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2018 (2) TMI 856

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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double taxation and prevention of fiscal evasion, with respect to taxes on income from capital gains. - Applicability of section 195 - i.e. whether tax has to be withheld on the gains arising from the sale of shares - Held that:- 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. - Applicability of transfer pricing provisio .....

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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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early states that the Applicant is 99% shareholder of AB India. In the regulatory filings in Mauritius in July 2003, it was specifically stated that the Applicant will initially hold investments in AB India. 2.3 It acquired 2,011,482 shares in AB India for an amount of USD 380,160 from AB Inc. and US Inc. USA (Sellers). These were acquired by the Applicant vide Stock Purchase Agreement (SPA) dated 10 November 2003, and since then the Applicant has been holding the shares legally and beneficially .....

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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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e various regulatory authorities including FIPB, RBI and the Income-tax authorities in India and Mauritius. Further, during the course of AB India s assessment proceedings for various years, time and again the income tax authorities have requested for details of shareholding pattern of the Applicant. 2.8 AB India, in the year 2009-10 had done a buy-back of shares, wherein the Applicant offered 486,090 shares under the buy-back offer and the gains on such buy-back was considered as exempt under t .....

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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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ng, AB India continued to carry on its business activities in India. 3. On the above facts, as submitted by the Applicant, the following Questions on which advance ruling is sought, have been framed and which form part of the application: 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 .....

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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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; JSH Mauritius Ltd, AAR No.995 of 2010, which has been subsequently upheld by the Hon ble Bombay High Court, Writ Petition No.3070 of 2016; Mahindra Investment Company (Mauritius) Ltd, AAR No. 991 of 2010; Shinsei Investment Limited, AAR No. 1017 of 2010; and CBDT circular No. 682, dated March 30, 1994. 4.3 In respect of Question III, the Applicant contends that since the gains on transfer of shares is not taxable in India, the consideration received by the Applicant would not be subject to any .....

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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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as acquired 2,011,482 shares in the Indian company, being 99% of the shareholding, without paying any amount whatsoever, as consideration. Thus, the shares were transferred by the two US entities to C Equity partners and C Affiliates , also US entities, against the cancellation of the entire loan payable by the two US entities. It was thus a transaction between two sets of US entities. 5.3 Revenue has submitted that the Applicant had no role in the above transaction. Its name was only interposed .....

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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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eference to the acquisition of Equity shares in AB India, it is stated that …..Mr. S informed the Board that following the re-organization of the group, of which the Company formed part, that the company has on 10 November 2003, acquired 2,011,482 equity shares in AB India, as also about the Stock Purchase Agreement, giving details of the acquisition. As per Clause 4.2, the Board took note of the business activities of AB India which included…… .Per Clause 4.3, following a q .....

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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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held by the applicant company for or on its own account. 5.12 It is reiterated that Mr. S was appointed as a Director of the applicant on 23 August 2005 long after the signing of the agreement. As on the date of the Stock Purchase Agreement, he had no authority to bind the applicant in any agreement. He was actually the MD of the C Group since 1995 and was so at the time of signing of the Stock Purchase Agreement. 5.13 Revenue submits that another important factor to decide the genuineness or ot .....

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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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obviously not signed or addressed by the applicant company. It only affirms that the company proposed to be incorporated would invest in India. It does not and cannot establish that such investment was really made by the Applicant. 5.17 As regards the application before FIPB in India, the same was made by the Indian company as seen in the approval letter. It is not a case before FIPB that the applicant company declared their intentions to invest in the Indian company. On 22 October 2003 when th .....

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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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ent on record to suggest that AT &T, Mauritius had agreed to subscribe/purchase the shares of JVC. Hence the payments made by AT&T, Mauritius could not be said to be payments for subscribing/purchasing the shares of the JVC in the name of AT&T, Mauritius. Mention has also been made of the cases of Ardex Investments Mauritius Ltd, (AAR 866 of 2010), Castleton investment Ltd AAR 999 of 2010, Dow Agri Sciences, AAR 1123 of 2011, as referred to by the applicant, to say that in all these .....

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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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-resident person; and if the income had been the income of the said first mentioned person, it should have been chargeable to income tax. It is stated that in the present case all these four conditions were met. Hence the income arising to the Mauritian entity should be deemed to be the income of the US entity, the C Group. 5.27.2 It is submitted that treaty provisions override the domestic law to the extent that there exists a conflict between the two. Such conflict is usually seen in the conte .....

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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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atements of AB India for the period ending 31 March 2004 show the Applicant as the shareholder. 22 December 2004 The Board of Directors record the acquisition of shares and the loan taken over in detail. Further, it is important to note that the said Board of Directors meeting minutes also reflect that the shares have been acquired for and on behalf of the Applicant. 6.2 The contention of the Revenue that the Board of Directors of the Applicant were not aware of the investment being made by the .....

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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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y. The Applicant submits that for a transaction to be genuine and the real owner being the recipient of shares, there is no requirement that there shall be actual flow of cash, as in barter system. Further, there is no specific provision in the Act which prohibits consideration other than cash. In the present context, the Applicant submits this is a similar situation, wherein the loan liability which was receivable by C Group was now transferred from the Sellers to the Applicant, which was event .....

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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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ue that the shares have been acquired by C Group is also not correct, as the loan which was receivable from the Sellers was now receivable from the Applicant, which was the consideration payable to the Sellers for acquisition for the shares in AB India. This fact is clearly brought out in the loan agreement and the annual account of the applicant company, which has been accepted by the statutory auditors, government and tax authorities in Mauritius and India. 6.10 With regard to the SPA being ex .....

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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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le doing so, the Revenue/ Courts should keep in mind the following factors: the concept of participation in investment; the duration of time during which the holding structure exits; the period of business operations in India; the generation of taxable Revenues in India; the timing of the exit; the continuity of business on such exit…. 95 ………… No presumption can be drawn that the Union of India or the Tax Department is unaware that the quantum of both FDI and F .....

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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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companies is not against law and the lifting of corporate veil is not permissible to deny the benefits of a tax treaty……..By virtue of the Circular 789 issued by the CBDT (which has been upheld by the Supreme Court), 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. 6.15 The Applicant further places rel .....

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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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the subject of treaty shopping, the Hon ble AAR in case of JSH Mauritius (supra) has held as following: 14. The above mentioned judgment will be a complete answer to the objections raised by the Revenue about the treaty shopping as also about the arguments under so called unethical aspect. We are therefore, completely convinced that in case of applicant the DTAC between Govt. of India and Govt. of Mauritius would be applicable and would govern the parties. ……….. 16. We have .....

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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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r 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 shareholders register as early as in December 2003. The Applicant places reliance on the Hon ble Supreme Court ruling in case of Howrah Trading Co Ltd v CIT, 36 ITR 215 (1959). 6.18 Regarding the allegation that the decision making of the Applicant is in the hands of the C Group and the Applicant mere .....

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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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tute an erosion of the faith and trust reposed by the contracting states in each other….. 6.21 The Applicant also relies on the CBDT circular 789 dated April 14, 2000 which states as following: It is hereby clarified that wherever a certificate of residence is issued by the Mauritian authorities, such certificate will constitute sufficient evidence for accepting the status of residence as well as beneficial ownership for applying the DTAC accordingly. Considering the above submission and .....

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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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dict the future 9 years from the date of making the investment. Its incorporation was not an afterthought and an interposed entity by C Group to take advantage of India-Mauritius DTAA by the C Group. On the basis of decided cases, it is submitted that the Revenue s allegation of the transaction being a colourable device for the avoidance of Income tax in India after a period of 9 years is untenable. 6.26 Regarding Revenues alternative plea in invoking section 93, the Applicant submits this is an .....

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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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cular 333 [F. No. 506/42/81-FTD], dated April 2, 1982. 6.27 Furthermore, regarding the argument of the Revenue that the DTAA provisions override domestic tax laws only when there exists a conflict between the two, it is submitted that the provisions of the Act are very clear to state that once a taxpayer is entitled to DTAA benefit, they shall be eligible for the same or the provisions of the DTAA, whichever are more beneficial. 6.28 In conclusion, the Applicant prays that once in its oral and w .....

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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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count, and must be visibly demonstrable. 7.3 In explaining how it was acting independently after being incorporated, the Applicant has, apart from the TRC and the FSC approval, laid great stress on the minutes of its Board of Directors meeting of 15 August 2003. However, these minutes of 15 August 2003 show discussions on the approvals granted, which were applied for and taken by the parent company or through AB India in which Mr. S , was a Director. It is not as though in this meeting, independ .....

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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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re and seal on an agreement for acquisition of shares. Further, such agreements would have full details of the consideration to be paid by each of the buyers, and in whose names shares are to be transferred. Ironically, while as many as 2,011,482 shares, valued at USD 380,160, were transferred to the Applicant, there was not a single clause informing or indicating its liability incurred for such an acquisition. This makes it clear that the Applicant s name was only superimposed in the Agreement .....

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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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cellation of debt), totaling USD 384,000, in full, for the shares acquired in AB India, they alone became the owners of the shares. The agreement itself says that the shares were transferred in the name of the companies which paid the consideration, i.e. the C Group. Having paid no consideration, as per the SPA, the Applicant could not be treated as the owner. It could only be benami or a name lender for the C Group. Regarding the Applicant s submission that it was the registered and beneficial .....

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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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greement with the C Group had agreed to share in the loan, being shareholders of about 20%, appears not to reconcile with the Balance Sheet, giving an indication that the SPA and the Loan Agreement were two different arrangements and not complementary to each other. This arrangement is also stated to be an oral one between these six persons and the C Group, and there is no evidence to this effect. 7.10 Coming now to the Financial Statements relied upon by the Applicant, and to claim that these w .....

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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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n explain the various lacunae noticed, and as discussed above. It had only lent its name and was a benami of the C Group. 7.13 Interpreting the various cases cited by both Revenue and the Applicant in the light of the above factual matrix we find that the decision of the Hon ble Supreme Court in Azadi Bachao Andolan, 263 ITR 706, holds good. In merely superimposing the name of the Applicant on a transaction done by the C Group, would render the transaction to be seen as a colourable device and a .....

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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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set up as an investment holding company. However, it is the subsequent conduct of the company that casts a shadow on whether it could be said to be the beneficial owner of the shares acquired throughthe SPA, which was neither signed by it nor mentions any consideration paid or payable by it. 7.13.3 As regards the case of Vodafone International BV, 341 ITR 1, which says that every strategic foreign direct investment coming to India, as an investment destination, should be seen in a holistic manne .....

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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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ourt relied on by the applicant also stress on this independence and require the Revenue to acknowledge it as well. However, in a case where the parent acts on behalf of its subsidiary and takes all its decisions, corporate veil between the company s subsidiary and its parent stands torn, not at the instance of the revenue, but by the conduct of the group itself. In the instant case where the companies are acting together as a group having C Group s Director sign agreements on behalf of another, .....

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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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ritian company, the Applicant; and the C Group, the Holding US companies. Also, in our view, the supremacy of the Treaty entered into between two sovereign states would prevail, unless some provision has been inserted with the specific objective to check non-genuine international transactions, such as the GAAR provisions. It cannot be deduced or inferred. 9. Now let us come to the other questions referred to us for a Ruling. 9.1 Regarding question no. III on the applicability of section 195, (re .....

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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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endment 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. 10. In conclusion, the questions referred to us for our Ruling are answered as under: 10.1 Questions I and II: No. 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 double taxat .....

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