TaxTMI 
TaxTMI 
TaxTMI 
2019 (5) TMI 557
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....The petitioner has also been issued the certificate as a "company resident in Mauritius for income tax purposes" which is popularly referred to as a Tax Residency Certificate ("TRC" for short) by Mauritius Revenue Authority. 2.2 The case of the petitioner is that it was formed with an intent to promote an Indian Non-banking Financial Company named Indostar Capital Finance Limited ("ICFL" for short). In order to acquire shares of ICFL, the petitioner raised capital from various groups of international institutional investors located across the world. In a span of over four years between 31.3.2011 to 17.8.2015, the petitioner acquired 7.13 Crores (rounded off) shares of ICFL which corresponds to 97.30% of its share capital. These transactions were duly reported to the Reserve Bank of India. 2.3 To appreciate the corporate structure which was constituted in order to enable the petitioner to make investment by acquiring shares in IFCL, we may reproduce the precise chain of holding of shares of different companies involved in this structure. 2.4 The petitioner desired to offload some 1.85 Crores (rounded of) of its shares of IFCL through IPO. The petitioner applied to the Assi....
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....uritius; iii. The assessee is a majority shareholder of ICF Limited. The shareholding pattern of the petitioner, in turn, shows that the shares are held in different proportions by some eight companies in equity funds. These companies have been constituted but they do not have office or employees. The assessee had failed to produced TRC of these companies. The assessee failed to furnish details of the ultimate beneficiaries of the assets being transferred; iv. As a culmination of these factors, he was of the opinion that present was a case where the company had given the colour of genuineness of the transactions but it appears that the transactions were fake. The sum and substance of the Assistant Commissioner rejecting the application of the petitioner for certificate under Section 197 of the Act was that the entire transaction was not genuine. In his opinion, the entire tax structure was crated to avoid legitimate tax liability. 2.6 On 13.6.2018, the Assessing Officer passed the consequential order authorizing the payer of the sale proceeds of the shares to make the payment after deducting tax @ 10% on the entire amount of receipt. On 20.6.2018, he passed further orde....
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....ons. Through, ICFL, the petitioner invested its such funds in Indian market. When the time was ripe, the petitioner decided to encash some of its gain. All the transactions were reported to the respective statutory authorities. There is no evidence to establish the allegation of sham or bogus transaction; v. Learned counsel submitted that the assessment in the present case is yet to be made. The petitioner would file the return of income and participate in the proceedings. In order to protect the interest of the Revenue, the petitioner may offer certain security till the assessment order is passed. However, to withhold a substantial portion of the petitioner's proceeds out of sale of shares at this stage till the assessment is completed, which would consume considerable time, would be wholly unjust; vi. Learned counsel referred to certain documents and relied upon certain decisions reference to which would be made at an appropriate stage. 4. On the other hand, learned counsel Mr. Chanderpal for the Department vehemently opposed the petition raising following contentions which we are recording in a summary format from the written arguments which he presented before us today....
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....n this judgment, therefore, would be prima facie in nature and would prejudice neither the petitioner nor the Department in the assessment which is yet to be done. 6. Sub-section (1) of Section 195 of the Act essentially provides that any person responsible for paying to a nonresident any sum chargeable under the provisions of the Act, would at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or any other mode, whichever is earlier, deduct income tax thereon at the rates in force. 7. Section 197 of the Act pertains to certificate for deduction at lower rate. Sub-section (1) of Section 197 of the Act provides that subject to the rules made under sub- section (2A), where in the case of any income of any person, tax is required to be deducted at the time of credit, or as the case may be, at the time of payment at the rates in force under the provisions including Section 195 and the Assessing Officer is satisfied that the total income of the recipient justifies the deduction of income tax at any lower rates or no deduction of income tax, he shall, on an application made by the assessee in this....
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....er the provisions of the Act.". In case of Vodafone International (supra) also, the Supreme Court in this context had held and observed as under:- "89. Section 195 casts an obligation on the payer to deduct tax at source ("TAS" for short) from payments made to non-residents which payments are chargeable to tax. Such payment(s) must have an element of income embedded in it which is chargeable to tax in India. If the sum paid or credited by the payer is not chargeable to tax then no obligation to deduct the tax would arise." 11. With this background, we may address the question of taxability of income in question. We may recall, the assessee, a Mauritius based company had made sizable investment in an Indian Non-banking Financial Company of which the assessee was a majority stakeholder. At the appropriate time, when the share prices were high, the assessee decided to book its profits in part. A portion of the shareholding was offloaded. This gave rise to a net gain to the tune of Rs. 800/- and odd Crores. Section 9 of the Act pertains to income deemed to accrue or arise in India. Subsection (1) of Section 9 lists various receipts, incomes which cannot be deemed to accrue or arise ....
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....ins 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. Paragraph 3A of the same Article provides that gains from alienation of shares acquired on or after 1.4.2017 in a company which is a resident of a contracting state may be taxed in that state. This was inserted in Article 13 by Notification dated 10.8.2016 and would come into effect from 1.4.2017. Simultaneously, paragraph 4 was also substituted. Previously, paragraph 4 provided that gains derived by a resident of a contracting state from the alienation of any property other than that is mentioned in paragraphs 1, 2 and 3, shall be taxable only in that state. To align this paragraph 4 with the insertion of paragraph 3A, it was amended under the same Notification dated 10.8.2016. Paragraph 4 now provides that gains from the alienation of any property but other than that referred to in paragraphs 1, 2, 3 and 3A shall be taxable only in contracting state of which the alienator is the resident. 15. As per paragraph 4 as it stood at the relevant time, the capital gain arising out of the sale of shares, in case of a company lik....
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....'s income arising out of the sale of shares was not taxable in India. Learned counsel for the petitioner had placed heavy reliance on the TRC issued by Mauritius Government and contended that as long as such certificate is in force, the Income Tax Authorities in India cannot dispute the same or go behind such circular. Our attention was drawn to the circular of CBDT dated 13.4.2000 which reads as under:- "734. Clarification regarding taxation of income from dividends 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 residents of Mauritius in accordance with the....
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....id officer has taken in the present case. Legal position that the Assessing Officer has taken, cannot be grudged. Despite the existence of DTAA, despite the availability of the TRC of the petitioner issued by the Mauritius Authorities and despite the CBDT circular that such certificate as long as in operation would be a valid consideration for applying the DTAA, we do not find that as laid down by the Supreme Court through series of judgments has shut out the case of the Revenue totally when it comes to a fraudulent or fictitious transaction. In Azadi Bachao Andolan (supra) also, while explaining the observations made in the earlier judgment of the case of McDowell & Co Ltd Vs. CTO [1985] 154 ITR 148 (SC), this small window was not closed. More recently, the Supreme Court in the case of Vodafone International (supra) made elaborate observations in this regard. Vodafone International (supra) was the case in which the question of taxing the capital gain in the hands of the foreign based company came up for consideration before the Supreme Court. Principally, the question itself was did the complex corporate structuring give rise to transfer of capital asset? Bombay High Court....
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....ise as to whether the TRC is so conclusive that the Tax Department cannot pierce the veil and look at the substance of the transaction. DTAA and Circular No. 789 dated 13.4.2000, in our view, would not preclude the Income Tax Department from denying the tax treaty benefits, if it is established, on facts, that the Mauritius company has been interposed as the owner of the shares in India, at the time of disposal of the shares to a third party, solely with a view to avoid tax without any commercial substance. Tax Department, in such a situation, notwithstanding the fact that the Mauritian company is required to be treated as the beneficial owner of the shares under Circular No. 789 and the Treaty is entitled to look at the entire transaction of sale as a whole and if it is established that the Mauritian company has been interposed as a device, it is open to the Tax Department to discard the device and take into consideration the real transaction between the parties , and the transaction may be subjected to tax. In other words, TRC does not prevent enquiry into a tax fraud, for example, where an OCB is used by an Indian resident for round-tripping or any other illegal activities, noth....
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....rement. We have summarized principle factors which the Assessing Officer pressed in service. Mere fact that the assessee company has not transacted any other business by itself may not be conclusive. The reference to the assessee unable to produce TRC of the companies which hold shares in the assessee company is erroneous. The petitioner would point out that such certificates were produced before the Assessing Officer. The observation that mere transfer of money though banking channel would not be conclusive, may be quite correct but the same cannot be a ground against the assessee unless there is adverse material. It is true that the extent of administrative expenditure and the employment structure may be some of the factors which eventually would go to establish whether the transaction was sham and the very existence of the assessee was fraudulent, however by themselves may not be sufficient. All these aspects can and need to be gone into in the assessment proceedings. 24. We have noticed the provisions contained in Section 197 of the Act. One of the main benefits for an assessee who obtains a certificate under Section 197 of the Act for no deduction of tax at source or for ded....