9911796707
TMI Blog2020 (6) TMI 159X X X X Extracts X X X X X X X X Extracts X X X X ..... ) of the Financial Services Act, 2007 and are tax resident of Mauritius under the laws of Mauritius and under the provisions of the Agreement between India and Mauritius for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Foreign Countries. The applicants held shares of Flipkart Private Limited, a private company limited by shares incorporated under the laws of Singapore (for short "Singapore. Co"). The total number of shares of Singapore Co acquired by the applicants was as per table below: S.No. Applicant Number of shares acquired Period / date of acquisition 1. Tiger Global International II Holdings, Mauritius 23,670,710 October, 2011 to April, 2015 2. Tiger Global International III Holdings, Mauritius 2,282,825 23rd June 2014 3. Tiger Global International IV Holdings, Mauritius 105,928 24th April, 2012 2. The applicants have submitted that Singapore Co, in turn, had invested in multiple companies in India and the value of the shares of Singapore Co was derived substantially from assets located in India. On 18-8-2018 all the three applicants transferred certain shares of Singapore Co. to Fit Holdings S.A.R.L. (Buyer), a company incorpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) would be chargeable to tax in India under the Income-tax Act, 1961 read with the Double Taxation Avoidance Agreement between India and Mauritius? As the question raised by the three applicants is common and issue as well as the facts of the case is identical, the matter is being decided by common order. The applicants have also requested for clubbing the applications as they had common set of facts relating to identical transaction. Revenue's objections on pendency 5. The Revenue has raised objections on the admissibility of the application in all the three cases in respect of all the three conditions as stipulated in provisos to section 245R(2) of the Income-tax Act, 1961 ("the Act"). The first condition of the said proviso is regarding pendency of proceeding before any Income-tax Authority or the Appellate Tribunal. In the report dated 3-1-2020, the Commissioner of Income-tax(IT)-4, Mumbai has admitted that as on date of application no proceeding was pending against any of the three applicants. However, it has been pointed that the issue of chargeability of capital gains on the sale proceeds of shares held by the applicants in Flipkart Private Limited, Singapore to Fit H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the application was already pending before any Income-tax Authority or the Appellate Tribunal. It was submitted that the CIT himself had conceded in his report that "as on date there was no proceeding pending against the assessee" and, therefore, there was no legal basis to attract the bar under this clause. The applicants have drawn our attention to Circular No. 774 dated 17-3-1999 issued by the CBDT which clarified that no certificate under section 197(1) of the Act should be issued after the amounts subject to tax deduction at source stand credited or paid, whichever is earlier. It was clarified that the amount subject to TDS was credited / paid prior to the filing of the present applications and, therefore, the proceeding under section 197(1) of the Act stood concluded and there was no pending proceeding on the date of present applications. The applicants relied upon the decision of Hon'ble Supreme Court in Asgarali Nazarali Singaporawalla v. State of Bombay AIR 1957 SC 503 and the decision of Delhi High Court in the case of Hyosung Corporation v. AAR 382 ITR 371, wherein the term "already pending" was explained. The applicants have also placed reliance on the following de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transaction was closed. The contention of the Revenue that the proceeding under section 197 of the Act was pending on the date of filing of the present application in February, 2019 is, therefore, not correct and can't be accepted. Once the transaction was closed there could be no pending proceeding under section 197 of the Act as clarified vide CBDT's circular no. 774 dated 17-3-1990. 11. It has been held by the Delhi High Court in the case of Hyosung Corporation (supra) that the word "already pending" in section 245R should be interpreted to mean "already pending" as on the date of application and not with reference to any future date. It was further held in this case that a notice under section 143(2) merely asking for certain information from the assessee issued prior to filing application before AAR will not constitute bar in terms of clause (i) to proviso to section 245R(2), on AAR for entertaining and allowing the application. As clarified in the report of the Commissioner there was no such pending proceeding in this case on the date of filing of the present applications. 12. The Revenue's other contention is that the question as raised in the present applicat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epositing it with the Government revenue by the payee does not decide the final tax liability of the recipient of income which would be subject matter of assessment of return. An identical view was taken by Hon'ble Madras High Court in the case of Anasaldo Energia SPA v. ITO 261 ITR 476 and by the Kerala High Court in the case of Infoparks v. DCIT 339 ITR 404 wherein it was held that the assessee's tax liability cannot be decided in the proceeding under section 197 of the Act but can only be subject matter of assessment proceeding. 14. This issue was also examined by this Authority in the case of Burmah Castrol (supra) wherein it was held that an order passed under section 197 of the Act does not fetter the jurisdiction of the AAR to proceed with the application. The relevant portion of said ruling is reproduced below: "....The application filed under section 197 has already been disposed of and the order passed therein worked itself out by reason of expiry of the validity period. Moreover, the proceeding initiated before the assessing authority was in connection with tax deduction at source. Deduction and withholding of tax at source by the payer, it is well settled, is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urn depended on the value assigned to each share of Flipkart. According to the Revenue, the question raised by the applicants involved determination of Fair Market Value of the shares held by the applicants in Flipkart and, therefore, the bar under clause(ii) of proviso to section 245R(2) of the Act was applicable and that the application was not admissible for this reason. 19. On the other hand, the applicants have submitted that the question raised in the application was only concerned with the chargeability of tax i.e. whether or not transfer would be taxable in India under the Act read with Indo- Mauritius treaty. The question does not require this Authority to undertake a valuation exercise in relation to the shares or compute the capital gains arising to the applicants from the transfer. The applicants have placed reliance on the ruling of this Authority in the case of Worldwide Wickets 303 CTR 107 (AAR) in this regard. 20. We have carefully considered the objection of the Revenue and the submission of the applicants. The question raised by the applicants in the present application is whether the gain arising from the sale of shares of Flipkart is chargeable to tax in India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India and other markets. According to Revenue, they were not acting independently but only as a conduit for the real beneficial owners based out of USA. The Revenue has submitted that as per Notes to the Financial Statement of the year ending 31.12.2011, the applicants were held by the Tiger Global Management LLC ,a USA based investment entity that invests in public and private markets across the world through a web of entities based out of low tax jurisdictions in Cayman Islands and Mauritius, which indicated that the real control of the Company does not lie within Mauritius. The structure of the shareholding arrangements of the applicants are depicted in the following chart: 22.1 The specific comments of the Department vide letter dated 13-2-2020 on the ownership structure is as under: On perusal of the material on record, it prima facie appears that the said Limited Partnership, legally Exempted Limited Partnerships, are by default flow through entity for the purposes of taxation and all profits directly flow to the partners in the ratio of their capital contribution or as defined in partnership deed. The limited partners, however, are not involved in the day to day business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... representatives of TGM, USA was always present to advise the Board of the applicants. The other Directors based in Mauritius were mere puppets and not independent. According to Revenue, the applicant's decision making was fully subordinate and reliance in this regard is placed on the decision of the Supreme Court in the case of Vodafone International Holding BV 341 ITR 1. 24. (c) Financial Control: On financial control, the submissions of the department were as under: . . . . . . the authority to operate the bank accounts for transactions above USD 250000 lies with Mr. Charles P. Coleman countersigned by one of the Mauritius based directors. It is found that Mr. Charles P. Coleman is NOT on the Board of Directors of the applicants company and his presence is NOT noted on any of the Minutes of meeting where apparently crucial decisions regarding investments were taken. Without being on board of directors, he yields maximum authority in controlling the funds of the applicants company. The other signatories are Mr. Steven Boyd, Mr. Michael Germino and Mr. Anthony Armenia with either of two categories of signatories countersigned by one of the Mauritius based directors. The no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... S P COLEMAN. IT IS PERTINENT TO NOTE THAT MR. CHARLES P COLEMAN IS THE FOUNDER AND PARTNER OF TIGER GLOBAL MANAGEMENT LLS, USA....". 26. The Revenue submitted that the element of good faith needs to be retained for applicability of the treaties. Both India-Mauritius treaty and India- USA treaty have captioned "prevention of tax avoidance" as one of the purpose of DTAA. Therefore, the good faith application of these treaties requires the element of tax avoidance and treaty abuse to be examined by the tax administration while invoking treaty provisions. 27. The Revenue further submitted that on the basis of material on record, it was evident that the decisions of the applicants were not taken independently by the companies situated in Mauritius but by the people located with TGM USA. The beneficial owner of the shares of the Flipkart was with Mr. Charles P. Coleman of TGM USA. Had the TGM USA directly held the shares in Flipkart it would have been liable to pay tax on gain on sale of those shares as per the provision of Indo-US DTAA. The Revenue relied upon the judgment of Hon'ble Supreme Court in the case of Vodafone International Holding BV (supra) and requested that consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there is business rationale surrounding the transaction. 30. The applicants have given specific comments to the report of the CIT vide letter dated 19-2-2020, the relevant portions of which are reproduced below: " (iv) At paragraphs 4.2,4.3,9.7 and 9.11(b) of the Revenue WS, the CIT has alleged that the applicants had established tax residency in Mauritius only to take advantage of the India-Mauritius DTAA and that the purpose of such residence was only to avoid paying taxes on returns earned by the applicants from its investments. It is submitted that the above allegation is baseless and factually incorrect. The Board minute extract relied on by the CIT specifically notes that Mauritius's comprehensive tax treaty network with various countries (and not just India) facilitated efficient asset management and achieved a competitive return for the Applicant's investors. The mere fact that the applicants applied for a TRC in order to avail of treaty benefits does not mean that a colourable device for tax avoidance was resorted to.... It is also submitted that a mere claim for treaty eligibility does not in any manner tantamount to "tax avoidance " for the purposes of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd to be applied to invoke clause(iii) of the proviso to section 245R(2) of the Act. It must be proven that the transaction itself and not the structure of the entity undertaking the transaction was designed for the avoidance of income-tax in order to invoke clause (iii) and that the Revenue had failed to discharge its burden of proof. The applicants submitted that it was managed and controlled of its Board of Directors in Mauritius in accordance with its constitution. The decision to invest into and ultimately sell the shares of Singapore Company was taken by the Directors of the applicants in Mauritius after proper discussions and deliberations. The applicants had beneficially held shares of Singapore Company and were not accountable to any third party. The applicants we reneither sham entity nor a conduit company and that the treaty benefit being claimed by the applicants cannot be considered as a measure of tax avoidance. Findings& Decision: 32. We have carefully considered the objections of the Revenue and the submissions made by the applicants. As per clause (iii) of proviso to section 245R(2) of the Act, the Authority shall not allow the application where the question rais ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee, merely on proof by the assessee, that it has entered into no illegality and made no prohibited transaction. (6) The court would have to assess, in the facts and circumstances of each case, upon general principles of conscience and justice, whether the arrangement of affairs by the assessee, so as to cause the possibility of a reduction of tax incidence, can fairly be permitted to the assessee, as a genuine and legal means of tax reduction, employed by it in a commercially fair sense, or whether, allowing the assessee to earn the reduction, in the facts and circumstances of the particular case, is opposed to the public policy of not encouraging citizens, to engage themselves in dealings and transactions, designed primarily for the purpose of non-payment of tax only. 34. The applicants have contended that the transaction involved in the present application was sale of shares simpliciter undertaken between two unrelated independent parties which cannot be considered as being designed for avoidance of tax. The contention of the applicants is too simplistic to be accepted. The precise question raised in the application is chargeability of capital gains on sale of shares unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons taken in the Board meetings. Further, the Supreme Court has held in the case of Vodafone (supra) that there was nothing wrong if the funds for making FDI by Mauritius companies/individuals had not originated from Mauritius but had come from investors of third countries. In view of this judgement, the Revenue's submission that funds had come not from the applicants but from the promoters in USA, so as to treat the arrangement as tax avoidance, has to be rejected. 37. What is relevant to consider here is the control and management of the applicant companies. Though the applicants have submitted that their control and management was with the Board of Directors in Mauritius, what is material is not the routine control of the affairs of the applicants but their overall control. The control and management of applicants does not mean the day-to-day affairs of their business but would mean the head and brain of the Companies. Therefore, it will be relevant to examine whether the head and brain of the applicants was in Mauritius. 38. The fact that the authority to operate the bank accounts for transaction above US$ 2,50,000 was with Mr. Charles P. Coleman, countersigned by one of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Directors of the applicants, were the key personnel of the Group and were managing and controlling the affairs of the entire organization structure. From the evidences brought on record by the Revenue, it is evident that the funds of the applicants were ultimately controlled by Mr. Charles P. Coleman and the applicants had only a limited control over their fund. Apparently, the decision for investment or sale was taken by the Board of Directors of the applicants but the real control over the decision of any transaction over USD 2,50,000 was exercised by Mr. Charles P. Coleman only. Obviously, he was controlling the decision of the Board of Directors of the applicants through the non-resident Director Mr. Steven Boyd who was accountable to him. We have, therefore, no hesitation to conclude that the head and brain of the companies and consequently their control and management was situated not in Mauritius but outside in USA. 40. The applicants have contended that the holding structure of the applicants has no relevance to determine whether the transaction was prima facie designed for avoidance of tax. In our opinion it is not the holding structure only that would be relevant. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed and not subject to capital gains tax in India. Thus as per the amended DTAA between India & Mauritius as well, what was not taxable was capital gains arising on sale of shares of a company resident in India. It is thus crystal clear that exemption from capital gains tax on sale of shares of company not resident in India was never intended under the original or the amended DTAA between India and Mauritius. In view of this clear stipulation in the India-Mauritius DTAA, the applicants were not entitled to claim benefit of exemption of capital gains on the sale of shares of Singapore Company. Thus, the applicants have no case on merits and fail on the ground of treaty eligibility as well. 42. The applicants have disputed the contention of the Revenue that the tax residency in Mauritius was established only to take advantage of India- Mauritius DTAA. The applicants submitted that Mauritius comprehensive tax treaty network with various countries (and not just India) facilitated efficient asset management and achieved a competitive return for their investors. According to the applicants, the mere fact of obtaining a TRC to avail the treaty benefits does not make it a colourable device ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chargeable to tax in India. As the issue involved there was capital gain on transfer of shares of Indian company, the facts are found to be distinct as the applicant has not transferred the shares of Indian Company but that of a Singapore company. In the case of Golden Bella Holdings Ltd. [2019] 109 taxmann.com 83,also relied by the applicants, the facts were different as the investment was made in CCDs of an Indian Private Limited company and the interest income derived therefrom was held as not taxable under the beneficial provision of DTAA between India and Cyprus. The facts of the case of STAR Television Entertainment Limited (supra) are also found to be different as the issue involved therein was capital gain arising on amalgamation. The other judicial pronouncements relied upon by the applicants are also found to be different and distinct on facts and the ratio of those decisions can't be imported to the facts of the present case. 45. The applicants have relied upon the decision of Punjab & Haryana High Court in the case of SERCO BPO P Ltd. 379 ITR 256 ,wherein the issue of transaction designed for avoidance of tax was considered by the Hon'ble Court. It was held by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trategic foreign direct investment in India there was neither any business operation in India nor they ever generated any taxable revenue in India. In the absence of any direct investment in India one can only conclude that the arrangement was a pre-ordained transaction which was created for tax avoidance purpose. 48. In view of the foregoing, we are of the considered opinion that the issue involved in the question raised in the present applications was designed prima facie for avoidance of tax. The applicants have contended that shares of the Singapore Company derived their value substantially from assets located in India and, therefore, it was eligible to take benefit of Article 13 (4) of India - Mauritius Treaty. Even if the Singapore Company derived its value from the assets located in India, the fact remains that what the applicants had transferred was shares of Singapore Company and not that of an Indian company. The objective of India-Mauritius DTAA was to allow exemption of capital gains on transfer of shares of Indian company only and any such exemption on transfer of shares of the company not resident in India, was never intended by the legislator. Further, as discussed ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
