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In Re : “AB” Mauritius

2018 (2) TMI 856 - AUTHORITY FOR ADVANCE RULINGS, NEW DELHI

Taxability of capital gains in India - transfer of shares held in ‘AB’ India to its subsidiary company, ‘AB’ Singapore - eligibility of benefits of India-Mauritius tax treaty - benami transaction - Held that:- Neither was the Applicant acting on its own behalf in taking decisions like an independent company with a separate legal status in a foreign territory, regarding the investment in ‘AB’ India, though it was an Investment Holding company itself; and also that the manner and accounting follow .....

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ncome in its hands. On the above facts, since the ‘C’ Group, comprising of two US companies had acquired the shares in ‘AB’ India from two other US companies, the gain having arisen in India in the hands of the ‘C’ Group of the US, was taxable in India as per the India-US DTAA. - In the above factual matrix, the Applicant, “AB” Mauritius, would not 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 .....

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ns - Held that:- As against the position in section 195 of the Act, there is no such requirement in section 92 that the transaction should result in income chargeable to tax under the Act. Hence, the transaction in the instant case of sale of shares in the Indian Company will have to be benchmarked as per the transfer pricing provisions contained in Chapter X of the Act. Transfer pricing provisions contained in section 92 to 92Fof the Act would apply to the proposed transaction. - Applicatio .....

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charge Chairman And Mr. Ashutosh Chandra, Member (Revenue) For the Applicant : Mr. Rajan Vora, CA SRBC & Associates Mr. Aditya Modani, CA SRBC & Associates For the Department : Mr. G C Srivastava, Special Counsel Ms. Kavita Pandey, CIT(DR) RULING ( by Ashutosh Chandra ) AB Mauritius (the Applicant) filed an application requesting an advance ruling on taxability of capital gains arising on transfer of shares held in AB India to its subsidiary company, AB Singapore. The Application was adm .....

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and C Affiliates Fund LP ( C Group) , which cumulatively hold 79.62% shares of the Applicant and the balance 20.38% shares are held by other individual investors. It s business activities are carried on from Mauritius and managed by its Board of Directors. The sole purpose of its incorporation was to invest in the S sector in India and other Asian markets. For acquiring the shares in AB India , it had obtained regulatory approvals from FSC in Mauritius and FIPB in India. FIPB in its approval cl .....

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, and enjoying all shareholder rights, including dividends. The SPA was executed by Mr. S , as an authorized signatory, representing the promoter group and being fully authorized by the Board of Directors of the Applicant. The Applicant submitted a letter from the Board of Directors clarifying and evidencing the authority of Mr. S to execute the SPA on behalf of the Applicant. These shares were taken over along with a liability which the sellers had payable to the C Group as per the loan agreeme .....

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Loans from shareholders(for investment) Loan from shareholders (for other business purposes) 380,160 6,674 Investment in subsidiary 380,160 2.5 The Applicant made further investment from time to time as mentioned below: Particulars Number of shares Share purchase on 1 Dec. 2003 2,011,482 Share purchase on 25 March 2007 636,855 Buy back of shares on 6 May 2009 (486,090) Total shares 2,162,247 It submits that it had made substantial follow-on investments amounting to USD 930,105 in 25 March 2007 i .....

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of investment. The Annual Accounts of AB India for the year ended 31 March 2004 give the following note for the change in shareholding: In December 2003, AB Inc. USA and US Inc. USA sold their equity investment in AB India to AB Mauritius and its holding company C Equity Portfolio II L.P. Pursuant to the above, the company has become the ultimate subsidiary of C Equity Portfolio II L.P. effective from December 2 2003. 2.7 The acquisition of shares by the Applicant has been in the knowledge of th .....

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he India - Mauritius Tax Treaty. The information of buy back was called by the Income tax authorities, including the tax treatment for the same, and tax exemption to the Applicant as per the India - Mauritius treaty was accepted. 2.9 The Applicant submits that 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 A .....

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arch on field and vegetable crops; c) Undertake the business of promoting, marketing and trading in hybrid S ; and d) Acting as an investment holding and management company for the Group in Asia- Pacific region; 2.9.1 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. 2.9.2 In order to ach .....

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n exchange of shares to achieve the objective. 2.10 Thus, prior to the transfer of shares to its subsidiary, the Applicant has held the shares of AB India for a period of 9 years, and thereafter, through AB Singapore for a further period of 3 years. By virtue of transferring the shares to AB Singapore , the Applicant s objective was not to earn any gains or earn immediate financial gains. The restructuring was solely motivated by business and commercial reasons. Furthermore, post the restructuri .....

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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 gains arising to the Applicant from the proposed sale of shares in AB India ( 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. hol .....

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acts and circumstances of the case the Applicant will be liable to tax under the provisions of section 115JB of the Act in relation to income earned from the proposed transaction? 4. Further to 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 .....

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, dated April 2, 1982. 4.2 In respect of Question II, it is stated that being eligible to avail benefits under the DTAA, by virtue of Article 13(4) of the DTAA read with section 90(2) of the Act, capital gains earned by the Applicant from transfer of shares of AB India would not be liable to tax in India, in view of the following: UOI v Azadi Bachao Andolan, 263 ITR 706 (SC); Serco BPO Private Limited vs AAR, CWP No.11037 of 2014; Dow Agri Sciences Agricultural Products Ltd, AAR No. 1123 of 2011 .....

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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, 327 ITR 456(2010), and Transmission Corporation of AP Ltd and Another vs CIT, 239 ITR 587(1999); recent rulings of the Hon ble AAR in case of JSH Mauritius Ltd, Dow Agri and Shinsei. 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 .....

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cable as per the retrospective amendment to section 115JB by Finance Act, 2016, and relies on the Supreme Court ruling in cases of Castleton Investments Limited, Dow Agriand Shinsei (supra) and the press release issued by Government dated 24 September 2015. 5. The Revenue, represented by Sri G C Srivastava, Special Counsel, 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 du .....

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of the Indian company came to be held in the name of the Mauritian applicant through the Stock Purchase Agreement of November 2003. The C Group , i.e.. C Equity Partners II, LLP and C Affiliates Fund, US, together acquired from AB Inc. USA, and 'US Inc. USA, a total of only 20,318 shares in the Indian company, being 1% of the shareholding, while it has forgone its total debt of USD 362,995 plus USD 21,005, i.e. USD 3,84,000, as a consideration for the same. On the other hand, the Applicant h .....

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in the agreement. Neither the preamble nor any clause in the Share Purchase Agreement makes any reference to the role of the applicant as a buyer. The US entities transferred the shares in consideration of the loans being cancelled by C Equity and C Affiliates . It is mentioned in the agreement that the shares were transferred to the entities which paid the consideration by way of cancellation of the liabilities, i.e. C Equity and C Affiliates . 5.4 It is further submitted that the agreement wa .....

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ubmitted a letter declaring Mr. S was authorized to sign. No minutes of the meetings of the Board of the applicant company have any indication that he was acting then as a representative of the applicant company. 5.6 It is submitted that there is no indication in the agreement that the Applicant either paid any consideration to the selling US entities or it took over the loans advanced by C Entities of the US. There was also no mention of any consideration flowing from the Applicant to the C Gro .....

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reaty benefits to a Mauritian company, it has to be ascertained that this company was in substance holding the investment on its own account. 5.9 Revenue further contends that the minutes of the meeting of the Board of Directors of the applicant held on 22 December 2004, show that evenone year after the acquisition of shares of the Indian company, the Board of Directors of the Applicant was not even aware of the investment held in its name. 5.10 Referring to above Clause 4 of the minutes, with r .....

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uestion raised by the Chairman on the profitability of AB India, Mr. S advised…….and per Clause 4.4, it was resolved to ratify the acquisition by the company of 2,011,482 equity shares of AB India and execution of the aforesaid Stock Purchase Agreement by Mr. S … . It was agreed that any future investments in AB India would be considered and approved by a Board meeting duly convened for that purpose. Clause 4.5 shows that the Chairman enquired on the financing of the aforesa .....

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the aforesaid 2,031,800 equity shares acquired in AB India, 2,03,142 equity shares were acquired for and on behalf of the company and 20,318 equity shares were acquired on behalf of C Equity Portfolio LP, a group company….. . 5.11 Thus, the applicant company had no knowledge of any such acquisition of the shares standing in the name of their company, prior to this date, and this fact exposes the falsity of the declaration in the agreement that Mr. S had at all signed on behalf of or under .....

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ing. The minutes also record that the amount of investment has already been shown as a loan advance to the applicants by the parent company and the applicant company was advised to give a similar treatment of the amount in the books of accounts. The Board of Directors ratified the acquisition and the advancement of loan to the applicant.The minutes also state that the shares were acquired as a result of the re-organization of the group. In these circumstances, the shares could not be said to be .....

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herwise of holding of investment is the consideration flows between the contracting parties. In the present case the C Group has foregone its receivables from AB Inc. USA, for acquiring the shares of the Indian company in the name of the applicant. But the real question is whether the applicant has paid any consideration to AB Inc. or the C Group for acquiring the shares. There is no mention of any consideration being payable by the applicant in the Stock Purchase Agreement or in the application .....

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o be highly suspicious, because the Stock Purchase Agreement contained reference to all the considerations but has no reference to this loan agreement, it does not mention anywhere that the loan relates to the subject transaction, the agreement was submitted much after the absence of consideration was questioned in these proceedings, and most importantly the minutes of the meeting of 22 December 2004 show that enquiry regarding financing of the shares was being made by the Directors, and Mr. S o .....

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s which originally held the shares. The applicants only lent their names to these investments at a later time through a ratification and did not hold the investment on their own behalf but for and on behalf of the C Group entities, as mere name lenders. 5.16 As regards, the submission of the business plan before the regulatory authorities in Mauritius, Revenue submits that the said letter is dated 7 July 2003 and was filed long before the incorporation of the applicant company and was therefore, .....

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e application before FIPB was made, the share purchase agreement was not even entered into and there is nothing to indicate that the applicant would be investing in India for an on its own behalf or to the applicant company was aware of any such investment being made in the name. 5.18 Regarding the annual accounts, Revenue states that it will only reflect the apparent and not the real state of affairs. The annual accounts for the period closing in June 2004 were audited and filed in May 2005 nea .....

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f which the Indo US DTAA would apply and not the Indo Mauritius treaty. 5.20 Revenue has referred to the case of Azadi Bachao Andolan, 263 ITR706, wherein the Hon ble Supreme Court held that, a colourable device, as in the instant case, is impermissible tax avoidance. It is stated that seen in the background of the Vodafone case, 341 ITR 1, it would fall under the exception as the apex court held that the subsidiary which acts as a puppet in the hands of its parent has to be disregarded, as in t .....

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efits of the treaty with that state. 5.22 Revenue states that this is different from a case where the Mauritian company made the investment on its own, irrespective of the sources from which the funds were raised. In the present case the investment was made by the US entity, the consideration directly flowed from the US company and the applicant merely lent its name. 5.23 Revenue has cited the case of Aditya Birla Nuvo, 342 ITR 308 where the Hon ble Bombay High Court held that there was no docum .....

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decisions Revenue s only argument for tax avoidance was the involvement of a Mauritian entity and unlike the present case, no peculiarity in the conduct of the group was demonstrated. 5.24 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 a double taxation Convention with arrangements that constitute an abuse of the provisions of the Convention….. The UN has also subscribed to this .....

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The look at versus the look through test propounded by the Hon ble Supreme Court in the case of Vodafone holds importance here.In this regard it is submitted that it is not the case of the revenue that ownership of the Indian shares cannot be of the applicant because the relevant documents do not exist. The point being highlighted is that what those arguments represent. In the instant case, if the Board of the applicant had convened a meeting before the purchase, decided to invest in India and .....

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ernative plea and contended that the transaction is squarely covered by the provisions of section 93 of the Act. 5.27.1 It is submitted that the applicability of sec 93 depends on four conditions, namely that there must be a transfer of assets, 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 .....

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xt of distribution of income sources between the countries. However in the case of treaty abuse, there does not exist any conflict 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. It cannot be limited to a resident person. 6. In its written submissions and during the course of these proc .....

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ly and 10 July 2003 Submission of business plan and application to FSC are mandatory for incorporating a company in Mauritius. The application to the FSC and submission of business plan which clearly brings out the fact that the Applicant is being incorporated to invest in S sector in India and other Asian countries and the initial investment would be made in AB India. 10 August 2003 Incorporation of the Applicant 12 August 2003 Grant of Global Business License by the FSC pursuant to furnishing .....

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ning approvals from the regulatory authorities in India and Mauritius, SPA dated 10 November 2003 was entered to acquire the shares and the consideration for such acquisition was discharged by taking over a loan/ liability by loan agreement 30 November 2003 which the seller owed to the C Group. December 2003 The Applicant and AB India records the acquisition of shares in its books of accounts. Shares were transferred in the name of the Applicant on 1 December 2003. 31 March 2004 The financial st .....

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Applicant until the board meeting on 22 December 2004 is also not correct as the Board of Directors in their meeting on 15 August 2003 considered the GBL license granted by the FSC pursuant to the application and business plan submitted, which clearly mentions the intent to invest in AB India. Relevant extracts of the board meeting minutes of 15 August 2003 are reproduced below The Chairman also reported that the Company has applied and was granted a Category 1 Global Business License by the Fin .....

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nterpreted the language of the application made to FSC and business plan to suggest that the investments are being held by the Applicant in the name of C Group. In essence the actual meaning of the said statement is to incorporate a wholly owned subsidiary to act as an investment holding company for the Group, which is an accepted way of making investments followed by several corporate. Support has been taken from the following cases: In Vodafone International BV, 368 ITR 1(SC), it was held that .....

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itself a legitimate, established and globally well recognized business/commercial avocation. 6.4 Regarding Revenue s contention that no consideration has flowed from the Applicant to the sellers, it is stated that the shares in AB India were acquired by the Applicant from the Sellers and the consideration for such acquisition was discharged by the Applicant by taking over the loan/ liability which they owed to C Group. Thereby, resulting in the Applicant acquiring an asset along with a liabilit .....

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ually paid by the Applicant through banking channels. 6.5 The Applicant submits that Revenue s reliance on the cash flow statement which shows no inflow and outflow of funds for acquisition of shares and that the acquisition has been made by virtue of adjustment entry is misplaced and inaccurate. The acquisition of shares was done along with taking over a liability of the seller, which is the due consideration for such a transaction and the said transactions were effected through accounting entr .....

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of the Applicant and the same being recognized by the Indian company in December 2003, and since then it was known to income tax authorities and various other government authorities, the acceptance of the tax treatment at the time of acquisition and buy back, clearly reflect that the Applicant was the rightful owner of the shares since the beginning. 6.7 The Applicant states that the understanding of the parties with respect to the transaction is important and it is left open to the parties invo .....

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ount. 6.8 It is further submitted that the six additional individuals who are reflected as party to the loan agreement are also the shareholders of the Applicant and hold approximately 20% share in the Company. These individuals have become party to the loan agreement on the basis of an arrangement between the C Group and the individuals, as they were also the investors in C Group , and for taking over certain portion of loan that Sellers owed to C Group. 6.9 Further, the allegation of the Reven .....

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ecuted by Mr. S , who was neither the Chairman or Director of the Applicant, the Applicant relies on the Board of Directors meeting minutes of 22 December 2004, to say that it clearly brings out the fact that the shares have been acquired for and on behalf of the Applicant by Mr. S , who was authorized by the Applicant to act on its behalf. Further, the Applicant submitted a letter from the Board of Directors certifying that Mr. S was authorized to act on behalf of the Applicant. Relevant extrac .....

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on of any documents related to the aforesaid loan by any of the C Directors or Mr. S , for and on behalf of the Company The letter for Board of Directors authorizing Mr. S reads as under: This letter is to certify that Mr. S was authorized by the Company to act on its behalf to execute the Share Purchase Agreement to buy the shares of the AB India from AB Inc., USA and US Inc. USA in 2003. 6.11 Revenue s contention that Mr. S signed the Stock Purchase Agreement on behalf of the promoter group bu .....

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the years received dividends amounting to USD 3,835,584. The Applicant has utilized the dividend received for its business activities as per the direction and decisions made by the Board of Directors of the Applicant. 6.13 In support of its contentions, the Applicant submits that Hon ble Supreme Court ruling in case of Vodafone International BV (341 ITR 1), held that: Every strategic foreign direct investment coming to India, as an investment destination, should be seen in a holistic manner. Whi .....

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II 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 declaration of special dividend by the Maurit .....

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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 proceeds received by the Mauritius .....

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also places reliance on the judgement of the Hon ble AAR in case of E*Trade Mauritius Ltd., AAR 826 of 2009, wherein the Hon ble AAR held as follows: 10… In this fact situation, ex facie, it is difficult to assume that the capital gain has not arisen in the hands of the applicant, more so when according to the binding pronouncement of the Supreme Court, the motive of tax avoidance is not relevant so long as the act is done within the framework of law, the treaty shopping through conduit .....

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iance on the Hon ble AAR ruling in the case of Ardex Investments Mauritius Ltd., AAR866 of 2010, wherein, on beneficial ownership of shares held in an Indian company, the AAR held as following in context of India - Mauritius DTAA 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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to all of a sudden. May be, the formation of this subsidiary in Mauritius was with an eye on the India-Mauritius Treaty. At worst it might be an attempt to take an advantage of a Treaty. But, that by itself cannot be viewed or characterized as objectionable treaty-shopping…………. .The decision in AzadiBachaoAndolan has even gone to the extent of holding that treaty-shopping itself is not taboo. ………………………. B .....

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view of the beneficial ownership of the shares vesting in the company in the UK. At worst it could be said to be the case of the treaty shopping. Even then, in the light of the decision of the Supreme Court in AzadiBachaoAndolan, no further enquiry on the question is warranted or justified. We may also notice that this is not a case of so called gift or transfer without consideration of shares that is contemplated, but a sale at market rate 6.16 The Applicant submits that on similar facts and on .....

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examined the rulings and we find in all the rulings a heavy reliance is placed on the aforementioned ruling of the Supreme Court in AzadiBachaoAndolan. We are in complete agreement with the above rulings. 17. ……….We are 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. The Applicant further draws attention to the Bombay High Court ruling in case of JSH Mauritiu .....

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ring this aspect, it has been observed by the AAR that the Respondent is not a Fly By Night or a ShellCompany……. 6.16.1 The Applicant submits that in case of JSH Mauritius Ltd, the facts were similar to that of the Applicant, and the AAR and the Bombay High Court has held that Mauritius company would be eligible for the benefits of the India - Mauritius DTAA and mere routing of investments through Mauritius shall not make it tax avoidance. Additionally, the Applicant submits in JSH .....

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ciences (supra) under similar facts as that of the Applicant has upheld the availability of the India - Mauritius DTAA. 6.17 As regards Revenue s allegation that the Applicant is a name lender or benami of C Group, it is submitted that this understanding is misplaced. 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 shareholde .....

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ly acts like a puppet, it is submitted that the Applicant, through its Board of Directors takes all its decisions for its day to day operations, strategic decisions, etc., as evidenced from its board minutes, whereby the Board of Directors of the Applicant meet in Mauritius to take all the decisions of the Company. In fact, the acquisition of shares of AB India was done by the Applicant after due consideration by its Board of Directors, who had full knowledge about the incorporation of the Appli .....

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estment I Ltd (AAR 1017 of 2010) has also examined the Aditya Birla Nuvo Ltd (supra) facts in case of an investment through 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. The facts in Aditya Birla Nuvo were entirely differen .....

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t submits that the customary principle of pactasuntservanda should be applied and the India - Mauritius DTAA shall be applied in good faith and also refers to the ruling of the Hon ble Punjab and Haryana High Court in case of Serco BPO (supra) which has held that ……..30……This 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 consti .....

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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 to be dismissed. 6.22 Regarding the allegation that the incorporation of the Applicant was an afterthought and interposed by C Affiliates Fund to take advantage of India-Mauritius DTAA, and that the transaction is a brazen and colourable device for the avoidance of tax in India, it is submitted that the Applicant has always over t .....

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al of shares of AB India, establishment of regional headquarters, and authorizations given to Directors to negotiate on behalf of the company etc. 6.23 The Applicant states that the transaction has to be looked at holistically in view of the decision of the Hon bleSupreme Court in case of Vodafone International BV which lays down various factors which must be kept in mind in taking a holistic view. In addition to the above, Courts/ AAR have held time and again that setting up of Mauritius subsid .....

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ia to a subsidiary of the Applicant, AB Singapore . The Applicant submits that at the time being referred to by Revenue there was no exit by the Applicant from the investment in AB India but a group restructuring to achieve the overall business objective of the Group. It is furthermore submitted that the allegation of the Revenue that the whole transaction in 2003 has been structured in order to take the benefit for the aforesaid transaction is misplaced, as it is not reasonable to assume or pre .....

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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 persons who are residents in India. To support the above inference, the App .....

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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. 6.26.2 Without prejudice to the above, it is submitted that the provisions of India - Mauritius DTAA cannot be overridden by the provisions of the Act. The provision of section 90(2) of the Act is very clear that the provisions of the DTAA shall prevail .....

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e Rules (GAAR), which specifically provides for DTAA override. Mauritius DTAA does not have a limitation of benefits clause and in the presence of the CBDT Circular 789 of 2000, the argument that the investment made through SPV in Mauritiusis for avoidance of tax is factually and legally incorrect and untenable. 6.26.3 In this connection the Applicant has placed reliance on the Hon ble Supreme Court ruling in case of UOI v Azadi Bachao Andolan, CIT v. P. V. A. L. Kulandagan Chettiar and CBDT Cir .....

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ritten submission, Revenue have acknowledged that the Applicant is tax resident of Mauritius and by virtue of TRC and Circular 789 entitled to benefits under the DTAA and is not a fly by night company, the Applicant is eligible for the benefits under the DTAA, and it is the Applicant to choose to be governed by either the DTAA or domestic tax provisions, whichever are more beneficial. 7. We have considered the questions posed to us by the applicant, the details, documents and Financial Statement .....

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decision-making process, on which Revenue has raised objections to say that the Applicant had only lent its name and was a benami of the C Group. We consider these aspects important, for the reason that any separate legal entity that puts up a claim for any benefit, under any law or Treaty, must first establish that it is acting on its own behalf, and even more importantly, that the asset sought to be alienated and which results in some gain, actually belongs to it. 7.2 The applicant company wa .....

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nd the appended Global Business Plan, also mentioning that the company would initially hold investments in AB India. Hence, the incorporation of the Applicant and the stated objects do not come into question, as it is the Holding company which takes these decisions of setting up a subsidiary and chooses its objectives. It is at this point, ie. the point of incorporation, begins its journey as a separate legal entity, when its decisions and ownership of assets and liabilities can be taken into ac .....

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ent decisions were taken regarding where and in which sector the investments were to be made, leave alone the quantum and the source thereof. It is seen that FSC approved the Global Business Plan on 22July 2003, ie. prior to its incorporation, and the above information was nothing but part of the application made on 10 July 2003 for the FSC approval. Hence, in this meeting, the Board of Directors merely reiterated what the Holding company had decided. Similarly, the FIPB approval at best only sh .....

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his is clearly illustrative of the fact that the Applicant had no role whatsoever in taking the decision with regard to acquisition of the shares in AB India from the US sellers. The Applicant s assertion that the agreement was the result of an understanding between all the parties is unacceptable. There could be scope for reading more than what is written or some understanding if there was some document or minutes or clause in the agreement that required or was capable of different interpretati .....

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gap in the very obvious lacuna, namely that it was Mr. S , MD of the Holding company, and not any Director of the Applicant who signed this very important decision and document, ie. the SPA. There are no decisions or discussions in the Board to show that he was authorized. It has to be understood that the Applicant is an Investment holding company. In a dynamic global scenario these decisions on investment are made after great deliberations in the Board of Directors before putting their signatu .....

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as part of some arrangement, of which the Applicant was not aware at all. 7.6 The above picture that the Applicant was a mere spectator gets confirmed from the minutes of the Board of Directors meeting of 22 December 2004, that is a full year later. In this meeting, as brought out by Revenue, for the first time Mr. S informed and the Directors took note of the happenings with regard to investment; enquiries were made about the financing arrangement; they were informed about the reorganization in .....

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s accounts. It was only now that the Board stated that the transactions were done for and on behalf of the Applicant. Clearly the Board of Directors was neither managing nor controlling its crucial investment decisions, for which it was stated to be set up. 7.6.1 Detailed narration of the activities post 2003 are of no avail as we are concerned with the happenings of 2003, when the Applicant is stated to have acquired the shares, as that is the relevant period for determining its independent sta .....

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nc. USA, a total of only 20,318 shares in the Indian company, being 1% of the shareholding, while it has forgone its total debt of USD 362,995 and USD 21,005, respectively, i.e.. USD384,000, as a consideration for the same. Very surprisingly, on the other hand, the applicant has been shown to have acquired 2,011,482 shares in the Indian company, ie. 99% of the shareholding, without paying any amount whatsoever, as consideration. Since the consideration was paid by these C Group companies (by can .....

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owner of the shares as per the shareholders register as early as in December 2003, we have to say that when the SPA speaks of no consideration paid or payable by the Applicant, the question of its acquiring any shares in AB India did not arise, except only on paper or by inter posing its name. 7.8 Since the ownership of shares in AB India could not be accepted unless a consideration of equal amount was paid by it, the Applicant has produced before us in 2016, a Loan Agreement, dated 30 November .....

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ed by Mr. S , without any authority, the Loan Agreement was signed by a Director, both around the same time. There is no indication in either document that one relates to the transaction mentioned in the other, or that the debt owed by the sellers to the C Group stood transferred to the Applicant. 7.9 The above issue has been explained by the Applicant as being an understanding between the parties concerned, to have two separate agreements. It is difficult to accept this position. In a major tra .....

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Agreement not knowing the purpose of the loan. These transactions between three sets of companies in three different countries cannot be said to have been guided by oral arrangements, as argued by the Applicant. 7.9.1 Besides, the Loan Agreement also has an Annexure where the names of six other individuals are given, which indicates that this Agreement and the SPA are dealing with completely unconnected issues. The explanation offered by the Applicant that these individuals on the basis of an a .....

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ere submitted to the Income tax and other authorities. Two things have to be said here - first, that financial statements in respect of the first year in which the shares were acquired were due in June 2004 but were actually filed much later in 2005. Also, these showed transactions as per the directions of Mr. S , who in the November 2004 meeting had advised incorporation of the loans and acquisition of shares in the books of accounts. Secondly, even if properly reconciled, they only represented .....

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lity and consideration. Further, as per the Applicant it is admitted that the shares were acquired by way of a barter system, and only book entries were passed, and the liability of the C Group was taken over as a consideration with no cash exchanged. It is intriguing as to how then there is a cash inflow appearing in the Cash Flow statement as part of the Financial Statements. This only establishes that these were only entries incorporated in the books, and that the loan reflected therein had n .....

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icant. 7.12 The above discussions lead to us to a situation that neither was the Applicant acting on its own behalf in taking decisions like an independent company with a separate legal status in a foreign territory, regarding the investment in AB India, though it was an Investment Holding company itself; and also that the manner and accounting followed in acquiring those shares only go to show that they were taken on its books on hindsight, at the directions of the Holding company. Only this ca .....

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n impermissible tax avoidance. The manner in which the name of the Applicant was brought in by stating that it had acquired the shares by taking over the debt owed by the US sellers to the C Group , the case clearly falls in the category of an exception being a mere name lender, as referred to in the case of Vodafone (341 ITR 1). Neither were the decisions for such take over taken by the Applicant, in fact it was completely unaware, nor did any consideration actually flow from it in any form, an .....

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necessary for us to allow the benefit of a Tax Treaty to the Applicant on such transactions. Similarly, it is seen that in the case of E*Trade, it is assumed that the transaction has been done in a lawful manner, whereas in the instant case, the Applicant was not even a signatory to the SPA by which the shares were handed over to it, without any consideration. In Ardex, the shares were acquired by the Company out of the funds made available by the parent. This is acceptable. But in the instant c .....

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T, it is agreed that the tax residency certificate issued by the Mauritius authorities is at least a presumptive evidence of beneficial ownership of the shares and the gains arising therefrom, even if it does not given rise to a conclusive presumption. In the instant case the applicant was incorporated in Mauritius for investing in the S sector and in India. Hence, when the TRC was obtained declaring the above intent, it was fairly granted the same. So the presumption would be right that it was .....

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r, the problem is with the very first of the suggested criterion, namely the concept of participation in investment, since in the instant case the investment came from the US companies in 1995, and only through a reorganization in 2003, the C Group acquired the shares for a consideration but simultaneously through a paper / oral agreement / arrangement the name of the Applicant was interposed. We would accept the arguments that it could not be denied the benefit of the India Mauritius treaty eve .....

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y the Hon ble Supreme Court in the case of Jaya Dayal Poddar, the Applicant could not be considered to be the beneficial owner of the shares in AB India, but only a benami. 7.14 In distinguishing the above cases, we do not wish to appear regressive or against promoting healthy and fair investment and business. Therefore, at this point it has to be said that it would be inconceivable that the C Group, being the Holding Company, would not be involved in any manner in setting up the subsidiary comp .....

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eking Treaty benefits. We cannot be seen as promoting such arrangements. 7.14.1 It has to be understood that the existence of a separate and independent status of a subsidiary in another territory is the core basis and foundation of the application of treaty law across the globe. Tax treaties throughout the world function on the premise that the subsidiary is an independent legal entity, different from its parent, even though controlled by it. The circulars and judgments of the Hon ble Supreme C .....

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without formally being on the Board and moving consideration to the convenience of the whole group, it can hardly be said that they are separate entities in substance. 7.14.2 As far as the accounts are concerned, the passing of an entry in the books cannot be taken to reflect the actual transaction, especially when seen in the context of the negligible role of the Applicant in the entire episode. We agree with the Revenue that a mere accounting entry without the actual flow of money or other co .....

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res, and that the capital gains derived on the transfer of those shares to AB Singapore was income in its hands. On the above facts, since the C Group, comprising of two US companies had acquired the shares in AB India from two other US companies, the gain having arisen in India in the hands of the C Group of the US, was taxable in India as per the India-US DTAA. 8. We have considered the Revenue s reference to the provisions of section 93 of the Act and the Applicant s response to the same. Thi .....

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e Applicant, holds good, wherein it was held that: The object of s. 44D of the Act, as disclosed by the provisions thereof, was to prevent residents of India from evading the payment of income-tax by transferring their assets to non-residents while enjoying the income by adopting devious methods…. 8.1 The provision in section 93 being similar in intent and purpose as section 44D, would therefore not be applicable in this situation where the transaction under consideration is between a Mau .....

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fer para 4.3) i.e. whether tax has to be withheld on the gains arising from the sale of shares, since in the instant case we have held that the income would be chargeable to tax in India, there would be a liability to withhold tax as required by this section. The cases cited by the Applicant are not applicable. 9.2 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 .....

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astleton Investments Limited (AAR 999 of 2010). 9.2.1 We have considered 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 AzadiBachaoAndol .....

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