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In Re : AB Holdings, Mauritius-II

2018 (2) TMI 855 - AUTHORITY FOR ADVANCE RULINGS, NEW DELHI

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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ed in the section itself (unlike section 92), there will be no obligation to withhold tax. Respectfully following that decision, we are of the view that there is no obligation on the Applicant to withhold tax in this case, as we have held that the capital gains arising in the hands of the Applicant was not chargeable to tax in view of paragraph 4 of Article 13 of the India – Mauritius DTAC. - Applicability of transfer pricing provisions - Held that:- As against the position in section 195 o .....

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115JB on the subject transaction - Held that:- The Applicant as well Revenue agree that the provisions of the said section shall not be applicable to foreign companies, as per the retrospective amendment to section 115JB by Finance Act, 2016, and the clarification issued by the CBDT dated 24 September 2015.This being so, we have no reason to disagree. The provisions of section 115JB shall not be applicable. - A.A.R. No 1129 of 2011 - Dated:- 8-11-2017 - Mr. R.S. Shukla, Incharge-Chairman And Mr. .....

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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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vest in S sector in India and other Asian markets, and has invested in AB International and companies in Philippines and Indonesia, which are engaged in S business. The shares of AB were acquired as under: Particulars Number of shares Share purchase on 10 Dec. 2008 9,900 Share purchase on 14 May 2009 75,52,000 Share purchase on 6 November 2009 12,90,358 Total shares 88,52,258 2.3 The Applicant made further investment from time to time as mentioned below: Dates of Capital infusion Number of share .....

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remittances were for the acquisition of shares and the money had come from the Applicant. 2.5 As part of the corporate strategy of the Group, to support its business in the Asia - Pacific region in the medium to long term, and to obtain operational and cost benefits from centralizing the ownership of investments and operations in Asia - Pacific region, a regional headquarters in Singapore was proposed. Pursuant to filing the Application, AB Singapore was incorporated in August 2011. The Group r .....

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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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d also invested in other companies, namely PTN and AB Philippines. The transfer of shares held for almost 3 years in AB International and other Group companies was undertaken with a view to implement the overall Group strategy and business re-organisation. Further, the Applicant continued to hold the shares of AB International for another 4+ years indirectly through its subsidiary, AB Singapore. 3. On the above facts, as submitted by the Applicant, the following Questions on which advance ruling .....

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s arising to the Applicant from the proposed sale of shares in AB India Private Limited ( AB India ) to a Group Company ( Transferee ) would not be liable to tax in India having regard to the provisions of Article 13 of the India-Mauritius tax treaty? III. If answer to Question 2 is in affirmative i.e. holding that the gains arising from the proposed sale of shares by Mauritian company are not chargeable to tax in India, whether there will be any obligation to withhold tax under section 195 of t .....

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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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cluding those of KP Varghese and AzadiBachaoAndolan. Support has also been taken from AAR Ruling numbers 826, 855, 878 and 879 and the case of DLJMB Mauritius (228 ITR 268). 4.2 In respect of Question II, it is stated that being eligible to avail benefits under the DTAC, by virtue of Article 13(4) thereof, capital gains earned by the Applicant from transfer of shares of AB International would not be liable to tax in India, in view Circular nos. 682 and 789, and decisions in UOI v Azadi Bachao An .....

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Another vs CIT [(1999) 239 ITR 587]; and recent rulings of the Hon ble AARin case of JSH Mauritius Ltd, Dow Agri and Shinsei (supra). 4.4 In respect of Question IV, that sale of shares by the Applicant would not give rise to any tax incidence in India and hence the transfer pricing provisions contained in section 92 to section 92F of the Act would not apply to the proposed transaction it relies on the ruling of Bombay High Court in case of Vodafone India Services Private (368 ITR 1), Shell India .....

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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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service etc. The Applicant has no assets or employees of its own in Mauritius, and all its activities are done by the Management company. Its expenses consisted only of legal and professional fees. 5.3 Two out of the three directors of the company are employees of the management company, and Mr. S , managing partner of C Group is the key director of the company. As per his passport details he was not present in Mauritius when key decisions were said to have been taken by the Board, as per his p .....

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porated in Mauritius only to take advantage of the India Mauritius DTAC. 5.5 As a part of business re-organization, the Applicant sold its entire shareholding in AB International to another company AB Singapore, for a consideration of shares of Singapore company equalling the fair market value of shares of the Indian company. 5.6 It is submitted that the nature of the transactions give an impression of a colourable/artificial device that is employed for the purpose of avoiding tax. As seen from .....

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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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of Directors: 1. Mr. S , an American national residing in the US, 2. Mrs. KPR , residing in Mauritius, 3. Mr. AS , residing in Mauritius. From the information available, it is stated that Revenue found that Mrs. KPR is a financial services consultant catering to about 400 client companies, in the areas of accounting, corporate secretarial service, as an employee of International Management, as seen from the website of the stock exchange of Mauritius. The role of Mrs.KPR, if any, in the affairs o .....

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company law makes it compulsory for companies incorporated in Mauritius to include at least two Mauritius residents in the board of directors. Applicant company has complied with the above stipulation by having these two non- executive directors, who are residents of Mauritius. Thus, it can be seen that Mr. S is the person who takes key decisions in the board of directors. 5.9 However documents supplied by the Applicant prove beyond doubt that the important decisions regarding investment and dis .....

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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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that without a majority of the directors, took the important decision of additional investment in a subsidiary company. Again this leads to the inference that there were no board meetings conducted in Mauritius. Thus it is clear that the place of effective management of the Applicant was in the US and not Mauritius, as been claimed by the Applicant. Mere presence of accounting professionals does not render the site a place of management decisions to be in Mauritius. 5.11 It is also contended by .....

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ortantly, in view of the compliance undertaken by the Applicant Group, with respect to LOB Clause, it is no more possible to tax any future gains also, likely to be earned by the Singapore entity on the assets in India. Thus, the proposed restructuring is a good consolidation exercise that limits the rights of India to tax the capital gains avoided through the Mauritian paper company, i.e. the Applicant. This fact was also confirmed by the fact that BCS, USA has purchased AB India in June 2015. .....

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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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oidance was the involvement of a Mauritian entity, and unlike the present case, no peculiarity in the conduct of the Group was demonstrated. 5.15 Revenue has cited the OECD, and para 22 of its commentary, to make a case for substance over form, and to say that States do not have to grant the benefits of DTAC with arrangements that constitute an abuse of those provisions. The UN has also subscribed to this view in its commentary at para 21 of Article 1.It is submitted that the form and the manner .....

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5.16.1 It is submitted that the applicability of sec 93 depends on four conditions, namely that there must be a transfer of assets, and as a result of this transfer, either alone or in conjunction with associated operations, any income becomes payable to a non-resident; any person by means of such transfer acquires a right by virtue of which he has the power to enjoy the income of the non-resident person; and if the income had been the income of the said first mentioned person, it should have b .....

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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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tings have considered and approved the investments in AB International. The Applicant and AB International recognized the acquisition of the shares by the Applicant in their balance sheets. 6.3 Further, AB International recognized the Applicant as the shareholder in the members register maintained as per the Companies Act, 1956 and in the first balance sheet (year ending 31 March 2009). 6.4 The Applicant submits that the fund for acquisition of the shares of AB International came from the bank a .....

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in other companies as well, namely PTN and AB Philippines. Hence, the Revenue s argument that the investment was with an eye on the India - Mauritius DTAC is not correct. The following sequence of events would further support the contention of the Applicant: Particulars Date reference Date of incorporation 7 October 2008 Financial Services Approval for Category 1 Global Business License 9 October 2008 Date of Foreign Investment Promotion Board ( FIPB ) approval 22 October 2003 Stock Purchase Agr .....

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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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case of Aditya Birla to contend that the beneficial owner of shares of AB International is the C Group and not the Applicant is factually distinguishable. Relying on the Hon ble AAR ruling in case of Shinsei Investment (supra), the Applicant submits that it had acquired the shares of AB International and C Group was not even a party to the SPA, hence the ruling of the Bombay High Court in the case of Aditya Birla shall not apply to the Applicant. 6.8 The Applicant places reliance on Circular 789 .....

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i. 6.10 In support of its contentions, support has also been taken from the following cases: 6.10.1 Vodafone International BV (368 ITR 1) (SC); wherein it was held that: 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 for tax evasion. 6.10.2 Support has also been taken from other cases, to bolster its arguments against Revenue, such as: Sano .....

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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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to take all the decisions of the Company. In fact, the acquisition of shares of AB International was done by the Applicant after due consideration by its Board of Directors. Subsequently also the Board of Directors has from time to time reviewed their investments, made decisions with respect to further investment and disinvestment, independently from its parent company, the C Group. 6.13 In addition to the above, the Applicant submits that it satisfies all the conditions laid down by the Suprem .....

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acts in case of an investmentthrough Mauritius, and has held: 7 …….that shares have been subscribed by the Applicant in its own name and the bank statements filed show that the Applicant has paid for such subscription of shares. In these circumstances the Applicant cannot be termed as a permitted transferee as was the case in Aditya Birla Nuvo...…….. .Once it is established that the Applicant has made investment on its own and Shinsei Bank Ltd was party to SPA only in .....

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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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ive plea in invoking section 93, the Applicant submits that this is an anti-abuse provision and takes its color from the erstwhile section 44D of the Income-tax Act, 1922. It refers to the Law Commission Report of September 26, 1958, which says that the provisions of section 44D of the Income tax Act, 1922 were intended to be applied in the hands of the residents, and that the reference to first mentioned person appearing even in the Income tax Act, 1922 was intended to effectively refer to pers .....

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there is no externalizing of asset in the form of capital/loan nor the Applicant or C Group are residents of India. Hence, the provisions of section 93 of the Act are not applicable to the subject transaction in Applicant s case. Otherwise also, Sec 93(3), exempts bonafide transactions. 6.17.2 Without prejudice to the above, it is submitted that the provisions of India - Mauritius DTAC cannot be overridden by the provisions of the Act. The provision of section 90(2) of the Act is very clear that .....

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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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to invest in S sector in India and other Asian markets. It accordingly made investment in AB International on different dates, between 2008 and 2015, and finally divested its investment in AB International, in favour of AB Singapore, a group company. It is also clear that both the setting up of the Applicant company, as also its investments were done through proper banking channels, as seen from the copies of its bank accounts in Mauritius, copies of which have been furnished. It is seen in the .....

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hares from AB International to AB Singapore, a group company, in 2012 was done along with shares of other Group companies also, as part of a re-organisation, which indicates a long term business and commercial purpose. In fact, later AB Singapore made further investments in AB International in 2013, showing a long term business perspective of the holding company, as also ongoing business of investment, spread over almost 7 years, and not short term or overnight transactions for avoiding tax. We .....

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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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mpany, Mr. S was also a Director in the Applicant company, as also in many other companies of the group. Being in investment business and having identified the S sector in India, and elsewhere, as an investment destination, it is only logical that he would have a persuasive influence on the investment decisions of the company, irrespective of where he was located. His presence may be required at all or any of these places. His travel details show that he had made as many as 11 trips to India and .....

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, to be physically present in each and every meeting, and communication is validly done through electronic audio and video devices. In the totality of circumstances, Mr. S and the other Directors movements in and out of Mauritius at different times, alone cannot lead to the conclusion that the control and management of the company was not in Mauritius, or that it was with the holding company. 7.5.1 As regards the role of the other Directors on the Board, as referred to by Revenue, it is seen fro .....

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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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from some unwritten clauses, as was pointed out by Revenue in the case of AB Mauritius dealt with in AAR 1128 of 2011, and in which we have taken an adverse view. 7.5.2 Regarding the office / place of management, Mauritian tax authorities have certified that the place of business of the Applicant is at the given address in Mauritius, the returns filed show this address and Board meetings also take place at this address, as mentioned in the Resolutions. Further, in the case of Investment companie .....

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ectively. At the cost of repetition, it has to be mentioned that this is not a manufacturing or trading company, requiring day to day dealings with buyers and sellers, distributors, financers, marketing staff, logistics etc., so as to have several accounts under which payments are received or paid. 7.6 In view of the foregoing factual position, and keeping the context of an Investment holding company in mind, where its only business is of making investments and gaining from capital appreciation, .....

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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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held as benami. These are: (i) the source from which the money came; (ii) the nature and possession of the property after the purchase; (iii) the motive in giving the transaction a benamicolour; (iv) the position and relationship of the parties; (v) the custody of the title deeds; and (vi) the conduct of the parties after the sale of the property. Of these, the source from which the money came is considered the most important. 7.8.1 In the instant case, the money was invested by the Applicant th .....

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uthorities; it was a subsidiary of the C Group but acted independently; and it had the custody of the share certificates which were dematerialized in 2012, being the shareholder. Thus, it met all the requirements and no adverse conclusion is possible, such as to hold that it was a benami of the holding company. 7.8.1 In Vodafone International Holdings BV (341 ITR 1),the Hon ble Supreme Court held that: Every strategic foreign direct investment coming to India, as an investment destination, shoul .....

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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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of the Treaty by stating that FDI was only routed through a Mauritius company, by a company/principal resident in a third country; or the Mauritius subsidiary is controlled/managed by the foreign principal; or the Mauritius company had no assets or business other than holding the investment/shares in the Indian company; or the foreign principal/100 per cent shareholder of Mauritius company had played a dominant role in deciding the time and price of the disinvestment/sale/transfer; or the sale .....

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or tax evasion. On the facts of the instant case, the Applicant fulfills all the criterion laid out above, and its investments in the Indian company cannot be questioned, when no other peculiarity or illegality is noticed, especially with regard to the flow of actual funds for investment in AB International. It is the legal and beneficial owner of shares and fully competent to transfer the same. 7.9 We also find that the Applicant s attempt to take support from the cases of E*Trade, Ardex, and J .....

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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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characterized as objectionable treaty-shopping………. . The decision in Azadi Bachao Andolan has even gone to the extent of holding that treaty-shopping itself is not taboo….. 7.9.3 In JSH Mauritius (supra) we held that: 16. We have examined the rulings and we find in all the rulings a heavy reliance is placed on the aforementioned ruling of the Supreme Court in Azadi Bachao Andolan. We are in complete agreement with the above rulings. 17. ……….We are .....

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as the Applicant is the legal and beneficial owner of the shares that have been lawfully and accounting wise correctly invested in AB International, as per legitimate and independent decisions of its Board of Directors. 7.10 Revenue has referred to the cases of Azadi Bachao Andolan (263 ITR 706), Vodafone case (341 ITR 1), and to Adtya Birla Nuvo (342 ITR 308). However, these are not applicable on the facts of this case, which are clearly distinguishable and do not portray the entire transaction .....

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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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ct, and the Applicant s response to the same. Considering the fact that we have ruled that the investments made by the Applicant in AB International were not for tax avoidance, and suffered from no such infirmity as would take away the benefit of the India - Mauritius DTAC, this issue of section 93 becomes academic, in fact inapplicable to the facts of the case. We do not, therefore, consider it necessary to deal with the same, especially as that is not one of the questions posed to us by the Ap .....

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hat decision, we are of the view that there is no obligation on the Applicant to withhold tax in this case, as we have held that the capital gains arising in the hands of the Applicant was not chargeable to tax in view of paragraph 4 of Article 13 of the India - Mauritius DTAC. 9. In respect of Question IV, against the Applicant s contention (refer para 4.4) that transfer pricing provisions would not apply, the Revenue submits that Chapter X of the Act does not contain any such requirement of ta .....

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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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