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2018 (2) TMI 855

Taxability of capital gains in India - transfer of shares held in ‘AB’ International Private Limited (‘AB’ International) to a group company, ‘AB’ Singapore Pte - eligibility of benefits of India-Mauritius tax treaty - Held that:- Yes, the Applicant would be entitled to the benefits of the Agreement between the Government of Mauritius and the Government of the Republic of India for the avoidance of double taxation and prevention of fiscal evasion; and the income and capital gains arising to the .....

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f the Act, there is no such requirement in section 92 that the transaction should result in income chargeable to tax under the Act for TP provisions to get attracted. Hence, the transaction in the instant case of sale of shares in ‘AB’ International will have to be benchmarked as per the transfer pricing provisions contained in Chapter X of the Act. Thus transfer pricing provisions contained in sections 92 to 92F of the Act would apply to the proposed transaction. - Applicability of section .....

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to a group company, AB Singapore Pte. ( AB Singapore). The Application was admitted by the AAR on 27 July 2015, keeping the question of tax avoidance open. 2. As per the details accompanying the application and subsequent submissions, the facts of the case are stated to be as under: 2.1 The Applicant is a company incorporated in Mauritius in the year 2008, having its registered office at Mauritius with a valid Tax Residency Certificate granted by the Mauritius tax authorities, and holds a Categ .....

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s 27 June 2013 662,878 31 January 2014 692,222 29 July 2015 7,081,938 2.4 The initial and subsequent investment decisions have been discussed and approved by the Board of Directors in its meetings held on 17 November 2008 and 14 May 2009. The original SPA dated 25 November 2008 was executed by the director of the Applicant. The considerations were limited to the banking channels. Details of the investments were provided to the RBI under FEMA, 1999. FIRC was obtained from the RBI which shows that .....

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y for the Group in Asia- Pacific region; Keeping in view the above objectives, the Group and AB Singapore have invested substantial amount in Singapore (more than USD 3 million) since its inception, including a state of art biotechnology lab in Singapore and hired specialist scientist to run the lab. 2.6 In order to achieve the above objectives, the Applicant proposed to transfer the shares held in AB International to AB Singapore, a Group company. Ultimately the shares were transferred by the A .....

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is sought, have been framed: I. Whether on the facts and circumstances of the case, the Applicant will be entitled to the benefits of the Agreement between the Government of Mauritius and the Government of the Republic of India for the avoidance of double taxation and prevention of fiscal evasion with respect to taxes on income and capital gains ( the India-Mauritius tax treaty )? II. If the answer to Question 1 is in the affirmative, whether on the facts and circumstances of the case, the gain .....

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the above, the Applicant has summarized its question-wise arguments as under: 4.1 In respect of Question I, that it is a company incorporated and a tax resident of Mauritius, which is evidenced by the certificate of incorporation issued by the Mauritius authorities. Hence, it is entitled to the benefits under the India-Mauritius DTAC. It holds a valid TRC issued by the Mauritius tax authorities, which serves as sufficient evidence of its residence in Mauritius and is entitled to benefits under .....

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dolan (263 ITR 706) (SC); E*Trade Mauritius Ltd., Praxair Pacific Ltd., DB Zwirn Mauritius Trading. 4.3 In respect of Question III, the Applicant contends that since the gain on transfer of shares is not taxable in India, the consideration received by the Applicant would not be subject to any withholding tax as per section 195 of the Act. It relies on the decision of Supreme Court in case of GE India Technology Centre (P) Ltd vs CIT [(2010) 327 ITR 456]and Transmission Corporation of AP Ltd and .....

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release issued by the Government dated 24 September 2015. 5. The Revenue has submitted detailed reports in the context of the details filed with the Application, as also in response to its subsequent contentions and defence, as filed and argued during the course of these proceedings. The same are, as under: 5.1 Revenue has contended that companies of the C Group USA, are the ultimate holding company and Mr. S , MD of 'C partners LP is director in majority of the group companies. The Applican .....

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assport details. Therefore, he was mainly operating from the US, where the control and management are located. 5.4 The transaction under consideration amounts to tax avoidance and is structured in such a way that increases the value of shares of the Applicant company as a result of appreciation in value of Indian assets, and it is neither taxed in India nor in Singapore, when the shares are finally sold. Hence, the incorporation of the Applicant is a device to avoid tax qua India and it is incor .....

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per company without any business purpose. 5.7 Revenue submits that the Applicant fails the substance over form test because the place of effective management of the Applicant company is not in Mauritius but only in the US because its shares are held by C Equity Portfolio II LP and C Affiliates Fund LP, both US companies. As per the India - US DTAC, India has the right to tax the gains as per its laws. To avoid incidence of tax in India as per its laws, instead of transferring from the holding co .....

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f the Applicant is that of providing accounting, legal compliance to the laws of Mauritius, and therefore renders her status of Finance/legal manager or non-executive director, at best. Mr. AS is also a financial services consultant from the same company and his role too is of providing accounting, legal compliance to local laws of Mauritius, and therefore renders his status also of a finance/legal manager or a non-executive director. He cannot be treated at par with Mr. S . 5.8.1 The Mauritian .....

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etings submitted by the Applicant are not complete to know as to who all were actually present in the meeting physically, or through any other mode. 5.9.2 On this basis Revenue is of the view that Mr. S was the key director who takes all the key decisions on behalf of the company. If he was always participating in the board meetings through telephone or videoconference from the US, then the place from where he operates should be taken as the place of effective management but not where the non-ex .....

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the Revenue that it is a clear attempt to benefit the Singapore entity with capital gains earned/accrued on sale of assets in India, but avoided tax qua India, which will never be taxed in India or Singapore. It is noteworthy that, not only the supposed appreciation on the Indian assets earned by the Singapore entity, after the date of transfer from the Applicant, will ever be liable to tax in Singapore, if any, but not even the gains earned out of the instant transaction in Singapore. More imp .....

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separate and independent entity, on which treaty law is based. It has referred extensively to the case of Vodafone International, to highlight that when the parent takes all decisions and actions for the subsidiary, the latter is reduced to a puppet and becomes ineligible for the benefits of the treaty with that state. 5.14 Revenue has cited the case of Aditya Birla Nuvo, 342 ITR 308, where the Hon ble High Court, Bombay, held that there was no document on record to suggest that AT &T, Mauri .....

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in which the actual transaction takes place is of paramount importance. The look at versus the look through test propounded by the Hon ble Supreme Court in the case of Vodafone holds importance here. 5.16 Revenue has taken an alternative plea that the transaction is squarely covered by the provisions of section 93 of the Act, and the resultant capital gains from the sale of shares in AB India should be considered as the income of the C Group as per Sec 9(1) of the Act, denying the DTAC benefit. .....

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lict between the domestic law and the treaty, and therefore the question of treaty override does not arise. It was further submitted that the correct import of the expression any person has to be derived from the definition of the word in section 2 (31) of the Act, and applies to non residents as well. 6. In its written submissions and during the course of these proceedings, the Applicant, represented by Mr. Rajan Vora, CA, strongly refuted all the allegations made by Revenue, and submitted that .....

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ccount of the Applicant. C Group being shareholders of the Applicant had subscribed to the equity share capital of the Applicant and also advanced loans. The Applicant based on the decision of its BOD, invested and acquired shares of AB International, PTN and AB Philippines. 6.5 The contention of the Revenue that Applicant was created to take advantage of the India Mauritius DTAC is also misplaced. The Applicant has its business objective of being an investment holding company, and had invested .....

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indirectly through its Group company for a period of 4+ years, ie. total holding of 7+ years. Considering this, it is clear that the intention of the Applicant was to hold the shares for a long term with an objective of earning long term capital appreciation and not with an objective of availing benefits of the India - Mauritius DTAC. 6.6 The Applicant submits that pursuant to transfer of shares of AB International to AB Singapore, the Applicant became the shareholder of AB Singapore and not of .....

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dated April 14, 2000 issued by the CBDT, as also the clarification issued by the Finance Ministry vide clarification regarding TRC on March 1, 2013. 6.9 With regard to Revenue s allegation that the Applicant is a benami shareholder / a name lender and the actual owner of shares of AB International is C Group, it has relied on the ruling of Hon ble Supreme Court in the case of Jaya Dayal Poddar (1974 AIR 171), which laid down key principles and basis on which a transaction could be held as benam .....

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own resources, as reflected in its financial statements. Also, as per the Companies Act, the name of the shareholder that appears in the shareholders registers is the lawful owner of the shares. In case the shares are held on behalf of someone - nominee shareholder, then the nominee shareholder is required to report the beneficial ownership of the shares to the company. In the present context, the Applicant submits that it was the registered and beneficial owner of the shares as per the sharehol .....

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e Court in case of Jaya Dayal Poddar (1974 AIR 171), which is being relied upon by the Revenue and states that it is the beneficial owner of the shares. Further, the Applicant has factually distinguished the ruling of Aditya Birla Nuvo Ltd [2011] 12 taxmann.com 141 (Bom), as the shares are registered in its own name, and not any Permitted Transferee . Further, it is submitted that the AAR in case of Shinsei Investment I Ltd (AAR 1017 of 2010) has also examined the Aditya Birla Nuvo Ltd (supra) f .....

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is a convention/treaty entered into between two sovereign states. A refusal to accept the validity of a certificate issued by the contracting states would be contrary to the convention and constitute an erosion of the faith and trust reposed by the contracting states in each other….. Considering the above submissions and factual matrix in the case of the Applicant, it is submitted that the allegation of the Revenue that Applicant is name lender/ benami of C Group is untenable and needs t .....

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ons who are residents in India. To support the above inference, the Applicant relies on the Hon ble Supreme Court ruling in case of M.C.T.M. Chidambaram Chettair&Ors v. CIT (60 ITR 28), to say that this provision was applicable only to residents. 617.1 It is submitted that the objective behind introducing section 93 is to tax income arising out of transaction which residents may undertake to externalize the assets, while continuing to enjoy the rights over such income or assets. In its case .....

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dered the questions posed to us by the Applicant, the details, documents and Financial Statements submitted, and the objections raised by the Revenue, as also the response of the Applicant company, as set out in the preceding paragraphs. 7.1 It is not in dispute that the Applicant is a tax resident of Mauritius and would ordinarily be covered under the India - Mauritius DTAC, and also that it was not a fly by night operator. It was incorporated in Mauritius on 7 October 2008 and possesses a vali .....

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financial statements that the amounts were received as investment from the holding company and subsequently invested in AB International. Hence the flow of actual funds for initial investment, as also subsequent ones stand explained and accounted for. AB International recognized the Applicant as the shareholder, as also the members register maintained as per the Companies Act, 1956.Nothing unusual or peculiar is noticed, and these facts are not disputed by Revenue as well. 7.3 The transfer of s .....

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lished and globally well recognized business/commercial avocation. 7.4.1 Secondly, it must be understood that it would be inconceivable that the C Group , being the Holding Company, would not be involved in any important decision making, be it the funding of the subsidiary company, deciding its objectives, its target markets, and making investments and disinvestments, etc. It can be no one s case that the holding company would have no role at all to play in the affairs of its subsidiary, whose a .....

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Mauritius, where the investee company and the Applicant were located, between the period September 2005 to October 2009, when important decisions were taken. So, it cannot be said that he had no presence in Mauritius, where the Applicant company was registered and located, or in India, where the investee company was located. Yet, with immense technological advancement in the present world of communication, it is unrealistic to expect all Directors, who are also Directors in many other companies .....

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rd with regard to the investments. For example, written resolution dated 17 November 2008, regarding approval to the investment in AB International amounting to USD 1,800,000; of 14 May 2009 regarding additional investment of USD 272,400; of 12 July 2011regarding establishment of a subsidiary and investment in Singapore; and one of 21 February 2012 regarding reorganization of the group, were signed by a Director, Ms. KPR . These indicate that the meetings were held at the registered office of th .....

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s, investment decisions do not require huge offices and staff. In this case, the auxiliary services have been outsourced to International Management (Mauritius), which provides all secretarial assistance. Revenue admits that for the FYs 2009, 2010 and 2011, expenses under the head Administrative expenses have been shown at USD 20,586, USD 21,796 and USD 27,661 respectively. Further, Legal and Professional fees has been incurred to the extent of USD 42,450, USD 5,718 in the FYs 2009 and 2010 resp .....

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ost, we consider Circular 789 dated April 14, 2000 issued by the CBDT, which states as follows: It is hereby clarified that wherever a certificate of residence is issued by the Mauritius authorities, such certificate will constitute sufficient evidence for accepting the status of residence as well as beneficial ownership for applying the DTAC accordingly . The above position has further been clarified by the Finance Ministry vide issuance of a clarification regarding TRC on March 1, 2013. When t .....

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rough banking channels in the initial as well as subsequent investments out of its own sources. Since the Applicant is an independent legal entity, it is not material that the money was received from the holding company, as held in several decisions, including Vodafone, Ardex, E*trade, JSH Mauritius etc. The shares were held and registered in its own name, both beneficially and legally; the motive was to invest in the S sector in India and other Asian markets as disclosed to various regulatory a .....

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that the quantum of both FDI and FII do not originate from Mauritius but from other global investors situate outside Mauritius….. 96….. on a subsequent sale/ transfer/disinvestment of shares by the Mauritius company, after a reasonable time, the sale proceeds would be received by the Mauritius company as the registered holder/ owner of such shares, such benefits could be sent back to the foreign principal/ 100 per cent shareholder of Mauritius company either by way of a declaratio .....

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proceeds received by the Mauritius company had ultimately been paid over by it to the foreign principal/ its 100 per cent shareholder either by way of special dividend or by way of repayment of loan received; or the real owner/beneficial owner of the shares was the foreign principal company. Setting up of a WOS Mauritius subsidiary/ SPV by principal/genuine substantial long-term FDI in India from/ through Mauritius, pursuant to the DTAC and Circular No. 789 can never be considered to be set up f .....

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conduit companies is not against law and the lifting of corporate veil is not permissible to deny the benefits of a tax treaty…….. 7.9.2 In the case of Ardex Investments Mauritius Ltd. (AAR /866 /2010), we held that: 6. It is true that the funds for acquisition of shares in the Indian company was provided by the principal, a company incorporated in the United Kingdom. The shares in the Indian company were first acquired in the year 2000. Subsequently further shares were acquired in .....

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quite convinced that the Applicant is not a fly by night or shell company . We therefore, answer the first question in favor of the assesse and against the Revenue. This Ruling was upheld by the Bombay High Court, in W.P. 3070 of 2016, wherein it was held that the AAR on considering the application and the documents and the facts on record had conclusively held that the transaction is not designed for avoidance of income tax. 7.9.4 The case in hand is similar and calls for a similar treatment, .....

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s as well, namely PTN and AB Philippines on the lines of many of its group companies in the S sector in India and other countries in Asia. Hence, the Revenue s argument that the investment was with an eye on the India - Mauritius Treaty only, is unacceptable, even though this was itself not taboo. 7.11 In conclusion, on this issue, we have to say that unless there are extraordinary and exceptional circumstances, as we noticed in the case of AB Mauritius, and as dealt with in AAR 1128 of 2011, we .....

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plicant. 8. Regarding question no. III on the applicability of section 195, (refer para 4.3) i.e. whether tax has to be withheld on the gains arising from the sale of shares, it has been held in GE Technology Centre P. Ltd. v. CIT [327 ITR 456(SC)] by the Hon ble Supreme Court that in cases where there is no chargeability to tax under the provisions of the Act, as per expressions used in the section itself (unlike section 92), there will be no obligation to withhold tax. Respectfully following t .....

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nsidered the matter. In a detailed finding on the issue, in the case of Castleton Investments Limited (AAR 999 of 2010), it was ruled by this Authority that: the applicability of section 92 does not depend on the chargeability under the Act. Literally in this case, the capital gains are chargeable to tax under the Act. They escape only in view of paragraph 4 of Article 13 of the DTAC and the ratio of the decision in Azadi Bachao Andolan on the applicability of the DTAC even when there is actuall .....

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ce Act, 2016, and the clarification issued by the CBDT dated 24 September 2015.This being so, we have no reason to disagree. 11. In conclusion, the questions referred to us for our Ruling are answered as under: 11.1 Questions I and II: Yes, the Applicant would be entitled to the benefits of the Agreement between the Government of Mauritius and the Government of the Republic of India for the avoidance of double taxation and prevention of fiscal evasion; and the income and capital gains arising to .....

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