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Article 13 India-Mauritius DTA – lifting corporate veil, substance over form, conduit arrangement
Facts:
In 2006, a Mauritius-based fund invested in shares of an Indian real estate company, with all capital used to buy land in Hyderabad. Due to a land title dispute unresolved until 2019, the fund later sold its shares to another Indian firm. For the 2019-20 tax year, the fund reported no income, claiming relief under article 13(4) of the DTA.
Revenue’s contention:
The Revenue denied the treaty benefit, arguing that the Indian company functioned as a shell entity created solely to hold land on behalf of the Mauritius fund. Revenue lifted the corporate veil and recharacterized the transaction as a sale of immovable property by the Mauritius Fund. It applied the doctrine of substance over form and asserted the matter involved treaty abuse, with the substance of the transaction being the transfer of immovable property rather than shares.
Tribunal decision:
The Tribunal agreed with Revenue’s findings and denied the treaty benefit, treating the structure as artificial. It applied the doctrine of substance over form, lifted the corporate veil, and regarded the Indian company as a conduit entity.
Analysis:
The Tribunal, along with Revenue, relied on Explanation 5 to Section 9(1)(i)—which, in my view, was not relevant since it applies to transfers of shares of a foreign company deriving substantial value from Indian assets. Here, the transaction involved the transfer of shares of an Indian company, making explanation 5 inapplicable and s9(1)(i) itself directly applicable.
The argument that the Indian company was a mere conduit overlooks key facts. The company’s inactivity stemmed from a legal dispute over the land it had acquired for development, a dispute that persisted for 13 years. Without clear title, how could development have begun? This crucial context was not examined in the proceedings.
Additionally, the appellant clarified that the Mauritius-based fund was being liquidated, prompting the sale of the Indian company’s shares. It would have been prudent to consider this fact in greater detail, supported by further evidence.
Notably, General Anti-Avoidance Rules (GAAR) were not invoked, and the Principal Purpose Test (PPT) was not applicable at the time. There was no argument that the arrangement amounted to treaty abuse, no involvement of a third country, and the tax benefit claimed was squarely within the provisions of the India-Mauritius treaty. The protocol to the treaty even grandfathered exemptions for investments made before April 2017, a point left unaddressed.
Lifting the corporate veil requires robust documentation and evidence to establish that the structure was a sham. Globally, it is common for foreign entities to establish subsidiaries for legitimate business purposes. Why single out this particular structure? Furthermore, no analysis was provided regarding possible FEMA or FDI regulation violations, and in the absence of any such restrictions, the totality of circumstances suggests there was no sham, no conduit, and no treaty abuse.
This case shows the need for a thorough, evidence-based approach when assessing substance and form in cross-border transactions, especially in the context of established global business practices.
