TaxTMI 
TaxTMI 
2021 (10) TMI 1270
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....is impugned. Hence both the petitions are taken up together. Shri Kotangle did not wish to file any reply since according to him only questions of law were involved. We shall take Writ Petition No.770 of 2021 filed by Abu Dhabi Investment Authority (hereinafter referred to as ADIA) as lead petition. 3. ADIA is a public institution owned by and subject to the supervision of the Emirate of Abu Dhabi. Article 4 (2) (d) of the India-United Arab Emirates ("UAE") Double Taxation Avoidance Agreement (hereinafter referred to as the "India-UAE DTAA") expressly provides that ADIA is a resident of UAE for the purposes of Article 4 thereof and, accordingly, ADIA is entitled to invoke the beneficial provisions of the India-UAE DTAA for the purpose of determining its tax liability in India. ADIA files its return of income (hereinafter referred to as "ROI") in India, disclosing therein income that falls within the scope of Section 5 (2) of the Income Tax Act, 1961 (hereinafter referred to as the "Act") but in view of the exemption available in terms of the India-UAE DTAA, reports NIL taxable income in the ROI. ADIA does not have any permanent establishment/fixed place of business or any other fo....
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.... expenses (including Operating Expenses), fees and liabilities of the Trust. (eee) "Trust" shall have the meaning provided in the Recitals above; (ggg) "Trust Fund" shall mean the Initial Settlement Sum, the Capital Contributions, Receipts, any accretions, all other cash and property held by the Trustee pursuant to the terms of this Deed in trust for the Sole Beneficiary together with all of the Trustee's interest in Portfolio Investments. 3.1 The Settlor has on or before the execution of this instrument transferred to the Trustee, by way of wire transfer or a cheque or such other instrument, the Initial Settlement Sum and the Trustee hereby admits, acknowledges and declares that the Trust Fund shall be held by it in trust for the Sole Beneficiary and shall be applied and governed by the terms and conditions of this Deed. 9.2 Receipts may, subject to the terms of this Deed, be distributed by the Trustee to the Sole Beneficiary as and when deemed appropriate by the Trustee but subject to payment of all accrued Operating Expenses and accrued fees then payable under the Investment Management Agreement which are not subject to a bona fide dispute. In the event that any fees pay....
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....ot considered an obstructive or opaque jurisdiction. In view of the aforesaid reasons ADIA set up the trust to make investments in India and claimed the benefit of the India-UAE DTAA. 7. The Trust was registered with the Securities and Exchange Board of India (SEBI) as Foreign Institutional Investor (FII) under the SEBI (Foreign Institutional Investors) Regulations, 1995 and later on as Foreign Portfolio Investor under the SEBI (Foreign Portfolio Investors) Regulations 2014. ETL as trustee has entered into an Investment Management Agreement dated 24th July 2013 with Kotak Mahindra (International) Ltd. (hereinafter referred to as KMIL). One of the obligations cast on KMIL in terms of the agreement is that a KMIL group Subsidiary will invest in each and every portfolio company alongside the Trust. The Deed of Settlement provides that the capital contributions made or proposed to be made by ADIA to the Trust would be a revocable transfer. According to ADIA, the income derived from making investment and debt securities in India was not assessable to tax in India having regard to the provisions Article 24 of the India-UAE DTAA read with sections 61 and 161 of the Act. 8. In view to....
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....ed 21st June 2016 since in the order of admission the words used are "irrevocable trust" whereas it should be "revocable trust". ADIA made further submissions and addressed various communications to AAR. The CIT(IT) gave its final report dated 1st November 2019 under Section 245R(4) of the Act reiterating the submissions/contentions raised by them in their earlier report dated 6th August 2019. AAR also held hearing on couple of days where ADIA reiterated its submissions made in their earlier letters and written submissions. Certain case laws were also relied upon by ADIA. 11. AAR did not accept any of the contentions raised by ADIA regarding the income accrued on the investments made or proposed to be made by the Trust in Indian portfolio companies and passed a common order/ruling dated 18th March 2020, which is impugned in both these petitions, denying ADIA and ETL the benefit of the India-UAE DTAA. AAR, inter alia, concluded:- (i) The income from investment in debt portfolios in India is received and accrues to the Trust in India and is taxable under Section 5 read with Section 9 (1) (i) of the Act. (ii) Since there is no treaty between India and Jersey, income received or a....
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....eil or lifting of veil of an arrangement is for the benefit of the Revenue to check if conception is used for tax evasion or not. In the present scenario, piercing the veil is not warranted. (x) Accrual of income to trust is not income derived by ADIA. Hence, the said income does not fall under article 24 of India-UAE Treaty. (xi) Had ADIA routed the funds through an entity or structure based in UAE and ADIA being the beneficial owner, then interest income would have been exempt under article 11(3) of India-UAE Treaty. The said view is fortified by the amendment proposed in the Finance Bill, 2020 (exemption for certain income of wholly owned subsidiaries of ADIA). [AAR relied on this amendment in spite of the fact that the same was introduced in the Act post the hearing of the application and was never put to ADIA, for them to make any submissions thereon]. (xii) Section 115AD of the Act, applicable to FIIs, is a code in itself. Hence the income earned by the Trust is taxable in India as per Section 115AD of the Act. 12. Shri Pardiwalla submitted that the term transfer and revocable transfer have been defined under Section 63 of the Act, which reads as under: "63. "Transfe....
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....nies, the transfer of the contribution that have been made and/or will be made by ADIA to the Trust are/will each be a revocable transfer under the provisions of Section 63 of the Act. 13. Shri Pardiwalla also relied upon Section 61 of the Act which contains provisions relating to taxability of income arising by virtue of revocable transfer of assets and the same reads as under: "Revocable Transfer of Assets 61. All income arising to any person by virtue of a revocable transfer of assets shall be chargeable to income-tax as the income of the transferor and shall be included in his total income." Shri Pardiwalla submitted as the capital contribution made and/or to be made by ADIA in the trust will be a revocable transfer under Section 63 of the Act, any income on the investment that is proposed to be made by the trust in the portfolio companies, in view of the provisions of Section 61 of the Act, shall be chargeable to income-tax as the income of ADIA (settlor) and shall be included in the total income of ADIA as settlor only. 14. Shri Pardiwalla also submitted, in the alternative and in addition, that by the Deed of Settlement between ADIA and ETL as settlor and trustee, res....
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....ins are receivable under a trust declared by any person by will exclusively for the benefit of any relative dependent on him for support and maintenance, and such trust is the only trust so declared by him. (2) Where any person is, in respect of any income, assessable underthis Chapter in the capacity of a representative assessee, he shall not, in respect of that income, be assessed under any other provision of this Act." In view thereof, even if the income is taxed in the hands of the Trustee, in terms of Section 161(1) of the Act, it will be taxed in the "like manner and to the same extent" as the beneficiary. As the tax on income received by or accruing to the Trust from the investments made or proposed to be made in portfolio companies is to be levied in the hands of the trustee and recovered from the trustee in the like manner and to the same extent as it would be leviable upon and recoverable from the sole beneficiary and as petitioner is the sole beneficiary of the Trust, the income assessed in the hands of the Trustee will take colour of that of petitioner's income and thereby, the benefit of the India-UAE DTAA must be granted. 15. Shri Pardiwalla relied upon Article 24....
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....ny income which may arise from investments made by the Trust in portfolio companies. 16. Shri Pardiwalla thereafter relied upon Section 166 of the Act. Section 166 of the Act reads as under: Section 166- "Direct assessment or recovery not barred. Nothing in the forgoing sections in this Chapter shall prevent either the direct assessment of the person on whose behalf or for whose benefit income therein referred to is receivable, or the recovery from such person of the tax payable in respect of such income." Shri Pardiwalla submitted:- (a) Under Section 166 of the Act, in the case of representative assessee, the revenue has an option embodied in Section 166 to assess the beneficiaries instead of the trustees or having assessed the trustees it may proceed to recover the tax from the beneficiaries. (b) The basic idea underlying section 166 is that the liability of the trustee should be co-extensive with that of the beneficiaries and in no sense wider or a larger liability and when the question of payment of tax arise, the section mandates to the taxation department that when they are dealing with the income of trustee, they must levy the tax and recover it in the manner laid ....
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....end to only Indian Trust, it would have expressly provided like it is provided in Section 10 (23FB) of the Act, which provides for venture capital fund means a fund operating under a trust deed registered under the provisions of the Registration Act, 1908. Shri Pardiwalla submitted that Sections 60 to 63 or Section 160 or 161 of the Act does not provide for any such qualification. Therefore, Sections 60 to 63 and 160, 161 and 166 are applicable to a foreign trust. 18. Shri Pardiwalla relied upon the following judgments: (a) Columbia Sportswear Company Vs. Director of Income Tax (2012) 11 Supreme Court Cases 224, Bangalore to submit that there is no alternate remedy against advance ruling by AAR and the proper forum to challenge will be the Division Bench of High Court under Articles 226 and 227 of the Constitution of India. (b) Union of India & Anr. Vs. Azadi Bachao Andolan & Anr (2004) 10 SCC 1 to submit that the terms of the agreement for avoidance of double taxation would automatically override the provisions of Income Tax Act in the matter of ascertainment or chargeability to income tax and ascertainment of total income to the extent of inconsistency with the terms of doub....
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....ust prevalent will be applicable and as there is no treaty between India and Jersey, Sections 63 or 161 to 164 does not apply. Shri Kotangle, however, did not elaborate; (d) Shri Kotangle, however, fairly conceded that India-UAE DTAA overrides the provisions of the Act as held by the Apex Court in Azadibachao Andolan (Supra). To a specific query raised by the court, Shri Kotangle in fairness, also agreed that there are no provisions in the Act which says that the provisions of Sections 61 to 63 or 161 to 166 are not applicable to Foreign Trust. 20. Shri Kotangle also submitted that ADIA received income through a device and not from direct or immediate receipt or transfer of income by trust and, therefore, income received from Indian debt investment is not derived by ADIA and as Article 24 of the Indian-UAE DTAA only exempt from tax the income derived by one government from other confirming State, the treaty is not applicable. Shri Kotangle submitted that ADIA could have directly invested in the instruments or investments in which the trust had invested but chose not to invest directly. When the court asked as to whether there is any bar for any entity to make investments throug....
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....ity or material has been placed before AAR to suggest that the provisions of Section 161 would be applicable to Foreign trust/trustee. h) The assessee's representative could not satisfactorily answer the query as to why ADIA would like to route its investment in non-convertible debenture funds through Jersey route for investment in Indian market and ADIA itself being an FII registered with SEBI could have directly invested in Indian Portfolios and taken advantage of Article 24 of India-UAE DTAA. i) As ADIA is receiving income through a device and not from direct or immediate receipt and, therefore, income received from Indian debt investment is not derived by ADIA and does not fall under Article 24 of the India-UAE DTAA. j) There was a proposed amendment (it has come into effect only from 1st April 2021) which supports the view that if an entity is resident of UAE and through this entity ADIA is in receipt of some income then the income would be exempted from tax under Section 10 of the Act and the proposed amendment suggest that indirect accrual of income is not eligible for treaty benefit. We do not agree with the conclusions arrived at by AAR. 24. As regards to the reas....
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....ch is not there in the Act cannot be imported into Sections 61 and 63 of the Act. As noted earlier, where such restriction is provided for the Act says so as noted in section 10(23FB) of the Act where it specifically provides that venture capital fund means a fund operating under the trust deed registered under the provisions of Registration Act, 1908. 26. As regards the stand that India has not ratified the Hague Convention on the Law Applicable to Trust and on their recognition ("Hague Trust Convention", Convention of 1 July 1985), trust laws of a foreign jurisdiction are not applicable in India, the word 'trust' first of all is not defined under the Act or General Clauses Act, 1897. The word trust has to be interpreted as per its general meaning. The trust is defined under Section 3 of the Indian Trust Act to be an obligation annexed to the ownership of the property, and arising out of a confidence reposed in and accepted by the owner or declared and accepted by him for the benefit of another, or of another and the owner. A trust can be an Indian Trust or a Foreign Trust. There is nothing in Sections 61 and 63 of the Act to restrict its applicability only to trust settled in In....
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....eneficiary) whether or not yet ascertained or in existence; (b) for any purpose which is nor for the benefit only of the trustee; or (c) for such benefit as is mentioned in sub-paragraph (a) and also for any such purpose as is mentioned in sub-paragraph(b)." Therefore, as can be seen from the definitions, the Trust created in terms of the deed of settlement is consistent with the requirements of both, the Indian Trusts Act as well as Trust (Jersey) Law, 1984 as to what constitutes a trust. 27 As to the ground that the settlor cannot be a sole beneficiary, as ADIA was settlor as well as sole beneficiary, first of all the Act does not make any such provision. Secondly, there is no provision under the Indian Trust Act also which debars the settlor from being beneficiary. In the case of Bhavna Nalinkant Nanavati (supra), the settlor of the trust was also the sole beneficiary in the Deed of Settlement. The Gujarat High Court, while interpreting Section 3 of the Indian Trust Act observed as under: ................. "The ownership of trust property has to be for the benefit of a person or more than one person of whom the settlor may himself be one but never for the benefit of an....
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....ome of wholly owned subsidiaries of ADIA), Shri Pardiwalla submitted that AAR relied on the amendment despite the fact that the same was introduced in the Act post the hearing of the application and was never put to ADIA for them to make any submissions thereon. We would agree with Shri Pardiwalla. It was improper for AAR to have relied upon the proposed amendment. If, AAR wanted to, it could have given notice to ADIA to make their submissions thereon. Therefore, the contents of the proposed amendment could not have been relied upon by AAR. 31. In our view, therefore, the Deed of Settlement dated 22nd July 2013, whereby the trust was set up, contained specific clauses which established the revocable nature of the trust. As the ADIA has settled the trust on the terms mentioned in the Deed of Settlement, the contribution made by it to the trust would be a transfer as defined in Section 63 of the Act. As Section 63 does not anywhere specify that a trust covered by it must necessarily be a trust falling under the Indian Trust Act 1882 and as per Section 63(b) of the Act, any settlement or trust is included within the meaning of 'transfer' and Section 63(b) does not provide that the tr....
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....which income would not be taxable in India by virtue of provisions of India-UAE DTAA. We have to note that there was no attempt whatsoever to reduce the tax liability by using the trust structure. When the provisions of the Trust Deed provided that ADIA has right to re-assume power over the entire income arising on the investments made by the trust in the portfolio companies, the entire income arising therefrom has to be in terms of Section 61 of the Act to be assessed in the hands of ADIA. This would mean the exemption under Article 24 of India-UAE DTAA would be attracted. Even if for a moment we say that for any reason the provisions of Section 61 are not applicable, then also the trustee can only be assessed in a representative capacity and, accordingly the provisions of Section 160(i)(iv) will be applicable. Therefore, even if the income is taxed in the hands of the trustee in terms of Section 161(1), it will be taxed in the "like manner and to the same extent" as the beneficiary. Once again, ADIA is the sole beneficiary of the trust, the income assessed in the hands of the trustee will take colour of that of ADIA's income and thereby, the benefit of India-UAE DTAA must be gran....