Treaty benefit denied for a Mauritius share-holding vehicle lacking commercial substance; Indian tax applied to the capital gains.

Capital gains from the transfer of shares by a Mauritius resident company were treated as taxable in India because the treaty claim under Article 13(4) of the India-Mauritius DTAA was denied. The arrangement was found to lack commercial substance: the Mauritius entity was incorporated shortly before the bid, inserted late into the consortium structure, and had no independent business rationale beyond routing the investment. On that basis, beneficial ownership and residence status were insufficient to secure treaty protection, and the anti-avoidance principle prevailed over the formal structure of the transaction.

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Issues: Whether the capital gains arising from the sale of shares held by a Mauritius resident company in an Indian company were taxable in India, or exempt under Article 13(4) of the India-Mauritius Double Taxation Avoidance Agreement.

Analysis: The application of the treaty depended on whether the applicant was the true beneficial owner of the shares and whether the Mauritius entity had independent commercial substance. The record showed that the Mauritius company was incorporated shortly before the bid, was interposed at a late stage in the consortium structure, and had no demonstrated independent business rationale apart from routing the investment. In these circumstances, the arrangement was found to be a device lacking commercial substance, and the treaty benefit could be denied notwithstanding residence status and the absence of an express limitation of benefits clause. The Revenue's reliance on the anti-avoidance principle and the substance of the transaction was accepted over its formal structure.

Conclusion: The capital gains from the share transfer were held taxable in India, and the applicant was held not entitled to the benefit of Article 13(4) of the India-Mauritius Double Taxation Avoidance Agreement.

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