TaxTMI 
TaxTMI 
2018 (2) TMI 855
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....ear 2008, having its registered office at Mauritius with a valid Tax Residency Certificate granted by the Mauritius tax authorities, and holds a Category 1 Global Business License. 2.2 The Applicant is a part of 'C' Equity Portfolio II LP and ' C' Affiliates Fund LP ('C' Group), which cumulatively hold 87.56% shares of the Applicant and the balance 12.44% shares are held by other individual investors. It's business activities are carried on from Mauritius and managed by its Board of Directors, comprising of 3 Directors, out of which 2 were residents of Mauritius, at the time of making the investments. The sole purpose of its incorporation was to invest in 'S' sector in India and other Asian markets, and has invested in 'AB' International and companies in Philippines and Indonesia, which are engaged in 'S' business. The shares of 'AB' were acquired as under: Particulars Number of shares Share purchase on 10 Dec. 2008 9,900 Share purchase on 14 May 2009 75,52,000 Share purchase on 6 November 2009 12,90,358 Total shares 88,52,258 2.3 The Applicant made further investment from time to time as mentioned below: Dates of Capital infusion ....
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....usion Number of shares 27 June 2013 662,878 31 January 2013 692,222 29 July 2013 7,081,938 2.8 It is submitted that as it's business objective of being an investment holding company, it had also invested in other companies, namely 'PTN' and 'AB' Philippines. The transfer of shares held for almost 3 years in 'AB' International and other Group companies was undertaken with a view to implement the overall Group strategy and business re-organisation. Further, the Applicant continued to hold the shares of 'AB' International for another 4+ years indirectly through its subsidiary, 'AB' Singapore. 3. On the above facts, as submitted by the Applicant, the following Questions on which advance ruling is sought, have been framed: I. Whether on the facts and circumstances of the case, the Applicant will be entitled to the benefits of the Agreement between the Government of Mauritius and the Government of the Republic of India for the avoidance of double taxation and prevention of fiscal evasion with respect to taxes on income and capital gains (''the India-Mauritius tax treaty'')? II. If the answer to Question 1 is in the affirmative, wheth....
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.... capital gains earned by the Applicant from transfer of shares of 'AB' International would not be liable to tax in India, in view Circular nos. 682 and 789, and decisions in UOI v Azadi Bachao Andolan (263 ITR 706) (SC); E*Trade Mauritius Ltd., Praxair Pacific Ltd., DB Zwirn Mauritius Trading. 4.3 In respect of Question III, the Applicant contends that since the gain on transfer of shares is not taxable in India, the consideration received by the Applicant would not be subject to any withholding tax as per section 195 of the Act. It relies on the decision of Supreme Court in case of GE India Technology Centre (P) Ltd vs CIT [(2010) 327 ITR 456]and Transmission Corporation of AP Ltd and Another vs CIT [(1999) 239 ITR 587]; and recent rulings of the Hon'ble AARin case of JSH Mauritius Ltd, Dow Agri and Shinsei (supra). 4.4 In respect of Question IV, that sale of shares by the Applicant would not give rise to any tax incidence in India and hence the transfer pricing provisions contained in section 92 to section 92F of the Act would not apply to the proposed transaction it relies on the ruling of Bombay High Court in case of Vodafone India Services Private (368 ITR 1), Shell Indi....
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....e, when the shares are finally sold. Hence, the incorporation of the Applicant is a device to avoid tax qua India and it is incorporated in Mauritius only to take advantage of the India Mauritius DTAC. 5.5 As a part of business re-organization, the Applicant sold its entire shareholding in 'AB' International to another company 'AB' Singapore, for a consideration of shares of Singapore company equalling the fair market value of shares of the Indian company. 5.6 It is submitted that the nature of the transactions give an impression of a colourable/artificial device that is employed for the purpose of avoiding tax. As seen from the annual returns which are submitted as part of the enclosed documents with the application, the Applicant does not have any business activity other than holding the shares. The holding company as part of 'C' Group is involved in business of middle market buyouts. The Group buys different businesses, sells them at appropriate time and value. Its expenses under the heads of "wages and salaries" and "other staff cost" are nil. This shows that it has no employees at all. This shows also that it is a paper company without any business purpose. 5.7 Revenu....
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....lied by the Applicant prove beyond doubt that the important decisions regarding investment and disinvestment the Applicant are not taken by the above board of directors in Mauritius. 5.9.1 The Applicant company was incorporated in the year 2008. As per audited accounts of the company the following individuals are directors: a) Mr. AR; b) Mr.PS; c) Mrs. KPR; and d) Mr. 'S'. Though it is argued by the Applicant that Mr. 'S' participated in the meetings conducted in Mauritius via telephone, videoconference etc, but evidence for the same has not been produced so far. Minutes of some select board meetings submitted by the Applicant are not complete to know as to who all were actually present in the meeting physically, or through any other mode. 5.9.2 On this basis Revenue is of the view that Mr. 'S' was the key director who takes all the key decisions on behalf of the company. If he was always participating in the board meetings through telephone or videoconference from the US, then the place from where he operates should be taken as the place of effective management but not where the non-executive directors sit. 5.10 Further the minutes of the board meeting of 1....
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.... the importance of the subsidiary acting as a separate and independent entity, on which treaty law is based. It has referred extensively to the case of Vodafone International, to highlight that when the parent takes all decisions and actions for the subsidiary, the latter is reduced to a puppet and becomes ineligible for the benefits of the treaty with that state. 5.14 Revenue has cited the case of Aditya Birla Nuvo, 342 ITR 308, where the Hon'ble High Court, Bombay, held that there was no document on record to suggest that AT &T, Mauritius had agreed to subscribe/purchase the shares of JVC. Hence the payments made by AT&T, Mauritius could not be said to be payments for subscribing/purchasing the shares of the JVC in the name of AT&T, Mauritius. Referring to the cases of Ardex Investments Mauritius Ltd. (AAR 866 of 2010), Castleton Investment Ltd. (AAR 999 of 2010), and Dow Agri Sciences (AAR 1123 of 2011), from which the Applicant has taken support, Revenue says that in all these decisions the only argument for tax avoidance was the involvement of a Mauritian entity, and unlike the present case, no peculiarity in the conduct of the Group was demonstrated. 5.15 Revenue has ci....
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....t the Applicant is a name lender and benami, and that it was set up for tax avoidance and treaty shopping, is completely misplaced and inaccurate. 6.1 The Applicant was the legal and beneficial owner of the shares held in 'AB' International. The original Share Purchase Agreement (SPA) was executed by the Director of the Applicant. Further, the purchase price and additional investments made were through the Applicant's bank account. 6.2 The BOD in their meetings have considered and approved the investments in 'AB' International. The Applicant and 'AB' International recognized the acquisition of the shares by the Applicant in their balance sheets. 6.3 Further, 'AB' International recognized the Applicant as the shareholder in the members register maintained as per the Companies Act, 1956 and in the first balance sheet (year ending 31 March 2009). 6.4 The Applicant submits that the fund for acquisition of the shares of 'AB' International came from the bank account of the Applicant. 'C' Group being shareholders of the Applicant had subscribed to the equity share capital of the Applicant and also advanced loans. The Applicant based on the decision of its BOD, invested and acq....
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....in the case of Aditya Birla to contend that the beneficial owner of shares of 'AB' International is the 'C' Group and not the Applicant is factually distinguishable. Relying on the Hon'ble AAR ruling in case of Shinsei Investment (supra), the Applicant submits that it had acquired the shares of 'AB' International and 'C' Group was not even a party to the SPA, hence the ruling of the Bombay High Court in the case of Aditya Birla shall not apply to the Applicant. 6.8 The Applicant places reliance on Circular 789 dated April 14, 2000 issued by the CBDT, as also the clarification issued by the Finance Ministry vide clarification regarding TRC on March 1, 2013. 6.9 With regard to Revenue's allegation that the Applicant is a benami shareholder / a name lender and the actual owner of shares of 'AB' International is ''C" Group, it has relied on the ruling of Hon'ble Supreme Court in the case of Jaya Dayal Poddar (1974 AIR 171), which laid down key principles and basis on which a transaction could be held as benami. 6.10 In support of its contentions, support has also been taken from the following cases: 6.10.1 Vodafone International BV (368 ITR 1) (SC); wherein it was held that....
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....(1974 AIR 171), which is being relied upon by the Revenue and states that it is the beneficial owner of the shares. Further, the Applicant has factually distinguished the ruling of Aditya Birla Nuvo Ltd [2011] 12 taxmann.com 141 (Bom), as the shares are registered in its own name, and not any "Permitted Transferee". Further, it is submitted that the AAR in case of Shinsei Investment I Ltd (AAR 1017 of 2010) has also examined the Aditya Birla Nuvo Ltd (supra) facts in case of an investmentthrough Mauritius, and has held: 7 .......that shares have been subscribed by the Applicant in its own name and the bank statements filed show that the Applicant has paid for such subscription of shares. In these circumstances the Applicant cannot be termed as a 'permitted transferee' as was the case in Aditya Birla Nuvo........... .Once it is established that the Applicant has made investment on its own and Shinsei Bank Ltd was party to SPA only in its capacity as sponsor and in order to comply with mutual fund regulations, there is no bar on application of Article 13(4) of the India-Mauritius DTAC in this case......" 6.14 The Applicant submits that the customary principle of "pactasun....
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....93 of the Act are not applicable to the subject transaction in Applicant's case. Otherwise also, Sec 93(3), exempts bonafide transactions. 6.17.2 Without prejudice to the above, it is submitted that the provisions of India - Mauritius DTAC cannot be overridden by the provisions of the Act. The provision of section 90(2) of the Act is very clear that the provisions of the DTAC shall prevail over the provisions of the Act (including section 93), to the extent such provisions are beneficial for the assessee. Further, neither section 90 nor section 93 of the Act provide for a DTAC override vis-à-vis section 93 of the Act. If the Parliament in its wisdom chooses to provide for an override of DTAC provisions by the domestic tax laws, it would make such a provision, like GAAR, which specifically provides for DTAC override. 7. We have considered the questions posed to us by the Applicant, the details, documents and Financial Statements submitted, and the objections raised by the Revenue, as also the response of the Applicant company, as set out in the preceding paragraphs. 7.1 It is not in dispute that the Applicant is a tax resident of Mauritius and would ordinarily be cov....
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....nofi Pasteur Holding SA(W.P. 14212 of 2010, 3339 and 3358 of 2012) (AP): ".......creating wholly owned subsidiaries or joint ventures either for domestic or overseas investment is a well-established business/commercial organizational protocol; and investment is of itself a legitimate, established and globally well recognized business/commercial avocation." 7.4.1 Secondly, it must be understood that it would be inconceivable that the 'C' Group , being the Holding Company, would not be involved in any important decision making, be it the funding of the subsidiary company, deciding its objectives, its target markets, and making investments and disinvestments, etc. It can be no one's case that the holding company would have no role at all to play in the affairs of its subsidiary, whose activities have to be necessarily in consonance with the overall goals of the holding company. Though, of course, and this must be emphasised, it is not permissible to it to participate in its affairs in a manner that renders the subsidiary a puppet. 7.5 Viewed in the above context, setting up a subsidiary for purposes of investment cannot be questioned. Further, as regards role of the hol....
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....nt of a subsidiary and investment in Singapore; and one of 21 February 2012 regarding reorganization of the group, were signed by a Director, Ms. 'KPR'. These indicate that the meetings were held at the registered office of the Applicant, as mentioned therein, where these Directors are located. The Share Purchase Agreements with subsequent sellers of shares, Ms. LG and Dr. BN duly signed by the sellers and a Director of the Applicant company, Ms. PS. When a Director signs an agreement or a resolution, it has to be assumed that he is in the know of things and represents a company decision regarding purchase of shares, unless something is amiss in the document itself or is done on hindsight, is backdated or is deduced from some unwritten clauses, as was pointed out by Revenue in the case of 'AB' Mauritius dealt with in AAR 1128 of 2011, and in which we have taken an adverse view. 7.5.2 Regarding the office / place of management, Mauritian tax authorities have certified that the place of business of the Applicant is at the given address in Mauritius, the returns filed show this address and Board meetings also take place at this address, as mentioned in the Resolutions. Further, in ....
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....ade to decision of the Hon'ble Supreme Court in the case of Jaya Dayal Poddar (1974 AIR 171), which laid down key principles and basis on which a transaction could be held as benami. These are: (i) the source from which the money came; (ii) the nature and possession of the property after the purchase; (iii) the motive in giving the transaction a benamicolour; (iv) the position and relationship of the parties; (v) the custody of the title deeds; and (vi) the conduct of the parties after the sale of the property. Of these, the source from which the money came is considered the most important. 7.8.1 In the instant case, the money was invested by the Applicant through banking channels in the initial as well as subsequent investments out of its own sources. Since the Applicant is an independent legal entity, it is not material that the money was received from the holding company, as held in several decisions, including Vodafone, Ardex, E*trade, JSH Mauritius etc. The shares were held and registered in its own name, both beneficially and legally; the motive was to invest in the 'S' sector in India and other Asian markets as disclosed to various regulatory authorities; it was a subsidi....
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....iding the time and price of the disinvestment/sale/transfer; or the sale proceeds received by the Mauritius company had ultimately been paid over by it to the foreign principal/ its 100 per cent shareholder either by way of special dividend or by way of repayment of loan received; or the real owner/beneficial owner of the shares was the foreign principal company. Setting up of a WOS Mauritius subsidiary/ SPV by principal/genuine substantial long-term FDI in India from/ through Mauritius, pursuant to the DTAC and Circular No. 789 can never be considered to be set up for tax evasion." On the facts of the instant case, the Applicant fulfills all the criterion laid out above, and its investments in the Indian company cannot be questioned, when no other peculiarity or illegality is noticed, especially with regard to the flow of actual funds for investment in 'AB' International. It is the legal and beneficial owner of shares and fully competent to transfer the same. 7.9 We also find that the Applicant's attempt to take support from the cases of E*Trade, Ardex, and JSH Mauritius was justified, in the facts of the instant case. 7.9.1 This Authority has held in the case of E*Trade ....
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....eficial owner of the shares that have been lawfully and accounting wise correctly invested in 'AB' International, as per legitimate and independent decisions of its Board of Directors. 7.10 Revenue has referred to the cases of Azadi Bachao Andolan (263 ITR 706), Vodafone case (341 ITR 1), and to Adtya Birla Nuvo (342 ITR 308). However, these are not applicable on the facts of this case, which are clearly distinguishable and do not portray the entire transaction as a colourable device, or place the Applicant in the category of an exception, or even that it had not acted independently. As mentioned above, the applicant was acting as an independent company, taking its own decisions, had made investments out of its own funds through banking channels, signed proper agreements for acquisition of shares, and doing business over a considerable period of time, had its business objective of being an investment holding company, and had invested in other companies as well, namely 'PTN' and 'AB' Philippines on the lines of many of its group companies in the 'S' sector in India and other countries in Asia. Hence, the Revenue's argument that the investment was with an eye on the India - Maurit....
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.... having regard to arm's-length price, if the same is between two or more 'associated enterprises'. Hence this transaction of sale of shares in the Indian company should be subjected to and benchmarked as per the transfer pricing provisions contained in Chapter X of the Act. Reference has been made to our Ruling in the case of Castleton Investments Limited (AAR 999 of 2010). 9.1 We have considered the matter. In a detailed finding on the issue, in the case of Castleton Investments Limited (AAR 999 of 2010), it was ruled by this Authority that: "the applicability of section 92 does not depend on the chargeability under the Act. Literally in this case, the capital gains are chargeable to tax under the Act. They escape only in view of paragraph 4 of Article 13 of the DTAC and the ratio of the decision in Azadi Bachao Andolan on the applicability of the DTAC even when there is actually no double taxation". In coming to this conclusion the earlier Rulings of this Authority in M/s. Praxair Pacific Limited (326 ITR 276), Vanenburg Group BV (289 ITR 464), and Dana Corporation (AAR 788 of 2008) were also considered and not followed. 9.2 We are in agreement with the view in ....