimed exemption from capital gains tax under Article 13 of India-Mauritius tax treaty. The taxpayer further claimed that it did not have a permanent establishment in India, a prerequisite for being liable to pay tax in India, and, therefore, is eligible for exemption from capital gains tax under the India-Mauritius tax treaty. But the assessing officer (AO) disagreed.

The AO claimed that it is the actual location of the effective management and not the location in which the company ought to be managed decides the residency of the company.

The company was set up in 1995-96, during which period its founder Suresh Rajpal was working in India. Mr Rajpal was a resident of India when the taxpayer purchased the shares in 1996-97. Therefore, for all practical purposes, the taxpayer is not a resident of Mauritius, the AO said.