Mauritius Tax Treaty Shopping Not Illegal: Supreme Court

Circular 789 Upheld: Mauritius Residence Certificate Suffices and Treaty Shopping Not Illegal, Says Supreme Court

Published: 11 October 2026 · NyayVidhan

The Supreme Court upheld CBDT Circular No. 789 of 13 April 2000, under which a Mauritian certificate of residence is sufficient evidence of residence and beneficial ownership under the Indo-Mauritius tax treaty, and set aside the Delhi High Court's judgment quashing it (para 140). A treaty notified under Section 90 overrides the Income-tax Act where inconsistent, ‘liable to taxation’ does not mean actual payment of tax, and treaty shopping is not illegal (paras 27, 75, 102, 113).

Key holdings

Provisions of a double taxation avoidance agreement notified under Section 90 operate even if inconsistent with the Income-tax Act, for assessees covered by it (paras 24, 27).

CBDT circulars under Section 119 bind the revenue; Circular 789 was within the CBDT's powers and did not take away an assessing officer's jurisdiction (paras 35, 46).

‘Liable to taxation’ is a legal situation, not the fiscal fact of paying tax; companies incorporated in Mauritius were residents there for the treaty (para 75).

Treaty shopping by third-country residents is not illegal without a limitation clause; whether it should continue is for the executive and Parliament (paras 95, 102, 106, 113).

An act valid in law cannot be treated as non-est merely because of an underlying motive; the Duke of Westminster principle continues to hold good in India (paras 138-139).

Brief Facts

The 1983 Indo-Mauritius Convention, notified under Section 90 of the Income-tax Act, makes gains from the sale of shares taxable only in the State of residence (paras 4, 59). In 2000 some income-tax officers issued show cause notices to Mauritius-based foreign institutional investors as ‘shell companies’ controlled from elsewhere, and funds were hastily withdrawn (para 7). The CBDT then issued Circular No. 789: a certificate of residence issued by the Mauritian authorities would be sufficient evidence of residence and beneficial ownership (para 8). On public interest writ petitions, the Delhi High Court quashed the circular as ultra vires Sections 90 and 119, holding treaty shopping illegal (paras 2, 9-10).

Court's Findings

Approving High Court decisions, the Court held that a double taxation agreement notified under Section 90 operates even if inconsistent with the Act, and an assessee covered by it may claim its benefits; the executive may grant exemptions through such treaties, whose wisdom is not the Court's concern (paras 24-25, 27). Long-settled High Court views were left undisturbed as parties had arranged their affairs on them (paras 28-29). Section 119 circulars bind the revenue, and Circular 789 did not curtail an assessing officer's jurisdiction in any assessment (paras 35, 45-46). The convention was within Section 90 and could not be struck down for unintended consequences (paras 49, 51). Liability to taxation "is a legal situation; payment of tax is a fiscal fact", so Mauritius-incorporated companies exempt from capital gains tax there remained residents (paras 66, 75, 85). Absent a limitation clause, third-country residents could claim treaty benefits; whether treaty shopping continues is for the executive (paras 95, 102, 113). Holding that McDowell did not displace the Duke of Westminster principle, the Court ruled that a valid act cannot be treated as non-est because of its motive (paras 120-123, 138-139).

Legal Principle

A double taxation treaty notified under Section 90 of the Income-tax Act prevails over the Act where inconsistent. ‘Liable to taxation’ in a treaty's residence clause means legal liability, not actual payment of tax, and without a limitation clause the use of a treaty by third-country residents is not illegal (paras 27, 75, 95, 102).

Precedents Relied Upon

Commissioner of Income Tax v. Visakhapatnam Port Trust
Followed Discussed at ¶ 18, 24
Andhra Pradesh High Court: Sections 4 and 5 of the Income-tax Act are subject to the Act and so to Section 90 and the terms of a double taxation agreement; the reasoning was approved.
Commissioner of Income Tax v. Davy Ashmore India Ltd
Followed Discussed at ¶ 19, 20, 24
Calcutta High Court: where an agreement and the taxation statute are inconsistent, the agreement alone prevails, as CBDT Circular No. 333 correctly stated; the reasoning was approved.
Commissioner of Income Tax v. R.M. Muthaiah
Followed Discussed at ¶ 21, 22, 24
Karnataka High Court: recognising the power of the other State to tax under an agreement takes away the corresponding power of India and bars Sections 4 and 5 to that extent; the reasoning was approved.

View all precedents (17)

Arabian Express Line Ltd. of United Kingdom and Others v. Union of India
Followed Discussed at ¶ 23, 24
Gujarat High Court: where a convention exists Section 90 has an overriding effect, and a residence certificate of the UK tax authority was held sufficient; the reasoning was approved.
Mishri Lal v. Dhirendra Nath (Dead) by Lrs. and Others
Applied Discussed at ¶ 28, 29
A decision followed for a long time and acted upon in the conduct of affairs will generally be followed (stare decisis); applied to leave the High Courts' consistent view on Section 90 undisturbed.
K.P. Varghese v. Income-Tax Officer, Ernakulam
Relied Upon Discussed at ¶ 32, 35
CBDT circulars under Section 119 are legally binding on the revenue, even if they depart from the correct interpretation of the provision.
UCO Bank v. Commissioner of Incom-Tax
Relied Upon Discussed at ¶ 37
The Board may issue circulars under Section 119 relaxing the rigour of the law, binding on the taxing authorities, though not adverse to the assessee.
McDowell & Company v C.T.O
Explained Discussed at ¶ 10, 117, 118, 120, 138
Relied on by the High Court and the respondents; held that the majority did not join Chinnappa Reddy J.'s departure from the Westminster principle and that it did not dissent from or overrule Bank of Chettinad.
IRC v. Duke of Westminster (1936) AC 1
Followed Discussed at ¶ 116, 118, 120, 123, 131, 135, 138
Every man is entitled if he can to order his affairs so that the tax attaching is less than it otherwise would be; held to be alive in England and to hold good in India.
Bank of Chettinad Ltd. v. CIT
Followed Discussed at ¶ 130, 138
The Privy Council approved Lord Russell's dicta in Westminster; this was the law when the Constitution came into force and continues to hold good.
Mathuram Agrawal v. State of Madhya Pradesh
Relied Upon Discussed at ¶ 129, 130, 138
A Constitution Bench: the intention of a taxing statute is gathered from its plain language, not the economic results sought; it reiterated Bank of Chettinad.
Craven v. White
Relied Upon Discussed at ¶ 120, 121
The House of Lords explained Ramsay, Burmah Oil and Furniss and emphasised the continued validity of the Westminster principle.
MacNiven (Inspector of Taxes) v. Westmoreland Investments Ltd
Relied Upon Discussed at ¶ 122
The House of Lords (2001) did not treat Ramsay as a rejection of the Duke of Westminster principle.
W.T. Ramsay Ltd. v. IRC
Distinguished Discussed at ¶ 117, 120, 122, 132
Relied on by the respondents as a departure from Westminster; held, on the House of Lords' later explanation, to be of no avail to them.
Furniss v. Dawson
Distinguished Discussed at ¶ 117, 120, 132
Relied on by the respondents; held to be of no avail to them.
Inland Revenue Commissioners v. Burman Oil Company Ltd
Distinguished Discussed at ¶ 117, 120, 132
Relied on by the respondents (also printed as "Burma Oil" and "Burmah Oil"); held to be of no avail to them.
CIT v. A. Raman and Company
Relied Upon Discussed at ¶ 118, 123
Shah J.'s observations based on Westminster and Fisher's Executors were held very much relevant even today.

Circular 789 Upheld: Mauritius Residence Certificate Suffices and Treaty Shopping Not Illegal, Says Supreme Court

Judgment Intelligence

Key holdings

Brief Facts

Court's Findings

Legal Principle

Precedents Relied Upon

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