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2019 (9) TMI 1549
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....ed by the Mauritius Revenue Authority, which was valid for the period from October 31, 2011 to October 29, 2012. The applicant is a part of BD group which is into development, manufacture and sale of medical devices, instrument systems and reagents used by the healthcare institutions, life sciences researchers, clinical laboratories, the pharmaceutical industry and the general public manufacturing of instrument materials. The applicant holds 100 per cent. equity share capital of Becton Dickinson India Private Limited ("BD India"), which is an Indian company and manufactures and trades in a broad range of medical supplies, devices, laboratory equipment and diagnostic products. 2. BD group undertook a worldwide group restructuring, wherein the applicant proposed to sell its entire stake constituting 100 per cent. of equity share capital of BD India to another non-resident group company known as Becton Dickinson Holdings Pte. Ltd., Singapore (BD Singapore). The shares were to be transferred at fair market value prevailing at the time of the proposed sale. The consideration for acquisition of shares of BD India was to be discharged in the form of shares of Becton Dickinson Holdings ....
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....cular No. 789, thereby ensuring applicability of the India-Mauritius Tax Treaty to entities having a valid tax residency certificate issued in Mauritius. In view of these facts, the applicant submitted that it qualifies as a tax resident of Mauritius under article 4 of the Treaty. 4. As regards taxability of capital gains, our attention was invited to article 13 of the Treaty. According to paragraph 4 of article 13 of the Treaty, capital gains derived by a resident of Mauritius from the alienation of any movable property [other than ships/aircrafts operated in international traffic or property forming part of the permanent establishment ("PE") of the enterprise in India, if any, would be taxable only in Mauritius (and not in India). Further, that the term "alienation" under the Treaty means the sale, exchange, transfer, or relinquishment of the property or the extinguishment of any rights therein or the compulsory acquisition thereof under any law in force in the respective countries. Therefore, the capital gain derived by the applicant on the alienation of the share capital of BD India was liable to tax only in Mauritius and not in India. The applicant further sub- mitted that ....
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....plicant had not furnished the complete information and the complete facts have not been placed before the authority, the ruling may be declined. In this regard reliance was placed on the following decisions wherein this authority had declined to give the ruling : 1. Royal Bank of Canada, In re [2010] 323 ITR 380 (AAR) (AAR No. 816 of 2009 dated March 22, 2010). 2. Ms. Meenu Shahi Mamik, In re [2006] 287 ITR 514 (AAR) ; [2006] 206 CTR 396 (AAR). 7. The thrust of the Revenue's submissions and arguments is that the transaction is designed for avoidance of tax. The Revenue has brought on record the following aspects in respect of this submission. A. Wide variation in financial statements and facts submitted before the Authority for Advance Ruling by the applicant : As per the financial statement of BD Mauritius as on September 30, 2012, the applicant was holding 99.99 per cent. equity in BD India in the year 2011 which has been shown to be Nil for the year 2012. The value of this investment in BD India is shown in the year 2011 as USD 27,09,844. These shares are stated to have been transferred to BD Singapore during 2012. The consideration, as....
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....cision to transfer the shares in BD India to BD Singapore has not been arrived at by the applicant in an independent manner. No analysis has been done by the applicant-company whether the transfer of shares will be beneficial or not to the company. The company has just acquiesced in the decision taken by its holding company BDX in US. It is clear that the applicant is not behaving in a manner which will show that the subsidiary has its own free will and is an independent company in its own right. It is open to dictation by the holding company without having any will of its own. This is not the way an independent company is supposed to behave. This shows that even though BD Mauritius may be holding the shares of BD India in its name, it is the owner of these shares only for name sake. That is, it is not the beneficial owner of shares. C. The profit is transferred to the US holding company as a loan bearing rate of interest of only 1 per cent., the loan being unsecured : The financial accounts of the company for the period ending September 30, 2011 and September 30, 2012 lay bare the tax avoidance scheme used by the applicant and its associates to make profit in a l....
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....d an outstanding loan receivable from its holding company of an amount of USD 556,642. As per the board resolution dated March 22, 2012 it has been resolved to waive this loan and the accrued interest amounting to USD 556,642. This is being done when fresh loan of USD 53,253,630 is being given to the holding company. No reason has been assigned as to what were the circumstances forcing the applicant to waive off the pending loan. No reason has been given why fresh loan is being given even while earlier loan has not been repaid and is being waived off. There is no mention of any request from the side of the holding company that the earlier loan requires to be waived and a new loan requires to be given. This is not the way two independent concerns transact with each other. This is not the way a business is being run. This is not the way independent board of directors decide. It is not the business of the applicant to grant loan to other companies and grant loan waiver without any reason. Loan waiver is done only in extreme circumstances when all efforts to recover money have yielded no results. Even then it is being done by way of an agreement. The way this is being done here shows t....
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....vents are not happening in a logical and consistent manner. Either the accounts are being made up or the share transfer agreement has been made up. In any case, this raises serious doubts over the credibility of the whole process. F. The loan given by applicant not reflected in accounts of holding company : As per Note 7 - Loan to holding company of the financial statement for year ended September 30, 2012, an additional loan of USD 53,253,630 was advanced to the holding company of the applicant- BDX with an interest of 1 per cent. per annum and which was repay able on March 30. The relevant part of the Note 7 to the financials is reproduced as : "(b) The Loan to holding company is unsecured, bears interest at the rate of 1 per cent. per annum and is repayable on March 30, 2013." Form 10-K (which is Annual Report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 USA) filed by BD USA before the Securities and Exchange Commission USA on November 21, 2012 is available in the public domain. This report contains the consolidated financial statements of BDX for the years 2012, 2011 and 2010. The financials for 2012 were perused. On....
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....ed that the element of good faith needs to be retained for applicability of treaties and pointed out that both Indo-Mauritius Treaty and Indo-US Treaty had captioned prevention of tax avoidance as one of the two purposes of the DTAA. There fore, the "good faith" application of these treaties require the element of tax avoidance and treaty abuse to be examined by tax administration while invoking the treaty provisions. According to the Revenue, the arrangement made by the applicant was the colourable device and accordingly it was requested that the corporate veil should be pierced as held by the hon'ble Supreme Court in the case of Vodafone International Holdings BV v. Union of India [2012] 341 ITR 1 (SC) and to pay regard to the economic realities behind the legal facade. The Revenue relied upon various judicial pronouncements in support of the contention that the Income-tax authorities are entitled to lift the corporate veil and expose the tax avoidance device/scheme. 9. The Revenue further submitted that the tests as laid down in the case of Vodafone (supra) by the hon'ble Supreme Court were satisfied in the present case. In this regard the following submission was mad....
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....o employee was based in Mauritius, (ii) there was no 'office' of the company in Mauritius (as there was no rent or electricity, water, and telephone expenses), it is evident that BD Mauritius could not and did not have a 'place of effective man agement' in Mauritius. - The transactions by BD Mauritius was a dependent and subservient transaction required by the holding company, BDX, and as such, it was not a material transaction. - The consideration involved in the transaction, and the mode of payments, highlighted the fact that it was a mere book entry." 10. It was further submitted by the Revenue that this authority in the case of "AB" Mauritius, In re [2018] 402 ITR 311 (AAR) (AAR No. 1128 of 2011) dated November 8, 2017 had laid down certain guiding principles following the mandate of the hon'ble Supreme Court in the case of Vodafone (supra) and it was held therein that the gains were taxable in India as per Indo-US DTAA. The Revenue submitted that the facts of the present case were identical and, therefore, the decision as given in the case of AB Mauritius may be followed in this case as well. It was further submitted that the principles....
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....res of BD Singapore) (As per section 1 on page 2 of the contribution agreement) 53,000,000 Less : Book value of investments (As per schedule 6 on page 22 of the financial statements for the year ended September 30, 2012) 2,709,844 Profit on disposal (as per statement of comprehensive income on page 7 of the financial statements for the year ended September 30, 2012) 50,290,156 12. It was submitted that the conclusion of the Revenue that the applicant had received consideration not only in the form of shares but beyond, was erroneous as the facts were misinterpreted. Regarding loan of USD 50,290,156 advanced to the holding company, BDX USA, it was submitted that the grant of loan was separate legal transaction subsequently done and was, therefore, not relevant for adjudicating the issue under consideration in the present application. Further regarding non-disclosure of the loan in the financial statement of BDX, it was explained that form 10K was for filing consolidated financial statements and not the stand-alone financials of the company. The form 10K contained the accounts of BDX and its subsidiaries and the transactions inter se between group companies would ge....
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....n Indo-Mauritius DTAC was entered into and a holistic view has to be taken in the matter. It was reiterated that provisions of India-Mauritius tax treaty as they stood at relevant point of time are binding on the parties to the treaties and need to be applied in good faith. The applicant also relied upon the decision of the hon'ble Supreme Court in the case of Vodafone (supra) wherein it was held that the tax Department cannot at the time of sale, deny benefits to Mauritius companies of the Treaty by stating that FDI was only routed through a Mauritius company. Reliance was also placed on this decision in respect of the contention that where the holding structure has existed for a considerable length of time, then there was no need to go into the question such as de-facto control v. legal control. 15. The applicant has also placed reliance on the decision of this authority in the case of Dow Agrosciences Agricultural Products Ltd., In re [2016] 380 ITR 668 (AAR) (AAR No. 1123 of 2011), wherein it was held that transfer of shares of an Indian company by a Mauritius entity to its group company in Singapore in a scheme of group reorganisation was not taxable in India. It was su....
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....the objection of the Revenue regarding incomplete furnishing of information as well as the clarification of the applicant in this regard. As per the provisions of section 245R of the Act, on receipt of an application this authority is required to call for the relevant records from the Principal Commissioner or Commissioner of Income-tax, if found necessary, and thereafter decide the matter regarding allowing or rejecting the application. Once the application is allowed, the authority is required to examine such further material as may be placed by the applicant or as obtained by the authority and thereafter pronounce its advance ruling on the question specified in the application. In view of this scheme under the Act, it is not open for the Revenue to call for any information as it desires. Nevertheless, the Revenue may obtain information that might be relevant to decide the question raised in the application with prior approval of the authority. At the same time it may have to be demonstrated as to how the information being called for is relevant and necessary to decide the issue before the authority. When viewed from this perspective, it is found that the applicant has provided t....
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....ses, relied upon by the Revenue, are found to be distinct and different from the facts of the present case and, therefore, the ratio of these decisions cannot be applied to this case. 20. The Revenue has strongly contended that the transaction was designed for avoidance of tax. The applicant in its response has addressed the concerns raised by the Revenue on all the issues. To recapitulate the facts of the case the applicant is a tax resident of Mauritius and holds a valid tax residency certificate (TRC) issued by the Mauritius Revenue Authority. It was holding Global 1 category business licence under "The Financial Services Act" of Mauritius issued by the financial service commission of Mauritius. As per section 71(5) of the said Act, a corporation holding category 1 global business licence shall at all times be administered by a management company. It was clarified that in terms of this requirement, the applicant had no employee as it was administered and managed by International Mauritius Management Limited, a management company. The other conditions regarding management and control from Mauritius, having at least two directors resident in Mauritius, its principal bank accoun....
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....hares of BD Singapore in return of transfer of shares of BD India. However, in its financial statement a consideration of USD 50,290,156 was shown as profits on disposal. As clarified by the applicant the profit on disposal was the difference between the consideration and the cost, the working of which has been provided. It has further been clarified that the investment in the shares of BD Singapore was sold by the applicant and hence it does not appear in the financial statement of the applicant for the year ended September 30, 2012. The investment in the shares of BD Singapore was finally replaced by way of a loan to the holding company, BDX. This amount of loan was duly disclosed in the financial statements of the applicant for the year ended September 30, 2012. 23. The Revenue has relied upon note 16 of the notes to financial statement for the period ending September 30, 2011 to emphasize that the decision for sale the shares of BD India was not taken by the applicant but by its holding company, Becton Dickinson and Company (BDX), a corporation under the laws of State of New Jersey, USA. As explained by the applicant, the said note was only a summary of the meeting held on S....
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....ural Products Ltd., In re [2016] 380 ITR 668 (AAR), decided by this authority wherein the Department had raised the issue of the applicant being a shell company in Mauritius and the transaction designed to avoid payment of tax in India. This authority had ruled in that case as under (page 677 of 380 ITR) : "This is a transaction which began almost 20 years back, could not have been a scheme to avoid the payment of taxes. The shares were acquired 20 years or as the case may be 18 years, 14 years and 10 years back. For a substantial cost of about Rs. 61 crores and if they are sought to be now transferred to a Singapore concern which is the own subsidiary of the applicant, it cannot amount to a design or a scheme to avoid payment of taxes in India. The applicant has relied on the details of the promoters of DAS India in their reply dated September 28, 2015. It is seen that DAS India was incorporated on December 7, 1994. The investment made in the DAS India was with the prior approval of the Department of Industrial Policy and Pro motion (DIPP). The subsequent investment also were with the approval of RBI and hence it cannot be said the shares were acquired with a view to sell....
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....stant case, the shares of BD India were held by the applicant for more than 15 years and shown as investments in its financial statements. 26. The factual matrix of the present case is identical with the facts of Dow Agro and, therefore, the decision as given in that case applies mutatis mutandis to this case as well. It is found that the investment was being held by the applicant since January 1996 and under the circumstances it cannot be treated as a fly by night operator. In view of the above factual position and keeping the context of the applicant being an investment holding company where its only business was of making investments and gaining from capital appreciation, we cannot draw any adverse inference on the applicant's independent status, its investment decisions and also the control and management of its business. We do not find any substance in the Revenue's allegations that the applicant was a benami shareholder, a name lender and that the actual owner of the shares of BD India was BDX. We, therefore, hold that the transaction was not designed, prima facie, for avoidance of tax. 27. We are supported by the decision of this authority in the case of E-Trad....
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....of the loan given by the applicant not found reflected in form 10-K accounts of the holding company. The other issues raised by the Revenue are also not found relevant for deciding the question before us. Accordingly, the information regarding manner of utilization of sale proceeds, copy of valuation report of shares of BD Singapore, copy of loan agreement between applicant and BS USA and the source of the loan etc., all become inconsequential and no adverse inference can be drawn if the details of the same are not provided by the applicant. 29. The Revenue has also contended that the holding company of the applicant BDX was the real beneficiary of the transactions and the investment was made through Mauritius route to take advantage of the treaty shopping, which was a colourable device, and a request was made to lift the corporate veil to unravel the real transaction. In this connection the applicant has relied upon the decision of the hon'ble Supreme Court in the case of Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706 (SC). The apex court has held in that case that there was no legal taboo against "treaty shopping". It was further held that the treaty shopping an....
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.... as it is dependent upon several economic and political considerations. This court cannot judge the legality of treaty shopping merely because one section of thought considers it improper. A holistic view has to be taken to adjudge what is perhaps regarded in contemporary thinking as a necessary evil in a developing economy." 30. It was held by the apex court that the motive behind setting up such conduit companies and doing business through them in a country having beneficial tax treaty provisions was not material to judge the legality or validity of the transactions. That the design of tax avoidance by itself is not objectionable if it is within the framework of law and not prohibited by law. In the instant case, the applicant was legal owner of the shares and had entered into transaction of sale of shares backed by board's resolution and had received the sale consideration. Under the circumstances the capital gain had arisen in the hands of the applicant only. As per 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. On the identical issue, this authority had held in the case of E....
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....cture as set up cannot be considered to be a set up for tax evasion. The apex court further held that the Revenue cannot deny the benefits of transfer of shares by alleging that the Mauritius company was merely a conduit and the US company was the actual beneficial owner of the shares. To reproduce from the order (page 101 of 341 ITR) : 95 . . . . No presumption can be drawn that the Union of India or the Tax Department is unaware that the quantum of both FDI and FII do not originate from Mauritius but from other global investors situate outside Mauritius. Mauritius, it is well known is incapable of bringing FDI worth millions of dollars into India. If the Union of India and the Tax Department insist that the investment would directly come from Mauritius and Mauritius alone then the Indo-Mauritius treaty would be dead letter. 96 . . . on a subsequent sale/transfer/disinvestment of shares by the Mauritius company, after a reasonable time, the sale proceeds would be received by the Mauritius company as the registered holder/owner of such shares, such benefits could be sent back to the foreign principal/100 per cent. shareholder of Mauritius company either by way of ....
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....uired in the years 2001, 2002 and 2009. These shares are sought to be transferred by the applicant-company to another subsidiary of the group, incorporated in Germany. It is not clear how far the theory of beneficial ownership could be invoked to come to a conclusion that the holder of the shares in the Indian company in this case would be the company in UK . . . . At the worst it might be an attempt to take an advantage of a Treaty. But, that by itself cannot be viewed or characterized as objectionable treaty-shopping . . . . The decision in Azadi Bachao Andolan has even gone to the extent of holding that treaty- shopping itself is not a taboo." 34. In CIT (International Taxation) v. JSH (Mauritius) Ltd. [2017] 10 ITR- OL 627 (Bom) ; [2017] 84 taxmann.com 37 (Bom) the hon'ble Bombay High Court had held that in view of India-Mauritius DTAA the capital gains from alienation of shares situated in India could only be taxed in Mauritius and not in India. It was also held that the Authority for Advance Ruling on considering the application and the documents and the facts on record had conclusively held that the transaction was not designed for avoidance of Income-tax. 35. The ....
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....any beneficial ownership to it, as expressly provided under the terms of the joint venture agreement. Accordingly, the hon'ble court had held that since the Mauritian entity was not the beneficial and the legal owner of the shares of the Indian company, the benefit of Circular No. 789 and the judgement of the apex court in the case of Azadi Bachao Andolan (supra) was not allowable. The facts of that case are thus totally different and therefore the ratio of the said decision is not applicable to the facts of the present case. The other decisions as relied upon by the Revenue are found to be different and distinct on facts and are not relevant to decide the issue before hand. 37. On the facts of the case as discussed above we do not have any adverse finding and we are inclined to accept the plea of the applicant that it was not a benami or set up for tax avoidance as a colourable device and only for treaty shopping, which in any case is not taboo. It is not in dispute that the applicant is a tax resident of Mauritius, possesses a valid tax residency certificate granted by the Mauritius tax authorities and would be covered under the India-Mauritius DTAC, the Circulars, decisio....
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.... rates, subject to a limitation of benefits (LOB) clause. After March 31, 2019, tax will be charged at full domestic tax rates. Thus, in the context of share investment from Mauritius, after renegotiation India has got taxing rights on capital gain income arising on shares of an Indian company acquired on or after April 1, 2017. 39. In the present case, however, the amended India-Mauritius DTAC is not applicable as the transaction of sale of shares took place much earlier in the year 2012. The pre-amended article-13 of the India-Mauritius DTAC is found to be as under ([1984] 146 ITR (St.) 214 ) : "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 resident of a Contracting State in the other Contracting State for the purpose of performing independent p....