TMI Blog2020 (2) TMI 1183X X X X Extracts X X X X X X X X Extracts X X X X ..... and providing supportive business environment. BSDM is an entity created two weeks before the filing of bid, it has no financial background, past experience or other unique skills to facilitate the instant business venture. The applicant could not provide any rationale or commercial basis for interposing of entity at fag end of the bidding process. The learned AR also could not provide any evidence as to how BSDM helped in doing business or providing support for the project. The points in its favor of applicant seem to be that it is tax resident of Mauritius holding a valid T RC and legal owner of shares which it disposed subsequently. We are unable to agree with the logic that the entity was brought in for ease of doing business or for operational reasons and to provide supportive business environment. The reason proffered by Ld. AR lacks substance and merit. First objection of the Revenue was admission of new entity at later stage was not ordained by EOI - AR has indicated that in the EOI filed by the consortium, it was stated that the final share holdings by three SA airport operators will be finalised once the requirement Of RFP are known and that GVK and the SA airport ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le 13(4) of Indo-Mauritius DTAA in regard to gains arising from the transaction of sale of shares. - AAR NO. 1270 Of 2011 - - - Dated:- 10-2-2020 - Kishore Kumar Vyawahare (Member (R), G. Chockalingam (Vice-Chairman) And Inder Kumar Member(L) Aarti Sathe, Adv. for the Applicant. S. Moharana and Satya Pinisetty for the Respondent. RULING 1. The Applicant is a Private Company with limited liability incorporated on 23 August 2005 under the laws of Republic of Mauritius and having its registered office at 6th Floor, Medine Mews Building, La Chaussee Street, Port Louis, Mauritius. The Applicant is a wholly-owned subsidiary Of Bid Services Division (Proprietary) Limited, a company incorporated in South- Africa. The ultimate holding company is the Bidvest Group Limited ('Bidvest'), a company incorporated in South Africa. Bidvest is an international services, trading and distribution company listed on the Johannesburg Stock Exchange South Africa. 2. The Applicant is a holder Of Category 1 Global Business License issued by Financial Financial Service Commission, Mauritius. The Applicant also holds a valid Tax Residency Certificate (TRC) issued by Mauriti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 54,000,000 10 Total 216,000,000 7. The Applicant has entered into a Share Purchase Agreement ('SPA') on 1 March 2011 along with subsequent addendums with GAHPL and GVK Industries Limited ('GVK'), the companies incorporated under the Indian Companies Act, 1956 wherein the Applicant has agreed to sell and transfer to GAHPL and GAHPL has agreed to purchase and acquire from the Applicant, the shares constituting 13.5% of the total paid-up share capital (comprising of 108,000,000 shares) of MIAL for the purchase price of US$ 231,000,000 (United States Dollar Two Hundred and Thirty One Million Only). 8. The shareholding pattern of MIAL after the transaction of sale of shares is as under: S.No. Name Of the Shareholder % of shareholding in MIAL At present Post transfer 1 AAI 26% 26% 2 GAHPL 37% 50.50% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in India:- (i) all income accruing or arising, whether directly or indirectly, through or from any business connection in Indio, or through or from any property in India, or through orfrom any asset or source of income in India, or through the transfer of a capital asset situate in India. 13. Accordingly, any income arising to a non-resident assessee through transfer of a capital asset situated in India shall be deemed to accrue or arise in India and chargeable to tax as per the provisions of the Act in the hands of the non-resident assessee. 14. The shares of MIAL, sold by applicant to GAHPL, is a capital asset of the applicant situated in India and accordingly, any gains arising to the applicant from sale of such shares would be considered as income accruing or arising in the hands of the applicant and chargeable to tax as capital gains as per the provisions of the Act. 15. However, section 90(2) of the Act provides that where the Government of India has entered into an agreement with the Government of any country outside India for avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions Of the agreement/treaty t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l traffic and movable propcrty pertaining to the operation of such ships and aircraft, shall be taxable only in the contracting state in which the place of effective management of the enterprise is situated. 4)Gains derived by a resident of contracting state from the alienation of any property other than those mentioned in paragraphs (1), (2) and (3) of this article shall be taxable only in that state. 5)For the purposes of this article, the term alienation means the sale, exchange, transfer, or relinquishment Of the property or the extinguishment of any rights therein or the compulsory acquisition thereof under any law in force in the respective contracting states. Accordingly, it can be inferred that the capital gains arising to resident Of Mauritius from the sale of shares of an Indian company will be chargeable to tax in Mauritius under Article 13(4) of the India-Mauritius DTAA. 18. The above position has also been clarified by Central Board Of Direct Taxes (CBDT) vide Circular No.682 dated 30 March 1994[(1994)207 ITR (St.)7] which mentions that capital gains arising to a resident of Mauritius on the transfer of shares in an Indian company would be liable to tax o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taxable in the hands Of the shareholder and tax was deductible at source under the Income-tax Act, 1961, Under the DTAC, tax was deductible at source on the gross dividend paid Out at the rate of 5% or 15% depending upon the extent of shareholding Of the Mauritius resident. Under the Income-tax Act, 1961, tax was deductible at source at the rates specified under section IISA, etc. Doubts have been raised regarding the taxation of dividends in the hands Of investors from Mauritius. 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. 3. The test of residence mentioned above would also apply in respect of income from capital gains on sale shares. Accordingly, Als etc., which are resident in Mauritius would not be taxable in India on income from capital gains arising in India On sale of shares as per paragraph 4 of article 13. 20. The scope and validity of the above-mentioned circular No. 789 with regard to claiming tax benefits pursuant to India-Mauritius DTAA has also be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of D.B.Zwirn Mauritius Trading No. 3 Limited wherein it has held that the applicant, being an investment holding company incorporated in Mauritius and holding tax residence certificate in Mauritius was eligible for the treaty benefits under the India-Mauritius DTAA. Accordingly, under Article 13(4) Of the India-Mauritius DTAA the taxpayer is not liable to pay capital gains tax in India in respect of the transfer of shares held in an Indian company. The AAR while coming to the conclusion relied on the CBDT circulars mentioned above as well as the Supreme Court decision in the case of Azadi Bachao Andolan (supra). 23. Similar view has again been taken by the AAR in its recent ruling dated 14 November 2011 in the case of Ardex Investments Mauritius Ltd a Company incorporated in Mauritius holding a TRC (the applicant), wherein it has been held that capital gains on the proposed sale of shares of an Indian company to the foreign company is not chargeable to tax in India in view of Article 13(4) of the India-Mauritius DTAA. 24. Further, the Hon'ble Supreme Court in its recent in the case of Vodafone International Holdings B.v. v. union of India Anr. [S.L.P. (C) N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ified and one was disqualified as it had partnered with an airport consultant instead of an airport operator. 27. As per the ITREOI, each prospective bidder must have a net worth in excess of ₹ 5,000 million. If the prospective bidder is a Consortium, then the combined net worth of only the prime members shall be considered. 'Prime member' means the individual entity proposing to hold equity of 10% or more in a JV Company. Each prospective bidder must be an Airport Operator, which has relevant and significant current experience of managing and operating airport(s) or have at least one Airport Operator in its Consortium. The JV Companies were to be subject to a 74% foreign ownership limit as per the prevailing FDI guidelines on sectoral limits. As per Para 6.1 of the ITREOI, proposed changes or additions to the prospective bidder's composition following lodgment of EOI are subject to the prior approval of the AAI and such changes should not affect the quality and operational capability of the prospective bidder. 28. In response to the AAI's ITREOI, the GVK-SA Consortium filed its EOI on 20/07/2004. The Consortium was led by M/S. GVK Industries Limited (he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AAI, Filing of EOI by the GVK-SA Consortium, short-listing Of pre-qualified bidders by AAI, issue of RFP to pre-qualified bidders, discussions with government agencies by pre-qualified bidders, Etc., but was brought in just before the filing of the Technical and Financial Bid at the far end of the Stage 2 of the bidding process. In fact the entity BSDM was not even in existence during Stage I and for most part of Stage 2 of the bidding process. It was incorporated just two weeks prior to the submission of binding bid by GVK-SA Consortium. 31 No prior approval of the AAI was taken by the Consortium regarding substitution of Bidvest with any other entity at any stage before the submission of the Technical and Financial Bid, which was a requirement as per Para 6.4 of the RFP and Para 6.1 of the ITREOI. 32. If the Bidvest Group wanted an SPV to undertake the project efficiently, commercial and business sense indicates that Mumbai or South Africa would have been the best alternatives but bot some third tax jurisdiction like Mauritius. The only advantage the jurisdiction of BSDM provides is the tax benefits with regard to capital gains. The inclusion of BSDM, a Mauritian entity, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. These crucial documents have not provided by the applicant.The application was admitted on 27-07-2015. While admitting the application, the Hon'ble AAR ruled that the applicant should supply the relevant information as required by the department. As to what will be relevant information can always be looked into by the AAR. Subject to this rider the matter was admitted. 37. The applicant relied on the beneficial provisions contained in Article 13(4) of the DTAA between India and Mauritius to claim exemption from chargeability to tax on capital gains arising to BSDM on the sale of its equity in MIAL to GAHPL. But the entire transaction was planned to avoid paying legitimate capital gains tax in India arising to BSDM. The sale Of 13.5% equity in MIAL held by BSDM to GAHPL lacks commercial substance and bona fide business purpose. It was only designed to misuse the provisions of the Treaty. 38. The provisions Of Section 93 of the Act may be applicable to the present case for the following reasons: a) There was a transfer of assets as per the provisions of Section 93(1) of the Act. The BSDM sold and transferred its 13.5% equity in MIAL to GAHPL vide the SPA dated 01-3- 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of M/S Bid Services Division (Pty) Limited. This full power is also evident from the fact that two out of the four directors of BSDM viz. Brian Joffe and Peter Nyman (both citizens of South Africa) are also the directors of Bidvest and M/S Bid Services Division (Pty) Limited and they represent the holding companies, which hold 100% equity in BSDM. The two other directors of BSDM are nominal directors without any real powers and are citizens of Mauritius, whose appointment is a necessary requirement as per the companies Act, 2001 of the Republic of Mauritius. So, Bidvest is deemed to have power to enjoy the income of the non-resident BSDM even as per sub-clause (iv) of Clause (c) of explanation to Section 93 of the Act. iii. The full control of Bidvest over BSDM through M/S. Bid Services Division (Pty) Limited and also through the common directors confirms its ability, both directly and indirectly to control the application of capital gains income of the non-resident BSDM. Therefore, Bidvest is deemed to have power to enjoy the income Of the non-resident BSDM even as per sub-clause (v) of clause (c) of explanation to Section 93 of the Act. iv. The receipt or accrual of income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eived or entitled to be received by the first mentioned person Bidvest from its ultimate subsidiary BSDM indirectly through M/S. Bid Services Division (Pty) Limited are covered in the definition as per Section 93(4)(d) of the Act. The capital gains income, therefore will be deemed to be the income of Bidvest under the provision of Section 93(1)(b) of the Act. h) Since, it is clear that the entire transaction was designed to avoid paying legitimate tax in India; the first mentioned person Bidvest would not get the benefit of the provisions of Section 93(3) of the Act. The factual avoidance of tax was as a result Of a design on the part Of Bidvest, the applicant and GAHPL but not merely an incident or effect of the transaction entered into for other reasons. 39. The Hon'ble Supreme Court in the case of Vodafone International Holdings B.V. vs. Union of India (2012) 17 taxmann.com 202 gave legitimacy to the 'business purpose test' in India by observing in para 67: If an Actual controlling Non-resident Enterprise (NRE) makes an indirect transfer through 'abuse of organization form/legal from and without reasonable business purpose' Which results in tax avoi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Supreme Court pointed out that a party cannot escape legal consequences merely by describing an agreement in a particular form even though it is different in substance. Nor can an assessee by dividing what is in fact a single transaction between two documents achieve the objective which he seeks, nor does he change the nature Of the transaction. The doctrine of substance is attracted if the nomenclature given by the parties to a particular transaction is of no avail. Where the form is held to be immaterial, what is meant is that the misinterpretation of their true rights by the parties as supported by assertions in their private documents or entries in their books of account donot count. Therefore, the substance of the arrangement takes priority over its form in the case of BSDM. The transaction involving the applicant was designed primarily for avoidance of tax. If the scheme is ignored, the gain from the transaction is taxable in India. It is very clear that the transaction between BSDM and GAHPL is a tax avoidance scheme and hence, needs to be looked at accordingly. 42. It is stated that similar tax avoidance arrangement was dealt with by the Hon'ble AAR in the recent c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e resembles the Seedworks case in many respects. Reliance is therefore, strongly placed on the Seedworks case. Rejoinder by Applicant 44. It is submitted that in accordance with the terms of the RFP and in line with the EOI filed by the Consortium wherein it was stated that the final shareholdings by the three SA Airport Operators will be finalized once the requirements of the RFP are known, the consortium parties i.e. GVK and SA Airport Operators, in the legally binding Technical and Financial Bid, submitted the names of their respective entities to hold shares in the proposed JVC. 45. It is stated that the EOI and Technical and Financial Bid submitted by the Consortium was thoroughly reviewed by the AAI, in consultation with Government Group, Financial Consultant appointed by the Government and the decision of the competent authority regarding the selection of the Consortium as the successful bidder of was communicated by the AAI to the Consortium. lt is contended that if the contention of the learned CIT Hyderabad regarding the constitution of Consortium was to be accepted, the Consortium would have been disqualified in Stage 2 of the bidding. 46. It is submitted tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccountant wherein each share of MIAL was valued at INR 145.77 whereas the consideration paid to BSDM was lesser than such value of INR 145.11 per share. 50. It is argued that the learned CIT Hyderabad in para 4.9 of its Final Report had raised concerns on the capabilities of Bidvest and the role played by it in the Consortium, though he has failed to take into consideration its role as stated in the EOI and as demonstrated in the Technical Financial Bid submitted to the AAI. As per the EOI filed, Bidvest was to Provides trategic input, advice, structured finance advice, advice on ancillary services required for the airport for the bid, strategic input, corporate governance oversight and cargo and logistics development expertise 51. The Applicant submits that section 93 of the Act corresponds to section 44D of the erstwhile Income-tax law i.e. the Indian Income-tax Act, 1922. The Applicant submits that the objective behind introducing section 44D of the Indian Income-tax Act, 1922 (i.e. section 92 of Income-tax Act, 1961) is to tax income arising out of transaction which residents may undertake to externalize the assets, while continuing to enjoy the rights over such income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... incorporation of the Mauritian company, immediately prior to investment in the Indian Company, was not regarded as an investment for the purposes of tax avoidance and the treaty benefits have been granted by the Hon'ble AAR in number of cases.lt is contended that the investment by Applicant in MIAL was for the purpose of modernization of airport and the Applicant had infused the funds basis equity call made by MIAL over a period of 7 years. Only after a period of 5.5 years of holding, BSDM divested its partial stake in MIAL. Furthermore, it would also be relevant to note that MIAL continues to carry on operations post partial divestment by BSDM.AII of the above factors will be relevant in determining the corporate's business purpose of the transaction. Decision: 55. We have carefully considered the contentions of the applicant, arguments and objections of the Revenue and the response thereof of the applicant. We have also perused the documents on record and the factual matrix of the case. The basic facts have been elaborated in the submissions of applicant and revenue above. 56. Applicant (in short BSDM) was incorporated in Mauritius on 23-8-2005 i.e. two weeks bef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est group committed to provide 27% equity funding required to be invested by BSDM, whereas ACSA committed 10% of funding through AGL. What in effect changed is the routing of funds of Bidvest group through Mauritius. The other two groups i.e., GVK and ACSA continued to have their headquarters in India and South Africa respectively. So in the JV there is a shell company, without any tangible assets, employees, office space, etc. which was incorporated few days before the bidding.lt has no management experts or financial advisers on its pay roll or on hire. Further, Mauritius unlike London or New York is not a known financial centre or a vibrant business hub from where capital can be sourced at cheaper rates or top-qualityprofessionals' engineers/ consultants could be employed. Neither Mauritius can boast of being seat of civil aviation experts. We thus, fail to appreciate what purpose the applicant is serving being in the JV or what is the economic or commercial rationale for roping in the applicant in the JV. Did it hire finance professionals who could arrange finance or did the entity have collaterals for raising funds or did it provide a meeting ground where active, cerebral ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the jurisdiction where it is located and lastly its income is subject to minimal tax in the country of location. 63. The doctrine of substance over form mandates taxing transaction pursuant to its economic effect rather than its form and that a valid transaction must have both a substantial purpose apart from reduction of tax liability. 64. The India-Mauritius treaty and India-South Africa treaty are based on OECD model convention and article 13 on capital gains are adopted from the same convention. In fact, India- South Africa treaty is wider in terms. The Model Tax Convention on Income and on Capital ,CONDENSED VERSION (as it read on 15 July 2014) in its commentary on art 1 has mentioned : Improper use of the Convention 7. The principal purpose of double taxation conventions is to promote, by eliminating international double taxation, exchanges of goods and services, and the movement of capital and persons. It is also a purpose of tax conventions to prevent tax avoidance and evasion. 7.1 Taxpayers may be tempted to abuse the tax laws of a State by exploiting the differences between various countries' laws. Such attempts may be countered by provisions or juri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the Apex court at para 67 that if there is abuse of organization form without legal business purpose which result in tax avoidance, then Revenue may disregard the form and impose tax on actual controlling non-resident entity. Further at para 98 of the same decision Hon'ble Supreme Court has held 98. LOB and look through provisions connot be read into a tax treaty but the question may arise as to whether the TRC is so conclusive that the Tax Department cannot pierce the veil and look at the substance of the transaction. DTAA and Circular No. 789 dated 13-4.2000, in our view, would not preclude the Income Tax Department from denying the tax treaty benefits, if it is established, on facts, that the Mauritius company has been interposed as the owner of the shares in India, at the time of disposal of the shares to a third party, solely with a view to avoid tax without any commercial substance. Tax Department, in such a situation, notwithstanding the fact that the Mauritian company is required to be treated as the beneficial owner of the shares under Circular No. 789 and the Treaty is entitled to look at the entire transaction of sale as a whole and if it is established that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny evidence as to how BSDM helped in doing business or providing support for the project. The points in its favor of applicant seem to be that it is tax resident of Mauritius holding a valid T RC and legal owner of shares which it disposed subsequently. 69. We are unable to agree with the logic that the entity was brought in for ease of doing business or for operational reasons and to provide supportive business environment. The reason proffered by Ld. AR lacks substance and merit. 70. In its rejoinder, the applicant has contested two main objections of the Revenue. The first objection of the Revenue was admission of new entity at later stage was not ordained by EOI. The Ld. AR has indicated that in the EOI filed by the consortium, it was stated that the final share holdings by three SA airport operators will be finalised once the requirement Of RFP are known and that GVK and the SA airport operators submitted the names of the respective entities in the legally binding technical and financial bid which was accepted by AAI. We are in agreement with the Revenue that no-where in the EOI it was mentioned that a new member would be brought in at a later stage. The uncertainty was ..... X X X X Extracts X X X X X X X X Extracts X X X X
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