TMI Blog2023 (3) TMI 563X X X X Extracts X X X X X X X X Extracts X X X X ..... us DTAA would not be taxable in India - As per revenue Petitioner was a sham or a shell or a conduit incorporated only for the purposes of evading tax in India or as a device - HELD THAT:- We note from Article 13 with respect to capital gains that 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 the Article shall be taxable only in that State i.e. in the present case in Mauritius and not in India. As per Circular No.682 dated 30th March 1994 issued by the CBDT 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 only in Mauritius, thus capital gains derived by a resident of Mauritius by alienation of shares of companies shall be taxable in Mauritius only and will not have any capital gains tax liability in India. Circular No.789 of 2000 dated 13th April 2000 clearly suggests that certificate of residence issued by Mauritian Authorities will constitute sufficient evidence for accepting the status of residence as well as beneficial ownership for the purposes of the Mauritius DTAA and that capital gains ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the position these observations of the authority appear to be misplaced. The investment by Petitioner in the JVC was with the knowledge and consent of the Government of India Authority viz., AAI. As noted above, Bidvest, the ultimate holding company, had informed AAI vide its letter dated 9th September 2005 that Petitioner would hold 27% of the share capital of JVC if the Consortium was selected as successful bidder. Not only that, it was submitted that the Consortium has addressed various letters dated 24th May 2005, 3rd June 2005, 7th July 2005 and 12th July 2005 to AAI seeking clarification to confirm the proposed change in the Consortium structure. Neither the Revenue nor the Authority have denied or disputed the aforesaid facts. After consideration of the technical and financial bid by the Consortium, the GVK-SA Consortium was selected as the successful bidder for the purposes of the project viz., modernization and development of the Mumbai Airport vide communication dated 4th February 2006. That, the Petitioner is one of the members of the offerer Consortium. Share holders agreement dated 4th April 2006 between the AAI, MIAL, GVK Airport Holdings Private Limited and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Act. Therefore, for the authority to hold that Petitioner s involvement at the stage of bidding process was without the approval of the authorities appears to be without substance. In our view, the logic that Petitioner was brought in for ease of doing business or for operational reasons and to provide supportive business environment appears to find favour with the aforesaid observations of the Hon ble Apex Court in Vodafone International Holding B.V. v. Union of India [ 2012 (1) TMI 52 - SUPREME COURT ] Having observed that the Advance Ruling Authority has failed to consider Circular 682 of 1994, 789 of 2000 , the Press release with respect to the TRC, the decision in the case of Union of India vs. Azadi Bachao Andolan [ 2003 (10) TMI 5 - SUPREME COURT ] the decision in the case of Vodafone Intl. Holding B.V. v. Union of India [ 2012 (1) TMI 52 - SUPREME COURT ] the applicability of the LOB clause as well as the Press Releases dated 1st March 2013 and 29th August 2016 which clearly grandfathers investments made before 1st April 2017 by stating that such investments will not be subject to capital gains taxation in India and the investment as well as the sale in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a joint venture of Airports Company South Africa Limited (ACSA), Old Mutual Life Assurance Company South Africa Limited and the Bidvest Group Limited (BidVest)) 1 filed their expression of interest on 20th July, 2004, with the AAI for both the Mumbai and Delhi airports. Bidvest is one of the parties to the joint venture which in turn is a part of the Consortium. Subsequently, the AAI issued a Request for Proposal ( RFP ) document to the pre-qualified bidders on 1st April, 2005. It is submitted in the Petition that the Consortium addressed various letters dated 24th May, 2005, 3rd June, 2005, 7th July, 2005 and 12th July, 2005, to the AAI seeking clarification to confirm the proposed change in the consortium structure. It is also submitted that Bidvest informed AAI vide letter dated 9th September, 2005 that BSDM would hold 27% of the total share capital of the Joint Venture Company (the JVC ) if the Consortium was selected as the successful bidder. The Consortium submitted the technical and financial bid to the AAI providing complete details as required by the RFP on 12th September, 2005. The AAI in consultation with the Ministry of Civil Aviation, Government of India ( GOI ) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1956, whereby the Petitioner agreed to sell and transfer to GAHPL and GAHPL agreed to purchase and acquire from the Petitioner 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 USD 287,222,000. The shareholding post divestment of stake in MIAL by the Petitioner would be as under:- Sr. No. Name of the Shareholder % of shareholding in MIAL Before transfer Post transfer 1 AAI 26% 26% 2 GAHPL 37% 50.50% 3 BSDM (i.e. Petitioner) 27% 13.50% 4 AGL 10% 10% Total 100% 100% 9. On 18th April, 2011, Petitioner made an application under Section 197(1) of the Act to the Assistant Direc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Consortium had taken into account the technical expertise and competence of the constituents of the Consortium including that of the South African parent company of the Petitioner. b) It was also submitted that the Petitioner was not inexistence when the EOI was filed by the Consortium in July, 2004 and it came in existence only in August, 2005. It was further submitted that only after the successful bid was given in favour of the Consortium that the Petitioner was brought into the Consortium in place of their parent company, Bidvest. It was therefore submitted that there was no economic/commercial purpose for making investment in the name of the Mauritian Group Entity, i.e. the Petitioner except for avoidance of tax in India as the Petitioner wanted to take the benefit of the Mauritius DTAA provisions for any subsequent divestment of their investment in the JVC. Several other objections were also made to oppose the admission of the aforesaid application and it was alleged that the entire transaction was designed prima facie for tax avoidance as per Clause (iii) of proviso to Section 245R (2) of the Act. 14. That, in response to the objections filed by the department, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l and technical competency of the group as a whole. However, while routing its investments in various projects, separate companies are formed which in commercial parlance is termed as Special Purpose Vehicles (SPVs). -SPVs are formed for commercial reasons as such for hedging business, political and economic risk of a country, mobility of investments, ability to raise loans from diverse investments, valuation from growth perspective and tapping global funds for listing purposes, facilitate specialisation and undivided attention on the project in hand. Hence, ease of doing business and supportive business environment is an important criterion in determining the jurisdiction of setting up of such SPVs. c. In respect of increase of value of shares by merely ten-times within a short span of less than six months from the date of last tranche of the investment, it was submitted as follows: -as required under the RFP and as agreed by the Consortium members under the Technical and Financial Bid which was binding in nature, the Consortium members were required to und for the first seven years by way of equity bank guarantee provided by the Consortium members. Hence, towards ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the contention of the department with regard to substitution of Bidvest by the Petitioner was incorrect and they once again filed a letter dated 25th February 2015 along with the annexures reiterating the correct facts in respect thereof. They also submitted that they had repeatedly, during the course of various hearings before Respondent no.1, submitted that the additional details sought for by the office of the Respondent no.4 were not relevant for the purpose of determining whether the application filed by the Petitioner should be admitted in terms of Section 245R(2) of the Act. They further submitted that most of the details sought for by the Respondent no.4 were already there before the Respondent no.1 and there was no requirement to file any additional details / documents. 17. Respondent no.4 submitted their reply on 16th April 2015 on the admissibility under Section 245R(2) of the Act before Respondent no.1. 18. Vide letter dated 15th July 2015 Petitioner through their authorised representative submitted their paragraph wise reply to the aforesaid final report. The matter was heard on 27th July 2015 and the application filed by the Petitioner was admitted. 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act, the capital gains arising out of the same of 13.5% equity stake in MIAL by BSDM to GAHPL is deemed to be the income in the hands of the ultimate holding company of BSDM i.e. Bidvest. As per the provisions of the Indian Income Tax Act, 1961 and as per the provisions of Article 13(4) of the DTAA between India and South Africa, this income is chargeable to tax in India. 20. The matter was finally heard on 22nd August 2019 before Respondent no.1, whereat, the Petitioner reiterated the submissions made by the Petitioner regarding the non-taxability of the gain arising from the transaction of sale of the shares, effected pursuant to the SPA dated 1st March 2011 held by the Petitioner in MIAL having regard to the provisions of Article 13(4) of the Mauritius DTAA. 21. Pursuant to the hearing, the submissions made by the Petitioner at the time of hearing were summarized by the Petitioner by way of written submissions dated 4th September 2019 and filed by the Petitioner before Respondent no.1. 22. Mr. Pardiwala, learned Senior Counsel for the Petitioner, would submit that on the basis of the ITREOI, EOI and RFP it was clear that the AAI had permitted use of the special pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he status of residence as well as beneficial ownership for applying the double taxation avoidance convention. Learned Senior Counsel has also relied upon Press Release dated 1st March, 2013 with respect to the TRC. Learned Senior Counsel relies upon the decision of Union of India Anr. v. Azadi Bachao Andolan and Anr. [2003] 263 ITR 706 (SC) in support of his contentions. Learned Senior Counsel also refer to the decision in the case of Vodafone International Holding B.V. v. Union of India [2012] 341 ITR 1 (SC) relied upon by the Revenue as well as the Authority and would submit that the decision of Vodafone International Holding B.V. v. Union of India (supra) would in fact support the case of the Petitioner. Learned Senior Counsel would submit that Vodafone International Holding B.V. v. Union of India (supra) read as a whole leads to a conclusion that the Ruling is completely contrary to the principles affirmed therein. He would submit that the allegation of interposing Petitioner for tax evasion has only been raised at the time of sale of the shares and not earlier. With respect to the observations that incorporation of Petitioner lacked economic /commercial ratio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... That this Hon ble Court may please to issue a Writ of Mandamus or a writ in the nature of Mandamus or any other appropriate writ, order or direction, directing the Respondent no.1 to rule that the gain arising on the sale of shares of MIAL to GAHPL would not be chargeable to tax in India having regard to the provisions of Article 13(4) of the Mauritius DTAA. 28. Mr. Suresh Kumar, learned standing Counsel for the Respondents supports the impugned Ruling and submits that the transaction by the Petitioner is sham and bogus. He would submit that entire structure of incorporation of Petitioner and Petitioner s introduction is a device to avoid taxation. Learned Counsel refers to the Affidavit-in-reply dated 5th May 2022 filed on behalf of the Respondents in support of his contentions. Mr. Suresh Kumar reads through the impugned decision and submits that interposing an entity for taking benefit of a tax treaty, even from the beginning, is not permitted. Learned Counsel refers to paragraph 59 of the impugned decision and submits that the Petitioner is a shell and a sham. It has no employees, no assets. He would submit that it is a device only interposed for taking tax benefit under t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce in the field of operation and maintenance of airport. The two business groups and ACSA complete the competences required to bid for the project. The consortium was declared as successful bidders by AAI on 04-02-2006 based on financial and management capabilities and experience in air force management of the evaluated entities. 57. GVK group is based in India. The bid services group is based in South Africa. The ACSA (in which government of South Africa has stake) is the only technical expert in the consortium in the field of airport and maintenance is also based in South Africa. GVK, ACSA and Bidvest were the evaluated entities as prequalifying bidding stage. 58. Just ten days prior to filing of technical and financial bid in September, 2005, the applicant [BSDM] was brought in the consortium. After AAI declared GVK consortium as successful bidder for undertaking the modernisation of Mumbai airport vide letter dated 4.2.2006, the Mumbai International Airport Pvt. Ltd. (MIAL), the capital JV company was incorporated on 2.6.2006. GAHPL, BSDM, AGL and AAI were designated as prime members of the joint venture and a shareholder agreement between the four entities and MIAL w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 61. Let us examine, what is the real role of applicant in the JV. It served as conduit for routing funds for South African based holding companies. The shares of joint venture were bought in the name of applicant though the beneficial owners were the holding companies in South Africa. The applicant kept on noting and endorsing decisions of the holding company in the Board meetings without any contribution or discussion about the decision making process. In short, the applicant is not in a position to create any value for the joint venture. 62. One can claim that holding company will always be predominantly controlling all vital decisions of subsidiary company and that latter may be implementing such decisions. This may be true but if an entity claims treaty benefits it must establish the economy rationale and substance for treaty entitlement. Treaty shopping is well known for international tax planning whereby an entity is interposed in a country with favourable tax laws. Lately, the world over it is reckoned that improper nature of treaty shopping structure is created if the following factors are satisfied i.e., the beneficial owner of the treaty shopping entity does not re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me and all his economic interests, including a substantial, shareholding in a company of the State, and who, essentially in order to sell the shares and escape taxation in that State on the capital gains from the alienation (by virtue of paragraph 5 of Article 13), transfers his permanent home to the other Contracting State, where such gains are subject to little or no tax. 9.5 It is important to note, however, that it should not be lightly assumed that a taxpayer is entering into the type of abusive transactions referred to above. A guiding principle is that the benefits of a double taxation convention should not be available where a main purpose for entering into certain transactions or arrangements was to secure a more favourable tax position and obtaining that more favourable treatment in these circumstances would be contrary to the object and purpose of the relevant provisions. (emphasis supplied) It would be apparent that the OECD prescriptions (supra) fit the factual matrix of case in hand. 65. The Hon ble Supreme Court in the case of Vodafone Intl. Holding v. Union of India has laid down various test to determine whether a transaction is used principally as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rporated few days before the JV was formed and has no independent sources of funds or sources of income nor has any fiscal independence. All the funds are with the holding companies. The applicant has no tangible assets, business activities except for owning the shares of the JV. Subjecting the facts to various tests i.e. Fiscal nullity Text, Commercial/business substance Test, Look at Principle Text, Investment Participation Test, Time duration Test, Business operations Period in India Test, Generation of taxable revenues in India Test, Scheme and dominant purpose test etc., the applicant fails the tests being a tax avoidance device, the dominant purpose of its interposing is to avoid taxes in India. 68. It is emphasised before us by the learned AR that introduction of BSDM helped in doing business 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 skill to facilitate the instant business venture. The applicant could not provide any rational or commercial basis for interposing of entity at fag end of the bidding process. The learned AR also could not pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing treaty benefit to the applicant. 73. The alternate plea of the learned AR is that even if it is assumed without admitting that the acquisition of shares in MIAL was done by applicant, solely with a view to take advantage of the beneficial provisions of Indo-Mauritius DTAA, the benefit cannot be denied as there is no limitation of benefit provision (LOB) in the DTAA. The plea is not tenable for the reason that the facts point towards a tax avoidance device and the Hon ble Apex Court in the case of Vodafone has clearly mentioned that though LOB and look through provisions cannot be read into a tax treaty but if it is established that the Mauritian company is interposed as a device, it is open to the tax department to discard the device and take into consideration the real transaction between the parties and the transaction would be subjected to tax. 74. We have perused the decisions cited by both sides. But we are primarily guided by decision of Apex court in the case of Vodafone Intl Holding v. Union of India and the peculiar facts of the case. It is trite law that the decisions are to be applied in the context of the facts of the case. In the case of Padmasundara Rao ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad the necessary technical expertise and experience in the field of operation and maintenance of the airport. That, the two business groups and ACSA had the complete competency required to bid for the project. On the basis of their financial and management capabilities and experience in airport management and on the basis that they were the evaluated entities, the Consortium was declared as successful bidder by the AAI on 4th February 2006. However, just ten days prior to filing of technical and financial bid, the Petitioner was brought into the Consortium. That the Mumbai International Airport Private Limited (MIAL) and the JV company was incorporated on 2nd June 2006. That the GVK group was committed to provide 37% equity through GAHPL and Bidvest provided 27% equity funding required to be invested by BSDM and ACSA was committed to funding 10% through AGL. That, despite this, the Bidvest group changed its routing of funds through the Petitioner through Mauritius, the Petitioner company being a shell company without any tangible assets, employees, office space etc. being incorporated a few days before the bidding. It has no management experts or financial advisers on its pay roll ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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 thisarticle, 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. 2 3A. Gains from the alienation of shares acquired on or after 1st April 2017 in a company which is resident of a Contracting State may be taxed in that State. 3 3B. However, the tax rate on the gains referred to in paragraph 3A of this Article and arising during the period beginning on 1st April, 2017 and ending on 31st March, 2019 shall not excee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by a resident of Mauritius by alienation of shares of companies shall be taxable in Mauritius only and will not have any capital gains tax liability in India. 38. Further, reliance was placed upon another Circular No.789 dated 13th April 2000 issued by the CBDT which clarified that companies 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 of Mauritius DTAA. An extract of Circular No.789 is reproduced below: 734. Clarification regarding taxation of income from dividends and capital gains under the Indo-Mauritius Double Tax Avoidance Convention (DTAC) 1. The provisions of the Indo-Mauritius DTAC of 1983 apply to residents of both India and Mauritius. Article 4 of the DTAC defines a resident of one State to mean any person who, under the laws of that State is liable to taxation therein by reason of his domicile, residence, place of management or any other criterion of a similar nature. Foreign Institutional Investors and other investment funds, etc., which are operating from Mauritius are invariably incorporated in that country. These entities are liable to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Taxation Avoidance Agreements. Sub-section (4) of section 90 was introduced last year by Finance Act, 2012. That subsection requires an assessee to produce a Tax Residency Certificate (TRC) in order to claim the benefit under DTAA. DTAAs recognize different kinds of income. The DTAAs stipulate that a resident of a contracting state will be entitled to the benefits of the DTAA. In the explanatory memorandum to the Finance Act, 2012, it was stated that the Tax Residency Certificate containing prescribed particulars is a necessary but not sufficient condition for availing benefits of the DTAA. The same words are proposed to be introduced in the Income-tax Act as sub-section (5) of section 90. Hence, it will be clear that nothing new has been done this year which was not there already last year. However, it has been pointed out that the language of the proposed sub-section (5) of section 90 could mean that the Tax Residency Certificate produced by a resident of a contracting state could be questioned by the Income Tax Authorities in India. The government wishes to make it clear that that is not the intention of the proposed subsection (5) of section 90. The Tax Reside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red by the provisions of the DTAC. 50. We do not think the circular in any way takes away or curtails the jurisdiction of the assessing officer to assess the income of the assessee before him. In our view, therefore, it is erroneous to say that the impugned circular No.789 dated 13.4.2000 is ultra vires the provisions of section 119 of the Act. In our judgment, the powers conferred upon the CBDT by sub-sections (1) and (2) of section 119 are wide enough to accommodate such a circular. 43. Paragraphs 97 and 98 of the decision in the case of Vodafone International Holding B.V. v. Union of India (supra) which also clearly uphold Circular No.789 and the conclusivity of the TRC are also usefully quoted as under : 97 We are, therefore, of the view that in the absence of LOB Clause and the presence of Circular No.789 of 2000 and TRC 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/principal resident in a third country; or the Mauritius company had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 44. Although paragraph 98 of the Vodafone International Holding B.V. v. Union of India (supra) has been quoted in the impugned ruling, however, paragraph 97 which is also relevant, appears to have been missed out by the authority. 45. No doubt mere holding of a TRC cannot prevent an enquiry if it can be established that the interposed entity was a device to avoid tax. However, the decisions of the Apex Court cited above have clearly upheld the conclusivity of the TRC absent fraud or illegal activities. Nowhere in the impugned ruling the existence of TRC has been denied. In fact in paragraph 2 of the impugned Ruling, the Authority has itself set out the existence of a valid TRC in the name of the Petitioner. Further, except bald allegations, no material has been placed on record to demonstrate or establish that Petitioner was a device to avoid tax or that there was fraud or any illegal activity. There is hardly any discussion in the impugned Ruling on the applicability of the said Circulars No. 682, 789 or the Press Releases by the CBDT / Ministry of Finance discussed above. 46. From the facts on record it cannot be said that the Indian Authorities were not aware of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vention. 48. It is observed that this Article disentitles benefits of Article 13(3B) if the affairs were arranged for the primary purpose to take advantage of the benefits of Article 13(3B). The Article has been inserted with effect from 1st April 2017. According to this Article, with effect from 1st April 2017, a shell or a conduit company that claims to be a resident of a contracting State shall not be entitled to benefits of Article 13(3B). 49. The Petitioner has also made reference to Press Release dated 29th August 2016 issued by the CBDT post amendment to Mauritius DTAA which was effective from 1st April 2017. The said Press Release is quoted as under:- Government of India Ministry of Finance Department of Revenue Central Board of Direct Taxes PRESS RELEASE New Delhi, 29th August, 2016. Subject: Notification of Protocol for amendment of the Convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains, and for the encouragement of mutual trade and investment between India and Mauritius - regarding The Protocol for amendment of the Convention for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n, streamline the flow of investment and stimulate the flow of exchange of information between the two Contracting Parties. It will improve transparency in tax matters and will help curb tax evasion and tax avoidance. (Meenakshi J Goswami) Commissioner of Income Tax (Media and Technical Policy) Official Spokesperson, CBDT. 50. The said press release expressly provides for grandfathering of capital gains exemption provided under the erstwhile Mauritius DTAA. The protocol provides for source based taxation of capital gains arising from alienation of shares acquired with effect from 1st April 2017 in a company resident in India viz. from Financial year 2017-18. Investments made before 1st April 2017 have been grandfathered and will not be subject to capital gains taxation in India. 51. The Authority appears to have clearly missed the clear import of this Circular as the entire sale by Petitioner was prior to 1st April, 2017. The arguments of the Revenue with respect to shell company/ conduit can only be considered for investments with effect from 1st April 2017 and not case at hand. 52. Therefore, to say that in the JV, Petitioner is a shell com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rds, subject to other conditions. 55. Although the observations of the Authority in paragraph 62 with respect to the claim of treaty shopping of as well as the doctrine of substance over formed in paragraph 63 cannot be faulted with, however, it needs to be emphasized that the LOB clause has been made effective for investments only from 1st April 2017. As noted above, even the press release dated 29th August 2016 confirms that investments made before 1st April 2017 will not be subject to capital gains taxation in India. That being the position these observations of the authority appear to be misplaced. 56. The investment by Petitioner in the JVC was with the knowledge and consent of the Government of India Authority viz., AAI. As noted above, Bidvest, the ultimate holding company, had informed AAI vide its letter dated 9th September 2005 that Petitioner would hold 27% of the share capital of JVC if the Consortium was selected as successful bidder. Not only that, it was submitted that the Consortium has addressed various letters dated 24th May 2005, 3rd June 2005, 7th July 2005 and 12th July 2005 to AAI seeking clarification to confirm the proposed change in the Consortium str ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs. SA Airport Operators in turn, is held by ACSA, Old Mutual and Bidvest. The final holdings by the three SA Airport Operators members will be finalised once the requirement of the RFP are issued but in any event ACSA s interest in the JV Company will not be less than 10%. b) The foreign ownership will take the form of the SA Airport Operator s Investment in GVK-SA representing 37% in the JV Company. c) It is not proposed that there will be any airline ownership of the JV Company. d) Other than the 26% shareholding in the JV Company by the Government of India it is not proposed that there will be any other government ownership of the JV Company. As a point of clarify the South African Government has a 74.6% shareholding in ACSA. 59. Thereafter, on 1st April 2005, RFP was issued by AAI to prequalified bidders and the GVK-SA Consortium was one of them. In the said RFP (on page 152 to the Petition) there is a definition of the term evaluated entity which is quoted as under : Evaluated Entity shall in relation to a Prime Member that is a special purpose vehicle ( SPV ), mean the Entity (a) whose qualifications have been attributed as the qualific ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or Bidder; Change the structure and timing of the transaction process; Accept or reject any offer at any time for any reason; Not provide PQBs or Bidders any reasons for any actions or decisions it may take including in respect of the exercise by AAI of any or all of the above mentioned rights; and Take such other action as it considers, in its absolute discretion, appropriate in relation to the transaction process for the airport. 64. Pursuant to the RFP, the Consortium submitted the technical and financial bid on 12th September 2005 making an offer for the modernisation of Mumbai Airport. As can be seen from page 227 of the Petition, the bid was submitted by GVK-SA Consortium comprising of the following members : The GVK-SA Consortium, comprising the following entities had submitted the expression of interest to AAI in respect of the transaction on 20 July 2004 : GVK Industries limited Airport Company South Africa Limited Old Mutual Life Assurance Company South Africa Limited The Bidvest Group Limited Subsequently, the terms of the criteria specified in the request for proposal dated 1 April 2005, GVK-SA Consortium vi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... val. All necessary approvals have been obtained for the Mauritian subsidiaries (ACSA Global Limited and Bid Services Division (Mauritius) Limited). 67. The offer also contained various resolutions of the share holders including Petitioner. Also on pages 278 to 280 of the Petition, the proposed ownership structure of the joint venture company also suggests that Petitioner would hold 27%. The structure of the evaluated entities viz. GVK as well as ACSA is also provided therein. 68. After consideration of the technical and financial bid by the Consortium, the GVK-SA Consortium was selected as the successful bidder for the purposes of the project viz., modernization and development of the Mumbai Airport vide communication dated 4th February 2006. That, the Petitioner is one of the members of the offerer Consortium. Share holders agreement dated 4th April 2006 between the AAI, MIAL, GVK Airport Holdings Private Limited and Bid Services Division - Petitioner and ACSA Global Ltd., which is annexed to the Petition clearly indicates that the Petitioner is a shareholder of the JV Company i.e. Mumbai International Airport (Private) Limited. The Petitioner has statedly invested Rs.270 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny deduction of tax at source. Thereafter, on 3rd October 2011 a Addendum to the Share Purchase Agreement was entered into as a consequence of which the consideration was reduced to US$ 231,000,000. This was intimated to Respondent no.2 Assistant Commissioner of Income Tax (International Taxation) by the Chartered Accountant. If there was any doubt on the Petitioner s investment or activities etc., there was no necessity of permitting the purchases of shares, to granting permission to the purchaser to make payment to Petitioner without deducting TDS. 71. In transnational investments, the use of tax efficient special purpose vehicles is not unknown. Corporations are primarily created for business and commercial purposes. Multinational companies develop corporate structures, joint ventures for operational efficiency, tax planning, risk, mitigation etc. such that better returns can be offered to their shareholders. Corporate structures are created for genuine business purposes generally at the time when investment is being made. These structures are created to avoid double taxation as certain countries are exempted from capital gains. It is not prohibited for the Revenue or the cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s members and are capable of enjoying rights and of being subject to duties which are not the same as those enjoyed or borne by its members. Multinational companies, for corporate governance, may develop corporate structures, affiliate subsidiaries, joint ventures for operational efficiency, tax avoidance, mitigate risks etc. On incorporation, the corporate property belongs to the company and members have no direct proprietary rights to it but merely to their shares in the undertaking and these shares constitute items of property which are freely transferable in the absence of any express provision to the contrary. 44. Corporate structure created for genuine business purposes are those which are generally created or acquired : at the time when investment is being made; or further investments are being made; or the time when the Group is undergoing financial or other overall restructuring; or when operations, such as consolidation, are carried out, to clean- defused or over-diversified. Sound commercial reasons like hedging business risk, hedging political risk, mobility of investment, ability to raise loans from diverse investments, often underlie creation of such structures ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e matter of corporate taxation, generally is founded on the abovementioned separate entity principle, i.e., treat a company as a separate person. The Indian Income Tax Act, 1961, in the matter of corporate taxation, is founded on the principle of the independence of companies and other entities subject to income-tax. Companies and other entities are viewed as economic entities with legal independence vis-a-vis their shareholders/participants. It is fairly well accepted that a subsidiary and its parent are totally distinct tax payers. Consequently, the entities subject to income-tax are taxed on profits derived by them on standalone basis, irrespective of their actual degree of economic independence and regardless of whether profits are reserved or distributed to the shareholders/ participants. Furthermore, shareholders / participants, that are subject to (personal or corporate) income-tax, are generally taxed on profits derived in consideration of their shareholding /participations, such as capital gains. Now a days, it is fairly well settled that for tax treaty purposes a subsidiary and its parent are also totally separate and distinct tax payers. 67. It is generally accepted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dictions do invariably impose taxation against a corporation based on the legal principle that the corporation is a person that is separate from its members. It is the decision of the House of Lords in Salomon v. Salomon (1897) A.C. 22 that opened the door to the formation of a corporate group. If a one man corporation could be incorporated, then it would follow that one corporation could be a subsidiary of another. This legal principle is the basis of Holding Structures. It is a common practice in international law, which is the basis of international taxation, for foreign investors to invest in Indian companies through an interposed foreign holding or operating company, such as Cayman Islands or Mauritius based company for both tax and business purposes. In doing so, foreign investors are able to avoid the lengthy approval and registration processes required for a direct transfer (i.e., without a foreign holding or operating company) of an equity interest in a foreign invested Indian company. However, taxation of such Holding Structures very often gives rise to issues such as double taxation, tax deferrals and tax avoidance. In this case, we are concerned with the concept of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Taxes) (supra) which further observed that genuine strategic tax planning has not been abandoned by any decision of the English Courts till date]. Applying the above tests, we are of the view that every strategic foreign direct investment coming to India, as an investment destination, should be seen in a holistic manner. While doing so, the Revenue/Courts should keep in mind the following factors: the concept of participation in investment, the duration of time during which the Holding Structure exists; the period of business operations in India; the generation of taxable revenues in India; the timing of the exit; the continuity of business on such exit. In short, the onus will be on the Revenue to identify the scheme and its dominant purpose. The corporate business purpose of a transaction is evidence of the fact that the impugned transaction is not undertaken as a colourable or artificial device. The stronger the evidence of a device, the stronger the corporate business purpose must exist to overcome the evidence of a device. 74. As can be seen, the said paragraphs of the Vodafone International Holding B.V. v. Union of India (supra) support the case of the Petition ..... X X X X Extracts X X X X X X X X Extracts X X X X
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