TaxTMI 
TaxTMI 
2025 (1) TMI 561
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....g with questionnaire were issued and served on 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 a....
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....ppeal before us raising following grounds of appeal :- "1. The Learned AO has erred in law and in facts in denying the benefit of 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. ....
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....ing the course of assessment, the assessee placed on record Articles of Association, Tax Residency Certificate, Certificate of registration with SEBI, and income-tax returns filed in 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 unde....
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....idence According to article 159 of the Corporate Income Tax Law, an entity is treated as a resident of Luxembourg if it has: - its legal seat in Luxembourg (siège statutaire) according to the articles of association; or - its central administration (administration centrale, i.e., the centre from which the activities 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 ....
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.... be issued from time to time. Circular No. 789 of 2000 clearly held out that a TRC issued by Mauritian authorities would constitute sufficient evidence for determining fiscal residence and beneficial ownership. This circular further clarified that such a certificate would suffice even in respect of capital gains on sale of shares. 196. Then came the Finance Bill of 2013 which sought to introduce a provision which provided that 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 Ot....
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.... petitioner was not interposed, the Bidvest group in accordance with the Indo-SA Double Taxation Avoidance Agreement would have to pay capital gains on the sale of shares as the same is taxable in India is misplaced as not relevant as the investment is by the petitioner. As noted above, the petitioner has been incorporated in Mauritius, holds a tax residency certificate which is sufficient proof of its residence in Mauritius, which as noted above, cannot be enquired into unless 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 ....
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....id TRC. 199. The significance and the salutary purpose underlying the issuance of a TRC cannot be overemphasized. Its importance stands duly acknowledged by the Union Government itself as is manifest from a reading of Circular 789 of 2000. Of equal import is the withdrawal of the amendments which were proposed to be introduced in Section 90 and were ultimately shelved. It becomes important to note that a TRC once found to have been issued by the competent authority must be accorded due weightage 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....
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....tivities and the complete absence of economic substance and the establishment of those charges would have to meet stringent and onerous standards of proof and the Revenue being required to base such conclusions on cogent and convincing evidence and not suspicion alone. It is only when the Revenue is able to meet such a threshold that it can disregard the presumption of validity which would be attracted the moment the TRC is produced and LOB conditions are fulfilled." Principal purpose test: The DTAA has been modified by the Multilateral 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....
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....the Appellant was set-up to expand investment activities in other countries such as Europe, UK, India, and Italy; - the Appellant 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; - the Appellant is 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; - from perusal of the geographical concentration of investments made by the Appellant, it would be evident that 86% of 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 expenditur....
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....opping given the economic compulsions of nations who are desirous of attracting foreign investment. The decision in Azadi Bachao Andolan assumes significance in light of its acknowledgement and recognition of the changing world order, the breaking down of commercial frontiers and the imperatives underlying developing nations to attract capital and technological inflows. It chose to describe treaty shopping as a "necessary evil in a developing economy". The decision thus clearly appears to hold and suggest that while treaty shopping may be permissible, nations have chosen to adopt a system of checks and balances to ensure that there is no significant revenue loss or treaty abuse. It however 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 see....
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....ion it would be wholly incorrect to deny it those benefits based on arguments founded on the perceived unethicality of treaty shopping. The Azadi Bachao Andolan Court also bids us to bear in mind the need for disablement or disqualification being found in the Convention itself and thus it being an aspect best left for the consideration of the Contracting Nations as opposed to courts being called upon to invoke the principle of piercing the corporate veil. This was again emphasized when the Supreme Court held that once the DTAA were recognised as intended to override the provisions of the Act, it would be impermissible for national courts to lift the veil of incorporation. 189. In Vodafone, Kapadia CJ. 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 transact....
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....s facilitating investments in diverse parts of our interconnected world. These entities thus sought out domiciles which had an established treaty network, were cognizant of the new realities concerned with ease of business and were enabled to overcome barriers of time and place. Capital thus sought out new avenues and found itself funding opportunities then unknown and unthought of. The forever shrinking world order saw the birth of new investment highways created by nations aligning their common economic goals aimed at fulfilling the need of their people to find upliftment and prosperity. This march cannot possibly be stalled, legally or otherwise, by skepticism or distrust except on the basis of well-established 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 th....
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....the above, we find ourselves unable to sustain the view taken by the AAR in light of the following undisputed facts which exist on the record. Undisputedly the petitioners came to be incorporated in Mauritius in 2011. They hold a Category 1 GBL granted under the Financial Services Act, 2007 and are regulated by the Financial Services Commission of Mauritius. They are stated to have aggregated funds from more than 500 investors domiciled across 30 jurisdictions worldwide. It was their consistent stand that they had been incorporated to act as pooling vehicles for funds received from various investors. The details of their principal shareholders have already been noted in the preceding parts of this decision. TGM LLC was the investment manager/management 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 ho....
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....laims of treaty benefits. Furthermore, the right of the Revenue to cast aspersions on the validity or legitimacy of a transaction would be constrained by the requirements of exacting and compelling standards of proof with the onus placed squarely in the domain of the Revenue to establish that a transaction in question would be disentitled to the benefits of a treaty being a sham, a colourable device and imputed with illegality and giving rise to the conclusion that Contracting States never intended for such transactions being accorded treaty benefits. It is also apparent that the Contracting States did not intend for domestic taxation authorities to deploy their own subjective standards in view of the enactment of LOB provisions which had also adopted ascertainable standards 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 te....
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....sp; [Emphasis Added] The Appellant had submitted Form 64F received from JMFARC Metallics Trusts (Refer page 93 to 96 of Paper Book) wherein JMFARC has indicated nature of income paid/ credited to the appellant as 'business income' (refer point 7 of the attached Form 64F). The Appellant claimed the business income to be not taxable in India in absence of a permanent establishment in India under Article 7 of the DTAA. The assessing officer has taxed interest income denying benefit of the DTAA. Once it is held that the appellant is a tax resident of Luxembourg entitled to benefit of the DTAA, business income received from investment in pass through certificates of JMFARC Metallics Trusts amounting to INR 2,37,57,762 should be held not to be taxable in India as per Article 7 of the DTAA. Re : Ground of appeal No. 4: Capital 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 ca....
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....Fund ("AIF") with Securities and Exchange Board of India, from which interest income of INR 33,839,127/- was earned. The Appellant had submitted Form 64C received from the AIF (Refer page 101 of paper book) This income received from the investment fund is chargeable to tax in accordance with the provisions of Section 115UB of the Act. "115UB (1) Notwithstanding anything contained in any other provisions of this Act and subject to the provisions of this Chapter, any income accruing or arising to, or received by, a person, being a unit holder of an investment fund, out of investments made in the investment fund, shall be chargeable to income-tax in the same manner as if it were the income accruing or arising to, or received by, such person had the investments made by the investment fund been made directly by him." Thus, income from AIF is chargeable to tax in the hands of the unit holders (i.e., the appellant) as if such investment was directly 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 incom....
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....s a legal obligation to forward the received payment. Second, the economic approach according to which a factual obligation to forward the income is also harmful to beneficial ownership. For example, in the Canadian Prévost case, the court followed the legal approach. It found that a Netherlands holding company, which had no employees and no assets other than the shares of a Canadian subsidiary (Prévost) could be regarded as the beneficial owner of the received dividends since there was "no predetermined or automatic flow" of these dividends to its shareholders (i.e. it was under no legal obligation to pass on the payment). Also, a shareholders' agreement between the two shareholders of the Netherlands holding company that stipulated that 80% of the profits of the Netherlands holding company were to be distributed to them was not considered to impose any legal obligation on the Netherlands holding company, because the company itself was not a party to the agreement. Conversely, in the British Indofood case, the economic approach was applied. The court ruled that an (hypothetical) interposed company in the Netherlands between a Mauritian subsidiary an....
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....), "the concept of beneficial ownership is a basic principle of income taxation: the beneficial owner of income is the person who should be taxed on the income. Accordingly, this basic principle of taxation on the basis of beneficial ownership is implicit in all of the distributive articles of the tax treaty and, to that extent, the explicit reference to 'beneficial owner' in Arts. 10, 11, and 12 of the OECD Model does not add anything". Accordingly, the term "beneficial owner" has no normative meaning on its own. Similarly, Lang (2008) also takes the view that the term has no normative meaning, but is merely an "indication that one has to apply an economic - and not a formal - approach in interpreting tax treaties". The reason why beneficial ownership is only expressly mentioned in articles 10-12 is that these articles deal with the types of income that are the most susceptible to abuse. However, "the usage of the term 'beneficial ownership' makes it clear for all tax treaty provisions as well that tax treaty terms have to be interpreted applying an economic approach"." 237. The author proceeded to formulate the following conclusion:- "4.6. Conclusion ....
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...., in her work titled "Beneficial Ownership in International Tax Law" offers the following insights. Referring firstly to Klaus Vogel's work on double taxation conventions, Meindl Ringler observes:- "1. KLAUS VOGEL Klaus Vogel in his book on Double Taxation Conventions states that the reason for the inclusion of beneficial ownership in the OECD Model was to prevent treaty shopping by the use of intermediaries. Beneficial ownership should not be interpreted with reference to domestic law, as precise definitions cannot be found in the domestic tax systems in question. Rather, beneficial ownership should be interpreted taking into account the context of the treaty and the purpose of the limitation of tax, since here the context requires otherwise according to Art. 3(2) OECD Model. In Vogel's opinion, treaty benefits should not depend on mere formal title but rather on "real" title, which means that substance should prevail over form. According to Vogel, the substantive right to receive income depends on the right to decide on the use of the assets (and therefore, whether income should be realised) or/and the right to decide on the use of the income. If a ....
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....er, the learned author observes as under:- "According to Philip Baker, the OECD uses beneficial ownership to exclude agents, nominees and "any other conduit who ... has very narrow powers over the income which render the conduit a mere fiduciary or administrator of the income on behalf of the beneficial owner" from claiming treaty benefits. Simply being a conduit is, thus, not sufficient to be excluded under the beneficial ownership test. Even a trustee can qualify as the beneficial owner of income as long as he is not an agent, nominee or conduit with very narrow powers. Baker finds the OECD's approach focusing on a binding obligation to forward the income to another person appropriate. Also, beneficial ownership is intended to counter only one specific type of treaty shopping since otherwise, the anti-avoidance rules mentioned in the Commentary and used by contracting states (e.g., LoB clauses) would be superfluous In Baker's opinion, beneficial ownership should have an international fiscal meaning, since the context requires otherwise under Art. 3(2) OECD Model. This is supported by the fact that beneficial ownership was introduced into international ta....
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....f income or the holder of the asset is found to be merely the ostensible depository and which may hold the income either in the capacity of an administrator or even as a trustee. For this charge to be accepted, it would have to be established that the recipient or holder of income has no right or control over the income and merely holds the same to be deployed on the instruction of another. While the obligation to forward the income or gain may be either legal or contractual dependent upon the position of parties, it would certainly require a finding on fact that the income is held at the behest of another, is controlled and regulated by a third party entity and the ostensible owner having no real or substantive control over the same. 244. Tested on the aforesaid precepts, it becomes manifest that the allegation of the revenue earned from the transfer of shares being beneficially held by the petitioner, TG III and TG IV is thoroughly misconceived and untenable. This since the respondents do not rest or found this allegation on any material or evidence which may be read as even remotely suggestive of the petitioners being under a contractual or legal obligation to transmit ....
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....ought to have been taxed @ 20% only in terms of section 115AD(1)(i) of the Act." 11. On the other hand, Ld. DR for the Revenue submitted that this assessment year under consideration being a first year of MLI, in this regard, he brought to our notice page 205 of the paper book, the MLI with Luxembourg. He submitted that above MLI with Luxembourg came into force is 1st October 2019 in India and 1st August 2019 for Luxembourg. Therefore, it is effective from current AY. He submitted that Article 6 of the MLI is included in the preamble of the Agreement and he also brought to our notice relevant amendments made in Article 6. He submitted that as per Article 1, the MLI is applicable to resident of one or both of the contracting state only. Further he brought to our notice page 220 of the paper book, brought to our notice Article 29. He submitted that as per paragraph 2 & 3 of Article 29, it clearly states the fact that if the main purpose or one of the main purposes of the creation of such enterprise was to obtain the benefits under this Agreement that would not otherwise be available, he submitted that paragraph 3 of Article 29 states clearly that the case of local entities not hav....
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....de by him may be considered. With regard to additional grounds, he submitted that no doubt the interest charged u/s 234 is consequential still the provisions of section 234B may be remitted back to the AO to determine the actual liability in accordance with the law. 14. Considered the rival submissions and material placed on record. We observe from the record, during the assessment proceedings, the AO observed that the assessee is a limited liability Company incorporated in Luxembourg and it is 100% subsidiary of SC Lowy Primary Investments Limited based in Cayman Islands and the Holding company also 100% subsidiary of SC Lowy Offshore Fund based in Cayman Islands. After analyzing the financial statements of the assessee company and various documents on record, he came to the conclusion that a) the scheme of arrangements employed in this case is tax avoidance through treaty shopping, b) it is just a conduit and the real owner is Holding Company based in Cayman Island, with whom there is no DTAA exists, c) TRC is not sufficient to establish the tax residency d) it is not a beneficial owner of income as control is not with them and e) no commercial rationale of establishment of co....
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....s of tax fraud, sham transactions, camouflaging of illegal activities and the complete absence of economic substance and the establishment of those charges would have to meet stringent and onerous standards of proof and required to base such conclusions on cogent and convincing evidence and not merely suspicion alone. 16. From the above, it is clear that the revenue has to accept the TRC issued by the competent authority and if the facts on record satisfies the conditions specified in the Article 29 on Limitation of Benefits, it cannot stretch beyond the above mandates unless they bring on record the cogent and convincing evidences to prove the existence of assessee being acted as conduit. On careful consideration of MLI with Luxembourg, we observe that the article 29 was modified and replaced the sub clause 2 and 3 of the Article by paragraph 1 of Art.7 of MLI, as per which benefit under the agreement shall not be granted in respect of income or capital if it is reasonable to conclude leading to relevant facts and circumstances, obtaining the benefit is one of the principal purposes of any arrangements or transaction that resulted directly or indirectly in that benefit. It is t....
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....x 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. It was submitted and brought to our notice that the assessee 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. 19. Finally, it was submitted that the assessee continues to exist till date in Luxembourg and continues to hold substantial investments. It clearly shows that the assessee controls the assets as well as income on its own and cannot be termed as conduit. Further we observe that the AO has not brought any cogent material on record to indicate that the assessee in substance a conduit except expressing his views and presumptions. In our considered view, as per the directions of Hon'ble Delhi High Court in the case of Tiger Global International decision (supra), revenue authorities cannot bring on record other conditions to deny the benefit under the treaty....