Article 13(4) of India-Mauritius DTAA – Capital gains exemption under pre-amended India-Mauritius DTAA is not available to shareholder Mauritius SPV upon transfer of shares of Indian company, as Mauritius SPV was set up as a tax-avoidance device, interposed solely for obtaining treaty benefit

4.       [2020]
114 taxmann.com 434 (AAR-Mum.)

Bid Services Division (Mauritius) Ltd., In re.

AAR No. 1270 of 2011

A.Y.: 2012-13

Date of order: 10^th February, 2020

Article 13(4) of India-Mauritius DTAA – Capital gains
exemption under pre-amended India-Mauritius DTAA is not available to
shareholder Mauritius SPV upon transfer of shares of Indian company, as
Mauritius SPV was set up as a tax-avoidance device, interposed solely for
obtaining treaty benefit

FACTS

The Airports Authority of India (AAI)
undertook an international bidding process for the purpose of inviting bids to
acquire 74% stake in an Indian joint venture company (JV Co.) proposed to be
formed for the purpose of undertaking development, operation and maintenance of
airports at Mumbai and Delhi.

A South African entity (SA Co.),
together with other independent entities, formed a consortium and was
successful in acquiring the contract with AAI. The other two entities which
participated with SA Co. were incorporated in India and SA.

During the entire bidding process, it
was understood that SA Co. would be a direct investor in the shares of JV Co.
However, ten days prior to submission of final bids, SA Co., through its
wholly-owned subsidiary in South Africa, incorporated an entity in Mauritius
(Mau Co. / Applicant) and invested the funds in JV Co. through Mau Co. The
other two entities in the consortium also invested vide their group entities,
without change in jurisdiction of the entities, i.e., vide entities located in
India (I Co) and SA (SA Co. 2).

After a period of approximately five
years of holding, during the A.Y. 2012-13, Mau Co. transferred JV Co.’s shares
to the extent of 13.5% to another existing shareholder of JV Co. while
retaining the balance 13.5% of shares. Mau Co. earned capital gains upon such transfer.

A diagrammatic depiction of JV Co.’s
shareholding is as follows:

Mau Co. claimed that the amount of
capital gains arising from such transfer was not taxable in India by virtue of
exemption granted under Article 13(4) of the India-Mauritius DTAA (treaty).

The issue before the AAR was whether
Mau Co. was eligible to claim the capital gains exemption provided under the
treaty.

HELD

The AAR held that Mau Co. was not
entitled to treaty benefit as it was a device employed to carry out tax avoidance,
without any commercial substance.

®  Mau
Co. was set up close to the project being finalised and was not in existence
from the very start of the bidding process. The other joint venture parties
(including from SA and India) also did investments through their group
concerns, but there was no change in jurisdiction of the principal entities and
the investor entities, being SA Co. 2 and I Co., were from the same
jurisdiction, i.e., SA and India, respectively, unlike SA Co. which interposed
Mau Co. and there was a change in jurisdiction from SA to Mauritius;

®  Mau
Co. did not have any fiscal independence, i.e., no independent source of funds,
and it relied on its holding entity for the same. Further, Mau Co. had no
independent collaterals to secure the funds from third parties;

®  Mau
Co. did not have any independent source of income;

®  Mau
Co. did not have any tangible assets, employees, office space, etc.;

®  While SA Co. as a member of the consortium was to
provide strategic input, advice on various aspects such as structured finance,
ancillary services, corporate governance and cargo and logistics development
services, Mau Co., as its substitution, did not even employ any management
experts or financial advisers to carry out the same tasks;

®  Mau
Co. was not involved in the decision-making process w.r.t the development
process of the project or for resolving the implementation issues that were
encountered;

®  Mau
Co. was set up only to hold the investments in the JV Co.;

®  Mau
Co. merely endorsed the decisions taken by the SA Co.;

®  Mau Co. did not provide any value addition in the
JV Co.

The AAR also held that even if
investments were proposed to be carried out by the SA Co. vide setting up of an
individual SPV, commercially, it could have been set up in South Africa or
India, rather than a third jurisdiction, Mauritius, which was neither a
financial hub nor a provider of low-cost capital.

The AAR applied the doctrine of
‘substance over form’ and followed the observations of the Apex Court in the
case of Vodafone International Holdings BV (2012) 341 ITR 1 which
state that treaty benefits should be denied, if a non-resident achieves
indirect transfer through abuse of legal form and without reasonable business
purpose, which results in tax avoidance. In such a case, the tax authority can
re-characterise the equity transfer as per its economic substance and impose
tax directly on the non-resident rather than the interposed entity.