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TMI Blog2018 (2) TMI 856X X X X Extracts X X X X X X X X Extracts X X X X ..... ies had acquired the shares in ‘AB’ India from two other US companies, the gain having arisen in India in the hands of the ‘C’ Group of the US, was taxable in India as per the India-US DTAA. In the above factual matrix, the Applicant, “AB” Mauritius, would not 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 from capital gains. Applicability of section 195 - i.e. whether tax has to be withheld on the gains arising from the sale of shares - Held that:- Since in the instant case we have held that the income would be chargeable to tax in India, there would be a liability to withhold tax as required by this section. The cases cited by the Applicant are not applicable. 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. Hence, the transaction in the instant case of sale of shares in the Indian Company will have to be benchmark ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Applicant will initially hold investments in AB India. 2.3 It acquired 2,011,482 shares in AB India for an amount of USD 380,160 from AB Inc. and US Inc. USA (Sellers). These were acquired by the Applicant vide Stock Purchase Agreement (SPA) dated 10 November 2003, and since then the Applicant has been holding the shares legally and beneficially, and enjoying all shareholder rights, including dividends. The SPA was executed by Mr. S , as an authorized signatory, representing the promoter group and being fully authorized by the Board of Directors of the Applicant. The Applicant submitted a letter from the Board of Directors clarifying and evidencing the authority of Mr. S to execute the SPA on behalf of the Applicant. These shares were taken over along with a liability which the sellers had payable to the C Group as per the loan agreement dated 30 November 2003. This liability was discharged by the Applicant over a period of time, as seen in its financial statements. 2.4 Pursuant to the aforesaid transaction, the Applicant became the owner of the shares of AB India and agreed to repay the loan owed by the Sellers to C Group, which represents fair and just com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... authorities have requested for details of shareholding pattern of the Applicant. 2.8 AB India, in the year 2009-10 had done a buy-back of shares, wherein the Applicant offered 486,090 shares under the buy-back offer and the gains on such buy-back was considered as exempt under the India Mauritius Tax Treaty. The information of buy back was called by the Income tax authorities, including the tax treatment for the same, and tax exemption to the Applicant as per the India Mauritius treaty was accepted. 2.9 The Applicant submits that 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 proposed. Pursuant to filing the application, AB Singapore was incorporated on 23 August 2011. The group re-organization has the following objective: a) AB Singapore shall function as a regional headquarters of the Group for the entire Asia-Pacific region covering India, Singapore, Thailand, Vietnam, Philippines and Indonesia; b) Function a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... res in AB India ( 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 92 to section 92F of the Act will apply? V. Whether on the facts and circumstances of the case the Applicant will be liable to tax under the provisions of section 115JB of the Act in relation to income earned from the proposed transaction? 4. Further to the above, the Applicant has summarized its question- wise arguments as under: 4.1 In respect of Question I, that it is a company incorporated and a tax resident of Mauritius, which is evidenced by the certificate of incorporation issued by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uestion 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 Government dated 24 September 2015. 5. The Revenue, represented by Sri G C Srivastava, Special Counsel, 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 It is submitted by Revenue that in this case the preliminary question is whether the applicant is entitled to the benefits of the India- Mauritius tax treaty, and it needs to be ascertained whether the applicant had made any investment in India and whether the capital gains on the transaction arose to it in terms of the DTAA, that is whether the applicant owns the shares on which the gains arose. 5.2 Revenue states that the shares of the Indian co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oans advanced by C Entities of the US. There was also no mention of any consideration flowing from the Applicant to the C Group in the Share Purchase Agreement or in the application before the Hon ble AAR. 5.7 There is also no material to show that the Mauritian applicant at any stage took any decision to invest in the Indian company or to purchase the shares from the US entities, or that it was involved in the process of such decision-making. 5.8 It is not Revenue s contention that the applicant is not a resident of Mauritius and therefore not entitled to treaty benefits. Its contention is that before granting such treaty benefits to a Mauritian company, it has to be ascertained that this company was in substance holding the investment on its own account. 5.9 Revenue further contends that the minutes of the meeting of the Board of Directors of the applicant held on 22 December 2004, show that evenone year after the acquisition of shares of the Indian company, the Board of Directors of the Applicant was not even aware of the investment held in its name. 5.10 Referring to above Clause 4 of the minutes, with reference to the acquisition of Equity shares in AB India, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ard meeting. The minutes also record that the amount of investment has already been shown as a loan advance to the applicants by the parent company and the applicant company was advised to give a similar treatment of the amount in the books of accounts. The Board of Directors ratified the acquisition and the advancement of loan to the applicant.The minutes also state that the shares were acquired as a result of the re-organization of the group. In these circumstances, the shares could not be said to be held by the applicant company for or on its own account. 5.12 It is reiterated that Mr. S was appointed as a Director of the applicant on 23 August 2005 long after the signing of the agreement. As on the date of the Stock Purchase Agreement, he had no authority to bind the applicant in any agreement. He was actually the MD of the C Group since 1995 and was so at the time of signing of the Stock Purchase Agreement. 5.13 Revenue submits that another important factor to decide the genuineness or otherwise of holding of investment is the consideration flows between the contracting parties. In the present case the C Group has foregone its receivables from AB Inc. USA, for ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany. It only affirms that the company proposed to be incorporated would invest in India. It does not and cannot establish that such investment was really made by the Applicant. 5.17 As regards the application before FIPB in India, the same was made by the Indian company as seen in the approval letter. It is not a case before FIPB that the applicant company declared their intentions to invest in the Indian company. On 22 October 2003 when the application before FIPB was made, the share purchase agreement was not even entered into and there is nothing to indicate that the applicant would be investing in India for an on its own behalf or to the applicant company was aware of any such investment being made in the name. 5.18 Regarding the annual accounts, Revenue states that it will only reflect the apparent and not the real state of affairs. The annual accounts for the period closing in June 2004 were audited and filed in May 2005 nearly a year after the close, and long after the investment was ratified by the applicant in December 2004. 5.19 It is stated by Revenue that in view of the above stated position the transaction was prima facie for the avoidance of tax payable in I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onduct of the group was demonstrated. 5.24 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 a double taxation Convention with arrangements that constitute an abuse of the provisions of the Convention .. The UN has also subscribed to this view in its commentary at para 21 of Article 1. 5.25 It is pointed out that the passing of an adjustment entry in the books cannot be taken to reflect the actual transaction, particularly when the conduct of the parties and other evidence point to a different reality. A mere accounting entry without the actual flow of money must be made subservient to the actual transaction. 5.26 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.In this regard it is submitted that it is not the case of the revenue that ownership of the Indian shares cannot be of the applicant because the relevant documents do not exist. The point being highlighted is that wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is the legal and beneficial owner of the shares held in AB India. The below given sequence of events would show that not only the Applicant was involved in the acquisition of the shares but the decision to acquire was also that of the Applicant: Date Sequence of events 7 July and 10 July 2003 Submission of business plan and application to FSC are mandatory for incorporating a company in Mauritius. The application to the FSC and submission of business plan which clearly brings out the fact that the Applicant is being incorporated to invest in S sector in India and other Asian countries and the initial investment would be made in AB India. 10 August 2003 Incorporation of the Applicant 12 August 2003 Grant of Global Business License by the FSC pursuant to furnishing of the application and business plan 15 August 2003 Date of first Board of Directors meeting wherein the Board of Directors took on record the Global Business License granted by the FSC after considering the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The beneficial owners of the proposed company are C Equity Portfolio II, L.P, Mr. BN and C Affiliates Fund L.P. 6.3 The Applicant also states that the Revenue has misinterpreted the language of the application made to FSC and business plan to suggest that the investments are being held by the Applicant in the name of C Group. In essence the actual meaning of the said statement is to incorporate a wholly owned subsidiary to act as an investment holding company for the Group, which is an accepted way of making investments followed by several corporate. Support has been taken from the following cases: In Vodafone International BV, 368 ITR 1(SC), 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 DTAA and circular no. 789 can never be considered to be set up for tax evasion. In Sanofi Pasteur Holding SA, W.P. 14212 of 2010, 3339 and 3358 of 2012 (AP) it was held that creating wholly owned subsidiaries or joint ventures either for domestic or overseas investment is a well-established business/commercial organizational protocol; and investment is of itse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he understanding of the parties with respect to the transaction is important and it is left open to the parties involved to document in the manner they commercially see fit. In the current context, the Applicant, the sellers and the C Group agreed and decided to enter into two separate agreements one for acquisition of the shares and second for availing a loan, but in essence the same were linked by virtue of the understanding between the parties. Further, the Applicant highlights the fact that the loan agreement specifically mentions that the loan is being given for the purpose of an investment of fixed amount. 6.8 It is further submitted that the six additional individuals who are reflected as party to the loan agreement are also the shareholders of the Applicant and hold approximately 20% share in the Company. These individuals have become party to the loan agreement on the basis of an arrangement between the C Group and the individuals, as they were also the investors in C Group , and for taking over certain portion of loan that Sellers owed to C Group. 6.9 Further, the allegation of the Revenue that the shares have been acquired by C Group is also not correct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it has made further investment amounting to USD930,000 in AB India and has over the years received dividends amounting to USD 3,835,584. The Applicant has utilized the dividend received for its business activities as per the direction and decisions made by the Board of Directors of the Applicant. 6.13 In support of its contentions, the Applicant submits that Hon ble Supreme Court ruling in case of Vodafone International BV (341 ITR 1), held that: Every strategic foreign direct investment coming to India, as an investment destination, should be seen in a holistic manner. While doing so, the Revenue/ Courts should keep in mind the following factors: the concept of participation in investment; the duration of time during which the holding structure exits; the period of business operations in India; the generation of taxable Revenues in India; the timing of the exit; the continuity of business on such exit . 95 No presumption can be drawn that the Union of India or the Tax Department is unaware that the quantum of both FDI and FII do not originate from Mauritius but from other global investors situate outside Mauritius .. 96 .. on a subsequent sale/ transfer/dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orporate veil is not permissible to deny the benefits of a tax treaty ..By virtue of the Circular 789 issued by the CBDT (which has been upheld by the Supreme Court), the tax residency certificate issued by the Mauritius authorities is at least a presumptive evidence of beneficial ownership of the shares and the gains arising therefrom, even if it does not given rise to a conclusive presumption. 6.15 The Applicant further places reliance on the Hon ble AAR ruling in the case of Ardex Investments Mauritius Ltd., AAR866 of 2010, wherein, on beneficial ownership of shares held in an Indian company, the AAR held as following in context of India Mauritius DTAA 6. It is true that the funds for acquisition of shares in the Indian company was provided by the principal, a company incorporated in the United Kingdom. The shares in the Indian company were first acquired in the year 2000. Subsequently further shares were acquired in the years 2001, 2002 2009. These shares are sought to be transferred by the applicant company to another subsidiary of the group, incorporated in Germany.It is not clear how far the theory of beneficial ownership could be invoked to come to a conclusio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the applicant is not a fly by night or shell company . We therefore, answer the first question in favor of the assesse and against the Revenue. The Applicant further draws attention to the Bombay High Court ruling in case of JSH Mauritius Ltd., W.P. 3070 of 2016, wherein the Bombay High Court while upholding the decision of the Hon ble AAR has held that: In the present matter, it would be relevant to note that the shares were purchased by the Respondent in the year 1996and were held for long period of 13 years and were sold in the year 2009. This goes to suggest the bona fide of the applicant. The said shares were again invested in another company of the same group in India and the same are being held by the Respondent. Considering this aspect, it has been observed by the AAR that the Respondent is not a Fly By Night or a ShellCompany . 6.16.1 The Applicant submits that in case of JSH Mauritius Ltd, the facts were similar to that of the Applicant, and the AAR and the Bombay High Court has held that Mauritius company would be eligible for the benefits of the India Mauritius DTAA and mere routing of investments through Mauritius shall not make it tax avoid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Nuvo Ltd [2011] 12 taxmann.com 141 (Bom) is not applicable, as the shares are registered in its own name. Further, it is submitted that the AAR in case of Shinsei Investment I Ltd (AAR 1017 of 2010) has also examined the Aditya Birla Nuvo Ltd (supra) facts in case of an investment through 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. The facts in Aditya Birla Nuvo were entirely different where AT T had paid for and subscribed to the shares of JV Company in India and obtained the shares in the name of AT T Mauritius as a permitted transferee. .. Once it is established that the applicant has made investment on its own and Shinshei 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 DTAA in this case ... 6.20 The Applicant submits that the customary principle of pactasuntservanda sho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng up of Mauritius subsidiary/ SPV by principal/ genuine substantial long term FDI in India from/ through Mauritius, pursuant to the DTAA and Circular 789 can never be considered to be set-up for tax evasion. 6.24 The Applicant submits that the reason for opting to select Mauritius as a base for investment holding company is very well documented in the business plan submitted to the FSC in Mauritius. 6.25 It is stated that the transaction on which ruling of the Hon ble AAR is sought is for a transfer of shares of AB India to a subsidiary of the Applicant, AB Singapore . The Applicant submits that at the time being referred to by Revenue there was no exit by the Applicant from the investment in AB India but a group restructuring to achieve the overall business objective of the Group. It is furthermore submitted that the allegation of the Revenue that the whole transaction in 2003 has been structured in order to take the benefit for the aforesaid transaction is misplaced, as it is not reasonable to assume or predict the future 9 years from the date of making the investment. Its incorporation was not an afterthought and an interposed entity by C Group to take advantage o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de. Mauritius DTAA does not have a limitation of benefits clause and in the presence of the CBDT Circular 789 of 2000, the argument that the investment made through SPV in Mauritiusis for avoidance of tax is factually and legally incorrect and untenable. 6.26.3 In this connection the Applicant has placed reliance on the Hon ble Supreme Court ruling in case of UOI v Azadi Bachao Andolan, CIT v. P. V. A. L. Kulandagan Chettiar and CBDT Circular 333 [F. No. 506/42/81-FTD], dated April 2, 1982. 6.27 Furthermore, regarding the argument of the Revenue that the DTAA provisions override domestic tax laws only when there exists a conflict between the two, it is submitted that the provisions of the Act are very clear to state that once a taxpayer is entitled to DTAA benefit, they shall be eligible for the same or the provisions of the DTAA, whichever are more beneficial. 6.28 In conclusion, the Applicant prays that once in its oral and written submission, Revenue have acknowledged that the Applicant is tax resident of Mauritius and by virtue of TRC and Circular 789 entitled to benefits under the DTAA and is not a fly by night company, the Applicant is eligible for the benefits under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cant has, apart from the TRC and the FSC approval, laid great stress on the minutes of its Board of Directors meeting of 15 August 2003. However, these minutes of 15 August 2003 show discussions on the approvals granted, which were applied for and taken by the parent company or through AB India in which Mr. S , was a Director. It is not as though in this meeting, independent decisions were taken regarding where and in which sector the investments were to be made, leave alone the quantum and the source thereof. It is seen that FSC approved the Global Business Plan on 22July 2003, ie. prior to its incorporation, and the above information was nothing but part of the application made on 10 July 2003 for the FSC approval. Hence, in this meeting, the Board of Directors merely reiterated what the Holding company had decided. Similarly, the FIPB approval at best only shows the intent of the holding company and not any decision taken by the Applicant regarding the proposed investment and its source. 7.4 The SPA was an agreement between the Applicant and the C Group on one side as buyers, the two US companies, AB Inc. USA and US Inc. USA, as sellers, and AB India in which the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng of 22 December 2004, that is a full year later. In this meeting, as brought out by Revenue, for the first time Mr. S informed and the Directors took note of the happenings with regard to investment; enquiries were made about the financing arrangement; they were informed about the reorganization in the group and about the acquisition in the shares of AB India ; advice was taken and decisions about the investment made in AB India were directed to be ratified. Even at this time Mr. S was not a Director in the Applicant company. Thus, even till the time the investment had been made the Board had no information at all on its own, and was so informed about it by the Holding company, through its MD. In fact, in this meeting the Board was also directed to incorporate the above transactions in its accounts. It was only now that the Board stated that the transactions were done for and on behalf of the Applicant. Clearly the Board of Directors was neither managing nor controlling its crucial investment decisions, for which it was stated to be set up. 7.6.1 Detailed narration of the activities post 2003 are of no avail as we are concerned with the happenings of 2003, when the App ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he right place for it to be mentioned, where all other liabilities are referred to. The SPA has no mention of this loan. Also, the Loan Agreement has no mention of the shares allotted to the Applicant or the consideration. While the SPA was signed by Mr. S , without any authority, the Loan Agreement was signed by a Director, both around the same time. There is no indication in either document that one relates to the transaction mentioned in the other, or that the debt owed by the sellers to the C Group stood transferred to the Applicant. 7.9 The above issue has been explained by the Applicant as being an understanding between the parties concerned, to have two separate agreements. It is difficult to accept this position. In a major transaction of taking over of the shares of an Indian company by C Equity and C Affiliates and paying for the same by cancellation of the sellers debt, and at the same time showing the acquisition of shares in the hands of the Applicant by creating a liability, all on the basis of an understanding and without any composite document, looks very peculiar and improbable. The US sellers had no clue how the Applicant would pay for the shares transf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Cash Flow statement as part of the Financial Statements. This only establishes that these were only entries incorporated in the books, and that the loan reflected therein had no connection with the sellers debt, stated to have been taken over by the Applicant. During the course of these proceedings, when this lacuna was pointed out to the Applicant, Sri Rajan Vora stated that these were only book entries. The only consideration paid for these shares was by the C Entities when they acquired these shares in AB India by cancelling the debt of the sellers, as per the SPA, and hence it can be reasonably concluded that the investment was made by the C Group and not the Applicant. 7.12 The above discussions lead to us to a situation that neither was the Applicant acting on its own behalf in taking decisions like an independent company with a separate legal status in a foreign territory, regarding the investment in AB India, though it was an Investment Holding company itself; and also that the manner and accounting followed in acquiring those shares only go to show that they were taken on its books on hindsight, at the directions of the Holding company. Only this can explain th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctual consideration was not routed through the Applicant. 7.13.2 As regards Circular 789 issued by the CBDT, it is agreed that the tax residency certificate issued by the Mauritius authorities is at least a presumptive evidence of beneficial ownership of the shares and the gains arising therefrom, even if it does not given rise to a conclusive presumption. In the instant case the applicant was incorporated in Mauritius for investing in the S sector and in India. Hence, when the TRC was obtained declaring the above intent, it was fairly granted the same. So the presumption would be right that it was set up as an investment holding company. However, it is the subsequent conduct of the company that casts a shadow on whether it could be said to be the beneficial owner of the shares acquired throughthe SPA, which was neither signed by it nor mentions any consideration paid or payable by it. 7.13.3 As regards the case of Vodafone International BV, 341 ITR 1, which says that every strategic foreign direct investment coming to India, as an investment destination, should be seen in a holistic manner, the problem is with the very first of the suggested criterion, namely the concept o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the Hon ble Supreme Court relied on by the applicant also stress on this independence and require the Revenue to acknowledge it as well. However, in a case where the parent acts on behalf of its subsidiary and takes all its decisions, corporate veil between the company s subsidiary and its parent stands torn, not at the instance of the revenue, but by the conduct of the group itself. In the instant case where the companies are acting together as a group having C Group s Director sign agreements on behalf of another, without formally being on the Board and moving consideration to the convenience of the whole group, it can hardly be said that they are separate entities in substance. 7.14.2 As far as the accounts are concerned, the passing of an entry in the books cannot be taken to reflect the actual transaction, especially when seen in the context of the negligible role of the Applicant in the entire episode. We agree with the Revenue that a mere accounting entry without the actual flow of money or other consideration must be made subservient to the actual transaction. In this case where the parent had signed the collusive agreements of the subsidiary on its behalf and pai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d on the gains arising from the sale of shares, since in the instant case we have held that the income would be chargeable to tax in India, there would be a liability to withhold tax as required by this section. The cases cited by the Applicant are not applicable. 9.2 In respect of Question IV, against the Applicant s contention (refer para 4.4) that transfer pricing provisions would not apply, the Revenue submits that Chapter X of the Act does not contain any such requirement of taxability of income. As per section 92, any income arising from an international transaction has to be computed having regard to arm s- length price, if there is an international transaction between two or more associated enterprises . Hence this transaction of sale of shares in the Indian company should be subjected to and benchmarked as per the transfer pricing provisions contained in Chapter X of the Act. Reference has been made to our Ruling in the case of Castleton Investments Limited (AAR 999 of 2010). 9.2.1 We have considered the matter. In a detailed finding on the issue, in the case of Castleton Investments Limited (AAR 999 of 2010), it was ruled by this Authority that: the applicabil ..... X X X X Extracts X X X X X X X X Extracts X X X X
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