Bombay High Court
Bid Services Division ... vs Authority For Advance Ruling ... on 8 March, 2023
Bench: Dhiraj Singh Thakur, Abhay Ahuja
WP-713-2021-J.doc
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
WRIT PETITION NO. 713 OF 2021
Bid Services Division (Mauritius) Limited )
Presently having its office at Level 9, )
Tower B, 1 Cybercity, Ebene, Muritius )
PAN No. AADCB7893E )...Petitioner
V/s.
1. Authority for Advance Ruling (Income Tax) )
Mumbai Bench, Having it's office at 5th Floor )
Hoechst House, 193, V.K. Shah Marg, )
Nariman Point, Mumbai-400 021. )
)
2. Assessing Officer of the Petitioner )
Assistant Commissioner of Income Taxation )
(International Taxation) - 1(1)(2), E-2 Block, )
Dr. S.P. Mukherjee Civic Centre, Minto Road, )
New Delhi-110 002 )
)
3. Director of Income Tax (International )
th
Taxation)-1, New Delhi, 4 Floor, Block )
E-2 Tower, Civic Centre, New Delhi-110 002 )
)
4. Director/Commissioner of Income Tax )
(International Taxation & Transfer Pricing), )
Hyderabad, Room No. 412, 4th Floor, A Block, )
IT Towers, A.C. Guards, Hyderabad-4. )
)
5. Union of India )
Ministry of Finance, Department of Revenue )
Room No. 46, North Block, New Delhi-110 001)...Respondents
Nikita Gadgil 1 of 82
WP-713-2021-J.doc
Mr. P. J. Pardiwalla, Senior Advocate with Ms. Aarti Sathe and Ms.
Aasavari Kadam for Petitioner.
Mr. Suresh Kumar, for Respondents.
CORAM : DHIRAJ SINGH THAKUR &
ABHAY AHUJA, JJ.
PRONOUNCED ON : 8th MARCH 2023
JUDGMENT :
1. By this Petition, Petitioner challenges ruling dated 10 th
February, 2020 denying the benefit of the Mauritius Double Taxation
Avoidance Agreement (the " Mauritius DTAA") to the Petitioner.
2. Petitioner, a private limited company incorporated under the
laws of the Republic of Mauritius on 23rd August, 2005, is a wholly
owned subsidiary of Bid Services Division (Proprietary) Limited,
South Africa the ultimate holding company being the Bidvest Group
Limited in South Africa ("Bidvest"). The Petitioner is holder of
Category-I Global Business Licence issued by the Finance Services
Commission, Mauritius as well as a valid Tax Residency Certificate
Nikita Gadgil 2 of 82
WP-713-2021-J.doc
("TRC") issued by the Mauritius Revenue Authority certifying that
the Petitioner is a tax resident of Mauritius and is entitled to avail
the benefits of the Mauritius DTAA. The Petitioner files its corporate
tax returns in Mauritius and is a non-resident under the provisions of
the Income Tax Act, 1961. The Petitioner does not have any
permanent establishment/fixed place of business nor any business
connection/operations in India.
3. Pursuant to the Government's approval of restructuring and
modernisation of the Delhi and Mumbai airports, the AAI issued an
invitation to Register Expression of Interest ("ITREOI") on 17 th
February, 2004 which set out the requirements to be satisfied by the
interested parties in order to participate in the international
competitive bidding process.
4. In response, the GVK-SA Consortium consisting of GVK
Industries Ltd. and SA Airport Operators (SA Airport Operators is a
joint venture of Airports Company South Africa Limited (ACSA), Old
Nikita Gadgil 3 of 82
WP-713-2021-J.doc
Mutual Life Assurance Company South Africa Limited and the
Bidvest Group Limited (BidVest))1 filed their expression of interest
on 20th July, 2004, with the AAI for both the Mumbai and Delhi
airports. Bidvest is one of the parties to the joint venture which in
turn is a part of the Consortium. Subsequently, the AAI issued a
Request for Proposal ("RFP") document to the pre-qualified bidders
on 1st April, 2005. It is submitted in the Petition that the Consortium
addressed various letters dated 24th May, 2005, 3rd June, 2005, 7th
July, 2005 and 12th July, 2005, to the AAI seeking clarification to
confirm the proposed change in the consortium structure. It is also
submitted that Bidvest informed AAI vide letter dated 9th
September, 2005 that BSDM would hold 27% of the total share
capital of the Joint Venture Company (the "JVC") if the Consortium
was selected as the successful bidder. The Consortium submitted the
technical and financial bid to the AAI providing complete details as
required by the RFP on 12th September, 2005. The AAI in
consultation with the Ministry of Civil Aviation, Government of India
1 It was also stated in the EOI that the final holdings of the three SA Airport Operators' members
would be finalized once the requirement of the RFP is issued but in any event ACSA's holding would
not be less than 10%.
Nikita Gadgil 4 of 82
WP-713-2021-J.doc
("GOI") sent a letter dated 4th February, 2006 selecting the
Consortium as the successful bidder for modernisation and
development of the Mumbai airport (the "Project"). Subsequently,
Mumbai International Airport Limited ("MIAL") was incorporated on
2nd March, 2006.
5. The Consortium agreement dated 2nd April, 2006 was entered
into to record their respective interse rights and obligations in
relation to the management and functioning of the Consortium vis-a-
vis the JVC, wherein the Petitioner was a party. On 4 th April, 2006,
the AAI also entered into an Operation, Management and
Development Agreement (the "OMDA") and on the same day
shareholders agreement was entered into between AAI, MIAL and
the prime members i.e. GVK Airport Holdings Pvt. Ltd. ("GAHPL"),
Petitioner and AGL, which recorded the terms and conditions that
govern their relationship as the shareholders of the JVC and recorded
their respective rights and obligations. Under the shareholders
agreement, the Petitioner agreed to subscribe and acquire 27% of
Nikita Gadgil 5 of 82
WP-713-2021-J.doc
the total issued and paid up share capital of MIAL. This 27% share
capital of MIAL comprised of 216,000,000/- shares, which was
acquired in five tranches between the years 2006 and 2012 by the
Petitioner as follows:-
Date of Allotment No. of shares Face value for share (INR)
19 April 2006 103,850 10
19 May 2006 53,863,150 10
14 March 2009 54,000,000 10
15 December 2009 54,000,000 10
14 October 2010 54,000,000 10
Total 216,000,000
6. The balance equity shares in MIAL are subscribed to by GAHPL
(37%), AGL (10%) and AAI (26%) respectively.
7. The Board of Directors of the Petitioner vide board meetings
held on 20th February, 2011 and 28th February, 2011 in Mauritius
decided to transfer the shares to GAHPL.
Nikita Gadgil 6 of 82
WP-713-2021-J.doc
8. On 1st March, 2011, the Petitioner entered into a Share
Purchase Agreement ("SPA") alongwith subsequent addendums with
GAHPL and GVK Industries Limited, both of which are companies
incorporated under the Companies Act, 1956, whereby the Petitioner
agreed to sell and transfer to GAHPL and GAHPL agreed to purchase
and acquire from the Petitioner the shares constituting 13.5% of the
total paid up share capital, comprising of 108,000,000 shares of
MIAL for the purchase price of USD 287,222,000. The shareholding
post divestment of stake in MIAL by the Petitioner would be as
under:-
Sr. No. Name of the Shareholder % of shareholding in MIAL
Before transfer Post transfer
1 AAI 26% 26%
2 GAHPL 37% 50.50%
3 BSDM (i.e. Petitioner) 27% 13.50%
4 AGL 10% 10%
Total 100% 100%
Nikita Gadgil 7 of 82
WP-713-2021-J.doc
9. On 18th April, 2011, Petitioner made an application under
Section 197(1) of the Act to the Assistant Director of Income Tax
Circle-1(1) (International Taxation), New Delhi for obtaining a "Nil"
withholding tax certificate and was issued a certificate dated 20 th
May, 2011, authorising GAHPL to make payment/remittance of USD
287,222,000 to the Petitioner for the transfer of shares without
deduction of any tax at source under Section 195 of the Act.
10. Subsequently, vide 9th addendum to the SPA dated 3rd October,
2011, the sales consideration for the sale and purchase of the
abovementioned offered shares was reduced to US$ 231,000,000
due to change in payment mechanism and other changes to waive
certain procedural aspects and payment was to be done upfront
which was duly communicated to the concerned tax authorities vide
letter dated 5th October, 2011 filed with Assistant Director of Income
Tax (International Taxation) Circle-1(1), New Delhi intimating the
change in the sale consideration and enclosing a copy of the 9 th
Addendum to the SPA respectively.
Nikita Gadgil 8 of 82
WP-713-2021-J.doc
11. The said transfer of shares was completed in the financial year
i.e. 2011-2012.
12. On 10th February, 2012, Petitioner filed an application under
Section 245Q(1) before Respondent no.1 to determine the
correctness of its belief that the capital gains that arose in the hands
of the Petitioner by virtue of the sale of shares held by it in MIAL
having regard to the provisions of the India-Mauritius DTAA would
not be taxable in India. The Petitioner raised the following question
for determination before Respondent:
"Whether on the facts and circumstances of the case, the
gains arising from the transaction from sale of shares, to
be effected pursuant to the share purchase agreement
dated 1st March, 2011, held by the Petitioner in Mumbai
International Airport Pvt. Ltd would be liable to tax in
India having regard to the provisions of Art 13 (4) of the
India-Mauritius Double Taxation Avoidance Agreement?"
13. By letter dated 5th January, 2015, the office of the Respondent
no. 4 objected to the admission of the application filed by the
Petitioner before Respondent No.1, inter alia on the following
grounds:
Nikita Gadgil 9 of 82
WP-713-2021-J.doc
a) It was alleged that at the time of bidding for the
purposes of the modernisation and development of
Mumbai airport, the parent company, of the Petitioner
i.e. Bidvest was a part of the Consortium and not the
Petitioner. It was also submitted that the technical and
financial bid filed by the Consortium had taken into
account the technical expertise and competence of the
constituents of the Consortium including that of the
South African parent company of the Petitioner.
b) It was also submitted that the Petitioner was not in
existence when the EOI was filed by the Consortium in
July, 2004 and it came in existence only in August, 2005.
It was further submitted that only after the successful bid
was given in favour of the Consortium that the Petitioner
was brought into the Consortium in place of their parent
company, Bidvest. It was therefore submitted that there
was no economic/commercial purpose for making
investment in the name of the Mauritian Group Entity,
i.e. the Petitioner except for avoidance of tax in India as
the Petitioner wanted to take the benefit of the Mauritius
DTAA provisions for any subsequent divestment of their
investment in the JVC. Several other objections were also
made to oppose the admission of the aforesaid
application and it was alleged that the entire transaction
was designed prima facie for tax avoidance as per Clause
(iii) of proviso to Section 245R (2) of the Act.
14. That, in response to the objections filed by the department, the
Petitioner vide its letter dated 25th February, 2015 filed its detailed
response as under :
Nikita Gadgil 10 of 82
WP-713-2021-J.doc
"a. In respect of substituting the Petitioner instead of the
South African entity, the Petitioner submitted as follows:-
"After shortlisting of the Consortium as pre-qualified
bidders, on 1st April, 2005 the AAI issued RFP document.
In response to the RFP document, in September, 2005
the Consortium submitted its offer, i.e. Technical and
Financial Bid for Mumbai Airport. The ownership
structure in the Technical and Financial bid clearly
mentioned the facts that GAHPL, ACSA Global and BSDM
shall hold 37%, 10% and 27% respectively in the JVC
while the remaining 26% will be held by AAI. This fact is
further supported by the following documents, which
form a part of the Technical and Financial bid:
- Proposed shareholding pattern in MIAL
-Board resolution passed by BSDM for submission of a
bid and financial offer as part of the Consortium.
-Complete details of bidders and other parties such as
place of incorporation, registered officer address, director
details, etc.
-Statement confirming no liquidation /receivership and
Solvency of BSDM issued by Standard Bank Trust
Company (Mauritius) Limited.
-Category 1 Global Business License issued by Financial
Services Commission.
-Certificate of Incorporation of Bid Services Division
Mauritius Limited.
-Equity commitment from BSDM that it will hold 27% of
the total share capital of proposed JVC.
Further, it is also pertinent to note that the Ministry of
Civil Aviation, Government of India and AAI which is a
statutory body incorporated under an act of Parliament
i.e. Airport Authority of India Act, 1994 has thoroughly
evaluated the Technical and Financial Bid documents
containing the structure details of Bidvest and only then
the Consortium was eventually declared as the successful
bidder for the Mumbai Airport vide its letter dated 2 nd
Nikita Gadgil 11 of 82
WP-713-2021-J.doc
February, 2006.
b. In respect of investing through the Petitioner allegedly
for the purposes of avoiding tax, it was submitted as
follows;
-Bidvest is engaged into various business lines and has
over 300 subsidiaries (direct plus indirect) spanning over
5 continents.
-It is a general commercial practice on the part of any
ultimate holding company of a group of companies to bid
for projects in its own name so as to highlight the
financial and technical competency of the group as a
whole. However, while routing its investments in various
projects, separate companies are formed which in
commercial parlance is termed as Special Purpose
Vehicles (SPVs).
-SPVs are formed for commercial reasons as such for
hedging business, political and economic risk of a
country, mobility of investments, ability to raise loans
from diverse investments, valuation from growth
perspective and tapping global funds for listing purposes,
facilitate specialisation and undivided attention on the
project in hand. Hence, ease of doing business and
supportive business environment is an important
criterion in determining the jurisdiction of setting up of
such SPVs.
c. In respect of increase of value of shares by merely ten
times within a short span of less than six months from
the date of last tranche of the investment, it was
submitted as follows:
"-as required under the RFP and as agreed by the
Consortium members under the Technical and Financial
Bid which was binding in nature, the Consortium
members were required to und for the first seven years
by way of equity bank guarantee provided by the
Nikita Gadgil 12 of 82
WP-713-2021-J.doc
Consortium members. Hence, towards its share of equity
commitment, BSDM made regular equity infusion into
MIAL during the yer 2006-2012 whenever the equity
cash calls were made by MIAL.
-The consideration for the transfer was arrived after
taking into account the valuation of the business of MIAL
using appropriate valuation method"
d. In respect of observation of Respondent No.4 in
paragraph 1(i) and (ii) of letter dated 5th January, 2015
it was submitted as follows:-
-"Government of India had undertaken restructuring and
modernisation of Mumbai airport with the key objectives
of world class development, expansion and management
of the Airport. The JVC had to ensure the timely
provision of high quality airport infrastructure.
-The selection of the Consortium by the Ministry of Civil
Aviation/AAI largely depended upon the past credentials
with regard to successful completion of similar airport
projects worldwide, operational expertise, managerial
and financial capabilities, financial commitments and
commitment to provide quality airport services. The
objective and requirement were clearly mentioned in the
RFP issued by AAI.
-ACSA and Bidvest had requisite technical and
management expertise in airport development and
operation. Conversely, on an independent evaluation
GVK did not meet the qualification criteria mentioned in
the RFP.
-Therefore, in order to meet the criterion laid down by
AAI, GVK, Bidvest and ACSA collectively as a Consortium
offered their bid to AAI bringing technical and financial
capabilities together on the basis of which they were able
to win the bid.
Nikita Gadgil 13 of 82
WP-713-2021-J.doc
e. The Petitioner also relied upon the decisions of Azadi
Bachao Andolan reported in (2003) 132 Taxmann 373
(SC), D.B.Zwrin Mauritius Trading No.3 Limited (AAR
No.878/2010)
f. The Petitioner therefore submitted that in view of the
above factual and legal position, the application filed by
the Petitioner before Respondent No. 1 deserved to be
admitted."
15. That Petitioner attended the hearing on 25 th February, 2015,
wherein the Petitioner once again reiterated the above submissions
and once again prayed that the application be admitted by
Respondent No.1. The matter was adjourned to a further date on the
request of the office of the Respondent No.4.
16. By letter dated 27th March 2015 addressed through their
authorised representatives to Respondent no.1, the Petitioner
submitted that the contention of the department with regard to
substitution of Bidvest by the Petitioner was incorrect and they once
again filed a letter dated 25 th February 2015 along with the
annexures reiterating the correct facts in respect thereof. They also
submitted that they had repeatedly, during the course of various
Nikita Gadgil 14 of 82
WP-713-2021-J.doc
hearings before Respondent no.1, submitted that the additional
details sought for by the office of the Respondent no.4 were not
relevant for the purpose of determining whether the application filed
by the Petitioner should be admitted in terms of Section 245R(2) of
the Act. They further submitted that most of the details sought for by
the Respondent no.4 were already there before the Respondent no.1
and there was no requirement to file any additional details /
documents.
17. Respondent no.4 submitted their reply on 16 th April 2015 on
the admissibility under Section 245R(2) of the Act before
Respondent no.1.
18. Vide letter dated 15th July 2015 Petitioner through their
authorised representative submitted their paragraph wise reply to the
aforesaid final report. The matter was heard on 27 th July 2015 and
the application filed by the Petitioner was admitted.
Nikita Gadgil 15 of 82
WP-713-2021-J.doc
19. As the office of Respondent no.1 fell vacant in the year 2015,
the matter was refixed in January 2007 whereafter various Benches
were set up in the cities including Mumbai to which Bench
Petitioner's matter was transferred. Thereafter again, the office of
AAR fell vacant post February 2018 and the matters were refixed for
hearing in May 2018 when the Bench was constituted again. The
matter came up for hearing on 16 th July 2019. During this period,
once again, some more documents were requested for from the
Petitioner, which the Petitioner supplied. Thereafter, Respondent
no.4 filed a final report with the following contentions :
"(i)The GVK - SA Consortium did not include the BSDM
as one of the members during the entire Stage 1 and
for most part of the Stage 2 of bidding process i.e.
issue of ITREOI by AAI, filing of EOI by the GVK-SA
Consortium, shortlisting of prequalified bidders by AAI,
issue of RFP to prequalified bidders by AAI, airport
visits and sight inspection by prequalified bidders,
discussions with the government agencies by
prequalified bidders etc., but was brought in just
before the filing of the Technical and Financial Bid at
the far end of the Stage 2 of the bidding process.
Infact, the entity BSDM was not even in existence
during Stage 1 and for most part of Stage 2 of the
bidding process. It was incorporated just two weeks
prior to the submission of binding bid by GVK-SA
Consortium.
Nikita Gadgil 16 of 82
WP-713-2021-J.doc
(ii)No prior approval of the AAI was taken by the
Consortium regarding constitution of Bidvest with any
other entity at any stage before the submission of the
Technical and Financial Bid, which was the
requirement as per paragraph 6.4 of the REF and
paragraph 6.1 of the ITREOI.
(iii)If the Bidvest group wanted an SPV to undertake the
project efficiently, commercial and business sense
indicates that Mumbai or South Africa would have
been the best alternatives but not some third tax
jurisdiction like Mauritius. The only advantage the
jurisdiction of BSDM, a Mauritian entity, in the
Consortium lacked commercial substance and bonafide
business purpose but was a clear design to avoid
paying legitimate tax to the Indian Government, as it is
a tax avoidance scheme. The Mauritius entity needs to
be overlooked and the Indian-South Africa DTAA
brought in, thereby making the capital gains taxable in
India.
(iv)As per the provisions Section 93 of the Act, the capital
gains arising out of the same of 13.5% equity stake in
MIAL by BSDM to GAHPL is deemed to be the income
in the hands of the ultimate holding company of BSDM
i.e. Bidvest. As per the provisions of the Indian Income
Tax Act, 1961 and as per the provisions of Article
13(4) of the DTAA between India and South Africa,
this income is chargeable to tax in India."
20. The matter was finally heard on 22nd August 2019 before
Respondent no.1, whereat, the Petitioner reiterated the submissions
made by the Petitioner regarding the non-taxability of the gain
Nikita Gadgil 17 of 82
WP-713-2021-J.doc
arising from the transaction of sale of the shares, effected pursuant
to the SPA dated 1st March 2011 held by the Petitioner in MIAL
having regard to the provisions of Article 13(4) of the Mauritius
DTAA.
21. Pursuant to the hearing, the submissions made by the
Petitioner at the time of hearing were summarized by the Petitioner
by way of written submissions dated 4th September 2019 and filed by
the Petitioner before Respondent no.1.
22. Mr. Pardiwala, learned Senior Counsel for the Petitioner,
would submit that on the basis of the ITREOI, EOI and RFP it was
clear that the AAI had permitted use of the special purpose vehicle
structured for the purposes of submitting the technical and financial
bid as well as for holding shares in the MIAL. He would submit that
the technical and financial bid submitted by the Consortium gave the
share holding pattern in the proposed joint venture company which
contained the name of Petitioner as one of the parties that would
hold direct interest in the proposed joint venture company. Learned
Nikita Gadgil 18 of 82
WP-713-2021-J.doc
Counsel would submit that the bid listed out the financial and
technical capabilities of the Petitioner with specific reference to the
definition of prime member and evaluated entity as contained in the
RFP. Learned Senior Counsel would submit that therefore Petitioner
is neither a shell nor a conduit nor an entity interposed as a device to
evade taxes in India.
23. Mr. Pardiwala has also drawn the attention of this Court to the
provisions of Section 90(2) of the Act as well as Article 13(4) of the
Mauritius DTAA to emphasize that the gains arising from the
transaction of sale of shares effected pursuant to the Share Purchase
Agreement dated 1st March 2011 held by the Petitioner in MIAL
would not be liable to tax in India. Learned Senior Counsel would
submit that since Petitioner is incorporated in Mauritius, it is liable to
tax in Mauritius. He submits that, besides, Petitioner held Category
1 Global Business License and also a valid TRC issued by the
Mauritian Authorities establishing the fact that it was a tax resident
of Mauritius and would be entitled to the beneficial provisions of the
Mauritius DTAA.
Nikita Gadgil 19 of 82
WP-713-2021-J.doc
24. Learned Senior Counsel has also drawn the attention of this
Court to Circular No.682 dated 30th March 1994 issued by the
Central Board of Direct Taxes ("CBDT") which mentions that capital
gains arising to a resident of Mauritius on transfer of shares in an
Indian company would be liable to tax only in Mauritius.
25. Learned Senior Counsel has further placed reliance upon
Circular No.789 dated 13th April 2000 issued by the CBDT which
clarifies that companies which are resident in Mauritius would not be
taxable in India on income from capital gains arising in India on the
sale of shares as per Article 13(4) of the Mauritius DTAA. He further
submits that the said circular also clarifies that wherever a certificate
of residence is issued by the Mauritian authorities such certificate
will constitute sufficient evidence for accepting the status of
residence as well as beneficial ownership for applying the double
taxation avoidance convention. Learned Senior Counsel has also
relied upon Press Release dated 1 st March, 2013 with respect to the
TRC. Learned Senior Counsel relies upon the decision of Union of
Nikita Gadgil 20 of 82
WP-713-2021-J.doc
India & Anr. v. Azadi Bachao Andolan and Anr. 2 in support of his
contentions. Learned Senior Counsel also refer to the decision in the
case of Vodafone International Holding B.V. v. Union of India 3 relied
upon by the Revenue as well as the Authority and would submit that
the decision of Vodafone International Holding B.V. v. Union of India
(supra) would in fact support the case of the Petitioner. Learned
Senior Counsel would submit thatVodafone International Holding
B.V. v. Union of India (supra) read as a whole leads to a conclusion
that the Ruling is completely contrary to the principles affirmed
therein. He would submit that the allegation of interposing Petitioner
for tax evasion has only been raised at the time of sale of the shares
and not earlier. With respect to the observations that incorporation
of Petitioner lacked economic /commercial rationale, learned Senior
Counsel drew the attention of this Court to paragraph 4.3 of the
written submissions and to the decision in the case of Vodafone
International Holding B.V. v. Union of India (supra) . Mr. Pardiwala
would submit that nowhere the impugned Ruling establishes tax
evasion. No material has been brought on record to demonstrate the
2 [2003] 263 ITR 706 (SC)
3 [2012] 341 ITR 1 (SC)
Nikita Gadgil 21 of 82
WP-713-2021-J.doc
same. Learned Senior Counsel would submit that only paragraph 98
of the decision in the case of Vodafone International Holding B.V. v.
Union of India (supra) has been quoted by the Authority whereas
paragraph 97 of the said decision has been conveniently omitted.
Learned Senior Counsel takes us to the said paragraph to make his
point that paragraph 97 upholds Circular 789 on residence and
beneficial ownership in the absence of Limitation of Benefits (LOB)
clause, which is admittedly not applicable in the present case as
Article 27A to the Mauritius DTAA was inserted with effect from 1 st
July 2017 whereas the sale transaction pertains to Financial Year
2011-2012. Learned Senior Counsel would therefore submit that the
Treaty benefit should have been given to Petitioner. Learned Senior
Counsel also refers to Press Release dated 29th August, 2016 by the
CBDT and submits that investments made before 1st April, 2017 have
been grandfathered and will not be subject to capital gains taxation
in India.
26. Learned Senior Counsel would submit that surprisingly,
Respondent no.1-Authority did not accept the contentions raised on
Nikita Gadgil 22 of 82
WP-713-2021-J.doc
behalf of the Petitioner regarding the non-taxability of the gain
arising from the transaction of sale of shares to be effected pursuant
to the SPA dated 1st March, 2011 held by the Petitioner in MIAL, by
virtue of Article 13(4) of the Mauritius DTAA and passed ruling
dated 10th February, 2020 rejecting the contentions raised by the
Petitioner holding that the Petitioner is not entitled to the benefits
under Article 13(4) of the Mauritius DTAA.
27. Aggrieved by the aforesaid Ruling, Petitioner has filed this
Petition for the following principal reliefs:
(a) That this Hon'ble Court may please to issue a Writ of
Certiorari or a writ in the nature of Certiorari or any other
appropriate writ, order or direction, calling for the records
of the Petitioner's case and after going into the legality and
propriety thereof, to quash and set aside the impugned
ruling dated 10th February 2020;
(b) That this Hon'ble Court may please to issue a Writ of
Mandamus or a writ in the nature of Mandamus or any
other appropriate writ, order or direction, directing the
Respondent no.1 to rule that the gain arising on the sale of
shares of MIAL to GAHPL would not be chargeable to tax in
India having regard to the provisions of Article 13(4) of the
Mauritius DTAA.
Nikita Gadgil 23 of 82
WP-713-2021-J.doc
28. Mr. Suresh Kumar, learned standing Counsel for the
Respondents supports the impugned Ruling and submits that the
transaction by the Petitioner is sham and bogus. He would submit
that entire structure of incorporation of Petitioner and Petitioner's
introduction is a device to avoid taxation. Learned Counsel refers to
the Affidavit-in-reply dated 5th May 2022 filed on behalf of the
Respondents in support of his contentions. Mr. Suresh Kumar reads
through the impugned decision and submits that interposing an
entity for taking benefit of a tax treaty, even from the beginning, is
not permitted. Learned Counsel refers to paragraph 59 of the
impugned decision and submits that the Petitioner is a shell and a
sham. It has no employees, no assets. He would submit that it is a
device only interposed for taking tax benefit under the Mauritius
DTAA and to evade taxes in India. Learned Counsel refers to
paragraph 67 of the impugned Ruling. Learned Counsel also draws
the attention of the Court to paragraphs 66 and 67 of the judgment
in the case of Vodafone International Holding B.V. v. Union of India
(supra). He would submit that in jurisdiction under Article 226 this
Nikita Gadgil 24 of 82
WP-713-2021-J.doc
Court cannot review the view taken by an authority. Learned
Standing Counsel, therefore, submits that the Petition ought to be
dismissed.
29. We have heard Mr. Pardiwalla, learned Senior Counsel for the
Petitioner and Mr. Suresh Kumar, learned standing Counsel for the
Respondents and with their able assistance we have perused the
papers and proceedings and have considered the rival contentions.
30. Before proceeding further it would be appropriate to set forth
the "Decision" in paragraphs No. 55 to 76 of the impugned Ruling as
under:-
"55. We have carefully considered the contentions of
the applicant, arguments and objections of the Revenue
and the response thereof the applicant. We have also
perused the documents on record and the factual matrix
of the case. The basic facts have been elaborated in the
submissions of applicant and revenue above.
56. Applicant (in short BSDM) was incorporated in
Mauritius on 23-8-2005 i.e. two weeks before
submission of technical and financial bid by GVK - SA
Consortium. When EOI was filed by the consortium on
20-7-2004, the BSDM was not even in existence. Right
Nikita Gadgil 25 of 82
WP-713-2021-J.doc
from issue of ITREOI, filing of EOI, shortlisting of pre-
qualified bidders by AAI, issue of RFP to pre-qualified
bidders, airport visits, site inspection and discussions
with Govt. agencies, etc., Bidvest was involved as
member of consortium. Only at Stage 2 of the bidding
process, Bidvest was substituted by BSDM. It is also a
fact that no prior approval of AAI was obtained by
consortium at any stage before filing of technical and
financial bid which was a requirement as per para 6.4 of
RFP and para 6.1 of ITREOI. The evaluated entities at
pre-qualified bidding stage were GVK-ACSA and Bidvest.
GVK is a major business group of India and Bidvest is an
international investment holding company based in
South Africa with investment in food service, trading,
distribution, etc. Both these groups have financial
muscle and management capabilities to undertake such
project. ACSA has necessary technical expertise and
experience in the field of operation and maintenance of
airport. The two business groups and ACSA complete
the competences required to bid for the project. The
consortium was declared as successful bidders by AAI on
04-02-2006 based on financial and management
capabilities and experience in air force management of
the evaluated entities.
57. GVK group is based in India. The bid services group
is based in South Africa. The ACSA (in which
government of South Africa has stake) is the only
technical expert in the consortium in the field of airport
and maintenance is also based in South Africa. GVK,
ACSA and Bidvest were the evaluated entities as pre-
qualifying bidding stage.
58. Just ten days prior to filing of technical and financial
bid in September, 2005, the applicant [BSDM] was
brought in the consortium. After AAI declared GVK
Nikita Gadgil 26 of 82
WP-713-2021-J.doc
consortium as successful bidder for undertaking the
modernisation of Mumbai airport vide letter dated
4.2.2006, the Mumbai International Airport Pvt. Ltd.
(MIAL), the capital JV company was incorporated on
2.6.2006. GAHPL, BSDM, AGL and AAI were designated
as prime members of the joint venture and a
shareholder agreement between the four entities and
MIAL was entered into on 4.4.2006.
59. The GVK group committed to provide 37% equity in
the JV through GAHPL and Bidvest group committed to
provide 27% equity funding required to be invested by
BSDM, whereas capital ACSA committed 10% of
funding through AGL. What in effect change is the
routing of funds of Bidvest group through Mauritius.
The other two groups i.e. GVK and ACSA continued to
have their head quarters in India and South Africa
respectively. So in the JV there is a Shell company,
without any tangible assets, employees, space, etc.
which was incorporated few days before the bidding. It
has no management experts or financial advisers on its
pay roll or on hire. Further, Mauritius unlike London or
New York is not a known financial center or a vibrant
business hub from where capital can be sourced at
cheaper rates or top quality professionals'
engineers/consultants could be employed. Neither
Mauritius can boast of being seat of civil aviation
experts. We thus, failed to appreciate what purpose the
applicant is serving being in the JV or what is the
economic or commercial rationale for roping in the
applicant in the JV. Did it hire finance professionals who
could arrange finance or did the entity have collaterals
for raising funds or did it provide a meeting ground
where active, cerebral discussions could take place
during the development process of the project or from
where difficulties encountered during implementation
Nikita Gadgil 27 of 82
WP-713-2021-J.doc
phase could be addressed. Did it discuss critical needs of
the project in the board meetings? The answer to all
these above crucial questions were 'no'. We ask
ourselves the questions that if GAHPL or ACSA are
missing from JV, can the project still operate, the
answer is 'no'. But if the applicant is missing and the
Bidvest provides the funding alone, would the JV
survive, the answer is 'yes'.
60. As per Indo-South Africa DTAA, the capital gain on
share sale is taxable in India. If applicant was not
interposed the Bidvest group would have to pay capital
gain tax in India on the share sale transaction. By
incorporating Mauritian entity benefit of Indo-Mauritius
DTAA is sought under Article 13(4) under which capital
gain is not taxable in India. Further, there is no capital
gain tax in Mauritius. The entire value creation activities
were happening in India which was also the basis for
steep rise in share valuations subsequently.
61. Let us examine, what is the real role of applicant in
the JV. It served as conduit for routing funds for South
African based holding companies. The shares of joint
venture were bought in the name of applicant though
the beneficial owners were the holding companies in
South Africa. The applicant kept on noting and
endorsing decisions of the holding company in the
Board meetings without any contribution or discussion
about the decision making process. In short, the
applicant is not in a position to create any value for the
joint venture.
62. One can claim that holding company will always be
predominantly controlling all vital decisions of
subsidiary company and that latter may be
implementing such decisions. This may be true but if an
Nikita Gadgil 28 of 82
WP-713-2021-J.doc
entity claims treaty benefits it must establish the
economy rationale and substance for treaty entitlement.
Treaty shopping is well known for international tax
planning whereby an entity is interposed in a country
with favourable tax laws. Lately, the world over it is
reckoned that improper nature of treaty shopping
structure is created if the following factors are satisfied
i.e., the beneficial owner of the treaty shopping entity
does not reside in the country where entity is created;
the interposed entity has minimal or no economic
activity in the jurisdiction where it is located and lastly
its income is subject to minimal tax in the country of
location.
63. The doctrine of substance over form mandates
taxing transaction pursuant to its economic effect rather
than its form and that a valid transaction must have
both a substantial purpose apart from reduction of tax
liability.
64. The India-Mauritius treaty and India-South Africa
treaty are based on OECD model convention and article
13 on capital gains are adopted from the same
convention. In fact, India-South Africa treaty is wider in
terms. The Model Tax Convention on Income and on
Capital, CONDENSED VERSION (as it read on 15 July
2014) in its commentary on Art. 1 has mentioned:
Improper use of the Convention.
7. The principal purpose of double taxation
conventions is to promote, by eliminating
international double taxation, exchanges of goods
and services, and the movement of capital and
persons. It is also a purpose of tax conventions to
prevent tax avoidance and evasion.
Nikita Gadgil 29 of 82
WP-713-2021-J.doc
7.1 Taxpayers may be tempted to abuse the tax
laws of a State by exploiting the differences
between various countries' laws. Such attempts may
be countered by provisions or jurisprudential rules
that are part of the domestic law of the State
concerned. Such a State is then unlikely to agree to
provisions of bilateral double taxation conventions
that would have the effect of allowing abusive
transactions that would otherwise be prevented by
the provisions and rules of this kind contained in its
domestic law. Also, it will not wish to apply its
bilateral conventions in a way that would have that
effect.
8. It is also important to note that the extension of
double taxation conventions increases the risk of
abuse by facilitating the use of artificial legal
constructions aimed at securing the benefits of both
the tax advantages available under certain domestic
laws and the reliefs from tax provided for in double
taxation conventions.
9. This would be the case, for example, if a
person(whether or not a resident of a Contracting
State), acts through a legal entity created in a State
essentially to obtain treaty benefits that would not
be available directly. Another case would be an
individual who has in a Contracting State both his
permanent home and all his economic interests,
including a substantial, shareholding in a company
of the State, and who, essentially in order to sell
the shares and escape taxation in that State on the
capital gains from the alienation (by virtue of
paragraph 5 of Article 13), transfers his permanent
home to the other Contracting State, where such
gains are subject to little or no tax.
Nikita Gadgil 30 of 82
WP-713-2021-J.doc
9.5 It is important to note, however, that it should
not be lightly assumed that a taxpayer is entering
into the type of abusive transactions referred to
above. A guiding principle is that the benefits of a
double taxation convention should not be available
where a main purpose for entering into certain
transactions or arrangements was to secure a more
favourable tax position and obtaining that more
favourable treatment in these circumstances would
be contrary to the object and purpose of the
relevant provisions. (emphasis supplied)
It would be apparent that the OECD prescriptions
(supra) fit the factual matrix of case in hand.
65. The Hon'ble Supreme Court in the case of Vodafone
Intl. Holding v. Union of India has laid down various
test to determine whether a transaction is used
principally as a colourable device, one such test is the
business purpose test and in that connection it is held
by the Apex court at para 67 that if there is abuse of
organization form without legal business purpose which
result in tax avoidance, then Revenue may disregard the
form and impose tax on actual controlling non-resident
entity. Further at para 98 of the same decision Hon'ble
Supreme Court has held-
98. LOB and look through provisions cannot be read
into a tax treaty but the question may arise as to
whether the TRC is so conclusive that the Tax
Department cannot pierce the veil and look at the
substance of the transaction. DTAA and Circular No.
789 dated 13.4.2000, in our view, would not
preclude the Income Tax Department from denying
the tax treaty benefits, if it is established, on facts,
Nikita Gadgil 31 of 82
WP-713-2021-J.doc
that the Mauritius company has been interposed as
the owner of the shares in India, at the time of
disposal of the shares to a third party, solely with a
view to avoid tax without any commercial
substance. Tax Department, in such a situation,
notwithstanding the fact that the Mauritian
company is required to be treated as the beneficial
owner of the shares under Circular No. 789 and the
Treaty is entitled to look at the entire transaction of
sale 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 may be subjected to tax. In other words,
TRC does not prevent enquiry into a tax fraud, for
example, where an OCB is used by an Indian
resident for round-tripping or any other illegal
activities, nothing prevents the Revenue from
looking into special agreements, contracts or
arrangements made or effected by Indian resident
or the role of the OCB in the entire transaction.
66. Though decision of Hon'ble Apex Court referred to
in the interposing of entity just before sale of shares, the
pith and substance of the statement by Apex court is
that merely holding of TRC cannot prevent an enquiry if
it can be established that the interposed entity was a
device to avoid tax.
67. It is a text book case, where an interposed entity
satisfies to a 'T', the tests laid down by the Hon'ble apex
court in Vodafone International Holding BV case (17
taxmann.com 202) to ascertain whether a structure or
device is created for tax avoidance. 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
Nikita Gadgil 32 of 82
WP-713-2021-J.doc
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 Text,
Commercial/business substance Test, "Look at" Principle
Text, 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.
68. It is emphasised before us by the learned 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 skill to facilitate the instant business venture.
The applicant could not provide any rational 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 the BSDM help in doing
business for providing support for the project. The
points in its favour of applicant seem to be that it is tax
resident of Mauritius holding a valid TRC and legal
owner of shares which it disposed subsequently.
69. 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 learned AR lacks
substance and merit.
70. In its rejoinder, the applicant has contested two
main objections of the revenue. The first objection of the
revenue was admission of new entity at later stage was
Nikita Gadgil 33 of 82
WP-713-2021-J.doc
not ordained by EOI. The learned 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 finalized 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 nowhere 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.,
SCSA, Old mutual and Bidvest and not to the
composition of the Consortium per se.
71. The second objection of the revenue was the
interposing of the applicant was without any
commercial reason. The learned AR has argued 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 found 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 paragraphs, 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.
72. The other plea of the learned AR is that AAI has
approved the bid being duly aware that BSDM was
prime member of the JV entry. 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.
Nikita Gadgil 34 of 82
WP-713-2021-J.doc
73. The alternate plea of the learned AR is that even if
it is assumed without admitting that the acquisition 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 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.
74. We have perused the decisions cited by both sides.
But we are primarily guided by decision of Apex court in
the case of Vodafone Intl Holding v. Union of India and
the peculiar facts of the case. It is trite law that the
decisions are to be applied in the context of the facts of
the case. In the case of Padmasundara Rao (Decd.) and
Ors. vs. State of Tamil Nadu and Others (2002) 70 CCH
0235 ISCC, the Hon'ble Supreme court has held that :
"Court should not place reliance on decisions without
discussing as to how the factual situation fits in with the
fact situation of the decision on which reliance is placed.
There is always peril in treating the words of a speech or
judgment as though they are words in the legislative
enactment and it is to be remembered that judicial
utterances are made in the setting of the facts of a
particular case. Circumstantial flexibility, one additional
or different fact may make a world of difference between
conclusions in two cases.
Nikita Gadgil 35 of 82
WP-713-2021-J.doc
75. Having regard to the aforesaid peculiar facts and
circumstances and our conclusions thereto, the other
urgings of the Revenue i.e. application of Section 93,
non-supply of certain documents by the applicant,
valuation of shares of JV entity, etc. are not discussed
here.
76. In view of foregoing, we are of the considered
opinion that the applicant is not entitled to benefit under
Article 13(4) of the Indo-Mauritius DTAA in regard to
gains arising from the transaction of sale of shares."
31. In short, the Authority has observed that the Petitioner was
incorporated in Mauritius on 23rd August 2005 i.e. two weeks before
submission of technical and financial bid by the GVK-SA Consortium.
That when the expression of interest was filed by the Consortium on
20th July 2004, the Petitioner was not even in existence. That, right
from the issue of ITREOI, filing of expression of interest, short listing
of pre-qualified bidders by AAI, issue of RFP to pre-qualified bidder,
Airport visits, site inspection and discussions with government
agencies etc., Bidvest i.e. the ultimate holding company, was
involved as member of the Consortium and not the Petitioner. That,
it is only at Stage 2 of the bidding process that the Petitioner was
substituted in place of Bidvest. That, no prior approval of AAI was
Nikita Gadgil 36 of 82
WP-713-2021-J.doc
obtained by the Consortium at any stage before filing of technical
and financial bid which was the requirement as per paragraph 6.4 of
the RFP and paragraph 6.1 of ITREOI. The evaluated entities at pre-
qualified bidding stage were GVK, ACSA and Bidvest. That, it is GVK
as well as Bidvest holding company and not Petitioner who have the
financial muscle and management capabilities to undertake the
project and ACSA had the necessary technical expertise and
experience in the field of operation and maintenance of the airport.
That, the two business groups and ACSA had the complete
competency required to bid for the project. On the basis of their
financial and management capabilities and experience in airport
management and on the basis that they were the evaluated entities,
the Consortium was declared as successful bidder by the AAI on 4th
February 2006. However, just ten days prior to filing of technical
and financial bid, the Petitioner was brought into the Consortium.
That the Mumbai International Airport Private Limited (MIAL) and
the JV company was incorporated on 2nd June 2006. That the GVK
group was committed to provide 37% equity through GAHPL and
Nikita Gadgil 37 of 82
WP-713-2021-J.doc
Bidvest provided 27% equity funding required to be invested by
BSDM and ACSA was committed to funding 10% through AGL.
That, despite this, the Bidvest group changed its routing of funds
through the Petitioner through Mauritius, the Petitioner company
being a shell company without any tangible assets, employees, office
space etc. being incorporated a few days before the bidding. It has no
management experts or financial advisers on its pay roll or on hire.
That, as per the Indo-South Africa DTAA, the capital gains on share
sale is taxable in India and if the Petitioner was not interposed, the
Bidvest group would have to pay capital gains tax in India on the
share sale transaction. By incorporating the Mauritian entity, the
benefit of the Indo-Mauritius DTAA is sought under Article 13(4) as
capital gain is not taxable in India under the same. Also, there is no
capital gain tax in Mauritius. That, the Petitioner has been noting
and endorsing decisions of the holding company in the Board
meetings without any contribution or discussion about the decision
making process, and therefore, not in a position to create any value
for the joint venture. There is neither any economic rationale and
Nikita Gadgil 38 of 82
WP-713-2021-J.doc
substance for the treaty entitlement. That, it is clearly a case of
treaty shopping and Petitioner has been incorporated and introduced
in the Consortium for obtaining tax benefits.
32. It emerges that the entire plank of the Advance Ruling
Authority's decision to deny benefit of Article 13(4) of the Mauritius
DTAA in regards to the gains arising to Petitioner from the
transaction of sale of shares is that Petitioner is an entity
incorporated only two weeks before the technical and financial bid
by GVK-SA consortium having neither financial nor management
capabilities of its own and is therefore interposed only as a device to
avoid tax.
33. Although settled law suggests that scrutiny in writ jurisdiction
of orders passed by Advance Ruling Authorities is minimal, however
the same can be interfered with if the Ruling is without considering
the entire material on record or the submissions made on behalf of
the parties or the Ruling suffers from a fundamental error or is
absurd or perverse.
Nikita Gadgil 39 of 82
WP-713-2021-J.doc
34. Mr. Pardiwala, learned Senior Counsel had relied upon Article
13 of the Mauritius DTAA to submit that in view of Circular 789
income from capital gains arising in India on sale of shares would
not be taxable in India in view of Article 13(4) of the Mauritius
DTAA. For ease of reference the said Article 13 is quoted as under :
" ARTICLE 13
CAPITAL GAINS
1. Gains from the alienation of immovable property, as
defined in paragraph (2) of Article 6, may be taxed in the
Contracting State in which such property is situated.
2. Gains from the alienation of movable property forming
part of the business property of a permanent establishment
which an enterprise of a Contracting State has in the other
Contracting State or of movable property pertaining to a
fixed base available to a resident of a Contracting State in
the other Contracting State for the purpose of performing
independent personal services, including such gains from
the alienation of such a permanent establishment (alone or
together with the whole enterprise) or of such a fixed base,
may be taxed in that other State.
3. Notwithstanding the provisions of paragraph (2) of this
article, gains from the alienation of ships and aircraft
operated in international traffic and movable property
pertaining to the operation of such ships and aircraft, shall
be taxable only in the Contracting State in which the place
of effective management of the enterprise is situated.
Nikita Gadgil 40 of 82
WP-713-2021-J.doc
43A. Gains from the alienation of shares acquired on or
after 1st April 2017 in a company which is resident of a
Contracting State may be taxed in that State.
3B. However, the tax rate on the gains referred to in
paragraph 3A of this Article and arising during the period
beginning on 1st April, 2017 and ending on 31 st March,
2019 shall not exceed 50% of the tax rate applicable on
such gains in the State of residence of the company whose
shares are being alienated;
54. Gains from the alienation of any property other than
that referred to in paragraphs 1, 2, 3 and 3A shall be
taxable only in the Contracting State of which the alienator
is a resident.
5. For the purposes of this article, the term "alienation"
means the sale, exchange, transfer, or relinquishment of the
property or the extinguishment of any rights therein or the
compulsory acquisition thereof under any law in force in
the respective Contracting States.
35. We note from Article 13 with respect to capital gains that gains
derived by a resident of a contracting State from the alienation of
any property other than those mentioned in paragraphs 1, 2 and 3 of
the Article shall be taxable only in that State i.e. in the present case
in Mauritius and not in India.
4 Paragraphs 3A and 3B inserted by Notification No.SO 2680(E) {NO.68/2016 (F.No.500/3/2012-
FTD-II)}, dated 10-8-2016, w.e.f. 1-4-2017 (Assessment Year 2018-19).
5 Paragraph 4 substituted by Notification No. SO 2680(E) {NO.68/2016 (F.No.500/3/2012-FTD-II},
dated 10-8-2016, w.e.f. 1-4-2017 (Assessment Year 2018-19). Prior to its substitution, said
paragraph read as under :
"4. Gains derived by a resident of a Contracting State from the alienation of any property other
than those mentioned in paragraphs (1), (2) and (3) of this article shall be taxable only in that State."
Nikita Gadgil 41 of 82
WP-713-2021-J.doc
36. The Petitioner has placed reliance upon Circular No.682 dated
30th March 1994 issued by the CBDT which mentions that 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. The
relevant extract of Circular No.682 is reproduced below:
"1605B. Clarification regarding agreement for avoidance
of double taxation with Mauritius
1. ......
2. ......
3. Paragraph 4 deals with the taxation of Capital gains
arising from the alienation of any property other than
those mentioned in the proceedings paragraphs and
gives the right of taxation of capitals gains only to that
State of which the person deriving the capital gains as a
resident. In terms of paragraph 4, capital gains derived
by residents of Mauritius by alienation of shares of
companies shall be taxable only in Mauritius according
to Mauritius Tax Law. Therefore, any resident of
Mauritius deriving income from alienation of shares of
Indian Companies will be liable to capital gains tax only
in Mauritius as per Mauritius tax law and will not have
any capital gains tax liability in India.
4. Paragraph 5 defines 'alienation' to mean the sale,
exchange, transfer or relinquishment of the property or
the extinguishment of any rights in it or its compulsory
acquisition under any law in force in India or in
Mauritius.
Circular : No.682, dated "30-3-1994"
Nikita Gadgil 42 of 82
WP-713-2021-J.doc
37. It is clear from the aforesaid that capital gains derived by a
resident of Mauritius by alienation of shares of companies shall be
taxable in Mauritius only and will not have any capital gains tax
liability in India.
38. Further, reliance was placed upon another Circular No.789
dated 13th April 2000 issued by the CBDT which clarified that
companies which are resident in Mauritius would not be taxable in
India on income from capital gains arising in India on sale of shares
as per paragraph 4 of Article 13 of Mauritius DTAA. An extract of
Circular No.789 is reproduced below:
"734. Clarification regarding taxation of income from
dividends and capital gains under the Indo-Mauritius
Double Tax Avoidance Convention (DTAC)
1. The provisions of the Indo-Mauritius DTAC of 1983
apply to 'residents' of both India and Mauritius. Article 4 of
the DTAC defines a resident of one State to mean "any
person who, under the laws of that State is liable to
taxation therein by reason of his domicile, residence, place
of management or any other criterion of a similar nature."
Foreign Institutional Investors and other investment funds,
etc., which are operating from Mauritius are invariably
incorporated in that country. These entities are 'liable to
tax' under the Mauritius Tax law and are, therefore, to be
Nikita Gadgil 43 of 82
WP-713-2021-J.doc
considered as residents of Mauritius in accordance with the
DTAC.
2. Prior to 1-6-1997, dividends distributed by domestic
companies were taxable in the hands of the shareholder
and tax was deductible at source under the Income-tax Act,
1961. Under the DTAC, tax was deductible at source on the
gross dividend paid out at the rate of 5% or 15% depending
upon the extent of shareholding of the Mauritius resident.
Under the Income-tax Act, 1961, tax was deductible at
source at the rate specified under section 115A, etc. Doubts
have been raised regarding the taxation of dividends in the
hands of investors from Mauritius. It is hereby clarified that
wherever a Certificate of Residence is issued by the
Mauritian Authorities, such Certificate will constitute
sufficient evidence for accepting the status of residence as
well as beneficial ownership for applying the DTAC
accordingly.
3. The test of residence mentioned above would also apply
in respect of income from capital gains on sale of shares.
Accordingly, FIIS, etc, which are resident in Mauritius
would not be taxable in India on income from capital gains
arising in India on sale of shares as per paragraph 4 of
Article 13.
Circular : No.789, dated "13-4-2000"
39. Circular No.789 of 2000 dated 13th April 2000 clearly
suggests that certificate of residence issued by Mauritian Authorities
will constitute sufficient evidence for accepting the status of
residence as well as beneficial ownership for the purposes of the
Nikita Gadgil 44 of 82
WP-713-2021-J.doc
Mauritius DTAA and that capital gains arising from sale of shares
would not be taxable in India. It is not in dispute that Circular
No.789 dated 13th April 2000 continued to be in force between India
and Mauritius at the relevant time.
40. A press release dated 1st March 2013 from the Finance Ministry
which is quoted as under also unequivocally declares that the TRC
produced by resident of a contracting State will be accepted as
evidence that he is a resident of that contracting State and the
Income Tax Authorities will not go behind the TRC and question his
residence status.
"FINANCE MINISTRY'S CLARIFICATION ON TAX
RESIDENCY CERTIFICATE (TRC)
PRESS RELEASE, DATED 1-3-2013
Concern has been expressed regarding the clause in the
Finance Bill that amends Section 90 of the Income-tax Act
that deals with Double Taxation Avoidance Agreements.
Sub-section (4) of section 90 was introduced last year by
Finance Act, 2012. That subsection requires an assessee to
produce a Tax Residency Certificate (TRC) in order to claim
the benefit under DTAA.
DTAAs recognize different kinds of income. The DTAAs
stipulate that a resident of a contracting state will be
Nikita Gadgil 45 of 82
WP-713-2021-J.doc
entitled to the benefits of the DTAA.
In the explanatory memorandum to the Finance Act, 2012,
it was stated that the Tax Residency Certificate containing
prescribed particulars is a necessary but not sufficient
condition for availing benefits of the DTAA. The same
words are proposed to be introduced in the Income-tax Act
as sub-section (5) of section 90. Hence, it will be clear that
nothing new has been done this year which was not there
already last year.
However, it has been pointed out that the language of the
proposed sub-section (5) of section 90 could mean that the
Tax Residency Certificate produced by a resident of a
contracting state could be questioned by the Income Tax
Authorities in India. The government wishes to make it
clear that that is not the intention of the proposed
subsection (5) of section 90. The Tax Residency Certificate
produced by a resident of a contracting state will be
accepted as evidence that he is a resident of that
contracting state and the Income Tax Authorities in India
will not go behind the TRC and question his resident status.
In the case of Mauritius, circular no. 789, dated 13-4-2000
continues to be in force, pending ongoing discussions
between India and Mauritius.
However, since a concern has been expressed about the
language of sub-section (5) of section 90, this concern will
be addressed suitably when the Finance Bill is taken up for
consideration."
(emphasis supplied)
41. As can be seen, the transaction of sale by Petitioner is of the
period of 2011 and the press release is of 1 st March 2013. That being
the position, we are unable to comprehend the logic of the findings
of the Advance Ruling Authority impugned in this Petition.
Nikita Gadgil 46 of 82
WP-713-2021-J.doc
42. It is also not in dispute that the decision of Apex Court in Azadi
Bachao Andolan (supra) has not only upheld Circular No.682 of
1994 but also Circular No.789 of 2000. Paragraphs 49 and 50 of the
said decision is usefully quoted as under :
"49. As early as on March 30, 1994, the CBDT had
issued circular no.682 in which it had been emphasised
that any resident of Mauritius deriving income from
alienation of shares of an Indian company would be liable
to capital gains tax only in Mauritius as per Mauritius tax
law and would not have any capital gains tax liability in
India. This circular was a clear enunciation of the
provisions contained in the DTAC, which would have
overriding effect over the provisions of sections 4 and 5 of
the Income-tax Act, 1961 by virtue of section 90(1) of the
Act. If, in the teeth of this clarification, the assessing
officers chose to ignore the guidelines and spent their time,
talent and energy on inconsequential matters, we think that
the CBDT was justified in issuing 'appropriate' directions
vide circular no.789, under its powers under section 119, to
set things on course by eliminating avoidable wastage of
time, talent and energy of the assessing officers discharging
the onerous public duty of collection of revenue. The
circular no.789 does not in any way crib, cabin or confine
the powers of the assessing officer with regard to any
particular assessment. It merely formulates broad
guidelines to be applied in the matter of assessment of
assessees covered by the provisions of the DTAC.
50. We do not think the circular in any way takes away
or curtails the jurisdiction of the assessing officer to assess
the income of the assessee before him. In our view,
therefore, it is erroneous to say that the impugned circular
Nikita Gadgil 47 of 82
WP-713-2021-J.doc
No.789 dated 13.4.2000 is ultra vires the provisions of
section 119 of the Act. In our judgment, the powers
conferred upon the CBDT by sub-sections (1) and (2) of
section 119 are wide enough to accommodate such a
circular."
43. Paragraphs 97 and 98 of the decision in the case of Vodafone
International Holding B.V. v. Union of India (supra) which also
clearly uphold Circular No.789 and the conclusivity of the TRC are
also usefully quoted as under :
"97 We are, therefore, of the view that in the absence
of LOB Clause and the presence of Circular No.789 of 2000
and TRC certificate, on the residence and beneficial
interest/ownership, tax department cannot at the time of
sale/disinvestment/exit from such FDI, deny benefits to
such Mauritius companies of the Treaty by stating that FDI
was only routed through a Mauritius company, by a
company/principal resident in a third country; or the
Mauritius company had received all its funds from a foreign
principal / company; or the Mauritius subsidiary is
controlled / managed by the Foreign Principal; or the
Mauritius company had no assets or business other than
holding the investment/shares in the Indian company; or
the Foreign Principal/100% shareholder of Mauritius
company had played a dominant role in deciding the time
and price of the disinvestment/sale/transfer; or the sale
proceeds received by the Mauritius company had ultimately
been paid over by it to the Foreign Principal/ its 100%
shareholder either by way of Special Dividend or by way of
repayment of loans received; or the real owner/beneficial
owner of the shares was the foreign Principal Company.
Nikita Gadgil 48 of 82
WP-713-2021-J.doc
Setting up of a WOS Mauritius subsidiary/SPV by
Principals/genuine substantial long term FDI in India from/
through Mauritius, pursuant to the DTAA and Circular No.
789 can never be considered to be set up for tax evasion.
98. LOB and look through provisions cannot be read into a
tax treaty but the question may arise as to whether the TRC
is so conclusive that the Tax Department cannot pierce the
veil and look at the substance of the transaction. DTAA and
Circular No. 789 dated 13.4.2000, in our view, would not
preclude the Income Tax Department from denying the tax
treaty benefits, if it is established, on facts, that the
Mauritius company has been interposed as the owner of the
shares in India, at the time of disposal of the shares to a
third party, solely with a view to avoid tax without any
commercial substance. Tax Department, in such a situation,
notwithstanding the fact that the Mauritian company is
required to be treated as the beneficial owner of the shares
under Circular No. 789 and the Treaty is entitled to look at
the entire transaction of sale as a whole and if it is
established that the Mauritian company has been
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 may be
subjected to tax. In other words, TRC does not prevent
enquiry into a tax fraud, for example, where an OCB is
used by an Indian resident for round- tripping or any other
illegal activities, nothing prevents the Revenue from
looking into special agreements, contracts or arrangements
made or effected by Indian resident or the role of the OCB
in the entire transaction."
44. Although paragraph 98 of the Vodafone International Holding
B.V. v. Union of India (supra) has been quoted in the impugned
Nikita Gadgil 49 of 82
WP-713-2021-J.doc
ruling, however, paragraph 97 which is also relevant, appears to
have been missed out by the authority.
45. No doubt mere holding of a TRC cannot prevent an enquiry if
it can be established that the interposed entity was a device to avoid
tax. However, the decisions of the Apex Court cited above have
clearly upheld the conclusivity of the TRC absent fraud or illegal
activities. Nowhere in the impugned ruling the existence of TRC has
been denied. In fact in paragraph 2 of the impugned Ruling, the
Authority has itself set out the existence of a valid TRC in the name
of the Petitioner. Further, except bald allegations, no material has
been placed on record to demonstrate or establish that Petitioner
was a device to avoid tax or that there was fraud or any illegal
activity. There is hardly any discussion in the impugned Ruling on
the applicability of the said Circulars No. 682, 789 or the Press
Releases by the CBDT / Ministry of Finance discussed above.
46. From the facts on record it cannot be said that the Indian
Authorities were not aware of the change or the introduction of the
Nikita Gadgil 50 of 82
WP-713-2021-J.doc
Petitioner as part of the Consortium. Parties arrange their affairs in a
manner as to make their businesses viable and profitable and it is
part of that exercise that the Petitioner appears have been introduced
into the Consortium with full knowledge of all the authorities
concerned. The entire structure as well as the transaction of sale was
in the full knowledge of the Indian Authorities including the tax
authorities.
47. Reference has been made to Article 27A of the Mauritius DTAA
on LOB which was inserted by Notification dated 10 th August, 2016
by amending the said DTAA pursuant to which shell/conduit
companies claiming residence of a contracting State shall not be
entitled to the benefits of the convention. The said Article is usefully
quoted as under:-
" ARTICLE 27A
LIMITATION OF BENEFITS
1. A resident of a Contracting State shall not be entitled to
the benefits of Article 13(3B) of this Convention if its
affairs were arranged with the primary purpose to take
advantage of the benefits in Article 13(3B) of this
Convention.
Nikita Gadgil 51 of 82
WP-713-2021-J.doc
2. A shell/conduit company that claims it is a resident of a
Contracting State shall not be entitled to the benefits of
Article 13(3B) of this Convention. A shell/conduit company
is any legal entity falling within the definition of resident
with negligible or nil business operations or with no real
and continuous business activities carried out in that
Contracting State.
3. A resident of a Contracting State is deemed to be a shell/
conduit company if its expenditure on operations in that
Contracting State is less than Mauritian Rs.1,500,000 or
Indian Rs. 2,700,000 in the respective Contracting State as
the case may be, in the immediately preceding period of 12
months from the date the gains arise.
4. A resident of a Contracting State is deemed not to be a
shell/conduit company if:
(a) it is listed on a recognized stock exchange of the
Contracting State; or
(b) its expenditure on operations in that Contracting State
is equal to or more than Mauritian Rs.1,500,000 or Indian
Rs.2,700,000 in the respective Contracting State as the case
may be, in the immediately preceding period of 12 months
from the date the gains arise.
Explanation : The cases of legal entities not having bona
fide business activities shall be covered by Article 27A(1) of
the Convention.
48. It is observed that this Article disentitles benefits of Article
13(3B) if the affairs were arranged for the primary purpose to take
advantage of the benefits of Article 13(3B). The Article has been
Nikita Gadgil 52 of 82
WP-713-2021-J.doc
inserted with effect from 1st April 2017. According to this Article,
with effect from 1st April 2017, a shell or a conduit company that
claims to be a resident of a contracting State shall not be entitled to
benefits of Article 13(3B).
49. The Petitioner has also made reference to Press Release dated
29th August 2016 issued by the CBDT post amendment to Mauritius
DTAA which was effective from 1st April 2017. The said Press Release
is quoted as under:-
" Government of India
Ministry of Finance
Department of Revenue
Central Board of Direct Taxes
PRESS RELEASE
New Delhi, 29th August, 2016.
Subject: Notification of Protocol for amendment of the
Convention for the avoidance of double
taxation and the prevention of fiscal evasion
with respect to taxes on income and capital
gains, and for the encouragement of mutual
trade and investment between India and
Mauritius - regarding
The Protocol for amendment of the Convention for
the avoidance of double taxation and the prevention of
Nikita Gadgil 53 of 82
WP-713-2021-J.doc
fiscal evasion with respect to taxes on income and capital
gains between India and Mauritius was signed by both
countries on 10th May, 2016. After completion of internal
procedures by both countries, the Protocol entered into
force in India on 19th July, 2016 and has been notified in
the Official Gazette on 11th August, 2016.
The Protocol provides for source-based taxation of
capital gains arising from alienation of shares acquired on
or after 1st April, 2017 in a company resident in India with
effect from financial year 2017-18. Simultaneously,
investments made before 1st April, 2017 have been
grandfathered and will not be subject to capital gains
taxation in India. Where such capital gains arise during
the transition period from 1st April, 2017 to 31st March,
2019, the tax rate will be limited to 50% of the domestic
tax rate of India. Taxation in India at full domestic tax
rate will take place from financial year 2019-20 onwards.
The benefit of 50% reduction in tax rate during the
transition period shall be subject to the Limitation of
Benefits Article, whereby a resident of Mauritius
(including a shell / conduit company) will not be entitled
to benefit of 50% reduction in tax rate, if it fails the main
purpose test and bonafide business test. A resident is
deemed to be a shell / conduit company, if its total
expenditure on operations in Mauritius is less than Rs.
2,700,000 (Mauritian Rupees 1,500,000) in the
immediately preceding 12 months.
The Protocol further provides for source-based
taxation of interest income of banks, whereby interest
arising in India to Mauritian resident banks will be subject
to withholding tax in India at the rate of 7.5% in respect
of debt claims or loans made after 31st March, 2017.
However, interest income of Mauritian resident banks in
respect of debt-claims existing on or before 31 st March,
Nikita Gadgil 54 of 82
WP-713-2021-J.doc
2017 shall be exempt from tax in India as per existing
provisions in the Convention.
The Protocol also provides for updating of the
Exchange of Information Article as per the international
standard, provision for assistance in collection of taxes,
source-based taxation of other income, amongst other
changes.
The Protocol will tackle treaty abuse and round
tripping of funds attributed to the India-Mauritius treaty,
curb revenue loss, prevent double non-taxation,
streamline the flow of investment and stimulate the flow
of exchange of information between the two Contracting
Parties. It will improve transparency in tax matters and
will help curb tax evasion and tax avoidance.
(Meenakshi J Goswami)
Commissioner of Income Tax
(Media and Technical Policy)
Official Spokesperson, CBDT."
50. The said press release expressly provides for grandfathering of
capital gains exemption provided under the erstwhile Mauritius
DTAA. The protocol provides for source based taxation of capital
gains arising from alienation of shares acquired with effect from 1st
April 2017 in a company resident in India viz. from Financial year
2017-18. Investments made before 1st April 2017 have been
grandfathered and will not be subject to capital gains taxation in
India.
Nikita Gadgil 55 of 82
WP-713-2021-J.doc
51. The Authority appears to have clearly missed the clear import
of this Circular as the entire sale by Petitioner was prior to 1 st April,
2017. The arguments of the Revenue with respect to shell company/
conduit can only be considered for investments with effect from 1 st
April 2017 and not case at hand.
52. Therefore, to say that in the JV, Petitioner is a shell company
without any tangible employees, space, assets, etc., incorporated
only a few days before bidding or that it has no management experts
or financial advisors on its payroll, thereby the Petitioner having no
economic or commercial rationale would not be relevant as the
concept of LOB in cases of shell company / conduit would become
applicable to investments with effect from 1st April 2017 only.
53. Therefore, for the Authority to hold that if Petitioner was not
interposed, the Bidvest group in accordance with the Indo-SA DTAA
would have to pay capital gains on the share sale as the same is
taxable in India is misplaced as not relevant as the investment is by
the Petitioner. As noted above, the Petitioner has been incorporated
Nikita Gadgil 56 of 82
WP-713-2021-J.doc
in Mauritius, holds a TRC which is sufficient proof of its residence in
Mauritius, which as noted above, cannot be enquired into unless
there is a fraud or illegal activity, which in this case, has neither been
alleged nor demonstrated. Even if as observed by the Authority that
the entire value creation activities are happening in India leading to
rise in share valuations, in our view absent any element of fraud or
illegality that cannot be a reason to hold the Petitioner's investment
as a device to evade tax. The suggestions / findings with respect to
shell company / conduit, in our view, would apply only in
accordance with Article 27A of the Mauritius DTAA which is
applicable for investment with effect from 1 st April 2017 and not
prior to that, and therefore, same would have to be reconsidered in
that light.
54. True that there may have been abuse of tax treaty laws and
contracting States have taken corrective measures to prevent abusive
transactions by amending the bilateral conventions, however, as
noted above, the amendments to the Mauritius DTAA for plugging
such transactions have been made effective from 1st April 2017,
Nikita Gadgil 57 of 82
WP-713-2021-J.doc
unless there is a fraud or any illegal activity involved. Infact, as
noted above, the investments prior to 1 st April 2017 have been
grandfathered and are not subject to capital gains taxation in India.
The Press Release dated 29th August 2016 quoted above also takes
care of the transition period from 1 st April 2017 to 31st March 2019
where the tax rate has been limited to 50% of domestic tax rate in
India. That taxation in India at full domestic rate is stated to take
place from financial year 2019-20 onwards, subject to other
conditions.
55. Although the observations of the Authority in paragraph 62
with respect to the claim of treaty shopping of as well as the doctrine
of substance over formed in paragraph 63 cannot be faulted with,
however, it needs to be emphasized that the LOB clause has been
made effective for investments only from 1 st April 2017. As noted
above, even the press release dated 29th August 2016 confirms that
investments made before 1st April 2017 will not be subject to capital
gains taxation in India. That being the position these observations of
the authority appear to be misplaced.
Nikita Gadgil 58 of 82
WP-713-2021-J.doc
56. The investment by Petitioner in the JVC was with the
knowledge and consent of the Government of India Authority viz.,
AAI. As noted above, Bidvest, the ultimate holding company, had
informed AAI vide its letter dated 9 th September 2005 that Petitioner
would hold 27% of the share capital of JVC if the Consortium was
selected as successful bidder. Not only that, it was submitted that the
Consortium has addressed various letters dated 24 th May 2005, 3rd
June 2005, 7th July 2005 and 12th July 2005 to AAI seeking
clarification to confirm the proposed change in the Consortium
structure. Neither the Revenue nor the Authority have denied or
disputed the aforesaid facts.
57. Mr. Pardiwalla, learned Senior Counsel had drawn our
attention to paragraph 6.1 of the ITREOI annexed to the Petition on
page 102 quoted as under which clearly enables changes in
Consortium membership :
"6.1 CHANGES IN CONSORTIA MEMBERSHIP
Proposed changes or additions to the Prospective
Bidder's composition following lodgement of EOI are
subject to both the prior approval of AAI and to new
Nikita Gadgil 59 of 82
WP-713-2021-J.doc
Entities in the Consortium of the Prospective Bidder
executing Confidentiality Deeds as referred to in
Section 6.2. Such changes should not affect the quality
and operational capability of the Prospective Bidder."
58. Any change or addition to the prospective bidder's composition
following lodgement of expression of interest is clearly permitted
and to new entities in the Consortium of the prospective bidder,
provided that such changes do not affect the quality and operational
capability of the prospective bidder. The expression 'prospective
bidder' has been defined in paragraph 1.21 to mean an Entity or a
Consortium that submits a formal EOI in response to the ITREOI.
Where the Prospective Bidder is a Consortium, references to
Prospective Bidder should be read as applying to each Entity
constituting the said Consortium. The Consortium that expressed its
interest is the GVK-SA Consortium which consists of four highly
reputable companies statedly having complementary strengths and
resources to partner the Government of India for modernizing India's
primary air transport hubs. The Consortium led by GVK Industries
Limited and partners with SA Airport Operators. SA Airport
Nikita Gadgil 60 of 82
WP-713-2021-J.doc
Operators is a joint venture of Airports Company South Africa
Limited (ACSA). Old Mutual Life Assurance Company South Africa
Limited and the Bidvest Group Limited (BidVest). It is not in dispute
that the GVK-SA Consortium filed the expression of interest on 20 th
July, 2004 in response to the AAI's ITREOI dated 17th February, 2004
clearly disclosing the ownership structure of the JV company. Clause
1.6 of the ITROI is relevant and is quoted as under :
"1.6 Ownership Structure (ITREOI para 5.2.5)
a) The proposed ownership structure of the JV
Company will be 74% GVK-SA and 26% held by
Government of India. GVK-SA is a Consortium
equally held by GVK Industries Limited and SA
Airport Operators. SA Airport Operators in
turn, is held by ACSA, Old Mutual and Bidvest.
The final holdings by the three SA Airport
Operators' members will be finalised once the
requirement of the RFP are issued but in any
event ACSA's interest in the JV Company will
not be less than 10%.
b) The foreign ownership will take the form of the
SA Airport Operator's Investment in GVK-SA
representing 37% in the JV Company.
c) It is not proposed that there will be any airline
ownership of the JV Company.
d) Other than the 26% shareholding in the JV
Nikita Gadgil 61 of 82
WP-713-2021-J.doc
Company by the Government of India it is not
proposed that there will be any other
government ownership of the JV Company. As
a point of clarify the South African Government
has a 74.6% shareholding in ACSA."
59. Thereafter, on 1st April 2005, RFP was issued by AAI to pre-
qualified bidders and the GVK-SA Consortium was one of them. In
the said RFP (on page 152 to the Petition) there is a definition of the
term 'evaluated entity' which is quoted as under :
"Evaluated Entity - shall in relation to a Prime Member that
is a special purpose vehicle ("SPV"), mean the Entity
(a) whose qualifications have been attributed as the
qualification of the Prime Member for the purpose of
evaluation;
(b) that is proposing to have a beneficial ownership of
10% or more in the JVC; and
(c) that is in control of such Prime Member"
60. The definition of 'Prime Member' is also useful and quoted as
under:
"Prime Member - Those Entities comprising the bidder that
propose equity of 10% or more in the JVC and whose
capabilities or its evaluated entities' capabilities are being
assessed for the purpose of the transaction. It is clarified
that AAI and / or GOI public sector entities shall not be
treated as Prime Member(s) irrespective of their percentage
equity holding."
Nikita Gadgil 62 of 82
WP-713-2021-J.doc
61. A conjoint reading of the aforesaid two expressions clearly
suggests that GVK Industries Ltd., ACSA and Bidvest (the ultimate
holding company of Petitioner) are the evaluated entities on the
basis of whose evaluation the bid of the Consortium was considered
according to the evaluation criteria mentioned in the RFP.
62. Clause 6.4 (on page 184) also contemplates changes to the
bidding consortia. Clause 6.4 is quoted as under :
"6.4 Changes to Bidding Consortia
Any proposed changes or additions to any of the
Consortium Members of the PQB in Stage 2 are subject to
the written approval of AAI, and the satisfaction of the
prescribed probity and security requirements in relation to
such party. Request for such approval should be directed
through ABN AMRO and will be considered at the absolute
direction of AAI. The last day for receipt of any application
for a change in of PQB to participate in the bidding process
was on the basis of the consortia membership described by
PQB in their respective EOIs and any new member or
withdrawal of an existing member will be assessed in terms
of the impact on the quality and capability of the PQB."
63. The RFP itself contemplates change of a prime member and an
evaluating member. Clause 6.12 on page 185 which refers to other
rights of AAI is also pertinent to quote :
Nikita Gadgil 63 of 82
WP-713-2021-J.doc
"6.12 Other AAI Rights
AAI / GOI reserves the right, in its absolute discretion
without liability and at any stage during the transaction
process, to:
Add to, or remove parties from, any shortlist of PQBs or
bidders;
Require additional information from any PQB or Bidders;
Vary its tender requirements;
Terminate further participation in the transaction process
for any PQB or Bidder;
Change the structure and timing of the transaction
process;
Accept or reject any offer at any time for any reason;
Not provide PQBs or Bidders any reasons for any actions
or decisions it may take including in respect of the
exercise by AAI of any or all of the above mentioned
rights; and
Take such other action as it considers, in its absolute
discretion, appropriate in relation to the transaction
process for the airport."
64. Pursuant to the RFP, the Consortium submitted the technical
and financial bid on 12th September 2005 making an offer for the
modernisation of Mumbai Airport. As can be seen from page 227 of
the Petition, the bid was submitted by GVK-SA Consortium
comprising of the following members :
"The GVK-SA Consortium, comprising the following entities
had submitted the expression of interest to AAI in respect of
Nikita Gadgil 64 of 82
WP-713-2021-J.doc
the transaction on 20 July 2004 :
GVK Industries limited
Airport Company South Africa Limited
Old Mutual Life Assurance Company South Africa
Limited
The Bidvest Group Limited
Subsequently, the terms of the criteria specified in the
request for proposal dated 1 April 2005, GVK-SA
Consortium vide letters dated 24 May 2005 and 3
June 2005, sought certain clarification from AAI /
ABN AMRO regarding structuring of Consortium and
requested AAI to confirm the proposed change in the
Consortium structure. However, AAI did not convey
its clarification and /or approval to GVK-SA
Consortium.
Thereafter, vide letter dated 12 July 2005 of M/s. Crawford
Bayley and Co. (the legal advisor to the GVK-SA
Consortium for the purpose of transaction) it was conveyed
to AAI /ABN AMRO that in absence of any communication
from AAI in respect of the above dated letters, Old Mutual
Life Assurance Company South Africa Limited shall not be a
part of GVK-SA Consortium."
65. Share holding pattern of the said Consortium has been set out
at page 228 of the Petition which was submitted as part of the RFP is
reproduced as under :
Nikita Gadgil 65 of 82
WP-713-2021-J.doc
GVK Industries Airports Company The Bidvest
Limited South Africa Group Limited
Evaluated Entry Evaluated Entry Evaluated Entry
28% 100% 100%
GVK Airport
Developers Bid Services
Private Limited ACSA Global
Divison (Pty)
72% Limited
Limited
10%
100%
GVK Airport Bid Services
Holdings Private JVC Division
Limited (Mauritius) Ltd
37% 27%
AAI
26%
It can be seen from the above that Petitioner would invest 27% in the
JVC as the prime member, the Bidvest group being the evaluated
entity.
66. As part of the said offer, the compliance of various conditions
were also submitted. The submission on page 231 with respect to
the Petitioner is also pertinent and quoted as under :
Nikita Gadgil 66 of 82
WP-713-2021-J.doc
"A.2(d) Conditions
GVK
GVK Airport Development Company Limited and GVK Holdings
Private Limited have been registered as a companies under the
Companies Act, 1956. Since these are specific investment
vehicles incorporated for the purpose of investment by GVK
Industries Limited and GVK entities in the proposed airport,
JVC, the initial capitalization has been kept at a lower rupee
value to avoid a higher issuance of shares value Rs.2 crores,
each, at the stage of bid and locking up of funds. Immediately
on the GVK-SA Consortium being declared successful, the above
companies propose to file for the status of a non-banking
financial company as per the rules and regulations prescribed by
the Reserve Bank of India.
ACSA and Bidvest
ACSA and Bidvest have obtained the initial approvals from
South African Reserve Bank for issuance of the necessary bid
bonds, debt and equity commitment letters and equity
investment. On the Consortium being declared the successful
bidder, ACSA and Bidvest shall obtain specific approval of the
South African Reserve Bank for each transfer of funds to India
for the purpose of investment in the JVC. The approvals are
expected within four weeks of seeking each such approval.
All necessary approvals have been obtained for the Mauritian
subsidiaries (ACSA Global Limited and Bid Services Division
(Mauritius) Limited)."
67. The offer also contained various resolutions of the share
holders including Petitioner. Also on pages 278 to 280 of the
Petition, the proposed ownership structure of the joint venture
company also suggests that Petitioner would hold 27%. The structure
of the evaluated entities viz. GVK as well as ACSA is also provided
therein.
Nikita Gadgil 67 of 82
WP-713-2021-J.doc
68. After consideration of the technical and financial bid by the
Consortium, the GVK-SA Consortium was selected as the successful
bidder for the purposes of the project viz., modernization and
development of the Mumbai Airport vide communication dated 4th
February 2006. That, the Petitioner is one of the members of the
offerer Consortium. Share holders agreement dated 4th April 2006
between the AAI, MIAL, GVK Airport Holdings Private Limited and
Bid Services Division - Petitioner and ACSA Global Ltd., which is
annexed to the Petition clearly indicates that the Petitioner is a
shareholder of the JV Company i.e. Mumbai International Airport
(Private) Limited. The Petitioner has statedly invested Rs.270 crores
on the acquisition of 27 crore shares of MIAL. The AAI and MIAL
have entered into an OMDA to undertake the project of designing,
developing, constructing, financing, managing, operating and
maintaining the Mumbai Airport. Perusal of the same nowhere
indicates nor even remotely suggests that the Petitioner is an entity
created or interposed to evade tax. The Schedule I of the said
agreement at page 1522 also refers to Petitioner being one of the
Nikita Gadgil 68 of 82
WP-713-2021-J.doc
participants as prime member which are referred to as prime
members at the time of submission of the RFP.
69. It is in this background, that the Authority ought to have
applied its mind before suggesting that the Petitioner was a sham or
a shell or a conduit incorporated only for the purposes of evading tax
in India or as a device. The entire bidding structure as well as the
bid has been evaluated by the AAI and pursuant to the evaluation the
AAI has entered into the OMDA for modernization of the Mumbai
Airport. Neither the AAI nor the Government of India nor any other
person have objected to the Petitioner's introduction or investment.
It is also not the case of the Revenue nor is there any finding from
the Authority that the investment by Petitioner did not have the
necessary compliances. There does not appear to be any irregularity
in complying with the Bid documents. And even if there was any
irregularity, that was a matter between the AAI and the Consortium,
which in our view would have been deemed waived, as not only the
GVK-SA Consortium was declared a successful bidder but Petitioner
has invested in the JV viz. in MIAL but the AAI has also entered into
Nikita Gadgil 69 of 82
WP-713-2021-J.doc
the OMDA with the Consortium for the purposes of the project of
modernization of the Mumbai Airport.
70. At their meetings on 20th February 2011 and 28th February
2011 the Board of Directors of the Petitioner authorized the transfer
of 13.5% of the paid up capital out of 27% held by it to GAHPL for a
consideration of US$ 287,222,000. The Share Purchase Agreement
dated 1st March 2011 was entered into in this regard. On 18 th April
2011 Petitioner made an application under Section 197 of the
Income Tax Act to obtain a NIL withholding tax certificate on the
basis that the gain would not be chargeable to tax in India. On 20 th
May 2011 an order under Section 197 was passed whereby GAHPL
was authorized to pay full sale consideration to Petitioner without
any deduction of tax at source. Thereafter, on 3rd October 2011 a
Addendum to the Share Purchase Agreement was entered into as a
consequence of which the consideration was reduced to US$
231,000,000. This was intimated to Respondent no.2 Assistant
Commissioner of Income Tax (International Taxation) by the
Nikita Gadgil 70 of 82
WP-713-2021-J.doc
Chartered Accountant. If there was any doubt on the Petitioner's
investment or activities etc., there was no necessity of permitting the
purchases of shares, to granting permission to the purchaser to make
payment to Petitioner without deducting TDS.
71. In transnational investments, the use of tax efficient special
purpose vehicles is not unknown. Corporations are primarily created
for business and commercial purposes. Multinational companies
develop corporate structures, joint ventures for operational
efficiency, tax planning, risk, mitigation etc. such that better returns
can be offered to their shareholders. Corporate structures are
created for genuine business purposes generally at the time when
investment is being made. These structures are created to avoid
double taxation as certain countries are exempted from capital gains.
It is not prohibited for the Revenue or the courts to examine the
genuineness and the sound commercial purpose of these investment
vehicles but the burden is entirely on the Revenue to demonstrate
that such incorporation has been effected to achieve a fraudulent,
Nikita Gadgil 71 of 82
WP-713-2021-J.doc
dishonest purpose to defeat the law. Therefore, for the authority to
find that Petitioner was incorporated in Mauritius on 23 rd August
2005 i.e. just two weeks before the submission of the technical and
financial bid by the GVK-SA Consortium, when the expression of
interest was filed on 20th July 2004 does not appear to be something
unusual or suggesting that the same was to defraud the Revenue or
perpetrate any illegal activity, especially when the AAI has not only
not raised any objection to the Petitioner's investment but entered
into OMDA with MIAL into which Petitioner has invested
approximately 270 crores. It is clear on the basis of ITREOI, EOI and
RFP that the AAI had permitted use of special purpose vehicle
structured for the purposes of submitting the technical and financial
bid as well as for holding shares in MIAL. We have seen above from
the shareholding pattern that Petitioner was part of the technical and
financial bid submitted by the GVK-SA Consortium which would hold
shares in the proposed joint venture company i.e. MIAL. Bidvest, the
ultimate holding company was the evaluated entity and Petitioner is
the prime member. Infact, as noted above, the Income Tax Director,
Nikita Gadgil 72 of 82
WP-713-2021-J.doc
International Taxation, New Delhi, had also issued a "Nil"
withholding tax certificate to GAPHL who is the purchaser of the
13.5% shares from Petitioner to make payment / remittance of the
purchase consideration to Petitioner for transfer of shares without
TDS under Section 195 of the Act. Therefore, for the authority to
hold that Petitioner's involvement at the stage of bidding process was
without the approval of the authorities appears to be without
substance.
72. In this regard, paragraphs 43 to 46 of the decision rendered by
Justice K.S. Radhakrishnan in the Vodafone International Holding
B.V. v. Union of India (supra) are also usefully quoted as under :
"43. Corporate structure is primarily created for business
and commercial purposes and multi-national companies
who make offshore investments always aim at better
returns to the shareholders and the progress of their
companies. Corporation created for such purposes are legal
entities distinct from its members and are capable of
enjoying rights and of being subject to duties which are not
the same as those enjoyed or borne by its members. Multi-
national companies, for corporate governance, may develop
corporate structures, affiliate subsidiaries, joint ventures for
operational efficiency, tax avoidance, mitigate risks etc. On
incorporation, the corporate property belongs to the
Nikita Gadgil 73 of 82
WP-713-2021-J.doc
company and members have no direct proprietary rights to
it but merely to their "shares" in the undertaking and these
shares constitute items of property which are freely
transferable in the absence of any express provision to the
contrary.
44. Corporate structure created for genuine business
purposes are those which are generally created or
acquired : at the time when investment is being made; or
further investments are being made; or the time when the
Group is undergoing financial or other overall
restructuring; or when operations, such as consolidation,
are carried out, to clean- defused or over-diversified. Sound
commercial reasons like hedging business risk, hedging
political risk, mobility of investment, ability to raise loans
from diverse investments, often underlie creation of such
structures. In transnational investments, the use of a tax
neutral and investor-friendly countries to establish SPV is
motivated by the need to create a tax efficient structure to
eliminate double taxation wherever possible and also plan
their activities attracting no or lesser tax so as to give
maximum benefit to the investors.
Certain countries are exempted from capital gain, certain
countries are partially exempted and, in certain countries,
there is nil tax on capital gains. Such factors may go in
creating a corporate structure and also restructuring.
45. Corporate structure may also have an exit route,
especially when investment is overseas. For purely
commercial reasons, a foreign group may wind up its
activities overseas for better returns, due to disputes
between partners, unfavourable fiscal policies, uncertain
political situations, strengthen fiscal loans and its
application, threat to its investment, insecurity, weak and
time consuming judicial system etc., all can be contributing
factors that may drive its exit or restructuring. Clearly,
Nikita Gadgil 74 of 82
WP-713-2021-J.doc
there is a fundamental difference in transnational
investment made overseas and domestic investment.
Domestic investments are made in the home country and
meant to stay as it were, but when the trans-national
investment is made overseas away from the natural
residence of the investing company, provisions are usually
made for exit route to facilitate an exit as and when
necessary for good business and commercial reasons, which
is generally foreign to judicial review.
46. Revenue/Courts can always examine whether those
corporate structures are genuine and set up legally for a
sound and veritable commercial purpose. Burden is entirely
on the Revenue to show that the incorporation,
consolidation, restructuring etc. has been effected to
achieve a fraudulent, dishonest purpose, so as to defeat the
law."
73. Paragraph 65, 66, 67 and 68 of the Vodafone International
Holding B.V. v. Union of India (supra) relied upon by Counsel for the
Respondents are also usefully quoted as under :
"65. In the thirteenth century, Pope Innocent IV espoused
the theory of the legal fiction by saying that corporate
bodies could not be ex-communicated because they only
exist in abstract. This enunciation is the foundation of the
separate entity principle.
66. The approach of both the corporate and tax laws,
particularly in the matter of corporate taxation, generally is
founded on the abovementioned separate entity principle,
i.e., treat a company as a separate person. The Indian
Income Tax Act, 1961, in the matter of corporate taxation,
Nikita Gadgil 75 of 82
WP-713-2021-J.doc
is founded on the principle of the independence of
companies and other entities subject to income-tax.
Companies and other entities are viewed as economic
entities with legal independence vis-a-vis their
shareholders/participants. It is fairly well accepted that a
subsidiary and its parent are totally distinct tax payers.
Consequently, the entities subject to income-tax are taxed
on profits derived by them on standalone basis, irrespective
of their actual degree of economic independence and
regardless of whether profits are reserved or distributed to
the shareholders/ participants.
Furthermore, shareholders / participants, that are subject
to (personal or corporate) income-tax, are generally taxed
on profits derived in consideration of their shareholding
/participations, such as capital gains. Now a days, it is fairly
well settled that for tax treaty purposes a subsidiary and its
parent are also totally separate and distinct tax payers.
67. It is generally accepted that the group parent company
is involved in giving principal guidance to group companies
by providing general policy guidelines to group
subsidiaries. However, the fact that a parent company
exercises shareholder's influence on its subsidiaries does
not generally imply that the subsidiaries are to be deemed
residents of the State in which the parent company resides.
Further, if a company is a parent company, that company's
executive director(s) should lead the group and the
company's shareholder's influence will generally be
employed to that end. This obviously implies a restriction
on the autonomy of the subsidiary's executive directors.
Such a restriction, which is the inevitable consequences of
any group structure, is generally accepted, both in
corporate and tax laws. However, where the subsidiary's
executive directors' competences are transferred to other
persons/bodies or where the subsidiary's executive
Nikita Gadgil 76 of 82
WP-713-2021-J.doc
directors' decision making has become fully subordinate to
the Holding Company with the consequence that the
subsidiary's executive directors are no more than puppets
then the turning point in respect of the subsidiary's place of
residence comes about. Similarly, if an actual controlling
Non-Resident Enterprise (NRE) makes an indirect transfer
through "abuse of organisation form/legal form and
without reasonable business purpose" which results in tax
avoidance or avoidance of withholding tax, then the
Revenue may disregard the form of the arrangement or the
impugned action through use of Non-Resident Holding
Company, re-characterize the equity transfer according to
its economic substance and impose the tax on the actual
controlling Non-Resident Enterprise. Thus, whether a
transaction is used principally as a colourable device for the
distribution of earnings, profits and gains, is determined by
a review of all the facts and circumstances surrounding the
transaction. It is in the above cases that the principle of
lifting the corporate veil or the doctrine of substance over
form or the concept of beneficial ownership or the concept
of alter ego arises. There are many circumstances, apart
from the one given above, where separate existence of
different companies, that are part of the same group, will
be totally or partly ignored as a device or a conduit (in the
pejorative sense).
68. The common law jurisdictions do invariably impose
taxation against a corporation based on the legal principle
that the corporation is "a person" that is separate from its
members. It is the decision of the House of Lords in
Salomon v. Salomon (1897) A.C. 22 that opened the door
to the formation of a corporate group. If a "one man"
corporation could be incorporated, then it would follow
that one corporation could be a subsidiary of another. This
legal principle is the basis of Holding Structures. It is a
common practice in international law, which is the basis of
international taxation, for foreign investors to invest in
Nikita Gadgil 77 of 82
WP-713-2021-J.doc
Indian companies through an interposed foreign holding or
operating company, such as Cayman Islands or Mauritius
based company for both tax and business purposes. In
doing so, foreign investors are able to avoid the lengthy
approval and registration processes required for a direct
transfer (i.e., without a foreign holding or operating
company) of an equity interest in a foreign invested Indian
company. However, taxation of such Holding Structures
very often gives rise to issues such as double taxation, tax
deferrals and tax avoidance. In this case, we are concerned
with the concept of GAAR. In this case, we are not
concerned with treaty-shopping but with the anti-avoidance
rules. The concept of GAAR is not new to India since India
already has a judicial anti-avoidance rule, like some other
jurisdictions. Lack of clarity and absence of appropriate
provisions in the statute and/or in the treaty regarding the
circumstances in which judicial anti-avoidance rules would
apply has generated litigation in India. Holding Structures
are recognized in corporate as well as tax laws. Special
Purpose Vehicles (SPVs) and Holding Companies have a
place in legal structures in India, be it in company law,
takeover code under SEBI or even under the income tax
law. When it comes to taxation of a Holding Structure, at
the threshold, the burden is on the Revenue to allege and
establish abuse, in the sense of tax avoidance in the
creation and/or use of such structure(s). In the application
of a judicial anti-avoidance rule, the Revenue may invoke
the "substance over form" principle or "piercing the
corporate veil" test only after it is able to establish on the
basis of the facts and circumstances surrounding the
transaction that the impugned transaction is a sham or tax
avoidant. To give an example, if a structure is used for
circular trading or round tripping or to pay bribes then such
transactions, though having a legal form, should be
discarded by applying the test of fiscal nullity. Similarly, in
a case where the Revenue finds that in a Holding Structure
Nikita Gadgil 78 of 82
WP-713-2021-J.doc
an entity which has no commercial/business substance has
been interposed only to avoid tax then in such cases
applying the test of fiscal nullity it would be open to the
Revenue to discard such inter-positioning of that entity.
However, this has to be done at the threshold. In this
connection, we may reiterate the "look at" principle
enunciated in Ramsay (supra) in which it was held that the
Revenue or the Court must look at a document or a
transaction in a context to which it properly belongs to. It is
the task of the Revenue/Court to ascertain the legal nature
of the transaction and while doing so it has to look at the
entire transaction as a whole and not to adopt a dissecting
approach. The Revenue cannot start with the question as to
whether the impugned transaction is a tax
deferment/saving device but that it should apply the "look
at" test to ascertain its true legal nature [See Craven
(Inspector of Taxes) (supra) which further observed that
genuine strategic tax planning has not been abandoned by
any decision of the English Courts till date].
Applying the above tests, we are of the view that every
strategic foreign direct investment coming to India, as an
investment destination, should be seen in a holistic manner.
While doing so, the Revenue/Courts should keep in mind
the following factors: the concept of participation in
investment, the duration of time during which the Holding
Structure exists; the period of business operations in India;
the generation of taxable revenues in India; the timing of
the exit; the continuity of business on such exit. In short,
the onus will be on the Revenue to identify the scheme and
its dominant purpose. The corporate business purpose of a
transaction is evidence of the fact that the impugned
transaction is not undertaken as a colourable or artificial
device. The stronger the evidence of a device, the stronger
the corporate business purpose must exist to overcome the
evidence of a device."
Nikita Gadgil 79 of 82
WP-713-2021-J.doc
74. As can be seen, the said paragraphs of the Vodafone
International Holding B.V. v. Union of India (supra) support the case
of the Petitioner and the Revenue's reliance on the same does not aid
the case of the Revenue in the facts of this case.
75. The Advance Ruling Authority appears to have completely lost
sight of paragraphs 65 and 66 of the Vodafone International Holding
B.V. v. Union of India (supra).
76. In our view, the logic that Petitioner was brought in for ease of
doing business or for operational reasons and to provide supportive
business environment appears to find favour with the aforesaid
observations of the Hon'ble Apex Court.
77. The reliance by the authority on the case of Padmasundara
Rao(Decd.) and Ors. vs. State of Tamil Nadu and Others (supra) also
appears to be misplaced in view of the aforesaid discussion. The
observations of the Hon'ble Apex Court in the case of Union of India
& Anr. v. Azadi Bachao Andolan and Anr. as well as in the case of
Nikita Gadgil 80 of 82
WP-713-2021-J.doc
Vodafone International Holding B.V. v. Union of India (supra) , as
noted above, squarely apply to the case of Petitioner and there
cannot be any two views about it.
78. Having observed that the Advance Ruling Authority has failed
to consider Circular 682 of 1994, 789 of 2000, the Press release with
respect to the TRC, the decision in the case of Union of India vs.
Azadi Bachao Andolan (supra) , the decision in the case of Vodafone
Intl. Holding B.V. v. Union of India (supra) , the applicability of the
LOB clause as well as the Press Releases dated 1st March 2013 and
29th August 2016 which clearly grandfathers investments made
before 1st April 2017 by stating that such investments will not be
subject to capital gains taxation in India and the investment as well
as the sale in the instant case being prior to 1 st April 2017, in our
view, the matter needs to be remanded back to the Authority.
79. We, accordingly, quash and set aside the Ruling dated 10 th
February, 2020 passed by the Respondent no.1 Authority for
Nikita Gadgil 81 of 82
WP-713-2021-J.doc
Advance Ruling, and remand the matter back to the Authority for
reconsideration of Petitioner's application in the light of the above
discussion, which the Authority shall consider and decide within a
period of eight weeks from today after giving an opportunity of
hearing to Petitioner and the Revenue Authorities.
80. Petition stands disposed in the above terms. No costs.
(ABHAY AHUJA, J.) (DHIRAJ SINGH THAKUR J.)
NIKITA
YOGESH
GADGIL
Digitally signed
by NIKITA
YOGESH GADGIL
Date: 2023.03.09
15:23:29 +0530
Nikita Gadgil 82 of 82
