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2014 (8) TMI 9 - HC - Income TaxLifting up of corporate veil - Whether the AAR was correct in holding that the corporate veil ought to be lifted and that the JV Company and Vatika were essentially the same entity – Held that:- The JV Company was to be managed as a joint venture between the petitioner and Vatika and the JV Company was not an alter ego of Vatika alone - the affairs of the JV Company were to be managed separately and distinctly from that of Vatika - The reading of the agreement as a whole clearly indicates that the petitioner was entitled to participate in the management and affairs of the JV Company, not only by appointing its nominee directors but also by ensuing independent auditors and an independent Asset Manager - the affairs of the JV Company were to be managed independent of Vatika - when the corporate veil of the JV Company is lifted, Vatika and the JV Company were essentially one and the same entity to be wholly erroneous and not warranted. Whether the amount paid/payable by Vatika in excess of the amount invested by the petitioner would be ‘interest’ within the meaning of Section 2(28A) of the Act and Article 11 of the Indo –Mauritius DTAA – Held that:- It cannot be read to mean that the petitioner was only entitled to a fixed return on the investments made by it in the equity and CCDs issued by the JV company - the CCDs held by the petitioner would mandatorily be convertible into equity shares and the petitioner would be entitled to the benefits that would accrue to an equity shareholder in respect of the equity shares issued by the JV Company on conversion of the CCDs - merely because an investment agreement provides for exit options to an investor, would not change the nature of the investment made - It also cannot be ignored that the options were granted to the investor as well as to Vatika - it is essentially a joint venture agreement and it is common in any joint venture agreement for the co-venturers to include covenants for buying each-others’ stakes - Although, the SHA enables the petitioner to exit the investment by receiving a reasonable return on it, and in that sense it is assured of a minimum return, it cannot be read to mean that the CCDs were fixed return instruments, since the petitioner also had the option to continue with its investment as an equity shareholder of the JV Company - The rights with regard to options as well as additional rights under Article 11 of the SHA were the mutual rights and obligations between Vatika and the petitioner and not the JV company - The JV Company would in any event, whether the options were exercised inter se Vatika and the petitioner or not, convert the CCDs into equity shares on completion of 72 months from the First Closing Date. Agreement structured for the purpose of avoiding tax or not – Held that:- If the gains are considered as payment of interest by Vatika, as is contended by the Revenue, it would also mean that the quantum of interest is a deductable expenditure in the hands of Vatika - it would be erroneous to conclude that the whole transaction had been structured to ensure avoidance of tax on income – Relying upon Vodafone International Holdings BV v. Union of India and Anr. [2012 (1) TMI 52 - SUPREME COURT OF INDIA] - Court must look at the entire transaction as a whole and not adopt a dissecting approach - the court cannot start with the question of whether the transaction is a tax saving device, but should instead apply the “look at test” to ascertain its true legal nature. There is sufficient commercial reason for the petitioner to have routed its investment in the real estate project through equity and CCDs - The pre-mature exit options as recorded in the SHA and the minimum return assumed by Vatika on its investment are clearly commercial agreements between the parties - These would not change the legal nature of the transaction entered into between the parties - The terms of the arrangements between Vatika and the petitioner reveal that the JV was a genuine commercial venture, in which both partners had management rights - The call and put options were defined commercial options capable of being elected by the parties –there is no reason to ignore the legal nature of the instrument of a Compulsorily Convertible Debenture or to lift the corporate veil to treat the JV Company and Vatika as a single entity – Decided in favour of Assessee.
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