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No Indo-Mauritius DTAA benefit as Co. was set-up in Mauritius to route funds for South African based holding Cos

February 20, 2020[2020] 114 434 (AAR - Mumbai)

INCOME TAX/ILT : Applicant is a wholly-owned subsidiary of 'Bidvest' a company incorporated in South Africa

• Airport Authority of India ('AAI'), with the approval of Government of India, selected the applicant in Consortium with GAHPL and AGL and ACSA as joint venture partners for undertaking development, operation and maintenance Activities at 'Mumbai Airport' AAI also entered into an Operation, Management and Development Agreement ('OMDA') with Mumbai International Airport Private Limited ('MIAL') to undertake said Activities at Mumbai Airport.

• A Shareholder Agreement was entered into between the Applicant, AAI, GAHPL, AGL and MIAL, inter alia, for the purpose of governing their relationship in their mutual capacity as the shareholder of MIAL Under such agreement, the applicant agreed to subscribe and acquire 27 per cent of the total issued and paid-up share capital of MIAL.

• The applicant has subsequantly entered into a Share Purchase Agreement ("SPA') with GAHPL and GVK, the companies incorpotated under the India Companies Act, 1956 wherein the applicant has agreed to sell and transfer to GHPL and GAHPL 13.5 per cent of the total paid-up share capital of MIAL.

• The applicant seeks advance ruling on question as to whether gain arising from the transaction of sale of share, to be effected pursuant to the Share Purchase agreement held by the Applicant in 'MIAL' would be liable to tax in India having regard to the provision of Article 13(4) of India-Mauritius DTAA.

Held that real rale of applicant in the Joint Venture (JV) is to serve as a conduit for routing funds for South Africa based holding companies. The shares of joint venture were bought in the name of applicant thought the beneficial owners were the holding companies in South Africa.

• The doctrine of substance over form mandates taxing transaction pursuant to its economic effect rather than its from and that a valid transaction must have both substantial purpose apart from reduction of tax liability.

• 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 or has any fiscal independent. All the funds are with the holding companies. The applicant has no tangible assets, business activities except for owing the shares of the JV. Subjecting the facts to various tests i.e., Fiscal nullity Test, Commercial/business substance Test. "Look at" Principal Test, Investment participation Test, time duration Test, Business operations Period in India Test, Generation of taxable revenue in India Test, Scheme and Dominant Purpose Test etc., the applicant fails these tests being a tax avoidance device, the dominant purpose of its interposing is to avoid taxation in India.

• Once it is established that the applicant company is interposed as a device, it is open to the Department to discard the device and take into consideration the real transaction between the parties and the transaction would be subjected to tax.

• In view of aforesaid, it is ruled 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 in question.

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