Dual system encryption:New Techniques for Dual System Encryption and Fully Secure HIBE with Short Ciphertexts
It uses an artifact of pairings over groups of composite order.

Specifically, if the order of $G$ is $p_1$ and the order of $H$ is $p_3$ and $p_1, p_3$ are relatively prime, then $e(G, H) = 1$.

This can be easily seen by considering the order of $e(G, H)$; we know that $e(G, H)^{p_1} = e(G^{p_1}, H) = e(1, H) = 1$, hence the order of $e(G, H)$ must be a divisor of $p_1$.  Similar logic shows us that the order must also be a divisor of $p_3$.  Because $p_1, p_3$ are relatively prime, the only common divisor they have is 1; hence the order of $e(G, H)$ must be 1.

Section 2.2 of the paper gives a different derivation of the same result.

Once we have that, we can see that $e(K_1, C_1) = e(g^r R_3, (u^{id}h)^s) = e(g_r, (u^{id}h)^s) \cdot e(R_3, (u^{id}h)^s)$.  Since the order of $R_3$ (which $p_3$) and the order of $(u^{id}h)^s$ (which is $p_1$) are relatively prime, the second half is a constant factor 1, and so this reduces to $e(g_r, (u^{id}h)^s)$ (and thus $R_3$ disappears).  Similar logic gets rid of $R'_3$ as well...