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1996 (8) TMI 512 - AAR - Income TaxApplication of investor company (IC) - (a) Whether in view of the provisions of India-Mauritius double tax avoidance agreement, can it be construed that the applicant does not have a permanent establishment (PE) in India ? (b) Whether the applicant be liable to tax in respect of the management fees received from the CT ? (c) Whether the applicant be liable to tax in respect of the carried interest received from the CT ? (d) Whether there be a withholding tax liability on the CT, in respect of the payment of management fees and carried interest to the applicant ? Application of investment manager (IM) Whether the applicant would be assessed in respect of its proportionate share of income earned by the contributory trust as per the provision of section 161 of the Income-tax Act, 1961 (the Act) ? Whether the contributory trust would be regarded as a see through or transparent entity vis-a-vis the applicant; i.e., to say, the applicant willbe taxed in respect of its proportionate share of income under section 161 of the Act ? Whether it is held that the provisions of section 161 do not apply to the incomeof the applicant from the contributory trust because of the power vestedin the trustees to add to the list of the beneficiaries on the terms laiddown in the indenture of trust and the contribution agreement, then ifsuch power is deleted, would the assessment of the applicant in respectof its proportionate share of income of the trust be made in accordancewith section 161 ? Whether if it is held that the shares of the additional beneficiaries are indeter-minate whether the capital gains arising to the applicant will be chargedto tax at the rate of 20 per cent. as prescribed in section 112 of the Act ? Whether will there be any tax withholding by the investee companies at the time of distribution of income to the CT ? Whether, on the facts and circumstances of the case,the character of the applicant s proportionate share in the income of thecontributory trust will be same as in the hands of the contributory trust? Whether the applicant s share in the dividend earned by the contributorytrust will be chargeable to tax and if so at what rate? Whether the applicant s share in the interest earned by the contributory trustbe chargeable to tax at the rate of 20 per cent. ? Whether, on the facts and in the circumstances ofthe case, the applicant s share in the capital gains earned by the contribu-tory trust will be chargeable to tax ? Whether there would be any withholding tax liability on the CT in respectof the distributions made to the applicant ? Whether, on the facts and in the circumstances ofthe case, the applicant s proportionate share in the surplus arising on therealisation of the investments made by the contributory trust would constitute capital gains ? Whether, in case the answer to question No. 11 is in the negative, the proportionate share of the applicant in such surplus will be chargeable to income-tax in India in the applicant s hands ?
Issues Involved:
1. Applicability of Section 161 or Section 164 of the Income-tax Act, 1961. 2. Tax consequences of income received by the investor company from the contributory trust. 3. Permanent establishment status of the investment manager in India under the India-Mauritius Double Tax Avoidance Agreement (DTAA). 4. Tax liability of management fees and carried interest received by the investment manager from the contributory trust. 5. Withholding tax obligations on the contributory trust. Issue-wise Detailed Analysis: 1. Applicability of Section 161 or Section 164 of the Income-tax Act, 1961: The Authority examined whether the assessments of the Contributory Trust (CT) and the Investor Company (IC) will be governed by Section 161 or Section 164 of the Income-tax Act. Section 161(1) imposes a representative character on the trustee, making the assessment on the trustee in the same manner and to the same extent as it would be on the beneficiary. Section 164(1) applies if the shares of the beneficiaries are indeterminate or unknown, taxing the income at the maximum marginal rate. The Authority concluded that the CT's income should be assessed under Section 161, as the beneficiaries and their shares are determinable based on the trust deed and contribution agreement. 2. Tax Consequences of Income Received by the Investor Company from the Contributory Trust: The Authority determined that the character of the income received by the IC from the CT retains its nature (dividends, interest, capital gains) as in the hands of the CT due to Section 161. Consequently, dividends and interest received by the IC are taxable under the DTAA at 15% and normal rates respectively, while capital gains are exempt from tax in India under Article 13 of the DTAA. 3. Permanent Establishment Status of the Investment Manager in India under the DTAA: The Authority considered whether the Investment Manager (IM) has a permanent establishment (PE) in India. Based on the documents and undertakings, it was concluded that no PE is envisaged at present. However, this conclusion is subject to the actual manner in which the IM's activities are carried out. If the IM operates through an office or employs personnel in India, it may constitute a PE. 4. Tax Liability of Management Fees and Carried Interest Received by the Investment Manager from the Contributory Trust: The tax liability of the management fees and carried interest received by the IM from the CT depends on whether the IM has a PE in India. If no PE exists, these amounts are not taxable in India. If a PE is established, the fees and interest attributable to the PE would be taxable in India, and the CT would be required to withhold tax on such payments. 5. Withholding Tax Obligations on the Contributory Trust: The investee companies must withhold tax on payments to the CT at the rates applicable to an Indian company. However, the CT or IC may apply for a lower or nil withholding tax certificate based on Section 161 and the DTAA. The CT would also need to withhold tax on distributions to the IC attributable to dividend and interest income. Rulings: 1. Investor Company (IC): - The IC can be assessed on its proportionate share of income from the CT under Section 161. - The CT is considered a transparent entity for the IC, making the IC liable for its share of income. - Modifications to the trust deed and contribution agreement ensure the shares of beneficiaries are determinate. - Dividends received by the IC are taxable at 15%, interest at normal rates, and capital gains are exempt under the DTAA. - The CT must withhold tax on distributions to the IC for dividend and interest income. 2. Investment Manager (IM): - Based on the current documents and undertakings, the IM does not have a PE in India. - If no PE exists, the management fees and carried interest received by the IM from the CT are not taxable in India. - The CT is not required to withhold tax on payments to the IM if no PE exists. - The ruling is subject to the actual manner in which the IM's activities are carried out, and the establishment of a PE would change the tax obligations. The Authority emphasized that the rulings are based on the modifications agreed upon by the parties and the current proposed transactions. The actual conduct of activities by the IM and the CT may necessitate a reevaluation of the tax obligations.
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