TaxTMI 
TaxTMI 
2018 (2) TMI 856
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.... a Tax Residency Certificate granted by the Mauritius tax authorities. 2.2 The Applicant is a part of "C" Equity Portfolio' and "C" Affiliates Fund LP ('C' Group) , which cumulatively hold 79.62% shares of the Applicant and the balance 20.38% shares are held by other individual investors. It's business activities are carried on from Mauritius and managed by its Board of Directors. The sole purpose of its incorporation was to invest in the 'S' sector in India and other Asian markets. For acquiring the shares in 'AB' India , it had obtained regulatory approvals from FSC in Mauritius and FIPB in India. FIPB in its approval clearly states that the Applicant is 99% shareholder of 'AB' India. In the regulatory filings in Mauritius in July 2003, it was specifically stated that the Applicant will initially hold investments in 'AB' India. 2.3 It acquired 2,011,482 shares in 'AB' India for an amount of USD 380,160 from 'AB' Inc. and 'US' Inc. USA (Sellers). These were acquired by the Applicant vide Stock Purchase Agreement (SPA) dated 10 November 2003, and since then the Applicant has been holding the shares legally and beneficially, and enjoying all shareholder rights, including divid....
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....o 'AB' Mauritius and its holding company 'C' Equity Portfolio II L.P. Pursuant to the above, the company has become the ultimate subsidiary of 'C' Equity Portfolio II L.P. effective from December 2 2003." 2.7 The acquisition of shares by the Applicant has been in the knowledge of the various regulatory authorities including FIPB, RBI and the Income-tax authorities in India and Mauritius. Further, during the course of 'AB' India's assessment proceedings for various years, time and again the income tax authorities have requested for details of shareholding pattern of the Applicant. 2.8 'AB' India, in the year 2009-10 had done a buy-back of shares, wherein the Applicant offered 486,090 shares under the buy-back offer and the gains on such buy-back was considered as exempt under the India - Mauritius Tax Treaty. The information of buy back was called by the Income tax authorities, including the tax treatment for the same, and tax exemption to the Applicant as per the India - Mauritius treaty was accepted. 2.9 The Applicant submits that as part of the corporate strategy of the Group, to support its business in the Asia - Pacific region in the medium to long term, and to obtain ....
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....cts 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, whether on the facts and circumstances of the case, the gains arising to the Applicant from the proposed sale of shares in 'AB' India (''AB' India') to a Group Company ('Transferee') would not be liable to tax in India having regard to the provisions of Article 13 of the India-Mauritius tax treaty? III. If answer to Question 2 is in affirmative i.e. holding that the gains arising from the proposed sale of shares by Mauritian company are not chargeable to tax in India, whether there will be any obligation to withhold tax under section 195 of the Income Tax Act, 1961? IV. If answer to Question 2 is in affirmative i.e holding that the gains arising from the proposed sale of shares by Mauritian company are not chargeable to tax in India, whether the transfer pricing provisio....
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....d, Dow Agri and Shinsei. 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. The Applicant relies on the decision of the Bombay High Court in Vodafone India Services Private Ltd., 368 ITR 1, Shell India Markets Private Ltd., Hon'ble AAR ruling in case of Hershey, AAR No. 1470 of 2013, and Dow Agri. 4.5 In respect of Question V, with regard to application of section 115JB of the Act on the subject transaction, the Applicant contends that the provisions of the said section shall not be applicable as per the retrospective amendment to section 115JB by Finance Act, 2016, and relies on the Supreme Court ruling in cases of Castleton Investments Limited, Dow Agriand Shinsei (supra) and the press release issued by Government dated 24 September 2015. 5. The Revenue, represented by Sri G C Srivastava, Special Counsel, has submitted detailed reports in the context of the details filed with the Application, as also in response to its subsequent contentions and defence, as filed and arg....
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....pplicant company. 5.5 Revenue states that Mr. 'S' had absolutely no authority to sign on behalf of the applicant company. In 2016 the applicant submitted a letter declaring Mr. 'S' was authorized to sign. No minutes of the meetings of the Board of the applicant company have any indication that he was acting then as a representative of the applicant company. 5.6 It is submitted that there is no indication in the agreement that the Applicant either paid any consideration to the selling US entities or it took over the loans advanced by 'C' Entities of the US. There was also no mention of any consideration flowing from the Applicant to the 'C' Group in the Share Purchase Agreement or in the application before the Hon'ble AAR. 5.7 There is also no material to show that the Mauritian applicant at any stage took any decision to invest in the Indian company or to purchase the shares from the US entities, or that it was involved in the process of such decision-making. 5.8 It is not Revenue's contention that the applicant is not a resident of Mauritius and therefore not entitled to treaty benefits. Its contention is that before granting such treaty benefits to a Mauritian company....
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....nt that Mr. 'S' had at all signed on behalf of or under the authority of the applicant company. A copy of the Stock Purchase Agreement was tabled, for the first time, for the Board's perusal, at this meeting. 5.11.1 These minutes, recorded by the company, show that the applicant's assertion that it took over the liabilities of US entities or that it invested in the Indian company on their own account was false. These minutes also show that it was agreed that any future investment in the Indian company would be considered and approved by a Board meeting. The minutes also record that the amount of investment has already been shown as a loan advance to the applicants by the parent company and the applicant company was advised to give a similar treatment of the amount in the books of accounts. The Board of Directors ratified the acquisition and the advancement of loan to the applicant.The minutes also state that the shares were acquired as a result of the re-organization of the group. In these circumstances, the shares could not be said to be held by the applicant company for or on its own account. 5.12 It is reiterated that Mr. 'S' was appointed as a Director of the applicant on....
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....iginally held the shares. The applicants only lent their names to these investments at a later time through a ratification and did not hold the investment on their own behalf but for and on behalf of the 'C' Group entities, as mere name lenders. 5.16 As regards, the submission of the business plan before the regulatory authorities in Mauritius, Revenue submits that the said letter is dated 7 July 2003 and was filed long before the incorporation of the applicant company and was therefore, obviously not signed or addressed by the applicant company. It only affirms that the company proposed to be incorporated would invest in India. It does not and cannot establish that such investment was really made by the Applicant. 5.17 As regards the application before FIPB in India, the same was made by the Indian company as seen in the approval letter. It is not a case before FIPB that the applicant company declared their intentions to invest in the Indian company. On 22 October 2003 when the application before FIPB was made, the share purchase agreement was not even entered into and there is nothing to indicate that the applicant would be investing in India for an on its own behalf or to ....
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....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. Mention has also been made of the cases of Ardex Investments Mauritius Ltd, (AAR 866 of 2010), Castleton investment Ltd AAR 999 of 2010, Dow Agri Sciences, AAR 1123 of 2011, as referred to by the applicant, to say that in all these decisions Revenue's 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. 5.24 Revenue has cited the OECD, and para 22 of its commentary, to make a case for substance over form, and to say that States do not have to grant the benefits of a double taxation Convention with arrangements that constitute an abuse of the provisions of the Convention..... The UN has also subscribed to this view in its commentary at para 21 of Article 1. 5.25 It is pointed out that the passing of an adjustment entry in the books cannot be taken to reflect the actual transaction, particularly when the conduct of the parties and other evidence point to a different reality. A mere accounting entry w....
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....fore the question of treaty override does not arise. It was further submitted that the correct import of the expression 'any person' has to be derived from the definition of the word in section 2 (31) of the act. It cannot be limited to a resident person. 6. In its written submissions and during the course of these proceedings, the Applicant, represented by Mr. Rajan Vora, CA submits that Revenue's interpretation of the facts that Applicant is a name lender and benami is completely misplaced and inaccurate. 6.1 The Applicant submits that it is the legal and beneficial owner of the shares held in 'AB' India. The below given sequence of events would show that not only the Applicant was involved in the acquisition of the shares but the decision to acquire was also that of the Applicant: Date Sequence of events 7 July and 10 July 2003 Submission of business plan and application to FSC are mandatory for incorporating a company in Mauritius. The application to the FSC and submission of business plan which clearly brings out the fact that the Applicant is being incorporated to invest in 'S' sector in India and other Asian countries and the initial investment would be mad....
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.... 'AB" Mauritius will be an Investment holding company for investments in 'S' sector in India and other Asian Markets. The company will initially hold investments in 'AB' India. The beneficial owners of the proposed company are 'C' Equity Portfolio II, L.P, Mr. 'BN' and 'C' Affiliates Fund L.P. 6.3 The Applicant also states that the Revenue has misinterpreted the language of the application made to FSC and business plan to suggest that the investments are being held by the Applicant in the name of 'C' Group. In essence the actual meaning of the said statement is to incorporate a wholly owned subsidiary to act as an investment holding company for the Group, which is an accepted way of making investments followed by several corporate. Support has been taken from the following cases: In Vodafone International BV, 368 ITR 1(SC), it was held that: "Setting up of a WOS Mauritius subsidiary/SPV by principal/genuine substantial long-term FDI in India from/through Mauritius, pursuant to the DTAA and circular no. 789 can never be considered to be set up for tax evasion." In Sanofi Pasteur Holding SA, W.P. 14212 of 2010, 3339 and 3358 of 2012 (AP) it was held that "....
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....f the tax treatment at the time of acquisition and buy back, clearly reflect that the Applicant was the rightful owner of the shares since the beginning. 6.7 The Applicant states that the understanding of the parties with respect to the transaction is important and it is left open to the parties involved to document in the manner they commercially see fit. In the current context, the Applicant, the sellers and the 'C' Group agreed and decided to enter into two separate agreements - one for acquisition of the shares and second for availing a loan, but in essence the same were linked by virtue of the understanding between the parties. Further, the Applicant highlights the fact that the loan agreement specifically mentions that the loan is being given for the purpose of an investment of fixed amount. 6.8 It is further submitted that the six additional individuals who are reflected as party to the loan agreement are also the shareholders of the Applicant and hold approximately 20% share in the Company. These individuals have become party to the loan agreement on the basis of an arrangement between the 'C' Group and the individuals, as they were also the investors in 'C' Group , a....
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....ted the Stock Purchase Agreement for and on behalf of the Applicant, which he was duly authorized to execute under the authority given by the Applicant. 6.12 In addition to the above, the Applicant submits that it has made further investment amounting to USD930,000 in 'AB' India and has over the years received dividends amounting to USD 3,835,584. The Applicant has utilized the dividend received for its business activities as per the direction and decisions made by the Board of Directors of the Applicant. 6.13 In support of its contentions, the Applicant submits that Hon'ble Supreme Court ruling in case of Vodafone International BV (341 ITR 1), held that: Every strategic foreign direct investment coming to India, as an investment destination, should be seen in a holistic manner. While doing so, the Revenue/ Courts should keep in mind the following factors: the concept of participation in investment; the duration of time during which the holding structure exits; the period of business operations in India; the generation of taxable Revenues in India; the timing of the exit; the continuity of business on such exit.... 95 ............ No presumption can be drawn....
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....o when according to the binding pronouncement of the Supreme Court, the motive of tax avoidance is not relevant so long as the act is done within the framework of law, the treaty shopping through conduit companies is not against law and the lifting of corporate veil is not permissible to deny the benefits of a tax treaty........By virtue of the Circular 789 issued by the CBDT (which has been upheld by the Supreme Court), the tax residency certificate issued by the Mauritius authorities is at least a presumptive evidence of beneficial ownership of the shares and the gains arising therefrom, even if it does not given rise to a conclusive presumption. 6.15 The Applicant further places reliance on the Hon'ble AAR ruling in the case of Ardex Investments Mauritius Ltd., AAR866 of 2010, wherein, on beneficial ownership of shares held in an Indian company, the AAR held as following in context of India - Mauritius DTAA "6. It is true that the funds for acquisition of shares in the Indian company was provided by the principal, a company incorporated in the United Kingdom. The shares in the Indian company were first acquired in the year 2000. Subsequently further shares were acqui....
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....e and would govern the parties. ........... 16. We have examined the rulings and we find in all the rulings a heavy reliance is placed on the aforementioned ruling of the Supreme Court in AzadiBachaoAndolan. We are in complete agreement with the above rulings. 17. ..........We are quite convinced that the applicant is not a "fly by night" or "shell company". We therefore, answer the first question in favor of the assesse and against the Revenue." The Applicant further draws attention to the Bombay High Court ruling in case of JSH Mauritius Ltd., W.P. 3070 of 2016, wherein the Bombay High Court while upholding the decision of the Hon'ble AAR has held that: "In the present matter, it would be relevant to note that the shares were purchased by the Respondent in the year 1996and were held for long period of 13 years and were sold in the year 2009. This goes to suggest the bona fide of the applicant. The said shares were again invested in another company of the same group in India and the same are being held by the Respondent. Considering this aspect, it has been observed by the AAR that the Respondent is not a Fly By Night or a ShellCompany...........
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....d its business objective. 6.19 In addition to the above, the Applicant submits that it satisfies all the conditions laid down by the Supreme Court in case of Jaya Dayal Poddar, 1974 AIR 171, which is being relied upon by the Revenue and states that it is the beneficial owner of the shares. Further, the ruling of Aditya Birla Nuvo Ltd [2011] 12 taxmann.com 141 (Bom) is not applicable, as the shares are registered in its own name. 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 investment through 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. The facts in Aditya Birla Nuvo were entirely different where AT&T had paid for and subscribed to the shares of JV Company in India and obtained the shares in the name of AT&T Mauritius as a permitted transferee. ........ Once it is established that the ap....
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....lf of the company etc. 6.23 The Applicant states that the transaction has to be looked at holistically in view of the decision of the Hon'bleSupreme Court in case of Vodafone International BV which lays down various factors which must be kept in mind in taking a holistic view. In addition to the above, Courts/ AAR have held time and again that setting up of Mauritius subsidiary/ SPV by principal/ genuine substantial long term FDI in India from/ through Mauritius, pursuant to the DTAA and Circular 789 can never be considered to be set-up for tax evasion. 6.24 The Applicant submits that the reason for opting to select Mauritius as a base for investment holding company is very well documented in the business plan submitted to the FSC in Mauritius. 6.25 It is stated that the transaction on which ruling of the Hon'ble AAR is sought is for a transfer of shares of 'AB' India to a subsidiary of the Applicant, 'AB' Singapore . The Applicant submits that at the time being referred to by Revenue there was no exit by the Applicant from the investment in 'AB' India but a group restructuring to achieve the overall business objective of the Group. It is furthermore submitted that the all....
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....e vis-à-vis section 93 of the Act. Additionally, if the Parliament in its wisdom chooses to provide for an override of DTAA provisions by the domestic tax laws, it would make such a provision or enable such a recourse in the domestic tax law itself, example of which is the General Anti Avoidance Rules (GAAR), which specifically provides for DTAA override. Mauritius DTAA does not have a limitation of benefits clause and in the presence of the CBDT Circular 789 of 2000, the argument that the investment made through SPV in Mauritiusis for avoidance of tax is factually and legally incorrect and untenable. 6.26.3 In this connection the Applicant has placed reliance on the Hon'ble Supreme Court ruling in case of UOI v Azadi Bachao Andolan, CIT v. P. V. A. L. Kulandagan Chettiar and CBDT Circular 333 [F. No. 506/42/81-FTD], dated April 2, 1982. 6.27 Furthermore, regarding the argument of the Revenue that the DTAA provisions override domestic tax laws only when there exists a conflict between the two, it is submitted that the provisions of the Act are very clear to state that once a taxpayer is entitled to DTAA benefit, they shall be eligible for the same or the provisions of ....
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.... setting up a subsidiary and chooses its objectives. It is at this point, ie. the point of incorporation, begins its journey as a separate legal entity, when its decisions and ownership of assets and liabilities can be taken into account, and must be visibly demonstrable. 7.3 In explaining how it was acting independently after being incorporated, the Applicant has, apart from the TRC and the FSC approval, laid great stress on the minutes of its Board of Directors meeting of 15 August 2003. However, these minutes of 15 August 2003 show discussions on the approvals granted, which were applied for and taken by the parent company or through 'AB' India in which Mr. 'S', was a Director. It is not as though in this meeting, independent decisions were taken regarding where and in which sector the investments were to be made, leave alone the quantum and the source thereof. It is seen that FSC approved the Global Business Plan on 22July 2003, ie. prior to its incorporation, and the above information was nothing but part of the application made on 10 July 2003 for the FSC approval. Hence, in this meeting, the Board of Directors merely reiterated what the Holding company had decided. Simila....
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....e informing or indicating its liability incurred for such an acquisition. This makes it clear that the Applicant's name was only superimposed in the Agreement as part of some arrangement, of which the Applicant was not aware at all. 7.6 The above picture that the Applicant was a mere spectator gets confirmed from the minutes of the Board of Directors meeting of 22 December 2004, that is a full year later. In this meeting, as brought out by Revenue, for the first time Mr. 'S' informed and the Directors took note of the happenings with regard to investment; enquiries were made about the financing arrangement; they were informed about the reorganization in the group and about the acquisition in the shares of 'AB' India ; advice was taken and decisions about the investment made in 'AB' India were directed to be ratified. Even at this time Mr. 'S' was not a Director in the Applicant company. Thus, even till the time the investment had been made the Board had no information at all on its own, and was so informed about it by the Holding company, through its MD. In fact, in this meeting the Board was also directed to incorporate the above transactions in its accounts. It was only now th....
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....mount was paid by it, the Applicant has produced before us in 2016, a Loan Agreement, dated 30 November 2003. As per this the 'C' Group and its Directors gave it a loan of USD 380,160, and it is claimed that this taking up of a liability was a consideration, equivalent to the value of shares acquired by it. If this had been the case, the SPA would have been the right place for it to be mentioned, where all other liabilities are referred to. The SPA has no mention of this loan. Also, the Loan Agreement has no mention of the shares allotted to the Applicant or the consideration. While the SPA was signed by Mr. 'S', without any authority, the Loan Agreement was signed by a Director, both around the same time. There is no indication in either document that one relates to the transaction mentioned in the other, or that the debt owed by the sellers to the 'C' Group stood transferred to the Applicant. 7.9 The above issue has been explained by the Applicant as being an understanding between the parties concerned, to have two separate agreements. It is difficult to accept this position. In a major transaction of taking over of the shares of an Indian company by 'C' Equity and 'C' Affilia....
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.... per the Loan Agreement, as a liability and consideration. Further, as per the Applicant it is admitted that the shares were acquired by way of a barter system, and only book entries were passed, and the liability of the 'C' Group was taken over as a consideration with no cash exchanged. It is intriguing as to how then there is a cash inflow appearing in the Cash Flow statement as part of the Financial Statements. This only establishes that these were only entries incorporated in the books, and that the loan reflected therein had no connection with the sellers' debt, stated to have been taken over by the Applicant. During the course of these proceedings, when this lacuna was pointed out to the Applicant, Sri Rajan Vora stated that these were only book entries. The only consideration paid for these shares was by the 'C' Entities when they acquired these shares in 'AB' India by cancelling the debt of the sellers, as per the SPA, and hence it can be reasonably concluded that the investment was made by the 'C' Group and not the Applicant. 7.12 The above discussions lead to us to a situation that neither was the Applicant acting on its own behalf in taking decisions like an independe....
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.... was interposed whereas it was the parent, the 'C' Group which owned the shares by virtue of the SPA and by cancelling the debt. In JSH Mauritius also the funds for investment in India were routed through this company, which again was acceptable but was clearly different from the facts of the instant case mentioned above, when only entries were made and the actual consideration was not routed through the Applicant. 7.13.2 As regards Circular 789 issued by the CBDT, it is agreed that the tax residency certificate issued by the Mauritius authorities is at least a presumptive evidence of beneficial ownership of the shares and the gains arising therefrom, even if it does not given rise to a conclusive presumption. In the instant case the applicant was incorporated in Mauritius for investing in the 'S' sector and in India. Hence, when the TRC was obtained declaring the above intent, it was fairly granted the same. So the presumption would be right that it was set up as an investment holding company. However, it is the subsequent conduct of the company that casts a shadow on whether it could be said to be the beneficial owner of the shares acquired throughthe SPA, which was neither si....
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....existence of a separate and independent status of a subsidiary in another territory is the core basis and foundation of the application of treaty law across the globe. Tax treaties throughout the world function on the premise that the subsidiary is an independent legal entity, different from its parent, even though controlled by it. The circulars and judgments of the Hon'ble Supreme Court relied on by the applicant also stress on this independence and require the Revenue to acknowledge it as well. However, in a case where the parent acts on behalf of its subsidiary and takes all its decisions, corporate veil between the company's subsidiary and its parent stands torn, not at the instance of the revenue, but by the conduct of the group itself. In the instant case where the companies are acting together as a group having 'C' Group's Director sign agreements on behalf of another, without formally being on the Board and moving consideration to the convenience of the whole group, it can hardly be said that they are separate entities in substance. 7.14.2 As far as the accounts are concerned, the passing of an entry in the books cannot be taken to reflect the actual transaction, especi....
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....me provision has been inserted with the specific objective to check non-genuine international transactions, such as the GAAR provisions. It cannot be deduced or inferred. 9. Now let us come to the other questions referred to us for a Ruling. 9.1 Regarding question no. III on the applicability of section 195, (refer para 4.3) i.e. whether tax has to be withheld on the gains arising from the sale of shares, since in the instant case we have held that the income would be chargeable to tax in India, there would be a liability to withhold tax as required by this section. The cases cited by the Applicant are not applicable. 9.2 In respect of Question IV, against the Applicant's contention (refer para 4.4) that transfer pricing provisions would not apply, the Revenue submits that Chapter X of the Act does not contain any such requirement of taxability of income. As per section 92, any income arising from an international transaction has to be computed having regard to arm's- length price, if there is an international transaction between two or more 'associated enterprises'. Hence this transaction of sale of shares in the Indian company should be subjected to and benchmarked as pe....