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TMI Blog2018 (2) TMI 855X X X X Extracts X X X X X X X X Extracts X X X X ..... ithhold tax. Respectfully following that decision, we are of the view that there is no obligation on the Applicant to withhold tax in this case, as we have held that the capital gains arising in the hands of the Applicant was not chargeable to tax in view of paragraph 4 of Article 13 of the India – Mauritius DTAC. Applicability of transfer pricing provisions - Held that:- As against the position in section 195 of the Act, there is no such requirement in section 92 that the transaction should result in income chargeable to tax under the Act for TP provisions to get attracted. Hence, the transaction in the instant case of sale of shares in ‘AB’ International will have to be benchmarked as per the transfer pricing provisions contained in Chapter X of the Act. Thus transfer pricing provisions contained in sections 92 to 92F of the Act would apply to the proposed transaction. Applicability of section 115JB on the subject transaction - Held that:- The Applicant as well Revenue agree that the provisions of the said section shall not be applicable to foreign companies, as per the retrospective amendment to section 115JB by Finance Act, 2016, and the clarification issued by the CBDT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade further investment from time to time as mentioned below: Dates of Capital infusion Number of shares 27 June 2013 662,878 31 January 2014 692,222 29 July 2015 7,081,938 2.4 The initial and subsequent investment decisions have been discussed and approved by the Board of Directors in its meetings held on 17 November 2008 and 14 May 2009. The original SPA dated 25 November 2008 was executed by the director of the Applicant. The considerations were limited to the banking channels. Details of the investments were provided to the RBI under FEMA, 1999. FIRC was obtained from the RBI which shows that remittances were for the acquisition of shares and the money had come from the Applicant. 2.5 As part of the corporate strategy of the Group, to support its business in the Asia Pacific region in the medium to long term, and to obtain operational and cost benefits from centralizing the ownership of investments and operations in Asia Pacific region, a regional headquarters in Singapore was propose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nces of the case, the Applicant will be entitled to the benefits of the Agreement between the Government of Mauritius and the Government of the Republic of India for the avoidance of double taxation and prevention of fiscal evasion with respect to taxes on income and capital gains ( the India-Mauritius tax treaty )? II. If the answer to Question 1 is in the affirmative, whether on the facts and circumstances of the case, the gains arising to the Applicant from the proposed sale of shares in AB India Private Limited ( AB India ) to a Group Company ( Transferee ) would not be liable to tax in India having regard to the provisions of Article 13 of the India-Mauritius tax treaty? III. If answer to Question 2 is in affirmative i.e. holding that the gains arising from the proposed sale of shares by Mauritian company are not chargeable to tax in India, whether there will be any obligation to withhold tax under section 195 of the Income Tax Act, 1961? IV. If answer to Question 2 is in affirmative i.e holding that the gains arising from the proposed sale of shares by Mauritian company are not chargeable to tax in India, whether the transfer pricing provisions of section 9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pra). 4.4 In respect of Question IV, that sale of shares by the Applicant would not give rise to any tax incidence in India and hence the transfer pricing provisions contained in section 92 to section 92F of the Act would not apply to the proposed transaction it relies on the ruling of Bombay High Court in case of Vodafone India Services Private (368 ITR 1), Shell India Markets Private Limited, AAR rulings in cases of Hershey (AAR No. 1470 of 2013) and Dow Agri (supra). 4.5 In respect of Question V, with regard to application of section 115JB of the Act on the subject transaction, the Applicant contends that the provisions of the said section shall not be applicable as per the retrospective amendment to section 115JB by Finance Act, 2016, and relies on the Supreme Court ruling in cases of Castleton Investments Limited, Dow Agriand Shinsei(supra) and the press release issued by the Government dated 24 September 2015. 5. The Revenue has submitted detailed reports in the context of the details filed with the Application, as also in response to its subsequent contentions and defence, as filed and argued during the course of these proceedings. The same are, as under: 5.1 Rev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company as part of C Group is involved in business of middle market buyouts. The Group buys different businesses, sells them at appropriate time and value. Its expenses under the heads of wages and salaries and other staff cost are nil. This shows that it has no employees at all. This shows also that it is a paper company without any business purpose. 5.7 Revenue submits that the Applicant fails the substance over form test because the place of effective management of the Applicant company is not in Mauritius but only in the US because its shares are held by C Equity Portfolio II LP and C Affiliates Fund LP, both US companies. As per the India - US DTAC, India has the right to tax the gains as per its laws. To avoid incidence of tax in India as per its laws, instead of transferring from the holding companies of the Applicant in US directly, transfer of shares has been routed through Mauritius, as a conduit, to avoid capital gains tax in India, which is a clear evidence of treaty shopping. 5.8 On an examination of the details filed by the Applicant, various factual discrepancies are noticed, which support the stand of Revenue, that the control and management of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tor who takes all the key decisions on behalf of the company. If he was always participating in the board meetings through telephone or videoconference from the US, then the place from where he operates should be taken as the place of effective management but not where the non-executive directors sit. 5.10 Further the minutes of the board meeting of 14 May 2009 refer to the decision taken by the board of directors with regard to the additional investment of USD 272,400 by the Applicant company. For the year 2009, the Board of Directors consisted of Mr. AS , Mrs. KPR and Mr S . Passport data furnished by the Applicant shows that Mr. S was not present in Mauritius on the said date and Mrs. AR was in the US. It cannot be conceived that the board met without the quorum, and that without a majority of the directors, took the important decision of additional investment in a subsidiary company. Again this leads to the inference that there were no board meetings conducted in Mauritius. Thus it is clear that the place of effective management of the Applicant was in the US and not Mauritius, as been claimed by the Applicant. Mere presence of accounting professionals does not rende ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on Investment Ltd. (AAR 999 of 2010), and Dow Agri Sciences (AAR 1123 of 2011), from which the Applicant has taken support, Revenue says that in all these decisions the only argument for tax avoidance was the involvement of a Mauritian entity, and unlike the present case, no peculiarity in the conduct of the Group was demonstrated. 5.15 Revenue has cited the OECD, and para 22 of its commentary, to make a case for substance over form, and to say that States do not have to grant the benefits of DTAC with arrangements that constitute an abuse of those provisions. The UN has also subscribed to this view in its commentary at para 21 of Article 1.It is submitted that the form and the manner in which the actual transaction takes place is of paramount importance. The look at versus the look through test propounded by the Hon ble Supreme Court in the case of Vodafone holds importance here. 5.16 Revenue has taken an alternative plea that the transaction is squarely covered by the provisions of section 93 of the Act, and the resultant capital gains from the sale of shares in AB India should be considered as the income of the C Group as per Sec 9(1) of the Act, denying the DTAC benef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding 31 March 2009). 6.4 The Applicant submits that the fund for acquisition of the shares of AB International came from the bank account of the Applicant. C Group being shareholders of the Applicant had subscribed to the equity share capital of the Applicant and also advanced loans. The Applicant based on the decision of its BOD, invested and acquired shares of AB International, PTN and AB Philippines. 6.5 The contention of the Revenue that Applicant was created to take advantage of the India Mauritius DTAC is also misplaced. The Applicant has its business objective of being an investment holding company, and had invested in other companies as well, namely PTN and AB Philippines. Hence, the Revenue s argument that the investment was with an eye on the India Mauritius DTAC is not correct. The following sequence of events would further support the contention of the Applicant: Particulars Date reference Date of incorporation 7 October 2008 Financial Services Approval for Category 1 Global Business License 9 October 2008 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shall not apply to the Applicant. 6.8 The Applicant places reliance on Circular 789 dated April 14, 2000 issued by the CBDT, as also the clarification issued by the Finance Ministry vide clarification regarding TRC on March 1, 2013. 6.9 With regard to Revenue s allegation that the Applicant is a benami shareholder / a name lender and the actual owner of shares of AB International is C Group, it has relied on the ruling of Hon ble Supreme Court in the case of Jaya Dayal Poddar (1974 AIR 171), which laid down key principles and basis on which a transaction could be held as benami. 6.10 In support of its contentions, support has also been taken from the following cases: 6.10.1 Vodafone International BV (368 ITR 1) (SC); wherein it was held that: Setting up of a WOS Mauritius subsidiary/SPV by principal/genuine substantial long- term FDI in India from/through Mauritius, pursuant to the DTAC and circular no. 789 can never be considered to be set up for tax evasion. 6.10.2 Support has also been taken from other cases, to bolster its arguments against Revenue, such as: Sanofi Pasteur Holding SA(W.P. 14212 of 2010, 339 and 3358 of 2012) (AP), Vodafone Internatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itya Birla Nuvo Ltd (supra) facts in case of an investmentthrough Mauritius, and has held: 7 .that shares have been subscribed by the Applicant in its own name and the bank statements filed show that the Applicant has paid for such subscription of shares. In these circumstances the Applicant cannot be termed as a permitted transferee as was the case in Aditya Birla Nuvo... .. .Once it is established that the Applicant has made investment on its own and Shinsei Bank Ltd was party to SPA only in its capacity as sponsor and in order to comply with mutual fund regulations, there is no bar on application of Article 13(4) of the India-Mauritius DTAC in this case ... 6.14 The Applicant submits that the customary principle of pactasuntservanda should be applied, and the India Mauritius DTAC shall be applied in good faith and also refers to the ruling of the Hon ble Punjab and Haryana High Court in case of Serco BPO (supra) which has held that ..30 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 f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xtent such provisions are beneficial for the assessee. Further, neither section 90 nor section 93 of the Act provide for a DTAC override vis- -vis section 93 of the Act. If the Parliament in its wisdom chooses to provide for an override of DTAC provisions by the domestic tax laws, it would make such a provision, like GAAR, which specifically provides for DTAC override. 7. We have considered the questions posed to us by the Applicant, the details, documents and Financial Statements submitted, and the objections raised by the Revenue, as also the response of the Applicant company, as set out in the preceding paragraphs. 7.1 It is not in dispute that the Applicant is a tax resident of Mauritius and would ordinarily be covered under the India Mauritius DTAC, and also that it was not a fly by night operator. It was incorporated in Mauritius on 7 October 2008 and possesses a valid Tax Residency Certificate granted by the Mauritius tax authorities, and holds a Category 1 Global Business License. Approval from the RBI, in the form of FIRC has been obtained. It is mainly part of the C Equity Portfolio II LP and C Affiliates Fund LP ( C Group), which cumulatively hold 87.56% sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding Company, would not be involved in any important decision making, be it the funding of the subsidiary company, deciding its objectives, its target markets, and making investments and disinvestments, etc. It can be no one s case that the holding company would have no role at all to play in the affairs of its subsidiary, whose activities have to be necessarily in consonance with the overall goals of the holding company. Though, of course, and this must be emphasised, it is not permissible to it to participate in its affairs in a manner that renders the subsidiary a puppet. 7.5 Viewed in the above context, setting up a subsidiary for purposes of investment cannot be questioned. Further, as regards role of the holding company, and its control and management, it is seen that the principal investor and MD in the holding company, Mr. S was also a Director in the Applicant company, as also in many other companies of the group. Being in investment business and having identified the S sector in India, and elsewhere, as an investment destination, it is only logical that he would have a persuasive influence on the investment decisions of the company, irrespective of where he was loc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns an agreement or a resolution, it has to be assumed that he is in the know of things and represents a company decision regarding purchase of shares, unless something is amiss in the document itself or is done on hindsight, is backdated or is deduced from some unwritten clauses, as was pointed out by Revenue in the case of AB Mauritius dealt with in AAR 1128 of 2011, and in which we have taken an adverse view. 7.5.2 Regarding the office / place of management, Mauritian tax authorities have certified that the place of business of the Applicant is at the given address in Mauritius, the returns filed show this address and Board meetings also take place at this address, as mentioned in the Resolutions. Further, in the case of Investment companies, investment decisions do not require huge offices and staff. In this case, the auxiliary services have been outsourced to International Management (Mauritius), which provides all secretarial assistance. Revenue admits that for the FYs 2009, 2010 and 2011, expenses under the head Administrative expenses have been shown at USD 20,586, USD 21,796 and USD 27,661 respectively. Further, Legal and Professional fees has been incurred to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arties after the sale of the property. Of these, the source from which the money came is considered the most important. 7.8.1 In the instant case, the money was invested by the Applicant through banking channels in the initial as well as subsequent investments out of its own sources. Since the Applicant is an independent legal entity, it is not material that the money was received from the holding company, as held in several decisions, including Vodafone, Ardex, E*trade, JSH Mauritius etc. The shares were held and registered in its own name, both beneficially and legally; the motive was to invest in the S sector in India and other Asian markets as disclosed to various regulatory authorities; it was a subsidiary of the C Group but acted independently; and it had the custody of the share certificates which were dematerialized in 2012, being the shareholder. Thus, it met all the requirements and no adverse conclusion is possible, such as to hold that it was a benami of the holding company. 7.8.1 In Vodafone International Holdings BV (341 ITR 1),the Hon ble Supreme Court held that: Every strategic foreign direct investment coming to India, as an investment destination, sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AC and Circular No. 789 can never be considered to be set up for tax evasion. On the facts of the instant case, the Applicant fulfills all the criterion laid out above, and its investments in the Indian company cannot be questioned, when no other peculiarity or illegality is noticed, especially with regard to the flow of actual funds for investment in AB International. It is the legal and beneficial owner of shares and fully competent to transfer the same. 7.9 We also find that the Applicant s attempt to take support from the cases of E*Trade, Ardex, and JSH Mauritius was justified, in the facts of the instant case. 7.9.1 This Authority has held in the case of E*Trade Mauritius Ltd. (AAR No. 826 of 2009), that: 10 In this fact situation, ex facie, it is difficult to assume that the capital gain has not arisen in the hands of the Applicant, more so when according to the binding pronouncement of the Supreme Court, the motive of tax avoidance is not relevant so long as the act is done within the framework of law, the treaty shopping through conduit companies is not against law and the lifting of corporate veil is not permissible to deny the benefits of a tax treaty ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that it had not acted independently. As mentioned above, the applicant was acting as an independent company, taking its own decisions, had made investments out of its own funds through banking channels, signed proper agreements for acquisition of shares, and doing business over a considerable period of time, had its business objective of being an investment holding company, and had invested in other companies as well, namely PTN and AB Philippines on the lines of many of its group companies in the S sector in India and other countries in Asia. Hence, the Revenue s argument that the investment was with an eye on the India Mauritius Treaty only, is unacceptable, even though this was itself not taboo. 7.11 In conclusion, on this issue, we have to say that unless there are extraordinary and exceptional circumstances, as we noticed in the case of AB Mauritius, and as dealt with in AAR 1128 of 2011, we would not like to interfere with the benefits available to any applicant, under a DTAC between two sovereign states. Hence, in the instant case, and on the facts discussed above, the benefit under the India- Mauritius DTAC shall be available to the Applicant, in the spirit of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the applicability of section 92 does not depend on the chargeability under the Act. Literally in this case, the capital gains are chargeable to tax under the Act. They escape only in view of paragraph 4 of Article 13 of the DTAC and the ratio of the decision in Azadi Bachao Andolan on the applicability of the DTAC even when there is actually no double taxation . In coming to this conclusion the earlier Rulings of this Authority in M/s. Praxair Pacific Limited (326 ITR 276), Vanenburg Group BV (289 ITR 464), and Dana Corporation (AAR 788 of 2008) were also considered and not followed. 9.2 We are in agreement with the view in the case of Castleton. As against the position in section 195 of the Act, there is no such requirement in section 92 that the transaction should result in income chargeable to tax under the Act for TP provisions to get attracted. Hence, the transaction in the instant case of sale of shares in AB International will have to be benchmarked as per the transfer pricing provisions contained in Chapter X of the Act. 10. In respect of Question V, with regard to applicability of section 115JB of the Act on the subject transaction, the Applicant as well Reven ..... X X X X Extracts X X X X X X X X Extracts X X X X
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