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2016 (1) TMI 791 - THE AUTHORITY FOR ADVANCE RULINGS NEW DELHI

2016 (1) TMI 791 - THE AUTHORITY FOR ADVANCE RULINGS NEW DELHI - [2016] 380 ITR 668 - Investment in equity shares of Dow Agrosciences India Private Limited - whether would be considered as ‘capital asset’ under section 2(14) of the Act? - whether capital gains arising from the proposed transfer of shares of DAS India by the Applicant to DAS Singapore (a company proposed to be incorporated in Singapore), would be subject to tax in India? - Held that:- There is no material before us to hold that t .....

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place from where it operates from India. These assertions of the fact have not been traversed by the Revenue even at the cost of repetition that there is no material before us to hold that the applicant has any PE in India. In that view even if the gains that the applicant makes from the proposed transfer are treated as business income, even then there will be no question of taxation on those gains.

Application of Section 115JB - Held that:- With effect from 1.4.2015, the provisions .....

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ent applicant is clearly covered as it is a company in Mauritius, which country has DTAA or as the case may be DTAC with India. Again we have already given a finding that the applicant does not have a PE in India. As such we answer this question in favour of the applicant holding that there will be no applicability of section 115JB to the applicant.

Applicability of the provisions of Section 92 to 92F - Held that:- Unless the transaction is taxable in India, there would be no applicat .....

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ection 195 - Held that:- The capital gains earned out of proposed transaction are not taxable there will be no question of the applicability of section 195 of the Act. As per the Ruling of the Hon’ble Supreme Court in Transmission Corporation of AP Ltd. vs. CIT [1999 (8) TMI 2 - SUPREME Court ].

Requirement to file return of income under section 139 - Held that:- No applicability of section 139(1) of the Act to the present applicant - A.A.R. No 1123 of 2011 - Dated:- 11-1-2016 - Mr V .....

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t ), is a company incorporated in Mauritius and having its registered office at Suite 308, St.James Court, St Denis Street, Port Louis, Republic of Mauritius and is a tax resident of Mauritius. The Applicant is a part of Dow group of companies (together, hereinafter referred to as Dow Group or Group ). A copy of the Certificate issued by the Registrar of Companies in Mauritius and the Tax Residency Certificate of the Applicant has been enclosed as Attachment 1 and Attachment 2 respectively. 2. D .....

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000,000 2 3 March 1997 134,999,100 3 October 1997 6,124,500 4 18 May 2001 312,247,200 5 27 January 2005 149,999,100 TOTAL 618,369,900 The balance 200 shares of ₹ 10 each have been acquired by DAS Agricultural Investment Holding Company Ltd. for an amount of INR 2,000. 4. It is further, pleaded that the applicant proposes to transfer these shares in favour of a Dow Group Entity Singapore and thus the Group entity Singapore hereinafter called SDA Singapore would be a transferee company. 5. T .....

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able in the long-term. ii) Prior to 2010, Dow group was divided in the following 5 areas depending on its geographical locations: - North America - South America - Europe - Asia Pacific - Dow India, Middle East and Africa ( Dow IMEA group) iii) In the beginning of year 2010, the IMEA group was dismantled and countries in IMEA group were realigned to other regions as per geographical convenience. The Asia pacific region now consists of countries like India, China and other South East Asian countr .....

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ntrol. Singapore is one of the upcoming countries in the Asia Pacific region. Keeping in view the above facts, Dow group is contemplating to shift the shareholding of DAS India from Mauritius to Singapore. vi) The Group believes that such re-alignment would help the Group to focus on customer service including support for new product launches, strong compliance culture, commitment to health, safety and the environment, and commitment to developing people that deliver strong results for the Group .....

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he shareholding (i.e. 61,836,990 shares) of DAS India to DAS Singapore by way of contribution. iv) The value of DAS Singapore s shares recorded in the books of DAS Mauritius would be considered as the sales consideration for transfer of shares of DAS India. v). The cost at which DAS Mauritius has obtained the shares of DAS India would be the cost of acquisition. vi). The Applicant also wishes to state that it does not have an office, or employee or agents in India and hence no permanent establis .....

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stions are proposed by the applicant:- (1) Whether on the facts and circumstances of the case, the investment held by the Applicant in equity shares of Dow Agrosciences India Private Limited (hereinafter referred to as DAS India ) would be considered as capital asset under section 2(14) of the Act? (2) Based on the facts and circumstances of the case, whether capital gains arising from the proposed transfer of shares of DAS India by the Applicant to DAS Singapore (a company proposed to be incorp .....

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as India Mauritius DTAA )? (4) If the answer to Question 2 is negative, whether the Applicant would be liable to pay minimum alternate tax under the provisions of section 115JB of the Act? (5) Based on the facts and circumstances of the case, if the proposed transfer of shares by the Applicant to DAS Singapore is not taxable, whether the provisions of section 92 to section 92F of the Act relating to transfer pricing would still be applicable? (6) Based on the facts and circumstances of the case .....

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ent Indian as it is not covered under the provisions of section 6(3) of the Income-tax Act, 1961. The applicant also relies on Section 226 and contends that it is not covered under any of the provisions thereof nor is it a company formed and registered as per the provisions of Indian Companies Act. It is more particularly pleaded that the applicant is not covered under clauses (i), (ia), (ib) (ii) and (iii). It is, therefore, claimed on the basis of the certificates issued by the Mauritian autho .....

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-89-IT (AI)dated 31.8.1989 or Instruction No.1827 and Supplementary Circular No.4/2007 dated 15.6.2007 issued by Central Board of Direct Taxes (CBDT). It is reiterated that considering the accounting test and intention test as also quantum test and further relying on G.Venkata Swami Naidu and Company vs. CIT [1959] (35 ITR 594)(SC) as also Raja Bahadur Kamakhya Narain Singh vs. CIT [1970] (77 ITR 253) (SC) as also the Ruling of this Authority in Praxair Pacific Ltd. AAR 855 of 2009. The equity s .....

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d more particularly Article 13(4). It is also pointed out on the basis of reported decisions in : (1) UOI vs. Azadi Bachao Andolan 2003 263 ITR 706 (SC) (2) CIT vs. Paul Kulangal Chettiyar 2004 267 ITR 654 (SC) as also the 2 other decisions by Hon ble Andhra Pradesh High Court and Kolkata High Court that where the provisions of DTAA are more beneficial the applicant could be able to avail of the same. The applicant also pleads that the CBDT Circulars are binding on the Revenue Authorities and as .....

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at there shall be no liability of withholding tax under section 195. 14. Revenue has filed in all three reports in opposition to the application. This matter was admitted for final hearing by an Order dated 16.8.2012. In fact, the Revenue has opposed the admission of this matter raising some objections under section 245R(2) of the Income-tax Act, 1961(hereinafter referred as Act ). However, those objections were ignored. However, it was mentioned in the Order dated 16.8.2012 that the question re .....

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s refuted in the Order passed by this Authority on 5th August, 2015. Some details have been supplied by the Revenue in para 5 of this reply dated 23.8.2015 wherein the factor of longevity of the applicant appears to be an admitted position. Reliance has been placed on the earlier decision of this Authority in M/s. WCT Mauritius, which decision is reported to be in challenge before the High Court. Be that as it may, we are not at all convinced that this company which has been operating for more t .....

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en is made to the observations of the Hon ble Supreme Court in Azadi Bachao Andolan case and Vodafone International Holdings BV case. It is again reiterated that the whole scheme of the transfer of shares in favour of Singapore, amounted to a scheme to avoid payment of taxes. We are not in agreement with the contention of Revenue. Firstly, because the first transaction of the shares was on 6th September,1995, the 2nd was on 3rd March, 1997 and 3rd was in October, 1997, 4th was on 18th May, 2001 .....

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a substantial cost of about ₹ 61 crores and if they are sought to be now transferred to a Singapore concern which is the own subsidiary of the applicant, it cannot amount to a design or a scheme to avoid payment of taxes in India. The applicant has relied on the details of the promoters of DAS India in their reply dated 28.9.2015. It is seen that DAS India was incorporated on 7th December, 1994. The investment made in the DAS India was with the prior approval of Department of Industrial Po .....

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t has produced a Tax Residency Certificate and also a declaration in the AAR application itself that it has no PE. Nothing has been brought by the Revenue that there is a PE in India. We therefore, do not hold that the applicant has a PE in India in the absence of any inputs which could have been provided by the Revenue. 19. In this behalf we accept the reiteration by the applicant that the applicant does not have an office or employees or agents in India and has also made declaration to this ef .....

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nt year 2011-12 and no issue about its being a PE in India was raised during the assessment proceedings. 20. We have also taken into consideration the fact that Dow IMEA Group was dismantled in 2010 and that is how the need for realignment of the group arose whereby DAS entity was to be shifted from an entity which falls under Europe region to an entity which would fall in the Asia-Pacific region. This was to be done with a view to achieve better control. Singapore is one of the upcoming countri .....

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is amounting to a scheme to avoid payment of taxes in India. We, therefore, accept the contention raised by the applicant about its not having a PE in India. 21. Department has raised as many as 8 contentions in support of their contention:- I) huge royalty payment for technical license procured from the group II) huge service charges being paid in lieu of service agreement to DAS US and it s subsidiaries III) DAS INDIA is more of a trading company (for product of DAS, USA). In FY 09-10 it s tra .....

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offered by DAS, USA to the employee of DAS, India implicitly treating them as its own employees. VIII) The transfer study suggest that control and guidance of the Indian operations are with DAS, USA and Indian entity is selling basically the end-products as registered, branded and marketed by DAS, USA. It is a fact that the product mix is completely USA based and there is no Research and Development activity in Indian entity or by Mauritius entity. 22. In our opinion all these contentions are ir .....

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applicant in DAS India was accepted by the Indian authorities which are clear from the certificate issued in its favour. The learned representative also pointed out that the applicant carried no activity in India. It is also pointed out that in their earlier replies to the departmental objections, it was pointed out that the applicant did not have a office or employees or agents in India and therefore, there was no question of there being a PE in India particularly because of the 8 submissions m .....

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ld come into effect if the applicant is held to have a PE. That may be true but once a finding is given that there could be no PE there would be no question of Article 13(2) of the Treaty been attracted. 23. In their report dated 23.8.2015, the Revenue is again reiterating that this was nothing but a scheme to avoid the payment of tax. We have already held that in the factual circumstances of the investment having been commenced about 20 years back and completed about 10 years back and the busin .....

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adi Bachao Andolan [2003] 263 ITR 706 wherein the Hon ble Supreme Court declared that treaty shopping is not taboo. The applicant has also relied on the decision of AAR in E*Trade Mauritius Limited (324 ITR 1) - page number 344 to 369 which also reiterates the principles of treaty shopping. The other decisions relied upon by the applicant are M/s. Sanofi Pasteur Holding SA (354 ITR 316), Castleton Investment Ltd. (AAR No.999 of 2010) (252 CTR 131), Deere & Co.(337 ITR 277), Ardex Investments .....

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voidance arrangement. 25. We do not accept the contention of the department that DAS India has not declared and distributed dividends since 2004 and therefore, to the extent of accumulated profits, sale proceeds should have to be assessed in India. We ignore this contention as it is not relevant. Considering the other factors like investment function made 20 years back etc., we are of the clear opinion that there is no scheme for the tax avoidance. We also do not accept the contention of the Rev .....

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be considered owner of the capital asset being the shares or the business unit i.e. B.E. It is, therefore, pleaded that in this situation, capital gain will be computed in the hand of DAS USA. It is the alternate submission that in case it is submitted that DAS Mauritius, the applicant herein earn capital gains by sale of shares then the gain related to accumulated profit should be treated as dividend under the Income-tax Act, 1961 and India-Mauritius DTAA and applicant should be directed to pa .....

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relied on the instructions issued by CBDT No.181-1-89-IT(AI) dated 31.8.1989 and Supplementary Circular No.2/2007 dated 15th June, 2007. Relying on the tests in these Circulars for distinguishing shares held as stock in shares and those held as investments, the applicant has contended that applying the key tests (1) accounting test, (2) intention test and (3) quantum test the shares held in DAS India would be clearly in the nature of the capital asset. The applicant has relied on G.Venkata Swamy .....

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oncerned, the objection was not to trade the shares which the applicant had in DAS India. It is also pointed out that the acquisition is from 1994 and obviously the intention was to hold these shares as investment. It is also pointed out that there have been no transaction in relation to the sale of these shares and the proposed transaction is the only transaction. Considering the whole long subject, we are of the opinion that these shares have to be held as capital asset. This takes us to the 2 .....

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e given reasons for holding as to why the said shares should be held as capital assets, while answering the question No.1, taking into consideration the 3 tests which we have referred to in the earlier paragraphs. 28. The further contention again raised by the Revenue in the Report dated 24.5.2013 that if these shares are not found to be business assets, then the gains from the sale thereof should be treated as capital gains. In answer to this the applicant submits that ordinarily the transfer o .....

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ains from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State or of movable property pertaining to a fixed base available to a resident of a Contracting State in the other Contracting State for the purpose of performing independent personal services, including such gains from the alienation of such a permanent establishment (alone or together with the whole enterprise) .....

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er 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 article, the term alienation means the sale, exchange, transfer, or relinquishment of the property or the extinguishment of any right therein or the compulsory acquisition thereof under any law in force in the respective Contracting States. 29. A glance at the provision of Article 13 would suggest that clause 1 and 3 are not applicable in the present case. Consi .....

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India. No material has been brought before us to that effect. 30. All that the department raised in its report dated 23.8.2015 was that DAS India and the 2nd generation wholly owned subsidiary is fit to be treated as a subsidiary/fixed place/ agency of DAS USA. The department has tried to plead before us that the capital gain in this transfer is arising to USA based DAS USA and not to Mauritian applicant and in case the Mauritian applicant is treated as a transferor then the transfer of capital .....

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ngapore. However, the shares of DAS India are held by the applicant and after the proposed transfer they will be held by DAS Singapore in its own capacity and as a representative of DAS LLC. The applicant, therefore, plead that DAS LLC cannot be regarded as a beneficiary of transfer of shares. 31. However, we are of the clear opinion that there is no material before us to hold that the applicant has a PE in India and therefore, the income arising out of the transfer of shares should be treated a .....

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e almost extremely similar if not identical. There also it was a Mauritian company which was gaining by the transfer of shares of the Indian company. We have discussed in paragraphs 22 to 24 of that Ruling and we rely on the same for the purposes of this Ruling also and hold that there would be no question of any taxation of Indian Law on the capital gains arising from the proposed transfer of shares of DAS India by the applicant to the DAS Singapore. 33. In view of our answer to Question No.1 i .....

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of the fact have not been traversed by the Revenue even at the cost of repetition that there is no material before us to hold that the applicant has any PE in India. In that view even if the gains that the applicant makes from the proposed transfer are treated as business income, even then there will be no question of taxation on those gains. 34. This brings us to Question No. 4, which is regarding the application of Section 115JB of the Act. The said question had arisen even in the case of our .....

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ur of the appellant therein on the basis of a statement made before the Hon ble Court to the effect that government did not press to apply section 115JB to FII and FPIs for the period prior to 1.4.2015. It was pointed out that a Circular dated 2.9.2015 was issued by Govt. of India and the same was filed before the Hon ble Supreme Court and a statement was made by the Attorney General for India that the said Circular would be followed. The said Circular clearly mentions that the FIIs/FPIs having .....

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t of a country which does not have a DTAA with India and such foreign company is not required to seek registration under section 592 of the Companies Act, 1956 or section 380 of the Companies Act, 1956. It is clear that the present applicant is clearly covered as it is a company in Mauritius, which country has DTAA or as the case may be DTAC with India. Again we have already given a finding that the applicant does not have a PE in India. As such we answer this question in favour of the applicant .....

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the present case even though the proposed transfer of shares could result in income/capital gain from the international transaction since this income is not chargeable to tax in India in accordance with Article 13, there will be no question of the applicability of section 92 to 92F. The applicant rightly relies on the 3 Rulings: Dana Corporation [2010] (227 CTR 441) (AAR), M/s. Praxair Pacific Limited (326 ITR 276) and Vanenburg Group B.V. vs. CIT (289 ITR 464). We answer the question according .....

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ort dated 23.8.2015, it is argued by the Revenue mainly relying upon the Ruling in Castelton Investment Ltd and more particularly paragraphs 31,32,33 & 34 of that Ruling, that the applicant would be liable to file return under section 139. In the decision of Castleton Investment Ltd. the view was taken that when any person claims the benefit of DTAC, that person is invoking section 90 sub-section (2) of the Act to do so. A view was, therefore, taken that a person earning the income that is c .....

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