2023 (3) TMI 563 - HC - Income Tax

Income deemed to accrue or arise in India - Benefit of the Mauritius Double Taxation Avoidance Agreement (DTAA) - Taxability of gains arising from the transaction from sale of shares, to be effected pursuant to the share purchase agreement held by the Petitioner in Mumbai International Airport Pvt. Ltd in India having regard to the provisions of Art 13 (4) of the India-Mauritius Double Taxation Avoidance Agreement - TDS u/s 195 - Petitioner filed an application under Section 245Q(1) before Respondent no.1 to determine the correctness of its belief that the capital gains that arose in the hands of the Petitioner by virtue of the sale of shares held by it in MIAL having regard to the provisions of the India-Mauritius DTAA would not be taxable in India - As per revenue Petitioner was a sham or a shell or a conduit incorporated only for the purposes of evading tax in India or as a device - HELD THAT - We note from Article 13 with respect to capital gains that gains derived by a resident of a contracting State from the alienation of any property other than those mentioned in paragraphs 1, 2 and 3 of the Article shall be taxable only in that State i.e. in the present case in Mauritius and not in India. As per Circular No.682 dated 30th March 1994 issued by the CBDT which mentions that capital gains arising to a resident of Mauritius on the transfer of shares in an Indian Company would be liable to tax only in Mauritius, thus capital gains derived by a resident of Mauritius by alienation of shares of companies shall be taxable in Mauritius only and will not have any capital gains tax liability in India. Circular No.789 of 2000 dated 13th April 2000 clearly suggests that certificate of residence issued by Mauritian Authorities will constitute sufficient evidence for accepting the status of residence as well as beneficial ownership for the purposes of the Mauritius DTAA and that capital gains arising from sale of shares would not be taxable in India. It is not in dispute that Circular No.789 dated 13th April 2000 continued to be in force between India and Mauritius at the relevant time. From the facts on record it cannot be said that the Indian Authorities were not aware of the change or the introduction of the Petitioner as part of the Consortium. Parties arrange their affairs in a manner as to make their businesses viable and profitable and it is part of that exercise that the Petitioner appears have been introduced into the Consortium with full knowledge of all the authorities concerned. The entire structure as well as the transaction of sale was in the full knowledge of the Indian Authorities including the tax authorities. For the Authority to hold that if Petitioner was not interposed, the Bidvest group in accordance with the Indo-SA DTAA would have to pay capital gains on the share sale 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 TRC 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 absent 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 DTAA which is applicable for investment with effect from 1st April 2017 and not prior to that, and therefore, same would have to be reconsidered in that light. Although the observations of the Authority in paragraph 62 with respect to the claim of treaty shopping of as well as the doctrine of substance over formed in paragraph 63 cannot be faulted with, however, it needs to be emphasized that the LOB clause has been made effective for investments only from 1st April 2017. As noted above, even the press release dated 29th August 2016 confirms that investments made before 1st April 2017 will not be subject to capital gains taxation in India. That being the position these observations of the authority appear to be misplaced. The investment by Petitioner in the JVC was with the knowledge and consent of the Government of India Authority viz., AAI. As noted above, Bidvest, the ultimate holding company, had informed AAI vide its letter dated 9th September 2005 that Petitioner would hold 27% of the share capital of JVC if the Consortium was selected as successful bidder. Not only that, it was submitted that the Consortium has addressed various letters dated 24th May 2005, 3rd June 2005, 7th July 2005 and 12th July 2005 to AAI seeking clarification to confirm the proposed change in the Consortium structure. Neither the Revenue nor the Authority have denied or disputed the aforesaid facts. After consideration of the technical and financial bid by the Consortium, the GVK-SA Consortium was selected as the successful bidder for the purposes of the project viz., modernization and development of the Mumbai Airport vide communication dated 4th February 2006. That, the Petitioner is one of the members of the offerer Consortium. Share holders agreement dated 4th April 2006 between the AAI, MIAL, GVK Airport Holdings Private Limited and Bid Services Division - Petitioner and ACSA Global Ltd., which is annexed to the Petition clearly indicates that the Petitioner is a shareholder of the JV Company i.e. Mumbai International Airport (Private) Limited. The Petitioner has statedly invested Rs.270 crores on the acquisition of 27 crore shares of MIAL. The AAI and MIAL have entered into an OMDA to undertake the project of designing, developing, constructing, financing, managing, operating and maintaining the Mumbai Airport. Perusal of the same nowhere indicates nor even remotely suggests that the Petitioner is an entity created or interposed to evade tax. The Schedule I of the said agreement at page 1522 also refers to Petitioner being one of the participants as prime member which are referred to as prime members at the time of submission of the RFP. It is in this background, that the Authority ought to have applied its mind before suggesting that the Petitioner was a sham or a shell or a conduit incorporated only for the purposes of evading tax in India or as a device. There does not appear to be any irregularity in complying with the Bid documents. And even if there was any irregularity, that was a matter between the AAI and the Consortium, which in our view would have been deemed waived, as not only the GVK-SA Consortium was declared a successful bidder but Petitioner has invested in the JV viz. in MIAL but the AAI has also entered into the OMDA with the Consortium for the purposes of the project of modernization of the Mumbai Airport. It is clear on the basis of ITREOI, EOI and RFP that the AAI had permitted use of special purpose vehicle structured for the purposes of submitting the technical and financial bid as well as for holding shares in MIAL. We have seen above from the shareholding pattern that Petitioner was part of the technical and financial bid submitted by the GVK-SA Consortium which would hold shares in the proposed joint venture company i.e. MIAL. Bidvest, the ultimate holding company was the evaluated entity and Petitioner is the prime member. Infact, as noted above, the Income Tax Director, International Taxation, New Delhi, had also issued a Nil withholding tax certificate to GAPHL who is the purchaser of the 13.5% shares from Petitioner to make payment / remittance of the purchase consideration to Petitioner for transfer of shares without TDS under Section 195 of the Act. Therefore, for the authority to hold that Petitioner s involvement at the stage of bidding process was without the approval of the authorities appears to be without substance. In our view, the logic that Petitioner was brought in for ease of doing business or for operational reasons and to provide supportive business environment appears to find favour with the aforesaid observations of the Hon ble Apex Court in Vodafone International Holding B.V. v. Union of India 2012 (1) TMI 52 - SUPREME COURT Having observed that the Advance Ruling Authority has failed to consider Circular 682 of 1994, 789 of 2000 , the Press release with respect to the TRC, the decision in the case of Union of India vs. Azadi Bachao Andolan 2003 (10) TMI 5 - SUPREME COURT the decision in the case of Vodafone Intl. Holding B.V. v. Union of India 2012 (1) TMI 52 - SUPREME COURT the applicability of the LOB clause as well as the Press Releases dated 1st March 2013 and 29th August 2016 which clearly grandfathers investments made before 1st April 2017 by stating that such investments will not be subject to capital gains taxation in India and the investment as well as the sale in the instant case being prior to 1st April 2017, in our view, the matter needs to be remanded back to the Authority. We, accordingly, quash and set aside the Ruling dated 10 th February, 2020 passed by the Respondent no.1 Authority for Advance Ruling, and remand the matter back to the Authority for reconsideration of Petitioner s application in the light of the above discussion, which the Authority shall consider and decide within a period of eight weeks from today after giving an opportunity of hearing to Petitioner and the Revenue Authorities.

Summary

Issues Involved:
1. Denial of benefits under the Mauritius Double Taxation Avoidance Agreement (Mauritius DTAA).
2. Validity of the tax residency certificate (TRC) and its conclusivity.
3. Allegations of tax avoidance and treaty shopping.
4. Applicability of Circulars No. 682 and 789 issued by the CBDT.
5. Impact of the Limitation of Benefits (LOB) clause in the Mauritius DTAA.

Issue-wise Detailed Analysis:

1. Denial of Benefits under the Mauritius DTAA:
The Petitioner, a company incorporated in Mauritius, challenged a ruling denying it the benefits of the Mauritius DTAA concerning capital gains tax on the sale of shares in an Indian company. The Petitioner argued that under Article 13(4) of the Mauritius DTAA, capital gains arising from the sale of shares should be taxable only in Mauritius. The Petitioner held a valid TRC issued by the Mauritius Revenue Authority, certifying it as a tax resident of Mauritius.

2. Validity of the Tax Residency Certificate (TRC) and Its Conclusivity:
The Petitioner relied on Circular No. 789, which clarified that a TRC issued by Mauritian authorities would constitute sufficient evidence of residence and beneficial ownership for applying the Mauritius DTAA. The Court noted that the TRC's conclusivity was upheld in the Supreme Court's decisions in Azadi Bachao Andolan and Vodafone International Holding B.V. v. Union of India. The Court emphasized that the TRC should be accepted unless there was evidence of fraud or illegal activity, which was not established in this case.

3. Allegations of Tax Avoidance and Treaty Shopping:
The Respondents argued that the Petitioner was a shell company incorporated solely to avoid taxes in India. They contended that the Petitioner had no economic or commercial substance and was interposed as a device for tax avoidance. The Court observed that the incorporation of the Petitioner was known to Indian authorities, including the Airports Authority of India (AAI), which had approved the Consortium's bid for the Mumbai airport project. The Court found no evidence of fraud or illegal activity and noted that the investment structure was a common commercial practice for multinational corporations.

4. Applicability of Circulars No. 682 and 789 Issued by the CBDT:
The Petitioner relied on Circular No. 682, which stated that capital gains derived by residents of Mauritius from the alienation of shares of Indian companies would be taxable only in Mauritius. Circular No. 789 further clarified that companies resident in Mauritius would not be taxable in India on capital gains from the sale of shares. The Court noted that these circulars were in force at the relevant time and supported the Petitioner's claim for exemption from capital gains tax in India.

5. Impact of the Limitation of Benefits (LOB) Clause in the Mauritius DTAA:
The Respondents referred to Article 27A of the Mauritius DTAA, which introduced the LOB clause to prevent treaty abuse. However, the Court noted that this clause was effective from 1st April 2017 and did not apply to the Petitioner's investment and sale, which occurred before this date. The Court also referred to a press release dated 29th August 2016, which clarified that investments made before 1st April 2017 would be grandfathered and not subject to capital gains taxation in India.

Conclusion:
The Court quashed the ruling dated 10th February 2020 by the Authority for Advance Ruling, which denied the benefits of the Mauritius DTAA to the Petitioner. The Court remanded the matter back to the Authority for reconsideration in light of the above discussion, emphasizing the validity of the TRC, the applicability of Circulars No. 682 and 789, and the non-applicability of the LOB clause to the Petitioner's investment. The Authority was directed to decide the matter within eight weeks, giving an opportunity for a hearing to both the Petitioner and the Revenue Authorities.