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TMI Blog2020 (6) TMI 159X X X X Extracts X X X X X X X X Extracts X X X X ..... application of advance rulings being entertained. The finding that the order under section 195 of section 197 of the Act does not stand in the way of Authority for entertaining the application for advance ruling was reaffirmed by this Authority in the case of CTCI [ 2012 (8) TMI 744 - AUTHORITY FOR ADVANCE RULINGS] as well. The provisions of the Act do not provide a bar that an applicant can t approach this Authority after the matter has been examined in the proceeding u/s 195 or u/s 197 of the Act. The bar is only in respect of pending proceeding and as already discussed earlier there was no pending proceeding on the date of filing of present applications. We don t find any merit in the objection of the Revenue to reject the applications under clause(i) of proviso to section 245R(2) of the Act and the objection raised is found to be unsustainable. Whether determination of Fair Market Value (FMV) involved?- The exercise of valuation of shares (if at all necessary) and the computation of capital gains has to be undertaken by the assessing officer only when the issue of taxability of capital gain on sale of shares is decided in the favour of the revenue. We do not find any involveme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estment activities with the intention of earning long term capital appreciation and investment income. The applicants are regulated by the Financial Services Commission in Mauritius and have been granted a Category 1 Global Business License under section 72(6) of the Financial Services Act, 2007 and are tax resident of Mauritius under the laws of Mauritius and under the provisions of the Agreement between India and Mauritius for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Foreign Countries. The applicants held shares of Flipkart Private Limited, a private company limited by shares incorporated under the laws of Singapore (for short "Singapore. Co"). The total number of shares of Singapore Co acquired by the applicants was as per table below: S.No. Applicant Number of shares acquired Period / date of acquisition 1. Tiger Global International II Holdings, Mauritius 23,670,710 October, 2011 to April, 2015 2. Tiger Global International III Holdings, Mauritius 2,282,825 23rd June 2014 3. Tiger Global International IV Holdings, Mauritius 105,928 24th April, 2012 2. The applicants have submitted that Singapore Co, in turn, had inve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stances of the case, gains arising to the Applicants (a private company incorporated in Mauritius) from the sale of shares held by the Applicants in Flipkart Private Limited (a private company incorporated in Singapore) to Fit Holdings S.A.RL. (a company incorporated in Luxembourg) would be chargeable to tax in India under the Income-tax Act, 1961 read with the Double Taxation Avoidance Agreement between India and Mauritius? As the question raised by the three applicants is common and issue as well as the facts of the case is identical, the matter is being decided by common order. The applicants have also requested for clubbing the applications as they had common set of facts relating to identical transaction. Revenue's objections on pendency 5. The Revenue has raised objections on the admissibility of the application in all the three cases in respect of all the three conditions as stipulated in provisos to section 245R(2) of the Income-tax Act, 1961 ("the Act"). The first condition of the said proviso is regarding pendency of proceeding before any Income-tax Authority or the Appellate Tribunal. In the report dated 3-1-2020, the Commissioner of Income-tax(IT)-4, Mu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herefore, there was a pending proceeding on the date when the present applications were filed on 19th February, 2019. 8. The applicants, on the other hand, have submitted that the bar under clause (i) of the proviso to section 245R(2) of the Act was attracted only if the question raised in the application was already pending before any Income-tax Authority or the Appellate Tribunal. It was submitted that the CIT himself had conceded in his report that "as on date there was no proceeding pending against the assessee" and, therefore, there was no legal basis to attract the bar under this clause. The applicants have drawn our attention to Circular No. 774 dated 17-3-1999 issued by the CBDT which clarified that no certificate under section 197(1) of the Act should be issued after the amounts subject to tax deduction at source stand credited or paid, whichever is earlier. It was clarified that the amount subject to TDS was credited / paid prior to the filing of the present applications and, therefore, the proceeding under section 197(1) of the Act stood concluded and there was no pending proceeding on the date of present applications. The applicants relied upon the decision o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aried. Even if the certificate u/s 197 was modified or varied by the TDS officer, it could not have been given effect after the transaction was closed on 17-8-2018 and such variation would have no impact. Therefore, the proceeding u/s 197 of the Act had for all practical purpose concluded on 17-8-2018 when the transaction was closed. The contention of the Revenue that the proceeding under section 197 of the Act was pending on the date of filing of the present application in February, 2019 is, therefore, not correct and can't be accepted. Once the transaction was closed there could be no pending proceeding under section 197 of the Act as clarified vide CBDT's circular no. 774 dated 17-3-1990. 11. It has been held by the Delhi High Court in the case of Hyosung Corporation (supra) that the word "already pending" in section 245R should be interpreted to mean "already pending" as on the date of application and not with reference to any future date. It was further held in this case that a notice under section 143(2) merely asking for certain information from the assessee issued prior to filing application before AAR will not constitute bar in terms of clause ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has contended that it had already decided the chargeability of capital gains on the sale of shares in the proceedings under section 197 of the Act and that the present applications should be rejected. The Hon'ble Gujarat High Court has held in the case of OPJ Trading Pvt. Ltd. (supra) that the deduction of tax at source and depositing it with the Government revenue by the payee does not decide the final tax liability of the recipient of income which would be subject matter of assessment of return. An identical view was taken by Hon'ble Madras High Court in the case of Anasaldo Energia SPA v. ITO 261 ITR 476 and by the Kerala High Court in the case of Infoparks v. DCIT 339 ITR 404 wherein it was held that the assessee's tax liability cannot be decided in the proceeding under section 197 of the Act but can only be subject matter of assessment proceeding. 14. This issue was also examined by this Authority in the case of Burmah Castrol (supra) wherein it was held that an order passed under section 197 of the Act does not fetter the jurisdiction of the AAR to proceed with the application. The relevant portion of said ruling is reproduced below: "....The application f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction raised is found to be unsustainable. Whether determination of Fair Market Value (FMV) involved? 18. The Revenue has submitted that the transfer of shares necessarily involves valuation of shares mutually acceptable to both the parties. The working of the capital gains involved correct working of total sales consideration which in turn depended on the value assigned to each share of Flipkart. According to the Revenue, the question raised by the applicants involved determination of Fair Market Value of the shares held by the applicants in Flipkart and, therefore, the bar under clause(ii) of proviso to section 245R(2) of the Act was applicable and that the application was not admissible for this reason. 19. On the other hand, the applicants have submitted that the question raised in the application was only concerned with the chargeability of tax i.e. whether or not transfer would be taxable in India under the Act read with Indo- Mauritius treaty. The question does not require this Authority to undertake a valuation exercise in relation to the shares or compute the capital gains arising to the applicants from the transfer. The applicants have placed reliance on the ruling of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision of DTAA between India and Mauritius. The Revenue submitted that the following facts discovered during the course of 197 proceedings indicated that the scheme was designed prima facie for avoidance of tax. 22. (a) Ownership Structure& Control: The applicant's companies were set up in Mauritius ostensibly for making investment in India and other markets. According to Revenue, they were not acting independently but only as a conduit for the real beneficial owners based out of USA. The Revenue has submitted that as per Notes to the Financial Statement of the year ending 31.12.2011, the applicants were held by the Tiger Global Management LLC ,a USA based investment entity that invests in public and private markets across the world through a web of entities based out of low tax jurisdictions in Cayman Islands and Mauritius, which indicated that the real control of the Company does not lie within Mauritius. The structure of the shareholding arrangements of the applicants are depicted in the following chart: 22.1 The specific comments of the Department vide letter dated 13-2-2020 on the ownership structure is as under: On perusal of the material on record, it prima facie appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... res Mr. Steven Boyd (By telephone) Annexure U Page 82 04.05.2018 Disposal of shares of Series E Preference Shares held in Flipkart Limited Mr. Steven Boyd (By telephone) Ms. BenaazMohun representing Tiger Global Mauritius Group Annexure W Page 88 23.1 The Revenue submitted that Mr. Steven Boyd or one of the representatives of TGM, USA was always present to advise the Board of the applicants. The other Directors based in Mauritius were mere puppets and not independent. According to Revenue, the applicant's decision making was fully subordinate and reliance in this regard is placed on the decision of the Supreme Court in the case of Vodafone International Holding BV 341 ITR 1. 24. (c) Financial Control: On financial control, the submissions of the department were as under: . . . . . . the authority to operate the bank accounts for transactions above USD 250000 lies with Mr. Charles P. Coleman countersigned by one of the Mauritius based directors. It is found that Mr. Charles P. Coleman is NOT on the Board of Directors of the applicants company and his presence is NOT noted on any of the Minutes of meeting where apparently crucial decisions regarding investments were ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... perusal of the documents submitted by Tiger Global International III Holdings with Mauritius Financial services commission for the purpose of obtaining Category 1 Global Business License, it is found that the applicants itself has clearly specified the BENEFICIAL OWNER OF THE COMPANY AS MR. CHARLES P COLEMAN. IT IS PERTINENT TO NOTE THAT MR. CHARLES P COLEMAN IS THE FOUNDER AND PARTNER OF TIGER GLOBAL MANAGEMENT LLS, USA....". 26. The Revenue submitted that the element of good faith needs to be retained for applicability of the treaties. Both India-Mauritius treaty and India- USA treaty have captioned "prevention of tax avoidance" as one of the purpose of DTAA. Therefore, the good faith application of these treaties requires the element of tax avoidance and treaty abuse to be examined by the tax administration while invoking treaty provisions. 27. The Revenue further submitted that on the basis of material on record, it was evident that the decisions of the applicants were not taken independently by the companies situated in Mauritius but by the people located with TGM USA. The beneficial owner of the shares of the Flipkart was with Mr. Charles P. Coleman of TGM US ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court in the case of Vodafone (supra) to emphasize that the onus was on the tax authority to demonstrate how such a design existed in each case. It was also submitted that this Authority has held in the case of Star Television Entertainment Ltd. [2010] 321 ITR 1 (AAR) that a transaction cannot be designed for the prima facie avoidance of tax if there is business rationale surrounding the transaction. 30. The applicants have given specific comments to the report of the CIT vide letter dated 19-2-2020, the relevant portions of which are reproduced below: " (iv) At paragraphs 4.2,4.3,9.7 and 9.11(b) of the Revenue WS, the CIT has alleged that the applicants had established tax residency in Mauritius only to take advantage of the India-Mauritius DTAA and that the purpose of such residence was only to avoid paying taxes on returns earned by the applicants from its investments. It is submitted that the above allegation is baseless and factually incorrect. The Board minute extract relied on by the CIT specifically notes that Mauritius's comprehensive tax treaty network with various countries (and not just India) facilitated efficient asset management and achieved a competit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... applicants that the holding structure of the applicants was of no relevance and the transaction was not prima facie found to be designed for avoidance of tax. The applicants contended that the CIT has deemed the holding structure of the applicants to be ipso facto determinative of whether the transaction was designed for the avoidance of tax which was not the standard to be applied to invoke clause(iii) of the proviso to section 245R(2) of the Act. It must be proven that the transaction itself and not the structure of the entity undertaking the transaction was designed for the avoidance of income-tax in order to invoke clause (iii) and that the Revenue had failed to discharge its burden of proof. The applicants submitted that it was managed and controlled of its Board of Directors in Mauritius in accordance with its constitution. The decision to invest into and ultimately sell the shares of Singapore Company was taken by the Directors of the applicants in Mauritius after proper discussions and deliberations. The applicants had beneficially held shares of Singapore Company and were not accountable to any third party. The applicants we reneither sham entity nor a conduit company and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses, whether, on a certain reasonable construction of one part of the taxing statute, as applied to the assessee's case, tax which would otherwise to be payable by the assessee, becomes not payable in the case in hand. (5) When the court is faced with a task of construction in the above manner, the court is not bound to make the construction in favour of the assessee, merely on proof by the assessee, that it has entered into no illegality and made no prohibited transaction. (6) The court would have to assess, in the facts and circumstances of each case, upon general principles of conscience and justice, whether the arrangement of affairs by the assessee, so as to cause the possibility of a reduction of tax incidence, can fairly be permitted to the assessee, as a genuine and legal means of tax reduction, employed by it in a commercially fair sense, or whether, allowing the assessee to earn the reduction, in the facts and circumstances of the particular case, is opposed to the public policy of not encouraging citizens, to engage themselves in dealings and transactions, designed primarily for the purpose of non-payment of tax only. 34. The applicants have contended that the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e taken by Mr. Steven Boyd, the non-resident Director, who was also General Counsel of Tiger Global Management LLC and that the other Directors were not independent but mere puppets. It is found that Mr. Steven Boyd was the non-resident Director of the applicant companies. Under the circumstance no adverse inference can be drawn if he was privy to the crucial decisions taken in the Board meetings. Further, the Supreme Court has held in the case of Vodafone (supra) that there was nothing wrong if the funds for making FDI by Mauritius companies/individuals had not originated from Mauritius but had come from investors of third countries. In view of this judgement, the Revenue's submission that funds had come not from the applicants but from the promoters in USA, so as to treat the arrangement as tax avoidance, has to be rejected. 37. What is relevant to consider here is the control and management of the applicant companies. Though the applicants have submitted that their control and management was with the Board of Directors in Mauritius, what is material is not the routine control of the affairs of the applicants but their overall control. The control and management of applicant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the applicants had no control over its funds. It must be considered that authorization given by the applicants to operate its bank account was not to certain person but to Mr. Charles P. Coleman, whose influence over the group has been described in the preceding para. Mr. Charles P. Coleman and another authorized signatory Mr. Anil Castro, though being not on the Board of Directors of the applicants, were the key personnel of the Group and were managing and controlling the affairs of the entire organization structure. From the evidences brought on record by the Revenue, it is evident that the funds of the applicants were ultimately controlled by Mr. Charles P. Coleman and the applicants had only a limited control over their fund. Apparently, the decision for investment or sale was taken by the Board of Directors of the applicants but the real control over the decision of any transaction over USD 2,50,000 was exercised by Mr. Charles P. Coleman only. Obviously, he was controlling the decision of the Board of Directors of the applicants through the non-resident Director Mr. Steven Boyd who was accountable to him. We have, therefore, no hesitation to conclude that the head and b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Convention for Avoidance of Double Taxation between India and Mauritius was signed on 10-5-2016 which provided that taxation of capital gains arising from alienation of shares acquired on or after 1st April, 2017 in a company resident in India will be taxed on source basis with effect from financial year 2017-18. At the same time investment made before 1st April, 2017 was grandfathered and not subject to capital gains tax in India. Thus as per the amended DTAA between India & Mauritius as well, what was not taxable was capital gains arising on sale of shares of a company resident in India. It is thus crystal clear that exemption from capital gains tax on sale of shares of company not resident in India was never intended under the original or the amended DTAA between India and Mauritius. In view of this clear stipulation in the India-Mauritius DTAA, the applicants were not entitled to claim benefit of exemption of capital gains on the sale of shares of Singapore Company. Thus, the applicants have no case on merits and fail on the ground of treaty eligibility as well. 42. The applicants have disputed the contention of the Revenue that the tax residency in Mauritius was established ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of this decision is not applicable to the facts of this case. 44. The applicants have also relied upon the ruling of this Authority in the case of Moody's Analytics Inc. USA [2012] 24 taxmann.com 41. It is found that the issue involved in that case was capital gains arising to Mauritius company on transfer of its shares in Indian company to a foreign company, which was held as not chargeable to tax in India. As the issue involved there was capital gain on transfer of shares of Indian company, the facts are found to be distinct as the applicant has not transferred the shares of Indian Company but that of a Singapore company. In the case of Golden Bella Holdings Ltd. [2019] 109 taxmann.com 83,also relied by the applicants, the facts were different as the investment was made in CCDs of an Indian Private Limited company and the interest income derived therefrom was held as not taxable under the beneficial provision of DTAA between India and Cyprus. The facts of the case of STAR Television Entertainment Limited (supra) are also found to be different as the issue involved therein was capital gain arising on amalgamation. The other judicial pronouncements relied upon by the applicant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s had made investment in shares of Flipkart which was a Singapore company and thus the immediate investment destination was in Singapore and not in India. In view of this fact the applicants also fail on other yardsticks viz. the period of business operation in India, the generation of tax revenue in India, timing of exit and continuity of business on such exit. In the absence of any strategic foreign direct investment in India there was neither any business operation in India nor they ever generated any taxable revenue in India. In the absence of any direct investment in India one can only conclude that the arrangement was a pre-ordained transaction which was created for tax avoidance purpose. 48. In view of the foregoing, we are of the considered opinion that the issue involved in the question raised in the present applications was designed prima facie for avoidance of tax. The applicants have contended that shares of the Singapore Company derived their value substantially from assets located in India and, therefore, it was eligible to take benefit of Article 13 (4) of India - Mauritius Treaty. Even if the Singapore Company derived its value from the assets located in India, the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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