TaxTMI 
TaxTMI 
2014 (8) TMI 606
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....and sale of shares of a US company (Exevo Inc.) sold by the Mauritius Company (Copal Market Research Limited) to another US company (Moody's Analytics, Inc.) were not liable to tax, in India, in the hands of the seller companies. Consequently, the purchasing companies - M/s Moody's Group Cyprus Ltd. and Moody's Analytics, Inc.- had no obligation to withhold tax under Section 195 of the Income Tax Act, 1961 (hereinafter referred to as the 'Act') from the consideration payable to the sellers - the Mauritian companies. 3. The details of various companies involved in the present writ petition are:- i. Copal Research Limited ('CRL') - a company incorporated on 17.03.2004 under the laws of Mauritius. ii. Copal Research India Private Limited ('CRIL') - an Indian company incorporated on 31.12.2002. iii. Copal Market Research Limited ('CMRL') - a company incorporated on 01.04.2008 under the laws of Mauritius. iv. Copal Partners Limited ('Copal-Jersey') - a company incorporated in Jersey on 21.07.2006. v. Exevo India Private Limited ('Exevo-India') - an Indian company incorporated on 22.03.2002. vi. Exevo Inc. ('Exevo-US') - a company incorporated on 24.07.2002 in United States of....
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....a. Subsequently, CMRL entered into a Share Purchase Agreement dated 03.11.2011 (hereinafter referred to as the 'SPA-II') with Moody-USA whereby CMRL sold all the shares of Exevo- USA to Moody-USA. The effect of the said transaction was that the control of the Indian Company (Exevo-India), which was a wholly owned subsidiary of Exevo-USA, was also indirectly transferred to Moody-USA (an American Company). The sale consideration under the said SPA-II comprised of two components being a fixed sum of USD 11,176,000 payable in lump-sum (referred to as initial consideration in the SPA-II) and deferred consideration in the form of an 'Earn-out' payable in one full and final installment as per Clause 5 of the SPA-II read with Schedule 5 thereto. 7. Copal-Jersey was, at the material time, the ultimate holding company of the Copal Group and its certain shareholders (other than banks and financial institutions) held approximately 67% of the issued and paid up capital of the company (the said shareholders are hereinafter referred to as the 'Copal Group Shareholders'). Banks and other Financial Institutions held the balance 33% shares (approx.) of Copal-Jersey. Copal Group Shareholders....
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....her such income would be taxable under the Act by virtue of any income having accrued or arisen to CMRL in India through or from: i. Any property in India; or ii. Any asset or source in India? 6) If the answer to question no. 5, is in the affirmative, whether the `Earn-Out' consideration would be chargeable to tax in the assessment year relevant to the previous year in which transfer took place or the year in which Earn-Out is received by CMRL? 7) Whether on the stated facts, the Applicant, being a foreign company and in absence of a place of business in India, would be subject to tax under the provisions to Section 115JB of the Act? 8) Whether on the facts and in law, the Applicant is required to withhold tax under section 195 of the Act on the income chargeable to tax in India in the hands of CMRL from sale of shares in Exevo Inc. to the Applicant? 9) If the answer to question 8 is in the affirmative, then, whether the Applicant would be liable to interest under section 201(1A) of the Act?" 10. The AAR framed the following questions in AAR No.1188/2011:- "1) Whether on facts and in law, the applicant is justified in its view that capital gains, if any, arising on the ....
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.... by the impugned ruling held that the capital gains arising out of the said transaction were not liable to tax in India in the hands of the respondents. The AAR further ruled that the Earn-Out consideration would also be a part of the consideration receivable by the respondents. The AAR held that there was no obligation on Moody-USA and Moody- Cyprus to withhold tax under Section 195 of the Act. Aggrieved by the impugned ruling, the Revenue has filed the present writ petitions. 12. The learned counsel appearing for the Revenue has submitted that the transactions for sale of shares of Exevo-USA and CRIL must not be viewed in isolation but in conjunction with the sale of shares of Copal- Jersey to Moody-UK as contemplated under SPA-III dated 04.11.2011. And, all the transactions i.e. Transaction-I, Transaction-II and Transaction- III were an integral part of a single transaction. It was argued that the W.P.(C) 2033/2013 & other connected matters Page 10 of 28 commercial understanding between Copal Group Shareholders and Moody- UK was to structurally transfer the entire businesses and interest of the Copal Group to the Moody Group and the same was effectuated by the three transaction....
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....tax. 14. The learned counsel for the assessee had objected to the contentions of the revenue and submitted that the same were neither raised before the AAR nor pleaded in the writ petition. He further submitted that the shares of CRIL and shares of Exevo-USA were sold to Moody Group as they insisted on acquiring 100% shareholding of these companies. However, with respect to shares of Copal-Jersey only 67% of its shares were sold to a separate entity of the Moody Group. That transaction, thus, ought to be considered as a transaction independent of Transaction-I and Transaction- II. 15. Before proceeding to consider the rival submissions, it would be necessary to refer to Clause (iii) of Proviso to Section 245R(2) of the Act which reads as under:- "245R. Procedure on receipt of application.- (1) xxxx xxxx xxxx xxxx (2) The Authority may, after examining the application and the records called for, by order, either allow or reject the application: Provided that the Authority shall not allow the application where the question raised in the application,- (i) xxxx xxxx xxxx xxxx (ii) xxxx xxxx xxxx xxxx (iii) relates to a transaction or issue which is designed prima facie f....
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....RIL and Exevo- US respectively; and (ii) sale consideration for the shares of Copal-Jersey. The banks and the financial institutions which held shares in Copal-Jersey also participated in the dividends that were distributed from the funds received from the sale proceeds of the sales of CRIL and Exevo-US. It would be obvious that this could not have been commercially achieved if the overall transaction had been structured in the manner as suggested by the Revenue i.e. by simplicitor sale of shares of Copal-Jersey. Thus, even if it is assumed that the transactions for sale of shares of CRIL and Exevo-US as well as the sale of 67% shares of Copal-Jersey are considered as a singular transaction which essentially entails exit by the shareholders of Copal-Jersey, commercially, the structure of transfer as suggested by the Revenue would not be an alternative to the transactions in question; First of all, for the reason that the Moody Group would not acquire 100% direct control over CRIL and Exevo-US but only an indirect 67% economic interest therein and secondly, the banks and financial institutions holding 33% shares in Copal-Jersey would not have received their share of the consideratio....
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....eholders to Moody-UK has been structured in the manner as suggested by the Revenue, there would be no incidence of tax. According to the Revenue, the real transaction is sale of shares by shareholders of Copal- Jersey to Moody-UK. This would mean that shareholders holding 67% of the equity in Copal-Jersey namely the Copal Group Shareholders would transfer their shares to Moody-UK without there being any sale of shares by CRL and CMRL of their equity holdings in CRIL and Exevo-US respectively. 25. The consideration payable by Moody-UK to Copal Group Shareholders for their 67% shareholding was agreed as USD 93,509,220. This consideration obviously does not include the fixed value of the shares of CRIL or Exevo-India as 100% economic interest of those companies was acquired by the Moody Group one day prior to the sale and purchase of shares of Copal-Jersey and the fixed consideration thereof had been distributed as dividends. If the sale and purchase transactions under SPA-I and SPA-II had not been executed and only 67% shares of Copal-Jersey would have been acquired by Moody-UK then the value of the Copal- Jersey shares would also include the value of shares of CRIL and Exevo- US. I....
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....ich read as under:- "Explanation 4.-For the removal of doubts, it is hereby clarified that the expression "through" shall mean and include and shall be deemed to have always meant and included "by means of", "in consequence of" or "by reason of". Explanation 5.-For the removal of doubts, it is hereby clarified that an asset or a capital asset being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be and shall always be deemed to have been situated in India, if the share or interest derives, directly or indirectly, its value substantially from the assets located in India;" 27. The notes to clauses explained the introduction of the Explanations 4 and 5 to Section 9(1)(i) of the Act as being clarificatory. A plain reading of Explanation 5 also indicates that the given reason for its introduction was for removal of any doubts. In other words, the language of the said legislative amendment suggests that it was always the intention of the legislature that an asset which derives its value from assets in India should be considered as one which is situated in India. The clear object of Section 9(1)(i) of the Act is inter alia to cas....
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....ve any fixed meaning and was vague. After analysis, the Committee noted that it was necessary to pin down a definition of the said expression and for that purpose, there were no reason to depart from the Direct Tax Code Bill, 2010 (DTC) that had been put in the public domain. Under the DTC, gains from the sale of assets situated overseas, which derived more than 50% of their value from assets situated in India, were liable to be taxed in India. The Shome Committee in its draft report recommended as under:- "The word "substantially" used in Explanation 5 should be defined as a threshold of 50 per cent of the total value derived from assets of the company or entity. In other words, a capital asset being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be situated in India, if the share or interest derives, directly or indirectly, its value from the assets located in India being more than 50% of the global assets of such company or entity. This has been explained through the above illustration." 30. In addition to the above, the 'United Nations Model Double Taxation Convention between Developed and Developing Countries' and the....
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..... (2) For the purposes of this paragraph, "principally" in relation to ownership of immovable property means the value of such immovable property exceeding 50 per cent of the aggregate value of all assets owned by the company, partnership, trust or estate." 32. The 'OECD Model Tax Convention on Income and on Capital' provides a means of settling on a uniform basis the most common problems that arise in the field of international juridical double taxation. Article 13 of the said Convention deals with the taxes on capital gains. Article 13(1) provides that the gains derived by a resident of a Contracting State from the alienation of immovable property situated in another Contracting State may be taxed in that other State. Article 13(4) of the said Convention provides that the 'gains derived by a resident of a Contracting State from the alienation of shares or comparable interests deriving more than 50 per cent of their value directly or indirectly from immovable property situated in the other Contracting State may be taxed in that other State.' 33. In view of the above, gains arising from sale of a share of a company incorporated overseas, which derives less than 50% of its value ....
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....t was stated that the companies were managed by their respective Board of Directors. It is also disputed that CRL and CMRL were not operative companies. It is stated that both CRL and CMRL held category-I Global Business Licenses (GBL) w.e.f. 18.03.2004 and 03.04.2008 respectively. CRL received substantial revenues from provision of services relating to business of financial research and CMRL also received revenues from provision of services relating to business of market research. The financial statements of both the said companies indicated that the companies had received substantial revenues. The respondent also disputed the contentions that CRL and CMRL were shell companies and asserted that the said companies were companies with substance. In the alternative, it was submitted that the India-Mauritius Double Taxation Avoidance Agreement did not include a Limitation of Benefits (LOB) clause and thus, it was not open for the revenue to contend that the said companies should be denied the treaty benefit with India. 38. In our view, the CRL and CMRL cannot be stated to be shell companies so as to ignore their corporate identities. Even according to the revenue, the companies are g....
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.... vests in its Board of Directors as authorized by the General Body. The role of Rishi Khosla highlighted by the Revenue is in respect of the sale transactions undertaken and in pushing them through. It does not appear to be a role in connection with the running of the businesses of the companies concerned. It is not shown that the management of the companies in Mauritius in general, is not with a Board of Directors of those companies sitting in Mauritius and that the management and control is from United Kingdom of which Rishi Khosla is a resident. Even if one were to take the Business Advisory Agreement relied on by the applicants with a pinch of salt, it cannot be said that the role played by Rishi Khosla in these transactions establish that the management and control of the Mauritian companies is with Rishi Khosla. It is therefore not possible to accept the contention of learned counsel for the Revenue that by applying the place of management test, the seller companies could be held to be non-Mauritian companies. 12. It was contended that Rishi Khosla has not acted in terms of the Board Resolution relied on and that he had varied the terms of the transaction at his pleasure and....