TMI Blog2021 (10) TMI 1270X X X X Extracts X X X X X X X X Extracts X X X X ..... he sole beneficiary, it should be considered as representative assessee of the sole beneficiary - reasoning given by AAR that the trust is registered in jersey, there is no treaty between India and Jersey and Section 61 and 63 of the Act would apply only to those trust which fall under the Indian Trust Act 1882 HELD THAT:- Nothing in Section 61 requires involvement of a trust in revocable transfer. Section 61 is plain and simple in as much as, it provides for income arising to any person by virtue of a revocable transfer of assets shall be chargeable to income tax as the income of the transferor and shall be included in his total income. Further Section 61 is not dependent on Section 63 of the Act. A transfer can be revocable transfer on its own merits without reference to Section 63 of the Act. Clause (a) of Section 63 of the Act merely extends the provisions of Section 61 of the Act to cases which might not otherwise be covered by Section 61 by extending the meaning of word revocable. The case of AAR that if the transaction does not qualify as a trust, the provisions of Section 63 and/or Section 61 are not applicable, is erroneous. In any event, under Section 63 there is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n advantage of Article 24 of India-UAE treaty. But the fact is ADIA has explained in detail in its letter dated 13th November 2018 and letter dated 25th September 2019 to AAR, why it routed its investment in non convertible debentures through Jersey route for Indian market. As regards the ground that Section 160(1)(i) or 160(1)(iv) of the Act, provides that trustee can be representative assessee but in this case trustee being a resident of Jersey cannot be an agent of ADIA, in our view that is not sustainable as the Act does not provide anywhere that only trustee who is resident of India can be an agent under Section 160 of the Act. Act presupposes that a Foreign Trust is a trust for the purposes of the Act. In Vikramsinghjit of Gondal [ 2014 (5) TMI 286 - SUPREME COURT] , the Apex Court has applied the provisions of Section 164 and 166 of the Act to tax the beneficiary of a trust settled in U.K. Even if, the trust is based out of Jersey and the trust is settled in Jersey, ADIA being the settlor and sole beneficiary of the trust and resident of UAE as per Article 24 of the India-UAE DTAA, the income which arises to it by virtue of investment in Indian Portfolio companies w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the counsel. 2. In both the petitions, a common ruling dated 18th March 2020 passed by the Authority for Advance Ruling (Income Tax) (hereinafter referred to as AAR) is impugned. Hence both the petitions are taken up together. Shri Kotangle did not wish to file any reply since according to him only questions of law were involved. We shall take Writ Petition No.770 of 2021 filed by Abu Dhabi Investment Authority (hereinafter referred to as ADIA) as lead petition. 3. ADIA is a public institution owned by and subject to the supervision of the Emirate of Abu Dhabi. Article 4 (2) (d) of the India-United Arab Emirates ( UAE ) Double Taxation Avoidance Agreement (hereinafter referred to as the India-UAE DTAA ) expressly provides that ADIA is a resident of UAE for the purposes of Article 4 thereof and, accordingly, ADIA is entitled to invoke the beneficial provisions of the India-UAE DTAA for the purpose of determining its tax liability in India. ADIA files its return of income (hereinafter referred to as ROI ) in India, disclosing therein income that falls within the scope of Section 5 (2) of the Income Tax Act, 1961 (hereinafter referred to as the Act ) but in view of the exemp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsent of the Sole Beneficiary; and (ii) the date on which the remaining Receipts in the Trust Fund are distributed to the Sole Beneficiary after payment and discharge of all accrued expenses (including Operating Expenses), fees and liabilities of the Trust. (eee) Trust shall have the meaning provided in the Recitals above; (ggg) Trust Fund shall mean the Initial Settlement Sum, the Capital Contributions, Receipts, any accretions, all other cash and property held by the Trustee pursuant to the terms of this Deed in trust for the Sole Beneficiary together with all of the Trustee s interest in Portfolio Investments. 3.1 The Settlor has on or before the execution of this instrument transferred to the Trustee, by way of wire transfer or a cheque or such other instrument, the Initial Settlement Sum and the Trustee hereby admits, acknowledges and declares that the Trust Fund shall be held by it in trust for the Sole Beneficiary and shall be applied and governed by the terms and conditions of this Deed. 9.2 Receipts may, subject to the terms of this Deed, be distributed by the Trustee to the Sole Beneficiary as and when deemed appropriate by the Trustee but su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aking a number of investments around the world. Jersey s regulatory regime is complaint with international standards and Jersey has also entered into information exchange agreements with a number of countries and is generally not considered an obstructive or opaque jurisdiction. In view of the aforesaid reasons ADIA set up the trust to make investments in India and claimed the benefit of the India-UAE DTAA. 7. The Trust was registered with the Securities and Exchange Board of India (SEBI) as Foreign Institutional Investor (FII) under the SEBI (Foreign Institutional Investors) Regulations, 1995 and later on as Foreign Portfolio Investor under the SEBI (Foreign Portfolio Investors) Regulations 2014. ETL as trustee has entered into an Investment Management Agreement dated 24th July 2013 with Kotak Mahindra (International) Ltd. (hereinafter referred to as KMIL). One of the obligations cast on KMIL in terms of the agreement is that a KMIL group Subsidiary will invest in each and every portfolio company alongside the Trust. The Deed of Settlement provides that the capital contributions made or proposed to be made by ADIA to the Trust would be a revocable transfer. According to AD ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dated 9th June 2016 before AAR, seeking a review of the order of admission apparently due to an error that had crept into the order. The said application was rejected by AAR on 15th November 2018. ADIA also had filed a rectification application dated 21st June 2016 since in the order of admission the words used are irrevocable trust whereas it should be revocable trust . ADIA made further submissions and addressed various communications to AAR. The CIT(IT) gave its final report dated 1st November 2019 under Section 245R(4) of the Act reiterating the submissions/contentions raised by them in their earlier report dated 6th August 2019. AAR also held hearing on couple of days where ADIA reiterated its submissions made in their earlier letters and written submissions. Certain case laws were also relied upon by ADIA. 11. AAR did not accept any of the contentions raised by ADIA regarding the income accrued on the investments made or proposed to be made by the Trust in Indian portfolio companies and passed a common order/ruling dated 18th March 2020, which is impugned in both these petitions, denying ADIA and ETL the benefit of the India-UAE DTAA. AAR, inter alia, concluded:- ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hence, it cannot be taxed in the like manner and to the same extent as ADIA would have been taxable. (ix) Rejected the argument of ADIA that even if the trust is to be ignored, the income would still accrue to ADIA and would be exempt under the India-UAE DTAA. Piercing the veil or lifting of veil of an arrangement is for the benefit of the Revenue to check if conception is used for tax evasion or not. In the present scenario, piercing the veil is not warranted. (x) Accrual of income to trust is not income derived by ADIA. Hence, the said income does not fall under article 24 of India-UAE Treaty. (xi) Had ADIA routed the funds through an entity or structure based in UAE and ADIA being the beneficial owner, then interest income would have been exempt under article 11(3) of India-UAE Treaty. The said view is fortified by the amendment proposed in the Finance Bill, 2020 (exemption for certain income of wholly owned subsidiaries of ADIA). [AAR relied on this amendment in spite of the fact that the same was introduced in the Act post the hearing of the application and was never put to ADIA, for them to make any submissions thereon]. (xii) Section 115AD of the Act, app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cipal amount would revert absolutely to ADIA as settlor; (f) Therefore, since the Deed of Settlement expressly provides for retransfer of right to re-assume power over the entire income arising on the investments made by the Trust in the portfolio companies as well as the principal amount invested in the portfolio companies, the transfer of the contribution that have been made and/or will be made by ADIA to the Trust are/will each be a revocable transfer under the provisions of Section 63 of the Act. 13. Shri Pardiwalla also relied upon Section 61 of the Act which contains provisions relating to taxability of income arising by virtue of revocable transfer of assets and the same reads as under: Revocable Transfer of Assets 61. All income arising to any person by virtue of a revocable transfer of assets shall be chargeable to income-tax as the income of the transferor and shall be included in his total income. Shri Pardiwalla submitted as the capital contribution made and/or to be made by ADIA in the trust will be a revocable transfer under Section 63 of the Act, any income on the investment that is proposed to be made by the trust in the portfolio companies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in clause (iv) of sub-section (1) of section 160 is liable as representative assessee consists of, or includes, profits and gains of business, tax shall be charged on the whole of the income in respect of which such person is so liable at the maximum marginal rate : Provided that the provisions of this sub-section shall not apply where such profits and gains are receivable under a trust declared by any person by will exclusively for the benefit of any relative dependent on him for support and maintenance, and such trust is the only trust so declared by him. (2) Where any person is, in respect of any income, assessable underthis Chapter in the capacity of a representative assessee, he shall not, in respect of that income, be assessed under any other provision of this Act. In view thereof, even if the income is taxed in the hands of the Trustee, in terms of Section 161(1) of the Act, it will be taxed in the like manner and to the same extent as the beneficiary. As the tax on income received by or accruing to the Trust from the investments made or proposed to be made in portfolio companies is to be levied in the hands of the trustee and recovered from the trustee in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee. ... Therefore, the provisions of Article 24 of India-UAE DTAA should apply as it is more beneficial than the provisions of the Act. Thus, ADIA should not be liable to pay tax on any income which may arise from investments made by the Trust in portfolio companies. 16. Shri Pardiwalla thereafter relied upon Section 166 of the Act. Section 166 of the Act reads as under: Section 166- Direct assessment or recovery not barred. Nothing in the forgoing sections in this Chapter shall prevent either the direct assessment of the person on whose behalf or for whose benefit income therein referred to is receivable, or the recovery from such person of the tax payable in respect of such income. Shri Pardiwalla submitted:- (a) Under Section 166 of the Act, in the case of representative assessee, the revenue has an option embodied in Section 166 to assess the beneficiaries instead of the trustees or having assessed the trustees it may proc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ividuals or otherwise; (f) It must follow inevitably from this premise that since it is the beneficial interests which are taxable in the hands of the trustee in a representative capacity, the liability of the trustee cannot be greater than the aggregate liability of the beneficiaries and no part of the corpus of the trust properties can be assessed in the hands of the trustee. 17. Shri Pardiwalla also submitted that if the act was to extend to only Indian Trust, it would have expressly provided like it is provided in Section 10 (23FB) of the Act, which provides for venture capital fund means a fund operating under a trust deed registered under the provisions of the Registration Act, 1908. Shri Pardiwalla submitted that Sections 60 to 63 or Section 160 or 161 of the Act does not provide for any such qualification. Therefore, Sections 60 to 63 and 160, 161 and 166 are applicable to a foreign trust. 18. Shri Pardiwalla relied upon the following judgments: (a) Columbia Sportswear Company Vs. Director of Income Tax (2012) 11 Supreme Court Cases 224 , Bangalore to submit that there is no alternate remedy against advance ruling by AAR and the proper forum to challenge wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... non resident. Therefore, if any income is received by or accrues or arise in India to a trust, it will be income due to having accrued or arisen in India and hence taxable; (b) As there is no treaty between India and Jersey where the trust is settled, the India-UAE DTAA will not be applicable; (c) Under Section 1 of the Indian Trust Act 1882, it only extends to the whole of India and hence will not be applicable to the Foreign Trust and for the trust, the liability for trust prevalent will be applicable and as there is no treaty between India and Jersey, Sections 63 or 161 to 164 does not apply. Shri Kotangle, however, did not elaborate; (d) Shri Kotangle, however, fairly conceded that India-UAE DTAA overrides the provisions of the Act as held by the Apex Court in Azadibachao Andolan (Supra). To a specific query raised by the court, Shri Kotangle in fairness, also agreed that there are no provisions in the Act which says that the provisions of Sections 61 to 63 or 161 to 166 are not applicable to Foreign Trust. 20. Shri Kotangle also submitted that ADIA received income through a device and not from direct or immediate receipt or transfer of income by trust a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . d) The settlor cannot be the sole beneficiary. e) Sections 60 to 64 are designed to over take and circumvent the counter design by a taxpayer to reduce its tax liability by parting its property in such a way that the income should no longer be received by him but at the same time he retains certain powers over property/income. f) Though Section 160(1)(i) or 160(1)(iv) provides that trustee can be representative assessee, in this case trustee being a resident of Jersey cannot be an agent of ADIA. g) No authority or material has been placed before AAR to suggest that the provisions of Section 161 would be applicable to Foreign trust/trustee. h) The assessee s representative could not satisfactorily answer the query as to why ADIA would like to route its investment in non-convertible debenture funds through Jersey route for investment in Indian market and ADIA itself being an FII registered with SEBI could have directly invested in Indian Portfolios and taken advantage of Article 24 of India-UAE DTAA. i) As ADIA is receiving income through a device and not from direct or immediate receipt and, therefore, income received from Indian debt investment is n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 63 is not restricted only to trust. It is an inclusive definition. So long as the conditions provided in Section 63 (a) are fulfilled, any transfer whether connected with the trust or not will be a revocable transfer. The case of AAR that if the transaction does not qualify as a trust, the provisions of Section 63 and/or Section 61 are not applicable, is erroneous. In any event, under Section 63 there is no requirement that a trust covered by it must necessarily be an Indian trust falling under the Indian Trust Act. Such restriction which is not there in the Act cannot be imported into Sections 61 and 63 of the Act. As noted earlier, where such restriction is provided for the Act says so as noted in section 10(23FB) of the Act where it specifically provides that venture capital fund means a fund operating under the trust deed registered under the provisions of Registration Act, 1908. 26. As regards the stand that India has not ratified the Hague Convention on the Law Applicable to Trust and on their recognition ( Hague Trust Convention , Convention of 1 July 1985), trust laws of a foreign jurisdiction are not applicable in India, the word trust first of all is not def ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an Trust Act the trust is an obligation annexed to the ownership of property and arising out of a confidence reposed in and accepted by the owner, or declared and accepted by him, for the benefit of another, or of another and the owner. Article 2 of the Trusts (Jersey) Laws 1984 reads as under: A trust exists where a person (known as a trustee) holds or has vested in the person or is deemed to hold or have vested in the person property (of which the person is not the owner in the person s own right)- (a) for the benefit of any person (known as a beneficiary) whether or not yet ascertained or in existence; (b) for any purpose which is nor for the benefit only of the trustee; or (c) for such benefit as is mentioned in sub-paragraph (a) and also for any such purpose as is mentioned in sub-paragraph(b). Therefore, as can be seen from the definitions, the Trust created in terms of the deed of settlement is consistent with the requirements of both, the Indian Trusts Act as well as Trust (Jersey) Law, 1984 as to what constitutes a trust. 27 As to the ground that the settlor cannot be a sole beneficiary, as ADIA was settlor as well as sole beneficiary, first ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AAR, why it routed its investment in non convertible debentures through Jersey route for Indian market. 29. As regards the ground that Section 160(1)(i) or 160(1)(iv) of the Act, provides that trustee can be representative assessee but in this case trustee being a resident of Jersey cannot be an agent of ADIA, in our view that is not sustainable as the Act does not provide anywhere that only trustee who is resident of India can be an agent under Section 160 of the Act. 30. As regards the ground of proposed amendment in the Finance Bill 2020 (Exemption from certain income of wholly owned subsidiaries of ADIA), Shri Pardiwalla submitted that AAR relied on the amendment despite the fact that the same was introduced in the Act post the hearing of the application and was never put to ADIA for them to make any submissions thereon. We would agree with Shri Pardiwalla. It was improper for AAR to have relied upon the proposed amendment. If, AAR wanted to, it could have given notice to ADIA to make their submissions thereon. Therefore, the contents of the proposed amendment could not have been relied upon by AAR. 31. In our view, therefore, the Deed of Settlement dated 22nd July 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in U.K. 32. Even if, the trust is based out of Jersey and the trust is settled in Jersey, ADIA being the settlor and sole beneficiary of the trust and resident of UAE as per Article 24 of the India-UAE DTAA, the income which arises to it by virtue of investment in Indian Portfolio companies will be governed by the beneficial provisions of the India-UAE DTAA. To take it further, even if the trust structure were to be discarded, then it must necessarily follow that the investment must be regarded as having been made by ADIA and hence the income would arise in the hands of ADIA which income would not be taxable in India by virtue of provisions of India-UAE DTAA. We have to note that there was no attempt whatsoever to reduce the tax liability by using the trust structure. When the provisions of the Trust Deed provided that ADIA has right to re-assume power over the entire income arising on the investments made by the trust in the portfolio companies, the entire income arising therefrom has to be in terms of Section 61 of the Act to be assessed in the hands of ADIA. This would mean the exemption under Article 24 of India-UAE DTAA would be attracted. Even if for a moment we say that f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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