ESSAR COMMUNICATIONS LIMITED,MAURITIUS vs. ACIT, CIRCLE-1 (2)(2), NEW DELHI
Income Tax Appellate Tribunal, DELHI BENCH ‘D’: NEW DELHI
Before: SHRI SATBEER SINGH GODARA & SHRIS.RIFAUR RAHMAN
PER S. RIFAUR RAHMAN, ACCOUNTANT MEMBER :
The assessees, Essar Com Ltd. and Essar Communications Ltd., have filed the appeals against the order of the Learned Commissioner of Income Tax (Appeals)-42, New Delhi [“Ld. CIT(A)”, for short]dated23.12.2021for the Assessment Year 2012-13. 2. Since the issues are common and the appeals are connected, hence the same are heard together and are being disposed off by this common order. We take ITA No.340/Del/2022 for AY 2012-13 in the case of Essar Communications Ltd. as lead case. 3. The assessee, Essar Communications Ltd., has raised the following grounds of appeal in ITA No.340/Del/2022 for AY 2012-13 :- “Based on the facts and circumstances of the case, and in law, ECL respectfully craves leave to prefer an appeal under Section 253 of the Income- tax Act, 1961 (the Act') against the order dated 23 December 2021 passed by Commissioner of Income (Appeals) - 42, New Delhi [CIT(A)] under section 250 of the Act, on the following grounds:
On the facts, in law and in circumstances of the case, the learned CIT(A):
General
erred in holding that the capital gains earned by the Appellant on the sale of Vodafone Essar Limited (VEL') shares by the Appellant to Euro Pacific Securities Limited ('EPSL') are taxable in India;
Holding that the Appellant was tax resident of India and that its control and management is situated wholly in India
erred in treating the Appellant as tax resident of India under the provisions of section 6(3) of the Act:
erred in disregarding the settled law with respect to tax residency of a foreign company under the provisions of section 6(3) of the Act as established through various judicial precedents on this aspect as well as provisions of memorandum of Finance Bill, 2015 introducing the provisions of place of effective management;
was not justified in ignoring the fact that control and management of the Appellant was with the board of directors of the Appellant, that all the decisions concerning the affairs of the Appellant have been taken by its board of directors outside India and in ignoring the supporting documentary evidence and justifications filed before the learned CIT(A) in this regard including letters from Mauritian government authorities; 5. erred in disregarding the settled principle of law that the test of tax residence is to be applied based on the facts of the relevant year alone, as upheld by various judicial precedents;
Denying the benefits of Article 13(4) of India-Mauritius tax treaty
(tax treaty') to the Appellant
erred in holding that the Appellant was not entitled to the benefits of Article 13(4) of the tax treaty on the sale of VEL shares by the Appellant to EPSL;
erred in ignoring the facts that the Appellant was incorporated in Mauritius, holds tax residence certificates, global business license etc and that the Appellant was entitled to the benefits of Article 13(4) of the tax treaty;
erred in disregarding settled law based on various judicial precedents in this regard;
erred in not following the Central Board of Direct Taxes (CBDT')) Circular No 789 which is squarely applicable to the Appellant's case and erred in relying upon inapplicable Circular 1 of 2003 issued by the CBDT and on Article 4(3) of the tax treaty to hold that treaty benefits are not available to the Appellant
erred in holding that the capital gains earned by the Appellant on the sale of VEL shares were related to assets located in India in telecommunication sector which derived its value based on the economic activity and value creation in India, without appreciating that this is not a criterion to determine taxability of the gains from the sale of shares under the tax treaty
Holding that the Appellant was a conduit company set up for availing tax benefits and for avoidance of tax
erred in holding that the acquisition of 6,56,34,887 VEL shares by the Appellant by way of liquidation is without any commercial purpose and is incontrovertibly a colourable device for avoidance of capital gain tax in India
erred in holding that the Appellant had contrived to devise a scheme to show that the control and management vests in Mauritius with the sole purpose of claim of exemption from capital gains taxation in India under Article 13(4) of the tax treaty on the transfer of shares in VEL 13. erred in relying on findings/ observations in the order dated 10 October 2019 passed by the Authority of Advance Rulings which was non- binding in nature:
erred in rejecting the without prejudice argument of the Appellant that if it is alleged that Essar Communications (Mauritius) Ltd (ECML') was the decision maker and the beneficial owner of the VEL shares, the consequence would be that the capital gains on sale of VEL shares would belong to ECML and further erred in holding that whether it is the Appellant who is liable for taxation on capital gains was not an issue to be decided in the appeal before the learned CIT(A).
Others
erred in drawing adverse inferences/ reaching conclusions without any evidence or material and only based on suspicion, conjecture and irrelevant, factually incorrect considerations and without appreciating the correct nature of various events, transactions, facts on records, the context thereof, including non-tax commercial aspects involved therein even though the same were explained and demonstrated to the learned CIT(A) in detail by the Appellant (for the sake of brevity a few instances are illustratively summarised hereunder):
the Mauritian directors of the Appellant were for name sake only and the directors had no control over its affairs;
the affairs of the Appellant and all the decisions were taken by the senior executives of Essar Group in India;
agreements and financial statements show that the Ruia family had a significant role to play in the affairs of the Appellant,
business of the Appellant is run by way of written resolutions without any discussion or deliberations; there are discrepancies in board minutes; the board minutes submitted by the Appellant for Financial Years 2010-11 and 2011-12 are of doubtful authenticity:
analysis of financial statements of the Appellant clearly shows that the Appellant was only a paper company without any substance as it was not involved in any significant business activities and its income/ expenditure was minimal in quantum and also as per the terms of the loan agreement and put option agreement the Appellant was restristed from carrying on any business activity;
all the benefits on account of the loan facility and also on account of sale of VEL shares have immediately gone for the repayment of loan taken for the benefit of the group companies
the Appellant has not exercised/ discharged any shareholder functions with respect to VEL shares,
frequent changes in holding structure of upstream and downstream companies / internal restructuring of ownership of VEL shares under Article 13(4) of the tax treaty:
VEL shares have been transferred before the expiry of lock in period as specified in Unified Access Service (UAS) license requlations which substantiates that the Appellant did not have a distinct identity and has been used by the Essar Group in India for availing of exemption under Article 13(4) of the tax treaty:
erred in failing to consider explanations / submissions made by the Appellant from time to time before the learned CIT(A) that ought to have been considered (for the sake of brevity a few instances are illustratively summarised hereunder): Essar has its presence in Mauritius since 1992 and that Essar group sector holding companies majorly operate from Mauritius and accordingly, the Appellant was not incorporated in Mauritius to avail treaty benefits on sale of VEL shares; the directors of the Appellant always comprised of people with significant qualifications and experience (as reflected by their profiles submitted), who were non-residents of India, except the nominee director appointed by lenders; the board minutes of the Appellant for FYs 2010-11 and 2011-12 had been contemporaneously maintained and shared with BLC Chambers and the report of BLC Chambers which was provided to the Mauritius Revenue Authority: the investment in VEL was made through the Appellant for legitimate commercial / business reasons; Liquidation cannot be a device to avoid taxation in India since, if taxability was the motive, ECML could have sold shares in the Appellant without undertaking liquidation of Essar Telecom Investments Ltd (ETIL) or the Appellant could have sold shares in ETIL and the benefits of the tax treaty inter alia would have been available and consequently the capital gains would not have been taxable in India on such sale of shares: the explanation as to how the Appellant's case satisfies the tests/parameters laid down by the Hon'ble Supreme Court in Vodafone International Holdings BV v UOI (341 ITR 1) (SC) for investment participation in India.
erred in incorrectly stating that the Appellant has made general submissions and that the Appellant has not disputed the facts brought on record and erred in incorrectly stating that the Appellant has failed to rebut various specific findings made by the AO;
erred in holding that the Appellant has not filed certain information and erred in drawing an inference that the Appellant had something to submissions filed before the CIT(A) during the course of the appellate proceedings;
Taxing worldwide income
erred in upholding the taxability of interest income earned by the Appellant during the subject AY.
Each of the above grounds is independent and without prejudice to one another.”
I.
Brief Facts of the case:
The Assessee is a company which was incorporated in Mauritius on 13 October 2005. The principal activity of the Assessee is to make and hold investments. The Assessee holds valid Tax Residency Certificates (‘TRC’) issued by the Mauritius Revenue Authority (‘MRA’) and Category 1 Global Business License (‘GBL’) issued by the Financial Services Commission, Mauritius since inception of the Assessee. 5. Essar Telecom Investments Limited (‘ETIL’), an Indian company, held a total of 6,56,34,887 equity shares in Vodafone Essar Ltd (‘VEL’)(Initially known as Hutchison Max Telecom Private Limited (‘HMTL’) subsequently known as Hutchison Essar Limited (‘HEL’) and now VEL), an Indian company, constituting 15.85% of the ordinary share capital of VEL. Pursuant to the approval obtained by ETIL on 11 December 2006 from Foreign Investment Promotion Board (‘FIPB’), the Assessee infused U 400.61 million into ETIL in various tranches during January 2007 and February 2007. 6. Majority of the funding for the investment by the Assessee in ETIL was from funds infused in the Assessee by Essar Communications (Mauritius) Limited (‘ECML’ Holding Company). The source of the aforesaid funds was a loan taken by ECML of U 1.1 billion from the Standard Chartered Bank (‘SCB’), UK, in January 2007, which was subsequently refinanced and upsized to U 1.4 bn in June 2007 and then to U 3.59 billion in August 2007 from a consortium of banks led by SCB, UK. For the aforesaid loans, VEL shares held by the Assessee and Essar Com Limited (‘ECom’) were effectively pledged as security. 7. The lenders, in order to have greater enforceability over security of VEL shares, wanted direct pledge on the VEL shares. Accordingly, an application for direct pledge of VEL shares was made in February 2007, to the Reserve Bank of India (‘RBI'), by ETIL, pursuant to the U 1.1 bn loan agreement. Since no approval from the RBI was forthcoming for such pledge, the consortium of lenders of the U 3.59 bn loan required liquidation of ETIL in order to migrate shares to the Assessee, so that the VEL shares can be directly pledged with the lenders. The RBI vide letter dated 4 October 2007 rejected the application made by ETIL to pledge VEL shares [refer RBI letter on page 1682 of the ITAT Paper book]. Thereafter, ETIL was liquidated in July 2008 pursuant to the lenders’ stipulation in the U 3.59 bn loan agreement. Pursuant to such liquidation, the VEL shares were distributed to the Assessee and it became a direct owner of VEL shares. Subsequently, an application for pledge of VEL shares was filed by the Assessee with the RBI, in line with the loan agreement. The same was approved by the RBI vide letter dated 14 November 2008 [refer page 1697 of the ITAT Paperbook]. 8. Under an Offshore Underwritten Put Option Agreement dated 24 August 2007 (as amended and restated on 22 September 2009) between Vodafone and Essar, ECML had a put option to sell shares of the Assessee, thereby effectively transferring the VEL shares or procure sale of VEL shares by ECom and the Assessee. Pursuant to negotiations with Vodafone, the put option agreement was amended by deed of amendment agreed by the Assessee. 9. Accordingly, the Assessee sold all the shares it held in VEL to Euro Pacific Securities Limited (‘EPSL’) (a non-resident company nominated by Vodafone International Holdings B.V) for total consideration of U 3,02,05,21,511. The gross consideration was received by the Assessee after deduction of tax at source @ 21.012% i.e., INR 28,21,21,70,693. a. The Assessee, in the return of income itclaimed that the capital gain arising on the sale of aforesaid shares was not chargeable to tax in India by virtue of Article 13(4) of the India – Mauritius Double Taxation Avoidance Agreement (“DTAA”). Consequently, a refund of the tax deducted at source of INR 28,21,21,70,693 was claimed by the Assessee in the return of income filed for the year under consideration. The learned AO and CIT(A) have denied the benefit under Article 13(4) of the India-Mauritius DTAA by holding the Assessee is a resident of India under section 6(3) of the Act as the control and management of its affairs is wholly situated in India and the Assessee has no substance and is a sham entity incorporated only to take benefit of India-Mauritius DTAA.
At the time of hearing, ShreePardiwala representing the assessee submitted as under:
I.
The Essar Group has been in Mauritius since the year 1992:
It is submitted that first investment by the Essar Group from Mauritius was made way back in the year 1992 when Essar Energy Holdings Ltd (earlier known as Prime Finance Co. Ltd) and Essar Steel Holdings Ltd (earlier known as Prime Holding Ltd) were incorporated. By the year 2012, Essar Group has invested, through Mauritius, approx. U 6 bn in India and U 2.5 bn in various business carried out in countries other than India. The sector holding companies of steel business, oil business, power business as well as the telecom business were based in Mauritius. The President of Mauritius, in a speech given on 17 August 2010, has recognized the fact that the Essar Group has made significant investments through Mauritius in various businesses internationally which has helped in the development of its economy. In fact, Essar Energy PLC, a UK company which was listed on the London Stock Exchange is headquartered in Mauritius. The group owns an office building in Mauritius from which the Assessee has been operating its business subsequently. 11. Therefore, the contention of the lower authorities that the Assessee is a sham entity and the investment in Mauritius was made only for the purpose of claiming benefits of India-Mauritius DTAA is baseless and without any substance.
II.
TRC issued by the MRA is conclusive proof of beneficial ownership of the shares sold by the Assessee consequently, the benefit of India-Mauritius DTAA cannot be denied:
The Assessee submits that the MRA has issued TRCs to the Assessee from the inception of the Assessee and even for the years subsequent to the sale of the shares by the Assessee, certifying that the Assessee is a tax resident of Mauritius since its inception including for the year under consideration. The MRA vide their letter dated 29 May 2012 has further clarified that the TRC was issued to the Assessee not only on the basis of the incorporation of the company in Mauritius but also on the basis of the control and management of the Assesseebeing in Mauritius (refer page 186 of the ITAT Paperbook). In this regard, the Assessee refers to Circular No. 789 dated 13 April 2000 issued by the Central Board of Direct Taxes (‘CBDT’) clarifying that wherever a certificate of residence was contrary to the provisions of Article 13(4) of India-Mauritius DTAA. Therefore, the Supreme Court held that the CBDT was correct in issuing the aforesaid circular directing the Assessing Officers that wherever the TRC is issued by the MRA, the benefit of India-Mauritius DTAA is and beneficial ownership of the person) is adequate/ sufficient for grant of benefits under the India-Mauritius DTAA to a taxpayer. It was further held that the tax department cannot at the time of sale/disinvestment/exit from such investments deny benefits of the DTAA to such Mauritius companies inter alia where such Mauritius company is not a fly by night operator. 15. The Assessee further submits that the Finance Bill 2013 had proposed an amendment to section 90 of the Act which provided that a TRC issued by a competent authority of another country is not sufficient to claim benefits of a DTAA notified under section 90 of the Act. The aforesaid amendment would have diluted the benefit available under Circular No. 789 which provides that the TRC issued by MRA is sufficient proof of residency and beneficial ownership for the purpose of Article 13(4) of the DTAA. However, the amendment proposed by the Finance Bill, 2013 was never implemented and on the contrary, a clarification was issued by the CBDT on 1 March 2013 stating that the TRC produced by a resident of a Contracting State will be accepted as evidence that it is a resident of a Contracting State and that tax authorities will not go behind the TRC and question the residential status. In the case of Mauritius, Circular No. 789 dated 13 April 2000 continues to be in force. The finding given by the lower authorities is contrary to a circular issued by the CBDT which is binding on them and such a course of action on his part cannot be countenanced. 16. The judgment of the Delhi High Court in the case of Blackstone Capital Partners (Singapore) VI FDI Three Pte.Ltd.W.P.(C) 2562/2022 & CM APPL. 7332/2022 and the Bombay High Court in the case of Bid Services Division (Mauritius) Ltd. (WP No. 713 of 2021) has reiterated that the tax authorities cannot go behind the TRC issued by the other tax juri iction as the same is sufficient evidence to claim treaty eligibility, residential status and legal ownership. Therefore, the benefits of DTAA cannot be denied to the Assessee ignoring the TRC issued by the competent authority. 17. Further, the Delhi Tribunal in the case of MIH India (Mauritius) Ltd. [ITA No.1023/Del/2022] and in the case of Reverse Age Health Services Pte. Ltd. [ITA No. 1867/Del/2022] has reiterated the legal position that as per Circular No. 789, where a TRC is issued by the foreign tax authorities, it will constitute sufficient evidence for accepting the status of residence as well as the beneficial ownership for the purpose of claiming treaty benefits. 18. In view of the above, the Assessee submits that denial of benefit of Article 13(4) by the lower authorities ignoring the TRC issued by the MRA and the clarification issued by the MRA vide letter dated 29 May 2012 to the Assessee, is incorrect and bad in law.
III.
In the absence of Limitation of Benefit (“LOB”) clause, the benefit of India-Mauritius DTAA cannot be denied:
The Assessee submits that the DTAA between India and Mauritius as it was in force for the year under consideration did not contain any LOB clause which restricted the benefit available under Article 13(4) of the DTAA nor provided for any condition to be fulfilled for claiming the benefit of Article 13(4) of the DTAA. 20. It is important to note that under the India-USA DTAA (executed in 1989), Article 24 specifically provides that a company can claim the benefit of the India-USA DTAA only when 50% shares of that company is held by individuals who are residents of either India or USA. Similarly, Article 24 of the India-Singapore DTAA (executed in 1994) provided that the exemption or lower rate of tax provided under the DTAA for income arising in a Contracting State will be restricted to the amount considered for taxation on receipt or remittance basis in the other Contracting State. The protocol executed between India and Singapore on 1 August 2005 further provides that the benefits provided under the DTAA shall not be available if the affairs of a resident were arranged with the primary on the operations is less than 2,00,000. 21. Similarly, Article 29 of the India – UAE DTAA (executed in 2007) and Article 29 of the India – Luxemburg DTAA (executed in 2008) provide that the benefit of the DTAA will not be available to the residents of a Contracting State if the main purpose or one of the main purposes of incorporating a company was to obtain benefits of the DTAA. 22. However, the India-Mauritius DTAA did not have any of the clauses incorporated by India in the DTAA executed with other countries and, therefore, in the absence of any restriction placed in the India-Mauritius DTAA, the treaty benefits cannot be denied by the tax authorities invoking the conditions which are not part of the DTAA. In this regard, the Assessee places reliance on the judgment in the case of Vodafone International Holding B.V. (supra) wherein the Supreme Court held that in the absence of a LOB clause in the India- Mauritius DTAA, there is no justification in prohibiting the incorporation of companies in Mauritius for deriving benefits of the DTAA. The absence of LOB clause makes the scope of the DTAA positive from the perspective of a special purpose vehicle (‘SPV’) created specifically to route investments into India and, the tax authorities cannot at the time sale/disinvestment deny benefit on the ground that the investment was only routed through Mauritius. 23. The Assessee further submits that similar argument was raised by the Revenue before the Supreme Court in the case of Azadi Bachao Andolan (supra) wherein it was contended that the companies incorporated in Mauritius are shell companies as they don’t carry on any business and are incorporated in Mauritius with the motive of treaty shopping. The Supreme Court rejected the argument of the Revenue and held that if the intention was to preclude a person from the third state from claiming benefits of the DTAA, then a suitable term of limitation to that effect should have been incorporated therein, and that in the absence of a limitation clause, such as the one contained in Article 24 of the India- USA DTAA, there are no disabling or disentitling conditions under the India-Mauritius DTAA prohibiting the benefits thereunder. The Supreme Court further held that the motives with which the companies have been incorporated in Mauritius is wholly irrelevant and cannot in any way affect the legality of the transaction. And, that there being nothing like equity in a fiscal statute, which applies proprio vigore or it does not. 24. The Assessee further submits that the LOB clause was inserted as Article 27A in the India-Mauritius DTAA only w.e.f. 1 April 2017 which provided for restriction on the benefits available under Article 13 of the DTAA that a company shall not be entitled to the benefits of Article 13 if the primary purpose was to take advantage of the DTAA and the company is a shell company incurring expenditure on operations of less than Mauritian Rs. 1.5 mn in Mauritius. The CBDT press releases dated 10 May 2016 and 29 August 2016 further clarify that the amendments made to the India-Mauritius DTAA will be applicable only from A.Y. 2018-19 that too on capital gains arising on the securities purchased after 1 April 2017. 25. Without prejudice to the fact that the said Article 27A does not apply to A.Y. 2012-13 i.e., the year under adjudication for entitlement of DTAA benefits to the Assessee, even if the principle laid down in the LOB clause found in the India-Mauritius DTAA is applied for the earlier year, the threshold of a minimum spend in Mauritius is easily met by the Assessee as the Assessee has incurred expenses in excess of Mauritian Rs.1.5 mn for the year under consideration. The workings and the extract of profit and loss account for the financial year ended 31 March 2012 (which has comparative figures for 2011) are at page 1683 to 1684 of the ITAT Paperbook. 26. In view of the above, the Assessee submits that the orders passed by the lower authorities denying the benefit of Article 13(4) of India-Mauritius DTAA for the A.Y. 2012-13 are unsustainable and bad in law.
IV.
The capital gain arising on the securities purchased before 1 April
2017 has been grandfathered and cannot be brought to tax in India
The Assessee submits that with effect from 1 April 2017 amendments have been made to Article 13 of the India-Mauritius DTAA whereby Article 13(3A) has been inserted which provides that capital gain arising on transfer of shares, acquired on or after 1 April 2017, will be taxable in the country in which the company whose shares are sold is resident. Article 13(3B) further provides that the capital gain arising, on shares acquired on or after 1 April 2017, during the period 1 April 2017 and 31 March 2019 will be chargeable to tax @50% of the rate it is ordinarily taxed in the residence country of the company whose shares are being alienated. 28. Article 13(4) has been substituted and provides that any capital gain arising from alienation of any property other than Article 13(1) (Capital gain on immovable property), 13(2) (Capital gain on movable property of Permanent Establishment), 13(3) (Capital gain on ships and aircrafts), 13(3A) (Capital gain on shares acquired after 1 April 2017), 13(3B) (Capital gain on shares between 1 April 2017 to 31 March 2019), will be taxable only in the country in which alienator is a resident. Therefore, the amended Article 13(4) effectively provides that the capital gain arising on alienation of shares acquired before 1 April 2017 cannot be brought to tax in India in any situation. Hence, the juri iction to tax capital gain in India is vested only w.e.f. 1 April 2017, that too only for the capital gain arising on alienation of shares acquired on or after 1 April 2017. 29. In these circumstances, it is not open to the Revenue to deny the benefit of the DTAA for an assessment year prior to A.Y. 2017-18. In order to test the correctness of the Revenue’s stand let us visualise a situation where the sale under consideration has been affected post 1 April 2017. In such a case, the capital gain arising from the shares purchased before 1 April 2017 would not be chargeable to tax in India and the provisions of Article 13(4) would continue to protect the assessee. Therefore, the Assessee submits that the denial of benefit of Article 13(4) to the Assessee is without juri iction and bad in law. 30. The aforesaid position has been clarified by the CBDT vide press release dated 29 August 2016 wherein it has been provided that the amendment made to India-Mauritius DTAA which provides for capital gains arising on transfer of shares on or after 1 April 2017 will be restricted to the shares purchased on or after 1 April 2017 and the capital gain arising on transfer of shares which were acquired before 1 April 2017 have been grandfathered and will not be subject to capital gain taxation in India. 31. In view of the above, the Assessee submits that the orders passed by the lower authorities taxing the capital gains on the shares which were acquired in 2008 and sold in 2011, which is much before 1 April 2017, is unsustainable and bad in law.
V.
The Assessee is not a resident of India as its control &
management is not situated wholly in India:
a. Residential status of an assessee is required to be determined every year
The Assessee submits that under section 6(3)(ii) of the Act (as applicable for the year under consideration), a company which is not incorporated in India is considered to be a resident of India only if, during the previous year, the control and management of its affairs is wholly situated in India. The relevant portion of the section 6(3) is reproduced as under:
“6. For the purposes of this Act, —
…..
(3) A company is said to be resident in India in any previous year, if—
(i) it is an Indian company; or (ii) during that year, the control and management of its affairs is situated wholly in India.”
The words “previous year” and “during that year” employed in the provision clearly bring out that the residential status of an assessee company is to be ascertained each year considering the control and management of the company during the previous year. However, the lower authorities have determined the residential status of the Assessee based on events and documents pertaining to earlier years which is wholly incorrect and contrary to the express provisions of section 6(3)(ii) of the Act which require that the residential status is to be ascertained basis the events pertaining to the previous year. 34. In this regard, reference is made to the judgments of Wallace Brothers & Co. Ltd v CIT (1945) 13 ITR 39 (FC), Sri Raja K.V. Narsimha Rao Bahadur v CIT (1950) 18 ITR 181 (Madras), GirdharlalGhelabhai v CIT (1964) (53 ITR 23) (Gujrat) wherein the courts have consistently section 6(3) of the Act is to be determined for the relevant previous year in which the income arises and it is the control and management during such year alone that is relevant to determine the residential status under the Act. 35. Without prejudice to the above, the Assessee submits that even if the earlier years’ events and/or documents are to be considered for the purpose of determining the residential status of the Assessee for the year under consideration, as sought to be done by the lower authorities, it would still qualify as a non-resident, since atleast a part of the control and management of the Assessee was situated in Mauritius, which is evident from the fact that the board meetings have taken place in Mauritius. A brief summary of decisions taken in relation to acquisition, sale and important decisions in relation to VEL is attached herewith as Annexure 1 and of other decisions taken in earlier years is attached herewith as Annexure 2. 36. In view of the above, the Assessee submits that the contention of the lower authorities that to decide the residential status, the events and documents relating to earlier years are required to be considered is unsustainable and bad in law.
b. A company incorporated outside India is a resident of India only if the control and management is “wholly” situated in India:
The Assessee submits that under the provisions of section 6(3)(ii) of the Act, a company incorporated outside India can be considered as a resident of India only when the control and management is “wholly” situated in India. Therefore, if any part of the control and management is situated outside India, the company cannot be considered a resident of India. 38. 920)(Delhi ITAT) wherein the courts/tribunals have held that a company incorporated outside India will not be considered as a resident of India if any part of the control and management is situated outside India. 39. This is further amplified by the Explanatory memorandum to the Finance Bill, 2015 which reaffirms the aforesaid legal position. The relevant part of the memorandum is reproduced as under: “The existing provisions of Section 6 of the Act provides for the conditions under which a person can be said to be resident in India for a previous year. In respect of a person being a company the conditions are contained in clause (3) of Section 6 of the Act. Under the said clause, a company is said to be resident in India in any previous year, if-
(i) it is an Indian company; or (ii) during that year, the control and management of its affairs is situated wholly in India.
Due to the requirement that whole of control and management should be situated in India and that too for whole of the year, the condition has been rendered to be practically inapplicable. A company can easily avoid becoming a resident by simply holding a board meeting outside India.”
In the instant case, the Assessee is controlled and managed by its board of directors. All decisions concerning the affairs of the Assessee are taken by the board of directors in meetings held at the registered office of the Assessee in Mauritius. During the previous year relevant to the A.Y. 2012-13, the board of directors held all 11 meetings at the registered office of the Assessee in Mauritius in which various decisions, including in respect of sale of VEL shares, were taken which conclusively proves Mauritius. It is also important to note that the Assessee had nine directors during the year and all of them, except Ms. Dina Wadia, who was a nominee director appointed by the lenders, were residents of Mauritius/non-residents of India. Therefore, it is submitted that the Assessee is not a resident of India as the control and management of the Assessee was not situated wholly in India and, on the contrary, the same was wholly in Mauritius. A brief profile of the directors is attached herewith as Annexure 3 and a summary of the 11 board meetings which took place in F.Y. 2011-12 is attached herewith as Annexure 4. 41. “control and management of affairs wholly situated in India” used in section 6(3) of the Act is equivalent to “central control and management” and would satisfy the requirements of section 6(3) even if a part of the control and management is situated outside India. The contention of the lower authorities is incorrect as the House of Lords in the case of De Beers Consolidated Mines Limited (supra) was not concerned with the provisions similar to the provisions found in section 6(3) of the Act which specifically provide that the control and management has to be “wholly” situated in India. The test of central control and management was evolved by the House of Lords to determine the residency of a company in the absence of any specific condition in the Income-tax Act, 1853 (UK). Therefore, the Assessee submits that the same cannot be applied while determining the residency of a company under section 6(3) of the Act. 44. Without prejudice to the above, the Assessee further submits that even if the test of central control and management as contended by the lower authorities is to be applied, the whole of the central control and management of the Assessee company is situated in Mauritius which is evident from board meetings that have taken place at the registered office of the company in Mauritius for the year under consideration and for the earlier years. The lower authorities have not brought any material on record to substantiate that the central control and management of the Assessee is situated in India. In Nandlal Gandalal (supra), the Supreme Court in the context of Section 4A(b) of the Indian Income-tax Act, 1922, which considered a partnership firm non-resident in India if the control and management was “situated wholly” outside India. The Supreme Court interpreting the word “situated wholly” held that the control and management being partly inside and partly outside India does not satisfy the requirement of it being “situated wholly” outside India. Similarly, the Bombay High Court in case of Narottam Pereira (supra), after considering the Judgment of House of Lords in De Beers Consolidated Mines Limited (supra) has unequivocally held that if any part of the be resident in India. Therefore, the Assessee submits that the reliance placed by the lower authorities on the judgment of De Beers Consolidated Mines Limited (supra) to hold that the requirements of section 6(3) is complied with even when a part of the control and management is situated outside India is incorrect and bad in law. 45. Therefore, it is submitted that the control and management of the Assessee was situated in Mauritius and by no stretch of imagination it can be said that the control and management of the Assessee was wholly in India for the year under consideration.
a. Execution of decisions by Indian personnel is not relevant to decide the control and management of the Assessee:
The lower authorities to come to the conclusion that the control and management of the Assessee is in India, have held that the agreements and the documents have been executed by employees of other Essar Group entities that are based in India and therefore the control and management of the Assessee is wholly situated in India. Consequently, the Assessee becomes a resident of India in terms of section 6(3) of the Act. 47. The lower authorities have failed to appreciate that the making of a decision is different from the execution of the decision. To determine the residential status under section 6(3) of the Act, the Assessing Officer is required to ignore circumstances where action is taken by personnel in India that has been delegated or authorised by the Assessee’s board of directors. In the instant case, the Assessing Officer has in fact observed that the personnel in India executed the transaction only after they were duly authorised by the board of directors of the Assessee (see page 855 of the ITAT appeal set). 48. The Assessee in support of the aforesaid, places reliance on the judgment of the Bombay High Court Narottam Pereira Ltd. (supra) wherein the High Court has observed that the board of directors had delegated authority to implement certain decisions and gave directions for same from time to time does not mean that the control and management does not vest with the directors. The relevant portion of the judgment is extracted as under: “But it is equally clear from the minutes of the meetings of the board of directors which are also before us that the central management and control has been kept in Bombay and has been exercised by the directors in Bombay. The minutes deal with various matters which are delegated to these two managers and yet the directors from a proper sense of responsibility to the company have retained complete control over these matters and have from time to time given directions to the managers as to how things should be done and managed….”
d. To determine the residential status under section 6(3) of the Act, de facto control is to be considered:
The lower authorities, to come to the conclusion that the control and management was not with the board of directors of the Assessee, have relied on clauses of various loan agreements by stating that the change of control clauses in various loan agreements bring out that control on VEL shares is of Shashikant, Ravikant and Prashant Ruia because as per the said clause, change of control will occur if these persons together with persons and entities controlled by them (directly or indirectly) and who are promoters of the borrower cease to have control over the VEL shares. 50. The lower authorities have failed to appreciate that there exists difference between management control and shareholder control. For the purpose of section 6(3) of the Act, what is required to be seen is de facto control, i.e., where the control and management is actually exercised. In the instant case, it is very clear that the control and management was exercised by the board of directors in Mauritius since all the 11 meeting during the previous year relevant to A.Y. 2012-13 were held in Mauritius. The lower authorities have not produced a single document which in any manner shows that members of the Ruia family have taken any decision with regard to the Assessee in any capacity other than as director of the Assessee. Therefore, it is submitted that the control and management of the Assessee is with the board of directors in Mauritius and the allegation made by the lower authorities is baseless and contrary to evidence on record.
VI.
Significant presence of Essar Group in Mauritius:
The lower authorities have denied treaty benefits to the Assessee on the basis that the investment has been made through Mauritius with a singular motive of claiming the benefits of not being liable to pay tax in India on the capital gains and having regard to the provisions, as they then stood, of the capital gain tax under India-Mauritius DTAA. 52. The lower authorities have failed to appreciate that the Essar Group is a multinational group with more than 200 companies which had a net worth in excess of U 10 bn and had a presence in more than 25 countries across the 5 continents (in 2011-12). It operates in several sectors such as shipping, oil & gas, power, steel, exploration and production of oil and gas, ports etc. It had raised a debt of over U 5 billion from reputed overseas lenders and the shares of some of the entities in the group were listed on stock exchange India and the UK (including on the FTSE 100). 53. The Essar Group has its presence in Mauritius since 1992, i.e., even before mobile telephony started in India. Further, the Assessee was incorporated in Mauritius in 2005 which also supports the fact that the Assessee was not set up in Mauritius only for availing the treaty benefits on sale of shares, which it acquired only in 2008. By 2012, the group as a whole had made investments of approx. U 6 bn in India and U 2.5 bn in various businesses internationally. 54. The sector holding companies of the Essar Group mainly operate from Mauritius. In fact, even some foreign companies of the group are headquartered from Mauritius (for e.g., Essar Energy PLC – a UK listed Company) (refer page 1621 of the ITAT Paperbook) for overall presence in Mauritius –refer page 1620 of the ITAT Paperbook; for accolades that were received by the Essar Group from the Mauritian government, refer page 1622 and 1623 of the ITAT Paperbook; for newspaper article published in l’express (www.lexpress.mu), which also shows the photograph of Essar House in Mauritius, refer page 1625 of the ITAT Paperbook; for sample photograph of board meeting held on 4 November 2011, refer page 1624 of the ITAT Paperbook.
VII. Legitimate investment business activity undertaken by the Assessee:
The lower authorities have denied treaty benefits to the Assessee on the basis that the Assessee was nothing but a shell company which had been used as a conduit with the sole objective of avoidance of tax on capital gain that arose on sale of VEL shares. 56. The lower authorities have failed to appreciate that the principal purpose test of incorporating the company in Mauritius for capital gain exemption clause w.e.f. 1 April 2017 and, therefore, the capital gain exemption claimed by the Assessee cannot be denied on this ground. On the contrary, the judgment of the Supreme Court in Vodafone International Holding B.V. (supra) supports the Assessee, wherein it has been held that claiming of treaty benefit is one of the relevant factors of making investment through the Mauritius route. The relevant portion of the judgment is extracted 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 received all its funds from a foreign principal/company; or the Mauritius subsidiary is controlled/managed by the foreign principal; or the Mauritius company had no assets or business other than holding the investment/shares in the Indian company; or the foreign principal/100 per cent shareholder of Mauritius company had played a dominant role in deciding the time and price of the disinvestment/sale/transfer; or the sale proceeds received by the Mauritius company had ultimately been paid over by it to the foreign principal/its 100 per cent shareholder either by way of special dividend or by way of repayment of loans received; or the real owner/beneficial owner of the shares was the foreign principal company. Setting up of a WOS Mauritius subsidiary/SPV by principals/genuine substantial long term
FDI in India from/through Mauritius, pursuant to the DTAA and Circular No.
789 can never be considered to be set up for tax evasion.”
Without prejudice to the above, the lower authorities have failed to appreciate that the Assessee is an investment holding company and its principal activity was investing in the telecom sector in India. It is akin to other sector holding company structures within the group. There is no aberration in the Assessee being an investment holding company in Mauritius. 58. The only way an investment holding company can monetize its investments is either to sell them or pending sale, raise funds based on such investments to further promote the group interests. Based on this rationale, ECML monetized the indirect investments it held in VEL by raising loans on the strength of the shares. The loan agreements prohibited the Assessee from doing any other business, other than being in the business of holding VEL shares so as to ensure that the security provider (i.e., the Assessee) did not undertake any activity that dilutes the lender’s security. 59. SPVs/ investment companies are very common in holding structures and have been accepted as a legitimate business practice in various judicial precedents. Reliance is placed on:
Vodafone International Holdings B.V. (supra)
“79. When a business gets big enough, it does two things. First, it reconfigures itself into a corporate group by dividing itself into a multitude of commonly owned subsidiaries. Second, it causes various entities in the said group to guarantee each other's debts.
A typical large business corporation consists of sub-incorporates.
Such division is legal. It is recognized by company law, laws of taxation, takeover codes etc. On top is a parent or a holding company. The parent is the public face of the business. The parent is the only group member that normally discloses financial results.
Below the parent company are the subsidiaries which hold operational assets of the business and which often have their own subordinate entities that can extend layers. If large firms are not divided into subsidiaries, creditors would have to monitor the enterprise in its entirety. Subsidiaries reduce the amount of information that creditors need to gather. Subsidiaries also promote the benefits of specialization. Subsidiaries permit creditors to lend against only specified divisions of the firm. These are the efficiencies inbuilt in a holding structure. Subsidiaries are often created for tax or regulatory reasons. They at times come into existence from mergers and acquisitions. As group members, subsidiaries work together to make the same or complementary goods and services and hence they are subject to the same market supply and demand conditions. They are financially inter-linked.
One such linkage is the intra-group loans and guarantees….
…
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. In transnational investments, the use of a tax neutral and investor- friendly countries to establish SPV is motivated by the need to create a tax efficient structure to eliminate double taxation wherever possible and also plan their activities attracting no or lesser tax so as to give maximum benefit to the investors. Certain countries are exempted from capital gain, certain countries are partially exempted and, in certain countries, there is nil tax on capital gains. Such factors may go in creating a corporate structure and also restructuring.”
Sanofi Pasteur Holdings SA (2013) 354 ITR 316 (AP).
“(18) …
No curial or academic authority is placed before us to hazard a conclusion that a corporate entity must necessarily involve itself either in manufacture or marketing/trading in/of goods or services to qualify for the ascription of being in business or commerce.
Creation of wholly owned subsidiaries or joint ventures either for domestic or overseas investment is a well established business/commercial organizational protocol; and investment is of business/ commercial avocation.
ShanH is a special purpose joint venture investment vehicle, established initially by MA and co-adopted in due course by GIMD and eventually by Mr. Georges Hibon, to facilitate investment by way of participation in the shareholding of SBL. That is a ShanH business and its commercial purpose.”
The Courts have recognised the use of tax efficient SPVs and that corporate structures are created for genuine business purposes generally at the time when investment is being made. 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. The burden is entirely on the Revenue to demonstrate that such incorporation has been affected to achieve a fraudulent, dishonest purpose to defeat the law. In this regard, reliance is placed on Bid Services Division (Mauritius) (supra), wherein the Bombay High Court has followed the judgment in Vodafone International Holding B.V. (supra). 61. Given the above, the Assessee submits that there is nothing unusual in the fact that the investment in VEL shares is itself the legitimate business of the Assessee. Accordingly, it cannot be said that the Assessee is a conduit and has not undertaken any business activity or that there was lack of commercial/ business substance in the present case.
VIII. Utilisation of loan proceeds and sale consideration:
The lower authorities have also denied the treaty benefits on the basis that no benefit of the loans taken on the strength of the VEL shares was shares was not utilised by the Assessee. 63. Out of the loan of U 1.1 Bn taken in January 2007 from SCB, UK by ECML, U 526 mn was paid by the lenders directly to the Assessee as share application money on behalf of ECML. The Assessee in turn used the funds so received to effectively infuse capital in ETIL and in ECom (which was effectively used by ETIL and ECom to acquire VEL shares and repay their existing debts taken to acquire VEL shares). 64. In large multinationals, it is normal for companies to support one another to maximize overall benefit to all in the group. Further, it would be appreciated that it is natural for a subsidiary company to act for the benefit of its holding company. Maximizing shareholders’ wealth is the ultimate objective of any company. 65. The investments in VEL by the Assessee yielded significant gains/ value to the Assessee and the Assessee was able to support/assist its overseas group entities to make other investments. It may also be noted that various group entities have supported/ assisted the Assessee. Illustratively, when the Assessee required funds for acquiring ETIL shares, the Assessee obtained funds in the form of interest-free and temporary loans from Essar Infrastructure Holdings Limited (‘EIHL’), Mauritius (the shareholder of the Assessee) and Essar Global Fund Limited (‘EGFL’), Cayman Islands (the then indirect shareholder of the Assessee). Further, group entities also provided non-monetary support to the Assessee such as assistance/ guidance/ support of different personnel with relevant expertise in various fields. The group entities co-operated with each other for reciprocal/ mutual benefit and interest. 66. As regards utilisation of sale proceeds, it may be noted that the Assessee was a guarantor to the 3.59 bn loan granted to ECML by a consortium of lenders led by SCB, UKin August 2007. As the loan was to be repaid and ECML (the borrower) did not have the funds to repay, the Assessee sold its VEL shares in order to meet its obligations under the loan agreement towards repayment of the facility. The tax authorities cannot deny treaty benefits to Mauritius companies by stating that the sale proceeds received by the Mauritius company had ultimately been paid over by it to the shareholder - Vodafone International Holdings B.V. (supra), Becton Dickinson (Mauritius) Ltd (434 ITR 180) (AAR) andE*Trade Mauritius Limited (2010) 324 ITR 1 (AAR) 67. The transactions were undertaken for commercial reasons and it is not open to the tax authorities to step into the shoes of the board of directors and question the business purpose of a transaction. The Assessee has also benefited from the various loans that were raised on the basis of ETIL/VEL shares and therefore, it agreed to pledge its holding in ETIL/VEL shares.
IX.
Liquidation of ETIL was pursuant to lenders requirement and rejection of pledge of VEL shares by the RBI:
The lower authorities have denied treaty benefits to the Assessee on the basis that the liquidation of ETIL was undertaken with a view to shift the locus of shares from India to Mauritius without any commercial purpose and, was a colourable device to avoid capital gains tax in India. 69. The lower authorities have failed to appreciate the commercial purpose behind the liquidation of ETIL, viz., the same would enable a direct pledge of VEL shares to the lenders resulting in greater enforceability of VEL shares as a security, which was not possible so long as the VEL shares were held by ETIL in view of the provisions of Foreign Exchange Management Act, 1999. The same is evident from the rejection by the RBI vide its letter dated 4 October 2007 of the application made for pledge of VEL shares by ETIL [refer RBI letter on page 1682 of the ITAT Paperbook]. 70. The lower authorities have also failed to appreciate that there was no intention to liquidate ETIL in the first place as is evident from the application dated 12 February 2007 made by ETIL for pledge of VEL shares to the RBI. Accordingly, the option of liquidation of ETIL provided under the U 1.1 bn loan agreement was not preferred by the Assessee. 71. The lower authorities failed to appreciate that while the application dated 12 February 2007 for pledge of VEL shares was pending, ECML was in the process of obtaining a loan of U 3.59 bn i.e., more than 3 times the loan already obtained. Since the approval of RBI was not forthcoming, the lenders in the loan agreement dated 17 August 2007, specifically stipulated that ETIL must, necessarily, be liquidated and the shares of VEL must be directly held by the Assessee so that the same can be pledged with the lenders directly. 72. The lower authorities failed to appreciate that after execution of the loan agreement dated 17 August 2007 for U 3.59 bn, the application made to the RBI for pledging of VEL shares by ETIL was rejected vide letter dated 4 October 2007 (in respect of U 1.1 bn loan). Further, the pledge of the VEL shares was allowed by the RBI only after holding of the shares by the Assessee (post liquidation of ETIL), which is evident from the approval dated 14 November 2008 granted by the RBI subsequent to liquidation of ETIL [refer page 1697 of ITAT Paperbook]. 73. The Assessee further submits that the liquidation of ETIL was not carried out with a view to claim the benefit of India-Mauritius DTAA, because, even in the absence of liquidation, the benefit of India-Mauritius DTAA was available to the Assessee as the Assessee had the option of selling the shares of ETIL, the gains arising whereof would have been exempt from tax under Article 13(4) of the India-Mauritius DTAA. In fact, even if ECML had sold shares of the Assessee, there would have been no tax liability in India under the Act itself and further, ECML would have been entitled to the benefits of the India - Mauritius DTAA as well. Please see the alternative scenarios attached at page 635 to 637 of the ITAT Paperbook. 74. In view of the above, it cannot be said that the motive behind the liquidation of ETIL was tax avoidance as it was undertaken for a commercial purpose and further no tax benefit was obtained by the Assessee by undertaking the liquidation. Accordingly, the same cannot be termed as a colourable device and the reliance of the lower authorities in this respect are bad in law. X. Conclusion
The Assessee being a foreign company reiterates that:
it is a Mauritius incorporated company and a tax resident of Mauritius;
its control and management is situated outside India, i.e., in Mauritius since inception;
it is a non-resident of India as per the provisions of the Act;
it held valid TRCs since inception issued by the MRA;
the transactions undertaken by it were based on commercial expediency and cannot be termed as colourable device/ design to avoid taxes by any stretch of imagination.
In light of the explanations and documentary evidences submitted time and again, the Assessee is eligible for the benefits of exemption from capital gains tax as provided under Article 13(4) of the India-Mauritius
DTAA. Accordingly, the capital gains that have arisen to it on the sale of shares of VEL are not liable to tax in India.
76. At the time of hearing, ld. ASG, Shri N. Venkatraman Sr. Advocate submitted that the issue involved in both the appeals, viz., Essar
Communications Limited and Essar Com Limited are inter-connected and intertwine and the facts have to be appreciated together. He submitted his arguments in detail and it was submitted in 5 paras as under :-
PART A - Background and the proceedings before the AAR and other Income Tax Authorities
This part comprises of - Background of the case; The AAR Ruling;
Order of the Assessing Officer; Order of the CIT(A); Present proceedings before the Hon'ble ITAT 1. 1. Background of the case:
Facts in brief are that the assessees, Essar Communications
Ltd ("ECL" in short) and Essar Com Limited ("ECOM" in short), companies of Essar Group, claimed that these were the companies incorporated in Mauritius; that they were non-residents in India; and that they did not have a permanent establishment in India.
The incorporation background is that the assessee, ECOM was initially incorporated in Mauritius on 09.03.2001 in the name of Clickforsteel Holdings Limited. The name was changed to Essar
Telecom India Holdings Limited on 25.05.2004 and later to Essar
Com Limited on 08.11.2005. The ECOM held a Global Business
Licence (GBL 1) issued by Financial Services Commission (FSC) of Mauritius and it was stated to be engaged in investment holding activities.
Similarly, ECL was initially incorporated in Mauritius on 13.10.2005 in the name of Essar Power India Holdings Ltd. The name was changed to Essar Communications Limited on 12.12.2005. The EeL too held a Global Business Licence (GBL 1) issued by Financial Services Commission (FSC) of Mauritius and it was stated to be engaged in investment holding activities. Both the assessee companies have undergone numerous ownership changes within the group and on the date of transfer of VEL shares to EPSL of Vodafone group, ECL happened to be hundred percent owner of the shareholding of Ecom.
Vodafone Essar Limited (VEL) was a joint venture of Vodafone Group and Essar Group.Before the entry of Vodafone, it was a joint venture between Hutchison Group and Essar Group and was known as Hutchison Essar Limited (HEL).
Ecom, a Mauritius incorporated Essar Group Company held
2,56,51,389 nos, of equity shares (6.19% of total equity share of the Essar group) in Vodafone Essar Ltd (VEL), an Indian company engaged in mobile telephone business in India. Similarly, Essar
Communications Limited, Mauritius (ECL, in short) which is 100% holding company of ECOM, held equityshares (15.85% of total equity of the Essar Group) in VEL. Both the companies are together known as assessees. Thus, together ECL and ECOM held
22.04% in VEL and another group company, resident of India held balance of the 11 % holding of the Essar Group in EL. The retention of around 11 % of ownership in the hands of the Indian resident company of the Essar Group, arose out of the agreement between the two groups when the Indian FDI regulations relaxed the FDI norms in the Telecom sector, to enhance foreign holding limit to 74%. Thus. on the date of transfer of the impugned shares, foreign shareholding of the Essar group was around 22% and Indian shareholding was around 11 %. The Indian company, transferred its shareholding in the VEL to another Indian company
(of Piramal group) nominated by the Vodafone Group in F. Y.
2011-12, as part of the deal between the Vodafone and the Essar
Group. Thus, the FDI regulatory requirements were satisfied by the group.
On 0l.06.2011 and 01.07.2011, the two assessees sold all the shares they held in VEL to Euro Pacific Securities Limited (EPSL)
(a non-resident company of Vodafone Group, nominated by Vodafone International Holdings B.Y) for a total consideration of U 1,18,04,78,489 and U 3,02,05,21,511 andrealised capital gains thereon. The gross consideration (including interest) was received by the assessee after deduction of tax at source at 21.012%. The shares under the impugned transactions were sold upon exercise of put option by another group company ECML,
Mauritius. Consideration was received on 01.07.2011 in the bank account of the assessees companies in Mauritius.
Prior to the sale of the VEL shares by the assessees, EPSL made an application before the Hon'ble Authority for Advance
Rulings ('AAR) seeking a ruling on its withholding tax liability on the proposed payment of sale consideration to the assessee for the transfer of shares in VEL. Capital gains made on proposed sale of shares to EPSL were claimed exempt under the DTAC before the AAR.
On their miscellaneous application filed before the AAR, the assessees were admitted as interveners in the matter.
After various round of hearings before the AAR, between
March 2011 to June 2011 for which both Vodafone Group and the Essar Group were parties- Vodafone Group as the deductors and the assessees as interveners, application for withdrawal of case was filed before the AAR. This application for withdrawal was made after an agreement dated 01.07.2011 between the two groups-
Vodafone and Essar was entered into. This agreement inter alia included clause for enhancement of consideration payable by the Vodafone group to the Essar group on account of taxes payable on the transaction.
As per terms of the settlement through this agreement.
Vodafone agreed to increase the total consideration of VEL shares of ECL and ECOM to' 4.20 I Bn U from earlier 3.8 Bn U .
The tax deduction component was agreed to be U 882.7 Mn.
Thus, Essar parties received increased consideration, the increase being about 400 Mn U . The tax component was thus nearly shared equally by the Vodafone and Essar parties. The relevant recitals from the deed of amendment dated 1.7.2011 referring to the terms of settlement of dispute are as under:
" ... 2.1 The parties agree that the offshore agreement is hereby amended so that:
(A) the put option price, as defined in clause 2.18 of the offshore agreement, is amended and is now US$
4,201,000,000 (being c.US$46.02 per share) of which US$
3,020,521,511 is the price payable for the 65,634,887 put option shares owned or formerly owned by ECL and US$
1,180,478,489 is the price payable for the 25,651,389 put option shares owned by ECom;
(B) notwithstanding any provision to the contrary in the Offshore agreement (including, but not limited to, clauses 4. J and 4.4 of the offshore agreement) and notwithstanding the provision of the Double Tax Avoidance Agreement between
India and Mauritius, Vodafone or Vodafone s nominee or VG Pic as Guarantor can deduct from the payment of the put option price (as amended by the terms of Clause 2.1 (A) above) an amount upto a maximum of US$ 882,714,120
(plus any amount withheld from any interest paid on the put option price) towards tax deducted at source in respect of capital gains tax on the sale and transfer of the put option shares provided that such withheld amount is deposited with the relevant tax authorities in accordance with the terms agreed between the parties. "(Emphasis supplied)
From this deed of settlement, it is observed that the two groups i.e. Vodafone and Essar have settled the amount of sale consideration and tax on the capital gains at taxable rate charged as per Indian law and have expressed the same to be attributed towards the withholding tax liable to be deducted at source, notwithstanding any provisions of DTAA.
The AAR allowed the said application for withdrawal vide order dated 01.07.2011 dismissing the application as “dismissed as withdrawn without prejudice to the rights of the applicant (i.e.
EPSL), the Revenue and the intervener to put forward whatever contentions they have at appropriate stage in other proceedings, in accordance with law.
Thereafter TDS was deposited by EPSL. i.e. the deductor.
This TDS was claimed to be paid under protest on the ground that capital gains arising from" sale of these shares were exempt from income-tax in India under Article 13(4) of the India-Mauritius Tax
Treaty ('tax treaty).
Subsequently, on 26.09.2012, again applications were filed by ECL and ECOM before the same forum, i.e. the AAR. These applications were for the same transaction and on the identical question which was the subject matter of earlier proceedings, i.e.
whether the assessees were chargeable to tax in India on the capital gains arising from transfer of shares in VEL. Capital gains made on sale of shares to EPSL viz 1.079 Bn U (INR 4772 Crore) by Ecom and 2.647 Bn U (Rs. 11,772/- Crore] by ECL were claimed exempt by the assessees under the DTAC in this application before the AAR.
This second round of application was made after a gap of about one year and 3 months and after the constitution of the AAR had changed upon the retirement of Hon'ble justice
Balasubramanyam. After multiple hearings, the AAR analyzed the issues like forum shopping, "other proceedings" dismissed both the applications on 10.10.2019 as non-maintainable. In addition, in the order, the Hon'ble AAR also held that it was prima-facie a case of tax avoidance. The AAR further enlisted the series of events submitted by the Revenue as evidences for tax avoidance and specifically expressed that the aspect of tax avoidance was to be examined by the authorities at the time of proceedings related to assessment.
This order of the AAR was challenged by the assessees before the Hon'ble Delhi High Court by way of a writ petition. The Hon'ble Delhi High Court disposed off the writ petition vide its order dated 19.12.2019. The order of the High Court also directed the AO to expedite the assessment proceedings and to pass the assessment order preferably on or before 30.06.2020 (later extended to 15.03.2021).
The return of incomes which were filed by Ecom on 29.09.2012 declaring nil income and claiming refund of Rs.1097,18,51,195/- being TDS deducted by EPSL was kept in abeyance on account of AAR proceedings in the second round. In this return it was claimed that the capital gains arising from transfer of shares in VEL was not chargeable to tax in India as per Article
13 (4) of the tax treaty. The case was taken up for scrutiny.
Similarly, the return of income which was filed by ECL on 29.09.2012 declaring nil income and claiming refund of Rs.
2821,21,70,693/- being TDS deducted by EPSL was also kept in abeyance. In this return, it was claimed that the capital gains arising from transfer of shares in VEL was not chargeable to tax in India as per Article 13(4) of the tax treaty. The assessment proceedings in both the cases were taken up subsequent to the decision of the AAR.
As facts of both ECL and ECOM are similar and intertwined, frequent reference to both the assessees have been made in the preceding orders of the authorities and also in earlier as well as the present submission.
The AAR Ruling:
i.
On the issue of maintainability of the applications filed before the same forum, i.e. the AAR, after withdrawal of the same and having been dismissed as withdrawn, the AAR held the applications to be non-maintainable.
ii.
On the plea of the taxpayer, that the revenue should limit itself to the activities and affairs of the relevant financial year in which the share were transferred, i.e. F. Y. 2011-12 only, the AAR held that all the functions related to the affairs of the companies needed to be examine, which in the instant cases involved acquisition, application, maintenance and disposal. The relevant portion of the decision is reproduced:
"186. At the outset it is mentioned that we are not in agreement with the plea of the applicant that for considering the issue of prima-facie tax avoidance or exemption under treaty, we have to limit ourselves to the activities and affairs of the relevant financial year i.e., if the (sale) pertains to financial year 2011-12, we have to examine whether there was a scheme of tax avoidance during that year. This is not acceptable interpretation. Imagine a share sale transaction happening on 1st April, 2011, there is nothing to even look for any documents or papers for the relevant financial year.
A scheme of tax avoidance presupposes a series of events and actions which might have been planned for few years and thereafter the desired event occurs leading to the intended tax benefit.The key determinants inter-alia as pointed out by Hon 'ble Supreme Court in Vodafone case are whether the entity exists for commercial purpose, whether it is entering into transaction ofsay asset purchase, asset sale, loans, strategic investment, etc., for its own benefit, or if is merely a conduit for someone else to park the funds or carry out activities as mere puppet at the behest of actual beneficiary who decides, strategies, executes its plan through the puppet entity. We do appreciate that there is very thin line between influence by parent company in affairs of executes its plan through the puppet entity. We do appreciate that there is very thin line between influence by parent company in affairs of subsidiary and abdication of responsibility by subsidiary company in favour of parent.
But for prima-facie tax avoidance what is to be ascertained is whether there is a scheme which is apparent from the documents on hand or ascertainable from the chain of events. Prima-facie means what appears to be true even though it may be proved false later.
iii.
On the issue of the transaction was prima facie a case of tax avoidance, gave a finding that the transaction was prima facie for the purpose of section 245R(2)(iii) and hence non maintainable.
The relevant observations are:
"187. We are in agreement with revenue that in the instant case certain events inter-alia do serve as pointer towards prima-facie tax avoidance. These are:
•
Investment for acquisition of VEL share not made by applicants but funds were routed through them and on Lop loan agreements.
•
Further loans were raised by pledging these shares for benefit of Essar group.
•
When shares were sold consideration immediately moved out from accounts of applicant to lenders on the directions of executives of Essar group
•
Shares were bought, pledged, sold by Essar group and the entities
•
Funds were routed through them and on Lop of that they bound themselves in restrictive covenants of loan agreements
•
Further loans were raised by pledging these shares for benefit of Essar group
•
When shares were sold consideration immediately moved out from accounts of applicant to lenders on the directions of executives of Essar group
•
Shares were bought, pledged, sold by Essar group and the entities merely lent their name to see treaty benefits.
•
The shares in HEL/VEL have been acquired by ECL by voluntary liquidation of ETIL. The sale purpose, it seems is to transfer the situs of ownership of 15.85% ofHEL/VEL shares owned by Essar group, to Mauritius to avoid capital gains tax in India.
In view of foregoing, we hold that the present applications are barred under clause (iii) of proviso to section 245R(2).”
iv.
The AAR flagging the issues to the assessing and appellate authorities for examining the transaction to be one for tax avoidance:
"189. We have held earlier that applications are not maintainable and liable to be dismissed and that applicants can pursue their cases in other proceeding in forum other than AAR, it would be in fitness of things that concerned authorities would also consider this aspect of tax avoidance in detail at the time of merit proceedings."
(Emphasis supplied)"
Order of the Assessing Officer:
After multiple hearings and analysis of facts, legal provisions and judicial decisions, the AO finalized the assessment in detailed orders dated 13.04.2021. The AO denied benefits under Article 13(4) of the tax treaty to the assessees by concluding inter alia that the assessees were nothing but a shell company which had been used as a conduit with the sole objective of avoidance of tax on capital gain arisen on sale of VEL shares. The AO held that the control and management of the assessee company always lay in India since the board of directors were for namesake only and all the decisions in respect of the assessee were taken by Ruia family and executed through the key persons of Essar group in India. The AO concluded that the assessees were tax residents of India and were not entitled to the benefit claimed under the tax treaty.
Accordingly, long term capital gains were charged to tax.
The draft assessment orders were issued and served on the assessees on 15.03.2021 u/s 144C of the Act. Vide letter dated
17.03.2021, the assessees informed the AO that they were not willing to approach the Dispute Resolution Panel and reserved the right to appeal before CIT(A) against the final assessment orders.
Accordingly, final assessment orders were passed. Aggrieved by the assessment order, the assessees filed appeals before the CIT(A)
The A0, arrived at conclusion of the transactions leading to the capital gains being taxable in India, based on the following reasons:
ECL and ECom were always controlled by the trusts controlled and managed by Ruia family members;
Investment for acquisition of VEL shares were not made by ECOM/ECL but funds were routed through them and on top of that they bound themselves in restrictive covenants of loan agreements;
Further loans were raised by pledging these shares for benefit of Essar group;
When shares were sold consideration immediately moved out from accounts of applicant to lenders on the directions of executives of Essar group:
Shares were bought, pledged, sold by Essar group and the entities merely lent their name to seek treaty benefits.
The shares in HEL/VEL have been acquired by ECL by voluntary liquidation of ETIL. The sole purpose, was to transfer the situs of ownership of 15.85% of HEL/VEL shares owned by Essar group, to Mauritius to avoid capital gains tax in India.
Board of directors of the companies were for namesake only and all the decisions in respect of the companies were taken by Ruia family and It executed through the key persons of Essar group in India, and thus, the board was controlled and managed by the Essar group from India and the respective boards of ECOM/ECL were mere puppets;
Analysis of financial statements of ECL/ECOM showed that they were only paper companies without any substance as they were not involved in any significant business activities and their income/expenditure was minimal in quantum;
It is not the holding of board meetings or complying to certain regulations but it is the Act of the Central
Management and Control applied through brain in factual matrix of course of business. Hon'ble Supreme Court applied the CMC test (Central Management and Control test) which determines from which place the real business is carried on.
In the facts of the case, the Central Management and Control i.e. the "Brain" of the assessee company was being exercised in India and thus the company was a resident of India under the provisions of section 6(3) of the Act:
Assessee company acted merely as a puppet and agreed to show the ownership in its own name as a mere name lender and without any knowledge, authority and decision- making owned in its name by the beneficial owners based in India;
ECOM/ECL are nothing but shell companies which have been used as a conduit with the sole objective of avoidance of tax on capital gain arisen on sale of VEL shares:
ECL/ECOM are tax resident of India and are not entitled to the benefit claimed under the tax treaty.
Order of the CIT(A):
i.
The CIT (A) framed the following questions for deciding the two appeals:
"6. The issues that arise for determination in this case are as follows:
Regarding taxation of capital gains on transfer of shares of VEL a)
Whether the assessee was a tax resident of India and whether its control and management lay wholly in India during the relevant financial year, b)
Whether the assessee was entitled to the benefits of Article 13 (4) of India- Mauritius Double Taxation
Avoidance Convention (DTAC); c)
Whether the assessee was a conduit company set up for availing tax treaty benefit and for avoidance of tax.
Regarding application of surcharge
Whether the assessee was liable to surcharge at the rate applicable to that on a foreign company or a domestic company.
Regarding taxing the interest income and balances written back be added to the total income.
Regarding taxing interest received from EPSL
Whether the interest received from EPSL is to be taxed twice both as part of sale consideration as well as 'income from other sources'.
Regarding indexed cost of acquisition
Whether the indexed cost of acquisition of the VEL shares was correctly computed in the hands of the Assessee. "
ii.
Summary of the findings of the CIT(A):
The CIT(A) has summarized his findings in para 170 of his order as follows:
"170. The summary offindings against the assessee are as under:
The assessee was tax resident of India and that its control and management was wholly in India;
The assessee was not entitled to the benefits of Article 13(4) of India-Mauritius DTAC;
The capital gains earned by the assessee on the sale of VEL shares were related to assets located in India in telecommunication sector which derived its value based on the economic activity and value creation in India;
The assessee was a conduit company set up for availing tax treaty benefit and for avoidance of tax;
The assessee had contrived to devise a scheme to show that the of claim of exemption from capital gains taxation in India under Article 13(4) of the tax treaty on the transfer of shares in an Indian company; colourabledevice.
1 Accordingly, the action of the AO in charging the capital gains to tax is confirmed. Grounds No.2 to 4 are dismissed. "
Present proceedings before the Hon'ble ITAT:
Against the decision of the CIT(A), the two assessees preferred appeals. During the course of the proceedings, based on comprehensive factual evidences, extensive oral submissions have been made before your honours on behalf of the department. The submissions of the revenue drew extensive support from the written submissions filed before the AAR, the ruling of the AAR, the order of the assessing officer and the order of the CIT(A).
PART B - Annotation of significant issues considered by the CIT(A) for the decision
The Ld CIT(A) has considered the issues in all comprehensiveness while referring extensively to the ruling of the AAR as also to the submissions filed before the AAR. Therefore, it is considered apt to flag his analysis including the relevant factual, legal and judicial analysis for his decision. These annotations are tabulated for clarity and intelligibility.
SI
No.
Issue
Relevant paragraph of the CIT(A)
1. Facts in brief and the background proceedings
Para 3-4 (page 14-17) ECL Para
3-4 (page 12-16) ECOM
2. Issues framed by the CIT(A)
Para 6 (page 17-18) ECL Para 6
(page 16) ECOM
3. Analysis of the results of the background proceedings leading to capital gains taxation
Para 7 (page 18-20) ECL Para 7
(page 16-19) ECOM
4. Summarising the analysis of the AO
Para 8 (page 20-22) ECL Para 8
(page 19-21) ECOM
5. Summarising the analysis of the AAR
Para 9 (page 22-24) ECL Para 9
(page 21-23) ECOM
6. Facts and circumstances leading to the conclusion of capital gains taxation by the AO
6.1 Broad view of Essar Group Company forming part of the existing arrangement
Para 11 (page 24-27) ECL
Para 11 (page 23-25) ECOM
6.2 Moving of holding Essar Group in Indian Telecom
Business from Onshore to offshore
Para 12 (page 27-33) ECL
Para 12 (page 26-31) ECOM
6.3 Acquisition of VEL shares by ECL through voluntary
Liquidation of ETIL and the evidences that voluntary liquidation was a colourable device
Para 13 (page 33-52) ECL
Para 13 (page 31-51) ECOM
6.4 Analysis of evidences that Ruia family was the ultimate beneficiary of ECL/Ecom
Para 14 (page 52-57) ECL
Para 14 (page 51-55) ECOM
6.5 Infographics showing Ruia family members to be ultimate beneficiaries of ECL/Ecom through maze of companies and trusts in Mauritius, Cayman Island and British Virgin Island
Para 14.1, 14.2 & 14.10
(page 52, 53, 54 & 57) ECL
Para 14.1, 14.2, & 14.10
(page 51, 52 & 55) ECOM
6.6 Questionable independence of directors and the issues relating to secrecy and non-transparency through analysis of GBL 1 Company in Mauritius and the profile of Mauritian directors
Para 15 & 16 (page 58-61)
ECL
Para 15 & 16 (page 56 - 59
ECOM
6.7 Use of colourable device in acquisition of shares, raising of loans, movement of funds for the benefit of Ruia family etc
Para 17 & 18 (page 61-72)
ECL
Para 17 & 18 (page 59-70)
ECOM
6.8 Analysis of Joint Assignment Agreement dated
31.01.2007
as a colourable device and the infographic representation of the same
Para 19 (page 72-76) ECL
Para 19 (page 70-74) ECOM
6.9 Analysis of loan agreements taken on the strength of the impugned shares for the benefit of Ruia family and the group companies and the Essar Group companies
Para 20 -28 (page 76-83)
ECL
Para 20-28 (page 74-80)
ECOM
6.10 Analysis of Advantages of U 2.2 bn given to Ruia family through Essar Global Ltd. Cayman Island
Para 26 (page 80) ECL Para
26 (page 77) ECOM
6.11 Infographic of the benefit of fund flow of loan of U 1.4 Billion on the strength of India based impugned shares
Para 27.1 (page 82) ECL
Para 27.1 (page 79) ECOM
6.12 Over arching role of Essar Global Ltd., Cayman
Island and practically no role of ECL/ Ecom in deciding the application of the impugned shares
Para 29 (page 83-86) ECL
Para 29 (page 80-82) ECOM
6.13 Infographics of Frequent changes in holding structure devoid of commercial substance
Para 30 (page 86-88) ECL
Para 30 (page 82-85) ECOM
6.14 Settlement of tax dispute before the AAR on 01.07.2011
through deed of amendment and enhancement of consideration
Para 31 (page 89-90) ECL
Para 31 (page 86-87) ECOM
6.15 Analysis of financial statements of ECL/ Ecom evidencing practically no discharge of functions by ECL/Ecom
Para 32 (page 90-96) ECL
Para 32 (page 87-93) ECOM
6.16 Entire affairs of ECL/Ecom and also of the Para 33 (page 96-142) ECL transactions relating to the impugned shares carried Para
33
(page
93-139)
6.17 ECL/Ecom not taking vital decisions even during
F.Y. 2010-11 & F.Y. 2011-12 and also many of the earlier years
Para 34-37 (page 142-158)
ECL
Para 34-37 (page 140-155)
ECOM
6.18 Residential status profile of the key management personnel substantially demonstrating decision making in India
Para 35 & 36 (page 147-
150) ECL
Para 35 & 36 (page 144-
147) ECOM
6.19 Letter of Mauritius Revenue Authority stating
Central Management Control in Mauritius, based on specific criteria mentioned by the assesses
Para 38 (page 158 & 159)
ECL
Para
38
(page
155-156)
ECOM
6.20 Non-production of TRC during the assessment proceedings for F.Y. 2004-05 to F.Y. 2009-10
Para 39 (page 159-160) ECL
Para 139 (page 156-157)
ECOM
7. Central management and control in India by the Essar Group to which the ECL/Ecom having absolutely no role
Para 40 & 41 (page 160-
164) ECL
Para 40 & 41 (page 157-
161) ECOM
8. Written submissions of the ECL/Ecom and analysis and rejection of arguments by the CIT(A)
Para 43 (page 164-177) ECL
Para
43
(page
161-173)
ECOM
9. Non-applicability of paragraph 4 of Article 13 under India Mauritius Treaty- Application of Section 6(3) of the Indian Income Tax Act, Article 4(3) of India
Mauritius Treaty, place of effective management, circular 1 of 2023 clarifying that in the case of findings of facts by the assessing officer establishing dual residence, place of effective management to be the governing criteria for residence
Para 44-47 (page 177-179)
ECL
Para 44-47 (page 173-175)
ECOM
10. Hon’ble Supreme court in Azadi bachao- clarifying power of the authorities to give finding of fact for determination of residential status in case of dual residence under Article 4(3) of the treaty
Para 48 (page 179-180) ECL
Para
48
(page
175-176)
ECOM
11. Conclusion by the CIT(A) that circular 1 of 2023 and Homble Supreme Court on Azadi Bachao andolan mandate that the residential status deciding the taxability governed by findings of facts
Para 49 (page 180-181) ECL
Para
49
(page
176-177)
ECOM
12. Testing of residential status by the CIT(A) through examination of the concept of control and management of affairs under the factual matrix of the cases- acquisition, use and disposal of the impugned shares
Para 50-59 (page 181 - 185)
ECL
Para 50-59 (page 177-181)
ECOM
13. Analysis of the cases of V.V.R.N.M. Subbayya
Chettiar; English case of DeBeers Howe; English
Para 60-73 (page 185-195)
ECL case of Laerstate BV Vs HMRC; English case of Development Securities Vs HMRC (2019); Erin
Estate Vs CIT(1958) (SC); CIT Vs. Nandlal Gandalal
(1960)(SC); CIT Vs Chitra Palayakat (1985) (Madras
HC); CIT Vs. Bank of China (Calcutta HC);
Universal Cargo Carriers Inc.; Meenu Sahi Mamik
(AAR)
Para 60-73 (page 181-191)
ECOM
14. Conclusion of the C1T(A) based on the application of judicial rulings, treaty definition of Article 4(3), circular 1 of 2023, the concept of place of effective management as defined by the OECD to factual matrix holding control and management of affairs wholly in India
Para 74-89 (page 195-205)
ECL
Para 74-89 (page 191-201)
ECOM
15. CIT(A) finding that the factual matrix prove complete lack of commercial substance and is a clear case of treaty abuse
Para 90-92 (page 205-213)
ECL
Para 90-92 (page 201-209)
ECOM
16. CIT(A) testing the factual matrix in terms of the guidance laid down by Hon’ble SC in Vodafone,
Azadi Bachao (SC), Banyan and Berry(Gujarat),
Consolidated Finvest& Holdings Ltd. (Delhi Tribe),
Wipro
Ltd.(Kar),
Copal
Research
Ltd.(Delhi),
Gosalia Shipping (R) Ltd (SC), Panipat Woollen &
General Mills Co. Ltd. (SC), Redington (India) Ltd
(Madras HC), McDowell & Co. Ltd. (SC) case
Para 93-100 (page 213-216)
ECL
Para 93-100 (page 209-214)
ECOM
17. CIT(A) tabulating and discussing guidelines of Hon’ble Supreme Court in Vodafone’s case and fitting the same to the factual matrix of the present case for consideration and rebuttal of the assessee’s submissions
Para 101-139 (page 217-
281) ECL
Para 101-139 (page 213-
277) ECOM
18. CIT(A) discussing the assessee’s plea that the affairs of the company should be viewed within the restrictive parameter of RY. 2011-12 and rejecting the assessee’s plea based on his factual and legal analysis, analysis and findings of the AAR in the present cases, ruling of the AAR in the case of Capex
Com Ltd (2021)
Para 140 (page 281-284)
ECL Para 140 (page 177-
280) ECOM
19. CIT(A) rendering the finding that the transaction in question was a case of colourable device and sham transaction
Para 141-142 (page 284)
ECL Para 141-142 (page
280) ECOM
20. CIT(A) discussing the decision cited by the assessees and holding that such cases are distinguishable on findings of facts while further relying on various decisions of the AAR and the High Courts
Para 143-146 (page 284-
289) ECL
Para 143-146 (page 280-
285) ECOM
21. Analysis and the findings of the CIT(A) that the impugned capital assets was located in India
Para 147-167 (page 289-
302) ECL
Para 147-167 (page 285-
298)
ECOM
22. Findings of the CIT(A) that no relief granted to the taxpayers in earlier proceedings i.e. two rounds of proceedings before the AAR - in the first round after hearing the case on behalf of the revenue, the application was withdrawn from the AAR and full payment of tax was made. In the second round before the AAR, application was filed after almost two years of withdrawing the applications before the same forum under curious circumstances. Ruling was rendered by the AAR that the taxpayer cannot contest before the same forum after having withdrawn the application. Ruling was also given to the effect that the application been tenable because the case was prima facie for the purpose of tax avoidance. The AAR expressed for the authorities passing/
examining the assessment orders to examine the issues brought on record by the department and flagged by the AAR pointing at tax avoidance.
Para 168 (page 302) ECL
Para 168 (page 298) ECOM
23. Final conclusion and the summary of findings holding taxability of the gains from the impugned transactions to be taxable as capital gains in India.
Para 169-170 (page 302-
304) ECL
Para 169-170 (page 298-
300) ECOM
24. Inference drawn by the CIT(A) with regard to non- production of the documents mentioned at pages 252-
253 of the assessment order, before the AO
Para 171 (page 304-305)
ECL Para 171 (page 300-
301) ECOM
PART C -Annotation of written submission dated 23.09.2019
made by the revenue before the Hon'ble Authority for Advanced Rulings
Written submissions dated 23.09.2019 were filed before the Hon'ble AAR which covers the submissions made for and on behalf of the Revenue as well as the rebuttal to the contentions canvassed by and on behalf of the taxpayer companies. These submissions were given in two parts, Part-A and Part-B. Part-A of the submissions cover issues relating to bar contained in item (i) of the proviso to Section 245R (2), suppression of fact of intervention in the Application No. 982 of 20 10 filed by Euro Pacific Securities
Ltd ("EPSL", in short) in the second round of applications filed by the Essar Group before the AAR and the effect of the said applications.
Part-B of such submissions deal with the contention of the revenue with regard to the bar contained under item (iii) of the proviso to section 245R(2) of the Act and thus submission made praying to disregard the claim of exemption from capital gains taxation made by the two applicants, seeking benefit of Paragraph
(4) of Article 13 of the Double Taxation Avoidance Agreement between India and Mauritius. This part of the submission made before the AAR dated 23.09.2019, contains seven (7) sub-parts B-1
to B-VII.
The factual legal and judicial analysis made in this part was accepted by the AAR while holding the applications to be barred under clause (iii) of the proviso to section 245R(2) and decision in favour of revenue was granted by the AAR. This submission was also considered relevant by the Ld. AO and the Ld. CIT(A).
Accordingly, it is submitted that this written submission is equally relevant for the current proceedings before this very Hon'ble
Tribunal. Therefore, annotation of Part B of the submissions filed before the AAR is tabulated below for the assistance of the Hon'ble
ITAT.
S.
Issue
Relevant pages
No.
of the written submissions dated
09.2019 PART-B PART-BI - Main Propositions 2 Issues relating bar contained in item (iii) of the proviso to section 245R (2) of the Act and claim of exemption made by the two applicants in their returns of income seeking benefit of Paragraph (4) of Article 13 of the Indo-Mauritius DTAA 26-32 PART-B11- Facts of the case including colourable devices 3 (I) Consolidation of holding of Essar Group In Indian Telecom Business V 33-35 4 (II) Acquisition of shares in the name of ECOM, Mauritius in HEL/VEL, India 36-51 (III) Voluntary liquidation of ETIL- Colourable device for tax 52-76 avoidance Shifting of situs to Mauritius of ownership of VEL shares held by ETHL India by first transferring such shares to ETIL India and thereafter its voluntary liquidation 6 (IV) Another colourable device-Joint Assignment Agreement dated 77-80 31.1.07 Loan taken on pledge of impugned shares changes colour and lands as income in another group company 7 (V) Loan availed by Group based on the security of ownership of ECL/ECOM in HEL/VEL - Facts showing that Applicant Companies have no decision making power 81-87 8 (VI) Various Put and Call Option Agreements with Vodafone Group 88-93 -showing lack of separate identity of the Applicant Companies 9 (VII) Ultimate beneficiary Factual Matrix - Ruia Family to be the ultimate beneficiary and controlling and managing the affairs of the Applicant Companies 94-102 10 (VIII) Another colourable device - Frequent Changes in Holding 103-104 Structure: Arrangement lacking commercial substance 11 (IX) Settlement of tax disputes between Vodafone & Essar Groups by way of tax sharing through deed of amendment dated 1.7.2011 - Against all norms of propriety 105-114 11 (X) Financial Statements of the Applicants Companies -- showing that these are empty boxes based in Mauritius only for tax benefit. 115-119
Part B-III -Analysis of Board minutes and various tables
13
(I) ECL- Mauritius; persons authorised as per Board minutes along with purpose of authorisation;
120-125
14
(II) ECOM- Mauritius; persons authorised as per Board minutes along with purpose of authorisation
126-133
15
(III) ECML- Mauritius; persons authorised as per Board minutes along with purpose of authorisation
134-136
16
(IV) ETIL, India -Persons authorised as per Board minutes
137-138
17
(V) Chart showing Various agreements-their signatories—-and the authorized persons as per Board minutes
139-152
18
(VI) Date -wise chart of Board meetings and written resolutions - how the companies are run through written resolutions largely
153-154
19
(VII) Serious discrepancies in board minutes of ECL and ECOM upto the period 16.8.2007
155-162
20
(VIII) Serious discrepancies in minutes of ECL & ECOM for FY
2010- 11 &FY 2011-12
163-174
21
(IX) Board minutes of FY 2010-12 and FY 2011-12 are of doubtful authenticity [submissions on without prejudice basis]
175-179
22
(X) ITD Profile of residential status of key management personnel
180-181
(XI) Control and management in India during FY 2011-12 - based on Board minutes provided for FY 2010-11 and FY 2011-12
[submissions on without prejudice basis]
182-195
Part B-IV - Legal submissions on Tax avoidance in view of the facts of the case
24
Legal submissions on Tax avoidance read with facts of the case
201-208
Part B-V - Legal submissions on Control and management in view of the facts of the case
25 (I) Prima Case of Tax Avoidance as the control and management of affairs of the Applicants vests wholly in India-Article 4( 1) of the Indo Mauritius Treaty read with Section 6(3) of the IT Act India
209-222
26 (II) Judicial Dicta on tests for “control and management of affairs situated wholly in India”
223-239
27 (III) Case of Dual Residence under the Treaty-Applicability of Article 4(3) of Indo Mauritius DTAA
235-239
Part-B-VI - Rebuttal of objections of Applicants
28 (I) Revenue rebuttal on Applicant’s submissions on (8) allegations of Revenue
240-267
29 (II) Revenue rebuttal of separate objections of the Applicants on nine (9) legal and factual issues.
268-274
Part-B-VII - Final Conclusion on facts of the case.
30 (I) Case of prima-facie tax avoidance - use of colourable device under judicial anti-avoidance rules
275-284
31 (II) Applicants taxable in India under Treaty as the control and management of affairs of the Applicants vests wholly in India-
Article 4(1) of the Indo Mauritius Treaty read with Section 6(3) of th
IT A t I di d
ith A ti l
4(3) f th T t
285-292
Miscellaneous - Few relevant charts
32 Charts and diagrams
293-312
PART D - Legal arguments and the judicial dicta further impinging on the issues involved in the present proceeding
The Legal submissions are in sections I, II and III which had been argued in detail and have now been captured as Written Submissions.
Before Respondents proceed to place on record the legal submissions, two aspects are first on record. This case is essentially and principally a case revolving around the test of Control and Management. And more importantly, the Mauritius.
On facts. the Respondents had demonstrated that there is no Control and Management in Mauritius and it is wholly in India. The expression "wholly" both under the erstwhile Section 4 of the Income Tax Act, 1922 and the present Section 6(3) of the Income Tax Act, 1961 both prior and subsequent to 2016 have been interpreted by the Hon'ble Supreme Court in the case of Mansarovar Commercial Pvt. Ltd. v. Commissioner of Income Tax, Delhi {2023} 8 S.C.R. 452. The Judgement dealt in detail in the latter half relying on all the earlier preceding Judgments, interpreting the expression "wholly" as the head and brain test. The erstwhile Section 4, Section 6(3) up to 2016 and Section 6(3) post 2016 and Section 73(1)(b) of the Mauritius Income Tax Act are parimateria. A detailed discussion on the same is brought on record in the later portion of the submissions.
As regards the India-Mauritius DTAA, according to the Respondents, the case would squarely fall under Article 4(1) and the residency test stands proved as India. Even applying the Tie breaker test, it would be self-evident that the Control and Management test both on facts and in law would only be in India.
With this background, the Respondents now proceed to place on record the submissions in law along with case law analysis.
Section I - Judgement of the Hon'ble Supreme Court rendered in Azadi and Vodafone and Observations on Circular No. 789, dated 13.04.2000 - Are they Ratio or Obiter?
The cases of the present two Assessees, namely ECL and ECOM, pertain to direct transfer of shares involving two sovereign juri ictions-India and Mauritius-and, beyond them, a complex web of upstream entities situated in Mauritius and ultimately the Cayman Islands. While the India-Mauritius Double Taxation Avoidance Agreement (DTAA), originally entered into in 1983, has been amended and extended from time to time-the latest amendment being in 2017-
The two earlier landmark decisions of The Hon 'ble Supreme Court-Azadi Bachao Andolanand Vodafone International Holdings B. V-did not involve an examination of a typical transaction under the India-Mauritius DTAA.
Decision in Azadi Bachao Andolan
In Azadi Bachao Andolan, the issue arose in the context of Public Interest Litigation (PIL) whereby legal validity of CBDT Circular No. 789 dated 13.04.2000 was challenged before Delhi High Court by way of 2 Writ petitions. These petitions also sought a declaration that exemption granted to Foreign Institutional Investors (FIIs) and various investment funds from income tax in India under the India Mauritius DTAA is void. Against these Writ petitions, the Delhi High Court in its judgment rendered on 16.03.01 declared the aforesaid Circular as illegal and void. Against such judgment of Hon'ble Delhi High Court, SLPs were filed before The Hon'ble Supreme Court by Union of India. The Hon'ble Supreme Court vide its order dated 07.10.03 set aside the order dated 16.03.01 passed by the Delhi High Court and upheld the legal validity of CBDT Circular No 789. 4. The legal framework applicable to Foreign Institutional Investors (FIIs), Mutual funds, and similar entities under the Income Tax Act, 1961 as well as the context of Circular No.789 is markedly different from that governing the sale of a business investment, whether by way of direct or indirect transfer. Accordingly, The Hon'ble Supreme Court in Azadi Bachao Andolan never had the occasion to examine the tax implications of a direct or indirect transfer of shares or the applicability of Circular No. 789 in such a context. The Respondents respectfully submit that this distinction will be further elaborated upon in the subsequent sections of these submissions. 5. In Azadi Bachao Andolan, both the Delhi High Court and The Hon’ble Supreme Court had an occasion to deal only with investments made by Foreign Institutional Investors (FIIs), mutual funds, and other such entities. The judgment of The Hon'ble Supreme Court in Azadi Bachao Andolanwas delivered at a time when India had yet to encounter cross- border transactions involving the direct or indirect transfer of shares constituting business investment. It is equally pertinent to note that, even under Mauritian law, the Financial Services Act came into force only in the year 200 I-subsequent to the issuance of CBDT Circular o. 789 dated t 3.04.2000. Thus, Azadi Bachao Andolandealt only with the prior legal regime then prevailing in Mauritius, namely the Mauritius Offshore Business Activities Act, 1992 (MOBA Act), which did not deal with the type of transactions currently under examination before The Hon'ble Supreme Court-a position that has been accepted by both parties in the present case.
To substantiate this distinction, the Respondents referred to the judgment dated 07.10.03 rendered by The Hon 'ble Supreme Court in Azadi Bachao Andolan, which is discussed below:
a.
Paragraph 9 of the judgment records that, in the year 2000, certain Income Tax Authorities issued show cause notices to various Foreign Institutional Investors (FIIs) operating in India, questioning why they should not be taxed on the profits and dividends accruing to them from their Indian investments. The basis on which the showcause notices were issued was that the recipient of the showcause notices were shell companies incorporated in Mauritius, with the sole or primary purposeof routing investments into India through
Mauritius so as to avail the benefits under India-Mauritius
DTAA. These actions created significant panic in the financial markets, leading to a hasty withdrawal of funds by FIls. In response, the then Finance Minister issued a press note dated 04.04.2000, clarifying that such show cause notices did not represent or reflect the policy of the Government of India and reaffirming the commitment of Government of India to honour the treaty-based tax exemptions applicable to FIls investing through Mauritius.
b.
Therefore, the facts as set out in paragraph 9 of the Azadi
Bachao Andolan judgment clearly pertain to the denial of tax benefits to Foreign Institutional Investors (FIIs), and not to any transaction involving the direct or indirect transfer of shares constituting a business investment. It was in this context that Circular No. 789 dated 13.04.2000 was issued by CBDT. Paragraph 10 of the judgment reproduces the entire text of the aforesaid Circular as under:
"10. Thereafter, to further clarify the situation, CBDT issued Circular No.789 dated 13-4-2000. Since this is the crucial circular, it would be worthwhile reproducing its full text. The circular reads as under:
"Circular No. 789
F. No. 500/60/2000-FTD
GOVERNMENT OF INDIA
MINISTRY OF FINANCE
DEPARTMENT OF REVENUE
CENTRAL BOARD OF DIRECT TAXES
New Delhi
13-4-2000
To,
All the Chief Commissioners/Directors General of Income Tax
Sub: Clarification regarding taxation of income from dividends and capital gains under the Indo-Mauritius Double Taxation
Avoidance
Convention (DTAC) - Reg.
The provisions of the Indo-Mauritius DTAC of 1983 apply to 'residents' of both India and Mauritius. Article 4 of 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 tax' under the Mauritian tax law and are therefore to be considered as residents of Mauritius in accordance with DTAC
Prior to 1-6-1997, dividends distributed by domestic companies were taxable in the hands of the shareholder and tax was deductible at source under the Income Tax Act, 1961. Under DTAC, tax was deductible at source on the gross dividend paid out at the rate 0/5% or 15% depending upon the extent of shareholding 0/ the Mauritian resident. Under the Income Tax Act, 1961, tax was deductible at source at the rates specified under Section 115-A etc. Doubts have been raised regarding the taxation of dividends in the hands of investors from Mauritius. It is hereby clarified that wherever a certificate of residence is issued by the Mauritian authorities, such certificate will constitute sufficient evidence for accepting the status of residence as well as beneficial ownership for applying DTA C accordingly.
The test of residence mentioned above would also apply in respect of income from capital gains on sale of shares. Accordingly,
FIls etc. which are resident in Mauritius would not be taxable in India on income from capital gains arising in India on sale of shares as per paragraph (4) of Article 13. The aforesaid clarification shall apply to all proceedings which are pending at various levels. "
The above Circular pertains solely to Foreign Institutional
Investors (FIIs) and other investment funds such as mutual funds and similar entities. It is crucial to underscore that both FIls and investment funds are governed by the regulatory framework prescribed by the Securities and Exchange Board of India (SEBI).
Consequently, entities incorporated in Mauritius and registered with SEBI either as FIls or as investment funds, which invested capital in Indian stock markets and derived income by way of dividends or capital gains on the sale of shares were extended the benefit of the India-Mauritius DTAA under the said Circular.
c.
The Public Interest Litigation (PIL) filed before the Hon'ble
Delhi High Court in the form of two Writ petitions challenged the validity of CBDT Circular No. 789 on the grounds of unconstitutionality and violation of Article 14 of the Constitution of India. It was contended that the Circular discriminated against similarly situated investors within
India who were subjected to tax on dividends and capital gains arising from the sale of shares, whereas foreign investments routed through Mauritius via SEBI registered
India-Mauritius DTAA and thus did not bear a similar tax burden. This differential treatment, it was argued, amounted to unequal treatment before the law.
d.
Paragraph 11 of the judgment records the specific prayers sought in the PIL filed before Delhi High Court, which included a direction to the Union of India to revise, modify, or terminate the India-Mauritius Double Taxation Avoidance
Agreement (DT AA), with a view to preventing Foreign
Institutional Investors (FIIs) and on-Resident Indians (NRls) from allegedly 'marauding' the financial resources of the State. Additionally, the petitioners sought the quashing of CBDT Circular No. 789 dated 13.04.2000, contending that it was illegal and unconstitutional.
e.
Paragraph 12 of the judgment records the reliefs granted by the Delhi High Court in allowing the PIL. The key findings and directions issued by the High Court were as follows:
i.
Circular No. 89. dated 13.04.2000 was held to be ultra vires the Income Tax Act. 1961 and beyond the powers of the CBDT.
ii.
The Income Tax Officer, being a quasi-judicial authority, was held to be entitled to lift the corporate veil to examine the residential status of the investing entity.
iii.
TRC issued by a foreign tax juri ictionwas held not to be conclusive evidence of tax residency iv.
Treaty shopping by entities from a third country through the India- Mauritius DTAA was declared impermissible and illegal.
In addition to the above, the Delhi High Court also granted several other reliefs besides declaring such Mauritius based entities as mere shell companies.
f.
Setting aside various relief granted by Delhi High Court, The Hon'ble Supreme Court in its judgment held/affirmed as under:
i.
Paragraph 29 of the judgment affirms that Circular 0
789 is a Circular issued within the meaning of Section 90 of the Income Tax Act, 1961 and therefore it must have the legal consequences contemplated by Section 90(2) i.e. the Circular shall prevail even if inconsistent with the provisions of Income Tax Act'1961 insofar as assessee covered by the provisions of DT AA are concerned.
ii.
Paragraph 51 of the judgment observes that Article 13
of India Mauritius DT AA lays down detailed rules with regard to taxation of capital gains. It further observes that Clause (3) of Article 4 provides that if, after application of the detailed rules provided in Article 4, it is found that a person other than an individual is a resident of both the contracting States, then it shall be deemed to be a resident of the contracting State in which its place of effective management is situated. The DTAA requires the test of 'place or effective management' to be applied only for the purposes of the tie-breaker clause in Article
4(3) which could be applied only when it is found that a person other than an individual is a resident both of India and Mauritius. This test cannot be applied in any other situation.
iii.
Even though Circular No. 789 dated 13.04.2000 was held to be legally valid and within the parameters of the powers exercisable by the CBDT under Section 119 of the Act, the Paragraph 53 makes it clear that the Circular does not in any way crib, cabin or confine the powers of an Assessing officer with regard to any particular assessment. Paragraph 54 reiterates that Circular No. 789, dated 13.04.2000 does not take away or curtail the juri iction of the Assessing
Officer to assess the income before it.
iv.
The judgment rejected the contentions raised in Paragraph 68 that the FIIs incorporated and registered under the provisions of the law in Mauritius are carrying on nobusiness there; they are, in fact, prevented from earning any income there; they are not liable to income tax on capital gains under the Mauritius Income-tax Act. They are liable to pay income-tax under Indian Income-tax Act, 1961, since they do not pay any income-tax on capital gains in Mauritius, hence, they are not entitled to the benefit of avoidance of double taxation under the DT AA v.
Paragraphs 84 to 110carefully examines the legal framework under the Mauritius Offshore Business
Activities Act, 1992 (MOBA), which prohibits offshore entities from earning income in Mauritius.
Paragraph 91 clarifies that merely because such entities are not liable to taxation in Mauritius, it does not follow that they cannot be regarded as residents of Mauritius under the DTAA. Paragraph 104 further rejects the contention that the avoidance of double taxation can arise only when tax is actually paid in at least one of the contracting States.
vi.
Paragraphs 111 to 118 address the issue of treaty shopping and concludes that the mere fact that investments are routed through Mauritius does not render them illegal or abusive. Motives behind incorporation of entities are not by themselves sufficient to invalidate their eligibility for treaty benefits. Consequently, the paragraph 115 of the judgment records that the principle of 'piercing the corporate veil' cannot be applied to the situation as the one before The Hon'ble Supreme Court in that case.
Paragraph 124 rejects the recommendations of the WorkingGroup on on-Resident Taxation as the same being about what the law ought to be and which per se does not render an attempt by resident of a third party to take advantage of the existing DT AA illegal.
the domain of policy-making vii.
Paragraph 137 -168 di cusses the judgment of Constitutional Bench of The Hon'ble Supreme Court in the case of Macdowell& Co Ltd vs CTO. In this context, the paragraph 146 of the judgment observes that Duke of Westminster's doctrine is very much alive and kicking in the country of its birth (UK).
Paragraph 148 furtherupholds the view of the Gujarat
High Court in Banyan and Berry v. CfT, which after referring to Macdowellheld that tax planning is not bad unless the same fall under the category of colourable device which may properly be called a device or a dubious method or a subterfuge clothed with apparent dignity. Paragraph 154 again holds that Duke of Westminster's doctrine had acquired judicial benediction of the Constitutional Bench in India
(Mathuram Aggarwal case) notwithstanding the temporary turbulence created in the wake of Macdowell.
viii. Paragraph 161 and 164 clarifies what would be a sham or a device as under:
"164. If the court finds that notwithstanding a series of legal steps taken by an assessee, the intended legal result has not been achieved, the court might be justified in overlooking the intermediate steps, but it would not be permissible for the court to treat the intervening legal steps as non est based upon some hypothetical assessment of the "real motive" of the assessee. In our view, the court must deal with what is tangible in an objective manner and cannot afford to chase a will-o'-the-wisp."
Comments of the Respondents onAzadi Bachao Andolan
7. A bare perusal of the judgment of The Hon'ble Supreme
Court in the case of Azadi Bachao Andolan, thusmakes the following key aspects abundantly clear:
a.
The Judgement does not even remotely deal with the present subject matter under consideration, namely direct transfer of shares constituting business investment. The judgment was rendered in a wholly distinct factual and legal matrix involving investments by FIls and investment funds in the nature of Mutual Funds registered with SEBI in India and operating in Indian stock market.
b.
The judgment dealt with the legal regime prevailing under the Mauritius Offshore Business Activities Act. 1992
(MOBA, 1992) and not under the Finance Services Act,
2001 as amended by the 2005 Act.
c.
At the time the Circular no. 789 dated 13.04.2000 was issued, large-scale direct or indirect transfers of shares constituting business investments had not yet emerged.
Therefore, the circular, being specifically framed for FIls and mutual funds registered with SEBI in India, cannot be extended by implication to encompass transactions of the nature involved in the present dispute.
d.
There is neither any discussion, nor any ratio, nor even an obiter dictum in the Azadi Bachao Andolan judgment that touches upon the issue of direct transfers of shares constituting business investments.
e.
The show cause notices issued to FIIs, the subsequent Press
Note dated 04.04.2000, the issuance of Circular No. 789, the PIL filed before the Delhi High Court, and the reliefs granted
- all exclusively pertained to investments made by FIIs and Investment Funds registered with SEBI and did not refer or deal with direct or indirect transfer of shares constituting business investment.
8. At this juncture, reliance is placed on the decision of the 11 -
Judge Bench in the case of Madhav Rao Jivaji Rao Scindia v.
Union of India, (1971) 1 SCC 85
"229. In State of Orissa v. Sudhansu Sekhar Misra [AIR
1968 SC 647: (1968) 2 SCR 154 : (1968) 2 SCJ 263 J dealing with the question as to the importance to be attached to the observations found in the judgments of this Court, this is what this Court observed:
"A decision is only an authority for what it actually decides.
What is of the essence in a decision is its ratio and not every observation found therein nor what logically follows from the various observations made in it. On this topic this is what
Earl of Halsbury, L.C said in Quinn v. Leathem, (1901) AC
495:
'Now before discussing the case of Allen v. Flood, (1898)
ACI and what was decided therein, there are two observations of a general character which 1 wish to make, and one is to repeat what I have very often said before, that every judgment must be read as applicable to the particular facts proved or assumed to be proved, since the generality of the expressions which may be found there are not intended to be expositions of the whole law, but governed and qualified by the particular facts of the case in which such expressions are to be found. The other is that a case is only an authority for what it actually decides. I entirely deny that it can be quoted for a proposition that may deem to follow logically from it. Such a mode of reasoning assume that [he law is necessarily a logical code, whereas every lawyer must acknowledge that the law is not always logical at all.’
It is not a profitable ta k to extract a sentence here and there from a judgment and to build upon it. "
In the light of the above, it is respectfully submitted that no reliance can be placed by the Assessees either on Azadi BacliaoAndolanor Circular No. 789 dated 13.04.2000 to its support. Decision in Vodafone International Holdings B. V.
The case of Vodafone International Holdings BV un1ikeAzadi Bachao Andolan involved only indirect transfer of shares constituting business investment and the underlying transaction did not involve the India-Mauritius DTAA. Instead, the transaction pertained to the acquisition of a 67% controlling interest in Hutchison Essar Ltd. (HEL), an Indian telecom entity, by Vodafone International Holdings B.Y. (Netherlands) from Hutchison Telecommunications International Ltd. (HTIL, Cayman Islands). HTIL Cayman Island had downstream entities in Mauritius and The Hon'ble Supreme Court vide para 134-135 held as follows:
"134. Firstly, the Tier I (Mauritius companies) were the indirect subsidiaries of HTIL who could have influenced the former to sell the shares of Indian companies in which event the gains would have arisen to the Mauritius companies, who are not liable to pay capital gains tax under the Indo-
Mauritius DTAA. That, nothing prevented the Mauritius companies from declaring dividend on gains made on the sale of shares. There is no tax on dividends in Mauritius.
Thus, the Mauritius route was available but it was not opted for because that route would not have brought in the control over GSPL.
Secondly, if the Mauritius companies had sold the shares of HEL, then the Mauritius companies would have continued to be the subsidiaries of HTIL, their accounts would have been consolidated in the hands of HTIL and HTIL would have accounted for the gains in exactly the same way as it has accounted for the gains in the hands of HTIHL. (CI) which was the nominated payee. Thus, in our view, two routes were available, namely, the CGP route and the Mauritius route. It was open to the parties to opt for anyone of the two routes. "
It is therefore evident that HTIL could have either sold the shares at a Cayman Island level or at a Mauritius level. lock, stock, and barrel transfer in favour of Vodafone. Consequently, the actual transaction occurred at the Cayman Island level and not through the Mauritius entities. As a result, The Hon'ble Supreme Court had no occasion to examine the India-Mauritius DTAA from a transactional standpoint so as to lay down any binding ratio in relation to direct transfer arising under the India-Mauritius DT AA in the current Essar cases. Thus, the ratio in Vodafone cannot be construed as laying down any legal proposition concerning the India-Mauritius treaty on this aspect. The judgment in Vodafone deals with several important legal facets. notably the issue of control and management, (which bears direct relevance to the present set of Essar cases) and also about Circular o. 789, dated 13.04.2000 holding that TRC cannot be construedas a conclusive proof for residence.
The legal principles evolved through this decision is brought out hereunder with a very respectful caveat that these are only Obiter dicta and not Ratio decidendi. It is a settled legal position that both the Ratio and the Obiter of The Hon'ble Supreme Court would be binding on all other Courts and judicial bodies. However, it is equally clear that the Obiter rendered by The Hon'ble Supreme Court in a Judgement is not binding on The Hon'ble Supreme Court. In this regard, attention is drawn to the decision of The Hon'ble Supreme Court in the case of Property• Owners Assn. v. State of Maharashtra, 2024 see OnLine SC 3122 wherein The Hon 'ble Supreme Court vide para 126-127 had held as follows:
In any event, the mere presence of an observation in multiple opinions of the court, be it concurring or dissenting opinions, does not automatically indicate that they form part of the ratio decidendi. In order to determine whether the observations form part of the ratio decidendi, one must go back to the drawing board and determine whether the observations pertained to an issue which to the determination by the court. In other words, even if a numerical majority of judges or opinions of the Court affirm an observation, it would not automatically constitute the ratio decidendi of the case. It must be independently established that the observation relates to an issue which was in dispute before the court.
Therefore, the single-line observation in Mafatlal that the phrase 'material resources of the community' used in Article 39(b) includes privately owned resources was obiter dicta and is not binding on this Court.
In Secunderabad Club v. CIT, (2023) 457 ITR 263, .The Hon'ble Supreme Court held as follows:
As against the ratio decidendi of a judgment, an obiter dictum is an observation by a court on a legal question which may not be necessary for the decision pronounced by the court. However. the obiter dictum of the Supreme Court is binding under article i 41 to the extent of the observations on points raised and decided by the court in a case. Although the obiter dictum of the Supreme Court is binding on all courts, it has only persuasive authority as far as the Supreme Court itself is concerned.
In the context of understanding a judgment, it is well settled that the words used in a judgment are not to be interpreted as those of a statute. This is because the words used in a judgment should be rendered and understood contextually and are not intended to be taken literally. Further, a decision is not an authority for what can be read into it by implication or by assigning an assumed intention of the judges and inferring from it a proposition of law which the judges have not specifically or expressly laid down in the pronouncement. in other words, the decision is an authority for what it specifically decides and not what can logically be deduced therefrom. It is therefore respectfully prayed that The Hon'ble Tribunal while dealing with Vodafone may kindly note this aspect of distinction while appreciating. the aforesaid judgment.
The Hon'ble Supreme Court in its leading judgment authored by Justice S.H. Kapadia in Vodafone held/affirmed as under:
a.
Paragraph 61-70 of judgment deals with the Constitutional Bench Judgement of The Hon'ble
Supreme Court in Macdowell. Paragraph 69-70 holds as under:
In the judgment of Reddy, J in McDowell [(1985) 3 SCC 230 : 1985 SCC (Tax) 391} there are repeated references to schemes and devices in contradistinction to "legitimate avoidance of tax liability" (paras 7-10, 17 & 18). In our view, although Chinnappa Reddy, J makes a number of observations regarding the need to depart from Westminster [IRe v. Duke of Westminster, 1936 Ae 1 : 1935 All ER Rep 259 (HL)] and tax avoidance- these are clearly only in the context of artificial and colourable devices.
Reading McDowell [(1985) 3 see 230 : 1985 see (Tax) 391] , in the manner indicated hereinabove, in cases of treaty shopping and/or tax avoidance, there is no conflict between McDowell [(1985) 3 SCC 230 : 1985 SCC(Tax) 391] and Azadi Bachao [(2004) 10 SCC 1] or between McDowell [(1985) 3 SCC230: 1985 see (Tax) 391] and Mathuram Agrawal [(1999) 8 see 667].
Prior to that, Paragraphs 65 to 67, the judgment refers to three seminal decisions of the House of Lords, namely
Ramsay v. IRC, Furniss v. Dawson, and Craven v. White.
These decisions collectively laid down important principles in the realm of tax jurisprudence, particularly regarding tax avoidance schemes. The Hon'ble Court noted the following key principles:
i.
That a device which is colourable in nature, introduced solely with the intent to avoid tax, must be ignored as a mere fiscal nullity.
ii.
That any inserted step in a transaction which serves no commercial or business purpose other than deferment of tax, though it may have some business effect, should be disregarded for tax purposes.
iii.
That whether a transaction amounts to tax deferment or a saving device, should be determined by applying the "look at" test.
b.
Therefore, as a matter of first principle in tax law, The Hon'ble Supreme Court has reaffirmed and approved the test laid down in McDowell and Co. Ltd. v.
Commercial Tax Officer, wherein it was held that a sham, colourable device, or an artificial arrangement created for the purpose tax deferment or avoidance must be ignored as a fiscal nullity.
c.
Paragraph 71-81 delves into international tax aspects of corporate holding structures and acknowledged that it is a well-established principle under international tax law that a parent company and its subsidiary are distinct and separate taxable entities. 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.
However,paragraph 82 raises following caution:
i.
Exercise of shareholder influence by a parent entity does not, in and of itself, justify treating the subsidiaries as residents of the State in which the parent company is situated.
ii.
However, if the competences of executive directors of the subsidiary are transferred or decision making has become fully subordinate to the holding company such that they are mere puppets, that may be a good ground in identifying the place of residence as that of the holding entity.
iii.
Likewise, if the actual controlling non-resident enterprise makes an indirect transfer through abuse of organisation form/legal form and without reasonable business purpose, Revenue is entitled to disregard that form of arrangement and recharacterize the transaction based on its actual economic substance.
iv.
When the transaction is used principally as a colourable device for the distribution of earnings, profits and gains, the doctrine of lifting the corporate veil or the doctrine of substance over form or the concept of beneficial owner ship or alter ego arises and there may be several other circumstances which can influence in holding totally or partially that the transaction is a device or a conduit in the pejorative sense.
d.
Paragraph 76-77 notes that it is not uncommon for structures to be incorporated or registered to avoid lengthy approval and registration process required for a direct transfer, but the same should not be for tax deferrals or tax avoidance.
e.
Paragraph 77 makes a clear distinction between Treaty shopping (dealt in Azadi Bachao Andolani from the General Anti Avoidance Rule (GAAR) and proceeded to hold that GAAR is not new to India since India already has a JAAR (Judicial Anti Avoidance Rule) such as substance over form, piercing the Corporate
Veil, sham or conduit etc.
f.
Paragraph 79 places the burden on the Revenue to allege and establish abuse and permits the revenue to invoke JAAR in the form of substance over form or piercing the corporate veil and similar such tests to prove that a transaction is sham or for tax avoidance.
g.
After referring to certain illustrative transaction such as circular trading, round tripping or payment of bribes, the judgment also affirmed that when the structure under question has no commercial/business substance and has been interposed only to avoid tax, then in such cases, applying the test of fiscal nullity,
Revenue is entitled to ignore that entity.
h.
The Hon'ble Supreme Court in the judgment also held that this has to be done at the threshold, meaning at the very beginning and this would arise under the Indian context only when the direct or indirect transfer of share happens and not at an anterior stage since mere investments are not considered to be income earning transactions for income tax purposes. It is only when the investments are sold and profits earned out of it, the same would give rise to a capital gains tax and at not point prior to it.
i.
Paragraph 80 applies "look at" test which would mandate looking at the entire transaction as a whole and not to adopt a dissecting approach and genuine tax planning should not be brought within its rigours.
j.
Paragraph 81-82 lists out the factors which can influence genuineness. Paragraph 82 reiterates that 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.
k.
Paragraph 103 reiterates that shareholder's influence on its subsidiaries cannot obliterate the decision making power or authority of its subsidiaries and such influence does not render the subsidiary a mere puppet of the parent.
l.
Paragraph 105 brings out the distinction between having the power and having the persuasive position and held that each subsidiary has to protect its own separate commercial interest.
m.
Paragraph 106-107 holds that on facts the Control and Management test in this case is only persuasive in nature since the group holding was only 42% plus
10% pro rata and therefore could only persuade and not prevail.
n.
Paragraph 160 reiterates a very important principle on Control and Management:
"160. The right of a shareholder may assume the character of a controlling interest where the extent of the share holding enables the shareholder to control the management. Shares, and the rights which emanate from them, flow together and cannot be dissected. in the felicitous phrase of Lord MacMillan in IRC v.
Crossman [1937 AC 26 : (1936) JAIL ER 762
(HL)],shares in a company consist of a "congeries of rights and liabilities" which are a creature of the Companies Acts and the memorandum and articles of association of the company. Thus, control and management is a facet of the holding of shares.”
The above aspect have been culled out from the leading judgement authored by the then chief justice of India Justice SH Kapadia. One more concurring Judgement was also authored by K.S.P. Radha Krishnan who had opined on Circular No. 789, dated 13.04.2000 as follows: a. Vide paragraph 277 of the judgment held as follows;
"A. Lifting the veil- Tax laws
Lifting the corporate veil doctrine is readily applied in the cases coming within the company law, law of contract, law of taxation. Once the transaction is shown to be fraudulent, sham, circuitous or a device designed to defeat the interests of the shareholders, investors, parties to the contract and also for tax evasion, the court can always lift the corporate veil and examine the substance of the transaction.”
b.
Vide paragraph304-322, the judgement deals with India-Mauritius DT AA and Azadi Bachao Andolan.
Vide paragraph 311, it observed as under:
We are, therefore, of the view that in the absence of an LOB clause and the presence of Circular No. 789 of 2000 and the TRC certificate, on the residence and beneficial interest/ownership, the 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 received all its funds from a foreign principal/company; or the Mauritius subsidiary is controlled/managed by the foreign principal; or the Mauritius company had no assets or business other than holding the investment/shares in the Indian company; or the foreign principal/100% shareholder of Mauritius company had played a dominant role in deciding the time and price of the disinvestment/sale/transfer; or the sale proceeds received by the Mauritius company had ultimately been paid over by it to the foreign principal/its IOO% shareholder either by way of special dividend or by way of repayment of loans received; or the real owner/beneficial owner of the shares was the foreign principal company. Setting up of a was Mauritius subsidiary/SPV by principals/genuine substantial long-term FDI in India from/through Mauritius, pursuant to the DTAA and Circular o. 789 can never be considered to be set up for tax evasion.
c.
Vide paragraph 312-314, it held that TRC is not always conclusive. The same is extracted as below:
"TRC whether conclusive
LOB and look through provisions can.not be read into a tax treaty but the question may arise as to whether the TRC is so conclusive that the Tax Department cannot pierce the veil and look at the substance of the transaction.
DTAA and Circular No. 789 dated 13-4-2000, in our view, would not preclude the Income Tax Department from denying the tax treaty benefits, if it is established, on facts, that the Mauritius company has been interposed as the owner of the shares in India, at the time of disposal of the shares to a third party, solely with a view to avoid lax without any commercial substance. The Tax Department, in such a situation. notwithstanding the fact that theMauritian company is required to be treated as the beneficial owner of the shares under Circular No. 789 and the Treaty is entitled to look at the entire transaction of sale as a whole and if it is established that the Mauritian company has been 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 may be subjected to tax. In other words, TRC does not prevent enquiry into a tax fraud; for example, where an OCB is usedby an Indian resident for round-tripping or any other illegal activities, nothing prevents the Revenue the role of OCB in the entire transaction.
No court will recognise a sham transaction or a colourable device or adoption of a dubious method to evade tax, but to say that the Indo-Mauritian Treaty will recognise FDI and Fll only if it originates from Mauritius, not the investors from third countries, incorporating company in Mauritius, is pitching it too high, especially when statistics reveal that for the last decade FDI in India was US $178 billion and, of this, 42% i.e. US $74.56 billion was through the Mauritian route. Presently, it is known, FII in India is Rs 4,50,000 crores, out of which Rs.70,000 crores is from Mauritius. The facts, therefore, clearly show that almost the entire FDI and FII made in India from Mauritius under DT AA does not originate from that country, but has been made by Mauritius companies SPV, which are owned by companies/individuals of third countries providing funds for making FDI by such companies/individuals not from Mauritius, but from third countries. "
d.
Vide paragraph334, it rejected the reference of Macdowell to a Larger Bench
Comments by the Respondents on Vodafone
A bare perusal of the judgment of The Hon'ble Supreme Court in the case of Vodafone, thusmakes the following key aspects abundantly clear:
a.
It is an unassailable fact that the transaction under consideration was sale of the shares held by the Cayman
Island entity and did not involve India-Mauritius DTAA or Circular No. 789, dated 13.04.2000. b.
It is for good reason that the leading Judgement by two learned Judges do not deal with either India-Mauritius
DTAA or Circular No. 789, dated 13.04.2000 since the underlying transaction is not sale of shares held by any Mauritian entity.
c.
This is also amply clear from the perusal of paragraph 134
and 135 of the leading Judgment of the two judges.
d.
However, the leading Judgement has reiterated the importance of JAAR as part of the Indian jurisprudence and reiterated that the classical test of the doctrine of substance over form/piercing the corporate veil/lacking in commercial substance/beneficial ownership/sham or bogus entities or conduits etc., can always be applied by the Courts.
e.
It has also reiterated the importance of control and management test especially in such cases where the holding and subsidiary structures are in different destinations or tax juri ictions.
f.
It brought out the distinction between influence of power over the subsidiaries rendering them as puppets vis-a-vis persuasive control. The former if resorted to for tax avoidance would become a colorable device or sham, but the latter is not. The examination of the facts in question has rendered the finding that the control and management in the Vodafone case is only persuasive in view of the percentage of holding structure. The judgment, therefore, reiterates the relevance and significance of the 'control and management'
test as an indispensable criterion in determining the true nature of a transaction involving the indirect transfer of shares constituting a business investment-specifically, whether such a transaction amounts to legitimate tax planning or a device/scheme of tax avoidance.
g.
The concurring judgement of Justice Radha Krishnan makes it clear that TRC is not always conclusive and the tax authorities are always entitled to examine the same. It is neither conclusive, nor final nor determinative and is subject to scrutiny.
h.
As regards observations vide paragraph 311, being a concurring Judgement and not a differing Judgement, these observations had to be aligned and read in conjunction and harmony to the findings rendered by the leading Judgement of the other two learned Judges.
i.
It is most respectfully prayed that an interpretation that para
311 is in the nature of dissent or overarching the decision of the leading Judgement should be avoided. Being a concurring Judgement, it has to be aligned in a harmonious way.
j.
Even more importantly, it is respectfully submitted that the observations by para 311 on Circular No. 789, dated
13.04.2000 or on control and management test is only an Obiter and not Ratio and therefore not binding, in light of the well settled position of law and reiterated recently by the 9- judge bench in Property Owners Assn. referred supra.
Section II - Legislative History and Evolution of Section 90,
Relevant Provisionsof Mauritius Income Tax Act
In Part II, the Respondents have placed on record how Circular No. 789, dated 13.04.2000 and Azadi Bachao Andolandoes not deal with direct or indirect transfer of shares constituting business investment. Vodafone also dealt with only indirect transfer and there is no underlying transaction involving India-Mauritius DT AA or Circular No.789, dated 13.04.2000. 18. It is respectfully submitted that there are no other decisions of The Hon'ble Supreme Court specifically addressing the India-Mauritius DTAA or the interpretation of Circular No. 789 dated 13.04.2000. It has becomes imperative for the Respondents to place on record before this Hon'ble Tribunal all relevant aspects and legal features under the Income Tax Act, 1961, the DT AA, the aforementioned Circular, and the legislative amendments introduced through the Finance Acts of 20 12,2013, and 2017, as well as the amendments to the Financial Services Act, 2005. 19. The entire chronology commencing from the initial India- Mauritius DTAA dated 01.04.1983, which came into effect on 16.12.1983, along with the significant milestones concerning its application, clarifications, and subsequent legislative amendments, is now being placed on record in a sequential and comprehensive manner. This is intended to assist The Hon'ble Tribunal in the interpretation of a matter of considerable importance in the realm of international taxation. The Respondents would alsobe placing references to authoritative commentaries by internationally renowned authors, as well as the OECD Commentary.
Before proceeding further, it is necessary to briefly summarize the interplay between the Income Tax Act, 1961 and a Double Taxation Avoidance Agreement COT AA) notified under Section 90 of the Act. The significance, scope, and relevance of this interplay have been elaborately discussed by The Hon'ble Supreme Court in paragraphs 14 to 32 of the judgment in Azadi Bachao Andolan, which are extracted below for ready reference:
"Purpose and consequence of Double Taxation A voidance
Convention
To appreciate the contentions urged, it would be necessary to understand the purpose and necessity of a Double Taxation Treaty, Convention or Agreement, as diversely called. The Income Tax Act, 1961, contains a special Chapter IX which is subject of "double taxation relief".
Section 90, with which we are primarily concerned, provides as under: "90. Agreement with foreign countries.-(1) The Central Government may enter into an agreement with the Government of any country outside India-
(a) for the granting of relief in respect of income on which have been paid both income tax under this Act and income tax in that country, or (b) for the avoidance of double taxation of income under this Act and under the corresponding law in force in that country, or (c) for exchange of information for the prevention of evasion or avoidance of income tax chargeable under this Act or under the corresponding law in force in that country, or investigation of cases of such evasion or avoidance, or (d) for recovery of income tax under this Act and under the corresponding law in force in that country, and may, by notification in the Official Gazelle, make provisions as may be necessary for implementing the agreement.
(2)
Where the Central Government has entered into an agreement with the Government of any country outside India under sub-section (1) for granting relief 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 A ct shall apply to the extent they are more beneficial to that assessee. "
(Explanation omitted as not relevant.)
Section 4 provides for charge of income tax. Section 5 provides that the total income of a resident includes all income which: (a) is received, deemed to be received in India, or (b) accrues. arises or is deemed to accrue or arise in India, or (c) accrues or arises outside India, during the previous year. In the case of a non-resident, the total income includes "all income from whatever source derived" which (a) is received or is deemed to be received or, (b) accrues or is deemed to accrue in India, during such year. A person "resident" in India would be liable to income tax on the basis of his global income unless he is a person who is "not ordinarily" a resident within the meaning of Section 6(b). The concept of residence in India is indicated in Section 6. Speaking broadly, and with reference to a company, which is of concern here, a company is said to be a "resident" in India in any previous year, if it is an Indian company or [f during that year the control and management of its affairs is situated wholly in India.
Every country seeks to tax the income generated within its territory on the basis of one or more connecting factors such as location of the source, residence of the taxable entity, maintenance of a permanent establishment, and so on. A country might choose to emphasise one or the other of the aforesaid factors for exercising fiscal juri iction to tax the entity. Depending on which of thefactorsis considered to be the connecting factor in different countries, the same income of the same entity might become liable to taxation in different countries. This would give rise to harsh consequences and impair economic development. In order to avoid such an anomalous and incongruous situation, the Governments of different countries enter into bilateral treaties, conventions or agreements for granting relief against double taxation. Such treaties, conventions or agreements are called Double Taxation Avoidance Treaties, Conventions or Agreements.
The power of entering into a treaty is an inherent parI of the sovereign power of the State. By Article 73, subject to the provisions of the Constitution, the executive power of the Union extends 10 the matters with respect to which Parliament has power to make laws. Our Constitution makes no provision making legislation a condition for the entry into an international treaty in times either of war or peace. The executive power of the Union is vested in the President and is exercisable in accordance with the Constitution. The executive is, qua the State, competent to represent the State law are binding upon the State. But the obligations arising under the agreement or treaties are not by their own force binding upon Indian nationals. The power to legislate in respect of treaties lies with Parliament under Entries IO and I -I of List I of the Seventh Schedule. But making of law under that authority is necessary when the treaty or agreement operates to restrict the rights of citizens or others or modifies the law of the State. if the rights of the citizens or others which are justiciable are not affected. no legislative measure is needed 10 give effect 10 the agreement or treaty. [See in this connection Maganbhailshwarbhai Patel vs. Union of India. (1970) 3 SCC 400].
When it comes to fiscal treaties dealing with double taxation avoidance, different countries have varying procedures. In the United States such a treaty becomes a part of municipal law upon ratification by the Senate. In the United Kingdom such a treatywouldhave to be endorsed by an order made by the Queen-in-Council. Since in India such a treaty would have to be translated into an Act of Parliament, a procedure which would be time-consuming and cumbersome, a special procedure was evolved by enacting Section 90 of the Act.
The purpose of Section 90 becomes clear by reference to its legislative history, Section 49-A of the Income Tax Act, 1922 enabled the Central Government to enter into an agreement with the Government ofany country outside India for the granting of relief in respect of income on which, both income tax (including supertax) under the Act and income tax in that country, under the Income Tax Act and the corresponding law in force in that country, had been paid. The Central Government could make such provisions as necessary for implementing the agreement by notification in the Official Gazette. When the Income Tax' Act, 1961 was introduced, Section 90 contained therein initially was a reproduction of Section 49-A of the 1922 Act. The Finance Act, 1972 (Act 16 of 1972) modified Section 90 and brought it into force with effect from 1-4-1972. The object and scope of the substitution was explained by a circular of the Central Board of Direct Taxes (No. 108 dated 20-3-1973) as to empower the Central Government to enter into agreements with foreign countries, not onlyfor the purpose of avoidance of double taxation of income, but also for enabling the Tax Authorities to exchange information for the prevention of evasion or avoidance of taxes on income or for investigation of cases involving tax evasion or avoidance or for recovery of taxes inforeign countries on a reciprocal basis. In 1991,the existing Section 90 was renumbered as sub-section (I) and sub-section (2) was inserted by the Finance Act, 1991 with retrospective effect from 1-4-1972. CBDT Circular No. 621 dated 19-12-1991 explains its purpose asfollows:
"43. Taxation offoreign companies and other non-resident taxpayers.-Tax treaties generally contain a provision to the effect that the laws of the two contracting States will govern the taxation of income in the respective State except when express provision to the contrary is made in the treaty. It may so happen that the tax treaty with a foreign country may contain a provision giving concessional treatment to any income as compared to the position under the Indian law existing at that point of time. However, the Indian law may subsequently be amended, reducing the incidence of taxto a level lower than what has been provided in the tax treaty.
1. Since the tax treaties are intended to grant tax relief and not put residents of a contracting country at a disadvantage vis-a-vis other taxpayers, Section 90 of the Income Tax Act has been amended to clarify that any beneficial provision in the law will not be denied to a resident of a contracting country merely because the corresponding provision in the tax treaty is less beneficial."
The provisions of Sections 4 and 5 of the Act are expressly made "subject to the provisions of this Act”, which would include Section 90 of the Act. As to what would happen in the event of a conflict between the provision of the no longer res integra.
The Andhra Pradesh High Court in CITv. Visakhapatnam Port Trust [(1983) 144 ITR 146 (AP)] held that provisions of Sections 4 and 5 of the Income Tax Act are expressly made "subject to the provisions of the Act" which means that they are subject to the provisions of Section 90. By necessary implication, they are subject to the terms of the Double Taxation Avoidance Agreement, if any, entered into by the Government of India. Therefore, the total income specified in Sections 4 and 5 chargeable to income tax is also subject to the provisions of the agreement to the contrary, if any.
In CITv. Davy Ashmore India Ltd. [(1991) 190 ITR 626 (Cal)] while dealing with the correctness of Circular No. 333 dated 2-4-1982, it was held that the conclusion is inescapable that in case of inconsistency between the terms of the Agreement and the taxation statute, the Agreement alone would prevail. The Calcutta High Court expressly approved the correctness ofCBDT Circular No. 333 dated 2- 4-1982 on the question as to what the assessing officers would have to do when they found that the provision of the double taxation was not in conformity with the Income Tax Act, 1961. The said circular provided as follows (quoted at ITR p. 632):
"The correct legal position is that where a specific provision is made in the Double Taxation Avoidance Agreement, that provision will prevail over the general provisions contained in the Income Tax Act, 1961. 1n fact the Double Taxation
Avoidance Agreements which have been entered into by the Central Governmentunder Section 90 of the Income Tax Act,
1961, also provide that the laws in force in either country will continue to govern the assessment and taxation of income in the respective country except where provisions to the contrary have been made in the Agreement.
in the Income Tax Act. Where there is no specific provision in the Agreement, it is the basic law i.e. the Income Tax Act, that will govern the taxation of income.”
The Calcutta High Court held that the circular reflected the correct legal position inasmuch as the convention or agreement is arrived at by the two contracting States "in deviation from the general principles of taxation applicable to the contracting States". Otherwise, the Double Taxation Avoidance Agreement will have no meaning at all. [See also in this connection Leonhardt Andra Und Partner, GmbH v. CIT, (2001) 249 ITR 418 (Cal)]
In CIT v. R.M. Muthaiah [(1993) 202 ITR 508 (Kant)] the Karnataka High Court was concerned with DTAT between the Government of India and the Government of Malaysia. The High Court held that under the terms. of the Agreement, if there was a recognition of the power of taxation with the Malaysian Government, by implication it takes away the corresponding power of the Indian Government. The Agreement wasthus held to operate as a bar on the power of the Indian Government to tax and that the bar would operate on Sections 4 and 5 of the Income Tax Act, 1961, and take away the power of the Indian Government to levy tax on the income in respect of certain categories as referred to in certain articles of the Agreement. The High Court summed up the situation by observing (ITR atpp. 512-13):
"The effect of an 'agreement' entered into by virtue of Section 90 of the Act would be:
(i) if no tax liability is imposed under this Act, the question of resorting to the agreement would not arise. No provision of the agreement can possibly fasten a tax liability where the liability is not imposed by this Act: (ii) if a tax liability is imposed by this Act, the agreement may be resorted to for negativing or reducing it; (iii) in case of difference between the provisions of the Act and of the agreement, the provisions of the agreement prevail over the provisions of this Act and can be enforced by the Appellate
Authorities and the court."
It also approved of the correctness of Circular No. 333 dated 2.4.1982 issued by the Central Board of Direct Taxes on the subject.
In Arabian Express Line Ltd. of United Kingdom v. Union of India [(1995) 212 ITR 31 (Guj)] the Gujarat High Court, interpreting Section 90, in the light of Circular No. 333 dated 2-4-1982 issued by CBDT, held that the procedure of assessing the income of an NRI because of his occasional activities in establishing a business in India would not be applicable in a case where there is a convention between the Government of India and the foreign country as provided under Section 90 of the Income Tax Act, 1961. In case of such an agreement, Section 90 would have anoverriding effect. Interestingly, in this case a certificate issued by HM inspector of Taxes certifying that the company was a resident of the United Kingdom for purposes of tax and that it had paid advance corporate tax in the office of the English Revenue Accounts Office, was held to be sufficient to take away the juri iction of the income tax officer.
A survey of the aforesaid cases makes it clear that the judicial consensus in India has been that Section 90 is specifically intended to enable and empower the Central Government to issue a notification for implementation of the terms of a Double Taxation Avoidance Agreement. When that happens, the provisions of such an agreement, with respect to cases to which they apply, would operate even if inconsistent with the provisions of the Income Tax Act. We approve of the reasoning in the decisions which we have noticed. If it was not the intention of the legislature to make a departure from the general principle of chargeability to tax under Section 4 and the general principle of ascertainment of total income under Section 5 of the Act, then there was no purpose in making those sections "subject to the provisions of the Act". The very object of grafting the said two sections with the said clause is to enable the Central Government to issue a notification under Section 90 towards implementation of the terms of DTACs which would automatically override the provisions of the Income Tax Act in the matter of ascertainment of chargeability to income tax and ascertainment of total income, to the extent of inconsistency with the terms ofDTAC
The contention of the Assessees, which weighed with the High Court viz. that the impugned Circular No. 789 is inconsistent with the provisions of the Act, is a total non- sequitur. As we have pointed out, Circular No. 789 is a circular within the meaning of Section 90, therefore, it must have the legal consequences contemplated by sub-section (2) of Section 90. In other words, the circular shall prevail even if inconsistent with the provisions of the Income Tax Act, 1961 insofar as assessees covered by the provisions of DTAC are concerned.
Though a number of interconnected and diffused arguments were addressed, broadly, the argument of the Assessees appears to be as follows: by reason of Article 265 of the Constitution, no tax can be levied or collected except by authority of law. The authority to levy tax or grant exemption therefrom vests absolutely in Parliament and no other body, howsoever high, can exercise such power. Once Parliament hasenacted the Income Tax Act, taxes must be levied and collected in accordance therewith and no person has the power to grant any exemption therefrom. The treaty- making power under Article 73 is confined only to such matters as would not fall within the province ofArticle 265. With respect to fiscal treaties, the contention is that they cannot be enforced in contravention of the provisions of the income Tax Act, unless Parliament has made an enabling law in support. The Assessees highlighted the provisions of the OECD Models with regard to tax treaties and how tax treaties were enunciated, signed and implemented in America, Britain and other countries.Placing reliance on the observations of Kier and Lawson [ D.L. Kier and FH. Lawson: Cases in Constitutional Law, pp. 53-54, 159-63 (ELBS & Oxford University Press, 5th Edn.).] it was contended that in England it has been recognised that "there are, however, two limits to its capacity; it cannot legislate and it cannot tax without the concurrence of Parliament". It is urged that the situation is the same in India; that unless there is a specific exemption granted by Parliament, it is not open for the Central Government to grant any exemption from the tax payable under the IncomeTax Act.
In our view, the contention is wholly misconceived. Section 90, as we have already noticed (including its precursor under the 1922 Act) was brought on the statute- book precisely 10 enable the executive to negotiate DTAC and quickly implement it. Even accepting the contention of the Assessees that the powers exercised by the Central Government under Section 90 are delegated powers of legislation, we are unable to see as to why a delegatee of legislative power in all cases has no power to grant exemption. There are provisions galore in statutes made by Parliament and State Legislatures wherein the power of conditional or unconditional exemption from the provisions of the statutes are expressly delegated to the executive. For example, even in fiscal legislation like the Central Excise Act and Sales Tax Act, there are provisions for exemption from the levy of tax. [ See Section 5-A of the Central Excise Act, 1944 and Section 8(5) of the Central Sales Tax Act, /956.] Therefore, we are unable to accept the contention that the delegatee of a legislative power cannot exercise the power of exemption in a fiscal statute.
The niceties of the OECD Model of tax treaties or the Report of the Joint Parliamentary Committee on the Stock Market Scam and Matters Relating Thereto, on which considerable time was spent by Mr Jha, who appeared in person, need not detain us for too long, though we shall advert to them later. This Court is not concerned with the manner in which tax treaties are negotiated or enunciated; nor is it concerned with the wi om of any particular treaty. Whether the Indo-Mauritius DTAC ought to have been enunciated in the present form, or in any other particular form, is none of our concern. Whether Section 90 ought to have been placed on the statute-book, is also not our concern. Section 90, which delegates powers to the Central Government, has not been challenged before us, and, therefore, we must proceed on the footing that the section is constitutionally valid. The challenge being only to the exercise of the power emanating from the section, we are of the view that Section 90 enables the Central Government to enter into a DTAC with a foreign Government. When the requisite notification has been issued thereunder, the provisions of sub-section (2) of Section 90 spring into operation and an assessee who is covered by the provisions of DTAC is entitled to seek benefits thereunder, even if the provisions of DTAC are inconsistent with the provisions of the Income Tax Act, 1961. Stare Decisis
The learned Attorney General justifiably relied on the observations of this Court in Mishri Lal v. Dhirendra Nath [(1999) -I SCC 11, paras 14 to 22] in which this Court referred to its earlier decision in Maktul v. Manbhari [AIR 1958 SC 918: 1959 SCR 1099} on the scope of the doctrine of stare decisis with reference to Halsbury's Laws of England and Corpus Juris Secundum, pointing out that a decision which has been followed for a long period of time, and has been acted upon by persons in the formation of contracts or in the disposition of their property, or in the general conduct of affairs, or in legal procedure or in other ways, will generally be followed by courts of higher authority other than the court establishing the rule, even though the court before whom the matter arises afterwards might be of a different view. The learned Attorney General contended that the interpretation given to Section 90 of the Income Tax Act, a Central Act, by several High Courts without dissent has been uniformly followed; several transactions have been entered into based upon the said exposition of the law; that several tax treaties have been else it will result in chaos and open up a Pandora's box of uncertainty.
We think that this submission is sound and needs to be accepted. It is not possible for us to say that the judgments of the different High Courts noticed have been wrongly decided by reason of the arguments presented by the Assessees. As observed in Mishri Lal (1999) 4 SCC 11, paras 14 to 22] even if the High Courts have consistently taken an erroneous view (though we do not say that the view is erroneous), it would be worthwhile to let the matter rest, since large number of parties have modulated their legal relationship based on this settled position of law."
India and Mauritius entered into a DTAA on 01.04.1983 and the same was notified on 16.12.1983. The same was renewed in 1993 and thereafter the last amendment was carried out in 2017. 22. The CBDT issued the first Circular relating to India Mauritius DTAA being Circular No. 682 dated 30.03.1994.The same is extracted below:
1605B.
Clarification regarding agreement/or avoidance of double taxationwith Mauritius
A Convention for the avoidance of double taxation and prevention of fiscal evasion with respect to taxes of income and capital gains was entered into between the Government of India and the Government of Mauritius and was notified on 6-12-1983. In respect of India, the Convention applies from the assessment year 1983-84 and onwards.
Article 13 of the convention deals with taxation of capital gains and it has five paragraphs. The .first paragraph gives the right of taxation of capital gains on the alienation of immovable property to the country in which the property is situated. The second and third paragraphs deal with right to taxation of capital gains on the alienation of movable property linked with business or professional enterprises and ships and aircrafts.
Paragraph 4 deals with taxation of capital gains arising from the alienation of any property otherthan those mentioned in the preceding paragraphs and gives the right of taxation of capital gains only to that stateofwhichthepersonderivingthecapitalgainsisa resident. In terms of paragraph 4,capital gains derived by a resident of Mauritius by alienation of shares of companies shall be taxable only in Mauritius according to Mauritius tax law. Therefore, any resident of Mauritius deriving income from alienation of shares of Indian companies will be liable to capital gains tax only in Mauritius as per Mauritius tax law and will not have any capital gains tax liability in India.
Paragraph 5 defines 'alienation' to mean the sale, exchange, transfer or relinquishment of the property or the extinguishment of any rights in it or its compulsory acquisition under any law inforce in India or in Mauritius.
Circular:No.682,dated 30-3-1994. 23. Following the issuance of show cause notices to FIIs, as recorded in paragraph 9 of the Azadi Bachao Andolan, the Central Board of Direct Taxes (CBDT) issued another
Circular being Circular o. 789, dated 13.04.2000. The text of the Circular is extracted below for reference:
"Circular No. 789
F. No. 500/60/2000-FTD
GOVERNMENT OF INDIA
MINISTRY OF FINANCE
DEPARTMENT OF REVENUE
CENTRAL BOARD OF DIRECT TAXES
New Delhi
13-4-2000
Sub: Clarification regarding taxation of income from dividends and capital gains under the Indo-Mauritius Double Taxation Avoidance
Convention (DTAC) - Reg.
The provisions of the Indo-Mauritius DTAC of 1983 apply to 'residents' of both India and Mauritius. Article", of 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 tax' under the Mauritian tax law and are therefore to be considered as residents of Mauritius in accordance with DTAC.
Prior to 1-6-1997, dividends distributed by domestic companies were taxable in the hands of the shareholder and tax was deductible at source under the Income Tax Act, 1961. Under DTA C, tax was deductible at source on the gross dividend paid out at the rate of 5% or 15% depending upon the extent of shareholding of the Mauritian resident. Under the 1ncome Tax Act,
1961, tax was deductible at source at the rates specified under Section 115-A etc. Doubts have been raised regarding the taxation of dividends in the hands of investors from Mauritius. It is hereby clarified that wherever a certificate of residence is issued by the Mauritian authorities, such certificate will constitute sufficient evidence for accepting the status of residence as well a beneficial ownership for applying DTAC accordingly.
The test of residence mentioned above would also apply in respect of income from capital gains on sale of shares.
Accordingly, FIIs etc. which are resident in Mauritius would not be taxable in India on income from capital gains arising in India on sale of shares as per paragraph (4) of Article 13. The aforesaid clarification shall apply to all proceedings which are pending at various levels."
24. The Hon'ble Supreme Court delivered its judgment in Azadi
Bachao Andolanon 07.10.2003. During the pendency of thiscase, a third Circular, being Circular No. 1/2003 dated
10.02.2003, was issued by the CBDT. The text of the said
Circular is extracted below for ready reference.:
Clarification regarding taxation of income from dividends and capital gains under the Indo-Mauritius Double Tax
Avoidance Convention (DTAC)
Reference is invited to the Circular No. 789, dated 13-4-
2000 issued by the Board where it was clarified that "wherever the 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
DTAC accordingly. The said circular specified the mode of proof of residence of an entity in Mauritius.
Certain doubts have been raised regarding the effect of the aforesaid circular, particularly whether the said circular would also apply to entities which are resident of both India and Mauritius. In order to remove all doubts on the subject, if is hereby clarified that where an assessee is a resident of both the Contracting States, in accordance with para J of article 4 of Indo-Mauritius DTAC, then, his residence is to be determined in accordance with para 3 of the said article, which reads as under :-
"3. Where, by reason of the provisions of paragraph
1, a person other than an individual is resident of both the Contracting States, then it shall be deemed to be a resident of the Contracting State in which the place of effective management is situated. "
In view of the above, where an Assessing Officer finds and is satisfied that a company or an entity is resident of both
India and Mauritius, he would be free to proceed to determine the residential status under para 3 of article 4 of be taxed under the DTAC in India.
Circular: No. 112003, dated 10-2-2003. 25. The Mauritius Offshore Business Activities Act, 1992
(MOBA, 1992), which was referred to in Azadi Bachao
Andolan, was subsequently replaced by the Financial
Services Development Act, 2000 in Mauritius, which, for the first time, introduced the concept of Global Business License
Category 1 and Category 2 under Section 20 of the aforesaid
Act. However, what is of particular relevance is the Financial Services Act, 2007 (Act 14 of2007), dated
28.09.2007, as amended up to 20.07.2023. 26. Part X (Sections 71-79) of the Financial Services Act, 2007
deals with Global Business License.
a.
Section 71(3) obligates the following:
(3)
(a)
A holder ofa Global Business Licence shall, at all times- i.
carry out its core income generating activities in, or from, Mauritius, as required under the Income Tax Act; ii.
be managed and controlled from Mauritius; and iii.
be administered by a management company.
b.
The Section 71 (3)(b)of Financial Services Act, 2007
further reads as under:
(b)
In determining whether a holder of a Global
Business Licence is managed andcontrolled from Mauritius, the Commission shall have regard to such matters as itdeems necessary in the circumstances and in particular but without limitation towhether that corporation -
(i) has at least 2 directors, resident in Mauritius, of sufficient calibre toexercise independence of mind andjudgement;
(ii) maintains, at all times. its principal bank account in Mauritius;
(iii) keeps and maintains, at all times, its accounting records at itsregistered office in Mauritius;
(iv) prepares its statutoryfinancial statements and causes such financialstatements to be audited in Mauritius; and (v) provides for meetings of directors to include at least 2
directors from Mauritius.
c.
The Section 71 (6) of Financial Services Act, 2007
further reads as under:
In this section -
"resident corporation" means a company incorporated or registered under theCompanies Act, a societe or partnership registered in Mauritius, a trust or any otherbodyofpersons established under the laws of Mauritius.
d.
Introduction of Sections 90(4) through Finance Act,
2012, Explanatory Memorandum and proposed amendment of Section 90(5) through Finance Bill, 2013 and the press release dated 01.03.2013
i.
Vide Finance Act 2012, Parliament introduced See
90(4) and the same reads as under:
An assessee, not being a resident, to whom an agreement referred to in sub-section (1) applies, shall not be entitled to claim any relief under such agreement unless a certificate of his being a resident in any country outside India or that country or specified territory.
ii.
The Explanatory Notes to the said amendment read as under:
Tax Residence Certificate (TRC) for claiming relief under DTAA
Section 90 of the Income Tax Act empowers the Central Government toenter into an agreement with the Government of anyforeign country or specified territory outside India for the purpose of -
(i) granting relief in respect of avoidance of double taxation,
(ii) exchange of informal ion and (iii) recovery of taxes.
Further section 90A of the Act empowers the Central Government to adopt any agreement between specified associations for relief of double taxation.
In exercise of this power, the Central
Government has entered into various Double Taxation
Avoidance
Agreements
(DTAA's)with different countries and have adopted agreements between specified associations for relief of double taxation.
The schemeof interplay of treaty and domestic legislation ensures that a taxpayer, who is resident of one of the contracting country to the treaty, is entitled to claim applicability of beneficial provisions either of treaty or of the domestic law.
It is noticed that in many instances the taxpayers who are not tax resident of a contracting country do claim benefit under the DTAA entered into by the Government with that country. Thereby, even thirdpartyresidents claim unintended treaty benefits.
Therefore, it is proposed to amend Section 90
and Section 90A of the Act to make submission of Tax
Residency
Certificatecontaining prescribed particulars, as a necessary but not sufficient condition for availing benefits of the agreements referredto in these Sections.
These amendments will take effect from 1st
April, 2013 and will, accordingly, apply in relation to the assessment year 2013-14 and subsequent years.
[Clauses 31, 32]
iii.
The Finance Bill, 2012 proposed introduction of sub- section (5) in Section 90which read as under:
(5)
The certificate of being a resident in a country outside India or specified territory outside India, as the case may be, referred to in sub-section (4), shall be necessary but not a sufficient condition for claiming any relief under the agreement referred to therein.
iv.
However, this amendment was not carried out and Section 90(5) came into effect in the following form:
Amendment of section 90. 23. In section 90 ofthe Income-tax Act,-
(a) (a) sub-section (2A) shall be omitted;
(a) (b) after sub-section (2), the following sub- section shall be inserted with effect from the 1st day of April, 2016, namely:-
"(2A) Notwithstanding anything contained in sub-section (2), the provisions of Chapter X-A such provisions are not beneficial to him."
(a) (c) in sub-section (4), for the words "a certificate, containing such particulars as may be prescribed, of his being a resident", the words "a certificate of his being a resident"
shall be substituted,'
(a) (d) after sub-section (4) and before
Explanation 1, the following sub-section shall be inserted, namely:-
"(5) The assessee referred to in sub-section (4) shall also provide such other documents and information, as may be prescribed. "
v.
Meanwhile, the Finance Ministry also issued a press release dated 0l.03.2013 on the proposed Section 90(5) as under:
FINANCE MINISTRY'S CLARIFICATION ON TAX
RESIDENCY
CERTIFICATE (TRC)
PRESS RELEASE, DATED 1-3-2013
Concern has been expressed regarding the clause in the Finance Bill that amends Section 90 of the IncometaxAct that deals with Double Taxation
Avoidance Agreements. Sub-section (4) of section 90
wasintroduced last year by Finance Act, 2012. That subsection requires an assessee to produce a Tax
ResidencyCertificate (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 willbe entitled to the benefits of the DTAA.
benefits of the DTAA. The same words are proposed to be introduced in the Income-tax Act as sub-section (5) of seclion90. Hence, it will be clear that nothing new has been done this year which was not there already last year.
However, if has been pointed out that the language of the proposed sub-section (5) of section 90 could meanthat 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 theproposed subsection (5) of section 90. The Tax
Residency Certificate produced by a resident ofacontracting state will be accepted as evidence that he is a resident of that contracting state and the Income Tax Authorities in India will not go behind the TRC and question his resident status.
In the case of Mauritius, circular no. 789, dated 13-4-
2000
continues to be in force, pending ongoingdiscussions between India and Mauritius.
However, since a concern has been expressed about the language of sub-section (5) of section 90, thisconcern will be addressed suitably when the Finance Bill is taken up/or consideration.
The Mauritius Income Tax Act, 1995
The provisions of Section 73 and 73A of Mauritius Income Tax Act, 1995are extracted below:
Definition of residence (1) For the purposes of this Act, "resident", in respect of an income year, when applied to -
(a) an individual, means a person who -
(i) has his domicile in Mauritius unless his permanentplace of abode is outside Mauritius;
(ii) has been present in Mauritius in that income year, for a period of or an aggregate period of 183 days or more,' or (iii) has been present inMauritius in that income year andthe 2 preceding income years, for an aggregate period 01270 days or more,'
(b) a company, means a company which -
(i) is incorporated in Mauritius: or (ii) has its central management and control in Mauritius;
(c) a societe -
(i) means a societe which has its seat or siege in Mauritius;and (ii) includes a societe which has at least one associate orssocie or gerantresidentin Mauritius:
(d) a trust, means a trust -
(i) where the trust is administered in Mauritius and amajority of the trustees areresident in Mauritius; or (ii) where the settlor of the trust was resident in Mauritiusat the lime the instrument creating the trust wasexecuted:
(da) a Foundation, means a Foundation which (i) is registered in Mauritius; or (ii) has its central management and control in Mauritius;
(e) any other association or body of persons. means an associationor body of personswhich is managed or administered in Mauritius.
(2)
Where a person wishes to be certified as a resident in Mauritius inrespect of an income year, he should apply to the Director-General fora Tax Residence Certificate.
(3)
The Tax Residence Certificate under subsection (2) shall be issuedwithin a period of 7 days from the date of the application, providedthat the person has submitted the return required to be submittedunder section 112 or 116, as the case may be, and paid such servicefee as may be prescribed.
73A. Companies treated as non-resident in Mauritius
(1)
Notwithstanding section 73, a company incorporated in Mauritiusshall be treated as non-resident if it is centrally managed andcontrolled outside Mauritius.
(2)
A company referred to in subsection (1) shall submit a return ofincome as required under section 116. Section 73 refers to footnote 441 and Section 73A refers to footnote 446 as found in Appendix 1 of the said Act. Both the footnotes are extracted below:
441 FA 2006 - Existing provision numbered (1) w.e.f.07.08.06. 446 FA 2019 - Section 73A amended, subsection (1) repealed and replaced, shall be deemed to have comeinto operation on 1 July 2019. Previously:
(1)
Notwithstanding section 73, a company which is incorporated in Mauritius shall be treated asnon- resident if its place of effective management is situated outside Mauritius.
FA 2018 - Section 73A repealed and replaced - shall come into operation on 1 October 2018. Section III - Issues and Propositions
During the course of hearing before The Hon'ble Tribunal, the Assessees made following submissions.
a.
In terms of Article I of India Mauritius DTAA, this convention shall apply to the persons who are residents of one or both of the Contracting States b.
As per Article 4, the term "resident of a Contracting
.State" means 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 similar nature.
c.
The Assessees were incorporated in Mauritius and thus are tax residents of Mauritius as per Section 73(1
)(b) of Mauritius Income Tax Act by virtue of incorporation.
Definition of residence
(1)
For the purposes of this Act, "resident", in respect of an income year, when applied to - b) a company, means a company which -
(i) is incorporated in Mauritius,' or (ii) has its central management and control in Mauritius, d.
The Assessees are holding valid TRC issued by Mauritius
Authority confirming tax residency. The Indian Tax
Authorities have no juri iction to go beyond TRC and determine the Tax residency of these entities under the Mauritius Income Tax Act, which can only and only be done by Mauritius Tax Authorities.
e.
Since the Assessees are holding valid TRC, the control and management test cannot be invoked as well.
f.
In terms of Article 4, the Place of Effective Management test is relevant specifically in cases falling under Article 4(3), which provides the tie-breaker rule to resolve situations where an entity is considered a resident of both contracting states-such as India and Mauritius. However, this test cannot be invoked to determine whether Place of Effective
Management existed in Mauritius or in a third juri iction. It is applicable only when the issue is between the two contracting states under the DTAA.
g.
Once a Tax Residency Certificate (TRC) is issued, it constitutes conclusive proof of residency for the purposes of availing treaty benefits, as per CBDT Circular No. 789, dated 13.04.2000. h.
What was earlier laid down through a CBDT Circular was subsequently given statutory backing by the Finance Act,
2013, through the insertion of Section 90(4) of the Income
Tax Act which reads as under:
(4)
An assessee, not being a resident, to whom an agreement referred to in sub-section (1) applies, shall not be entitled to claim any relief under such agreement unless a certificate of his being a resident in any country outside specified territory.
i.
The amendment proposed in the Finance Bill, 2013 to introduce Section 90(5) which read as under. was withdrawn.
"The certificate of being a resident in a country outside India or specified territory outside India as the case may be referred to in sub-Section 4 shall be necessary but not sufficient condition for claiming any relief under the agreement referred to therein. "
A revised version of Section 90(5), which read under, was subsequently enacted.
(5)
The assessee referred to in sub-section (4) shall also provide such other documents and information, as may be prescribed.
j.
Press note dated 01.03.13 i sued by the Ministry again supports this aspect that TRC once issued becomes conclusive in determining the residential status under Article
4(1) ofDTAA.
The Respondents would deal all the above submissions of the Assessees by classifying them into following broad categories:
a)
Whether India as a source state while ascertaining treaty eligibility can determine tax residency of an entity incorporated in Mauritius under domestic laws of Mauritius or the same can be done only by Mauritius Authorities?
b)
Whether Control and Management test can be invoked in this case?
c)
What is the scope and contours of Circular No. 789. dated
13.04.2000 and to whom does it apply?
d)
What is the scope of Section 90(4) and 90(5) and Press release dated 01.03.2013 and to whom does it apply?
e)
Whether TRC as filed becomes all conclusive even in the case of a direct transfer and therefore all proceedings should come to a closure?
Determination of Tax Residency under Article 4(1) ofDTAA
The Assessees had argued that India as a source state cannot determine tax residency of an entity incorporated in Mauritius under domestic laws of Mauritius which can be done only and only by Mauritius Tax Authorities. Thus, once a valid TRC is issued by Mauritius Tax Authorities, it is argued by the Assessees that India is bound to accept it as a conclusive proof of Mauritius Tax Residency. Such proposition of the Assessees is incorrect as amply evident from Paragraph 25 of Klaus Vogel commentary on Article 4 (3rd Edition) which is reproduced below:
Whether or not the circumstances exist that establish residence in the other contracting state in accordance with the latter s domestic law, is a question which each state may examine on its own (and which it may discuss with the competent authority of the other contracting state under the terms of mutual agreement procedure. The fact that a person is actually subjected to resident taxation in the other contracting state is a strong indication of the legal pre-requisite having been satisfied, but it is not more than that. Thus, in the Johannson case, the US Court of Appeals (5th Circuit) quite properly declined to accept a determination by the Swiss authorities that Johansson was a resident of Switzerland as sufficient evidence of Johansson’s treaty entitlement (336 F2d 809 (1964)). The French
Conseil d' Eta1, on the other hand, accepted as sufficient the fact that a taxpayer resident in Liechtenstein and maintaining a dwelling in Paris was effectively taxed as. a resident in Germany (req. n.
28.177, 35 Dr. Fisc. Com., (1983) cone!.Bissara:
Germany s DTC with France; of Hahn. H., 29, R1W
623 (1983). Generally, it will be incumbent upon the taxpayer to supply facts from which a residence in the other contracting State might arise.
The Indian tax authorities thus can determine if the person is a resident of the other contracting State for purposes of the treaty by applying the Mauritius domestic law.
Whether control and Management Test Applicable in the present case?
It is now a well-settled and undisputed principle that the test of control and management constitutes a key component in applying the doctrine of "substance over form" while determining the bonafide/malafide of an underlying transaction. The doctrine of substance over form, recognized under common law and widely applied across juri ictions, is used to assess whether a transaction or structure is genuinely commercial in nature or is a mere subterfuge-such as a shell, conduit, or interposed entity- established solely for the purpose of tax avoidance
Courts have consistently applied this time-honoured test to distinguish between legitimate tax planning and tax avoidance. Where it is found that a transaction falls into the latter category, the interposed structure may be declared a nullity, disregarded, or pierced in order to identify the true beneficial owner.
It is equally well settled that the substance over form doctrine has long been in use and has been applied to assess the legality of business structures and underlying transactions even prior to the advent of DTAAs. This doctrine continues to hold relevance and applicability under the DTAA regime as well. Notably. both the OEcD and Klaus Vogel commentaries, along with decisions of The Hon'ble Supreme Court in Azadi Bachao Andolan and the substance over form doctrine.
Every sovereign Nation has a right to tax a transaction in its soil. Taxation is an inherent and natural power vested with every sovereign Nation. This power which is a foundational power to every source Nation to impose taxation can never be eroded or annihilated. Consequently, while testing the sovereign power to tax, Courts have always applied what is called the "substance test" in deciding whether a transaction leads to tax evasion or a tax avoidance.
Considering globalization and its inevitable offshoot of cross border transactions, Sovereign Nations started to sign DTAAs which are Treaties in the form of contracts entered into by Sovereign partners. The overarching objective of every DTAA is to avoid double taxation to agree and allocate taxing powers and to extend tax Treaty benefits wherever contractually provided. Consequently, the principal question is how does and when does DTAA come into play and how does the source State apply DTAA and confer tax benefits? Every source State will apply a two-fold test as under:
a)
As a source State, having sovereign power of taxation, it would decide whether the transaction under question is taxable under its domestic laws. For any reason the transaction is not taxable, then the same goes out of the scope of taxation at the threshold level itself and therefore the question of applying DTAA to such transaction would not arise at all.
b)
On the other hand, if a transaction is found to be taxable in the source State, the tax authorities would then proceed to the second step-verifying whether the said transaction qualifies for any tax benefits under the applicable DTAA entered into with the other contracting State. If the DTAA provides for such benefits, they should be extended to the assessee.
However, if no such benefit is envisaged under the accordance with the domestic law of the source State.
Courts across juri ictions have made a distinction between a tax Treaty benefit viz-a-viz a tax treaty abuse and carved out the following exceptions:
a)
Conferment of tax benefits through a DTAA cannot
•mean to include or promote tax evasion or tax avoidance b)
A DTAA merely permits the allocation of taxing rights between contracting States; it does not involve the surrender or cessation of a State's sovereign right to tax. In such a framework, the question arises-who has the authority to examine whether a transaction constitutes treaty abuse? Without any doubt, the default rule must be thatthe source country, which holds the primary right to tax the transaction, is entitled to undertake such an examination.
c)
The power of taxation, the conferment of treaty benefits, and the examination of treaty abuse arise under distinct legal circumstances and cannot be conflated. It would be erroneous to assume that, by granting treaty benefits, a sovereign State also transfers or delegates the authority to assess treaty abuse to the other contracting State. No such jurisprudence has ever been established, nor can it be permitted to develop through the courts of any sovereign nation. The inherent sovereign power to tax lies fundamentally with the source State, which naturally encompasses the power to scrutinize and address abusive transactions.
d)
The allocation of taxing rights or the conferment of tax benefits under a DTAA cannot, by default, curtail or diminish the sovereign authority of the source State to examine instances of tax abuse. Such sovereign transferred through a tax treaty.
The taxability of the transaction in question can be examined in the following steps:
a)
Now the question is whether the India-Mauritius
DTAA confers any Treaty benefit upon the Assessees.
The Assessees' claim is that, notwithstanding the fact that the transfer relates to assets situated in India, the taxing rights on the resulting capital gains are allocated to Mauritius under the terms of Article 13(4) of the DTAA- provided the Assessees qualify as tax residents of Mauritius. Consequently, the Assessees raised two contentions to the Respondent's pursuit:
i.
Having produced a TRC evidencing residency
III Mauritius, benefit under Article 13(4) cannot be denied.
ii.
The substance test is not part of the DTAA and therefore cannot be raised or examined for the transactions under question.
The Respondent respectfully submit that this is exactly where the problem arises. Substance test is not a tax Treaty benefit test. It is an anti-abuse exercise and will therefore be outside the ken of a tax Treaty benefit.
Coming to the other aspect of proof of residency by way of TRC, while examining the residency, one may have to look into the provisions of the Mauritius Income Tax Act. Section 73 of the Mauritius Income Tax Act defines residence and sub-clause (b) is identically worded to Section 6(3) of the Income Tax Act, 1961. 73. Definition of residence (2) For the purposes of this Act, "resident", in respect of an incomeyear; when applied to - b) a company, means a company which -
(i) is incorporated in Mauritius; or (ii) has its central management and control in Mauritius;
Section 73A of the Mauritius Income Tax Act further provides that a company incorporated in Mauritius shall be treated as non-resident if it is centrally managed and controlled outside Mauritius.
73A. Companies treated as non-resident in Mauritius
(1)
Notwithstanding section 73, a company incorporated in Mauritius shall be treated as non-resident if it is centrally managed and controlled outside Mauritius.
This is the law with effect from July 2019. Prior to that,
Section 73A read as under:
(1)
Notwithstanding section 73, a company which is incorporated in Mauritius shall be treated as non- resident if its place of effective management is situated outside Mauritius.
The bottom line is clear without any ambiguity.
a)
Section 6(3) of the Income Tax Act, 1961 mandates
Control and Management as essential test for determining residency. Equally true is the position even under the Mauritius law.
b)
Section 71 (3)(a) and (b) of the Financial Services
Act, 2007 of Mauritius mandate that the holder of a controlled at Mauritius and sub-clause (b) even though lists five ingredients, caveats that very clearly that the same is not limited to these five by use of the expression "the commission shall have regard to such matters as it deems necessary in the circumstance and in particular, without limitation to ... ".
c)
With effect from October 2018, even the Mauritius income tax Act vide Section 3 mandated Place of Effective Management/Control and Management tests.
In light of the foregoing discussion, it is no longer open for the Assessees to argue that the Control and Management test is inapplicable under the India-Mauritius DTAA merely because a Tax Residency Certificate (TRC) has been issued by the Mauritian tax authorities. The issuance of a TRC, while relevant, does not preclude the application of the substance over form doctrine or the examination of control and management to determine the genuineness of the residency claim and to address potential treaty abuse.
This is a case which falls squarely under Article 4(3) since the Control and Management test is between India and Mauritius and not even Mauritius and yet another State which again would be governed under Article 4. Article 4(3) reads as under. This Article is defined and understood as the tie breaker rule and the deciding factor is Place of Effective Management or in other words, the Control and Management test. This is a test as contracted by the parties to the Treaty and therefore bound and governed by it. The Control and Management test in law is therefore inevitable to be applied and once applied, it is self-evident on facts that the entire Control and Management was only in India and not in Mauritius. The detailed finding by the CIT (Appeals) upholding the AO Order that every critical limb of the commercial transaction had happened only in India, thus evidencing the fact that the Control and Management is only in India. 43. The Hon'ble Supreme Court, in the Vodafone judgment, unequivocally upheld the application of the "substance over form" doctrine and extensively analyzed the Control and Management test in that context. The Court drew a clear distinction between influencing power and persuasive power. It held that influencing power-which enables a holding entity to exercise actual control-could indicate that the subsidiary is merely a conduit or sham. In contrast, persuasive power, stemming from mere shareholding influence without effective control, would not vitiate the integrity of the subsidiary's independent legal status. Upon a thorough analysis of the facts, the Court concluded that going by the percentage of shareholding the control exercised in the Vodafone case was persuasive and not influencing, thereby recognizing the bonafide nature of the holding- subsidiary structure and allowing it to survive the substance test.
While applying the substance over form test, The Hon'ble Supreme Court in paragraph 77 of the Vodafone judgment reaffirmed the relevance of the JAAR (Judicial Ant- Avoidance Rule) as an integral part of Indian jurisprudence.
In the light of the above, the authorities below are right in invoking the Control and Management test.
Control and Management test otherwise called as the Head and Brain test has been dealtvery recently and in detail by The Hon'ble Supreme Court in Mansarovar Commercial Pvt. Ltd. v. Commissioner of Income Tax, Delhi [2023j 8 S.C.R. 452. Para 75.1-76 reads as follows: (the extracts are taken from (2023) 17 SCC 109 for ease of reference)
"75. On control and management of business, few decisions on interpretation of Section 4-A of the erstwhile the Income Tax Act, 1922 and interpretation of Section 6(3) of the 1ncome Tax Act, 1961 are required to be referred to, which are as under:
75.1. In Subbayya Chettiar [Subbayya Chettiar v. CIT, 1950
SCC 971 : AIR 1951 SC 101 : 1950 SCR 961] , it is observed in para 10 as under: (SCC pp. 974-75)
"10. The principles which are now well established in England and which will be found to have been very clearly enunciated in Swedish Central Railway Co.
Ltd. v. Thompson [Swedish Central Railway Co. Ltd.
v. Thompson, 1925 AC -195 (HL) : 9 TC 373 (HL)] , which is one of the leading cases on the subject, are:
(1)
That the conception of residence in the case of a fictitious "person", such as a company, is as artificial as the company itself, and the locality of the residence can only be determined by analogy, by asking where is the head and seat and directing power of the affairs of the company. What these words mean have been explained [Ed. : C1T v. Subbayya Chettiar, 1947 SCC
OnLine Mad 194] by Patanjali Sastri, J. with very great clarity in the following passage where he deals with the meaning of Section 4-A(b) of the Income Tax
Act:
'4-A. (b) 'Control and management' signifies, in the present context, the controlling and directive power,
"the head and brain" as it is sometimes called, and "situated" implies the functioning of such power at a particular place withsome degree of permanence, while "wholly" would seem to recognise the possibility of the seat of such power being divided between two distinct and separated places. '
As a general rule, the control and management of a business remains in the hand of a person or a group of persons, and the question to be asked is wherefrom the person or group of persons controls or directs the business.
(2)
Mere activity by the company in a place does not create residence, with the result that a company may be "residing" in one place and doing a great deal of business in another.
(3)
The central management and control of a company may be divided, and it may keep house and do business in more than one place, and, if so, it may have more than one residence.
(4)
In case of dual residence, it is necessary to show that the company performs some of the vital organic functions incidental to its existence as such in both the places, so that in fact there are two centres of management. "
2. Thereafter, in Erin Estate [Erin Estate v. CIT, 1958 SCC Onl.ine SC 108 : 1959 SCR 573 : AIR 1958 SC 779] , it is observed in paras 6 and 9 as under: (SCC Online SC)
"6. There is no doubt that the question raisedfor our decision is a question of law. Whether or not the Respondent is a resident firm under Section -I-A(b) would depend upon the legal effect of the facts proved in the case. The status of the Respondent which has tobe determined by reference to the relevant section of the Act is a mixed question of fact and law and in determining this question the principles of law deducible from the provisions of the said section will have to be applied. This position has not been disputed before us in the present proceedings. Section 4-A(b) provides inter alia that 'for the purpose of the Act, a firm is resident in the taxable territories unless the control and management of its affairs is situated wholly without the taxable territories '.
This provision shows / hat, where / he partners of a firm are residents of this country, the normal presumption would be that the firm is resident in the taxable territories. This presumption is rebuttable and firm is situated wholly without the taxable territories.
The onus to rebut the initial presumption is on the assessee, The control and management contemplated by the section evidently refers to the controlling and directing power. Often enough, this power has been described in judicial decisions as the "head and brain"; the affairs of the firm which are subject to the said control and management refer to the affairs which are relevant for the purpose of taxation and so they must have some relation to the income of the firm.When the section refers to the control and management being situated wholly without the taxable territories it implies that the control and management can be situated in more places than one. Where the control and management are situated wholly outside India the initial presumption arising under the section is effectively rebutted. It is true that the control and management which must be shown to be situated at least partially in India is not the merely theoretical control and power, not a de jure control and power but the de facto control and power actually exercisedin the course of the conduct and management of the affairs of the firm. Theoretically, if the partners reside in India they would naturally have the legal right to control the affairs of thefirm which carries on its operations outside India. The presence of this theoretical de jure right to control and manage the affairs of the firm which inevitably vests in allthe partners would not by itself show that the requisite control and management is situated in India. It must be shown by evidence that control and management in the affairs of the firm is exercised, may be to a small extent, in India before it can be held that the control and management is not situated wholly without the taxable territories. (Vide Bhimji R. aik v. CIT [Bhimji
R. aik v. CIT, 1944 SCC Online Bom 64 : (19-15) 13
ITR 12-1) .Bhimji .aik v. CIT [Bhimji Naik v. CIT,
19-16 SCC OnLine Bom 82: (1946) 14 ITR 334]) The effect and scope of the provisions of Section 4-A(b) has been considered by this Court in Subbayya
Chettiar v. CfT [Subbayya Chettiar v. CIT, 1950 SCC
971 : AIR 1951 SC 101 : 1950 SCR 961} . After examining the relevant decisions on this point, Fazl
Ali, J, who delivered the judgment of the Court, has observed: (Subbayya Chettiar case [Subbayya Chettiar v. CfT, 1950 SCC 971 : AIR 1951 SC 101 : 1950 SCR
961} , SCC p. 975, para 10)
'10 .... (1) That the conception of residence in the case of a fictitious "person", such as a company, is as artificial as the company itself, and the locality of the residence can only be determined by analogy, by asking where is the head and seat and directing power of the affairs of the company.
***
(2)
Mere activity by the company in a place does not create residence, with the result that the company may be "residing" in one place and doing a great deal of business in another.
(3)
The central management and control of a company may be divided, and it may keep house and do business in more than one place, and, if so, it may have more than one residence.
(4)
In case of dual re id. 11 e. it i necessary to show that the company performs someof the vital organic function incidental to its existence as such in both the places, so that in fact there are two centres of management. '
It is in the light of these principles that Section -I-A (b) has to be construed. Thus, the only question which remains to be considered is whether the High Court of Madras was right in holding that the Respondent was resident in India under Section 4-A(b).
***
9. Mr Kolah then raised a further point which had not been urged before the High Court. He contended that the control and management mentioned in Section -I-A (b) must be control and management valid and effective in law. Under Section 12 of the Partnership
Act; it is only the majority of partners who could have given effective directions to the superintendent and since there is no evidence that the alleged control and management has been exercised by the majority of partners acting in concert it would not be possible to hold that any control and management of the firm's affairs resided in India. We do not think there is any substance in this argument. Under Section 12(a), evelY partner has a right to take part in the conduct of the business and it is only where difference arises as to ordinary matters connected with the business of the firm that the same has to be decided by majority of partners under sub-section (c) of the said section. It has no/ been suggested or shown that there was any difference between the partners in regard to the mailers covered by the individual partner's letters of instruction to the superintendent. Indeed the course of conduct evidenced by these letters shows that Andiappa Pillai who holds the maximum number of individual shares has purported to act for the partnership and usually gave instructions in regard to the conduct and management of the firm's affairs. On the record we see no trace of any protest against, or disagreement with, this conduct of Andiappa Pillai.
Besides, it was never suggested during the course of the enquiry before the Income Tax Officers that the directions given by Andiappa Pillai were not valid or effective and had not been agreed upon by the remaining partners. That is why we think this technical point raised by Mr Kolah must fail."
3. That thereafter the Bombay High Court in Narottam & Pereira [Narottam & Pereira Ltd. v. CIT, (1953) 23 ITR 454 .' 1953 SCC Onl.ine Bom 142J through Me. Chagla, J. as his under :
(SCC OnLine Bom)
"3. It is also necessary that the control and management of the affairs of the company should be situated wholly in the taxable territories. Therefore, if any part of the control and management is outside the taxable territories then the company would not be resident. In this connection it is perhaps necessary to look at the converse definition for a Hindu undivided family, firm or other association of persons. In their case they are resident unless the control and management of its affairs is situated wholly without the association of persons any measure of control and management within the taxable territories would make them resident, in the case of a company any measure of control and management of its affairs outside the taxable territories would make it non-resident. In construing the expression "control and management"
it is necessary to bear In mind the distinction between doing of business and the control and management of business. Business and the whole of it may be done outside India and yet the control and management of that business maybe wholly within India. In this particular case considerable emphasis is placed upon the fact that the whole of the business of the company is done in Ceylon and the whole of the income which is liable to tax has been earned in Ceylon. But that is not a factor which the Legislature has emphasised, It is entirely irrelevant where the business is done and where the income has been earned. What is relevant and material is from which place has that business been controlled and managed.
"Control and management" referred /0 in Section -I-A (c) is, as we shall presently point out on the authorities, central control and management.
The control and management contemplated by this sub-section is not the carrying on of day to day business by servants, employees or agents. The real test to be applied is, where is the controlling and directing power, or rather, where does the controlling and directing power function or to put it in a different language there is always a seat of power or the head and brain, and what has got to be ascertained is, where is this seat of power, or the head and brain. A company or for the matter of that a firm or an undivided Hindu family has got to work through servants and agents, but it is not the servants and agents that constitute the seat of power or the controlling and directing power. It is that authority to which the servants, employees and agents are subject, it is that authority which controls and manages them, which is the central authority, and it is at the place where the central authority functions that the company resides. It' may be in some cases that like an individual a company may have residence in more than one place. It may exercise control and management not only from one fixed abode, but it may have different places. That would again be a question dependent upon the circumstances of each case. But the contention which Mr Kolah has most strongly pressed before us is entirely unacceptable that a company controls or manages at a particular place because its affairs are carried on at a particular place and they are carried on by people living there appointed by the company with large powers of management. A company may have a dozen local branches at different places outsideIndia, it may send out agents fully armed with authority to deal with and carryon business at these branches, and yet it may retain the central management and control in Bombay and manage and control all the affairs of these branches from Bombay and at Bombay. It would be impossible to contend that because there are authorised agents doing the business of the company at six different places outside India, therefore the company is resident not only in Bombay but at all these six different places.
4 .... It is perfectly true that these two managers do all the business of the company in Ceylon and in doing that business naturally a large amount of discretion is given to them and a considerable amount of authority.
But the mere doing of business does not constitute these managers the controlling and directing power.
Their power-of-attorney can be cancelled at any moment, they must carry out any orders given to them from Bombay, they must submit to Bombay an explanation of what they have been doing, and throughout the time that they are working in Ceylon a vigilant eye is kept over their work from the Directors'
board room in Bombay. The correspondence which has also been relied upon between the company here and its office in Colombo also goes to show and emphasises the same state of affairs. Mr Kolah is right again when he puts emphasis upon the fact that what we have to consider in this case is not the power or the capacity to manage and control, but the actual control and management, or, in other words, not the de jure control and management but the de facto control and management, and in order to hold that the company is resident during the years of account it must be established that the company de facto controlled and managed its affairs in Bombay. Mr Kolah says that the two powers of attorney go to show that whatever legal or juridical control and management the company might have had, in fact the actual management was exercised bythe two managers in Ceylon. In our opinion this is not a case where the company did nothing with regard to the actual management and control of its affairs and left it to some other agency.
As we said before, the two managers were the employees of the company acting throughout the relevant period under the control and management ofthe company, and therefore in the case we are considering therewas not only a de jure control and management, but also a de Jacto control and management. "
referring to the decision in Bhimji R. Naik v. CIT [Bhimji R.
Naik v. CIT, 1944 SCC OnLine Bom 64 : (1945) 13 ITR
124] has observed and held that the expression "control and management" means where the central control and management actually abides.
4. The Calcutta High Court in Bank oj China [CIT v. Bank of China, 1985 SCC OnLine Cal 24] has specifically held that a company may be simultaneously resident in more than one place, but the control and management is where the head and brain is situated. While holding so, in paras 7 to 9, it is observed and held as under: (SCC pp. 287-89)
"7. Under Section 6(3), a non-Indian company is said to be resident in India in any previous year if during that year the control and management of its affairs is situated wholly in India. The determination as to at what place or places the control and management of a particular company is situated is essentially a question of 'fact to be determined on the facts and circumstances of the particular case. A company can be simultaneously resident in more than one place but the question is whether the control and management is situated wholly in India during the relevant previous year. The expression "control and management" signifies the controlling and directive power, "the head and brain ", as it is sometimes called, and "situated" implies the functioning of such power at a particular place with some degree of permanence.
The word "wholly" as used in Section 6(3) would indicate that the seat of such power may be divided between two distinct and separate places. The expression "control and management" means de facto control and management and not merely the right or power to control and manage. In order to hold that a non-Indian company is resident in India during any previous year, it must be established that such company de facto controls and manages its affairs in 1ndia. The principles are by now well settled.
8. Lord Loreburn L. C. in De Beers Consolidated
Mines Ltd. v. Howe [De Beers Consolidated Mines
Ltd. v. Howe, 1906 A C 455 (HL) : (1906) 5 TC 198
(HL)] at p. 212, observed as follows : (AC p. 458)
'Mr Cohen propounded a test which had the merits of simplicity and certitude. He maintained that a company resides where it is registered, and nowhere else ....
I cannot adopt Mr Cohen's contention. In applying the conception of residence to a company, we ought, I think, to proceed as nearly as we can upon the analogy of an individual. A company cannot eat or sleep, but it can keep house and do business. We ought, therefore, to see where it really keeps house and does business.
An individual may be of foreign nationality, and yet reside in the United Kingdom. So may a company.
Otherwise it l11i~ht have its chief seat of management and its centre of trading in England under the protection of English law, and yet escape the appropriate taxation by the simple expedient of being registered abroad and distributing its dividends abroad. The decision of Kelly C. B. and Huddleston
B. in Cesena Sulphur Co. Ltd. v. Henry Nicholson
[Cesena Sulphur Co. LId. v. Henry Nicholson, (1876)
LR / Ex D 428 : (1876) / TC 83J ' now thirty years ago, involved the principle that a company resides for purposes of income tax where its real business is carried on. Those decisions have been acted upon ever since. I regard that as the true rule, and the real business is carried on where the central management and control actually abides.
Since thatjudgment, the words underlined have been taken as the test, although central management and control has sometimes been stated in the form "head, seat and directing power". The question depends on the fact of the management and not on the physical situation of the thing that is managed. A company is managed by the board of Directors and if the meetings of the board of Directors are held within India, if may be said that the central control and management is situated here. The direction, management and control "the head and seat and directing power" of a company's affairs is, therefore, situate at the place where the Directors' meetings are held and, consequently, a non-Indian company would be a resident in this country if the meetings of the Directors who manage and control the business are held here. The word "affairs" means affairs which are relevant for the purpose of the 1. T. Act and which have some relation to the income sought to be assessed. It is not the bare possession of powers by the Directors, but their taking part in or controlling the affairs relating to the trading, that is of importance in determining the question of the place where the control is exercised. They must exercise their power of control in relation to business or activity wherefrom the profit is derived. [SeeMitchell (Surveyor of Taxes) v. Egyptian Hotels Ltd. [Mitchell (Surveyor of Taxes) v. Egyptian Hotels Ltd., 1915 AC 10 (HL): (1915) 6 TC 542 (HL)]]"
5. In Nandlal Gandalal [CITv. and Nandlal Gandalal, (1960) 40 ITR 1 (SC)] , this Court has held that the expression "control and management" in Section 4-A (b) of the Income Tax Act, 1922, means de facto control and management and not merely the right or power to control and manage.
The sum and substance of the above decisions of this Court as well as various High Courts would be that where the head and seC:I and directing power of the affairs of the company and the control and management is must be shown is not merely theoretical control and power i. e. not de jure control and power, but de facto control and power actually exercised in the course of the conduct and management of the affairs of the firm; that the domicile or the registration of lies. "
Effects of Circular No. 789, dated 13.04.2000, Amendment to Section 90(4) and 90(5) and Press release dated 01.03.2013 and Conclusiveness of TRC
To recapitulate, the Respondents while dealing with Azadi BacltaoAndolanhad submitted as under:
a)
Direct and indirect transfer of shares constituting business investment was not a much prevalent concept way back in 2000 and the then prevailing laws of Mauritius as discussed in Azadi Bachao Andolandid not contemplate a Global Business License regime.
b)
Financial Services Act 2001 which gave way to the Financial Services Act, 2007 elaborately deals with Global Business License regime c)
Para 9 and 11 of Azadi Bachao Andolanbrings out clearly that what was questioned by the tax authorities then was the investments made by the FIIs and the investment funds registered with SEBI and not direct or indirect transfer of shares constituting business investment. Even the prayers in the PIL were directed only against FIIs. It is a common fact and not disputed that FIIs and investment funds like mutual funds are overseas entities registered with SEBI and investing in the Indian share market. These are not entities which make business investments, take control of the management, become part of Board of directors, add value to the growth of the company and exit at an appropriate time by making a direct or indirect transfer of shares.
When this is the background and a scenario of direct or indirect transfer of share was nowhere in the radar and not even remotely referred to in Circular No. 789. Dated 13.04.2000, there is cannot be questioned.
The background of the challenge and the ratio laid down by The Hon'ble Supreme Court should not be overlooked. The cry of the PIL was the discrimination sought to be maintained between a domestic investor and an FII even though both invest in the same Indian stock market. It was a policy choice of the Government to extend the Treaty benefit and to give confidence to these set of investors namely FIIs and investment funds and similar NRIs and thus issued Circular No. 789, dated 13.04.2000 and directed the AOs to accept the TRC.
Such a policy choice was not exercised for direct or indirect transfers and the Assessees had not placed an iota of material in support of such assumption. Even the subsequent Circular No 1 dated 10thFebruary 2003 does not refer to direct or indirect transfer of shares. Consequently, the basic assumption of the Assessees that Circular No. 789, dated 13.04.2000 applies in all force needs to be rejected.
In the light of the above, the following inferences are inescapable:
a)
Circular No. 789, dated 13.04.2000 is only in relation to FIIs and investment funds and NRI and not for direct and indirect transfer of shares constituting business investment.
b)
This interpretation stands vindicated if one looks into the pattern of amendments brought through Finance
Act, 2012 and 2013 while giving a statutory affirmation to Circular No. 789, dated 13.04.2000 by introducing Section 90(4) and 90(5). The assurance given to FII, investment funds and NRIs through
Circular No. 789, dated 13.04.2000 stands statutorily aligned.
c)
As regards the applicability of Circular No. 789, dated
13.04.2000, it is crucial to note that the said Circular did not contemplate or address scenarios involving direct or indirect transfer of shares.
A cumulative analysis of Circular No. 789 dated 13.04.2000, Sections 90(4) and 90(5) of the Income Tax Act, 1961, read with Rule 10U(I)(b) and (c) of the Income Tax Rules, 1962, makes it evident that investments made by Foreign Institutional Investors (FIIs) are treated as permissible transactions, and such transactions are not subject to scrutiny under GAAR, provided the FII furnish a valid Tax Residency Certificate (TRC) issued by the Mauritius authority. In contrast, the same protection does not extend to transactions in involving direct or indirect transfers of shares constituting business investments.
In conclusion, the Respondents respectfully reiterate the established global jurisprudence that the prerogative to examine and address treaty abuse lies with the source State in full consonance with this global principle and reflects India's legitimate exercise of its sovereign taxing powers.
In the light of the above, the submission of the Assessees both on the Control and Management test and conclusivity of TRC needs to be rejected.
At this juncture, reliance is placed on the decision Constitutional Bench judgement of The Hon’ble Supreme Court in Lzliar Ahmad Khan v. Union of India, 1962 SCCOnLine SC 1 where the following was held on irrebuttable presumption (conclusive proof):
In deciding the question as to whether a rule about irrebuttable presumption is a rule of evidence or not, it seems to us that the proper approach to adopt would be to consider whether fact A from the proof of which a presumption is required to be drawn about the existence offact B, is inherently relevant in the mailer of proving fact B and has inherently any probative or persuasive value in that behalf or not. If fact A is inherently relevant in proving the existence would be a rule of evidence. On the other hand, if fact A is inherently not relevant in proving the existence of fact B or has no probative value in that behalf and yet a rule is made prescribing for a rebutable or an irrebuttable presumption in that connection, that rule would be a rule of substantive law and not a rule of evidence. Therefore, in dealing with the question as to whether a given rule prescribing a conclusive presumption is a rule of evidence or not, we cannot adopt the view that all rules prescribing irrebuttable presumptions are rules of substantive law. We can answer the question only after examining the rule and its impact on the proof of facts A and B. If this is the proper test, it would become necessary to enquire whether obtaining a passport from a foreign Government is or is not inherently relevant in proving the voluntary acquisition of the citizenship of that foreign State.
It has been fairly conceded before us that a passport obtained by the petitioners from the Pakistan Government would undoubtedly be relevant in deciding the question an to whether by obtaining the said passport they have or have not acquired the citizenship of Pakistan. Sometimes the argument appears to have been urged and accepted that a passport in question would not be relevant to the enquiry as to whether citizenship of Pakistan has been acquired or not. That view, in our opinion, is clearly erroneous.
Section 2 of The BharatiyaSakshyaAdhiniyam, 2023 defines the following:
(b)
"conclusive proof" means when one fact is declared by this Adhiniyam to be conclusive proof of another.
the Court shall. on proofof the one fact, regard the other as proved, and shall not allow evidence to be given for the purpose of disproving it;
(h)
"may presume ".-Whenever it is provided by this Adhiniyam that the Court may presume afact, it may either regard such fact as proved, unless and until it is disproved or may call for proof of it;
(I)
"shall presume ".-Whenever it is directed by this Adhiniyam that the Court shall presume a fact, it shall regard such fact as proved. unless and until it is disproved.
The Respondents respectfully submit that neither Section 90(4) nor Section 90(5) of the Income Tax Act, 1961, nor Circular No. 789 dated 13.04.2000, confer any statutory or executive conclusivity upon Tax Residency Certificate (TRC). Both Azadi Bachao Andolan and Vodafone decisions affirmatively clarify that the TRC, while relevant, is not final or conclusive. Quasi-judicial authorities and Courts are not precluded from examining the true nature and character of the business structure and the underlying transaction to ascertain whether the arrangement is bona fide or a colorable device aimed at tax avoidance.
Further, it may also be noted that DTAAs are instruments which are negotiated by two countries to divide the rights of taxation of different incomes. It has been well recognised across the globe in all international forms such as OECD, UN etc. that the purpose of DTAAs is to avoid double taxation of income rather than to promote double non- taxation. In fact, during the BEPS Pillar two negotiations, there was a larger consensus among the countries that there should be a minimum 15% tax rate across juri ictions and if some juri iction has less than 15% tax rate then juri iction in which the parent company is situated, shall have right to collect the differential.
The basic idea is that tax is a justified right of a country to run a welfare state. If some juri iction tries to create an arbitrage by imposing lower taxes, then it disturbs the justified right of other countries to collect their rightful share of taxes. It may happen in two different ways. First, by structures to avoid taxes. Second, by tempting them to shift their base to the low tax juri ictions. In either situation, the justified rights of the juri ictions tat impose normal taxes for the welfare of their citizens is affected.
The first situation is more serious because in that case, the taxpayer is trying to avoid taxes by creating colourable devices to avoid justified taxes in a juri iction. This has been well recognised across the globe and that is the reason why many countries, including India have come out with their general anti avoidance regulations which try to lift the corporate veil and pierce the colourable structures so that the juri iction can get its rightful share of taxes. This principle has been well recognised by the Hon'ble Supreme Court in different cases.
Hon'ble Supreme Court in the case of Vodafone International Holdings laid down the guiding principles regarding the situation in which corporate veil may be lifted as follows:
"The difference is between having power or having a persuasive position. Though it may be advantageous for parent and subsidiary companies to work as a group, each subsidiary will look to see whether there are separate commercial interests which should be guarded. When there is a parent company with subsidiaries, is it or is it not the law that the parent company has the "power" over the subsidiary. It depends on the facts of each case. For instance, take the case of a one-man company, where only one man is the shareholder perhaps holding 99% of the shares, his wife holding 1%. In those circumstances, his control over the company may be so complete that it is his alter ego. But in case of multinationals it is important to realise that their subsidiaries have a great deal of autonomy in the country concerned except where subsidiaries are created or used as a ham. Of course, in many cases the courts do lift up a corner of position between the companies. The directors of the subsidiary under their Articles are the managers of the companies. If new director are appointed even at the request of the parent company and even if such directors were removable by the parent company, such directors of the subsidiary will owe their duty to their companies (subsidiaries). They are not to be dictated by the parent company if it is not in the interests of those companies (subsidiaries). The fact that the parent company exercises shareholder's influence on its subsidiaries cannot obliterate the decision-making power or authority of its (subsidiary's) directors. They cannot be reduced to be puppets. The decisive criteria is whether the parent company's management has such steering interference with the subsidiary's core activities that subsidiary can no longer be regarded to perform those activities on the authority of its own executive directors."
Hon'ble Court has made a very critical observation that corporate veil can be lifted where somebody has a steering interference with the subsidiary's core activities. In para 67
of the judgement, Hon'ble Court also held:
It is generally accepted that the group parent company is involved in giving principal guidance to group companies by providing general policy guidelines to group subsidiaries. However, the fact that a parent company exercises shareholder's influence on its subsidiaries does not generally imply that the subsidiaries are to be deemed residents of the State in which the parent company resides. Further, if a company is a parent company, that company's executive director(s) should lead the group and the company's shareholder's influence will generally be employed to that end. This obviously implies a restriction on the autonomy of the subsidiary's executive directors. Such a restriction, which is the inevitable consequences of any group structure, is generally accepted, both in corporate and tax laws. However, where the subsidiary's executive directors' competences are transferred to other persons/bodies or where the subsidiary's executive directors' decision making has become fully subordinate to the Holding Company with the consequence that the subsidiary's executive directors are no more than puppets then the turning point in respect of the subsidiary's place of residence comes about. Similarly, if an actual controlling on- Resident Enterprise ( RE) makes an indirect transfer through "abuse of organisation form/legal form and without reasonable business purpose" which results in tax avoidance or avoidance of withholding tax, then the Revenue may disregard the form of the arrangement or the impugned action through use of on-Resident Holding Company, re- characterize the equity transfer according to its economic substance and impose the tax on the actual controlling Non- Resident Enterprise. Thus, whether a transaction is used principally as a colourable device for the distribution of earnings, profits and gains, is determined by a review of all the facts and circumstances surrounding the transaction. It is in the above cases that the principle of lifting the corporate veil or the doctrine of substance over form or the concept of beneficial ownership or the concept of alter ego arises. There are many circumstances, apart from the one given above, where separate existence of different companies, that are part of the same group, will be totally or partly ignored as a device or a conduit (in the pejorative sense)."
The majority judgment in McDowell held that "tax planning may be legitimate provided it is within the framework of law" (para 45). In the latter part of para 45, it held that "colourable device cannot be a part of tax planning and it is wrong to encourage the belief that it is honourable to avoid payment of tax by resorting to dubious methods". It is the obligation of every citizen to pay the taxes without resorting to subterfuges.
Thus, it is well recognised principle that colourable devises can not be allowed as a tool of tax evasion. Also, the decision about the genuineness of a structure and it being a colourable device will depend upon the facts and circumstances of the case. In this context, the most crucial fact is the nature of the assessee company and the activities carried out the assessee. Thefacts and circumstances surrounding the transaction are required to be seen. The facts and circumstances of the case are as follows:
a)
Shares are owned by the assessee company, as a result of voluntary liquidation of ETIL, India which is a colourable devise
The issue under consideration is the taxability of capital gains on the sale of shares of Vodafone Essar
Ltd (an Indian company) by the assessee company.
The assessing Officer as well as the CIT(A) in their orders have clearly established that the shares reached the assessee company as a result of voluntary liquidation of ETIL, India after several complicated restructuring of the Indian companies of the group.
The AO has clearly established that voluntary liquidation of ETIL, India is a colourable devise at page 44-63 of his order. Thus, the entire structure has been created from the very beginning as a colourable device for the sole object of evading the income tax liability in India.
b)
Colourable holding structure of Essar group being highlighted in paradise paper leak
The assessee company is a group company of Ruia family. Ruia family holds 100% stake in the assessee company through a chain of holding passing through
Mauritius, Cayman Islands, etc. Thus, despite the Ruia family continue to control the colourable device created in Mauritius in the form of assessee company.
It is quite evident why this complicated structure has been created by the Ruia family. Why would any person who is willing to pay the taxes due in India would like to control the holding in Indian company through Triton Trust and Virgo Trusts. The names of these two trusts appear in Paradise Papers leak, and can also be found in public domain at the following links:
https:llindianexpress.com/article/indialparadise- papers-shashi-ravi-ruia-essar-khaitan- appleby-black- money-49274191
The AO has mentioned the enquiries into the affairs of Ruia family and offshore trusts by the DRI at page
222-224 of his order.
c)
No operations of assessee company in Mauritius
The assessee company is a colourable device formed just to hold the investment of Ruia family in Mauritius and has no operations in Mauritius. It has no substance other than the shares of VEL.
d)
Assesssee company is only a paper company to hold investments and has no real operations and management other than decisions to purchase and sell shares that are taken by Ruia family through its key executives:
The concept of control and management for a fully operational company that has full fledged operations and a company like assessee company that is formed as a colourable device just to hold shares of an India company of the Ruia family can't be the same. In case of assessee company, there are only two critical decisions: when and how to purchase the shares and when and how to sell the shares and both these decisions can not be taken by anybody other than the Ruia family.
e)
No role of the Board over the decisions related to borrowings:
Even the shares of VEL were acquired by the assessee company out of the proceeds of the borrowed funds, which were borrowed on the security of shares of VEL as elaborated by the AO in his order page no 85-
87. The AO on page 91 of the order has mentioned facility. If the control and management of the assessee company is in Mauritius, how can such a significant decision be taken without Board of Directors not contemplating on such a crucial matter?
f)
An analysis of the financial statements of the assessee company confirms that it is a colourable device
An analysis of the financial statements of the assessee company has been carried out by the AO at page 107-
110 of his order, The assessee company has no operative income or operative expenses. The sole activity of the assessee company from FY 05-06 to FY
11-12 is to hold the shares of VEL. There is no operational expenses and the sole expenses being in the nature of professional fees, audit fees, etc.
g)
Key executives of the Essar group performed all crucial activities and not the directors of assessee company:
Moreover, even to carry out the transactions of sale of shares, and also bank transactions, the key executives of Essar Group are authorised by the assessee company, as elaborated by the AO at page 116-129 of his order. The key executives of the Essar group are parties to all major agreements signed by the assessee company as tabulated by the AO in his order at page
130-142 of his order.
h)
Discrepancies in Board minutes clearly establishing that it was a colourable device:
There are serious discrepancies in the Board minutes, clearly establishing that the assessee company is a colourable device. These discrepancies have been elaborated by the AO at page 144-163 of his order.
been casted to hide the reality. Directors have signed despite not being present in the meeting. The entire emphasis of the assessee is that the "control and management" of. its affairs is in Mauritius, while discrepancies the minutes of the Board meetings establish it beyond doubt that these are just paper works and the real "control and management" lies in India. The AO has established at page 177 of his order that the Board Minutes are of doubtful authenticity due to many factual contradictions.
i)
Puppet directors
The Directors of the assessee company are acting just as a puppet of the Ruia family in India. As pointed out by the AO in para 5(1)(4) of his Order, as per the minutes of the Board meetings, Mr Uday Kumar
Gujadhur and Mr Yuvraj Kumar Juwaheer are the Mauritian directors of the assessee company. Both these persons hold multiple directorships. A search was carried out on the website of Mauritius