Income deemed to accrue or arise in India - Determination of Tax Residency under Article 4(1) of DTAA - Capital gain arising on sale of shares by a resident in Mauritius - status of residence as well as beneficial ownership - Tax resident of India - Limitation of Benefit (“LOB”) clause - whether control and management is situated wholly in India? - settled law with respect to tax residency of a foreign company under the provisions of section 6(3) - Denying the benefits of Article 13(4) of India-Mauritius tax treaty - Taxing worldwide income - words “previous year” and “during that year” employed in the provision to bring out that the residential status of an assessee company
Conclusive proof of beneficial ownership of the shares sold by the Assessee - As argued capital gain arising on the securities purchased before 1 April 2017 has been grandfathered and cannot be brought to tax in India - Assessee is a non-resident in India and does not have a permanent establishment in India.
Assessee is a company which was incorporated in Mauritius on 13 October 2005. The principal activity of the Assessee is to make and hold investments - Assessee holds valid Tax Residency Certificates (‘TRC’) issued by the Mauritius Revenue Authority (‘MRA’) and Category 1 Global Business License (‘GBL’) issued by the Financial Services Commission, Mauritius since inception of the Assessee.
HELD THAT:- The words “previous year” and “during that year” employed in the provision clearly bring out that the residential status of an assessee company is to be ascertained each year considering the control and management of the company during the previous year. However, the lower authorities have determined the residential status of the Assessee based on events and documents pertaining to earlier years which is wholly incorrect and contrary to the express provisions of section 6(3)(ii) of the Act which require that the residential status is to be ascertained based on the events pertaining to the previous year.
As we observed that the Assessee was controlled and managed by its board of directors. All the meetings of the board of directors of the Assessee (including those during FY 2011-12) were convened, chaired and conducted in Mauritius. All decisions concerning the affairs of the Assessee have been taken by the board of directors of the Assessee.
From inception till FY 2011-12, the Assessee has held all 82 board meetings in Mauritius. This is also evident from copy of board minutes of the Assessee for Financial Year (‘FY’) 2011-12 furnished in this regard. The board of directors of the Assessee has comprised of people with significant qualification and experience who were non-residents of India, except the nominee director appointed by lenders. List of directors of the Assessee from FY 2006-07 (year of acquisition of Essar Telecom Investments Limited (‘ETIL’) shares) to FY 2011-12 have also been furnished in this regard. Further, TRCs from MRA/ certificate from Multiconsult Limited/ self-declarations in relation to the tax residence of the directors and brief profiles of directors for FY 2011-12 have also been furnished before us.
As observed that it was for the first time in the assessment order that the AO stated that the Assessee had not submitted the TRC for the earlier years, in response to that allegation the TRC for the earlier years were produced by the Assessee before the CIT(A).
Therefore, the contention of the Revenue that the TRCs for the earlier years were not produced before the AO and no application was filed under Rule 46A is incorrect. In any case, the TRCs for the earlier years are not relevant since the resident status for each year has to be decided separately and TRCs of earlier years have no bearing on the year under consideration.
Whether the control and management is “wholly” situated in India or not? - Dictionary meanings of the word “wholly”, when applied in the context of Section 6(3) of the Act denote that the control and management of the company is to be seen in entirety and not in piecemeal or partially.
As decided in Narottam Pereira Ltd. [1953 (3) TMI 31 - BOMBAY HIGH COURT, Nandlal Gandalal [1960 (4) TMI 3 - SUPREME COURT] Radha Rani Holdings (P.) Ltd.[2007 (5) TMI 267 - ITAT DELHI-I] wherein the courts/tribunals have held that a company incorporated outside India will not be considered as a resident of India if any part of the control and management is situated outside India.
We observed, as per the argument of the Revenue that there is a unified Central command when viewed holistically is also unsustainable and without any evidence in support. The evidence on record shows that the control and management of the Assessee rests with the Board of directors in Mauritius. Further, the Revenue has not found any evidence or material to support its conclusion that the decisions have been taken by Unified Central command and not by the Board of Directors.
Bombay High Court in case of Narottam Pereira (supra), after considering the Judgment of House of Lords in De Beers Consolidated Mines Limited has unequivocally held that if any part of the control and management is situated outside India, the company would not be resident in India. Therefore, the Assessee submitted that the reliance placed by the lower authorities on the judgment of De Beers Consolidated Mines Limited (supra) to hold that the requirements of section 6(3) is complied with even when a part of the control and management is situated outside India is incorrect and bad in law.
Therefore, in our view, the control and management of the Assessee was situated in Mauritius and by no stretch of imagination it can be said that the control and management of the Assessee was wholly in India for the year under consideration.
We observed that the lower authorities have come to the conclusion that the control and management of the Assessee is in India, have held that the agreements and the documents have been executed by employees of other Essar Group entities that are based in India and therefore the control and management of the Assessee is wholly situated in India. Consequently, the Assessee becomes a resident of India in terms of section 6(3) of the Act.
The lower authorities have failed to appreciate that the making of a decision is different from the execution of the decision. To determine the residential status u/s 6(3) of the Act, the AO is required to ignore circumstances where action is taken by personnel in India that has been delegated or authorised by the Assessee's board of directors. In the instant case, the AO has in fact observed that the personnel in India executed the transaction only after they were duly authorised by the board of directors of the Assessee.
In our view, the lower authorities have failed to appreciate that there exists difference between management control and shareholder control.
For the purpose of section 6(3) of the Act, what is required to be seen is de facto control, i.e., where the control and management is actually exercised. In the instant case, it is very clear that the control and management was exercised by the board of directors in Mauritius since all the 11 meetings during the previous year relevant to A.Y. 2012-13 were held in Mauritius.
The lower authorities have not produced a single document which in any manner shows that members of the Ruia family have taken any decision with regard to the Assessee in any capacity other than as director of the Assessee. Therefore, the control and management of the Assessee is with the board of directors in Mauritius and the allegation made by the lower authorities is baseless and contrary to evidence on record.
There is clear difference between management control and ownership control.
Members of the Ruia family are controlling and managing the affairs of the Assessee (and the Mauritius Board has no role to play) and that too wholly from India when several of the Ruia family members are non-residents - The reasoning of the AO is purely based on conjectures and surmises, and no shred of evidence has been brought on record by the learned AO to prove that the Assessee is controlled and managed wholly by the family members and that too wholly in India.
Contention of the lower authorities that the Assessee is a sham entity - We observe that the Essar Group is a multinational group with more than 200 companies which had a net worth in excess of USD 10 bn and had a presence in more than 25 countries across the 5 continents (in 2011-12). It operates in several sectors such as shipping, oil & gas, power, steel, exploration and production of oil and gas, ports etc. It had raised a debt of over USD 5 billion from reputed overseas lenders and the shares of some of the entities in the group were listed on stock exchange India and the UK (including on the FTSE100). Further, the Essar Group has its presence in Mauritius since 1992, i.e., even before mobile telephony started in India.
As submitted that the Assessee cannot be termed as a “substance less” entity since it is an investment holding company and have been undertaking requisite investment holding activities in Mauritius. Further, there are qualified people on the Board of directors (the Board) who have taken decisions concerning the affairs of the Assessee’s, in Mauritius. The entities have also facilitated raising substantial loans (from third party lenders). The directors are required to discharge obligations and undertake various duties under the Mauritian laws. Accordingly, the existence of these entities should be respected by the Revenue.
Therefore, in our view, the contention of the lower authorities that the Assessee is a sham entity and the investment in Mauritius was made only for the purpose of claiming benefits of India-Mauritius DTAA is baseless and without any substance.
Lower authorities have denied treaty benefits to the Assessee on the basis that the Assessee was nothing but a shell company which had been used as a conduit with the sole objective of avoidance of tax on capital gain that arose on sale of VEL shares - The lower authorities have not to appreciate that the principal purpose test of incorporating the company in Mauritius for capital gain exemption purpose was brought in for the first time by the insertion of the LOB clause w.e.f. 1 April 2017 and, therefore, the capital gain exemption claimed by the Assessee cannot be denied on this ground. We observe that the decision of the Hon’ble Supreme Court in the case of Vodafone International Holding B.V. [2012 (1) TMI 52 - SUPREME COURT] supports the submissions of the Assessee, wherein it has been held that claiming of treaty benefit is one of the relevant factors of making investment through the Mauritius route.
Mere collaboration by related parties for mutual benefit / enhanced bargaining power cannot lead to an inference that the parties surrender their rights / decision making ability to one another. Such contracts and agreements are especially not unusual in the context of shareholders / investors in a company where one frequently sees “shareholder agreements” having been entered into for mutual benefits. Entering into any contract results into rights and obligations for the parties. In the given case, ECML, ECom (the offshore put option holder) and the Assessee collaborated with ETHL Communications Holdings Limited (‘ECHPL’) (the onshore put option holder) for their collective best interests in relation to the agreements/ arrangements with Vodafone. Given the above, there is nothing unusual in the fact that the investment in VEL shares is itself the legitimate business of the Assessee. Accordingly, it cannot be said that the Assessee is a conduit and has not undertaken any business activity or that there was lack of commercial/ business substance in the present case.
Denial of treaty benefits on the basis that no benefit of the loans taken on the strength of the VEL shares was obtained by the Assessee and further the sale consideration from the VEL shares was not utilised by the Assessee - It is incorrect for the Revenue to allege that ETIL was a paper entity with no resources and had nothing to pay for the acquisition of VEL shares or to draw any negative inference from the transactions that were undertaken. Accordingly, ETHL raised funds by sale of VEL shares to ETIL and utilized the funds for repayment of its existing loans and interest. It is natural that money went to ETHL, since it was the seller of the VEL shares to ETIL.
There is no basis for the learned AO to allege that the situs of VEL shares was changed to save tax. The situs of shares of VEL continued to be in India in view of the shares being of an Indian company. It is also submitted that there was no shifting of shareholding for tax purposes whatsoever in the present case. Even in the absence of liquidation, if the Assessee had sold the shares of ETIL the capital gains arising to the Assessee would have been non-taxable in India under Article 13(4) of the India-Mauritius tax treaty. In fact, even if ECML had exercised the alternative put option and sold shares in ECL, there would have been no tax liability in India under the Act itself and further, ECML would have been entitled to the benefits of the India Mauritius tax treaty as well. Hence it cannot be said that the motive of the liquidation was tax avoidance as no tax benefit was obtained by ECL by undertaking the liquidation.
Thus, the conclusion of the Revenue that the shares belong to an Indian entity and entities were created in Mauritius to migrate and monetize the shares without paying taxes is factually incorrect and contrary to the evidence on record.
Allegation about immediate use of sale proceeds - In our view, the transactions were undertaken for commercial reasons and it is not open to the tax authorities to step into the shoes of the Board of Directors and question the business purpose of a transaction. The Assessee’s had also benefited from the various loans that were raised on the basis of ETIL/VEL shares and therefore, it agreed to pledge its holding in ETIL/VEL shares.
We observed that the authorities below have not considered all the factual documents/ evidence provided by the Assessee at the time of assessment as well as appellate proceedings and they have arrived at conclusions/ drawn adverse inferences at several places in the order without any documentary evidence. The authorities below have merely undertaken a fault-finding exercise rather than concluding the assessment/appellate proceedings objectively basis the documents/ evidences furnished by the Assessee over the years.
We observed that the Liquidation of ETIL was pursuant to lenders requirement and rejection of pledge of VEL shares by the RBI, however, the lower authorities have denied treaty benefits to the Assessee on the basis that the liquidation of ETIL was undertaken with a view to shift the locus of shares from India to Mauritius without any commercial purpose and, was a colourable device to avoid capital gains tax in India.
Lower authorities have failed to appreciate the commercial purpose behind the liquidation of ETIL, viz., the same would enable a direct pledge of VEL shares to the lenders resulting in greater enforceability of VEL shares as a security, which was not possible so long as the VEL shares were held by ETIL in view of the provisions of Foreign Exchange Management Act, 1999. The same is evident from the rejection by the RBI vide its letter dated 4 October 2007 of the application made for pledge of VEL shares by ETIL.
It cannot be said that the motive behind the liquidation of ETIL was tax avoidance as it was undertaken for a commercial purpose and further no tax benefit was obtained by the Assessee by undertaking the liquidation. Accordingly, the same cannot be termed as a colourable device and the inference drawn by the lower authorities is incorrect and devoid of any merit.
All the transactions were undertaken for commercial reasons, and it is not open to the learned lower authorities to rewrite on mere suspicions and on vague allegations. In light of the above, in our view, there is no colourable device adopted or avoidance of tax attempted in the Assessee’s case.
In light of the findings and with the support of documentary evidence submitted before us, we are of the view that it is eligible for the benefits of exemption from capital gains tax as provided under Article 13(4) of the India-Mauritius DTAA. Accordingly, the capital gains that have arisen to it on the sale of shares of VEL are not liable to tax in India. Therefore, the Assessee is not a tax resident of India, rather it is a tax resident of Mauritius and is entitled to the benefits of Article 13(4) of the India- Mauritius DTAA and therefore inter alia the capital gains on sale of VEL shares in FY2011-12 are not chargeable to tax in India.
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