TaxTMI 
TaxTMI 
2020 (2) TMI 1183
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....rvice Commission, Mauritius. The Applicant also holds a valid Tax Residency Certificate (TRC) issued by Mauritius Revenue Authority, Certifying that the applicant is a tax resident Of Mauritius and entitled to avail beneficial provisions of the Double Taxation Avoidance Agreement entered between India and Mauritius. The Applicant files its corporate tax returns in Mauritius. The Board meetings of the Applicant takes place in Mauritius. Thus, the effective control and the management of the Applicant is situated wholly outside India i.e. in Mauritius. 3. The Applicant does not have any permanent Establishment/ fixed place in India nor have any business connection/ operations in India. 4. Airports Authority of India ('AAI'), with the approval of Government of India, selected the Applicant in Consortium with GVK Airport Holdings Private Limited ('GAHPL') and ACSA Global Limited ('AGL'), as joint venture partners for undertaking development, operation and maintenance Activities at Chhatrapati Shivaji International Airport ('Mumbai Airport'). AAI also entered into an Operation, Management and Development Agreement ('OMDN) on 4 April 2006 with Mum....
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....nancial year i.e. 2011-12. 10. The Applicant has sought ruling on the following question: Whether, on the facts and in the circumstances of the case, the gain arising from the transaction of sale of shares, to be effected pursuant to the Share Purchase Agreement dated 1 March 2011, held by the Applicant in Mumbai International Airport Private Limited would be liable to tax in India having regard to the provisions of Article 13(4) of India-Mauritius Double Taxation Avoidance Agreement? 11. The said application was admitted by AAR on 27/07/15 with following remarks: "Heard Shri Pardiwla on behalf of the applicant. The only question involved in the application is about the capital gains made by the applicant company by selling its shares of the Indian company to M/S G. V.K. Airport Holdings Private Limited. There has not been a serious dispute of the question on admission. Shri Srivastava appearing for the Revenue makes a request that firstly the question about this being o tax avoidance scheme be kept open. Shri Pardiwala does not have any objection to this suggestion made by Shri Srivastava. Shri Srivastava also makes a request that whatever information is sought, ....
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....t assessee." 16. In other words, the assessee has the option to be governed by the provisions of Double Taxation Avoidance Agreement (DTAA) entered into by India with any other country, if the provisions Of such DTAA are more beneficial than the provisions Of the Act. 17. The applicant is incorporated in Mauritius and holds a valid TRC issued by Mauritius Revenue Authority. Thus, the applicant is a tax resident Of Mauritius in terms Of Article 4 Of the DTAA between India and Mauritius ('India-Mauritius DTAA') and shall be entitled to be governed by the beneficial provisions of India-Mauritius DTAA.Article 13(4) of the India- Mauritius DTAA provides that capital gains derived by a 'resident' of a contracting state from the alienation of property other than those mentioned in paragraphs 1, 2 and 3 of the Article shall be taxable in that contracting state. The provisions of Article 13 are reproduced below: "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....
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....axation with Mauritius 1 ...... 2. ......... 3. paragraph 4 deals with taxation of capital gains arising from the alienation of any property other than those mentioned in the preceding paragraphs and gives the right of taxation of capital gains only to that state of which the person deriving the capitol gains is a resident. In terms of paragraph 4, capital gains derived by a resident of Mauritius by alienation of shares of companies shall be taxable only in Mauritius according to Mauritius tax law. Therefore, any resident of Mauritius deriving income from alienation of shares of Indian companies will be liable to capitol gains tax only in Mauritius as per Mauritius tax low and will not have any capital gains tax liability in India. 4. Paragraph 5 defines 'alienation' to mean the or relinquishment of the property or the extinguishment of any rights in it or its compulsory acquisition under any law in force in India or in Mauritius." 19. Extract of Circular NO. 789 is reproduced below: "Clarification regarding taxation of income from dividends and capital gains under the Indo-Mauritius Double Tax Avoidance Convention (DTAC) ....
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....gains tax only in Mauritius as per Mauritius tax law and would not have any capital gains tax liability in India. This Circular was a clear enunciation of the provisions contained in the DTAC, which would have 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......., ............ ............ We do not think the circular in any way takes away or curtails the jurisdiction of the assessing officer to assess the income of the assessee before him. In our view, therefore, it is erroneous to say that the impugned circular No. 789 dated 134.2000 is ultra vires the provision Of section 119 of the Act. In our judgement, the powers conferred upon the CBDT by sub-sections (1) and (2) of section 119 are wide enough to accommodate such a circular. ............. ............. In the result, we are of the view that Delhi High Court erred on all counts in quashing the impugned circular. The judgement under appeal is set aside and it is held and declared that the circular No. 789 dated 13.04.2000 is valid and efficacious." 21. Further reliance is placed on the decision....
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.... of 2000 and Tax Residency certificate (TRC), on the residence and beneficial interest/ownership, the benefits under the tax treaty shall be granted at the time of sale/disinvestment/exit from the foreign Direct Investments (FDI) in India. 25. In view of all the above discussion, it can be held that the capital gains arising to the Applicant on account of sale of shares of MIAL to GAHPL would not constitute income chargeable to tax in India in view Of Article 13(4) of the India-Mauritius DTAA. Arguments Of the Revenue 26. The AAI had issued an "Invitation to Register an Expression of Interest" (herein: 'ITREOI') on 17/02/2004. The ITREOI had set out the requirements that must be satisfied by the interested parties in order to participate in the international competitive bidding process for the acquisition of a 74% equity interest in the JV Companies for cach of the Mumbai and Delhi Airports. Expression of Interest (herein: 'EOI') was invited for either or both the Airports. An entity or a Consortium that submits a formal EOI in response to the ITREOI was to be considered a 'Prospective Bidder'. Short-listing of prospective bidders was to be carried ....
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....ACSA qualifies as an Airport Operator among the constituents of GVK- SA Consortium. ACSA, being an Airport Operator is the only member of the Consortium having technical expertise and competence with regard to construction, operation and maintenance of airports. The Consortium filed EOI for both Mumbai and Delhi Airports but stated that its preference would be for the Mumbai Airport. As per the EOI filed by GVK-SA Consortium, the role of Bidvest is to provide strategic input, advice structured finance advice and advice on ancillary services required for the airport for the bid arid to provide strategic input, corporate governance oversight and cargo and logistics development expertise. 29. In Para 1.6 of the EOI filed by the GVK-SA Consortium, the ownership structure was stated. This Para is reproduced below for the sake of clarity: "1.6 Ownership Structure (ITREOI para 5.2.5) a) The proposed ownership structure of the JV Company will be 74% GVK-SA and 26% held by Government of India. GVK-SA is a Consortium equally held by GVK Industries Lirnited and SA Airport Operators. SA Airport Operators in turn, is held by ACSA, old Mutual and Bidvest. The final holdings ....
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....33. As per the provisions of Section 93 of the Act, the capital gains arising out of the sale of 13.5% equity stake in MIAL by BSDM to GAHPL is deemed to be the income in the hands of the ultimate holding company of BSDM i.e. Bidvest. As per the provisions of the Indian Income-tax, 1961 and as per the provisions of Article 13(4) of the DTAA between India and South Africa, this income is chargeable to tax in India. 34. It is pertinent to mention here that the applicant M/S. Bid Services Division (Mauritius) Limited ['BSDM' or 'Applicant'] was requested through AAR to provide following information/documents to facilitate submission of final report on the issue that was raised before the AAR. The following three documents were called for: i. Copies of the Minutes of the Meetings of Board of Governors of the Applicant from the Fin Years 2005-06 to 2011-12. ii. Copies of Financial Statements of the Applicant from 2005 to 2011. iii. Copy of the Inter-se Consortium Agreement Dt.02-04-2006. 35. During the course of hearing on 23-07-2019 before the Hon'ble AAR, the applicant furnished copies of Board resolutions passed by the Directors in....
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....nt as a result of this transfer of assets as per the provisions of Section 93(1) of the Act. The sale consideration of US $231 million became payable by GAHPL to the non-resident entity BSDM vide the final Addendum to SPA dated 03-10-2011. c) By this transfer of equity, the Bidvest, a South African entity, has acquired the rights by virtue of which it has the power to enjoy the income of the non-resident BSDM in the future as required u/s 93(1)(a) of the Act. d) If the income of the non-resident BSDM were the income of the first mentioned person i.e. Bidvest, it would have been chargeable to income-tax as no such benefit as that given by Article 13(4) of the DTAA between India and Mauritius is available under the DTAA between India and South Africa. This fact satisfied the further condition laid down by Section 93(1)(a) of the Act. e) This capital gains income arising out of transfer of its 13.5% fully paid-up equity in MIAL by BSDM to GAHPL is deemed to be the income of the first mentioned person i.e. Bidvest as per the provisions of Section 93(1)(a) of the Act. f) The first mentioned person Bidvest has acquired the rights by virtue of which it ....
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.....5% equity stake in MIAL. This remarkable increase in value by around 10 times happened within a short period of six months from the last tranche of investment by BSDM. This remarkable increase in value per share of BSDM's equity in MIAL also increased multifold the capacity of BSDM and its ultimate holding company Bidvest to raise loans from the market. So, Bidvest benefitted remarkably from this transaction. The essential undercurrent in each sub-clause of the explanation is that the power to enjoy can be inferred if in the circumstances of the case the assessee is liable, directly or indirectly, to control the income. Bidvest is in fact under such a circumstance. Being a 100% ultimate holding company of BSDM, Bidvest has full power to control the application of the entire profits of BSDM within the meaning of Section 93 of the Act. Bidvest is also entitled to dividends from its 100% subsidiary M/S. Bid Services Division (Pty) Limited, which in turn is entitled to dividends from its 100% subsidiary BSDM. g) The first mentioned person i.e. Bidvest is entitled to receive capital sums from the non-resident BSDM. This is because the Mauritian entity BSDM is a 100% subsid....
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....mpose the tax on the Actual controlling Non-Resident Enterprise. Thus, Whether a transaction is used principally as a colorable device for the distribution of earnings, profits and gains, is determined by the review of all the facts and circumstances surrounding the transaction. it is in the above case that the principle of lifting the corporate veil or the doctrine of substance over form or the concept of beneficial ownership or the concept of alter ego arises" 40. The Court held that the revenue can invoke the 'substance over form' principle or 'piercing the Corporate veil' test in the application of a judicial anti-avoidance rule if it can establish, based on facts and circumstances, that a transaction is a 'sham or tax avoidant'. 41. Further, there are several subsequent judgments where courts have looked into the substance of a transaction top determine whether there was a tax avoidance motive {Consolidated Finvest and Holdings Limited vs. ACIT [2014) 51 taxmann.com 187, [20151 152 ITC) 792 (Delhi- trib.); CIT vs. Wipro Ltd. [20141 50 taxmann.com 421, [2014] 227 Taxman 224 (kar.) and DIT vs. Copal Research Ltd., Mauritius [2014) 49 taxmann.com 124....
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.... Ruling it was held that: "7.1 It is seen from the discussions and arguments above, that it is not in dispute that the applicant is a tax resident of Mauritius and would ordinarily be covered under the India-Mauritius DTAA, and also that it was not a fly by night operator. This narrows down the issues to the investment made by the applicant in 'AB' India in 2003, and the surrounding decision-making process, on which Revenue has raised objections to say that the applicant had only lent its name and was a benami Of the 'C' Group. We consider these aspects important, for the reason that any separate legal entity that puts up a claim for any benefit, under any law or Treaty, must first establish that it is acting on its own behalf, and even more importantly, that the asset sought to be alienated and which results in some gain, actually belongs to it." 43. Further, the hon'ble AAR inferred that: "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 independent company with a separate legal status in a foreign territory, regarding the investment in 'AB' Ind....
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....s a whole. However, while investing in various projects, separate companies i.e. SPVs are formed for commercial reasons such as for hedging business, geopolitical and economic risk, mobility of investment, ability to raise loans from diverse investments, valuation from growth perspective, tapping global funds etc. 47. It is mentioned that Mauritius is one of the ideal destinations for investments in Asian markets and prior to the set-up of the Applicant in Mauritius, the group was already operating in Mauritius through Top Turf Limited providing services in the hospitality sector. If desired the group could have routed its investment in MIAL through the said existing Mauritian entity butthe acquisition of shares through this entity allowed the group the operational flexibility. In view of the above facts, it is impressed that BSDM was incorporated in Mauritius for commercial reasons and the observation of learned CIT that the corporate structure was primarily designed to avoid tax is incorrect and devoid of any merits. 48. Without prejudice to the above, even assuming without admitting that the acquisition of shares in MIAL was done by the Applicant solely with view of taking....
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....nds of the residents, and that the reference to first mentioned person appearing even in the Income-tax Act, 1922 was intended to effectively refer to persons who are residents in India. ln the facts of current case, the Applicant would like to submit that there has been transfer of shares of an Indian company (i.e. MIAL) by a non- resident to a resident company (i.e. GAHPL). Further, the non-acquisition of shares by the Bidvest group and the subscription of the shares by the Applicant is also not an arrangement that falls within the realm of section 93 of the Act. Further, it is submitted that the provisions of India - Mauritius DTAA cannot be overridden by the provisions of the Act. Section 90(2) OF THE Act is very clear in that the provisions of the DTAA 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 overriding of any provision of DTAA by virtue of section 93 of the Act. Without prejudice to the above contention is indicated that the above views and observations have been made in the order of the Hon'ble AAR in the case of See....
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....-qualified bidders by AAI, issue of RFP to pre-qualified bidders, airport visits, site inspection and discussions with Govt. agencies, etc., Bidvest was involved as Member of the consortium. Only at Stage 2 of the bidding process, Bidvest was substituted by BSDM. It is also a fact that no prior approval of AAI was obtained by consortium at any stage before filing of technical and financial bid which was the requirement as per para 6.4 of RFP and para 6.1 of ITREOI. The evaluated entities at pre-qualified bidding stage were GVK, ACSA & Bidvest. GVK is a major business group of India and Bidvest is an international investment holding company based in South Africa with investment in food service, trading, distribution, etc. Both these groups have financial muscle and management capabilities to undertake such project. ACSA has necessary technical expertise and experience in the field of operation and maintenance of airport. The two business groups and ACSA complete the competencies required to bid for the project. The consortium was declared as successful bidders by AAI on 04-2-2006 based on financial and management capabilities and experience in air force management of the evaluated e....
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....board meetings? The answer to all these above crucial questions were 'no'. We ask ourselves the question, if GAHPL or ACSA are missing from JV, can the project still operate, the answer is 'no'. But if the applicant is missing and the Bidvest provides the funding alone, would the JV survive, the answer is 'yes'. 60. As per Indo-South Africa DTAA, the capital gain on share sale is taxable in India. If applicant was not interposed the Bidvest group would have to pay capital gain tax in India on the share sale transaction. By incorporating Mauritian entity benefit of Indo-Mauritius DTAA is sought under Article 13(4) under which capital gain is not taxable in India. Further, there is no capital gain tax in Mauritius. The entire value creation activities were happening in India which was also the basis for steep rise in share valuations ubsequently. 61. Let us examine, what is the real role of applicant in the IV. It served as conduit for routing funds for South African based holding companies. The shares of joint venture were bought in the name of applicant though the beneficial owners were the holding companies in South Africa. The applicant kept on notin....
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.... of allowing abusive transactions that would otherwise he prevented by the provisions and rules of this kind contained in its domestic law. Also, it will not wish to apply its bilateral conventions in a way that would have that effect. .................. 8. It is also important to note that the extension of double taxation conventions increases the risk of abuse by facilitating the use of artificial legal constructions aimed at securing the benefits of both the tax advantages available under certain domestic laws and the reliefs from tax provided for in double taxation conventions. 9. This would be the case, for example, if a person (whether or not a resident of a Contracting State), acts through a legal entity created in a State essentially to obtain treaty benefits that would not be available directly. Another case would be an individual who has in a Contracting State both his permanent home and all his economic interests, including a substantial shareholding in a company of that State, and who, essentially in order to sell the shares and escape taxation in that State on the capital gains from the alienation (by virtue of paragraph 5 of Article 13), tra....
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....e real transaction between the parties, and the transaction may be subjected to tax. In other words, TRCdoes 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, nothing prevents the Revenue from looking into special agreements, contracts or arrangements made or effected by Indian resident or the role of the OCB in the entire transaction. 66. Though decision of Hon'ble Apex Court referred to in the interposing of entity just before sale of shares, the pith and substance of the statement by Apex court is that merely holding of T RC cannot prevent an enquiry if it can be established that the interposed entity was a device to avoid tax. 67. It is a text book case, where an interposed entity satisfies to a 'T', the tests laid down by the Hon'ble apex court in Vodafone International Holding BV case (17 taxmannn.com 202) to ascertain whether a structure or device is created for tax avoidance. In the instant case the applicant was incorporated few days before the JV was formed and has no independent sources of funds or sources of income nor has any fiscal independence. All th....
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.... se. 71. The second objection of the Revenue was the interposing of the applicant was without any commercial reason. The Ld. AR has argued that that it is a general practice on the part of MNCs to highlight the financial and technical competency of the group as a whole and while investing separate SPVs are formed for commercial reason, ease of doing business and supported business environment in determining the jurisdiction of SPV. Having considered the facts in totality and discussed in preceding paras, we do not see any commercial or economic rationale or ease of doing business in incorporating the applicant in Mauritius and interposing it in the JV. 72. The other plea of the Ld. AR is that AAI has approved the bid being fully aware that BSDM was prime member of the JV entity. The plea is not germane to issue at hand as AAI is not concerned with the interpretation of treaty and interposing of any entity for tax avoidance and therefore acceptance of bid by AAI is not an endorsement or justification for granting treaty benefit to the applicant. 73. The alternate plea of the Ld. AR is that even if it is assumed without admitting that the accusation of shares in MIAL was don....