TMI Blog2019 (5) TMI 557X X X X Extracts X X X X X X X X Extracts X X X X ..... Mere fact that the assessee company has not transacted any other business by itself may not be conclusive. The reference to the assessee unable to produce TRC of the companies which hold shares in the assessee company is erroneous. The petitioner would point out that such certificates were produced before the AO. The observation that mere transfer of money though banking channel would not be conclusive, may be quite correct but the same cannot be a ground against the assessee unless there is adverse material. It is true that the extent of administrative expenditure and the employment structure may be some of the factors which eventually would go to establish whether the transaction was sham and the very existence of the assessee was fraudulent, however by themselves may not be sufficient. All these aspects can and need to be gone into in the assessment proceedings. Provisions contained in Section 197. One of the main benefits for an assessee who obtains a certificate u/s 197 for no deduction of tax at source or for deduction of tax at low rate would be to receive full payment from the payer without exposing the payer to the possibility of being declared as deemed defaulter. Y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onal investors located across the world. In a span of over four years between 31.3.2011 to 17.8.2015, the petitioner acquired 7.13 Crores (rounded off) shares of ICFL which corresponds to 97.30% of its share capital. These transactions were duly reported to the Reserve Bank of India. 2.3 To appreciate the corporate structure which was constituted in order to enable the petitioner to make investment by acquiring shares in IFCL, we may reproduce the precise chain of holding of shares of different companies involved in this structure. 2.4 The petitioner desired to offload some 1.85 Crores (rounded of) of its shares of IFCL through IPO. The petitioner applied to the Assistant Commissioner of Income Tax under letter dated 14.5.2018 for grant of the certificate under Section 197 of the Act. In such application, the petitioner placed before the said authority the corporate structure and the source of funds for acquisition of the shares. The assessee pointed out that the assessee expected to receive ₹ 570/- to ₹ 572/- per share from sale of such shares through the IPO and that upon sale of 1.85 Crores of shares, the petitioner expected to receive a tota ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sferred; iv. As a culmination of these factors, he was of the opinion that present was a case where the company had given the colour of genuineness of the transactions but it appears that the transactions were fake. The sum and substance of the Assistant Commissioner rejecting the application of the petitioner for certificate under Section 197 of the Act was that the entire transaction was not genuine. In his opinion, the entire tax structure was crated to avoid legitimate tax liability. 2.6 On 13.6.2018, the Assessing Officer passed the consequential order authorizing the payer of the sale proceeds of the shares to make the payment after deducting tax @ 10% on the entire amount of receipt. On 20.6.2018, he passed further order asking the payee to deduct income tax @ 10% of the actual gain. He thereafter passed another order on 20.6.2018 directing the payer to deduct tax @ 7.73% on the entire amount and release the rest in favour of the payee. It is not necessary to go into the details of such consequential orders. Suffice it to record, if the order passed by the officer under Section 197 of the Act stands, his final consequential order dated 20.6.2018 would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e made. The petitioner would file the return of income and participate in the proceedings. In order to protect the interest of the Revenue, the petitioner may offer certain security till the assessment order is passed. However, to withhold a substantial portion of the petitioner's proceeds out of sale of shares at this stage till the assessment is completed, which would consume considerable time, would be wholly unjust; vi. Learned counsel referred to certain documents and relied upon certain decisions reference to which would be made at an appropriate stage. 4. On the other hand, learned counsel Mr. Chanderpal for the Department vehemently opposed the petition raising following contentions which we are recording in a summary format from the written arguments which he presented before us today. i. Once it is prima facie shown that the transaction is not genuine, the petitioner must participate in the assessment proceedings and only if the petitioner succeeds in such assessment, the amount deducted by way of tax at source can be refunded. At the stage of passing the order under Section 197 of the Act, there was sufficient material to enable the Ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble under the provisions of the Act, would at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or any other mode, whichever is earlier, deduct income tax thereon at the rates in force. 7. Section 197 of the Act pertains to certificate for deduction at lower rate. Sub-section (1) of Section 197 of the Act provides that subject to the rules made under sub- section (2A), where in the case of any income of any person, tax is required to be deducted at the time of credit, or as the case may be, at the time of payment at the rates in force under the provisions including Section 195 and the Assessing Officer is satisfied that the total income of the recipient justifies the deduction of income tax at any lower rates or no deduction of income tax, he shall, on an application made by the assessee in this behalf, give to him such certificate as may be appropriate. Sub-section (2) of Section 197 provides that where any such certificate is given, the person responsible for paying the income shall, until such certificate is cancelled, deduct income tax at the rates specified in such certificate o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents made to non-residents which payments are chargeable to tax. Such payment(s) must have an element of income embedded in it which is chargeable to tax in India. If the sum paid or credited by the payer is not chargeable to tax then no obligation to deduct the tax would arise. 11. With this background, we may address the question of taxability of income in question. We may recall, the assessee, a Mauritius based company had made sizable investment in an Indian Non-banking Financial Company of which the assessee was a majority stakeholder. At the appropriate time, when the share prices were high, the assessee decided to book its profits in part. A portion of the shareholding was offloaded. This gave rise to a net gain to the tune of ₹ 800/- and odd Crores. Section 9 of the Act pertains to income deemed to accrue or arise in India. Subsection (1) of Section 9 lists various receipts, incomes which cannot be deemed to accrue or arise in India. Reference to all the clauses under sub-section (1) is not necessary. We may record that Explanation 5 was added below sub-section (1) by Finance Act 2012 but with retrospective effect from 1.4.1962. This explanation reads as un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vides that gains from alienation of shares acquired on or after 1.4.2017 in a company which is a resident of a contracting state may be taxed in that state. This was inserted in Article 13 by Notification dated 10.8.2016 and would come into effect from 1.4.2017. Simultaneously, paragraph 4 was also substituted. Previously, paragraph 4 provided that gains derived by a resident of a contracting state from the alienation of any property other than that is mentioned in paragraphs 1, 2 and 3, shall be taxable only in that state. To align this paragraph 4 with the insertion of paragraph 3A, it was amended under the same Notification dated 10.8.2016. Paragraph 4 now provides that gains from the alienation of any property but other than that referred to in paragraphs 1, 2, 3 and 3A shall be taxable only in contracting state of which the alienator is the resident. 15. As per paragraph 4 as it stood at the relevant time, the capital gain arising out of the sale of shares, in case of a company like the present petitioner, could be taxed if at all in Mauritius. In other words, the gain arising the sale of shares acquired on or before 31.3.2017, in a company which is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... placed heavy reliance on the TRC issued by Mauritius Government and contended that as long as such certificate is in force, the Income Tax Authorities in India cannot dispute the same or go behind such circular. Our attention was drawn to the circular of CBDT dated 13.4.2000 which reads as under:- 734. Clarification regarding taxation of income from dividends and capital gains under the Indo-Mauritius Double Tax Avoidance Convention (DTAC) 1. The provisions of the Indo-Mauritius DTAC of 1983 apply to residents of both India and Mauritius. Article 4 of the DTAC defines a resident of one State to mean any person who, under the laws of that State is liable to taxation therein by reason of his domicile, residence, place of management or any other criterion of a similar nature. Foreign Institutional Investors and other investment funds, etc., which are operating from Mauritius are invariably incorporated in that country. These entities are liable to tax under the Mauritius Tax law and are, therefore, to be considered as residents of Mauritius in accordance with the DTAC. 2. Prior to 1-6-1997, dividends distributed by domestic companies were taxabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gal position that the Assessing Officer has taken, cannot be grudged. Despite the existence of DTAA, despite the availability of the TRC of the petitioner issued by the Mauritius Authorities and despite the CBDT circular that such certificate as long as in operation would be a valid consideration for applying the DTAA, we do not find that as laid down by the Supreme Court through series of judgments has shut out the case of the Revenue totally when it comes to a fraudulent or fictitious transaction. In Azadi Bachao Andolan (supra) also, while explaining the observations made in the earlier judgment of the case of McDowell Co Ltd Vs. CTO [1985] 154 ITR 148 (SC), this small window was not closed. More recently, the Supreme Court in the case of Vodafone International (supra) made elaborate observations in this regard. Vodafone International (supra) was the case in which the question of taxing the capital gain in the hands of the foreign based company came up for consideration before the Supreme Court. Principally, the question itself was did the complex corporate structuring give rise to transfer of capital asset? Bombay High Court having ruled in favour of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whether the TRC is so conclusive that the Tax Department cannot pierce the veil and look at the substance of the transaction. DTAA and Circular No. 789 dated 13.4.2000, in our view, would not preclude the Income Tax Department from denying the tax treaty benefits, if it is established, on facts, that the Mauritius company has been interposed as the owner of the shares in India, at the time of disposal of the shares to a third party, solely with a view to avoid tax without any commercial substance. Tax Department, in such a situation, notwithstanding the fact that the Mauritian company is required to be treated as the beneficial owner of the shares under Circular No. 789 and the Treaty is entitled to look at the entire transaction of sale as a whole and if it is established that the Mauritian company has been interposed as a device, it is open to the Tax Department to discard the device and take into consideration the real transaction between the parties , and the transaction may be subjected to tax. In other words, TRC does not prevent enquiry into a tax fraud, for example, where an OCB is used by an Indian resident for round-tripping or any other illegal activities, nothing preven ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... command fell short of this requirement. We have summarized principle factors which the Assessing Officer pressed in service. Mere fact that the assessee company has not transacted any other business by itself may not be conclusive. The reference to the assessee unable to produce TRC of the companies which hold shares in the assessee company is erroneous. The petitioner would point out that such certificates were produced before the Assessing Officer. The observation that mere transfer of money though banking channel would not be conclusive, may be quite correct but the same cannot be a ground against the assessee unless there is adverse material. It is true that the extent of administrative expenditure and the employment structure may be some of the factors which eventually would go to establish whether the transaction was sham and the very existence of the assessee was fraudulent, however by themselves may not be sufficient. All these aspects can and need to be gone into in the assessment proceedings. 24. We have noticed the provisions contained in Section 197 of the Act. One of the main benefits for an assessee who obtains a certificate under Section 197 of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssing Officer about the same and shall to the extent of shortfall of 200% of the amount of TDS provide security to the satisfaction of the Assessing Officer. In case of any difficulty, it would be open the either side to approach the Court. b. Learned counsel for the petitioner further stated that the petitioner shall maintain such minimum number of shares till 31.3.2021 which is the last date for passing the order of assessment under normal circumstances, unless of course assessment order is passed earlier, in which case the entire issue will be governed by such assessment order subject to right of appeal. The petitioner shall abide by such statement. c. Additionally, it is provided by us that the petitioner shall maintain such shares upto 31.12.2021 which would enable the Assessing Officer to complete assessment even after invoking extended period of limitation. If the Department needs any further extension beyond 31.12.2021, it would be open for it to apply. d. As stated by the learned counsel for the petitioner, the petitioner shall file a return of income before the Assessing Officer before the due date of filing of the return. e. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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