TMI Blog1997 (7) TMI 669X X X X Extracts X X X X X X X X Extracts X X X X ..... nment of Mauritius, as notified on December 6, 1983, along with the Protocol (hereinafter referred to as the treaty ) ? 2. Whether, on the facts and circumstances of the case, the dividends received by the applicant will be subject to a withholding tax at the rate of five per cent. if the applicant holds 10 per cent. or more of the capital of the Indian company paying dividends, and 15 per cent. in other cases ? 3.Whether, on the facts and circumstances of the case, interest received by the applicant pursuant to a loan agreement in respect of debentures and/or any other debt claims issued pursuant to the approval of the Reserve Bank of India (hereinafter referred to as the RBI )/Government will be exempt from tax under article 11 of the Treaty ? 4. Whether, on the facts and circumstances of the case, the applicant will not be taxable in India on capital gains (whether long-term or short-term) arising from the transfer of securities it holds in Indian companies ? 5. Whether, on the facts and circumstances of the case, the activities of the Indian advisor will constitute a permanent establishment of the applicant in India ? 6. Whether, on the facts and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... L). (vii) DLJ Millenium Partners, L.P. (DMP). Some of them are owned by U.S. investors while some others, such as DLJOP and DDPL, have considerable non-U.S. investor holdings as well. It is stated that they are all interested in investing in the applicant by taking up shares therein and it is expected that other DLJ affiliates may also join in later. The DLJ affiliated entities identified above are a part of its three million merchant banking funds. It is said that each of these entities is committed to invest a certain portion of its committed capital on a side by side basis with DLJ in DLJ s Merchant Banking Investments, about 25 per cent. of which is expected to be made outside U.S. and Canada. Certain additional DLJ affiliated entities, not part of the DLJ s merchant banking fund, are also expected to become shareholders of the applicant. The applicant expects that, with all these funds pouring into it from various affiliated entities, it would be able to make investments in Indian shares, debentures and other debt instruments to the tune of 100 million U.S. dollars. Since the applicant is a resident of Mauritius and there is a Double Taxation Avoidance Agreement (D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... intainability of the present application. It is based on clause (c) of the proviso to sub-section (2) of section 245R which reads as follows : 245R. Procedure on receipt of application.-. . . (2) The Authority may, after examining the application and the records called for, by order, either allow or reject the application : Provided that the Authority shall not allow the application where the question raised in the application,-. . . (c) relates to a transaction which is designed prima facie for the avoidance of income-tax ; It is pointed out, on behalf of the Department, that all the various entities which are proposing the invest their monies are all corporations or partnerships located in the USA. They could have directly invested those monies in India and if they had done so they might not have been able to receive the benefits which are available under the Mauritian Treaty with India. The scope of their exemptions would have been restricted to those available under the Double Taxation Avoidance Treaty between India and the USA. The plea made on behalf of the Department is that clearly these U.S. entities, which desire to invest in India, have chose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Also, within a period of three years from the date it is organised, it must invest at least 80 per cent. of the amount it has raised, in unlisted companies. Venture capital entities cannot also invest in certain high technology areas (like bio-technology) and certain service sectors. For these reasons, it was decided not to invest through an entity organised in India. 7. Since the shareholders in the applicant are organised in different countries and since the shareholders have a varied investor base, it was essential for the applicant to be domiciled in a cost effective taxneutral jurisdiction. Mauritius has emerged as a low-cost offshore financial centre where a large number of funds have been set up for investment in India and other countries. As a result of this, offshore investors prefer to set up their funds or invest through vehicles in Mauritius. In addition, Mauritius is also preferred by offshore investors in view of its well developed low-cost financial services sector and also its favourable double taxation avoidance treaty with India. It was, therefore, decided to organise the applicant there. Reliance is placed on behalf of the applicant on the decision of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. Where by reason of the provisions of paragraph 1, a person other than an individual is a resident of both the Contracting States, then it shall be deemed to be a resident of the Contracting State in which its place of effective management is situated. The contention urged is that if the applicant is to be treated as resident in Mauritius because it is incorporated there, it should equally be treated as resident in India under paragraph 1 of the above article because it is liable to tax in India. In this situation, it is said, paragraph 3 of the article is attracted and, hence, the applicant-company cannot be entitled to the benefits of the agreement unless it can be said that its place of effective management is in Mauritius. It is pointed out that though the company is formally incorporated in Mauritius and regulated by its laws, it is a subsidiary of DLJ and, therefore, the place of its effective management is only in the USA and not in Mauritius. On the other hand, it is contended on behalf of the applicant that the seat of its effective management and control is only in Mauritius and nowhere else. It is pointed out that the applicant has obtained a tax residency cer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t forth in the case in Advance Ruling No. P-9 of 1995, In re [1996] 220 ITR 377 (AAR), but was rejected by the Authority in the following words (page 385) : For the above reasons, the Authority is of the view that the applicants must be considered to be residents both in Mauritius and in India within the meaning of paragraph 1 of article 4. One has, therefore, to turn to paragraph 3 of that article 4 to ascribe the residence to one of these two Contracting States. The effect of that paragraph is that the applicants are to be considered as residents of that one of the two Contracting States in which the place of their effective management is situated. On this issue, the applicants argument that this can only be Mauritius appears to be well founded based as it is on the terms of the memoranda and articles of association of the applicant companies. A difficulty in this line of argument arose by a disclosure made by the applicant s counsel in the course of his arguments before us. He stated that the applicant was a fully owned subsidiary of a banking company of Britain. However, this was not borne out in the papers before us which, as stated earlier, showed two other companies as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve one in Mauritius. On a proper construction of article 4 of the Double Taxation Avoidance Agreement, therefore, the applicant companies have to be treated as residents of Mauritius for the purposes of the Double Taxation Avoidance Agreement. These reasons are equally applicable in the present case. For the same reasons, it is held that the applicant is resident in Mauritius within the meaning of article 4 of the Treaty and is entitled, therefore, to the benefits that flow under the Treaty. This disposes of questions Nos. 1 and 4 raised on behalf of the applicant. By the third question, the applicant desires to know whether the interest received by it pursuant to loan agreements in respect of debentures and/or any other debt claims issued pursuant to the approval of the Reserve Bank of India/Government will be exempt from tax under article 11 of the Treaty. Article 11 reads as follows in so far as it is relevant for our present purpose (see [1984] 146 ITR (St.) 214, 222) : ARTICLE 11 Interest 1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, subject to the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payable under the agreement is reasonable or not in the view of the Government. It is, therefore, submitted that any interest that may be receivable by the applicant can only be under a transaction which has been approved by the Government and to the extent approved by the Government. The terms of paragraph 4 of article 11 are, therefore, it is said, satisfied by any investment in debt-instruments that may be made by the applicant in pursuance of its objects. On the other hand, on behalf of the Department, it is argued that the factual background necessary for a decision of the question has not been fully given by the applicant. No details are given as to the nature of the investments in which the applicant proposes to invest or the terms and conditions thereof. No reference has been made to any application made to the RBI or FIPB for necessary approval. The argument is vague and general and without the necessary factual contents. No ruling can be given on the question raised by the applicant in such a situation. That apart, it is submitted that the terms of paragraph 4 will not apply unless the transaction giving rise to the debt-claim has been approved in this regard by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that is available under law and not to the extent of interest which has been permitted to be paid. This, it is said, is the only way to interpret both parts of the paragraph harmoniously. There are two points made for the applicant in reply to this plea. The first is that if the intention of the treaty had been that the quantum of exemption should be governed by the Indian tax law, it would have been easy to have said so. The rate of tax exemption prescribed under the Income-tax statute is not ever described as an extent of tax exemption approved by the Government. The State grants exemption in respect of a particular quantum of interest ; it does not approve such exemption. This difficulty in language apart, it is pointed out by Shri Desai, that if the quantum of interest is already exempted under the law of the State, there was no necessity for a provision in this regard in the DTAA. The only intention of the DTAA could have been to grant an exemption in respect of something which may have been otherwise liable to tax by reason of paragraphs 1 and 2 of article 4 of the DTAA. There is some force in the first point. But the Authority agrees with the Department that the inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in paragraph 4 to support the view that a full exemption was intended to be extended to such cases as well. After considering the pros and cons of both view-points, the Authority is of the opinion that notwithstanding some inappropriateness in the wording of the first part of the paragraph, conditions Nos. 1 and 3 should be read harmoniously and that any interest received in respect of a debt transaction will be exempt only if it is paid under a transaction that has been approved by the Government and only subject to such limits of exemption as may be provided for in respect of such payments under the Indian income-tax law. While expressing the above view, the Authority wishes to make it clear that the above opinion proceeds on the assumption that the transaction which the applicant enters into will be one specifically approved by the Government. A question may be raised whether the FIPB or the RBI can be said to be the Government of India for the purposes of this article. Though the tax treaty does not define the expression Government , under article 3(2), any term not defined therein will, unless the context otherwise requires, have the meaning which it has under the laws ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tual funds are either run by companies or by other entities such as a trust. The income distributions made by companies will be dividends and fall under article 12. But this is no longer possible because dividend income has been exempted in the hands of the shareholder from the assessment year 1998-99. True, earlier, the income received from the Unit Trust of India could have been considered to be dividends because, under section 32 of the Unit Trust of India Act, 1963, the UTI was deemed to be a company for income-tax purposes. With the Finance Act of 1997, this will cause no difficulty to the applicant. Thus, income from the UTI will be any how exempt and income from mutual funds run by domestic companies will be exempt from the assessment year 1998-99 onwards in view of the provisions of the Finance Act, 1997. If the income distribution is by any body other than a company, it would not be in the nature of dividend and it would also not fall under any of the categories specified in articles 7, 11, 12 and 13 of the DTAA. Article 22 will, therefore, apply to such income. This argument of the applicant is well-founded and accepted. Question No. 6 is disposed of accordingly. In th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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