TMI Blog2012 (8) TMI 162X X X X Extracts X X X X X X X X Extracts X X X X ..... pplicant to withhold tax under section 195. Sale by a Mauritian company of the shares held by it in an Indian company to a Cyprus company - Held that:- The Capital Gains arising on the sale of shares of Indian company helb by Mauritian company are not chargeable to tax in India in the hands of the applicant as the transactions are held to be taxable in India, going by the DTAC, the transactions which give rise to capital gains, can be taxed only in Mauritius, in view of paragraph 4 of Article 13 of the India-Mauritius DTAC Earn-Out consideration would be part of the full value of consideration receivable by the applicant - no obligation on Moody's Group Cyprus Limited, Cyprus to withhold tax under section 195. - AAR Nos. 1186 to 1189 of 2011 - - - Dated:- 31-7-2012 - Justice P.K. BALASUBRAMANYAN, J. RULING The applicant in AAR No. 1186 of 2011, Moody's Analytics, Inc. Co., USA (Moody's, USA) is a company incorporated in the United States of America. The applicant in AAR 1187 of 2011, Moody's Group Cyprus Limited (Moody's Cyprus) is a company incorporated in Cyprus. The applicant in AAR 1188 of 2011, Copal Research Limited Mauritius (Copal, Mauritius) is a company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in Azadi Bachao Andolan (263 ITR 706). He submitted that the Tax Residency Certificates are liable to be accepted and in the light of the observations in the decision of the Supreme Court referred to, the transactions have to be accepted and even if no capital gain is actually taxed or is chargeable to tax in Mauritius, the jurisdiction to tax under the DTAC will still be with Mauritius and hence the authorities under the Income-tax Act cannot tax the transactions. 6. On behalf of the Revenue, it was submitted that this was a clear case of devising of a scheme for avoidance of tax. It was pointed out that the beneficial owner of the shares was CPL Jersey and since there existed no convention between India and Jersey, the taxability of the transactions had to be tested on the anvil of the Income-tax Act. So tested, even according to the applicants, they were taxable under the Act as amended by the Finance Act of 2012. In the first case, it was the sale of the shares of an Indian Company by the Mauritius Company to a Cyprus Company and in the second case, though the sale was of the shares of a US Company by a Mauritian company to another US Company, the underlying assets were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Exevo Inc., USA, the Director of Copal India and CEO of Copal. It is seen that Rishi Khosla is a resident of United Kingdom. It is the argument of counsel for the Revenue, that the management and control of the companies involved, was not in Mauritius but was with Rishi Khosla and if so, the applicant cannot claim to take advantage of the DTAC between India and Mauritius. The tax residence of the companies, if it is to be determined on the basis of its place of management, then, the effective place of management in this case, is the residence of Rishi Khosla. 9. In this context, learned counsel submitted that the applications filed by the applicants deserve to be dismissed for non-disclosure of full and complete facts. He referred to rule 10 of the Rules of procedure framed by the Authority for Advance Rulings, Rule 44(2) of the Income-tax Rules and Form 34C adopted for approaching this Authority by a Non-resident. He emphasized the need for setting out correct and complete facts and the affirmation that an applicant has to make regarding the facts stated in the application. He submits that the entire facts which are relevant for deciding the applications especially that in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ectors function. Normally, the management of a company vests in its Board of Directors as authorized by the General Body. The role of Rishi Khosla highlighted by the Revenue is in respect of the sale transactions undertaken and in pushing them through. It does not appear to be a role in connection with the running of the businesses of the companies concerned. It is not shown that the management of the companies in Mauritius in general, is not with a Board of Directors of those companies sitting in Mauritius and that the management and control is from United Kingdom of which Rishi Khosla is a resident. Even if one were to take the Business Advisory Agreement relied on by the applicants with a pinch of salt, it cannot be said that the role played by Rishi Khosla in these transactions establish that the management and control of the Mauritian companies is with Rishi Khosla. It is therefore not possible to accept the contention of learned counsel for the Revenue that by applying the place of management test, the seller-companies could be held to be non-Mauritian companies. 12. It was contended that Rishi Khosla has not acted in terms of the Board Resolution relied on and that he ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m operational income, there cannot be any question of round tripping. There may be at best some suspicion. Even then, the investments have been made by the companies. Even if the funds were made available by the American company or investors from UK, that cannot deprive the Mauritian companies of the ownership of the shares and the questions raised have to be considered only on that basis. 15. On behalf of the Revenue, a strenuous attempt was made to contend that the beneficial owner of the shares was CPL Jersey and since there was no DTAC between India and Jersey, the transactions were taxable under the Income-tax Act and even otherwise the DTAC would not apply. In the first case, it was clearly the shares of an Indian company that were being dealt with and in the second case, the sale involved the underlying assets of an Indian company. The Revenue's contention that since capital gain is not actually taxed in Mauritius and is liable to be taxed only in India and a person who earns the income by way of capital gains by dealing with the assets of an Indian company has to pay tax in one jurisdiction or the other and cannot rely upon the DTAC between India and Mauritius to evade ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne of argument, before the Supreme Court. The arguments are of no avail before this Authority. 20. Learned counsel for the Revenue argued that the beneficial ownership of the shares vested with Copal Jersey and that ownership should determine the applicatory law. India did not have a treaty with Jersey and hence on the application of the Income-tax Act, the capital gains are taxable in India. He pointed out that there was no dispute that the gains were taxable under the Act. Counsel for the applicants in answer pointed out that the test of beneficial ownership has not been applied in such circumstances and the legal ownership of the shares vested in the company that held it. The fact that the owner company is a 100% subsidiary of another company will not alter the legal ownership. Every corporation is an independent legal entity. 21. As things now stand, in such cases the theory of beneficial ownership has not prevailed over the apparent legal ownership. Company law also recognized the recorded owner of the shares and not the person on whose behalf it may have been held (even if, possible). I am, therefore, satisfied that this attempt of counsel for the Revenue must also fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) If the answer to question No. 5, is in the affirmative, whether the 'Earn-Out' consideration would be chargeable to tax in the assessment year relevant to the previous year in which transfer took place or the year in which Earn-Out is received by CMRL? (7) Whether on the stated facts, the Applicant, being a foreign company and in absence of a place of business in India, would be subject to tax under the provisions to section 115JB of the Act? (8) Whether on the facts and in law, the Applicant is required to withhold tax under section 195 of the Act on the income chargeable to tax in India in the hands of CMRL from sale of shares in Exevo Inc. to the Applicant? (9) If the answer to question 8 is in the affirmative, then, whether the Applicant would be liable to interest under section 201(1A) of the Act? 26. In the light of the discussion above, the Rulings are as follows:- (1) On question No.1, the Ruling is that the capital gains arising are not chargeable to tax in India in the hands of CMRL. (2) On question No. 2, the ruling is that Earn-out would be part of the full value of consideration receivable by CMRL. (3) On question Nos. 3 to 6, no ruling is call ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year relevant to the previous year in which transfer took place or the year in which Earn-Out is received by the Applicant? (7) Whether on the stated facts, the Applicant, being a foreign company and in absence of a place of business or a Permanent Establishment ('PE') in India, would be subject to tax under the provisions of section 115JB of the Act? (8) Whether on the stated facts and in law, Moody's Group Cyprus Ltd. another non-resident is required to withhold tax under section 195 of the Act on the income chargeable to tax in India in the hands of the applicant from the sale of shares? 29 . On question No.1, the Ruling is that the Capital Gains arising on the sale of shares of Copal Research India Private Limited are not chargeable to tax in India in the hands of the applicant. 30. On question No.2, the Ruling is that the Earn-Out consideration would be part of the full value of consideration receivable by the applicant. 31. In view of the Rulings on questions 1 and 2, rulings are not necessary on question Nos. 3 to 6. 32. On question No. 7, I decline to give a ruling though I am of the view that section 115JB of the Act would apply equally to a foreign c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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