TaxTMI 
TaxTMI 
TaxTMI 
2025 (1) TMI 561
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....n the assessee. In response, assessee filed its responses to various notices issued during the assessment proceedings. 3. The background of the assessee is, it is incorporated on 06.03.2015 as Limited Liability Company under the laws of Luxembourg. It is a Category II - Foreign Portfolio Investor registered with the Securities and Exchange Board of India (SEBI). Assessee is a subsidiary of SC Lowy Primary Investments Limited and it invests in securities. It has invested in SCCL Property Sorel., Italy (it is a subsidiary of assessee company), bonds issued by the Indian company and pass through certificates issued by securitization trusts. AO observed that assessee has offered the interest income of Rs. 3,38,39,127/- for tax in India chargeable to tax @ 10%, claiming benefit under Article 11 of India- Luxembourg DTAA. The assessee has claimed business income amounting to Rs. 2,37,57,762/- and capital gain of Rs. 37,46,96,834/- to be exempt from tax under Article 7 and Article 13(6) of the DTAA respectively. 4. During assessment proceedings, assessee was asked to differentiate between commercial activities of both the parent company and subsidiary company and the commercial rational....
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....Double Taxation Avoidance Agreement between the Government of the Republic of India and the Government of the Grand Duchy of Luxembourg ("DTAA"). The Learned AO has erred in law and in facts in completing the assessment under the provisions of the Income Tax Act, 1961 ("Act") on the basis of incorrect assumptions of facts and alleging that (a) The Appellant is not the beneficial owner of income as control and dominion of fund is not with the company. (b) The Appellant is a pass-through entity in Luxembourg and has not paid any tax in Luxembourg on income earned from India. (c) There is no commercial rationale of establishment of Appellant in Luxembourg. (d) The Learned AO has erred in law in concluding that scheme of arrangement employed by the Appellant is a tax avoidance through treaty shopping mechanism. 2. The Learned AO has erred in law and in facts in not accepting the Appellant's contention of a valid TRC to be conclusive evidence for determining tax residency in India as per Circular No. 789 dated 13 April 2000. 3. The Learned AO has erred law and in facts in taxing the business income received from investment in pass through certificates of securitization trust amo....
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....Luxembourg for the years 2015 to 2019. Ld. AR submitted that the assessing officer has denied the benefit of DTAA by observing in the para 13.10 of the assessment order. Accordingly, the assessing officer subjected to tax income earned in India as per the provisions of the Act. 10. At the time of hearing, Ld AR submitted the detailed submissions and the same are reproduced as under: 1. Appellant is tax resident of Luxembourg and entitled to benefit of DTAA: As per the provisions of the DTAA, a person resident in Luxembourg is eligible to claim benefit thereof. Relevant extracts of DTAA are reproduced below: * "ARTICLE 1: This Agreement shall apply to persons who are residents of one or both of the Contracting States." * "ARTICLE 3(1)For the purposes of this Agreement, unless the context otherwise requires: .... * (d) The term "person" includes an individual, a company, a body of persons and any other entity which is treated as a taxable unit under the taxation laws in force in the respective Contracting States;" * "ARTICLE 4(1) For the purposes of this Agreement, the term "resident of a Contracting State" means any person who, under the laws of that State, is liable ....
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....ities of the Assessee are directed) is located in Luxembourg." It is submitted that the appellant is liable to tax in Luxembourg and is a tax resident of Luxembourg considering that the Appellant is: * incorporated under the laws of Luxembourg as a SARL * a board managed company with its legal seat and registered office in Luxembourg * liable to tax in Luxembourg on worldwide income * not a fiscally transparent entity * holding valid tax residency certificate (@ pg 23 of the paper book) * filing tax returns in Luxembourg and has paid corporate tax, municipal business tax and net worth tax in Luxembourg In that view of the matter, benefit of the DTAA cannot be denied to the Appellant. The appellant placed reliance upon the decision of the Hon'ble Delhi High Court in the case of Tiger Global International III Holdings [W.P.(C) 6764/2020] wherein the Hon'ble Court, relying upon the CBDT Circular no. 789 of 2020 dated 13th April, 2000, decision of the Hon'ble Supreme Court in the case of Union of India vs. Azadi Bachao Andolan (263) ITR 706 and other judicial precedents held that validity and sanctity of TRC issued by competent authority cannot be questioned unles....
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....at a TRC would not be sufficient to claim benefits under a treaty. This proposed amendment was ultimately abandoned. The proposed amendment itself was sought to be explained away with the Press Release of 01 March 2013 in unequivocal terms explaining that proposed sub-section (5) was not intended to enable authorities to question the validity of such a certificate when produced. It was thus announced that TRCs' would be duly accepted and that the tax authorities would not go behind that certification and question resident status. 197. The position of a TRC and the extent to which it would be conclusive was succinctly explained by the Bombay High Court in Bid Services Division (Mauritius) Ltd. v. Authority for Advance Rulings (Income-tax) and Others65 when it held: - "45. No doubt mere holding of a tax residency certificate cannot prevent an enquiry if it can be established that the interposed entity was a device to avoid tax. However, the decisions of the apex court cited above have clearly upheld the conclusivity of the tax residency certificate absent fraud or illegal activities. Nowhere in the impugned Ruling the existence of tax residency certificate has been denied. In fac....
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....ess there is a fraud or illegal activity, which in this case, has neither been alleged nor demonstrated. Even if as observed by the authority that the entire value creation activities are happening in India leading to rise in share valuations, in our view absence of any element of fraud or illegality that cannot be a reason to hold the petitioner's investment as a device to evade tax. The suggestions/findings with respect to shell company/conduit, in our view, would apply only in accordance with article 27A of the Mauritius Double Taxation Avoidance Agreement which is applicable for investment with effect from April 1, 2017 and not prior to that, and therefore, the same would have to be reconsidered in that light. 54. True that there may have been abuse of tax treaty laws and Contracting States have taken corrective measures to prevent abusive transactions by amending the bilateral conventions, however, as noted above, the amendments to the Mauritius Double Taxation Avoidance Agreement for plugging such transactions have been made effective from April 1, 2017, unless there is a fraud or any illegal activity involved. In fact, as noted above, the investments prior to April 1, ....
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....ge and its sanctity duly acknowledged. The TRC represents the first level of certification of the holder being a bona fide business entity domiciled in the Contracting State. The issuance of a TRC constitutes a mechanism adopted by the Contracting States themselves so as to dispel any speculation with respect to the fiscal residence of an entity. It therefore can neither be cursorily ignored nor would the Revenue be justified in doubting the presumption of validity which stands attached to that certificate bearing in mind the position taken by the Union itself of it constituting "sufficient evidence" of lawful and bona fide residence. Taking any other view would clearly be destructive of what Serco BPO aptly described as resulting in an erosion of faith and the trust reposed by the parties to the convention in each other. 200. Regard must also be had to the fact that when Vodafone was rendered, the DTAA was yet to incorporate provisions regulating entitlement of benefits. The TRC concept came to be adopted subsequently followed by the incorporation of a specific LOB clause in the Treaty itself. The observations appearing in Vodafone are thus liable to be appreciated bearing in mi....
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....ultilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting signed by India and Luxembourg on 7th June, 2017 (the 'MLI"). The provisions of MLI applicable to DTAA take effect in India for "taxes levied with respect to taxable periods beginning on or after 1st April, 2020, i.e., before assessment year 2021-22 and hence applicable for the year under reference. The following para 1 of Article 6 of MLI is included in the preamble of the DTAA (refer pg 206 of the paper book): "ARTICLE 6 OF THE MLI-PURPOSE OF A COVERED TAX AGREEMENT Intending to eliminate double taxation with respect to the taxes covered by this Agreement without creating opportunities for non-taxation or reduced taxation through tax evasion on avoidance (including through treaty shopping arrangements aimed at obtaining reliefs provides in this Agreement for the indirect benefit of residents of third jurisdictions)," The amended preamble of the DTAA reads as below: "The Government of the Republic of India and the Government of the Grand Duchy of Luxembourg, desiring to conclude an Agreement for the avoidance of double taxation and the prevention of fiscal evasion ....
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....investments is in jurisdictions other than India; - the Appellant has filed tax returns and paid tax in Luxembourg on its worldwide income, i.e., income earned from investments made in India as also income from other investments in different jurisdictions; - the Appellant is, both, the legal and beneficial owner of the investments made, having made investments in various securities on its own account using funds raised by issue of capital and share warrants; - the Appellant has incurred substantial operational expenditure relating to investments in Luxembourg in the nature of consulting fees, legal and litigation fees, other professional fees apart from other administrative expenses such as rent paid for office premises, bank account charges, accounting fees, etc.; - the Appellant continues to exist till date in Luxembourg and continues to hold substantial investments. The Hon'ble Delhi High Court in case of Tiger Global (supra), analyzed LOB provisions in the India - Mauritius Double Tax Treaty, with reference to the facts of that case, observing as under: "185. As was noticed by us hereinabove, Mauritius perhaps became the preferred destination for various investors w....
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....er further observed that these concerns must principally be left for the consideration of the executive and which may weigh the economic and political ramifications of such measures. 187. When doubts with respect to legality of such entities domiciled in tax friendly jurisdictions or what are commonly referred to as tax havens came to be raised in Vodafone, Radhakrishnan J. in a concurring opinion noted that the establishment of such entities in particular jurisdictions appeared to have seen an immense rise on account of the sheer rise in the number of multinational corporations and corporate behemoths seeking to invest in markets across the globe and businesses continually striving to find new investment opportunities. This phenomenon according to the learned Judge was fueled by barriers to cross border trade disintegrating, the liberalization of financial markets and the march of developing nations seeking to alleviate the standard and quality of life of their citizenry. Not only do these sentiments find resonance in paragraphs 247 to 249 of the report, the learned Judge pertinently observes that the mere establishment of an offshore company would not justify an assumption that....
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....J. propounded the tests of "abuse of organization form/legal form" and "without reasonable business purpose" as constituting some of the circumstances relevant for disentitlement. Vodafone proceeds to observe that where the transaction be a colourable device for distribution of profits or where the interposed entity be found to be a device or conduit, the Revenue may be entitled to apply the principles of substance over form and disregard the propounded character of the transaction. It proceeded further to acknowledge situations where the transaction be found on facts to be a complete sham, used as a camouflage for illegal activities as being some of the circumstances where a person may be denied the benefits of a treaty. The Supreme Court further cautioned the Revenue from adopting a dissecting approach or seeking to doubt the validity of a transaction based on the assumption that it was designed as a tax deferment device. The decision underlines the imperative of the "look at" doctrine being applied based on an evaluation of the transaction as a whole. Radhakrishnan J. while expounding on the extent of applicability of the lifting of the corporate veil principle pertinently obser....
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....parameters. 191. While much water has flown post Azadi Bachao Andolan and the BEPS initiatives adopted by nations across the globe, the tests to doubt the legitimacy of investments have remained more or less the same. All that has occurred is of nations becoming more aware and cognizant of devices and conduits which seek to exploit the positive measures adopted by nations to derive benefits from cross border trade and investments illegitimately and contrary to the avowed objectives of those conventions and the underlying interpretative precept of good faith. These are aspects which have also been underscored by two High Courts in Serco BPO and Sanofi. 192. This would constitute an appropriate juncture to take note of the executive response by India of the ethical concerns which were raised with respect to investments emanating from Mauritius. The first seeds of doubt pertaining to capital gains arising out of alienation of shares was considered in Circular No. 682 of 1994. The Union Government clarified that any gains derived by a Mauritian resident from alienation of shares would be taxable only in that country. Many years before the introduction of sub-section (4) in Section ....
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....ent company a crucial fact which has been lost sight of by the respondents and who had proceeded on the incorrect premise that it was the holding or the parent company. The assertion of the petitioner that TGM LLC neither held shares nor had it made any investments in them has gone unrebutted. Both the respondents as well as the AAR appear to have proceeded on the incorrect premise that the petitioner had admitted to TGM LLC being the holding company despite the pleadings and the material which existed on the record and which clearly asserted to the contrary. 211. The initial shares which the petitioners acquired in Flipkart Singapore were issued against a capital contribution of USD 109,020.10. As the Minutes of the Board Meeting records, the initial investment was to be preceded by the extension of a Bridge Loan of USD 15 million. The entire stock holding was acquired between October 2011 to April 2015. The introduction of the LOB provisions in the DTAA, the tax implications arising out of sale of shares were facts duly disclosed and acknowledged in its Financial Statement which forms part of our record as Annexure P-12. Flipkart Online had made a slump sale of its India busine....
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....andards to defenestrate presumptions of treaty abuse. It is the finding of this Court that taking any view to the contrary would amount to privileging domestic legislation over and above the enactments in the treaty provisions adopted by Contracting States and would amount to holding that jurisdiction inheres in taxing authorities to question the validity of transaction on parameters alien to the negotiated terms of the treaty. In view of the aforesaid we find that LOB provisions and the TRC comprehensively and adequately addresses concerns in relation to potential treaty abuse and it would be impermissible for the Revenue to manufacture additional roadblocks or standards that parties would be required to meet in order to avail of DTAA benefits, subject to caveats of illegality, fraud and the transaction being in contravention of the underlyingobject and purpose of the treaty." [Emphasis added] Applying the ratio of the decision in Tiger Global (supra) to the facts of the Appellant's case, it would be apparent that the Appellant was not incorporated in Luxembourg with one of the principal purpose being to obtain benefit of the DTAA. Furthermore, the assessing officer has not br....
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....al gains from sale of investment in securities During the year under consideration, appellant has sold debentures of Indiabulls Housing Finance Ltd and security receipts of Edelweiss Asset Reconstruction Company Ltd on which appellant has earned short term capital gains of INR 37,46,96,834/-. Appellant has submitted capital gain workings at pages 97 to 98 of paper book. Sale of debentures and securities receipts would be "any other property" other than those refereed in paragraphs 1, 2, 3, 4 and 5 and shall not be taxable in India as per Article 13(6) of the DTAA reproduced here under: "ARTICLE 13(1) Gains derived by a resident of a Contracting State from the alienation of immovable property referred to in Article 6 and situated in the other Contracting State may be taxed in that other State. (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 personal services, incl....
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....irectly made by the unit holder (i.e., the appellant). Accordingly, interest income is chargeable to tax @ 21.84% in accordance with the provisions of Section 115AD(1)(i) of the Act. The Appellant offered such income to tax @ 10% as per beneficial provisions of Article 11(2) of the DTAA. The assessing officer taxed the interest income from investment in units of investment fund amounting to INR 3,38,39,127/- @ 40% plus surcharge plus cess, as per section 115UB of the Act denying benefit of reduced rate of tax. Article 11(2) of the DTAA provides that interest earned from investments in India will be taxable @ 10% provided beneficial owner of interest income is resident of Luxembourg. The said Article is reproduced as under: "ARTICLE 11(1) Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. (2) However, such interest may also be taxed in the Contracting State in which it arises, and according to the laws of that State, but if the beneficial owner of the interest is a resident of the other Contracting State, the tax so charged shall not exceed 10 per cent of the gross amount of the interest." The a....
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.... approach was applied. The court ruled that an (hypothetical) interposed company in the Netherlands between a Mauritian subsidiary and its Indonesian parent company would not be the beneficial owner of the interest it received, although the company would not have been under a legal obligation to pass on the payment (back-to-back loan structures). Rather, the court found that the term "beneficial ownership" was not to be limited by a legal approach but regard was to be had to the substance of the matter. Hence, the court concluded that, in practical terms, the Netherlands company would be bound to forward the interest it received and that it was impossible to conceive of any circumstances in which it could derive any benefit from the received interest other than to fund its liability (i.e. the factual obligation upon it to forward the payment). Consequently, the potentially interposed Netherlands company did not have the 'full privilege' needed to qualify as the beneficial owner, but rather its position equates to that of an "administrator of the income". The current OECD Model Commentary (2017) leaves leeway for both approaches when it states that "[s]uch an obligation will norma....
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..... The author proceeded to formulate the following conclusion:- "4.6. Conclusion The meaning of beneficial ownership is still highly contentious. At this point. it may be questioned whether a uniform meaning of the term can still be achieved, as courts in different jurisdictions have already established a line of jurisprudence on the term and probably may not deviate from it without profound reason, that is, only a further amendment of the OECD Commentary. This is especially daunting when considering that the historical analysis of the beneficial ownership concept indicates that the term was not meant to add anything of substance to a treaty but was only a clarification of a self-evident principle. However, amendments to the OECD Commentary and "[t]he temptation for desperate tax authorities to use (misuse) any weapon at their disposal to combat tax avoidance" resulted in a meaning for the term that it was probably never intended to have from a historical point of view. Furthermore, a major problem is that the concept was enhanced via amendments only to the OECD Model Commentary but not to the OECD Model itself. Moreover, different OECD publications are often inconsistent re....
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.... of the income. If a person is restricted legally or factually in regard to both, only formal ownership exists. "Hence, the 'beneficial owner' is he who is free to decide (1) whether or not the capital or other assets should be used or made available for use by others or (2) on how the yields therefrom should be used or (3) both." As long as one of the requirements is fulfilled, even a trustee can be the beneficial owner. In the case of a joint stock company, Vogel mentions that the company can be the beneficial owner of income even if the company has to distribute all of its profits to its shareholders. However, the situation might - depending on the facts of the individual case - be different where the decision-making power rests with a controlling shareholder and the management must comply with this shareholder's will. Vogel focuses on the power to decide on the use of assets or income as the main attribute of ownership relevant in determining beneficial ownership. Ownership attributes are the attributes that, at least in a common law context, are necessary to achieve a position of ownership. Commonly cited ownership attributes are possession, use, control and risk....
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....y the OECD and that the meaning of the concept must be consistent with equivalent terms used in treaties in other languages, e.g., "bénéficiaire effectif" in French. Also, some countries that use beneficial ownership in their treaties know the concept in domestic law, whereas others do not. Baker raises the question whether, for instance, a company controlled by another company would be treated as the beneficial owner of dividends if the company was likely but not legally bound to pay the income to its ultimate owners. To determine whose income a payment constitutes in reality, he proposes the following test: [What] would happen if the recipient went bankrupt before paying over the income to the intended, ultimate recipient? If the ultimate recipient could claim the funds as its own, then the funds are properly regarded as already belonging to the ultimate recipient. It, however, the ultimate recipient would simply be one of the creditors of the actual recipient (if even that), then the funds properly belong to the actual recipient." .... 242. As is manifest from the aforesaid passages and the views expressed by leading authorities on international tax plannin....
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....not base these submissions on any material which may have tended to indicate that the revenue obtained from the transfer of shareholding was an action undertaken by the writ petitioners acting for and on behalf of TGM LLC. In fact and as was noted by us in the preceding parts of this decision, the allegation of beneficial ownership itself rested on straws with the respondents still seeking to discover the ultimate beneficiaries of the revenue earned from the transfer of shares." The assessing officer has not been able to demonstrate any material or evidence which would suggest that the Appellant was under a contractual or legal obligation to transmit the interest income to the shareholder / ultimate shareholder, coupled with the fact that no dividend was declared by the Appellant in the subject assessment year. Applying the dictum of law laid down by the Hon'ble Delhi High Court in the said decision, the Appellant ought to have been entitled to the reduced rate of tax of 10% on the interest income as per the beneficial provision of Article 11(2) of the DTAA. Re : Ground of Appeal No. 6 : Interest income from India RE 2019 Trust The Appellant had received interest income amoun....
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....herefore, he submitted that the company established in Luxembourg is with the purpose of getting the tax benefit out of the DTAA since the company is established in Luxembourg by the Cayman Islands Holding Company. Further he brought to our notice page 12 of the assessment order and brought to our notice organization chart referred by the AO as per which parent companies are from Cayman Islands holding 100% shares in the assessee company. He also brought to our notice findings of the AO that there is no treaty with the Cayman Islands and only treaty exists to exchange the information, therefore, there is no DTAA in existence with the Cayman Islands. Further he submitted that the offshore companies from Cayman Islands has no physical presence in Luxembourg. 12. Further he brought to our notice page 76 of the paper book which is the financial statements for the period 01.02.2020 to 31.12.2020 and submitted that assessee has not claimed any expenditure of operations. He wondered how the company is established in Luxembourg without incurring any expenditure. Based on the MLI entered with the Luxembourg, the assessee is not eligible to claim DTAA benefits considering the fact that asse....
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.... funds. Accordingly, he denied the treaty benefits claimed by the assessee during this year. The issue raised before us is a) whether the existence of TRC issued by the Luxembourg authorities is valid for availing DTAA benefits and corresponding existence of LOB in the respective DTAA/MLI, compliance to the Art.29 is sufficient. And b) Whether the revenue could go beyond to raise several other conditions to grant DTAA benefits. 15. We observe that the above questions were considered by the Hon'ble High Court of Delhi in the case of Tiger Global International III Holdings (supra) wherein they held that i. A validity and sanctity of TRC issued by competent authority must be considered to be sacrosanct and due weightage must be accorded to the same as it constitutes the relevant entity being a bona fide entity having beneficial ownership domiciled in the contracting state to pursue a legitimate business purpose in the contracting state. Unless there is evidence of Fraud, sham transactions where the entity has no vestige of economic substance or the transaction is alleged to be aimed at camouflaging an illegality with cogent material at the disposal of the revenue authorities. ii.....
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.... prove that purpose of arrangements and transactions only for the purpose of taking treaty benefit. 17. Coming to issue under consideration, we observe that the assessee has submitted the valid TRC and the revenue has not raised any flag on the validity of the TRC. Further we observe that it was incorporated in Luxembourg in the year 2015 and incorporated in Luxembourg as an investment holding company and invested mainly in distressed assets. It also made investments in Italy in its step down subsidiary for making further investments. It is a step-down subsidiary of SC Lowy Offshore Fund incorporated in Cayman Islands as a special purpose vehicle for pooling of funds from various investors. It also registered with SEBI as Category II - Foreign Portfolio Investor and has made investment in India only in financial year 2018-19 in securitization trust / securities issued by companies in India. Ld AR also submitted the geographical concentration of investments made by the assessee, for the sake of clarity, it is reproduced below: Geographical location Percentage Region India 13.95% Asia Indonesia 14.84% Asia Korea 9.03% Asia China 8.91% Asia Bahrain 8.42% Middle Eas....