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TMI Blog2015 (8) TMI 1219X X X X Extracts X X X X X X X X Extracts X X X X ..... aphs (1) (2) and (3) thereof (the shares of SKR BOP sold by Blackstone Mauritius and Barclays do not fall within paragraphs (1), (2) and (3) of Article 13 shall be taxable only in that State i.e. Mauritius. The gains derived from the alienation of any property would include the gains derived on account of the sale of shares. The words ‘any property’ are wide enough to cover shares in a company incorporated under the Companies Act, 1956. The gains from the sale of shares are taxable under the Income Tax Act, 1961. Article 2 of the DTAC, which stipulates the existing taxes to which the convention applies in the case of India, includes income tax including any surcharge thereon imposed under the Income Tax Act, 1961. The words ‘contracting States’ obviously refers to Mauritius. This is obvious as the reference in first part of paragraph-4 of Article 13 is to the ‘Contracting State’. The concluding words therein viz. ‘that State’ therefore refer to the Contracting State. Thus the capital gains that arose on account of the sale of the shares of SKR BPO by Blackstone Mauritius and Barclays are derived by a resident of a Contracting State from the alienation of property other than prop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... situation under Section 245-R(2)(iii) detailed and in-depth analysis to arrive at a definite conclusion about the nature of the transaction is impermissible. 3. We have accepted the request made by Mr. Kaka, the learned Senior counsel appearing on behalf of the petitioner to decide the matter onmerits instead of remanding it due to a combination of reasons. The Act mandates an application for advance ruling under Section 245R(6) to be decided within six months. It is now over four years since the application was made on 03.05.2011. The matter had been heard several times before respondent No.1. It had at one stage been reserved for orders but then released on the respondents application for further material. It had to be argued afresh as the constitution of respondent No.1 had changed. The matter was argued before respondent No.1 on several occasions over a period of almost three years. On the application of the respondents, the petitioner produced from time to time voluminous records before respondent No.1. Mr. Joshi, the learned counsel appearing on behalf of the Department admitted that the record is complete in all respects. We are informed that the petition had been heard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ocess outsourcing services in the ITES sector. (iii) Pursuant to the subscription of equity shares of SKR by Blackstone Mauritius, downstream investment by SKR by way of acquisition of upto 3,229,500 shares constituting 20% of the equity share capital of Sparsh BPO Services Limited, a company incorporated under the Companies Act, 1956 and having its registered office at Intelenet Towers, Plot CSA No.1406-A/28, Mindspace, Malad (W), Mumbai- 400064, and engaged in the business of providing process outsourcing services in the ITES sector. (iv) For SKR to make further investments from time to time in companies engaged in IT and IT enabled services. The application ended by stating that any further or additional information as required would be furnished. 6. The FIPB granted the approval on 27.08.2007 subject to the terms and conditions mentioned therein. Blackstone Mauritius was named therein as the foreign collaborator. By an amendment dated 31.08.2010, Barclay (H B) Mauritius Limited was also included. As is usual, with FIPB approvals, the letter was to be made a part of the foreign collaboration agreement to be executed between the investee company and the foreign colla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shares in SKR BPO for a consideration of about ₹ 1,400 crores and ₹ 269.40 crores respectively. The question is whether the petitioner was bound to deduct the tax at source and to pay over the same to the Government. 10. Under cover of its letter dated 31.05.2011, the petitioner forwarded an application to respondent No.1 seeking an advance ruling under Section 245Q(1) of the Income Tax Act, 1961, on the following questions:- 1. Whether, on the facts and in the circumstances of the case, the capital gains arising in the hands of Blackstone GPV Capital Partners Mauritius V-B Ltd. ( Blackstone Mauritius ) and Barclays (H B) Mauritius Limited ( Barclays Mauritius ) (Collectively referred to as the Sellers ) on account of the sale of shares of SKR BPO Services Private Limited is not chargeable to tax having regard Article 13(4) of the Agreement for the Double Taxation and Prevention of Fiscal Evasion with Mauritius ( India Mauritius DTAA ) read with Section 90(2) of the Income Tax Act, 1961 (the Act )? 2. Whether, on the facts and in the circumstances of the case, and on the basis that capital gains earned by the Sellers is not chargeable to tax in India having ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... falling in sub-clause ( iii-a ) of clause ( b ) of Section 245-N Provided further that no application shall be rejected under this sub-section unless an opportunity has been given to the applicant of being heard: Provided also that where the application is rejected, reasons for such rejection shall be given in the order. (3) A copy of every order made under sub-section (2) shall be sent to the applicant and to the Commissioner. (4) Where an application is allowed under sub-section (2), the Authority shall, after examining such further material as may be placed before it by the applicant or obtained by the Authority, pronounce its advance ruling on the question specified in the application. (5) On a request received from the applicant, the Authority shall, before pronouncing its advance ruling, provide an opportunity to the applicant of being heard, either in person or through a duly authorised representative. Explanation. -For the purposes of this sub-section, authorised representative shall have the meaning assigned to it in sub-section (2) of Section 288, as if the applicant were an assessee. (6) The Authority shall pronounce its advance ruling in writ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icle 6, may be taxed in the Contracting State in which such property is situated. 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, including such gains from the alienation of such a permanent establishment (alone or together with the whole enterprise) or of such a fixed base, may be taxed in that other State. 3. Notwithstanding the provisions of paragraph (2) of this article, gains from the alienation of ships and aircraft operated in international traffic and movable property pertaining to the operation of such ships and aircraft, shall be taxable only in the Contracting State in which the place of effective management of the enterprise is situated. 4. 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 this article shall be taxable only in that State ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f his domicile, residence, place of management or any other criterion of a similar nature. Foreign Institutional Investors and other investment funds, etc., which are operating from Mauritius are invariably incorporated in that country. These entities are liable to tax under the Mauritius Tax Law and are, therefore, to be considered as residents of Mauritius in accordance with the DTAC. 2. Prior to 1-6-1997, dividends distributed by domestic companies were taxable in the hands of the shareholder and tax was deductible at source under the Income-tax Act, 1961. Under the DTAC, tax was deductible at source on the gross dividend paid out at the rate of 5% or 15% depending upon the extent of shareholding of the Mauritius resident. Under the Income-tax Act, 1961, tax was deductible at source at the rates specified under section 115A, etc. Doubts have been raised regarding the taxation of dividends in the hands of investors from Mauritius. It is hereby clarified that wherever a Certificate of Residence is issued by the Mauritian Authorities, such Certificate will constitute sufficient evidence for accepting the status of residence as well as beneficial ownership for applying the DTA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is legitimate tax avoidance within the framework of law is not the consideration while dealing with a situation envisaged under proviso (iii) to Section 245R(2). If on detailed examination of materials adduced the applicant satisfies the Revenue officials that the transaction is a legitimate tax avoidance arrangement, naturally the consequences will follow as mandated in law. For dealing with a situation envisaged under proviso (iii) to sub-section (2) of Section 245R detailed and in depth analysis to arrive at a definite conclusion about the nature of the transaction is impermissible. 17. In our considered view, the factual scenario projected by the Revenue clearly establishes that the transaction in question was designed prima facie for avoidance of income tax. We, therefore, decline to give ruling on the application, which is accordingly rejected. 17. The observation in paragraph-6 of the order that the petitioner was reluctant in submitting the documents/particulars required by the Revenue is no longer relevant. All the documents have infact been furnished. To leave no room for doubt, we asked Mr. Joshi whether there was anything else that the Revenue required even at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hed details of the transactions, corporate structure, share purchase agreements, confidential valuation report of SKR BPO, details of incorporation of Blackstone Mauritius and Barclays, Memorandum Article of Association of Blackstone Mauritius and Barclays, Tax Residency Certificates, details of the activities of these companies, details of the Directors including their addresses and PAN details, balance sheets and profit loss accounts, Board Minutes, FIPB approvals, complete details of initial investment into SKR BPO and the consideration paid for the shares, details of source of funds for initial investment into SKR BPO, bank account statements from the date of initial acquisition of SKR BPO shares till sale of the shares to the petitioner, details of the consideration received, addresses and details of the holding of these two companies and details, names and addresses of the share holders of these two companies, bank account statements and details of SKR BPO. Further hearings were again held before the first respondent in May, 2012 and December, 2013, during the course of which submissions were filed and notices were issued. The matter was finally heard on 09.12.2013. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e not on record. Paragraph-16 of the impugned order observes that for dealing with a situation envisaged under proviso (iii) to sub-section (2) of Section 245R detailed an in-depth analysis to arrive at a definite conclusion about the nature of the transaction is impermissible. There was no indication in the order and there was no indication even before us as to the direction or the nature of the analysis. We repeatedly asked Mr. Joshi if there was anything that the Revenue wanted to know even now regarding these aspects viz. fund flows, commercial purpose of the Mauritius companies and commercial expediency of the transactions. He did not indicate any requirement. We asked Mr. Joshi whether the Revenue wanted any material or had any other queries for the purpose of determining the true nature of the transactions. He did not indicate the need for the same either. Mr. Kaka on the other hand stated that the petitioner was willing to furnish any information required and to answer any question raised by the Revenue in respect of the transactions and the parties thereto. 22. The first respondent was of the view that there is a prima-facie case of the transaction/arrangement bei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eard afresh. By that time the constitution of the first respondent changed and therefore, the matter had to be heard de novo. Considering the nature of this matter, we decided to hear it on-merits. Moreover, the Revenue did not demand any further evidence and had no further queries to raise. No purpose would be served, therefore, by remanding the matter. 26. This brings us to a consideration of Mr. Joshi s submission on merits before us. Mr. Joshi contended that the real beneficiaries of the transaction do not actually reside and carry on business for gain in Mauritius and therefore, the entire transaction was nothing but a device for taking advantage of the DTAC between India and Mauritius. This he contended was a clear case of treaty shopping. He submitted that Blackstone Mauritius and Barclays cannot be considered to be residents of Mauritius as they have absolutely no business interest in Mauritius. They do not do any business in Mauritius. They have no manufacturing unit in Mauritius. They do not render any services in Mauritius and therefore, they cannot even to be considered to be residents of Mauritius. He submitted that in any event the real beneficiaries are the sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orities in favour of Blackstone Mauritius and Barclays was accepted by the authorities. Its genuineness and validity was fairly not questioned either before the first respondent or before us. The certificates of residence issued by the Mauritius Authorities, therefore, establish that Blackstone Mauritius and Barclays are residents of Mauritius within the meaning of Article-1. 30. In view of the circular, it is incumbent upon the authorities in India to accept the certificates of residence issued by the Mauritian authorities. Circular No. 789 is a statutory circular issued under section 119 of the Act. It is obviously based upon the trust reposed by the Indian authorities in the Mauritian authorities. Once it is accepted that the certificate has been issued by the Mauritian authorities, the validity thereof cannot be questioned by the Indian authorities. This is a convention/treaty entered into between two sovereign States. A refusal to accept the validity of a certificate issued by the contracting States would be contrary to the convention and constitute an erosion of the faith and trust reposed by the contracting States in each other. It is for the Government of India to decide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... endment in the Finance Bill was proposed which would affect the circular, the same was never implemented. (C) The reason for Parliament not implementing the amendment is also evident from the clarification dated 01.03.2013 issued by the Finance Ministry specifically regarding Tax Residency Certificates. It is necessary to set out the entire circular as it is of vital importance. It establishes beyond doubt now that the Circular No. 789 was in full force and ought to have been given effect to. The circular reads as under:- Finance Ministry Clarification Regarding Tax Residency Certificate (TRC) March 2, 2013 Concern has been expressed regarding the clause in the Finance Bill that amends section 90 of the Income-tax Act that deals with Double Taxation Avoidance Agreements. Sub-section (4) of section 90 was introduced last year by Finance Act, 2012. That sub-section requires an assessee to produce a Tax Residency Certificate (TRC) in order to claim the benefit under DTAA. DTAAs recognize different kinds of income. The DTAAs stipulate that a resident of a contracting state will be entitled to the benefits of the DTAA. In the explanatory memorandum to the Finance A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e than once for it also answers the other questions conclusively. T he Supreme Court considered the very provisions that we have referred to as well as the said Circulars issued by the Central Board of Direct Taxes. With reference to the Circular No. 682 dated 30.03.1994, the Supreme Court observed that relying on this circular a large number of foreign institutional investors (hereinafter referred to as FIIs ), which were resident in Mauritius, invested large amounts of capital in shares of Indian companies with expectations of making profits by sale of such shares without being subjected to tax in India. In the year 2000, the Income Tax Authorities issued notices to some FIIs calling upon them to show cause why they should not be taxed for profits and for dividends accrued to them in India. The basis on which the notices were issued was that the FIIs were mostly shell companies incorporated in Mauritius, operating through Mauritius, whose main purpose was investment of funds in India. It was alleged before the Supreme Court as it was before us, that these companies were controlled and managed from countries other than India or Mauritius and as such they were not residents o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the reasoning in the decisions which we have noticed. If it was not the intention of the legislature to make a departure from the general principle of chargeability to tax under Section 4 and the general principle of ascertainment of total income under Section 5 of the Act, then there was no purpose in making those sections subject to the provisions of the Act . The very object of grafting the said two sections with the said clause is to enable the Central Government to issue a notification under Section 90 towards implementation of the terms of DTACs which would automatically override the provisions of the Income Tax Act in the matter of ascertainment of chargeability to income tax and ascertainment of total income, to the extent of inconsistency with the terms of DTAC. 29. The contention of the respondents, which weighed with the High Court viz. that the impugned Circular No. 789 is inconsistent with the provisions of the Act, is a total non-sequitur. As we have pointed out, Circular No. 789 is a circular within the meaning of Section 90, therefore, it must have the legal consequences contemplated by sub-section (2) of Section 90. In other words, the circular shall preva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clarification, the assessing officers chose to ignore the guidelines and spent their time, talent and energy on inconsequential matters, we think that CBDT was justified in issuing appropriate directions vide Circular No. 789, under its powers under Section 119, to set things on course by eliminating avoidable wastage of time, talent and energy of the assessing officers discharging the onerous public duty of collection of revenue. Thus, Circular No. 789 does not in any way crib, cabin or confine the powers of the assessing officer with regard to any particular assessment. It merely formulates broad guidelines to be applied in the matter of assessment of the assessees covered by the provisions of DTAC. We do not think the circular in any way takes away or curtails the jurisdiction of the assessing officer to assess the income of the assessee before him. In our view, therefore, it is erroneous to say that the impugned Circular No. 789 dated 13-4-2000 is ultra vires the provisions of Section 119 of the Act. In our judgment, the powers conferred upon CBDT by sub-sections (1) and (2) of Section 119 are wide enough to accommodate such a circular. (emphasis supplied) . These ob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tire DTAC being rendered unworkable. Take for instance a case where the Government of one of the countries introduces a tax holiday or grants an exemption for a specified period or where a tax exemption is introduced or revoked. If the respondent s submission is to be accepted, the position would be fluid and fluctuating depending upon whether a person is required to pay tax or not at a given point of time in Mauritius. It would mean that the person would be liable to pay taxes in India when there is an exemption or no liability to pay any tax in Mauritius and would not be liable to pay taxes in India when he actually pays tax in Mauritius. If that had been the intention, the Government would have also provided the extent to which the tax can be levied by the countries. There would in that event in all the probability have been a provision for liability to the extent of the difference, if any, between the tax to be payable in one country and the taxes actually paid in the other. If as contended by Mr. Joshi, the intention had been that Article 13(4) operates only where a person pays tax in Mauritius, it could never be that the extent of payment is irrelevant. If would be irratio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lso clear from Article 13. 44. Clause-4 of Article 13 provides that the gains derived by a resident of a contracting State (Blackstone Mauritius and Barclays are residents of Mauritius a contracting State), from the alienation of any property other than those mentioned in paragraphs (1) (2) and (3) thereof (the shares of SKR BOP sold by Blackstone Mauritius and Barclays do not fall within paragraphs (1), (2) and (3) of Article 13 shall be taxable only in that State i.e. Mauritius. The gains derived from the alienation of any property would include the gains derived on account of the sale of shares. The words any property are wide enough to cover shares in a company incorporated under the Companies Act, 1956. The gains from the sale of shares are taxable under the Income Tax Act, 1961. Article 2 of the DTAC, which stipulates the existing taxes to which the convention applies in the case of India, includes income tax including any surcharge thereon imposed under the Income Tax Act, 1961. 45. The words contracting States obviously refers to Mauritius. This is obvious as the reference in first part of paragraph-4 of Article 13 is to the Contracting State . The concluding wor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss in Mauritius and that it is the share holders of these companies who actually gain from the transactions in question. These share holders are not residents of Mauritius. Therefore, the provisions of the DTAC are not available to them. 48. The case of treaty shopping was dealt with by the Supreme Court in Union of India v. Azadi Bachao Andolan (supra), in detail. The following observations are important:- Treaty shopping - is it illegal? The respondents vehemently urge that the offshore companies have been incorporated under the laws of Mauritius only as shell companies, which carry on no business there, and are incorporated only with the motive of taking undue advantage of DTAC between India and Mauritius. They also urged that treaty shopping is both unethical and illegal and amounts to a fraud on the Treaty and that this Court must be astute to interdict all attempts at treaty shopping. Treaty shopping is a graphic expression used to describe the act of a resident of a third country taking advantage of a fiscal treaty between two contracting States. According to Lord McNair, provided that any necessary implementation by municipal law has been carried ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge that there is nothing like equity in a fiscal statute. Either the statute applies proprio vigore or it does not. There is no question of applying a fiscal statute by intendment, if the expressed words do not apply. In our view, this contention of the appellants has merit and deserves acceptance. We shall have occasion to examine the argument based on motive a little later. The decision of the Chancery Division in F. G. (Films) Ltd., In re [(1953) 1 WLR 483 : (1953) 1 All ER 615] was pressed into service as an example of the mask of corporate entity being lifted and account be taken of what lies behind in order to prevent fraud . This decision only emphasises the doctrine of piercing the veil of incorporation. There is no doubt that, where necessary, the courts are empowered to lift the veil of incorporation while applying the domestic law. In the situation where the terms of DTAC have been made applicable by reason of Section 90 of the Income Tax Act, 1961, even if they derogate from the provisions of the Income Tax Act, it is not possible to say that this principle of lifting the veil of incorporation should be applied by the court. As we have already emphasised, the wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urther observed that the finding on such a plea would have a serious impact on the ruling to be given in the application, one way or the other. The Chairman, therefore, reserved the question whether the present scheme put forward by the petitioner is one for avoidance of tax in India for consideration at the stage of hearing under section 245R(4) of the Act. The order concluded as under:- Subject to the above reservation, the application is allowed under section 245R(2) of the Act for rendering a ruling on the two questions set out above. The application will be posted for hearing under section 245R(4) of the Act on 30.07.2012. Mr. Kaka s submitted that in view of this order the first respondent was bound to decide the application for advance ruling one way or the other. He submitted that the matter had by virtue of this order been admitted for hearing at the final stage i.e. at the stage of hearing under section 245R(4) of the Act. According to him, there was no question of the first respondent sending the matter to the Assessing Officer for regular assessment as the matter had already been admitted. He relied upon the operative part of the order which we quoted earlier to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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