TaxTMI 
TaxTMI 
2020 (2) TMI 1183
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....nt 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 Mumbai International Airport Private Limited (&....
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....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, the applicant should be directed to supply the same. Shri Pardiwalo says that if the information sought is relevant according to the applicant, the same will be offe....
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....ovisions 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 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 available to a r....
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.... 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) 1. The provision 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 is domicile, residence, place Of man....
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....f 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 of Authority for Advance Ruling ('AAR') in its ruling pronounced on 22 March 2010 in case of E *Trade Mauritius Ltd, wherein the AAR has also upheld the above position, and observed the following: . " ...On such consideration, this Authority is of the view that the question raised by the applicant shall be answered in affirmative. On the basis of the facts....
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....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 out on the basis of information provided in the EOI documents. The prospective bidder that gets declared as pre-qualified for Stage-2 of bidding process (i.e. Request for Proposal (herein: 'RFP')) by the AAI was to be considered as a 'Pre-Qualified Bidder'. Pre-qualified bidders were then to be given the opportunity to submit final binding bids (Technical and Financial ....
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....r 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 by the three SA Airport Operators' members will be finalized once the requirements of the RFP are issued but, in any event, ACSA'S interest in the JV Company will not be less than 10%. b) The foreign ownership will take the form of the SA Airport Operators' investment in GVK-SA representing 37% in the JV Company. c) It is not proposed that there will be any airline ownership of the JV Comp....
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....t 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 connection with the sale of shares and Financial Statements of the applicant pertaining to the year of sale of shares. However, the applicant has not furnished the copy of the Inter-se Consortium Agreement dated 02-04-2006 and other Board Resolutions/Financial Statements. During the hearing on 23-07- 2019, the Hon'ble AAR again directed the applicant to furnish the said information or submit in writing the objection to such compliance. The applicant, vi....
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....me 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 has the power to enjoy the income of the non-resident BSDM in terms of Clause (c) of explanation to section 93 of the Act. This is evident, from the following facts: i. As Bidvest is a 100% holding company of M/S. Bid Services Division (Pty) Limited, which in turn is a 100% holding company of BSDM, the income in the form of dividend or repayment of loan or interest on such loan paid or payable by BSDM enures ultimately for the benefit of Bidvest in terms of sub-clauses (i), (ii) & (iii) of Clause (c) of....
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....rcumstances 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% subsidiary of another Mauritian entity M/S. Bid Services Division (Pty) Limited, which in turn is a 100% subsidiary of the South African entity Bidvest. The Bidvest and M/S. Bid Services Division (Pty) Limited aspart of the technical and financial bid gave certificates to the AAI reiterating their commitment to provide the funds needed by BSDM in case the GVK-SA Consortium is selected as the successful bidder. The Bid Services Division (Pty) Limited received loans/ advances from Bidvest and BSDM received loans/ advances from M/S. Bid Services Di....
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.... '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, [2014] 226 Taxmann 226, (2014] 270 CTR 223, [2015] 371 ITR 114 (Delhi)). one facet of the principle that the form of a transaction may be ignored in certain circumstances is that the documents should be not be construed purely from their legal or technical aspect and by attaching undue significance to the names, labels or words used rather than to the true intentions of the parties. in Union of India vs. Gosalia Shipping Pvt. Ltd. [19781 113 ITR 307 (SC), the Supreme Court held that one cannot place undue reliance on the form which the parties give to their....
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....se 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' India, though it was an Investment Holding company itself; and also that the manner and accounting followed in acquiring those shares only go to show that they were taken on its books on hindsight, at the directions of the Holding Company. Only this can explain the various lacunae noticed and as discussed above. It had only lent its name and was a benami of the 'C' Group. " "7.15 In view of the above position, we are unable to rule that the shares were genuinely acquired by the applicant, that it became the beneficial owner of those shares, and that the capital gains de....
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....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 advantage of the beneficial provisions of the India - Mauritius DTAA, the benefits thereof cannot be denied, absent any provision limiting the benefit of the DTAA (as are applicable in the DTAA with the USA or with Singapore) or the provisions of Chapter X-A being in force. 49. In response to the allegation that the shares in MIAL were acquired at a face value of INR 10 per share during the investment period window between 2006 to 2010 and were sold at INR 96 per share (approx.) during Financial Year 2011-12 and that the increase in valuation is inexplicable, it is argued that it has negotiated ....
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....isions 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 Seed Works Holdings Mauritius, In re [2018] 402 ITR 311(AAR) . 52. The facts of SeedWorks' rulings are not similar to the facts of Applicant's case and hence ought not to have any bearing in the deciding the questions raised in the application filed by the Applicant. 53. Attention is drawn to the observation of Chief Justice S.R. Kapadia in the Hon'ble Apex Court's judgement in the case of Vodafone International Holding B.V. (supra): "68 .............Every strategic foreign direct investment coming to India, as an investment destination, should be seen in a holistic manner. While doing ....
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....nt 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 entities. 57. GVK group is based in India. The Bid Services Group is based in South Africa. The ACSA (in which Government Of South Africa has stake) is the only technical expert in the consortium in the field of airport and maintenance ,is also based in South Africa. GVK, ACSA and Bidvest were the evaluated entities at pre-qualifying bidding stage. 58. Just 10 days prior to filing of technical and financial bid in September, 2005, the applicant (BSDM) was brought in the consortium. After AAI declared GVK consortium as successful bidder for undertaking the modernisation of Mumbai airport vide letter dated 4.2.2006, ....
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....icle 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 noting and endorsing decisions of the holding company in the Board meetings without any contribution or discussion about the decisionmaking process. In short, the applicant is not in a position to create any value for the joint venture. 62. One can claim that holding company will always be predominantly controlling all vital decisions of subsidiary cornpany and that latter may be implementing such decisions. This may be true but if an entity claims treaty benefits it must establish the economy rationale and substance for treaty entitlement. Treaty shopping is well known for international tax planning whereby an entity is interposed in ....
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....esident 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), transfers his permanent home to the other Contracting State, where such gains are subject to little or no tax. .............. 9.5 It is important to note, however, that it should not be lightly assumed that a taxpayer is entering into the type of abusive transactions referred to above. A guiding principle is that the benefits of a double taxation convention should not be available where a main purpose for entering into certain transactions or arrangements was to secure a more favourable tax position and obtaining that more favourable treatment in these circumstances would be contrary to the object and purpose of the relevant provisions. (emphasis supplied) It would be apparen....
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.... 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 the funds are with the holding companies. The applicant has no tangible assets, business activities except for owning the shares of the JV. Subjecting the facts to various tests i.e., Fiscal nullity Test, Commercial/business substance Test, "Look at" Principle Test, Investment Participation Test, Time duration Test, Business operations Period in India Test, Generation of taxable revenues in India Test, Scheme and Dominant Purpose Test etc., the applicant fails the tests being a tax avoidance device, the dominant purpose of its interposing is to avoid taxes in India. 68. It is emphasized before us by the Ld. AR that introduction of BSDM helped in doing business and providing supportive business environment. B....
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....he 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 done by applicant, solely with a view to take advantage of the beneficial provisions of Indo-Mauritius DTAA, the benefit cannot be denied as there is no limitation of benefit provision (LOB) in the DTAA. The plea is not tenable for the reason that the facts point towards a tax avoidance device and the Hon'ble Apex court in the case of Vodafone has clearly mentioned that though LOB and Look through provisions cannot be read into a tax treaty but if it is established that the Mauritian company is 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 would be subjected to tax. 74. We have perused the decisio....