TMI Blog1995 (12) TMI 394X X X X Extracts X X X X X X X X Extracts X X X X ..... olding company and for that purpose to acquire and hold, either in the name of the company or that of any nominee, and to use, sell, assign, transfer, mortgage, pledge or otherwise deal with or dispose of shares, stocks, bonds, debentures and securities. The authorised capital of each company is stated to be US $ 10,000,100 comprising 100 founder shares of US $1 each and 10,000,000 ordinary shares of US $1 each. Each memorandum shows one share each as having been agreed to be taken by the two subscribers to the memorandum : company X and company Y. The address of each of these has been given as c/o their chartered accountants in Maruitius and the memorandum has been signed by the two chartered accountants, respectively, on behalf of these companies. It is also necessary to refer to two of the articles of association of the companies for our present purposes which provide, inter alia, that the number of directors shall not be less than two and more than ten or such other number as the company may by ordinary resolution determine. The first directors appointed under the articles are the two chartered accountants referred to above who have signed the memorandum on behalf of the subs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent. of the capital of the company paying the dividends ; (b) fifteen per cent. of the gross amount of the dividends in all other cases. This paragraph shall not affect the taxation of the company in respect of the profits out of which the dividends are paid.'' (b) Article 13 of the Double Taxation Avoidance Agreement relating to capital gains reads as under (see [1984] 146 ITR (St.) 214, 224) : 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 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 permanent establishment (alone or together with the whole enterprise) or of such fixed base may be taxed in that other State. 3. Notwithstanding the provisions of par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch he has a permanent home available to him ; if he has a permanent home available to him in both Contracting States, he shall be deemed to be a resident of the Contracting State with which his personal and economic relations are closer (hereinafter referred to as his 'centre of vital interests') ; (b) if the Contracting State in which he has his centre of vital interests cannot be determined, or if he does not have a permanent home available to him in either Contracting State, he shall be deemed to be a resident of the Contracting State in which he has an habitual abode ; (c) if he has an habitual abode in both Contracting States or in neither of them, he shall be deemed to be a resident of the Contracting State of which he is a national ; (d) if he is a national of both Contracting States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement. 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 sit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dia. He can derive the benefits sought from the Double Taxation Avoidance Agreement, as already pointed out, only if he is resident in the U.A.E. within the meaning of article 4. But, this consideration apart, the argument is not well founded. It is true that if the words 'or any other criterion of a similar nature' are given a very narrow meaning as contended for and construed as applicable only where the liability of the person concerned to tax arises out of his continued presence or activity in the country in question, it may be possible to say that the present applicant is not a resident in India. But it appears to the Authority that such a narrow interpretation would not be correct. What the paragraph contemplates is that the liability to taxation for its purposes should arise out of some nexus between India (or the other country) and the claimant. The four words, 'resident', 'domicile' 'place of incorporation' and 'place of management' have been used only to indicate the need for the existence of some nexus between the applicant and the State concerned which can justify the imposition, by that State, of the tax on the income sought to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt, all applicants for relief will, on this interpretation, be automatically considered to be residents of both the Contracting States rendering paragraph 1 of article 4 meaningless. This argument is unacceptable for two reasons. The first is that article 4 has to be read as a whole and paragraphs 2 and 3 thereof proceed to set out the course to be adopted for the exact situation where a person thus becomes resident in both the Contracting States. They lay down rules to assign the residence of that person to one of the two States for the purposes of the Double Taxation Avoidance Agreement and it is only as such resident that he/it can claim relief under the agreement. The fact that an applicant can be termed 'resident' in both the countries under paragraph 1, far from rendering the application of the Double Taxation Avoidance Agreement difficult or infructuous actually activates the provisions of paragraph 2 or 3. Secondly, the plea unduly restricts the scope of the Double Taxation Avoidance Agreement and results in denial of relief thereunder in many cases although a taxpayer may be actually subjected to tax in both the countries. For the above reasons, the Authority is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is located. This conclusion will not, however, be correct for three reasons. The first is that it is equally plausible to say that the word place of effective management refers to the place from where, factually and effectively, the day to day affairs of the companies are carried on and not to the place in which may reside the ultimate control of the company. Secondly, it has been stated in the papers filed here that the general meetings of the company are also held in Mauritius and, if this is correct, the fact that the holding bank is in Britain may not be material. The third and most important reason is that what paragraph 3 of article 4 contemplates is not the location of a place of effective management generally but the location of the place of effective management as between the two Contracting States entering into the Double Taxation Avoidance Agreement. Looked at from this point of view, the applicants do not have any place of management at all in India while they do have 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... holding its assets or profits in trust for the shareholders. However, in view of the categorical admission that all the shares of the applicant companies are held by the British bank and, consequently, the entire funds of the applicant company by way of share capital have been contributed by that bank, the inevitable inference is that it is the British bank and not the applicants which is the real and beneficial owner of the assets of the applicant companies including the shares in the Indian bank. The shares as well as the income arising therefrom are held by the applicant only subject to the control and direction of the sole shareholder which can deal with these assets or the income therefrom in whatever manner it likes by virtue of its sole shareholding in the applicant companies. It is, therefore, possible to take the view that the applicant companies are not the beneficial owners of the dividends payable on their shares in the Indian bank and that, therefore, the dividends received by them from the Indian bank are liable to be taxed at 15 per cent. of the gross amount thereof and not at five per cent. as claimed. In this context it will be useful to make a reference to cert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould be realised-i.e., whether the capital or other assets should be used or made available for use-the second is the right to dispose of the yield. Ownership is merely formal, if the owner is fettered in regard to both aspects either in law or in fact. On the other hand, recourse to the treaty is justified-i.e., is not improper-if he who is entitled under private law is free to wield at least one of the powers referred to. Hence, the 'beneficial owner' is he who is free to decide (1) whether or not the capital or other assets should be used or made available for use by others or (2) on how the yields therefrom should be used or (3) both. The MCs do not require the beneficial owner also to be the legal owner of the right or property giving rise to the payments . . . (c) The fetters that exclude beneficial ownership may be legal or merely factual ('effectif'). Where individuals are involved, it will normally hardly be possible to prove the existence of a factual restriction of the individual's power of disposition. But it may be of significance in cases of control under company law. Of course, a joint stock company which receives dividends, interest or royal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eld not to be beneficial owners of the shares held by them in the Indian bank. The Authority does not, however, consider it necessary to give a ruling on this issue as, in its view, the applications are liable to be rejected for reasons to be presently stated. A rather fundamental issue which was considered in the course of the hearing was whether the Authority should not reject the applications under clause (c) of the second proviso to section 245R(2) of the Act on the ground that the questions raised therein relate to a transaction which is designed, prima facie, for the avoidance of tax. This provision assumes great importance consequent on the revelation in the course of the proceedings before the Authority that each of the applicant companies have only one shareholder, namely, the British bank, a company resident in the United Kingdom. To appreciate the problem it is necessary to consider the position in three different situations : (i) The normal scheme of taxation of dividends received from Indian companies by non-resident companies located in countries which have no double-tax treaty with India is outlined in section 115A to section 115AD of the Act. Section 115A e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from tax if the shares are held by companies in Mauritius while that benefit will not be available if the shares are held by an English company. The above background coupled with the chronological sequence : (a) that the revised Double Taxation Avoidance Agreement between India and the U.K., was notified early in 1994, (b) that the applicant companies were incorporated in November, 1994, (c) that the investments in the shares of the Indian bank, were made in early 1995 and (d) that the present claims of the applicants have been put up before the Authority soon after seem, prima facie, to support the inference that the purpose of the investment in the shares of the Indian bank, in the names of the applicant companies is the avoidance of the taxes that would have fallen on the British bank had it directly invested in the Indian shares. Unlike in regard to the concept of beneficial ownership discussed earlier, there is no need to delve into greater factual detail here as the proviso to section 245R(2) refers only to the prima facie impression created in the mind of the Authority on the facts stated before it on behalf of the applicants. The applicant's counsel has, however, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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