TaxTMI 
TaxTMI 
2015 (8) TMI 1219
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....ing that the consideration paid by the petitioner and received by its seller is not taxable and therefore, the petitioner was not required to withhold the tax in respect of such consideration. Lastly, the petitioner has sought an order remanding the matter to respondent No.1 for consideration of its application on merits. The application for remand was, however, not pressed and we were invited to decide the matter ourselves in view of the considerable delay that has occurred despite the mandate of the Act. 2. On 31.05.2011, the petitioner made an application to the first respondent-Authority for Advance Ruling. The first respondent by the impugned order dated 02.05.2014 declined to give a ruling on the application on the basis of a prima-facie finding that the factual scenario projected by the Revenue establishes that the transaction in question was designed for avoidance of income tax. It was held that for dealing with a situation under Section 245-R(2)(iii) detailed and in-depth analysis to arrive at a definite conclusion about the nature of the transaction is impermissible. 3. We have accepted the request made by Mr. Kaka, the learned Senior counsel appearing on behalf of the ....
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....d, Blackstone Mauritius requests the Foreign Investment Promotion Board to kindly permit: (i) Blackstone Mauritius, directly and/or through any of its subsidiaries and affiliates, to subscribe to and hold 54,720 equity shares of face value Rs. 10 each, constituting up to 80% of the post issue total paid up equity share capital of SKR BPO Services Private Limited, a company incorporated under the Companies Act, 1956, for a sum of upto Rs. 447,20,00,000/-. (ii) Pursuant to the subscription of equity shares of SKR by Blackstone Mauritius, downstream investment by SKR by way of acquisition of 68,398,726 shares constituting 100% of the equity share capital of Intelenet Global Services Private Limited, a company incorporated under the Companies Act, 1956 and having its registered office at Ramon House, H. T. Parekh Mark, 169, Backbay Reclamation, Mumbai 400020, and engaged in the business of providing process outsourcing services in the ITES sector. (iii) Pursuant to the subscription of equity shares of SKR by Blackstone Mauritius, downstream investment by SKR by way of acquisition of upto 3,229,500 shares constituting 20% of the equity share capital of Sparsh BPO Services Limited, a ....
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....clay (H&B) Mauritius Limited, Housing Development Finance Corporation (HDFC), SKM Technology Ventures Private Limited and persons named in Schedule-II as individual sellers on the one hand (referred to in the agreement as Seller 1, Seller 2, Seller 3, Trust Seller and individual sellers, respectively) and the petitioner (therein called the purchaser) on the other. Serco Group plc and Barclay Banks plc are referred to in the agreement as the purchaser parent guarantor and Barclay, respectively. Recital 'C' sets out the business of the petitioner i.e. the purchaser. It is the same as that of the target company SKR BPO. Each of the sellers i.e. shareholders agreed to sell their shares and the purchaser i.e. the petitioner agreed to purchase the same on the terms and conditions stipulated therein. Blackstone sold its 66.29% equity shares and Barclay sold its 12.75% equity shares in SKR BPO for a consideration of about Rs. 1,400 crores and Rs. 269.40 crores respectively. The question is whether the petitioner was bound to deduct the tax at source and to pay over the same to the Government. 10. Under cover of its letter dated 31.05.2011, the petitioner forwarded an application to respo....
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.... called for by the Authority in any case, such records shall, as soon as possible, be returned to the Commissioner. (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) is already pending before any income tax authority or Appellate Tribunal [except in the case of a resident applicant falling in sub-clause (iii) of clause (b) of Section 245-N] or any court; (ii) involves determination of fair market value of any property; (iii) relates to a transaction or issue which is designed prima facie for the avoidance of income tax [except in the case of a resident applicant falling in sub-clause (iii) of clause (b) of Section 245-N or in the case of an applicant falling in sub-clause (iii-a) of clause (b) of Section 245-N Provided further that no application shall be rejected under this sub-section unless an opportunity has been given to the applicant of being heard: Provided also that where the application is rejected, reasons for such rejection shall be given in the order. (3) A copy of every o....
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....ion shall apply are: (a) in the case of India,- (i) the income-tax including any surcharge thereon imposed under the income-tax Act, 1961 (43 of 1961); (ii) the surtax imposed under the Companies (Profits) Surtax Act, 1964 (7 of 1964): (hereinafter referred to as "Indian tax"): .......... ............ ......... ......... ARTICLE 4- Residents - 1. For the purposes of this Convention, the term "resident of a Contracting State" means 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 similar nature. The terms "resident of India and "resident of Mauritius" shall be construed accordingly. .......... ............ ......... ......... 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 availabl....
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....me 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." This circular and the next were referred to by the Supreme Court in Union of India vs. Azadi Bachao Andolan, (2004) 10 SCC 1, which we will refer to later. (B) Circular No.789 dated 13.04.2000 is important and reads as under:- "Circular No.789, dated 13-4-2000 734. Clarification regarding taxation of income from dividents 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 considered as reside....
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....ediency of the transaction etc. that cannot be done by this Authority. We consider that this is a fit case for the Revenue to investigate and examine the necessary details in order to come to a logical conclusion. Even otherwise, this is a case that falls under proviso (iii) to section 245R(2) which bars this Authority to allow the application. ........... 15. In order to determine as to whether there was any design, several factors have to be taken into consideration and on isolated or a combination of few circumstances, conclusion cannot be arrived at either to hold that there was a design or not. No straight jacket formula can be laid down as to in which case inference of design can be arrived at and in which case not. 16. It is not the legitimacy of the transaction with which we are concerned. What is the legal effect if it is legitimate tax avoidance within the framework of law is not the consideration while dealing with a situation envisaged under proviso (iii) to Section 245R(2). If on detailed examination of materials adduced the applicant satisfies the Revenue officials that the transaction is a legitimate tax avoidance arrangement, naturally the consequences will follo....
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....any further information that it may deem relevant. The order was passed on 27.08.2012 and the learned Chairperson retired the next day. It was, therefore, necessary for the hearing to be conducted de novo. The petitioner by a letter dated 26.03.2013 set out the details of the hearing and the fact that it had submitted all the documents and information relevant to the application over the course of four sets of submissions submitted on 31.05.2011, 31.01.2012, 23.07.2012 and 14.08.2012. It further stated that much of the information requested for had already been submitted with the earlier submissions. The letter also contains a detailed response to the ACIT's letter. A voluminous record was filed by the petitioner before the authorities at the instance of the respondents. Charts were prepared. The petitioner also furnished details of the transactions, corporate structure, share purchase agreements, confidential valuation report of SKR BPO, details of incorporation of Blackstone Mauritius and Barclays, Memorandum & Article of Association of Blackstone Mauritius and Barclays, Tax Residency Certificates, details of the activities of these companies, details of the Directors including ....
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....in that paragraph itself. In the very next sentence in that paragraph where it is stated that in order to find out the true nature of the transactions, it will be necessary to investigate and examine number of things like fund flows, commercial purpose of the Mauritius companies, commercial expediency of the transactions etc. The order does not co-relate any document to the prima-facie finding. Nor does the order indicate what aspect the first respondent had in mind in respect of the said things, namely, fund flows, commercial purpose of the Mauritius companies and commercial expediency of the transactions etc. which are necessary for determining the true nature of the transactions. The order does not state that any information or documents necessary for the consideration of these aspects were not furnished or were not on record. Paragraph-16 of the impugned order observes that for dealing with a situation envisaged under proviso (iii) to sub-section (2) of Section 245R detailed an in-depth analysis to arrive at a definite conclusion about the nature of the transaction is impermissible. There was no indication in the order and there was no indication even before us as to the direct....
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....eir shares in SKR BPO to the petitioner was actually conceived at the time Blackstone Mauritius subscribed to the shares in June, 2007 and that such a plan was only implemented in the year 2011. The record certainly does not indicate the same. It indicates to the contrary. 25. We may have considered remanding the matter to the first respondent for a fresh hearing to enable the Department to present its case afresh. We, however did not do so and instead heard the matter ourselves for more than one reason. Firstly, the legislative mandate is that the application is to be decided within six months. The application was made on 31.05.2011 and the six month's period expired on 31.11.2011. The matter had been heard between May, 2011 and May, 2014. The matter was once part heard and thereafter ordered to be heard afresh. By that time the constitution of the first respondent changed and therefore, the matter had to be heard de novo. Considering the nature of this matter, we decided to hear it on-merits. Moreover, the Revenue did not demand any further evidence and had no further queries to raise. No purpose would be served, therefore, by remanding the matter. 26. This brings us to a consi....
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....21 January 2011 to 20 January 2012. This eleventh day of February, two thousand and eleven. Sd/- V.Ramdin (Mrs) For Director-General Mauritius Revenue Authority." The authenticity of these certificates is not doubted. 29. As per Article 1 the convention applies to persons who are residents of one or both of the contracting States. Blackstone Mauritius and Barclays are both residents of Mauritius. The residency certificates referred to above establish the same. Clause 2 of the CBDT circular No. 789 expressly clarifies that Certificates of Residence issued by the Mauritius authorities constitute sufficient evidence for accepting the status of residence as well as the beneficial ownership for applying the DTAC. The certificate of residence issued by the Mauritian authorities in favour of Blackstone Mauritius and Barclays was accepted by the authorities. Its genuineness and validity was fairly not questioned either before the first respondent or before us. The certificates of residence issued by the Mauritius Authorities, therefore, establish that Blackstone Mauritius and Barclays are residents of Mauritius within the meaning of Article-1. 30. In view of the circular, it is incu....
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.... (c) after sub-section (4) and before Explanation 1, the following sub-section shall be inserted, namely:- "(5) The certificate of being a resident in a country outside India or specified territory outside India, as the case may be, referred to in sub-section (4), shall be necessary but not a sufficient condition for claiming any relief under the agreement referred to therein." The proposed sub section (5) was not implemented. Parliament was obviously, therefore, conscious of the Circular No. 789 of 2000 and the effect thereof, namely, that the certificate of Residence issued by the Mauritian authorities would constitute sufficient evidence for accepting the status of residence as well as the beneficial ownership for applying the DTAC accordingly. Though an amendment in the Finance Bill was proposed which would affect the circular, the same was never implemented. (C) The reason for Parliament not implementing the amendment is also evident from the clarification dated 01.03.2013 issued by the Finance Ministry specifically regarding Tax Residency Certificates. It is necessary to set out the entire circular as it is of vital importance. It establishes beyond doubt now that the Cir....
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.... Bill, 2013, the clarification issued by the Finance Ministry regarding the Tax Residency Certificate dated 01.03.2013 and the Finance Act, 2013 establish beyond doubt that the Residence Certificate issued by the Mauritius authorities must be accepted provided ofcourse it is established that it has been issued by the appropriate Mauritius Authorities. As we mentioned earlier it is not disputed that the Residence Certificate relied upon by Blackstone Mauritius and Barclays were issued by the Mauritius authorities. 35. This is a convenient stage to introduce the judgment of the Supreme Court in Union of India and another v. Azadi Bachao Andolan and another 2003 (263) Income Tax Reports, 706. We will be referring to this judgment more than once for it also answers the other questions conclusively. The Supreme Court considered the very provisions that we have referred to as well as the said Circulars issued by the Central Board of Direct Taxes. With reference to the Circular No. 682 dated 30.03.1994, the Supreme Court observed that relying on this circular a large number of foreign institutional investors (hereinafter referred to as "FIIs"), which were resident in Mauritius, invested ....
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....nts that were considered by the Supreme Court. It is sufficient to note that the Supreme Court overruled the judgment of the Delhi High Court. In respect of such circulars and even the findings of the Delhi High Court, the Supreme Court held:- "................28. A survey of the aforesaid cases makes it clear that the judicial consensus in India has been that Section 90 is specifically intended to enable and empower the Central Government to issue a notification for implementation of the terms of a Double Taxation Avoidance Agreement. When that happens, the provisions of such an agreement, with respect to cases to which they apply, would operate even if inconsistent with the provisions of the Income Tax Act. We approve of the reasoning in the decisions which we have noticed. If it was not the intention of the legislature to make a departure from the general principle of chargeability to tax under Section 4 and the general principle of ascertainment of total income under Section 5 of the Act, then there was no purpose in making those sections "subject to the provisions of the Act". The very object of grafting the said two sections with the said clause is to enable the Central Gove....
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....lusiveness of a certificate is a matter of legislative action and cannot form the subject-matter of a circular issued by a delegate of legislative power. 53. As early as on 30-3-1994, 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 Mauritian tax law and would not have any capital gains tax liability in India. This circular was a clear enunciation of the provisions contained in DTAC, which would have an 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 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. Thus, Circular No. 789 does not i....
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....een otherwise, Article 4 would have been worded differently. A view to the contrary would make the DTAC unworkable and erode the basis thereof. 40. As we mentioned while dealing Article-4, the term 'resident of a Contracting State' means any person who under the laws of that State i.e. Mauritius is liable to taxation therein by reason of his domicile, residence, place of management or any other criterion of similar nature. The terms "resident of India" and "resident of Mauritius" shall be construed accordingly. Whether a person is actually required to pay tax or not in respect of a particular transaction is irrelevant in determining whether he is liable to taxation. A view to the contrary could result in the entire DTAC being rendered unworkable. Take for instance a case where the Government of one of the countries introduces a tax holiday or grants an exemption for a specified period or where a tax exemption is introduced or revoked. If the respondent's submission is to be accepted, the position would be fluid and fluctuating depending upon whether a person is required to pay tax or not at a given point of time in Mauritius. It would mean that the person would be liable to pay ta....
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....t it is clear that FIIs incorporated under Mauritian laws are liable to taxation; therefore, they are "residents" in Mauritius within the meaning of DTAC." 42. The Supreme Court also referred to the Organization for Economic Co-operation and Development Council (OEDC), Model Convention, 1977 and commentaries in relation thereto in support of this view and concluded there from as follows:- "It is, therefore, not possible for us to accept the contentions so strenuously urged on behalf of the respondents that avoidance of double taxation can arise only when tax is actually paid in one of the contracting States." 43. Capital gains arising from the sale of the said shares can only be brought to tax in Mauritius. This is also clear from Article 13. 44. Clause-4 of Article 13 provides that the gains derived by a resident of a contracting State (Blackstone Mauritius and Barclays are residents of Mauritius a contracting State), from the alienation of any property other than those mentioned in paragraphs (1) (2) and (3) thereof (the shares of SKR BOP sold by Blackstone Mauritius and Barclays do not fall within paragraphs (1), (2) and (3) of Article 13 shall be taxable only in that State ....
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....ch ships and aircraft, shall be taxable only in the Contracting State in which the place of effective management of the enterprise is situated. The entitlement to tax a gain from the alienation of such property is determined on the basis of the place i.e. situs of the effective management of the enterprise. There is no such stipulation in paragraph-4 which applies to the present case. Thus, under the DTAC it is clear that the capital gain from the alienation of the shares situated in India can only be taxed in Mauritius and not in India where the other requirements are as they are in this case. 47. Mr. Joshi contended that this is a case of treaty shopping. Blackstone Mauritius and Barclays do not do any business in Mauritius and that it is the share holders of these companies who actually gain from the transactions in question. These share holders are not residents of Mauritius. Therefore, the provisions of the DTAC are not available to them. 48. The case of 'treaty shopping' was dealt with by the Supreme Court in Union of India v. Azadi Bachao Andolan (supra), in detail. The following observations are important:- "Treaty shopping - is it illegal? The respondents vehemently u....
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....res of each class of the company, be owned directly or indirectly by one or more individual residents of one of the contracting States. Article 24 of the Indo-US DTAC is in marked contrast with the Indo- Mauritius DTAC. The appellants rightly contend that in the absence of a limitation clause, such as the one contained in Article 24 of the Indo-US Treaty, there are no disabling or disentitling conditions under the Indo- Mauritius Treaty prohibiting the resident of a third nation from deriving benefits thereunder. They also urge that motives with which the residents have been incorporated in Mauritius are wholly irrelevant and cannot in any way affect the legality of the transaction. They urge that there is nothing like equity in a fiscal statute. Either the statute applies proprio vigore or it does not. There is no question of applying a fiscal statute by intendment, if the expressed words do not apply. In our view, this contention of the appellants has merit and deserves acceptance. We shall have occasion to examine the argument based on motive a little later. The decision of the Chancery Division in F. G. (Films) Ltd., In re [(1953) 1 WLR 483 : (1953) 1 All ER 615] was pressed i....
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....nt No.2 raised objection as to the maintainability of the application for advance ruling and requested for additional date. By an order dated 04.04.2012, the Chairman of the first respondent opined that the question raised by the Revenue on tax avoidance should be left to be decided at the final hearing under section 245R(4) of the Act. He held that it is not possible to come to a prima-facie finding at that stage on the basis of the material put forth one way or the other and that it would not be just to do so either. He was satisfied that the consideration of that question should also be postponed to the stage when the application is taken up for hearing to render the ruling. It was further observed that the finding on such a plea would have a serious impact on the ruling to be given in the application, one way or the other. The Chairman, therefore, reserved the question whether the present scheme put forward by the petitioner is one for avoidance of tax in India for consideration at the stage of hearing under section 245R(4) of the Act. The order concluded as under:- "Subject to the above reservation, the application is allowed under section 245R(2) of the Act for rendering a r....