9911796707
TMI Blog2019 (9) TMI 1549X X X X Extracts X X X X X X X X Extracts X X X X ..... as valid for the period from October 31, 2011 to October 29, 2012. The applicant is a part of BD group which is into development, manufacture and sale of medical devices, instrument systems and reagents used by the healthcare institutions, life sciences researchers, clinical laboratories, the pharmaceutical industry and the general public manufacturing of instrument materials. The applicant holds 100 per cent. equity share capital of Becton Dickinson India Private Limited ("BD India"), which is an Indian company and manufactures and trades in a broad range of medical supplies, devices, laboratory equipment and diagnostic products. 2. BD group undertook a worldwide group restructuring, wherein the applicant proposed to sell its entire stake constituting 100 per cent. of equity share capital of BD India to another non-resident group company known as Becton Dickinson Holdings Pte. Ltd., Singapore (BD Singapore). The shares were to be transferred at fair market value prevailing at the time of the proposed sale. The consideration for acquisition of shares of BD India was to be discharged in the form of shares of Becton Dickinson Holdings Pte. Ltd. The entire transaction was to happen o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x Treaty to entities having a valid tax residency certificate issued in Mauritius. In view of these facts, the applicant submitted that it qualifies as a tax resident of Mauritius under article 4 of the Treaty. 4. As regards taxability of capital gains, our attention was invited to article 13 of the Treaty. According to paragraph 4 of article 13 of the Treaty, capital gains derived by a resident of Mauritius from the alienation of any movable property [other than ships/aircrafts operated in international traffic or property forming part of the permanent establishment ("PE") of the enterprise in India, if any, would be taxable only in Mauritius (and not in India). Further, that the term "alienation" under the Treaty 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 countries. Therefore, the capital gain derived by the applicant on the alienation of the share capital of BD India was liable to tax only in Mauritius and not in India. The applicant further sub- mitted that it did not have any place of business or activity in India and hence, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not been placed before the authority, the ruling may be declined. In this regard reliance was placed on the following decisions wherein this authority had declined to give the ruling : 1. Royal Bank of Canada, In re [2010] 323 ITR 380 (AAR) (AAR No. 816 of 2009 dated March 22, 2010). 2. Ms. Meenu Shahi Mamik, In re [2006] 287 ITR 514 (AAR) ; [2006] 206 CTR 396 (AAR). 7. The thrust of the Revenue's submissions and arguments is that the transaction is designed for avoidance of tax. The Revenue has brought on record the following aspects in respect of this submission. A. Wide variation in financial statements and facts submitted before the Authority for Advance Ruling by the applicant : As per the financial statement of BD Mauritius as on September 30, 2012, the applicant was holding 99.99 per cent. equity in BD India in the year 2011 which has been shown to be Nil for the year 2012. The value of this investment in BD India is shown in the year 2011 as USD 27,09,844. These shares are stated to have been transferred to BD Singapore during 2012. The consideration, as per the application before the Authority for Advance Ruling and also as per share contribution agreement, is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n done by the applicant-company whether the transfer of shares will be beneficial or not to the company. The company has just acquiesced in the decision taken by its holding company BDX in US. It is clear that the applicant is not behaving in a manner which will show that the subsidiary has its own free will and is an independent company in its own right. It is open to dictation by the holding company without having any will of its own. This is not the way an independent company is supposed to behave. This shows that even though BD Mauritius may be holding the shares of BD India in its name, it is the owner of these shares only for name sake. That is, it is not the beneficial owner of shares. C. The profit is transferred to the US holding company as a loan bearing rate of interest of only 1 per cent., the loan being unsecured : The financial accounts of the company for the period ending September 30, 2011 and September 30, 2012 lay bare the tax avoidance scheme used by the applicant and its associates to make profit in a low tax jurisdiction and thereafter to transfer the same to the holding company in the US as a loan for almost no consideration. The financial accounts for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oan and the accrued interest amounting to USD 556,642. This is being done when fresh loan of USD 53,253,630 is being given to the holding company. No reason has been assigned as to what were the circumstances forcing the applicant to waive off the pending loan. No reason has been given why fresh loan is being given even while earlier loan has not been repaid and is being waived off. There is no mention of any request from the side of the holding company that the earlier loan requires to be waived and a new loan requires to be given. This is not the way two independent concerns transact with each other. This is not the way a business is being run. This is not the way independent board of directors decide. It is not the business of the applicant to grant loan to other companies and grant loan waiver without any reason. Loan waiver is done only in extreme circumstances when all efforts to recover money have yielded no results. Even then it is being done by way of an agreement. The way this is being done here shows that the books of the applicant BD Mauritius are open to manipulation. Anything and everything is permissible till such time it benefits the holding company. Thus the holdin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dibility of the whole process. F. The loan given by applicant not reflected in accounts of holding company : As per Note 7 - Loan to holding company of the financial statement for year ended September 30, 2012, an additional loan of USD 53,253,630 was advanced to the holding company of the applicant- BDX with an interest of 1 per cent. per annum and which was repay able on March 30. The relevant part of the Note 7 to the financials is reproduced as : "(b) The Loan to holding company is unsecured, bears interest at the rate of 1 per cent. per annum and is repayable on March 30, 2013." Form 10-K (which is Annual Report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 USA) filed by BD USA before the Securities and Exchange Commission USA on November 21, 2012 is available in the public domain. This report contains the consolidated financial statements of BDX for the years 2012, 2011 and 2010. The financials for 2012 were perused. On perusal of Note 14 - Debt to the consolidated financials for 2012, it was observed that the loan given by BD Mauritius is not reflected both under the short term and long term debt as on September 30, 2012. . . . The facts na ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eaties require the element of tax avoidance and treaty abuse to be examined by tax administration while invoking the treaty provisions. According to the Revenue, the arrangement made by the applicant was the colourable device and accordingly it was requested that the corporate veil should be pierced as held by the hon'ble Supreme Court in the case of Vodafone International Holdings BV v. Union of India [2012] 341 ITR 1 (SC) and to pay regard to the economic realities behind the legal facade. The Revenue relied upon various judicial pronouncements in support of the contention that the Income-tax authorities are entitled to lift the corporate veil and expose the tax avoidance device/scheme. 9. The Revenue further submitted that the tests as laid down in the case of Vodafone (supra) by the hon'ble Supreme Court were satisfied in the present case. In this regard the following submission was made : "The underlying transaction in the instant application was effected through the terms of the contribution agreement (date of which is under dispute). Though the Revenue wishes to see the transaction in totality and not just a segment of transaction. The advancing of an unsecured lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... material transaction. - The consideration involved in the transaction, and the mode of payments, highlighted the fact that it was a mere book entry." 10. It was further submitted by the Revenue that this authority in the case of "AB" Mauritius, In re [2018] 402 ITR 311 (AAR) (AAR No. 1128 of 2011) dated November 8, 2017 had laid down certain guiding principles following the mandate of the hon'ble Supreme Court in the case of Vodafone (supra) and it was held therein that the gains were taxable in India as per Indo-US DTAA. The Revenue submitted that the facts of the present case were identical and, therefore, the decision as given in the case of AB Mauritius may be followed in this case as well. It was further submitted that the principles as enunciated by the hon'ble Supreme Court in the case of Vodafone (supra) such as fiscal nullity test, look at principle, timing test, commercial/ business purpose test, colourable or artificial device test, treaty shopping or treaty abuse/abuse of rights doctrine were all satisfied in the present case. An alternate submission was also made by the Revenue that the transaction was clearly targeted at tax avoidance and, hence, the Indo- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pplicant had received consideration not only in the form of shares but beyond, was erroneous as the facts were misinterpreted. Regarding loan of USD 50,290,156 advanced to the holding company, BDX USA, it was submitted that the grant of loan was separate legal transaction subsequently done and was, therefore, not relevant for adjudicating the issue under consideration in the present application. Further regarding non-disclosure of the loan in the financial statement of BDX, it was explained that form 10K was for filing consolidated financial statements and not the stand-alone financials of the company. The form 10K contained the accounts of BDX and its subsidiaries and the transactions inter se between group companies would get eliminated therein. It was explained that loan by the applicant to BDX was an inter-company transaction, which was eliminated while reporting consolidated accounts in form 10K. 13. As regards the allegation of the Revenue that the decision to transfer the shares was taken by the US based holding company, it was submitted that the note 16 of the auditors in the financial statements was merely a summary of the meetings held by the board of directors of the ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to Mauritius companies of the Treaty by stating that FDI was only routed through a Mauritius company. Reliance was also placed on this decision in respect of the contention that where the holding structure has existed for a considerable length of time, then there was no need to go into the question such as de-facto control v. legal control. 15. The applicant has also placed reliance on the decision of this authority in the case of Dow Agrosciences Agricultural Products Ltd., In re [2016] 380 ITR 668 (AAR) (AAR No. 1123 of 2011), wherein it was held that transfer of shares of an Indian company by a Mauritius entity to its group company in Singapore in a scheme of group reorganisation was not taxable in India. It was submitted that the facts of the present case were similar to the facts of the said ruling. It was further submitted that it was an established principle that a subsidiary would depend on its parent company for funding in the form of debt or equity. In this regard the applicant placed reliance on the ruling of this authority in the case of E-Trade Mauritius Ltd., In re [2010] 324 ITR 1 (AAR). 16. Regarding the request of the Revenue to lift the corporate veil the appl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... authority is required to examine such further material as may be placed by the applicant or as obtained by the authority and thereafter pronounce its advance ruling on the question specified in the application. In view of this scheme under the Act, it is not open for the Revenue to call for any information as it desires. Nevertheless, the Revenue may obtain information that might be relevant to decide the question raised in the application with prior approval of the authority. At the same time it may have to be demonstrated as to how the information being called for is relevant and necessary to decide the issue before the authority. When viewed from this perspective, it is found that the applicant has provided the information which is relevant for deciding the question before us. Obviously the information which was not in the possession of applicant, e.g., global financial statement of BDX USA, could not have been provided. The question raised before us was taxability of capital gains arising on sale of shares of BD India. Some of the information regarding how the sale proceeds of the shares was utilised, copy of valuation report of shares of BD Singapore, copy of loan agreement b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax residency certificate (TRC) issued by the Mauritius Revenue Authority. It was holding Global 1 category business licence under "The Financial Services Act" of Mauritius issued by the financial service commission of Mauritius. As per section 71(5) of the said Act, a corporation holding category 1 global business licence shall at all times be administered by a management company. It was clarified that in terms of this requirement, the applicant had no employee as it was administered and managed by International Mauritius Management Limited, a management company. The other conditions regarding management and control from Mauritius, having at least two directors resident in Mauritius, its principal bank accounts being maintained in Mauritius, its accounting and registered office being in Mauritius, etc. were also fulfilled. It was clarified that there were no common directors in BDX, the holding company, and the applicant. 21. The applicant made investment in BD India commencing from January 1996 to February 1999 and acquired 1,229,205,187 shares of Rs. 10 each as under : - Date Amount Invested 30-Jan-96 107,480,187 18-Feb-98 116,220,000 17-Apr-98 158,680,000 16- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d September 30, 2012. The investment in the shares of BD Singapore was finally replaced by way of a loan to the holding company, BDX. This amount of loan was duly disclosed in the financial statements of the applicant for the year ended September 30, 2012. 23. The Revenue has relied upon note 16 of the notes to financial statement for the period ending September 30, 2011 to emphasize that the decision for sale the shares of BD India was not taken by the applicant but by its holding company, Becton Dickinson and Company (BDX), a corporation under the laws of State of New Jersey, USA. As explained by the applicant, the said note was only a summary of the meeting held on September 8, 2011 by the board of directors. The holding company had informed that as part of its global business optimization strategy it was seeking to align its corporate legal entity organizational structure in a way that was consistent with the evolving business strategy. As part of reorganization BDX had formed BD Singapore as direct holding company for some of BD Group Asian entities in Malaysia, China, Singapore and Taiwan. It was further mentioned in the said note that "the Company will subsequently transfer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r a substantial cost of about Rs. 61 crores and if they are sought to be now transferred to a Singapore concern which is the own subsidiary of the applicant, it cannot amount to a design or a scheme to avoid payment of taxes in India. The applicant has relied on the details of the promoters of DAS India in their reply dated September 28, 2015. It is seen that DAS India was incorporated on December 7, 1994. The investment made in the DAS India was with the prior approval of the Department of Industrial Policy and Pro motion (DIPP). The subsequent investment also were with the approval of RBI and hence it cannot be said the shares were acquired with a view to sell in future through the Mauritian company and thus to avoid the taxes on possible capital gains. We, therefore, reject the contention of the Revenue that this amounted to a scheme to avoid payment of taxes in India and hold accordingly." 25. It is found that the facts of the present case are identical with the facts of Dow Agro (supra) as evident from the following chart : Particulars Facts in Dow Agro's ruling Facts of applicant's case Period of investment and regulatory approvals Dow Agro, a company incorpora ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plicant being an investment holding company where its only business was of making investments and gaining from capital appreciation, we cannot draw any adverse inference on the applicant's independent status, its investment decisions and also the control and management of its business. We do not find any substance in the Revenue's allegations that the applicant was a benami shareholder, a name lender and that the actual owner of the shares of BD India was BDX. We, therefore, hold that the transaction was not designed, prima facie, for avoidance of tax. 27. We are supported by the decision of this authority in the case of E-Trade Mauritius Ltd., In re [2010] 324 ITR 1 (AAR) wherein it was held that in case shares of an Indian company were purchased by the applicant with funds received from its parent company by way of capital contributions and loans, it cannot be said that beneficial owner of shares was with the parent company and that the capital gain had arisen not in the hands of the applicant but in the hands of a parent company. The appropriation of sale proceeds in advancing loan by the applicant to its holding company will also have no impact on this issue. It was he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has also contended that the holding company of the applicant BDX was the real beneficiary of the transactions and the investment was made through Mauritius route to take advantage of the treaty shopping, which was a colourable device, and a request was made to lift the corporate veil to unravel the real transaction. In this connection the applicant has relied upon the decision of the hon'ble Supreme Court in the case of Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706 (SC). The apex court has held in that case that there was no legal taboo against "treaty shopping". It was further held that the treaty shopping and the underlying objective of tax avoidance/mitigation was apparently not equated to colourable device. To reproduce from the order (page 752 of 263 ITR) : "Many developed countries tolerate or encourage treaty shopping, even if it is unintended, improper or unjustified, for other non-tax reasons, unless it leads to a significant loss of tax revenues. Moreover, several of them allow the use of their treaty network to attract foreign enterprises and offshore activities. Some of them favour treaty shopping for outbound investment to reduce the foreign taxes of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sign of tax avoidance by itself is not objectionable if it is within the framework of law and not prohibited by law. In the instant case, the applicant was legal owner of the shares and had entered into transaction of sale of shares backed by board's resolution and had received the sale consideration. Under the circumstances the capital gain had arisen in the hands of the applicant only. As per 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. On the identical issue, this authority had held in the case of E Trade Mauritius Ltd. (supra), as under (page 21 of 324 ITR) : "10. In this fact situation, ex facie, it is difficult to assume that the capital gain have 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, 'treaty shopping' through conduit companies is not against law and the lifting of the corporate veil is not permissible to deny the benefits of a tax treaty." 31. The Revenue has submitted that the principles ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bringing FDI worth millions of dollars into India. If the Union of India and the Tax Department insist that the investment would directly come from Mauritius and Mauritius alone then the Indo-Mauritius treaty would be dead letter. 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 Mauritius company and/or by way of repayment of loans received by the Mauritius company from the foreign principal/shareholder for the purpose of making the investment. 97. We are, therefore, of the view that in the absence of LOB clause and the presence of Circular No. 789 of 2000 and tax residency certificate, on the residence and beneficial interest/ownership, tax Department cannot at the time of sale/disinvestment/exit from such FDI, deny benefits to such Mauritius companies of the Treaty by stating that FDI was only routed through a Mauritius company, by a company/pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a taboo." 34. In CIT (International Taxation) v. JSH (Mauritius) Ltd. [2017] 10 ITR- OL 627 (Bom) ; [2017] 84 taxmann.com 37 (Bom) the hon'ble Bombay High Court had held that in view of India-Mauritius DTAA the capital gains from alienation of shares situated in India could only be taxed in Mauritius and not in India. It was also held that the Authority for Advance Ruling on considering the application and the documents and the facts on record had conclusively held that the transaction was not designed for avoidance of Income-tax. 35. The Revenue has relied upon the decision of this authority in the case of "AB" Mauritius, In re [2018] 402 ITR 311 (AAR) ; [2018] 90 taxmann.com 182 (AAR - New Delhi). It is found that in that case the board of directors of the applicant had merely reiterated the decision of the holding company and the applicant had no role in decision making process for acquiring shares of AB India from US sellers and had also not paid any consideration for the same. Further, SPA was signed by MD of C Group and not by any director of the applicant even though the applicant was mentioned as buyer in SPA. On these specific facts and exceptional circumstances the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant to decide the issue before hand. 37. On the facts of the case as discussed above we do not have any adverse finding and we are inclined to accept the plea of the applicant that it was not a benami or set up for tax avoidance as a colourable device and only for treaty shopping, which in any case is not taboo. It is not in dispute that the applicant is a tax resident of Mauritius, possesses a valid tax residency certificate granted by the Mauritius tax authorities and would be covered under the India-Mauritius DTAC, the Circulars, decisions and rulings as discussed above. The Circular 789 dated April 14, 2000 issued by the Central Board of Direct Taxes states as follows (page 57 of 243 ITR (St.)) : "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." The above position has further been clarified by the Finance Ministry vide issuance of a clarification regarding tax residency certificate on March 1, 2013. When the intent and activities of the applicant are found to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... immovable property, as defined in paragraph 2 of article 6, may be taxed in the Contracting State in which such property is situated. 2. Gains from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State or of movable property pertaining to a fixed base available to a resident of a Contracting State in the other Contracting State for the purpose of performing independent personal services, including such gains from the alienation of such a permanent establishment (alone or together with the whole enterprise) or of such a fixed base, may be taxed in that other State. 3. Notwithstanding the provisions of paragraph 2 of this article, gains from the alienation of ships and aircraft operated in international traffic and movable property 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 a Contracting State from the alienation of any property other than those mentioned in paragraphs 1, 2 and 3 of this a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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