Substance Over Form Invoked Once Again! AAR Denies Indo- Mauritius DTAA Benefits

Posted On - 7 March, 2020 • By - Prithiviraj Senthil Nathan

Investments by the foreign investors in India through the Mauritius route has always been a contentious issue, from the Indian taxation perspective. The Hon’ble High Courts of various states and the Authority for Advance Ruling (“AAR”) have revisited the provisions of the India – Mauritius Double Taxation Avoidance Agreement (“DTAA”) (specifically Article 13 which deals with the taxation of the capital gains) time and again. The denial of tax benefits by the tax authorities has led to such revisions. According to them, the transactions are structured with the sole purpose of taking advantage of the provisions of the DTAA. The AAR, in its recent ruling dated February 10, 2020[1], denied capital tax benefits to a resident of Mauritius and held that the entire transaction was structured to avoid capital gains tax (“CGT”) in India.


Services Division (Mauritius) Ltd. (“Applicant”)
is a private limited company incorporated in Mauritius on August 23, 2005, and is
a wholly-owned subsidiary of the Bid Services Division (Proprietary)
Limited, a company incorporated in South Africa. The ultimate holding company
is the Bidvest Group Limited (“Bidvest”),
a company incorporated in South Africa listed on the Johannesburg Stock
Exchange. The Applicant possessed a Category 1 Global
Business License issued by the Financial Services Commission, Mauritius, and a
valid Tax Residency Certificate (“TRC”).
It was factually recorded in the ruling that the Applicant filed its
corporate tax returns in Mauritius. The board meetings of the Applicant were
also conducted in Mauritius as the Applicant did not have a permanent
establishment or any business connection in India.

bidding process was undertaken by the Airport Authority of India (“AAI”) wherein the Applicant was
selected in a consortium with GVK Airport Holdings Private Limited (“GAHPL”), and ACSA Global Limited for
developing, operating, and maintaining the Mumbai International Airport. In
pursuant to the same, Mumbai International Airport Private Limited (“MIAPL”) was incorporated as a private
limited company in India to undertake the assignment. The Applicant initially
owned 27% of the share capital of MIAPL amounting to 216,000,000 shares.
Subsequently, on March 01, 2011, the Applicant entered into a Share Purchase
Agreement wherein it transferred its 108,000,00 shares of MIAPL constituting
13.5%. The same was made in favour of GAHPL for a consideration of USD 231
million. The shareholding pattern of MIAPL, post this transfer is interspersed

SL NO Name of the Shareholder Pre Transfer Percentage Post Transfer Percentage
1 Airport Authority of India 26% 26%
2 GAHPL 37% 50.50%
3 Applicant 27% 13.50%
4 ACSA Global Limited 10% 10%


brief, the contentions of the Applicant were based on three grounds. Firstly,
Section 90(2) of the Income Tax Act, 1961 (“Act”)
provides the
assesse an option to be governed by the provisions of DTAA entered into by
India with any other country, if the provisions of such DTAA are more
beneficial than the provisions of the Act. It was contended that Section 90(2)
will override Section 9 of the Act which treats income arising from direct or
indirect transfer of assets situated in India is deemed to accrue or arise in
India. Secondly, according to Article 13 (4) of India – Mauritius DTAA read
with the circulars[2]
issued by the Central Board of Direct Taxes, capital gains arising to a
resident of Mauritius on the transfer of shares in an Indian company would be
liable to tax only in Mauritius. Thirdly, the rulings of the Supreme Court[3]
and AAR relied on the fact which held that capital gains arising out of the
sale of shares of an Indian company by companies incorporated in Mauritius
holding a valid TRC are not chargeable to tax in India in consonance with
Article 13(4) of the India-Mauritius DTAA.

On behalf of
the tax authorities, it was argued that Bidvest incorporated the Applicant in
Mauritius primarily to avail the benefits under the India- Mauritius DTAA and
to avoid paying legitimate tax to the Indian government. As it is a tax
avoidance scheme, the Mauritius entity needed to be overlooked and the
India-South Africa DTAA was brought in, thereby making the capital gains
taxable in India. In this regard, the rulings of the Supreme Court[4]
and various other judicial forums[5]
were relied upon, which had given legitimacy to ‘substance over form’ principle
or ‘piercing the Corporate veil’ test in the application of a judicial
anti-avoidance rule based on the fact that the transaction is  ‘sham or tax avoidant’.


After hearing
the arguments, the AAR denied capital tax benefits to the Applicant and held
that the entire transaction was structured to avoid CGT in India. It stressed
on the importance of an entity having to establish economic rationale and
substance for availing treaty benefits. It appears that the AAR invoked the
principle due to the following factual information:

  1. The
    applicant was incorporated in Mauritius, only two weeks before the submission
    of the technical and financial bid with the AAI. It is only at Stage 2 of the
    bidding process, Bidvest was substituted by the Applicant in the consortium.
  • The
    shares of MIAP, though, were in the name of the Applicant, the ultimate
    beneficial owner was Bidvest. The board of the Applicant kept on noting and
    endorsing decisions of Bidvest in the Board meetings without any contribution
    or discussion about the decision making process. In short, the Applicant served
    merely as a conduit for routing funds for Bidvest.
  • The
    Applicant has no financial background, experience or other unique skills to
    facilitate the operations to be undertaken by MIAPL. Hence the argument of
    replacing Bidvest with the Applicant in the consortium for ease of doing
    business or for operational reasons and to provide a supportive business
    environment lacks no merit.

interesting question which arose after the ruling of AAR are as follows:

TRC – No
longer Important?

a valid TRC, the AAR in the instant case refused to provide treaty benefits to
the Applicant. However, at this juncture, it is pertinent to note that the
Supreme Court decision in Union of India v. Azadi Bachao Andolan[6]
clarified that TRC submission shall be sufficient evidence to claim treaty
benefits under India- Mauritius DTAA. Further, in Vodafone International
Holdings B.v. v. Union of India &Anr,
the Supreme Court stated that TRC can be accepted as conclusive evidence for
accepting the status of residents as well as beneficial ownership for applying
the tax treaty. The Supreme Court’s decision 
was followed by AAR in its rulings in E *Trade Mauritius Ltd[8]
D.B.Zwirn Mauritius Trading No. 3[9],
Ardex Investments Mauritius Ltd[10]
and AB Mauritius II[11]
where TRC was considered and treaty benefits to the respective applicants were
allowed. However, the recent ruling of the AAR in AB Mauritius[12]
and observations made by the Bombay High Court in Indostar Capital v. CIT[13]
seem to indicate that TRC is losing its significance due to the importance
given to the ‘substance over the form’ principle.

Provisions – Ignored?

One has to note that in 2016, the
India-Mauritius DTAA was amended, giving India the right to tax capital gains
on the alienation of shares in an Indian company acquired on or after April 01,
2017. This is a grandfathering provision which allows gains arising from the
sale of shares acquired before 1st of April 2017 to be taxed as per the
earlier 13(4), thus entitling tax benefits. Further, any shares acquired on or
after 1 April 2017 and transferred before 31 March 2019, capital gains limited
to 50% of the Indian tax rate will be taxed, subject to conditions stated in
Limitation of Benefits (“LOB”) clause.
The LOB provides that

a) If the
structure is designed with the primary purpose to take benefit of a provision
granting reduced rate of tax; or

b) The
company claiming the aforesaid benefit is a ‘shell or a conduit company’, the
benefit provided during the transitional period cannot be availed.

appears that the AAR ruling has erroneously invoked substance over form
principle’ and applied the LOB conditions in the instant case and in AB
Mauritius case where shares were acquired on or before April 01, 2017.

Specific factors
to be considered

While the ruling does not stipulate the list of factors that would establish
that the Applicant is the true owner of the MIAPL shares, it throws light on
some pointers that should be appropriately addressed to claim the eligibility:

  • The date of incorporation of the
    Mauritius entity and date of investments are crucial.  Larger the period between the two events,
    better the chances for the Mauritius entity – at least this is the inference
    while analysing the reasoning in the ruling?
  • Source of the payment of
    consideration used in acquiring the shares of the Indian Company;
  • Independence of the Board of
    Directors of the Mauritius entity in the decision making process is key. Such
    decision-making process must be recorded in the minutes in detail;
  • Assets, employees and office space
    of Mauritius entity and dates associated with these events;
  • Business activities undertaken by
    Mauritius entity and all records associated with the same;
  • Whether the Mauritius entity has
    management experts or financial advisers on its payroll or hire;
  • Investments made by Mauritius
    entity in jurisdictions other than India.
  • All documents of the Applicant
    like financial statements, board meeting minutes and agreements executed must
    be maintained and if required by the AAR should be shared.

Note: The pointers have to be
considered in addition to the factors mentioned in other AAR rulings.


AAR rulings in Bidvest and AB Mauritius is a major concern for the foreign
investors, in terms of unsettling the set principles and going beyond the
judicial precedents. Although the ruling
(much like the other AAR rulings) is binding only upon the concerned parties,
the tax authorities are likely to increase the tax scrutiny for investments
based out of Mauritius, thus propelling more litigations in this subject area.
Hence, the Government of India needs to come up with a clarificatory note to
put rest to the scramble.

  • [2] Circular No.682 dated 30 March 1994[(1994)207 ITR (St.)7] and Circular No.789 dated April 13, 2000 [(2000) 243 ITR (St.)57]
  • [3] Union of India and Anr. v. Azadi Bachao Andolan and Anr. [2003] 132 Taxmann 373 (SC); Vodafone International Holdings B.v. v. Union of India &Anr. [S.L.P. (C) No. 26529 of 2010, dated 20 January 2012];
  • [4] Union of India vs. Gosalia Shipping Pvt. Ltd. [19781 113 ITR 307 (SC); CIT vs. Panipat Woolen and General Mills Co. Ltd. [1976] 103 ITR 66 (SC);
  • [5] Consolidated Finvest and Holdings Limited vs. ACIT [2014) 51 187, [20151 152 ITC) 792 (Delhi- trib.); CIT vs. Wipro Ltd. [20141 50 421, [2014] 227 Taxman 224 (kar.) and DIT vs. Copal Research Ltd., Mauritius [2014) 49 124, [2014] 226 Taxmann 226, (2014] 270 CTR 223, [2015] 371 ITR 114 (Delhi); Seedworks Holdings Mauritius, In re [2017] AAR No. 1128/2011
  • [6] [2003] 132 Taxmann 373 (SC);
  • [7] S.L.P. (C) No. 26529 of 2010, dated 20 January 2012;
  • [8] A.A.R. NO. 826 OF 2009 dated 22 March, 2010);
  • [9] AAR NO. 878 OF 2010 & AAR NO. 879 OF 2010;
  • [10] AAR No. 886/2010, decision dated November 14, 2011;
  • [11] AAR No. 1128 of 2011;
  • [12]TS-634-AAR-2017;
  • [13] [2019] 105 96 (Bombay-HC)]

Contributed By – Prithiviraj Senthil
Designation – Partner

King Stubb & Kasiva,
Advocates & Attorneys

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