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2020 (2) TMI 1183 - AAR - Income TaxIncome accrued in India - Capital gains derived by a 'resident' of a contracting state from the alienation of property other - Indo-Mauritius DTAA in regard to gains arising from the transaction of sale of shares - HELD THAT - In the instant case the applicant was incorporated few days before the JV was formed and has no independent sources of funds or sources of income nor has any fiscal independence. All the funds are with the holding companies. The applicant has no tangible assets, business activities except for owning the shares of the JV. Subjecting the facts to various tests i.e., Fiscal nullity Test, Commercial/business substance Test, Look at Principle Test, Investment Participation Test, Time duration Test, Business operations Period in India Test, Generation of taxable revenues in India Test, Scheme and Dominant Purpose Test etc., the applicant fails the tests being a tax avoidance device, the dominant purpose of its interposing is to avoid taxes in India. As emphasized before us by the Ld. AR that introduction of BSDM helped in doing business and providing supportive business environment. BSDM is an entity created two weeks before the filing of bid, it has no financial background, past experience or other unique skills to facilitate the instant business venture. The applicant could not provide any rationale or commercial basis for interposing of entity at fag end of the bidding process. The learned AR also could not provide any evidence as to how BSDM helped in doing business or providing support for the project. The points in its favor of applicant seem to be that it is tax resident of Mauritius holding a valid T RC and legal owner of shares which it disposed subsequently. We are unable to agree with the logic that the entity was brought in for ease of doing business or for operational reasons and to provide supportive business environment. The reason proffered by Ld. AR lacks substance and merit. First objection of the Revenue was admission of new entity at later stage was not ordained by EOI - AR has indicated that in the EOI filed by the consortium, it was stated that the final share holdings by three SA airport operators will be finalised once the requirement Of RFP are known and that GVK and the SA airport operators submitted the names of the respective entities in the legally binding technical and financial bid which was accepted by AAI. We are in agreement with the Revenue that no-where in the EOI it was mentioned that a new member would be brought in at a later stage. The uncertainty was only limited to the shares of three SA airport operators i.e., ACSA, Old Mutual and Bidvest and not to the composition of the consortium per se. Revenue was the interposing of the applicant was without any commercial reason - AR has argued that that it is a general practice on the part of MNCs to highlight the financial and technical competency of the group as a whole and while investing separate SPVs are formed for commercial reason, ease of doing business and supported business environment in determining the jurisdiction of SPV. Having considered the facts in totality and discussed in preceding paras, we do not see any commercial or economic rationale or ease of doing business in incorporating the applicant in Mauritius and interposing it in the JV. Other plea of the Ld. AR is that AAI has approved the bid being fully aware that BSDM was prime member of the JV entity. The plea is not germane to issue at hand as AAI is not concerned with the interpretation of treaty and interposing of any entity for tax avoidance and therefore acceptance of bid by AAI is not an endorsement or justification for granting treaty benefit to the applicant. Alternate plea of the Ld. AR is that even if it is assumed without admitting that the accusation of shares in MIAL was done by applicant, solely with a view to take advantage of the beneficial provisions of Indo-Mauritius DTAA, the benefit cannot be denied as there is no limitation of benefit provision (LOB) in the DTAA. The plea is not tenable for the reason that the facts point towards a tax avoidance device and the Hon'ble Apex court in the case of Vodafone 2012 (1) TMI 52 - SUPREME COURT has clearly mentioned that though LOB and Look through provisions cannot be read into a tax treaty but if it is established that the Mauritian company is interposed as a device, it is open to the tax Department to discard the device and take into consideration the real transaction between the parties and the transaction would be subjected to tax. We are of the considered opinion that the applicant is not entitled to benefit under Article 13(4) of Indo-Mauritius DTAA in regard to gains arising from the transaction of sale of shares.
Issues Involved:
1. Tax liability on capital gains from the sale of shares under the India-Mauritius Double Taxation Avoidance Agreement (DTAA). 2. Substance over form and tax avoidance. 3. Applicability of Section 93 of the Income Tax Act, 1961. 4. Role and substance of the Mauritian entity in the joint venture. 5. Validity of the interposing Mauritian entity for tax benefits. Issue-wise Detailed Analysis: 1. Tax Liability on Capital Gains from Sale of Shares under India-Mauritius DTAA: The applicant, a Mauritian company, sought a ruling on whether the capital gains from the sale of shares in an Indian company (MIAL) to an Indian buyer (GAHPL) would be taxable in India under Article 13(4) of the India-Mauritius DTAA. The applicant argued that as a tax resident of Mauritius, it should benefit from the DTAA, which stipulates that capital gains derived by a resident of Mauritius from the alienation of shares in an Indian company are taxable only in Mauritius. This position was supported by CBDT Circulars No. 682 and 789 and upheld by the Supreme Court in Union of India v. Azadi Bachao Andolan and other AAR rulings. 2. Substance Over Form and Tax Avoidance: The Revenue contended that the Mauritian entity (BSDM) was interposed solely to avoid paying capital gains tax in India. They argued that the inclusion of BSDM lacked commercial substance and was a clear design to avoid tax. The Revenue emphasized that the real beneficial owners were South African entities, and the Mauritian entity was a mere conduit. They cited the Supreme Court's decision in Vodafone International Holdings B.V. v. Union of India, which allows piercing the corporate veil to determine the substance of the transaction and disregard any artificial arrangement aimed at tax avoidance. 3. Applicability of Section 93 of the Income Tax Act, 1961: The Revenue argued that Section 93 of the Income Tax Act, which deals with the transfer of assets to non-residents to avoid tax, was applicable. They contended that the capital gains should be deemed income of the ultimate holding company (Bidvest) and taxable in India as per the India-South Africa DTAA, which does not provide the same capital gains exemption as the India-Mauritius DTAA. 4. Role and Substance of the Mauritian Entity in the Joint Venture: The applicant was incorporated just two weeks before the submission of the bid for the Mumbai airport project. The Revenue argued that BSDM had no tangible assets, employees, or office space and did not contribute to the management or decision-making process of the joint venture. The Revenue maintained that BSDM's sole purpose was to route funds from South African entities to India to exploit the tax benefits under the India-Mauritius DTAA. 5. Validity of the Interposing Mauritian Entity for Tax Benefits: The applicant contended that it was a general commercial practice for multinational groups to form special purpose vehicles (SPVs) for investments and that BSDM was incorporated in Mauritius for commercial reasons. They argued that even if BSDM was set up to take advantage of the DTAA, the benefits could not be denied in the absence of a Limitation of Benefits (LOB) clause in the treaty. However, the Revenue countered that the interposing of BSDM was a tax avoidance scheme and that the benefits of the DTAA should be denied. Decision: The Authority for Advance Rulings (AAR) concluded that the applicant was not entitled to the benefits under Article 13(4) of the India-Mauritius DTAA. The AAR found that BSDM was a shell company with no commercial substance, interposed solely to avoid capital gains tax in India. The AAR emphasized the doctrine of substance over form and upheld the Revenue's contention that the transaction was a tax avoidance scheme. The ruling was based on the principles laid down by the Supreme Court in Vodafone International Holdings B.V. v. Union of India, which allows the Revenue to disregard artificial arrangements aimed at tax avoidance and tax the real beneficial owner.
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