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TMI Blog2019 (9) TMI 1549X X X X Extracts X X X X X X X X Extracts X X X X ..... f utilization of sale proceeds, copy of valuation report of shares of BD Singapore, copy of loan agreement between applicant and BS USA and the source of the loan etc., all become inconsequential and no adverse inference can be drawn if the details of the same are not provided by the applicant. We find that the investment was made out of the funds emanating from the applicant, the investment was held for a period of over 15 years during which the business operations in India was carried on and which continued even after the exit, there was continuous generation of taxable revenue in India and thus the applicant fulfils the conditions as laid out above. In fact the hon'ble Supreme Court had observed in that case that the funds coming from Mauritius were not originating from that country but from third nations, still the structure as set up cannot be considered to be a set up for tax evasion. The apex court further held that the Revenue cannot deny the benefits of transfer of shares by alleging that the Mauritius company was merely a conduit and the US company was the actual beneficial owner of the shares. We do not have any adverse finding and we are inclined to accept the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... For the Applicant : Kanchun Kaushal , Fellow Chartered Accountant, and Vishal Anand , PWCL For the Department : Ramesh Chander , Commissioner of Income-tax, S. R. Kaushik , Additional Commissioner of Income-tax, Smt. Sarojini Xess , Deputy Commissioner of Income-tax (International Taxation) and Abhishek Tripathy , Assistant Commissioner of Income-tax-Departmental representative RULING NARENDRA PRASAD SINHA (REVENUE MEMBER). - 1. Becton Dickinson (Mauritius) Ltd. ( the applicant or Becton ) is a company registered and incorporated under the company law of Mauritius on October 27, 1995. It is a tax resident of Mauritius as contemplated under article 4 of the India- Mauritius Tax Treaty and it has filed a tax residence certificate issued by the Mauritius Revenue Authority, which was valid for the period from October 31, 2011 to October 29, 2012. The applicant is a part of BD group which is into development, manufacture and sale of medical devices, instrument systems and reagents used by the healthcare institutions, life sciences researchers, clinical laboratories, the pharmaceutical industry and the general public manufacturing of instrument mat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the applicant is a company resident in Mauritius for Income-tax purposes. Hence, the applicant qualifies as a resident of Mauritius under article 4 of the Treaty. Further, the Central Board of Direct Taxes ( CBDT ) had issued Circular No. 789 dated April 13, 2000 ([2000] 243 ITR (St.) 57 ) which provided that a tax residency certificate issued by the Mauritius Revenue Authority would be regarded a sufficient evidence for accepting the residential status as well as beneficial ownership for the purpose of applying the India-Mauritius Tax Treaty to the non-resident entity. It was pointed out that the hon'ble Supreme Court, in the case of Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706 (SC), had upheld the validity of Central Board of Direct Taxes Circular No. 789, thereby ensuring applicability of the India-Mauritius Tax Treaty to entities having a valid tax residency certificate issued in Mauritius. In view of these facts, the applicant submitted that it qualifies as a tax resident of Mauritius under article 4 of the Treaty. 4. As regards taxability of capital gains, our attention was invited to article 13 of the Treaty. According to paragraph 4 of article 13 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed even after the application has been admitted as it goes to the root of the validity of the application and, therefore, a request was made to decide this issue first before taking up the application on the merits. In case it is found that the transaction was designed prima facie for avoidance of tax, no ruling is required to be given. It was further submitted that the applicant has not complied with the earlier direction of the authority to provide certain information on the plea that the same were not relevant. Our attention was drawn to the order dated January 24, 2018 wherein a direction was given to the applicant to provide whatever information had not been provided by them to the Revenue. It was submitted by the learned Departmental representative that since the applicant had not furnished the complete information and the complete facts have not been placed before the authority, the ruling may be declined. In this regard reliance was placed on the following decisions wherein this authority had declined to give the ruling : 1. Royal Bank of Canada, In re [2010] 323 ITR 380 (AAR) (AAR No. 816 of 2009 dated March 22, 2010). 2. Ms. Meenu Shahi Mamik, In re [2006] 287 I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the board minutes dated September 8, 2011, Becton Dickinson and Company (BDX), the holding and ultimate holding of the company informed that as part of its global business optimization strategy, it seeks to align its corporate legal entity organizational structure in a way that is consistent with its evolving business strategy. As part of reorganization, BDX formed Becton Dickinson Holdings Pte. Ltd. on June 14, 2011 (the transferee). The company will subsequently transfer all of its rights, title and interest in the shares held in Becton Dickinson India Pvt. Ltd. to the transferee at fair value and will subsequently issue a number of shares in the transferee company. It is clear from the aforesaid notes to accounts that the decision to transfer the shares in BD India to BD Singapore has not been arrived at by the applicant in an independent manner. No analysis has been done by the applicant-company whether the transfer of shares will be beneficial or not to the company. The company has just acquiesced in the decision taken by its holding company BDX in US. It is clear that the applicant is not behaving in a manner which will show that the subsidiary has its own free wil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany do not even raise their voice against whole sale transfer of profits to the US company against all norms. Thus, the sequence of shifting of profits again makes it clear that the consideration of sale of shares of BD India is practically considered by the US company as its own and not of the Mauritian entity and therefore, whole of the profit is transferred to US almost immediately when it arises in Mauritius. On this account also, the Mauritian entity proves that it is not the beneficial owner of shares as well as the sale con sideration. D. Loan of USD 556,642 is waived even while new loan is being given : As per financial accounts for the period ending September 30, 2011 placed on record the applicant had an outstanding loan receivable from its holding company of an amount of USD 556,642. As per the board resolution dated March 22, 2012 it has been resolved to waive this loan and the accrued interest amounting to USD 556,642. This is being done when fresh loan of USD 53,253,630 is being given to the holding company. No reason has been assigned as to what were the circumstances forcing the applicant to waive off the pending loan. No reason has been given why fresh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 19, 2014. The description to Note 6 of the financial statement reads as : As part of its global business optimization strategy, the Becton Dickinson Group aligned its corporate entity organizational structure in a way that is consistent with its evolving business strategy. As a result, on March 28, 2012, the company transferred all the 1,000,000 equity shares held in Becton Dickinson India Private Limited to Becton Dickinson Holding Ltd., a private company existing under the laws of Singapore. . . . It is clear from the above that the agreement for share transfer has been made on March 30, 2012 after the date of transfer of shares, i. e., March 28, 2012. This is very surprising. This shows that the events are not happening in a logical and consistent manner. Either the accounts are being made up or the share transfer agreement has been made up. In any case, this raises serious doubts over the credibility of the whole process. F. The loan given by applicant not reflected in accounts of holding company : As per Note 7 - Loan to holding company of the financial statement for year ended September 30, 2012, an additional loan of USD 53,253,630 was advanced to the holdin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Results directly and indirectly in the misuse as well as abuse of pro visions of Income-tax Act as well as Indo-Mauritius DTAA ; - Lacks commercial substance ; and - Is entered in a manner which is not ordinarily employed for bona fide purposes. It was contended by the Revenue that the structure instituted by the applicant and its associate concern was an impermissible avoidance arrangement. Our contention was also drawn to Vienna Convention on the Law of Treaties, article 26 of which lays down the principle of Pactasuntservanda : Every treaty in force is binding upon the parties to it and must be performed by them in good faith . It was submitted that the element of good faith needs to be retained for applicability of treaties and pointed out that both Indo-Mauritius Treaty and Indo-US Treaty had captioned prevention of tax avoidance as one of the two purposes of the DTAA. There fore, the good faith application of these treaties require the element of tax avoidance and treaty abuse to be examined by tax administration while invoking the treaty provisions. According to the Revenue, the arrangement made by the applicant was the colourable device and accordingly it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts filed before the authority for the year ended September 30, 2011 and September 30, 2012 : - Currency in which accounts have been prepared - US Dollar - Did the company have its place of central management and control in Mauritius. - Number of employees not mentioned. - Heads of expenses : - Audit fees - Administrative and management fees - Accountancy fees - Licence fees - Telephone and courier - Bank charges - Loss on exchange From a combined reading of the above, the following emerge out : - From the facts that (i) no employee was based in Mauritius, (ii) there was no 'office' of the company in Mauritius (as there was no rent or electricity, water, and telephone expenses), it is evident that BD Mauritius could not and did not have a 'place of effective man agement' in Mauritius. - The transactions by BD Mauritius was a dependent and subservient transaction required by the holding company, BDX, and as such, it was not a material transaction. - The consideration involved in the transaction, and the mode of payments, highlighted the fact that it was a mere book entry. 10. It was furth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmation and other intangible property relating to manufacture, sale and distribution of the syringes, etc. 12. As regards the allegation of non-submission of the relevant documents the applicant submitted that the date-wise detail of investment and copy of FIPB approval was duly furnished by the applicant. Regarding the profit on disposal of USD 50,290,156 as appearing in the financial statements, it was explained that this was the difference between the consideration and cost and was worked out as under : Particulars Amount (in USD) Sale proceeds (fair value of shares of BD Singapore) (As per section 1 on page 2 of the contribution agreement) 53,000,000 Less : Book value of investments (As per schedule 6 on page 22 of the financial statements for the year ended September 30, 2012) 2,709,844 Profit on disposal (as per statement of comprehensive income on page 7 of the financial statements for the year ended September 30, 2012) 50,290,156 12. It was submitted that the conclusion of the Revenu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tand of the Revenue that the transaction was designed for tax avoidance, the applicant submitted that the Revenue has failed to highlight the specific right/obligation which are not ordinarily created and, therefore, the assertion of the Revenue was not justified and liable to be rejected. It was submitted that the applicant had complied with applicable laws of Mauritius and was holding a valid tax residency certificate, which as per the Indian law, is the only relevant document for claiming tax treaty benefits. The applicant relied upon the decision of the hon'ble Supreme Court in the case of Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706 (SC), wherein it was observed that treaty shopping may have been intended at the time when Indo-Mauritius DTAC was entered into and a holistic view has to be taken in the matter. It was reiterated that provisions of India-Mauritius tax treaty as they stood at relevant point of time are binding on the parties to the treaties and need to be applied in good faith. The applicant also relied upon the decision of the hon'ble Supreme Court in the case of Vodafone (supra) wherein it was held that the tax Department cannot at the time o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce of income-tax and, therefore, the application may not be allowed under the provisions of section 245R(2) of the Act. It has also been contended that all the information as required was not provided by the applicant to the Revenue and, therefore, the ruling may be declined for this reason as well. As regards furnishing of information is concerned, the applicant in the course of hearing on August 14, 2019 has furnished a chart indicating as to how and when the information as required by the Revenue was provided. It was clarified therein that some of the information was not in the possession of the applicant and that some of the queries raised had no bearing at all on the question to be decided by this authority. 18. We have carefully considered the objection of the Revenue regarding incomplete furnishing of information as well as the clarification of the applicant in this regard. As per the provisions of section 245R of the Act, on receipt of an application this authority is required to call for the relevant records from the Principal Commissioner or Commissioner of Income-tax, if found necessary, and thereafter decide the matter regarding allowing or rejecting the applicati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ual state of affairs. It was, therefore, held that it would not be appropriate to give a ruling as the question had to be decided on the basis of actual facts but not on hypothetical basis. In the case of Ms. Meenu Sahi Mamik (supra) the important facts pertaining to the constitution of the firm, copy of partnership deed and agreement with Bayer Health were not placed on record and it was held that the questions pertaining thereto cannot be answered in a hypothetical manner. It was held in that case that since the de facto control and management of the affairs was with the resident partner in India, the firm cannot be said to be a non-resident entity and, therefore, the application was not maintainable on this ground alone. Thus the facts of these two cases, relied upon by the Revenue, are found to be distinct and different from the facts of the present case and, therefore, the ratio of these decisions cannot be applied to this case. 20. The Revenue has strongly contended that the transaction was designed for avoidance of tax. The applicant in its response has addressed the concerns raised by the Revenue on all the issues. To recapitulate the facts of the case the applicant is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ently in pursuance of the order of the hon'ble High Court of Delhi dated January 13, 2006, the share capital of BD India was reduced to 10,00,000 equity shares of ₹ 10 each. The said reduction in share capital was also intimated by BD India to FIPB. The 1 per cent. redeemable preference shares were redeemed in tranches on November 16, 2009 and July 16, 2011 in accordance with the agreed terms. The sale of shares of BD India was also made after obtaining necessary clearance from DIPP and FIPB. The sale of shares of BD India was backed by applicant's Board resolution dated September 8, 2011, a copy of which was filed. A copy of contribution agreement between the applicant and BD Singapore dated March 30, 2012 was also filed as per which the applicant had agreed to transfer one million equity shares of ₹ 10 each in BD India to BD Singapore. The value of the contributed shares was USD 53,000,000 and the consideration for contribution was agreed to be 54,426,572 ordinary shares in the share capital of BD Singapore. 22. The Revenue has contended that as per share contribution agreement the applicant was to receive shares of BD Singapore in return of transfer of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cant only. There was nothing wrong for the applicant as a subsidiary to follow the policy decision taken by the holding company. 24. The Revenue's contention is that as the decision to transfer the shares of BD India was taken not by the applicant but by its holding company BDX, the applicant was merely a name lender and BDX was the real owner of the shares. As mentioned above we have no evidence to conclude that the decision to transfer the shares of BD India was taken by the holding company BDX and not by the applicant. Further, in this context it has to be kept into consideration that the source of investment in shares of BD India was share capital of the applicant, which was provided by its holding company BDX. When the holding company is providing funds to a subsidiary, it is imperative that the holding company will be involved in important decision making, e.g., in areas of deciding the object, its target market, making investments, etc. in order to ensure that the activities of subsidiary are in consonance with the overall goal of the holding company. An identical issue was involved in the case of Dow Agrosciences Agricultural Products Ltd., In re [2016] 380 ITR 668 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any in Singapore (Singapore Co.). Such transfer was made to shift the holding company of Indian group company from an entity falling under European region to an entity which falls in Asian Pacific region with a view to achieve better control. Becton Dickinson Group, as part of its global business optimization strategy, realigned and restructured some of its operations in Asia, including Singapore, to improve group s international cash management, rationalize intra-group debt and generate operational and administrative synergies. Accordingly, the applicant transferred the shares held by it in BD India to another group company, BD Singapore. Consideration for transfer of shares of Indian company Mauritius Co. received the shares of Singapore Co. as sales consideration for transfer of shares of the Indian company. The shares of BD India were transferred by the applicant at the fair market value prevailing at the time of transfer and consideration for such acquisition was discharged in the form of allotment of shares of BD Singapore of the equivalent value. Period of holding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lding company in reality owned the shares and/or the recipient of capital gains arising from transfer of shares is the holding company but not the subsidiary. To take such a view would be clearly contrary to the ground realities of the mutual business and economic relations between a holding and subsidiary company and the inter se legal structure. The fact that the subsidiary has its own corporate personality and is a separate legal entity cannot be overlooked. The fact that the holding company exercises acts of control over its subsidiary does not in the absence of compelling reasons dilute the separate legal identity of the subsidiary. It is unrealistic to expect that a subsidiary should keep off the clutches of the holding company and con duct its business independent of any control and assistance by the parent company. 28. In view of the above ruling the issues of advancing loan to the holding company with interest at 1 per cent. and waiver of earlier loan while advancing fresh loan, have no relevance while deciding the question before us. Even if the entire sale consideration goes back to the parent holding company it will not dilute the separate legal identity of the ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om other similar tax incentives given by them, such as tax holidays, grants etc. Developing countries need foreign investments, and the treaty shopping opportunities can be an additional factor to attract them. The use of Cyprus as a treaty haven has helped capital inflows into eastern Europe. Madeira (Portugal) is attractive for investments into the European Union. Singapore is developing itself as a base for investments in South East Asia and China. Mauritius today provides a suitable treaty conduit for South Asia and South Africa. In recent years, India has been the beneficiary of significant foreign funds through the 'Mauritius conduit'. Although the Indian economic reforms since 1991 permitted such capital transfers, the amount would have been much lower without the India-Mauritius tax treaty. . . . There are many principles in fiscal economy which, though at first blush might appear to be evil, are tolerated in a developing economy, in the interest of long-term development. Deficit financing, for example, is one ; treaty shopping, in our view, is another. Despite the sound and fury of the respondents over the so called 'abuse' of 'treaty shopping ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also placed reliance on this decision in support of the contention that where the holding structure has existed for a considerable length of time, then there is no need to go into the question of de facto control Vs. legal control. The apex court had held in the case of Vodafone as under (page 37 of 341 ITR) : 68 . . . 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 exists ; 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. 32. When we examine the facts of the case on the above parameters, we find that the investment was made out of the funds emanating from the applicant, the investment was held for a period of over 15 years during which the business operations in India was carried on and which continued even after the exit, there was continuous generation of taxable revenue in India and thus the applicant fulfil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isinvestment/sale/ transfer ; or the sale proceeds received by the Mauritius company had ultimately been paid over by it to the foreign principal/its 100 per cent. shareholder either by way of special dividend or by way of repayment of loan received ; or the real owner/beneficial owner of the shares was the foreign principal company. 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. (emphasis supplied). The apex court further held that in a case where the structure has existed for a considerable length of time generating taxable revenues and where the court is satisfied that the transaction satisfies all the parameters of participation in investment then in such a case the court need not go into the questions such as de facto control vs. legal control, legal rights vs. practical rights, etc. 33. In the case of Ardex Investments Mauritius Ltd., In re [2012] 340 ITR 272 (AAR), this authority had held as under (page 277 of 340 ITR) : 6. It is true that the funds for acquisition of shares in the Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of AB Holdings, Mauritius-II, In re [2018] 402 ITR 37 (AAR) ; [2018] 90 taxmann.com 177 (AAR - New Delhi) the facts were identical as the shares owned by the applicant in Indian company were transferred to another group company located in Singapore and the applicant was held eligible to avail of the benefits of India-Mauritius DTAA and capital gain arising to it from sale of shares of Indian company was held not liable to tax in India in terms of article 13 of the India-Mauritius DTAA. 36. The Revenue has also relied upon the decision of the hon'ble Bombay High Court in the case of Aditya Birla Nuvo Ltd. v. Dy. DIT (International Taxation) [2012] 342 ITR 308 (Bom). It is found that the facts of that case were different from the facts of the present case. In the said judgment, though the equity shares of an Indian company were issued in the name of Mauritian entity, all the rights in respect of the said equity shares were vested with the US Company. Further, as per the joint venture agreement between the parties, the US company was a founder and the party share- holder and was permitted to seek allotment in the name of permitted transferee, i.e., Mauritian entit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 38. The tax treaty between India and Mauritius was originally signed in 1983 which provided a capital gains tax exemption to a Mauritius resident on transfer of Indian securities. The availability of capital gains tax exemption under the Indo-Mauritius Treaty was challenged in courts which had resulted in the Government issuing Circular No. 789 assuring investors the benefits of capital gains exemption under the treaty and which was upheld by the Supreme Court in the Azadi Bachao Andolan case (supra). Over the years, there has been a shift in point of view of global Governments on certain historic tax practices and norms, with the OECD's Base Erosion and Profit Shifting (BEPS) project, recognising that tax treaties are intended to avoid double tax, and that they should not be used as a basis for double non-taxation (where income ends up not being taxed in either the source country or resident country). Accordingly, a Protocol was signed between India and Mauritius in 2017 to amend the old tax treaty, which gives India the right to tax capital gains on transfer of Indian shares acquired on or after April 1, 2017. Share investments made up to March 31, 2017, are fully grand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntracting States. 40. It is clearly stipulated in article 13(4) of India-Mauritius DTAC that the capital gains derived by the resident of a Contracting State from the alienation of any property other than those mentioned in paragraphs 1, 2 and 3 of the article shall be taxable only in that State. The shares and securities are not specified in clauses 1, 2 and 3 of the article 13. Therefore, any gain arising on sale of shares is liable to tax only in the State in which the person alienating the shares is resident. In the instant case the applicant is resident of Mauritius and accordingly the capital gain arising on transfer of shares of BD India is liable to tax in Mauritius only. We, therefore, uphold the contention of the applicant that by virtue of article 13.4 of India-Mauritius DTAA, capital gain tax is not liable to be charged in India. 41. On the facts presented by the applicant and in the light of the legal position discussed, the applicant is not liable to pay capital gains tax in India in respect of the transfer of shares held in BD India to BD Singapore having regard to the provisions of India-Mauritius DTAA. The question is thus answered as under : Questi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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