Under the provisions of a tax treaty between India and Dubai, any capital gains arising from the sale of shares of Sun India Ltd, an Indian Company would be taxable only in Dubai if the transferor is a resident of Dubai

The above arrangement of splitting the investment through two subsidiaries appears to be with the intention of obtaining tax benefit under the treaty. Further, there appears to be no commercial substance in creating two subsidiaries as they do not change the economic condition of investor Gama Inc. in any manner (i.e. on business risks or cash flow), and reveals a tainted element of abuse of tax laws. Hence, the arrangement would be treated as an impermissible avoidance arrangement by invoking General Anti Avoidance Rules 'GAAR'. Consequently, treaty benefit would be denied by ignoring Fama Inc. and Gama Inc. The two subsidiaries, or by treating Fama Inc. and Gama Inc. as one and the same company for tax computation purposes, profits from sale of shares shall be taxable in India.