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2015 (8) TMI 1219 - PUNJAB AND HARYANA HIGH COURT

2015 (8) TMI 1219 - PUNJAB AND HARYANA HIGH COURT - [2015] 379 ITR 256 (P&H) - Taxation of income from dividents and capital gains under the Indo-Mauritius Double Tax Avoidance Convention - Application for advance ruling - Whether the capital gains arising in the hands of Blackstone GPV Capital Partners Mauritius V-B Ltd. (‘Blackstone Mauritius’) and Barclays (H&B) Mauritius Limited (‘Barclays Mauritius’) (Collectively referred to as the ‘Sellers’) on account of the sale of shares of SKR BPO Ser .....

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e residents of Mauritius a contracting State), from the alienation of any property other than those mentioned in paragraphs (1) (2) and (3) thereof (the shares of SKR BOP sold by Blackstone Mauritius and Barclays do not fall within paragraphs (1), (2) and (3) of Article 13 shall be taxable only in that State i.e. Mauritius. The gains derived from the alienation of any property would include the gains derived on account of the sale of shares. The words ‘any property’ are wide enough to cover shar .....

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e ‘Contracting State’. The concluding words therein viz. ‘that State’ therefore refer to the Contracting State. Thus the capital gains that arose on account of the sale of the shares of SKR BPO by Blackstone Mauritius and Barclays are derived by a resident of a Contracting State from the alienation of property other than property mentioned in paragraphs 1, 2 and 3 of the Article 13 and are, therefore, taxable only in ‘that State’ i.e. Mauritius.

It is declared that no capital gain tax .....

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liwal, Advocate, Mr. Manish Kanth, Advocate, Mr. Rajesh Sunhan, Advocate, Mr. Prateek Banjara, Advocate, For The Respondent : Mr. Tejinder Joshi, Advocate S.J.VAZIFDAR, ACTING CHIEF JUSTICE The petitioner has challenged an order dated 02.05.2014 issued by respondent No.1-Authority for Advance Rulings under Section 245-R of the Income Tax Act, 1961 (hereinafter referred to as the Act ) and for consequential reliefs restraining respondent No.2-Assistant Commissioner of Income Tax from initiating p .....

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rder remanding the matter to respondent No.1 for consideration of its application on merits. The application for remand was, however, not pressed and we were invited to decide the matter ourselves in view of the considerable delay that has occurred despite the mandate of the Act. 2. On 31.05.2011, the petitioner made an application to the first respondent-Authority for Advance Ruling. The first respondent by the impugned order dated 02.05.2014 declined to give a ruling on the application on the .....

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nmerits instead of remanding it due to a combination of reasons. The Act mandates an application for advance ruling under Section 245R(6) to be decided within six months. It is now over four years since the application was made on 03.05.2011. The matter had been heard several times before respondent No.1. It had at one stage been reserved for orders but then released on the respondents application for further material. It had to be argued afresh as the constitution of respondent No.1 had changed .....

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e a Judge of this Court. It would in these circumstances be unfair to remand the matter for yet another hearing effectively the fourth before the first respondent. FACTS 4. The petitioner was incorporated on 20.01.2002. Barclays (H&B) Mauritius Limited., (hereinafter referred to as Barclays ) was incorporated on 02.08.2004 in Mauritius. Blackstone GPV Capital Partners (Mauritius) VB Ltd. (hereafter referred to as Blackstone Mauritius ) was incorporated on 10.05.2006 in Mauritius. On 01.06.20 .....

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sition of shares and the resultant holding structure of the entities involved. Along with the application several documents were annexed including Board resolutions authorizing the above investments, Certificates of Incorporation and public announcements. Accordingly, the following approvals were requested:- 6. Request for Approval In the light of the aforesaid, Blackstone Mauritius requests the Foreign Investment Promotion Board to kindly permit: (i) Blackstone Mauritius, directly and/or throug .....

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% of the equity share capital of Intelenet Global Services Private Limited, a company incorporated under the Companies Act, 1956 and having its registered office at Ramon House, H. T. Parekh Mark, 169, Backbay Reclamation, Mumbai 400020, and engaged in the business of providing process outsourcing services in the ITES sector. (iii) Pursuant to the subscription of equity shares of SKR by Blackstone Mauritius, downstream investment by SKR by way of acquisition of upto 3,229,500 shares constituting .....

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formation as required would be furnished. 6. The FIPB granted the approval on 27.08.2007 subject to the terms and conditions mentioned therein. Blackstone Mauritius was named therein as the foreign collaborator. By an amendment dated 31.08.2010, Barclay (H&B) Mauritius Limited was also included. As is usual, with FIPB approvals, the letter was to be made a part of the foreign collaboration agreement to be executed between the investee company and the foreign collaborator and it was provided .....

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f the share value of SKR BPO for an aggregate consideration of ₹ 447.20 crores. On 26.02.2008, Blackstone Mauritius subscribed to preferential shares of SKR BPO for a consideration of about ₹ 31.25 crores so as to retain its 80% holding of the equity shares of SKR BPO. On 07.07.2008, Blackstone Mauritius subscribed to shares of SKR BPO at an aggregate consideration of ₹ 64.25 crores. As a result of a buy-back of shares by SK Infra, the holding of the Blackstone Mauritius was re .....

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auritius Limited, Housing Development Finance Corporation (HDFC), SKM Technology Ventures Private Limited and persons named in Schedule-II as individual sellers on the one hand (referred to in the agreement as Seller 1, Seller 2, Seller 3, Trust Seller and individual sellers, respectively) and the petitioner (therein called the purchaser) on the other. Serco Group plc and Barclay Banks plc are referred to in the agreement as the purchaser parent guarantor and Barclay, respectively. Recital C set .....

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he petitioner was bound to deduct the tax at source and to pay over the same to the Government. 10. Under cover of its letter dated 31.05.2011, the petitioner forwarded an application to respondent No.1 seeking an advance ruling under Section 245Q(1) of the Income Tax Act, 1961, on the following questions:- 1. Whether, on the facts and in the circumstances of the case, the capital gains arising in the hands of Blackstone GPV Capital Partners Mauritius V-B Ltd. ( Blackstone Mauritius ) and Barcla .....

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ed by the Sellers is not chargeable to tax in India having regard to Article 13(4) of India Mauritius DTAA read with section 90(2) of the Act, the Appellant is not required to withhold tax under Section 195 of the Act while making payment of sale consideration to Sellers? The dates of closing of the sale by Blackstone Mauritius and Barcley were 08.07.2011 and 19.10.2011. 11. It would be convenient at this stage to set out the relevant provisions of the Act from Chapter XIX-B relating to advance .....

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of fact specified in the application; ….. …… ………. ……… 245-Q. Application for advance ruling.-(1) An applicant desirous of obtaining an advance ruling under this Chapter may make an application in such form and in such manner as may be prescribed, stating the question on which the advance ruling is sought. ….. …… ………. ……… 245-R. Procedure on receipt of application.-(1) On .....

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low the application where the question raised in the application,- (i) is already pending before any income tax authority or Appellate Tribunal [except in the case of a resident applicant falling in sub-clause (iii) of clause (b) of Section 245-N] or any court; (ii) involves determination of fair market value of any property; (iii) relates to a transaction or issue which is designed prima facie for the avoidance of income tax [except in the case of a resident applicant falling in sub-clause (iii .....

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e an application is allowed under sub-section (2), the Authority shall, after examining such further material as may be placed before it by the applicant or obtained by the Authority, pronounce its advance ruling on the question specified in the application. (5) On a request received from the applicant, the Authority shall, before pronouncing its advance ruling, provide an opportunity to the applicant of being heard, either in person or through a duly authorised representative. Explanation.-For .....

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at source under section 195. The petitioner, however, contends that its sellers are not liable to capital gains tax on account of the agreement for avoidance of double taxation between Mauritius and India and consequently there was no question of its being required to deduct tax at source. 13. This brings us to the Agreement for avoidance of double taxation and a prevention of fiscal evasion with Mauritius (hereinafter referred to as the DTAC ) between India and Mauritius. The convention had com .....

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wo countries. The relevant provisions of the DTAC are as under:- CHAPTER 1 SCOPE OF THE CONVENTION ARTICLE 1 - Personal scope - This Convention shall apply to persons who are residents of one or both or the Contracting States. Article 2 - Taxes covered - 1. The existing taxes to which this Convention shall apply are: (a) in the case of India,- (i) the income-tax including any surcharge thereon imposed under the income-tax Act, 1961 (43 of 1961); (ii) the surtax imposed under the Companies (Profi .....

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nd resident of Mauritius shall be construed accordingly. ………. ………… ……… ……… Article 13 - Capital gains - 1. Gains from the alienation of immovable property, as defined in paragraph(2) of article 6, may be taxed in the Contracting State in which such property is situated. 2. Gains from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of .....

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rom the alienation of ships and aircraft operated in international traffic and movable property pertaining to the operation of such ships and aircraft, shall be taxable only in the Contracting State in which the place of effective management of the enterprise is situated. 4. Gains derived by a resident of a Contracting State from the alienation of any property other than those mentioned in paragraphs (1),(2) and (3) of this article shall be taxable only in that State. 5. For the purposes of this .....

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made simpler still in view of the judgment of the Supreme Court in Union of India v. Azadi Bachao Andolan, (2004) 10 SCC 1. We will, therefore, refer to the circulars immediately. 15. A) Circular No.682 dated 30-3-1994, issued Clarification regarding agreement for avoidance of double taxation with Mauritius . Paragraph-3 of the circular reads as under:- 1605B. Clarification regarding agreement for avoidance of double taxation with Mauritius 1. & 2. ………… …&h .....

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tax law. Therefore, any resident of Mauritius deriving income from alienation of shares of Indian companies will be liable to capital gains tax only in Mauritius as per Mauritius tax law and will not have any capital gains tax liability in India. This circular and the next were referred to by the Supreme Court in Union of India vs. Azadi Bachao Andolan, (2004) 10 SCC 1, which we will refer to later. (B) Circular No.789 dated 13.04.2000 is important and reads as under:- Circular No.789, dated 13 .....

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n 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 taxable in the hands of the shareholder and tax was deductible at source under the Income-tax Act, 1961. Under the DTAC, tax was deducti .....

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idence for accepting the status of residence as well as beneficial ownership for applying the DTAC accordingly. 3. The test of residence mentioned above would also apply in respect of income from capital gains on sale of shares. Accordingly, FIIs, etc., which are resident in Mauritius would not be taxable in India on income from capital gains arising in India on sale of shares as per paragraph 4 of article 13. (emphasis supplied) This circular was also a clarification regarding taxation of incom .....

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cant was reluctant in submitting documents/particulars required by the Revenue for examination though the Sr. Counsel stated that all the relevant documents required by the Department were submitted. On the basis of the submissions and examination of the documents before us, we are of the view that there is prima facie case of the transaction/arrangement being designed for avoidance of income tax in India as submitted by the Revenue. In order to find out the true nature of the transactions, it w .....

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p;….. 15. In order to determine as to whether there was any design, several factors have to be taken into consideration and on isolated or a combination of few circumstances, conclusion cannot be arrived at either to hold that there was a design or not. No straight jacket formula can be laid down as to in which case inference of design can be arrived at and in which case not. 16. It is not the legitimacy of the transaction with which we are concerned. What is the legal effect if it is leg .....

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arrive at a definite conclusion about the nature of the transaction is impermissible. 17. In our considered view, the factual scenario projected by the Revenue clearly establishes that the transaction in question was designed prima facie for avoidance of income tax. We, therefore, decline to give ruling on the application, which is accordingly rejected. 17. The observation in paragraph-6 of the order that the petitioner was reluctant in submitting the documents/particulars required by the Reven .....

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ation for advance ruling was made on 31.05.2011. Mr. Kaka submitted that under sub section (6) of Section 245R the Authority for Advance Ruling is to pronounce its advance ruling in writing within six months of the receipt of the application. We do not think that this aspect can be carried much further for it is possible that due to the exigencies of the docket of the Advance Ruling Authority it was not possible to adhere to this time limit. The other aspects are, however, important. To the prel .....

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The Chairman, therefore, recorded that he was satisfied that the parties must be heard afresh and directed the matter to be posted for hearing again under section 245R(4) of the Act at a later date. The Revenue was also granted liberty to gather any further information that it may deem relevant. The order was passed on 27.08.2012 and the learned Chairperson retired the next day. It was, therefore, necessary for the hearing to be conducted de novo. The petitioner by a letter dated 26.03.2013 set .....

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nstance of the respondents. Charts were prepared. The petitioner also furnished details of the transactions, corporate structure, share purchase agreements, confidential valuation report of SKR BPO, details of incorporation of Blackstone Mauritius and Barclays, Memorandum & Article of Association of Blackstone Mauritius and Barclays, Tax Residency Certificates, details of the activities of these companies, details of the Directors including their addresses and PAN details, balance sheets and .....

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se two companies, bank account statements and details of SKR BPO. Further hearings were again held before the first respondent in May, 2012 and December, 2013, during the course of which submissions were filed and notices were issued. The matter was finally heard on 09.12.2013. The impugned order was passed on 02.05.2014. 20. It is surprising that the Revenue from time to time kept asking for the documents and received the documents and claims to have made submissions before the first respondent .....

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ith its submissions, the first respondent would certainly have dealt with the same in the order. An analysis of the order makes this apparent. 21. There is not a single finding of fact in relation to the prima-facie finding that the transaction/arrangement in this case was designed for avoidance of income tax in India. These findings have been rendered in one sentence in paragraph-6 and in one sentence in paragraph-17. The first respondent has referred to the documents in general. The order, how .....

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, it will be necessary to investigate and examine number of things like fund flows, commercial purpose of the Mauritius companies, commercial expediency of the transactions etc. The order does not co-relate any document to the prima-facie finding. Nor does the order indicate what aspect the first respondent had in mind in respect of the said things, namely, fund flows, commercial purpose of the Mauritius companies and commercial expediency of the transactions etc. which are necessary for determi .....

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was no indication even before us as to the direction or the nature of the analysis. We repeatedly asked Mr. Joshi if there was anything that the Revenue wanted to know even now regarding these aspects viz. fund flows, commercial purpose of the Mauritius companies and commercial expediency of the transactions. He did not indicate any requirement. We asked Mr. Joshi whether the Revenue wanted any material or had any other queries for the purpose of determining the true nature of the transactions. .....

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sis on which such a finding albeit a prima-facie finding could be rendered. We have set out the findings of the Authority for Advance Rulings (AAR) dated 04.04.2012 which are only in paragraphs 6, 15, 16 and 17 of the impugned order. These are the only findings of the first respondent. The rest of the order comprises of the submissions of the parties as well as the legal provisions and the authorities. 24. The record infact indicates the contrary. Blackstone Mauritius subscribed to about 80% of .....

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fact that while SKR BPO was incorporated on 01.06.2007, the application to the FIBP by Blackstone Mauritius to purchase its shares was made on 27.06.2007. There is nothing which even remotely suggests that the investment in June, 2007 was only with a view to profiting from the sale of the shares four years later. It was not even suggested that the Share Purchase Agreement dated 31.05.2011 under which Blackstone Mauritius and Barclays sold their shares in SKR BPO to the petitioner was actually co .....

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application is to be decided within six months. The application was made on 31.05.2011 and the six month s period expired on 31.11.2011. The matter had been heard between May, 2011 and May, 2014. The matter was once part heard and thereafter ordered to be heard afresh. By that time the constitution of the first respondent changed and therefore, the matter had to be heard de novo. Considering the nature of this matter, we decided to hear it on-merits. Moreover, the Revenue did not demand any furt .....

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ty shopping. He submitted that Blackstone Mauritius and Barclays cannot be considered to be residents of Mauritius as they have absolutely no business interest in Mauritius. They do not do any business in Mauritius. They have no manufacturing unit in Mauritius. They do not render any services in Mauritius and therefore, they cannot even to be considered to be residents of Mauritius. He submitted that in any event the real beneficiaries are the share holders of these companies and they do not res .....

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ndolan, (2004) 10 SCC 1 (supra). 28. The first question is whether Blackstone Mauritius and Barclays are residents of Mauritius. It is important firstly to note that Tax Residence Certificates were issued to Barclay (H&B) Mauritius Limited and Blackstone Mauritius both valid till 10.12.2011. The Tax Residence Certificates which are identical in both the cases are of considerable importance in this matter read as under:- TAX RESIDENCE CERTIFICATE BLACKSTONE GPV CAPITAL PARTNERS MAURITIUS V-B .....

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certificate is valid for the period 21 January 2011 to 20 January 2012. This eleventh day of February, two thousand and eleven. Sd/- V.Ramdin (Mrs) For Director-General Mauritius Revenue Authority. The authenticity of these certificates is not doubted. 29. As per Article 1 the convention applies to persons who are residents of one or both of the contracting States. Blackstone Mauritius and Barclays are both residents of Mauritius. The residency certificates referred to above establish the same. .....

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s. The certificates of residence issued by the Mauritius Authorities, therefore, establish that Blackstone Mauritius and Barclays are residents of Mauritius within the meaning of Article-1. 30. In view of the circular, it is incumbent upon the authorities in India to accept the certificates of residence issued by the Mauritian authorities. Circular No. 789 is a statutory circular issued under section 119 of the Act. It is obviously based upon the trust reposed by the Indian authorities in the Ma .....

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o decide whether or not such a certificate ought to be accepted. Once it is established that it has been issued by the contracting State i.e. Mauritius, a failure to accept the residence certificate issued by the Mauritian authorities would be an indication of break down in the faith reposed by the Government of India in the Government of Mauritius and the Mauritian authorities reiterated in and evidenced by statutory Circulars issued under section 119 of the Act. 31. Consequently, the conventio .....

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in sub-section (1) applies, shall not be entitled to claim any relief under such agreement unless [a certificate of his being a resident] in any country outside India or specified territory outside India, as the case may be, is obtained by him from the Government of that country or specified territory. (B) The Finance Bill, 2013 as introduced in the Loksabha on 28.02.2013 was to give effect to the financial proposals of the Central Government for the financial year 2013-14. Clause 21 of the bill .....

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lief under the agreement referred to therein. The proposed sub section (5) was not implemented. Parliament was obviously, therefore, conscious of the Circular No. 789 of 2000 and the effect thereof, namely, that the certificate of Residence issued by the Mauritian authorities would constitute sufficient evidence for accepting the status of residence as well as the beneficial ownership for applying the DTAC accordingly. Though an amendment in the Finance Bill was proposed which would affect the c .....

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ing Tax Residency Certificate (TRC) March 2, 2013 Concern has been expressed regarding the clause in the Finance Bill that amends section 90 of the Income-tax Act that deals with Double Taxation Avoidance Agreements. Sub-section (4) of section 90 was introduced last year by Finance Act, 2012. That sub-section requires an assessee to produce a Tax Residency Certificate (TRC) in order to claim the benefit under DTAA. DTAAs recognize different kinds of income. The DTAAs stipulate that a resident of .....

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t has been pointed out that the language of the proposed sub-section (5) of section 90 could mean that the Tax Residency Certificate produced by a resident of a contracting state could be questioned by the Income Tax Authorities in India. The government wishes to make it clear that that is not the intention of the proposed sub-section (5) of section 90. The Tax Residency Certificate produced by a resident of a contracting state will be accepted as evidence that he is a resident of that contracti .....

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certificate of being resident. The newly added sub section (5) requires the person to also provide such other documents and information as may be prescribed. Nothing has been prescribed to date. 34. The entire sequence of events namely the Finance Bill, 2013, the clarification issued by the Finance Ministry regarding the Tax Residency Certificate dated 01.03.2013 and the Finance Act, 2013 establish beyond doubt that the Residence Certificate issued by the Mauritius authorities must be accepted p .....

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or it also answers the other questions conclusively. The Supreme Court considered the very provisions that we have referred to as well as the said Circulars issued by the Central Board of Direct Taxes. With reference to the Circular No. 682 dated 30.03.1994, the Supreme Court observed that relying on this circular a large number of foreign institutional investors (hereinafter referred to as FIIs ), which were resident in Mauritius, invested large amounts of capital in shares of Indian companies .....

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ed before the Supreme Court as it was before us, that these companies were controlled and managed from countries other than India or Mauritius and as such they were not residents of Mauritius so as to entitle them to the benefits of the DTAC. This resulted in panic and consequent hasty withdrawal of funds by FIIs from India. The Finance Ministry issued a press note dated 04.04.2000 clarifying that the views taken by some of the Income Tax Officers pertained to specific cases of assessment and di .....

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ian Tax Authorities is neither contemplated under DTAC, nor under the Income Tax Act; whether a statement is conclusive or not, must be provided under a legislative enactment such as the Indian Evidence Act and cannot be determined by a mere circular issued by CBDT. (E) Treaty shopping , by which the resident of a third country takes advantage of the provisions of the Agreement, is illegal and thus necessarily forbidden. (L) By reason of the impugned circular the power of the assessing authority .....

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ulars and even the findings of the Delhi High Court, the Supreme Court held:- …………….28. A survey of the aforesaid cases makes it clear that the judicial consensus in India has been that Section 90 is specifically intended to enable and empower the Central Government to issue a notification for implementation of the terms of a Double Taxation Avoidance Agreement. When that happens, the provisions of such an agreement, with respect to cases to which they apply, w .....

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tions with the said clause is to enable the Central Government to issue a notification under Section 90 towards implementation of the terms of DTACs which would automatically override the provisions of the Income Tax Act in the matter of ascertainment of chargeability to income tax and ascertainment of total income, to the extent of inconsistency with the terms of DTAC. 29. The contention of the respondents, which weighed with the High Court viz. that the impugned Circular No. 789 is inconsisten .....

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hellip;… The challenge being only to the exercise of the power emanating from the section, we are of the view that Section 90 enables the Central Government to enter into a DTAC with a foreign Government. When the requisite notification has been issued thereunder, the provisions of sub-section (2) of Section 90 spring into operation and an assessee who is covered by the provisions of DTAC is entitled to seek benefits thereunder, even if the provisions of DTAC are inconsistent with the pro .....

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urt has held, and the respondents so contend, that the assessing officer under the Income Tax Act is entitled to lift the corporate veil, but the circular effectively bars the exercise of this quasi-judicial function by reason of a presumption with regard to the certificate issued by the competent authority in Mauritius; conclusiveness of such a certificate of residence granted by the Mauritian Tax Authorities is neither contemplated under DTAC, nor under the Income Tax Act a provision as to con .....

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as a clear enunciation of the provisions contained in DTAC, which would have an overriding effect over the provisions of Sections 4 and 5 of the Income Tax Act, 1961 by virtue of Section 90(1) of the Act. If, in the teeth of this clarification, the assessing officers chose to ignore the guidelines and spent their time, talent and energy on inconsequential matters, we think that CBDT was justified in issuing appropriate directions vide Circular No. 789, under its powers under Section 119, to set .....

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ils the jurisdiction of the assessing officer to assess the income of the assessee before him. In our view, therefore, it is erroneous to say that the impugned Circular No. 789 dated 13-4-2000 is ultra vires the provisions of Section 119 of the Act. In our judgment, the powers conferred upon CBDT by sub-sections (1) and (2) of Section 119 are wide enough to accommodate such a circular. ……(emphasis supplied) . These observations are a complete answer to Mr. Joshi s submissions on be .....

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h Mauritius. The Government of India is obviously aware of the same. It would be absurd to suggest that it was not or is not. 39. Article 4 provides that for the purpose of the Convention, the term resident of a Contracting State means any person, who, under the laws of that State, is liable to taxation therein by reason inter-alia of his domicile residence, place of management or any other criterion of similar nature. The words is liable to taxation mean that the income of the person may be lia .....

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the laws of that State which immediately precede the words liable to taxation therein . Had it been otherwise, Article 4 would have been worded differently. A view to the contrary would make the DTAC unworkable and erode the basis thereof. 40. As we mentioned while dealing Article-4, the term resident of a Contracting State means any person who under the laws of that State i.e. Mauritius is liable to taxation therein by reason of his domicile, residence, place of management or any other criterio .....

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ax exemption is introduced or revoked. If the respondent s submission is to be accepted, the position would be fluid and fluctuating depending upon whether a person is required to pay tax or not at a given point of time in Mauritius. It would mean that the person would be liable to pay taxes in India when there is an exemption or no liability to pay any tax in Mauritius and would not be liable to pay taxes in India when he actually pays tax in Mauritius. If that had been the intention, the Gover .....

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irrational then to assume that it would have meant nothing whether the tax paid was only a rupee or crores of rupees. 41. This issue is also considered by the judgment of the Supreme Court in Union of India v. Azadi Bachao Andolan (supra). The Supreme Court dealing with the expression liable to taxation held :- ……………………..the respondents contend that FIIs incorporated and registered under the provisions of the law in Mauritius are carrying o .....

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y General and Shri Salve for the appellants that the phrase liable to taxation is not the same as pays tax . The test of liability for taxation is not to be determined on the basis of an exemption granted in respect of any particular source of income, but by taking into consideration the totality of the provisions of the income tax law that prevails in either of the contracting States. [See in this connection K.V. A. L.M. Ramanathan Chettiar v. CIT, (1973) 88 ITR 169] Merely because, at a given .....

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lopment Council (OEDC), Model Convention, 1977 and commentaries in relation thereto in support of this view and concluded there from as follows:- It is, therefore, not possible for us to accept the contentions so strenuously urged on behalf of the respondents that avoidance of double taxation can arise only when tax is actually paid in one of the contracting States. 43. Capital gains arising from the sale of the said shares can only be brought to tax in Mauritius. This is also clear from Article .....

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n of any property would include the gains derived on account of the sale of shares. The words any property are wide enough to cover shares in a company incorporated under the Companies Act, 1956. The gains from the sale of shares are taxable under the Income Tax Act, 1961. Article 2 of the DTAC, which stipulates the existing taxes to which the convention applies in the case of India, includes income tax including any surcharge thereon imposed under the Income Tax Act, 1961. 45. The words contrac .....

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ticle 13 and are, therefore, taxable only in that State i.e. Mauritius. 46. As Mr. Kaka rightly submitted, the words any property in paragraph 4 of Article 13 are not qualified by the situs of the property. This is in contrast to paragraph Nos. 1, 2 and 3 thereof. Paragraph Nos. 1, 2 and 3 stipulate the situs of the property. Paragraph-1 refers to the gains from alienation of immovable property and provides that such gains may be taxed in the Contracting State in which such property is situated .....

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ain the situs of such property as is included in paragraph-2 entitles India to tax the gains on account of the alienation thereof. Similarly, paragraph-3 of Article 13 specifically provides that the gains from alienation of ships and aircraft operated in international traffic and movable property pertaining to the operation of such ships and aircraft, shall be taxable only in the Contracting State in which the place of effective management of the enterprise is situated. The entitlement to tax a .....

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ckstone Mauritius and Barclays do not do any business in Mauritius and that it is the share holders of these companies who actually gain from the transactions in question. These share holders are not residents of Mauritius. Therefore, the provisions of the DTAC are not available to them. 48. The case of treaty shopping was dealt with by the Supreme Court in Union of India v. Azadi Bachao Andolan (supra), in detail. The following observations are important:- Treaty shopping - is it illegal? The r .....

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to describe the act of a resident of a third country taking advantage of a fiscal treaty between two contracting States. According to Lord McNair, provided that any necessary implementation by municipal law has been carried out, there is nothing to prevent the nationals of third States , in the absence of any expressed or implied provision to the contrary, from claiming the right or becoming subject to the obligation created by a treaty . [ Lord McNair: The Law of Treaties, p. 336 (Oxford, at th .....

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each country were exempt from taxation in respect of fees earned for lecturing in the other country, and any necessary changes in the tax laws were made, that privilege could be claimed by, or on behalf of, professors of those universities who were the nationals of third States . It is urged by the learned counsel for the appellants, and rightly in our view, that if it was intended that a national of a third State should be precluded from the benefits of DTAC, then a suitable term of limitation .....

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residents of one of the contracting States. Article 24 of the Indo-US DTAC is in marked contrast with the Indo- Mauritius DTAC. The appellants rightly contend that in the absence of a limitation clause, such as the one contained in Article 24 of the Indo-US Treaty, there are no disabling or disentitling conditions under the Indo- Mauritius Treaty prohibiting the resident of a third nation from deriving benefits thereunder. They also urge that motives with which the residents have been incorporat .....

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f the Chancery Division in F. G. (Films) Ltd., In re [(1953) 1 WLR 483 : (1953) 1 All ER 615] was pressed into service as an example of the mask of corporate entity being lifted and account be taken of what lies behind in order to prevent fraud . This decision only emphasises the doctrine of piercing the veil of incorporation. There is no doubt that, where necessary, the courts are empowered to lift the veil of incorporation while applying the domestic law. In the situation where the terms of DT .....

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cing the veil of incorporation can hardly apply to a situation as the one before us………… 49. The Supreme Court also dealt with the interpretation of treaties with respect to treaty shopping in considerable detail. It is sufficient to note only a few observations. It was observed that many developed countries tolerate or encourage treaty shopping, even if it is unintended, improper or unjustified, for other non-tax reasons unless it leads to a significant loss of tax re .....

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add that entering into a treaty and terms and conditions thereof are the sovereign functions involving important aspects of policy. Such decisions must be left to the policy makers who are best equipped and have been entrusted with the responsibility of negotiating the treaty to the greatest advantage and good of the country. 50. Mr. Kaka raised another issue which we do not intend deciding in view of what we have already held. It is sufficient to only note the contention. It is as follows. On .....

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d that it would not be just to do so either. He was satisfied that the consideration of that question should also be postponed to the stage when the application is taken up for hearing to render the ruling. It was further observed that the finding on such a plea would have a serious impact on the ruling to be given in the application, one way or the other. The Chairman, therefore, reserved the question whether the present scheme put forward by the petitioner is one for avoidance of tax in India .....

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