TMI Blog2011 (7) TMI 60X X X X Extracts X X X X X X X X Extracts X X X X ..... ICL shares held by AT&T Mauritius belonged to NCWS and the value of the ICL shares remaining with AT&T Mauritius (after selling shares to Indian Rayon) was US$ 150 million, then the question to be considered is, whether TIL paid US$ 150 million for the shares of ICL or for the shares of AT&T Mauritius which had no assets other than ICL shares - primafacie case is made out by the Revenue for initiating proceedings under Section 148 as also under Section 148 read with Section 163 of the Act. The assessing officer is directed to complete the assessment proceedings as expeditiously as possible - Petiiton is disposed of - 730 OF 2009, 345 OF 2010, 1837 OF 2009, 38 OF 2010 - - - Dated:- 14-7-2011 - J.P. Devadhar A.A. Sayed, JJ. Mr.Rafiq Dada, Senior Advocate with Mr.P.K. Katpalkar, Mrs.Simran Gurnaii/by Mulla Mulla Craegie Blunt Caroe for the petitioner. Mr.Mohan Parasaran, Additional Solicitor General with Mr.G.C. Shrivastava,Special counsel, Mr.B.M. Chatterjee, Mr.D.K. Chidananda i/by Mr.Suresh Kumar for the respondents. ORAL JUDGMENT : (Per J.P. Devadhar, J.) 1. Though the reliefs claimed in these four writ petitions are different, the core issue ra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the four writ petitions. 4. On 4th March 1995, a Company known as Birla Communications Limited (presently known as Idea Cellular Limited) was formed by the Birla Group of Companies in India. At that time, the Birla Group consisted of Grasim Industries Limited, Hindalco Industries Limited, Indian Rayon and Industries Limited and IndoGulf Fertilizers and Chemicals Corporation Limited. 5. On 5th December 1995, AT T Corp, a Company incorporated in the United States of America and Grasim Industries Limited representing the Birla Group entered into a Joint Venture Agreement ( JVA for short), under which, Birla Communications Limited was to be the Joint Venture Company ( JVC for short) for carrying on the wireless telecommunication service in India by obtaining requisite licence from the Department of Telecommunications in India ( DoT for short). Under the joint venture, 51% equity shares of the JVC were to be subscribed and owned by the Birla Group and 49% of the equity shares of the JVC were to be subscribed and owned by AT T Corp. The JVA was executed by the Executive Vice President, AT T Wireless Services Inc, USA. Thus, AT T Corp / AT T Wireless Services Inc, USA ('AT T US ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a 100% subsidiary of the founder who owns the equity shares of the JVC. Each founder shall retain directly or indirectly, ownership of all the voting stock of the permitted transferee. The founder and the permitted transferee were jointly and severally liable for all obligations and on fulfillment of various conditions only would shares for convenience of arrangement be transferred to the subsidiary as a permitted transferee . [Article 12.04] i) The Board of the JVC shall consist of four directors appointed by Birla Group, four directors appointed by AT T USA and four independent directors with the consent of both the founders . One director representing each founder shall be a nonretiring Director. The chairman shall be appointed by the Birla Group and both the founders shall designate one board member each to act as the Principal Founding Member . No director shall be removed without the consent of the founder whom he represents. [Article 5.01]. j) The company shall have a President nominated by AT T USAwith the concurrence of the Birla Group. Birla Group shall nominate CFO with the consent of AT T USA [Article 5.02]. k) Certain key decisions of the group req ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equity capital held by the founders shall carry an endorsement imprinted on it to the effect that any sale of the shares shall be only subject to the JVA and the holder of shares cannot sell, assign or pledge the shares independent of the terms of the JVA. [Article 12.03]. u) The founder is allowed to transfer all its shares to the permitted transferee with a prior written notice to the other founder. No such transfer shall be effective until such permitted transferee agrees to be bound by the terms and conditions of the JVA. The founder and the Permitted Transferee shall be jointly and severally liable for all the obligations of the Founder. Upon meeting the above requirements for transfer, the JVC at the closing or thereafter shall issue Equity Capital directly to a permitted transferee. [Article 12.04]. v) If any party shareholder receives any offer for purchase of its shares, the other founder shall have the right of first refusal. [Article 12.07]. w) Notices in relation to the Joint Venture Agreement are to be sent to AT T Wireless Services Inc, a US company and a 100% subsidiary of AT T Corp, USA. Thus, under the JVA dated 5th December 1995, the AT T USA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e equity shares of ICL as a permitted transferee of AT T USA. However, the liability of AT T USA to pay for the equity shares of the JVC were discharged by AT T Mauritius during the period from 1996 to 2003. Equity shares of the JVC allotted in the name of AT T Mauritius were approved by the Reserve Bank of India under Section 19(1)(a), 19(1)(b) and Section 29(1)(b) of the Foreign Exchange Regulation Act, 1973 ( FERA for short). 11. On 15th December 2000, a Shareholders Agreement was entered into by and between AT T Wireless Services Inc, USA (acting on behalf of itself and the AT T Wireless Group), Grasim Industries Limited, India, (acting on behalf of itself and the AV Birla Group) and Tata Industries Limited, (acting on behalf of itself, the Tata Group), wherein it was agreed that the Tata Cellular Limited ( TCL for short) would merge with BACL and the respective share holdings of the three groups in BACL would be restructured as per the Shareholders Agreement. According to Indian Rayon, after the merger of TCL the shareholding of the JVC were as follows : Birla Group 33.70 per cent. Tata Group ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the Tata Group (as they had the rights of first refusal) and it was only if these two founders refused to purchase the shares of ICL, NCWS could sell those shares to third parties like India Televentures Limited. Accordingly, NCWS by its letter dated 26th July 2005 called upon the Birla Group and the Tata Group to exercise their rights of first refusal in purchasing the shares of ICL owned by NCWS. 16. Grasim Industries Limited, acting on behalf of the Birla Group and Tata Industries Limited acting on behalf of the Tata Group accepted the offer in identically worded letters dated 29th July 2005 and 30th July 2005 respectively and informed NCWS about their willingness to purchase the shares of ICL offered by NCWS. As both the Groups, namely the Birla Group and the Tata Group were interested in purchasing the entire 74,35,61,480 equity shares of ICL offered by NCWS for US$ 300 million, each Group could get 37,17,80,740 equity shares of ICL on payment of US$ 150 million. 17. Before entering into an agreement for purchase of 37,17,80,740 equity shares of Idea Cellular Limited (ICL) offered by NCWS, Indian Rayon representing the Birla Group applied to the Director of Income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... authority and the same is pending. Subsequently, by two orders both dated 2nd March 2009, the DDIT has held that TIL is liable to be assessed as agent of NCWS / MMMH under Section 163 of the 1961 Act and accordingly two notices both dated 3rd March 2009 have been issued under Section 148 of the 1961 Act calling upon TIL as agent of NCWS / MMMH to file return of income in the prescribed form relating to income accrued to NCWS / MMMH on sale of shares under the Sale and Purchase Agreement dated 28th September 2005. 21. In the meantime, on 31st March 2008, the Additional Director of Income Tax (Intl Taxn), Mumbai addressed a letter to the Director of Income Tax (Intl Taxn), Mumbai enclosing a copy of the order dated 28th March 2008 passed by him in the case of TIL under Section 201(1) / (1A) of the 1961 Act. In that letter, it was stated that since the income by way of capital gains is chargeable in the hands of NCWS and MMMH, the Additional Director (Intl Taxn), Range 4, Mumbai may be requested to examine the matter and carry out regular assessment in the hands of the above two US companies. 22. The Deputy Director of Income Tax (Intl Taxn), Mumbai, thereupon, issued a showc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dian Rayon cannot be assessed as a representative assessee of NCWS / MMMH for the following reasons : A) Indian Rayon has purchased shares of ICL from AT T Mauritius and the profits arising or accruing to AT T Mauritius from such sale is not taxable in India because of the IndoMauritius DTAA as discussed elaborately by the Hon ble Supreme Court in the case of Union of India V/s. Azadi Bachao Andolan reported in 263 ITR 706 (S.C.). B) Indian Rayon cannot be treated as an agent of NCWS and MMMH under the provisions of Section 160(1)(i) read with Sections 9(1) and 5(2) as interpreted by the Hon ble Supreme Court in Eli Lilly and Company (India) P. Limited reported in 312 ITR 225 (S.C.). C) ICL being an approved industrial undertaking under Section 10(23G) of the 1961 Act, capital gains arising on sale of the shares of ICL to a resident or nonresident would be exempt from payment of tax. D) Once certificate under Section 195(2) is issued by the Revenue authorising payment of the sale proceeds for the purchase of Idea Cellular Limited shares without deduction of tax at source and based on such certificate Indian Rayon has remitted the money to the nonresident, the Revenu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er of 37,17,80,740 shares of ICL (being 50% of the shares) in favour of Indian Rayon was effected in India by way of transfer from the depository account of AT T Mauritius in India into the depository account of Indian Rayon in India. Such transfer of shares gave rise to income by way of capital gains which accrued or arose in India under Section 5(2)(b) of the 1961 Act and hence taxable in India. However, AT T Mauritius is a resident of Mauritius holding Tax Residence Certificate dated 19th May 1995 issued by the Commissioner of Income Tax in the Republic of Mauritius and the same was valid till the date of transfer of shares as is evident from the certificate issued by the Commissioner of Income Tax, Republic of Mauritius on 18th August 2005. Therefore, capital gains accrued to AT T Mauritius on transfer of shares of ICL is taxable only in Mauritius and cannot be taxed in India as per Article 13(4) of the DTAA between India and Mauritius. (c) Section 90(2) of the 1961 Act provides that when the Central Government enters into an Agreement with the Government of any country outside India for granting relief of tax, then in relation to an assessee, the DTAA would prevail except ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d taxable in Mauritius are exempted under the Mauritian tax law cannot be a ground to tax that capital gains in India. Even assuming whilst denying that AT T Mauritius was incorporated in Mauritius with a view to obtain benefit of the DTAA, the benefits under the DTAA cannot be denied to AT T Mauritius because there is no provision in the DTAA / domestic law to deny such benefits. (g) Decision of the Apex Court in the case of Azadi Bachao Andolan (supra) holds good even today and in fact the Review Petition as well as the Curative Petition filed against the decision of the Apex Court in the case of Azadi Bachao Andolan (supra) have been dismissed by the Apex Court. Moreover, the decision in the case of Azadi Bachao Andolan (supra) has been followed subsequently by the Authority for Advance Ruling (AAR) in the case of E Trade Mauritius Limited (324 ITR 1), Emirates Fertilizers Trading Company (272 ITR 84) and an unreported judgment of the AAR in the case of D.B. Zwirn Mauritius Trading No.3 Limited. (h) The Apex Court in the case of Carew Co. Limited V/s. Union of India reported in 46 Comp. Cases 121 (SC) and Mrs.Bacha F. Guzdar V/s. Commissioner of Income Tax reported in 27 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AT T Mauritius) have contributed funds by way of a share capital and loan to AT T Mauritius to acquire the shares of ICL. Under para 4.01 of the Shareholders Agreement the liability to make payment for the uncalled capital was on the shareholder i.e. AT T Mauritius. For application of the DTAA, it is not necessary that the Company as well as the shareholders of the Company must be resident of Mauritius. Therefore, AT T Mauritius would be resident of Mauritius even though its shareholders viz. NCWS and MMMH are US residents. (m) The argument of the Revenue that they are not lifting the Corporate Veil but simply determining as to who should be regarded as the owner of the shares of ICL is not acceptable, because, while accepting that AT T Mauritius is the legal owner of the shares of ICL (as a registered shareholder) to find out as to whether NCWS is the real owner of the said shares itself amounts to lifting the corporate veil which is not permissible in view of the decision of the Apex Court in the case of Azadi Bachao Andolan (supra). (n) The transaction of purchasing the shares of ICL from AT T Mauritius by Indian Rayon in the year 2005 was based on the Share Purchase Agr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... party to the Sale and Purchase Agreement dated 28th September 2005 makes no difference, because, the shares were sold by AT T Mauritius as vendor and NCWS had agreed to be party to the sale purchase agreement dated 28th September 2005, because, it had given warranties to Indian Rayon to the effect that the shares of ICL held by AT T Mauritius were free from encumbrances and that India Rayon would acquire good and valid title to the shares upon completion of transfer. (r) Filings by AT T Corp, Cingular Wireless LLC and NCWS before the Securities Exchange Commission (SEC) of USA regarding the receipt of sale proceeds do not support the case of the Revenue because, US law requires the companies to reflect a consolidated position of the group as a whole and AT T Mauritius being a subsidiary, the sale proceeds realised by AT T Mauritius on sale of shares of ICL had to be disclosed before the SEC. Therefore, the fact that disclosures have been made before the SEC by NCWS regarding the sale proceeds received by AT T Mauritius, it cannot be assumed that the said sale proceeds belonged to NCWS. (s) The fact that AT T Mauritius immediately on receipt of the sale proceeds amounting to U ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iven the authority to appoint arbitrator. For all the aforesaid reasons, it is submitted by Mr.Dastur that AT T Mauritius should be regarded as the owner of the shares of ICL and it must be held that the capital gains arising on sale of those shares are not taxable in India in view of Article 13(4) of the DTAA between India and Mauritius. 28. We have carefully considered the above arguments of Mr.Dastur, as also arguments to the contrary advanced by Mr.Parasharan, learned Additional Solicitor General appearing on behalf of the Revenue. 29. In the present case, Indian Rayon pursuant to a Sale and Purchase Agreement dated 28th September, 2005 has purchased 37,17,80,740 equity shares of ICL from AT T Mauritius and NCWS (USA) for US$ 150,000,000. The dispute is, whether the ICL shares were owned by AT T Mauritius or by NCWS (USA). According to the Revenue, the said shares were owned by NCWS (USA) and the capital gains arising or accruing to NCWS (USA) from the above transaction is taxable in India either in the hands of NCWS (USA) or taxable in the hands of Indian Rayon as an agent of NCWS (USA) under Section 163(1) of the Income Tax Act, 1961. 30. Admittedly, the shares of I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest attached to the said shares were to vest in the joint venture partners only. 32. As per the JVA, AT T USA was to subscribe and own 49% equity shares of the JVC as party shareholder and AT T USA could seek allotment of shares in the name of its permitted transferee. The expression party shareholder and permitted transferee were defined in the JVA as follows : Party shareholder means any owner of Equity Capital who is a party to this Agreement. Permitted Transferee has the meaning set forth in Section 12.04(a). Article 12.04 of the JVA (to the extent relevant) reads thus : 12.04 Permitted Transfers . (a) For purposes of this Article XII, a Permitted Transferee is, in the case of shares of Equity Capital owned by a Founder, any corporation of which that Founder directly or indirectly owns all of the shares of voting stock. (b) Subject to the provisions of this Section 12.04(b), each Founder shall be entitled, upon prior written notice to the Company and the other Founders, to transfer all but not less than all, of its Shares to any Permitted Transferee. No such transfer shall be or become effective, however, until such Permitted Transferee execu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... age 58 of the petition). 35. Since the equity share amount was paid by AT T Mauritius and the equity shares were allotted in the name of AT T Mauritius with the approval of the RBI, it is contended by Indian Rayon, that the beneficial ownership in those shares vested in AT T Mauritius and not in NCWS. The question, therefore, to be considered is whether, AT T Mauritius paid the amount for acquiring the equity shares of the JVC in its own name or paid the amount for and on behalf of AT T USA and whether sale of shares of ICL jointly by AT T Mauritius and NCWS (successor to AT T USA) amounts to sale by AT T Mauritius alone. 36. Apart from the JVA there is no other document on record to show that AT T Mauritius had independently entered into any transaction for acquiring the equity shares of the JVC. The obligation under the JVA to pay for the equity shares of the JVC was on AT T USA. 74,35,61,480 equity shares of the JVC allotted in the name of AT T Mauritius corresponds to the shares subscribed by AT T USA under the JVA and the Shareholders Agreement. Out of 74,35,61,480 shares allotted to AT T Mauritius, 43,82,81,480 shares were allotted prior to the execution of the Sharehol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T T Mauritius as a permitted transferee of AT T USA. In other words, it is only because, the joint venture partners viz. AT T USA and the Birla Group subscribed and owned the shares of the JVC, shares of the JVC were allotted to the joint venture partners or permitted transferee of the joint venture partners. Thirdly, there is no document on record to suggest that the AT T Mauritius had agreed to subscribe / purchase the shares of JVC. In these circumstances, the payments made by AT T Mauritius cannot be said to be payments for subscribing / purchasing the shares of the JVC in the name of AT T Mauritius. Therefore, it is evident that the payments made by AT T Mauritius to the JVC was obviously for and on behalf of AT T USA, because, under the JVA, the obligation to subscribe and own the shares of the JVC was on AT T USA. 38. The payments made by AT T Mauritius towards the equity shares of the JVC was for and on behalf of the joint venture partner / founder AT T USA is further supported by the Shareholders Agreement dated 15th December 2000. It is AT T USA (not AT T Mauritius) which has entered into the Shareholders Agreement with the Birla Group and the Tata Group. Admittedly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reholders Agreement, ownership of the shares of the JVC to be issued, were to vest in AT T USA and not with the member of the AT T Wireless Group who paid for the shares or in whose name the shares were to be issued. In other words, though the Shareholders Agreement partially alters the shareholding and management rights vested in the joint venture partners under the JVA on account of inducting the Tata Group into the joint venture, the Shareholders Agreement does not in any way impair or obliterate the ownership rights in the shares of the JVC vested in the joint venture partners whether allotted prior to or subsequent to the Shareholders Agreement. 40. The argument of Indian Rayon is that since the shares of the JVC purchased by Indian Rayon stood in the name of AT T Mauritius, the legal owner of the said shares would be AT T Mauritius and, therefore, on sale of the said shares, capital gains would accrue to AT T Mauritius which as per DTAA between India and Mauritius cannot be taxed in India and consequently the tax on capital gains arising from the transfer of shares of JVC cannot be recovered from Indian Rayon as a representative assessee. As noted earlier, out of 74,35,61,4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y AT T Mauritius only if NCWS consented to the sale. NCWS could give consent only if it wanted to get out of the joint venture partnership. Therefore, the argument that NCWS was a party to the Sale and Purchase Agreement, because of the warranties given by it cannot be accepted. 41. Even while granting approval for allotment of shares in the name of AT T Mauritius, the RBI recorded (see page 60 of the petition) that AT T Mauritius is the wholly owned subsidiary of AT T USA and that the allotment of equity shares of the JVC in favour of AT T Mauritius shall not exceed 49% (later on reduced to 32.91% under the Shareholders Agreement) of the paid up capital of the JVC. These facts noted by RBI clearly suggests that the RBI approval was in terms of the JVA, wherein the ownership of the shares allotted in the name of AT T Mauritius was to vest in AT T USA. Thus, the approval granted by RBI for allotment of shares in the name of AT T Mauritius support the contention of the Revenue that the equity shares of the JVC were issued in the name of AT T Mauritius under the JVA as a permitted transferee of AT T USA. 42. Similarly, the approval granted by RBI to the effect that the allotme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wnership rights over the shares of ICL subscribed to by AT T USA and allotted in the name of AT T Mauritius as a permitted transferee of AT T USA. 44. The argument that the JVA comes to an end on the execution of the Shareholders Agreement is also without any merit. No doubt, clause 12.07 of the Shareholders Agreement dated 15th December 2000 records that the understanding arrived at between the three parties therein in respect of the subject matter of the Shareholders Agreement shall be final and any understanding to the contrary under any other agreement between the parties shall stand superseded. Obviously, clause 12.07 of the Shareholders Agreement seeks to supersede the terms of the JVA to the extent they are in conflict with the Shareholders Agreement. The Shareholders Agreement does not deal with the rights vested in AT T USA in respect of the 43,82,81,480 equity shares of JVC already subscribed and owned by AT T USA but allotted in the name of the permitted transferee AT T Mauritius. The Shareholders Agreement does not envisage that the ownership of the shares of the JVC to be issued after the Shareholders Agreement shall vest in the member of the AT T Wireless Group ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring into a JVA with the Birla Group and by investing funds in India by subscribing to the shares of the JVC. The fact that AT T USA paid the amount towards equity shares through AT T Mauritius and got allotted the shares of the JVC in the name of AT T Mauritius as a permitted transferee, it cannot be said that the investments in India were made by the permitted transferee viz. AT T Mauritius. In these circumstances, in the present case since the investments in India were made by AT T USA and not by AT T Mauritius, neither, the CBDT circulars nor the DTAA between India and Mauritius are applicable to the facts of the present case. (b) In the case of Azadi Bachao Andolan (supra), investments in India were admittedly made by the Companies incorporated in Mauritius. Income accrued to those Mauritian Companies were governed by the DTAA between India and Mauritius. However, in many cases, the tax authorities sought to treat the shareholders of the Mauritian entities as the real owners and deny the benefit of DTAA between India and Mauritius to the Mauritian entities. In that context, CBDT circulars were issued to the effect that where investments are made by Mauritian entities havin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of sale consideration received by AT T USA through AT T Mauritius would be taxable in the hands of the AT T USA (now represented by NCWS). The argument that the amount received by NCWS was not the sale proceeds but represented the dividend income and return of loan advanced by NCWS to AT T Mauritius cannot primafacie be accepted, because, under the JVA the liability to pay for the equity shares was on AT T USA and if AT T USA discharges that liability by a device of advancing loan to AT T Mauritius and paying through AT T Mauritius, then it is open to the assessing officer to discard the device and take into consideration the real transaction between the parties. 48. Strong reliance was placed by the Counsel for Indian Rayon on the decision of the Apex Court in the case of Carew Company Limited (supra) and Mrs.Bacha F. Guzdar (supra), wherein it is held that the assets belonging to a wholly owned subsidiary cannot be regarded as belonging to the parent company and the person whose name is entered in the Register of Members is to be regarded as the holder of the said shares. In our opinion, those decisions are distinguishable on facts. In the case of Mrs.Bacha F. Guzdar (supr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cumstances, in our opinion, the decision of the Apex Court in the case of Carew Co. (supra) is wholly distinguishable on facts and has no application in the present case. 49. Reliance was also placed by the Counsel for Indian Rayon on the decision of the Apex Court in the case of Howrah Trading Company Limited (supra). In that case, the assessee had purchased shares in a company under a blank transfer, but his name was not registered in the books of the company. The question was whether the assessee was entitled to the dividend income on the said shares purchased by the assessee therein. In that context, it was held by the Apex Court that the person in whose name the shares are registered in the books of the company would be the shareholder and not the purchaser of the shares who may have equitable right to the dividend on account of purchasing the shares. In the present case, no doubt that the shares are registered in the name of AT T Mauritius and, hence, it would be holder of the said shares. However, holding of the said shares by AT T Mauritius itself was as a permitted transferee of AT T USA, with all rights including the right to sell the said shares vested in AT T USA. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mauritius but on account of the direct investment in India made by AT T USA as a joint venture partner under the JVA. In these circumstances, it cannot be said that the Revenue is trying to lift the corporate veil to find out the real owners of the shares but the Revenue is seeking to tax NCWS, because investment in the shares of the JVC made by the predecessor of NCWS viz. AT T USA by subscribing to the shares of the JVC under the JVA and on sale of the said shares, capital gains have accrued to NCWS. 51. It was contended that if the argument of the Revenue is accepted, then absurd situation would arise, because, under the Benami Transactions (Prohibition) Act, 1988, the US Company would not have any right over the shares that stood in the name of AT T Mauritius but assessable to capital gains tax under the 1961 Act. There is no merit in the above contention, because under the Benami Transactions Act, 1988, a transaction is considered to be a benami transaction, in which the property is transferred to one person for a consideration paid or provided by another person. In the present case, the shares of the JVC subscribed to and owned by AT T USA are allotted in the name of AT T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated as an agent under Section 163 can be regarded as a representative assessee in respect of the income of a nonresident covered under subsection (1) of section 9. Subsection (1) of section 9 enumerates certain categories of income accruing or arising in India which are deemed to accrue or arise in India. One such category of income set out in Section 9(1)(i) is, the income accruing or arising through the transfer of a capital asset situate in India. 54. The argument of Indian Rayon is that in the present case, the Revenue has admitted that on sale of shares of ICL, income has accrued in India and income is received in India. Once it is accepted that income has accrued or is received in India, then the said income cannot be said to be deemed to accrue or arise in India as contemplated under Section 9 of the Act. Reliance is placed on the decision of the Apex Court in the case of Eli Lilly Co (India) P. Limited (supra) wherein it is held that Section 9 would not apply in respect of income which actually accrues in India. In the present case, since it is admitted by the Revenue that income has accrued and arisen in India, Section 9 would not apply and consequently the questi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in respect of a nonresident s income. In performing this function, the clause (a) applies to the income of nonresidents alone; (b) specifies the categories of income in respect of which the agent is vicariously liable even if the income actually accrues in India or is received in India. (emphasis supplied) Thus, the Apex Court in the case of Eli Lilly Co. (supra) has held that any income which accrues in India or is received in India within the meaning of Section 5 of the Act would be income deemed to accrue or arise in India if such income falls within the categories of income specified under Section 9(1) of the Act. Similarly, this Court in the case of Vodafone International Holdings B.V. V/s. Union of India reported in (2010) 329 ITR 326 (Bom) after construing Section 5 and Section 9 of the Act has held that where an asset or source of income is situated in India, all income which accrues or arises directly or indirectly through or from it shall be treated as income which is deemed to accrue or arise in India. In the present case, transfer of ICL shares constitutes transfer of a capital asset situate in India and income from such transfer of capital asset even ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e hands of Indian Rayon as agent of the nonresident under Section 163 of the Act. (C) Exemption under Section 10(23G) 59. The argument that the capital gains arising on transfer of ICL shares are exempt under Section 10(23G) of the Act was raised by Indian Rayon in the proceedings initiated under Section 163 of the Act. 60. However, the Assessing Officer while holding that Indian Rayon is liable to be assessed as a representative assessee, observed that the question of exemption under Section 10(23G) would be considered in the assessment proceedings. Even before us, it is contended on behalf of the Revenue that the exemption issue can be considered only after the question as to whether the investee company had the necessary approval for grant of benefit under Section 10(23G) is investigated in the assessment proceedings. In these circumstances, we do not consider it proper to dwell upon an issue which is not adjudicated by the assessing officer and leave it for Indian Rayon to agitate the applicability of Section 10(23G) in the assessment proceedings. D) Impact of Certificate issued under Section 195(2) 61. It is the contention of Indian Rayon that once a Certificate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he application that Indian Rayon intended to purchase 37,17,80,740 shares of ICL from AT T Mauritius was itself not an entirely correct statement, because, Indian Rayon was purchasing the said shares as a representative of the Birla Group in exercise of the rights of first option which NCWS (successor to AT T USA) had called upon the Birla Group to exercise. In fact, Grasim Industries Limited representing the Birla Group by its letter dated 29th July 2005 (see page 690 of the Petition) informed NCWS (successor to AT T USA) that the Birla Group intends to purchase the shares of ICL subscribed to by AT T USA (now NCWS). These facts were suppressed by Indian Rayon in the application seeking Certificate under Section 195 of the Act. 66. Indian Rayon, which represents the Birla Group cannot be said to be an innocent purchaser so as to be unaware of the circumstances under which the shares of the JVC (ICL) were issued in the name of AT T Mauritius. The JVC (now known as ICL) was formed under the JVA between AT T USA and the Birla Group. The JVA specifically records that the Birla Group inter alia consists of Indian Rayon and in fact Indian Rayon is a signatory to the JVA. As per the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the contrary, the assessing officer was bound to issue Certificate under Section 195 of the Act, because, as per the DTAA between India and Mauritius, income accrued to AT T Mauritius on sale of the shares of ICL to Indian Rayon could not be brought to tax in India and consequently recovering the tax on the said income accrued to AT T Mauritius from Indian Rayon as agent of AT T Mauritius did not arise. Once the statement that income has accrued to AT T Mauritius was accepted, there was no scope for considering the applicability of Section 163 of the Act, because, if the income by way of capital gains accrued to AT T Mauritius was not taxable in India, there was no question of recovering tax from Indian Rayon as agent of AT T Mauritius under Section 163 of the Act. 69. According to the learned ASG, the proceedings under Sections 163 and 195 of the Act operate in completely different fields and, therefore, Certificate issued under Section 195 of the Act does not preclude the assessing officer from initiating proceedings under Section 163 of the Act, for the following reasons :" (a) Section 195 casts a statutory obligation to deduct tax on the payer. Section 195(2) is a prot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce of the above vital documents, the assessing officer could not have come to the conclusion that the income arose to NCWS and that the applicable DTAA was IndoUS DTAA and not IndoMauritius DTAA. " We find merit in the above arguments advanced on behalf of the Revenue. Accordingly, we hold that in the facts of the present case, initiation of proceedings under Section 163 of the Act cannot be faulted. 70. Relying on a decision of the Karnataka High Court in the case of Anusuya Alva V/s. DCIT reported in 278 ITR 206 (Karn), it was contended on behalf of Indian Rayon that while discharging the obligation to deduct tax at source, the payer (in the present case Indian Rayon) acts as agent of the Government. It was contended that as per the directions given by the Government of India contained in the Certificate issued under Section 195(2) of the Act, Indian Rayon had made remittances to the nonresident without deduction of tax at source. It was further contended that having induced Indian Rayon to make the remittance without deduction of tax at source, it was not open to the Revenue subsequently to allege that the transaction of sale of shares by AT T Mauritius to Indian Rayon g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee therein while seeking Certificate under Section 197(3) did not mention the profit for the relevant previous year in its letter dated 17th July 1962, the assessee had enclosed a statement along with the said letter which indicated the profits earned in the previous year and the same was considered by the Income Tax Officer while issuing the Certificate. In that context, it was held by the Rajasthan High Court that the failure to mention the profit in the letter would not be a very material difference so as to invalidate the Certificate. In the present case, the basic facts disclosed in the application itself was inaccurate,if not false and the same was compounded by making incorrect statement to the effect that the shares were purchased by AT T Mauritius directly from ICL. Neither before the assessing officer nor before us, it is contended by Indian Rayon that the JVA was not acted upon or implemented. If the JVA was implemented, then there was no question of issuing the shares of the JVC to AT T Mauritius, because, as per the JVA 100% shares of the JVC were to be owned by the joint venture partners only. Admittedly, AT T Mauritius was not the joint venture partner and, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owers on the assessing officer to assess either the representative assessee or the principal assessee to whom the income has accrued. Thus, Section 166 provides that initiation of proceedings to assess the income deemed to accrue or arise in India to a nonresident in the hands of a representative assessee shall not bar direct assessment in the hands of the nonresident. Though the Section contemplates one assessment either in the hands of the nonresident or in the hands of the representative assessee, the Section does not provide any clue to the effect that once the assessment proceedings are initiated against the nonresident, the proceedings initiated to assess the income of the nonresident in the hands of the representative assessee must be dropped. In other words, there is nothing in Section 166 or any other provision of the Act to suggest that the option to assess either in the hands of the representative assessee or in the hands of the nonresident must be exercised at the threshold itself and not at the end of the assessment proceedings. 75. In our opinion, the observations made by the Apex Court in the case of Mrs.Arundhati Balkrishna (supra) does not support the arguments ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ainst the representative assessee once the assessment proceedings are initiated against the nonresident but in exceptional cases like the present one, where complex issues are involved relating to the computation of capital gains and the assessing officer is unable to make up his mind on account of suppression of material facts, then, it would be open to the assessing officer to continue with the assessment proceedings against the representative assessee and the nonresident simultaneously till he decides to assess either of them. 77. In the present case, AT T Corp / AT T Wireless Services Inc (AT T USA) carried on business in India as a joint venture partner of JVC by subscribing to and owning the shares of JVC. Admittedly in October 2004 Cingular Wireless LLC USA acquired AT T Wireless Services Inc, USA (AT T USA) and renamed it as New Cingular Wireless Services Inc, USA (NCWS). Thus, from October 2004, NCWS stepped in to the shoes of AT T USA and all rights and obligations of AT T USA vested in NCWS. It is neither the case of Indian Rayon nor the case of NCWS that after October 2004 any of the rights and obligations of AT T USA in the joint venture business continued to vest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Act both dated 31st March 2009, whereby NCWS and the erstwhile MMM Holdings LLC (which has merged with NCWS with effect from 31st December 2006) are called upon to file return of income for assessment year 200607 so as to assess the income which according to the assessing officer has escaped assessment in the said assessment year. 81. The argument of Mr.Chinoy, learned Senior Advocate appearing on behalf of NCWS can be summed up as follows : a) Once proceedings are initiated to assess the income allegedly accrued to the nonresident in the hands of the representative assessee, notice under Section 148 cannot be issued so as to assess the very same income in the hands of the nonresident (NCWS) b) NCWS is a company incorporated in USA and has no presence whatsoever in India. NCWS does not have a representative or liaison office in India nor does it have even a branch or subsidiary in India and, therefore, NCWS cannot be taxed in India. c) the transaction referred to in the reasons recorded for reopening of the assessment do not amount to transfer of capital asset situated in India and, therefore, not covered under Section 9(1)(i) of the Act. d) Sale of 50% shar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e shares of AT T Mauritius by TIL, the Company (AT T Mauritius) continues to exist at Mauritius and TIL became shareholder of AT T Mauritius situate at Mauritius. Therefore, acquisition of shares of AT T Mauritius by TIL from NCWS and MMMH cannot constitute transfer of a capital asset situate in India and consequently NCWS and MMMH cannot be held liable to pay tax in India on any gains accruing or arising from the above transaction. In support of the above contention, reliance was placed on two decisions of the Delhi High Court in the case of Carrasco Investments Limited V/s. Special Director, Enforcement Directorate reported in 79 Comp. Cases 631 (Del) Commissioner of Income Tax V/s. Quantas Airways Limited reported in 256 ITR 84 (Del), and a decision of this Court in the case of Commissioner of Income Tax V/s. Framji reported in 54 ITR 588. 82. We have carefully considered the arguments advanced by the Counsel for NCWS. 83. The basic question to be considered in this Writ Petition is, whether initiation of proceedings under Section 148 of the Act is in accordance with law or not. From the reasons recorded for reopening of the assessment it is evident that the said proceed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere as a permitted transferee of AT T USA. (d) Prior to the execution of the Shareholders Agreement dated 15th December 2000, the JVC, as per the JVA had allotted 43,82,81,480 shares in the name of AT T Mauritius, as a permitted transferee of AT T USA. (e) The Shareholders Agreement for all the practical purposes was a reconstitution of the Joint Venture which was originally between AT T USA and the Birla Group and after the Shareholders Agreement the joint venture was between AT T USA, Birla Group and the Tata Group. As per the JVA, 100% shares of JVC were to be held by and between AT T USA and the Birla Group. After the Shareholders Agreement, 100% of the shares of the JVC were to be held by and between AT T USA, Birla Group and the Tata Group. (f) In the Shareholders Agreement, it is recorded that AT T USA represents the AT T Wireless Group and that the payments for the balance equity shares would be paid by the members of the AT T Wireless Group (which includes AT T Mauritius). However, all rights in the equity shares of the JVC to be issued after the Shareholders Agreement were to vest in AT T USA. Thus, the rights in respect of the shares of the JVC allotted to AT T M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sferee of the AT T USA (now NCWS). (l) As regards the balance 50% shares of ICL held by NCWS i.e. 37,17,80,740 equity shares of ICL, TIL was entitled to purchase the same (in exercise of the rights of first refusal) from NCWS on payment of US$ 150,000,000/. However, TIL instead of purchasing balance 50% shares of ICL held by NCWS for US$ 150,000,000/sought to purchase 100% shares of AT T Mauritius owned by NCWS and MMMH (belonging to the AT T Group) for US$ 150,000,000/. NCWS MMMH held 70% and 30% shares of AT T Mauritius respectively. Accordingly, a Sale and Purchase Agreement was entered into on 28th September 2005 between TIL on the one hand and NCWS and MMMH on the other hand, wherein it is recorded that TIL would purchase entire shares of AT T Mauritius held by NCWS and MMMH for US$ 150,000,000. The said agreement records that AT T Mauritius holds 74,35,61,480 shares of ICL and that AT T Mauritius has agreed to sell 37,17,80,740 shares of ICL to Indian Rayon out of the total 74,35,61,480 shares and that the sale of the shares of AT T Mauritius to TIL would take place only after the sale transaction between AT T Mauritius and Indian Rayon is completed. (m) Thereafter, T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ght of first refusal under the Shareholders Agreement. As noted earlier, even before the execution of the Shareholders Agreement 43,82,81,480 equity shares of ICL were allotted to AT T Mauritius as a permitted transferee of AT T USA with all rights vested in AT T USA. Thus, shares issued under JVA and thereafter under the Shareholders Agreement could be divested by NCWS by not merely transferring the shares of the JVC but also by relinquishing all rights conferred under the JVA / Shareholders Agreement. By the two Sale and Purchase Agreements, though NCWS has ceased to be the joint venture partner of ICL, it is the contention of NCWS that the amounts received thereunder do not represent the consideration received on relinquishment of right, title and interest including the shares of ICL held by NCWS. 88. It is an admitted fact that the value of 74,35,61,480 equity shares of ICL offered by NCWS to the Birla Group and the Tata Group was US $ 300 million. It is an admitted fact that the Birla Group and the Tata Group had agreed to purchase the said shares of ICL from NCWS for US$ 300 million. It is an admitted fact that on completion of transaction under the two Sale and Purchase ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that TIL had purchased 100% shares of AT T Mauritius from NCWS and MMMH for US$ 150 million and the capital gains arising from the above transaction is not taxable in India. In the ordinary course, income accrued to a nonresident on account of sale of shares of a foreign Company would not taxable in India. However, in the present case, the argument of the Revenue is that the transaction between TIL and NCWS / MMMH is really a transaction for purchase of 37,17,80,740 equity shares of ICL subscribed and owned by NCWS (successor to AT T USA) as a joint venture partner of JVC in India and, therefore, income accrued to NCWS and MMMH would be taxable in India. 92. Mr.Dada, learned Senior Advocate appearing on behalf of TIL vehemently contended that the case of TIL cannot be compared with the case of Indian Rayon, because, Indian Rayon has purchased shares of ICL from AT T Mauritius, whereas TIL has purchased the shares of AT T Mauritius from NCWS and MMMH. According to Mr.Dada, acquisition of shares of AT T Mauritius does not mean acquisition of shares of ICL held by AT T Mauritius. Shares of ICL continued to belong to AT T Mauritius even after the shares of AT T Mauritius were acqui ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entered into with NCWS and MMMH, TIL agreed to purchase the entire shares of AT T Mauritius for US$ 150 million. Once we find merit in the contention of the Revenue that primafacie the ICL shares held by AT T Mauritius belonged to NCWS and the value of the ICL shares remaining with AT T Mauritius (after selling shares to Indian Rayon) was US$ 150 million, then the question to be considered is, whether TIL paid US$ 150 million for the shares of ICL or for the shares of AT T Mauritius which had no assets other than ICL shares. These questions would have to be gone into in the assessment proceedings. 96. TIL cannot be said to be unaware of the fact that the shares of ICL held by AT T Mauritius did not belong to AT T Mauritius because TIL was party to the Shareholders Agreement, wherein all rights in respect of the shares of JVC to be issued after the Shareholders Agreement was to vest in AT T USA and not with AT T Mauritius. In the Share Purchase Agreement, it is recorded that the sale of shares of AT T Mauritius in favour of TIL would take place only after the sale of shares of ICL in favour of Indian Rayon takes place so that on the date of transfer of shares of AT T Mauritius, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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