BEFORE THE AUTHORITY FOR ADVANCE RULINGS...

1 AB Holdings Mauritius-II AAR / 1129 / 2011

BEFORE THE AUTHORITY FOR ADVANCE RULINGS (INCOME TAX) NEW DELHI

8thDay of November, 2017

A.A.R. No 1129 of 2011

PRESENT

Mr. R.S. Shukla, Incharge-Chairman Mr. Ashutosh Chandra, Member (Revenue)

Name & address of the Applicant : AB Holdings, Mauritius-II Present for the Applicant : Mr. Rajan Vora, CA SRBC & Associates Mr. Aditya Modani, CA SRBC & Associates

Present for the Department : Mr. G C Srivastava, Special Counsel MsKavitaPandey, CIT(DR)

RULING (by Ashutosh Chandra)

“AB” Holdings Mauritius-II (the Applicant), filed an application on 13

September 2011, requesting an advance ruling on taxability of capital gains arising

on account of transfer of shares held in ‘AB’ International Private Limited (‘AB’

International) to a group company, ‘AB’ Singapore Pte. (‘AB’ Singapore). The

Application was admitted by the AAR on 27 July 2015, keeping the question of tax

avoidance open.

2. As per the details accompanying the application and subsequent

submissions, the facts of the case are stated to be as under:

2.1 The Applicant is a company incorporated in Mauritius in the year 2008,

having its registered office at Mauritius with a valid Tax Residency Certificate

granted by the Mauritius tax authorities, and holds a Category 1 Global Business

License.

2.2 The Applicant is a part of ‘C’ Equity Portfolio II LP and ‘ C’ Affiliates Fund LP

(‘C’ Group), which cumulatively hold 87.56% shares of the Applicant and the


balance 12.44% shares are held by other individual investors. It’s business activities

are carried on from Mauritius and managed by its Board of Directors, comprising of 3

Directors, out of which 2 were residents of Mauritius, at the time of making the

investments. The sole purpose of its incorporation was to invest in ‘S’ sector in India

and other Asian markets, and has invested in ‘AB’ International and companies in

Philippines and Indonesia, which are engaged in ‘S’ business. The shares of ‘AB’

were acquired as under:

Particulars Number of

shares

Share purchase on 10 Dec. 2008 9,900

Share purchase on 14 May 2009 75,52,000

Share purchase on 6 November 2009 12,90,358

Total shares 88,52,258

2.3 The Applicant made further investment from time to time as mentioned below:

Dates of Capital infusion Number of

shares

27 June 2013 662,878

31 January 2014 692,222

29 July 2015 7,081,938

2.4 The initial and subsequent investment decisions have been discussed and

approved by the Board of Directors in its meetings held on 17 November 2008 and

14 May 2009. The original SPA dated 25 November 2008 was executed by the

director of the Applicant. The considerations were limited to the banking channels.

Details of the investments were provided to the RBI under FEMA, 1999. FIRC was

obtained from the RBI which shows that remittances were for the acquisition of

shares and the money had come from the Applicant.

2.5 As part of the corporate strategy of the Group, to support its business in the

Asia – Pacific region in the medium to long term, and to obtain operational and cost

benefits from centralizing the ownership of investments and operations in Asia –

Pacific region, a regional headquarters in Singapore was proposed. Pursuant to filing


the Application, ‘AB’ Singapore was incorporated in August 2011. The Group re-

organization has the following objectives:

a) ‘AB’ Singapore shall function as a regional headquarters of the Group for

the entire Asia-Pacific region covering India, Singapore, Thailand, Vietnam,

Philippines and Indonesia; b) Function as a research and development centre

for the Group in the Biotech Park Singapore to perform research on field and

vegetable crops; c) Undertake the business of promoting, marketing and

trading in hybrid ‘S’; d) Acting as an investment holding and management

company for the Group in Asia- Pacific region;

Keeping in view the above objectives, the Group and ‘AB’ Singapore have invested

substantial amount in Singapore (more than USD 3 million) since its inception,

including a state of art biotechnology lab in Singapore and hired specialist scientist to

run the lab.

2.6 In order to achieve the above objectives, the Applicant proposed to transfer

the shares held in ‘AB’ International to ‘AB’ Singapore, a Group company.

Ultimately the shares were transferred by the Applicant to Singapore on 30 March

2012. The shares of other Group companies were also transferred to ‘AB’

Singapore in exchange of shares to achieve the objective. This was done solely for

business and commercial reasons.

2.7 Further, ‘AB’ Singapore made investments in ‘AB’ International as under:

Date of capital infusion Number of shares

27 June 2013 662,878

31 January 2013 692,222

29 July 2013 7,081,938

2.8 It is submitted that as it’s business objective of being an investment holding

company, it had also invested in other companies, namely ‘PTN’ and ‘AB’

Philippines. The transfer of shares held for almost 3 years in ‘AB’ International

and other Group companies was undertaken with a view to implement the overall


Group strategy and business re-organisation. Further, the Applicant continued to

hold the shares of ‘AB’ International for another 4+ years indirectly through its

subsidiary, ‘AB’ Singapore.

3. On the above facts, as submitted by the Applicant, the following Questions on

which advance ruling is sought, have been framed:

I. Whether on the facts and circumstances of the case, the Applicant will be entitled to

the benefits of the Agreement between the Government of Mauritius and the

Government of the Republic of India for the avoidance of double taxation and

prevention of fiscal evasion with respect to taxes on income and capital gains (‘’the

India-Mauritius tax treaty’’)?

II. If the answer to Question 1 is in the affirmative, whether on the facts and

circumstances of the case, the gains arising to the Applicant from the proposed sale of

shares in ‘AB’ India Private Limited (‘AB India’) to a Group Company (‘Transferee’)

would not be liable to tax in India having regard to the provisions of Article 13 of the

India-Mauritius tax treaty?

III. If answer to Question 2 is in affirmative i.e. holding that the gains arising from the

proposed sale of shares by Mauritian company are not chargeable to tax in India,

whether there will be any obligation to withhold tax under section 195 of the Income

Tax Act, 1961?

IV. If answer to Question 2 is in affirmative i.e holding that the gains arising from the

proposed sale of shares by Mauritian company are not chargeable to tax in India,

whether the transfer pricing provisions of section 92 to section 92F of the Act will

apply?

V. Whether on the facts and circumstances of the case the Applicant will be liable to tax

under the provisions of section 115JB of the Act in relation to income earned from the

proposed transaction?

4. Further to the above, the Applicant has summarized its question-wise

arguments as under:


4.1 In respect of Question I, that it is a company incorporated and a tax resident

of Mauritius, which is evidenced by the certificate of incorporation issued by the

Mauritius authorities. Hence, it is entitled to the benefits under the India-Mauritius

DTAC. It holds a valid TRC issued by the Mauritius tax authorities, which serves as

sufficient evidence of its residence in Mauritius and is entitled to benefits under the

DTAC, which has been upheld in the following rulings:UOI v AzadiBachaoAndolan

[(263 ITR 706) (SC)]; CIT v. P. V. A. L. KulandaganChettiar [(267 ITR 654) (SC)],

Circular 333 [F. No. 506/42/81-FTD], dated April 2, 1982, Circular 728 dated October

30, 1995, and Circular 789, dated April 14, 2000.Reference has been made to Article

1 of the Treaty regarding its entitlement to the benefits thereunder. It is also stated

that the Circulars issued by the CBDT have been upheld in a number of cases,

including those of KP Varghese and AzadiBachaoAndolan. Support has also been

taken from AAR Ruling numbers 826, 855, 878 and 879 and the case of DLJMB

Mauritius (228 ITR 268).

4.2 In respect of Question II, it is stated that being eligible to avail benefits under

the DTAC, by virtue of Article 13(4) thereof, capital gains earned by the Applicant

from transfer of shares of ‘AB’ International would not be liable to tax in India, in

view Circular nos. 682 and 789, and decisions in UOI v Azadi Bachao Andolan (263

ITR 706) (SC); E*Trade Mauritius Ltd., Praxair Pacific Ltd., DB Zwirn Mauritius

Trading.

4.3 In respect of Question III, the Applicant contends that since the gain on

transfer of shares is not taxable in India, the consideration received by the Applicant

would not be subject to any withholding tax as per section 195 of the Act. It relies on

the decision of Supreme Court in case of GE India Technology Centre (P) Ltd vs CIT

[(2010) 327 ITR 456]and Transmission Corporation of AP Ltd and Another vs CIT

[(1999) 239 ITR 587]; and recent rulings of the Hon’ble AARin case of JSH Mauritius

Ltd, Dow Agri and Shinsei (supra).

4.4 In respect of Question IV, that sale of shares by the Applicant would not give

rise to any tax incidence in India and hence the transfer pricing provisions contained

in section 92 to section 92F of the Act would not apply to the proposed transaction it


relies on the ruling of Bombay High Court in case of Vodafone India Services Private

(368 ITR 1), Shell India Markets Private Limited, AAR rulings in cases of Hershey

(AAR No. 1470 of 2013) and Dow Agri (supra).

4.5 In respect of Question V, with regard to application of section 115JB of the Act

on the subject transaction, the Applicant contends that the provisions of the said

section shall not be applicable as per the retrospective amendment to section 115JB

by Finance Act, 2016, and relies on the Supreme Court ruling in cases of Castleton

Investments Limited, Dow Agriand Shinsei(supra) and the press release issued by

the Government dated 24 September 2015.

5. The Revenue has submitted detailed reports in the context of the details filed

with the Application, as also in response to its subsequent contentions and defence,

as filed and argued during the course of these proceedings. The same are, as under:

5.1 Revenue has contended that companies of the ‘C’ Group USA, are the

ultimate holding company and Mr. ‘S’, MD of 'C’ partners LP is director in majority

of the group companies. The Applicant is a paper company incorporated in Mauritius

by the ‘C’ Group USA, whose main business is to buy different businesses, sell them

at appropriate value and time. As part of its business strategy, the Applicantcompany

was formed in Mauritius whereas its control and management are located in the US.

5.2 The Applicant company has no address of its own except that of the

management company M/s IM Mauritius, with functions consisting of filing of returns

of income, filing of audited accounts, financial service etc. The Applicant has no

assets or employees of its own in Mauritius, and all its activities are done by the

Management company. Its expenses consisted only of legal and professional fees.

5.3 Two out of the three directors of the company are employees of the

management company, and Mr. ‘S’ , managing partner of ‘C’ Group is the key

director of the company. As per his passport details he was not present in Mauritius

when key decisions were said to have been taken by the Board, as per his passport

details. Therefore, he was mainly operating from the US, where the control and

management are located.


5.4 The transaction under consideration amounts to tax avoidance and is

structured in such a way that increases the value of shares of the Applicant company

as a result of appreciation in value of Indian assets, and it is neither taxed in India

nor in Singapore, when the shares are finally sold. Hence, the incorporation of the

Applicant is a device to avoid tax qua India and it is incorporated in Mauritius only to

take advantage of the India Mauritius DTAC.

5.5 As a part of business re-organization, the Applicant sold its entire

shareholding in ‘AB’ International to another company ‘AB’ Singapore, for a

consideration of shares of Singapore company equalling the fair market value of

shares of the Indian company.

5.6 It is submitted that the nature of the transactions give an impression of a

colourable/artificial device that is employed for the purpose of avoiding tax. As seen

from the annual returns which are submitted as part of the enclosed documents with

the application, the Applicant does not have any business activity other than holding

the shares. The holding company as part of ‘C’ Group is involved in business of

middle market buyouts. The Group buys different businesses, sells them at

appropriate time and value. Its expenses under the heads of “wages and salaries”

and “other staff cost” are nil. This shows that it has no employees at all. This shows

also that it is a paper company without any business purpose.

5.7 Revenue submits that the Applicant fails the substance over form test

because the place of effective management of the Applicant company is not in

Mauritius but only in the US because its shares are held by ‘C’ Equity Portfolio II

LP and ‘C’ Affiliates Fund LP, both US companies. As per the India - US DTAC,

India has the right to tax the gains as per its laws. To avoid incidence of tax in India

as per its laws, instead of transferring from the holding companies of the Applicant in

US directly, transfer of shares has been routed through Mauritius, as a conduit, to

avoid capital gains tax in India, which is a clear evidence of treaty shopping.

5.8 On an examination of the details filed by the Applicant, various factual

discrepancies are noticed, which support the stand of Revenue, that the control and


management of the Applicant was located in the US. In the application filed before

the AAR, it has mentioned the following persons to be its Board of Directors:

1. Mr. ‘S’, an American national residing in the US,

2. Mrs.‘KPR’, residing in Mauritius,

3. Mr. ‘AS’, residing in Mauritius.

From the information available, it is stated that Revenue found that Mrs. KPR is a

financial services consultant catering to about 400 client companies, in the areas of

accounting, corporate secretarial service, as an employee of International

Management, as seen from the website of the stock exchange of Mauritius. The role

of Mrs.KPR, if any, in the affairs of the Applicant is that of providing accounting, legal

compliance to the laws of Mauritius, and therefore renders her status of

Finance/legal manager or non-executive director, at best. Mr. ‘AS’ is also a financial

services consultant from the same company and his role too is of providing

accounting, legal compliance to local laws of Mauritius, and therefore renders his

status also of a finance/legal manager or a non-executive director. He cannot be

treated at par with Mr. ‘S’.

5.8.1 The Mauritian company law makes it compulsory for companies incorporated

in Mauritius to include at least two Mauritius residents in the board of directors.

Applicant company has complied with the above stipulation by having these two non-

executive directors, who are residents of Mauritius. Thus, it can be seen that Mr. ‘S’

is the person who takes key decisions in the board of directors.

5.9 However documents supplied by the Applicant prove beyond doubt that the

important decisions regarding investment and disinvestment the Applicant are not

taken by the above board of directors in Mauritius.

5.9.1 The Applicant company was incorporated in the year 2008. As per audited

accounts of the company the following individuals are directors:

a) Mr. AR;

b) Mr.PS;


c) Mrs.KPR; and

d) Mr. ‘S’.

Though it is argued by the Applicant that Mr. ‘S’ participated in the meetings

conducted in Mauritius via telephone, videoconference etc, but evidence for the

same has not been produced so far. Minutes of some select board meetings

submitted by the Applicant are not complete to know as to who all were actually

present in the meeting physically, or through any other mode.

5.9.2 On this basis Revenue is of the view that Mr. ‘S’ was the key director who

takes all the key decisions on behalf of the company. If he was always participating

in the board meetings through telephone or videoconference from the US, then the

place from where he operates should be taken as the place of effective management

but not where the non-executive directors sit.

5.10 Further the minutes of the board meeting of 14 May 2009 refer to the decision

taken by the board of directors with regard to the additional investment of USD

272,400 by the Applicant company. For the year 2009, the Board of Directors

consisted of Mr. ‘AS’, Mrs. ‘KPR’ and Mr ‘S’. Passport data furnished by the

Applicant shows that Mr.’S’ was not present in Mauritius on the said date and Mrs.

AR was in the US. It cannot be conceived that the board met without the quorum,

and that without a majority of the directors, took the important decision of additional

investment in a subsidiary company. Again this leads to the inference that there were

no board meetings conducted in Mauritius.

Thus it is clear that the place of effective management of the Applicant was in the US

and not Mauritius, as been claimed by the Applicant. Mere presence of accounting

professionals does not render the site a place of management decisions to be in

Mauritius.

5.11 It is also contended by the Revenue that it is a clear attempt to benefit the

Singapore entity with capital gains earned/accrued on sale of assets in India, but

avoided tax qua India, which will never be taxed in India or Singapore. It is

noteworthy that, not only the supposed appreciation on the Indian assets earned by


the Singapore entity, after the date of transfer from the Applicant, will ever be liable

to tax in Singapore, if any, but not even the gains earned out of the instant

transaction in Singapore. More importantly, in view of the compliance undertaken by

the Applicant Group, with respect to LOB Clause, it is no more possible to tax any

future gains also, likely to be earned by the Singapore entity on the assets in India.

Thus, the proposed restructuring is a good consolidation exercise that limits the

rights of India to tax the capital gains avoided through the Mauritian paper company,

i.e. the Applicant. This fact was also confirmed by the fact that BCS, USA has

purchased ‘AB’ India in June 2015.

5.12 Revenue has referred to the case of AzadiBachaoAndolan, 263 ITR 706,

wherein the Hon’ble Supreme Court held that, a colourable device, as in the instant

case, is impermissible tax avoidance. It is stated that seen in the background of the

Vodafone case, 341 ITR 1, it would fall under the exception, as the Apex court held

that the subsidiary which acts as a puppet in the hands of its parent has to be

disregarded.

5.13 Revenue has argued at length the importance of the subsidiary acting as a

separate and independent entity, on which treaty law is based. It has referred

extensively to the case of Vodafone International, to highlight that when the parent

takes all decisions and actions for the subsidiary, the latter is reduced to a puppet

and becomes ineligible for the benefits of the treaty with that state.

5.14 Revenue has cited the case of Aditya Birla Nuvo, 342 ITR 308, where the

Hon’ble High Court, Bombay, held that there was no document on record to suggest

that AT &T, Mauritius had agreed to subscribe/purchase the shares of JVC. Hence

the payments made by AT&T, Mauritius could not be said to be payments for

subscribing/purchasing the shares of the JVC in the name of AT&T, Mauritius.

Referring to the cases of Ardex Investments Mauritius Ltd. (AAR 866 of 2010),

Castleton Investment Ltd. (AAR 999 of 2010), and Dow Agri Sciences (AAR 1123 of

2011), from which the Applicant has taken support, Revenue says that in all these

decisions the only argument for tax avoidance was the involvement of a Mauritian

entity, and unlike the present case, no peculiarity in the conduct of the Group was

demonstrated.


5.15 Revenue has cited the OECD, and para 22 of its commentary, to make a case

for substance over form, and to say that States do not have to grant the benefits of

DTAC with arrangements that constitute an abuse of those provisions. The UN has

also subscribed to this view in its commentary at para 21 of Article 1.It is submitted

that the form and the manner in which the actual transaction takes place is of

paramount importance. The look at versus the look through test propounded by the

Hon’ble Supreme Court in the case of Vodafone holds importance here.

5.16 Revenue has taken an alternative plea that the transaction is squarely

covered by the provisions of section 93 of the Act, and the resultant capital gains

from the sale of shares in ‘AB’ India should be considered as the income of the ‘C’

Group as per Sec 9(1) of the Act, denying the DTAC benefit.

5.16.1 It is submitted that the applicability of sec 93 depends on four conditions,

namely that there must be a transfer of assets, and as a result of this transfer, either

alone or in conjunction with associated operations, any income becomes payable to

a non-resident; any person by means of such transfer acquires a right by virtue of

which he has the power to enjoy the income of the non-resident person; and if the

income had been the income of the said first mentioned person, it should have been

chargeable to income tax. It is stated that in the present case all these four

conditions were met. Hence the income arising to the Mauritian entity should be

deemed to be the income of the US entity.

5.16.2 It is submitted that treaty provisions override the domestic law to the extent

there exists a conflict between the two. Such conflict is usually seen in the context of

distribution of income sources between the countries. However in the case of treaty

abuse, there does not exist any conflict between the domestic law and the treaty,

and therefore the question of treaty override does not arise. It was further submitted

that the correct import of the expression ‘any person’ has to be derived from the

definition of the word in section 2 (31) of the Act, and applies to non residents as

well.


6. In its written submissions and during the course of these proceedings, the

Applicant, represented by Mr. Rajan Vora, CA, strongly refuted all the allegations

made by Revenue, and submitted that Revenue’s interpretation of the facts that the

Applicant is a name lender and benami, and that it was set up for tax avoidance and

treaty shopping, is completely misplaced and inaccurate.

6.1 The Applicant was the legal and beneficial owner of the shares held in ‘AB’

International. The original Share Purchase Agreement (SPA) was executed by the

Director of the Applicant. Further, the purchase price and additional investments

made were through the Applicant’s bank account.

6.2 The BOD in their meetings have considered and approved the investments in

‘AB’ International. The Applicant and ‘AB’ International recognized the acquisition

of the shares by the Applicant in their balance sheets.

6.3 Further, ‘AB’ International recognized the Applicant as the shareholder in the

members register maintained as per the Companies Act, 1956 and in the first

balance sheet (year ending 31 March 2009).

6.4 The Applicant submits that the fund for acquisition of the shares of ‘AB’

International came from the bank account of the Applicant. ‘C’ Group being

shareholders of the Applicant had subscribed to the equity share capital of the

Applicant and also advanced loans. The Applicant based on the decision of its BOD,

invested and acquired shares of ‘AB’ International, ‘PTN’ and ‘AB’ Philippines.

6.5 The contention of the Revenue that Applicant was created to take advantage

of the India Mauritius DTAC is also misplaced. The Applicant has its business

objective of being an investment holding company, and had invested in other

companies as well, namely ‘PTN’ and ‘AB’ Philippines. Hence, the Revenue’s

argument that the investment was with an eye on the India – Mauritius DTAC is not

correct. The following sequence of events would further support the contention of

the Applicant:


Particulars Date reference

Date of incorporation 7 October 2008

Financial Services Approval for Category 1 Global Business

License

9 October 2008

Date of Foreign Investment Promotion Board (‘FIPB’) approval 22 October 2003

Stock Purchase Agreement (‘SPA’) for acquisition of 9,900

shares

25 November 2008

Subsequent investment – 1 10 December 2008

Subsequent investment – 2 14 May 2009

Subsequent investment – 3 6 November 2009

Subsequent investment -4 (by ‘AB’ Singapore post

restructuring)

27 June 2013

Subsequent investment – 5 (by ‘AB’ Singapore post

restructuring)

31 January 2014

Subsequent investment – 6 (by ‘AB’ Singapore post

restructuring)

29 July 2015

The Applicant held the shares of ‘AB’ International directly for a period3+ years and

indirectly through its Group company for a period of 4+ years, ie. total holding of 7+

years. Considering this, it is clear that the intention of the Applicant was to hold the

shares for a long term with an objective of earning long term capital appreciation and

not with an objective of availing benefits of the India – Mauritius DTAC.

6.6 The Applicant submits that pursuant to transfer of shares of ‘AB’

International to ‘AB’ Singapore, the Applicant became the shareholder of ‘AB’

Singapore and not of the ‘C’ Group. Accordingly, the Applicant continued to hold

shares in ‘AB’ International indirectly (through ‘AB’ Singapore) post the subject

transaction and no benefit was passed onto the ‘C’ Group as a result of the said

transaction.

Hence, the shares held by the Applicant were in its own name – legally and

beneficially and not as a benami or name holder of ‘C’ Group, as alleged by the

Revenue.


6.7 It is submitted that the reliance placed by the Revenue on the decision of the

Hon’ble High Court in the case of Aditya Birla to contend that the beneficial owner of

shares of ‘AB’ International is the ‘C’ Group and not the Applicant is factually

distinguishable. Relying on the Hon’ble AAR ruling in case of Shinsei Investment

(supra), the Applicant submits that it had acquired the shares of ‘AB’ International

and ‘C’ Group was not even a party to the SPA, hence the ruling of the Bombay

High Court in the case of Aditya Birla shall not apply to the Applicant.

6.8 The Applicant places reliance on Circular 789 dated April 14, 2000 issued by

the CBDT, as also the clarification issued by the Finance Ministry vide clarification

regarding TRC on March 1, 2013.

6.9 With regard to Revenue’s allegation that the Applicant is a benami

shareholder / a name lender and the actual owner of shares of ‘AB’ International is

‘’C” Group, it has relied on the ruling of Hon’ble Supreme Court in the case of Jaya

Dayal Poddar (1974 AIR 171), which laid down key principles and basis on which a

transaction could be held as benami.

6.10 In support of its contentions, support has also been taken from the following

cases:

6.10.1 Vodafone International BV (368 ITR 1) (SC); wherein it was held that:

“Setting up of a WOS Mauritius subsidiary/SPV by principal/genuine substantial long-

term FDI in India from/through Mauritius, pursuant to the DTAC and circular no. 789

can never be considered to be set up for tax evasion.”

6.10.2 Support has also been taken from other cases, to bolster its arguments

against Revenue, such as: Sanofi Pasteur Holding SA(W.P. 14212 of 2010, 339 and

3358 of 2012) (AP), Vodafone InternationalBv(341 ITR 1), E*Trade Mauritius Ltd.

(AAR No. 826 of 2009), Ardex Investments Mauritius Ltd. (AAR /866 /2010), AAR

ruling as well as the decision of the Bombay High Court in the case of JSH

Mauritius,(W.P. 3070 of 2016); and Dow Agri Sciences (AAR).


6.11 As regards Revenue’s allegation that the Applicantwasa name lender

or benami of ‘C’ Group, it is submitted that the investments have been made out of

its own resources, as reflected in its financial statements. Also, as per the

Companies Act, the name of the shareholder that appears in the shareholders

registers is the lawful owner of the shares. In case the shares are held on behalf of

someone – nominee shareholder, then the nominee shareholder is required to report

the beneficial ownership of the shares to the company. In the present context, the

Applicant submits that it was the registered and beneficial owner of the shares as per

the shareholders register. The Applicant places reliance on the Hon’ble Supreme

Court ruling in case of Howrah Trading Co Ltd v CIT [1959] 36 ITR 215 (SC).

6.12 Regarding the allegation that the decision making of the Applicant is in the

hands of the ‘C’ Group’, it is submitted that the Applicant, through its Board of

Directors takes all its decisions for its day to day operations, strategic decisions, etc.,

as evidenced from its board minutes, whereby the Board of Directors of the Applicant

meet in Mauritius to take all the decisions of the Company. In fact, the acquisition of

shares of ‘AB’ International was done by the Applicant after due consideration by

its Board of Directors. Subsequently also the Board of Directors has from time to

time reviewed their investments, made decisions with respect to further investment

and disinvestment, independently from its parent company, the ‘C’ Group.

6.13 In addition to the above, the Applicant submits that it satisfies all the

conditions laid down by the Supreme Court in case of Jaya Dayal Poddar (1974 AIR

171), which is being relied upon by the Revenue and states that it is the beneficial

owner of the shares. Further, the Applicant has factually distinguished the ruling of

Aditya Birla Nuvo Ltd [2011] 12 taxmann.com 141 (Bom), as the shares are

registered in its own name, and not any “Permitted Transferee”. Further, it is

submitted that the AAR in case of Shinsei Investment I Ltd (AAR 1017 of 2010) has

also examined the Aditya Birla Nuvo Ltd (supra) facts in case of an

investmentthrough Mauritius, and has held:

7 …….that shares have been subscribed by the Applicant in its own name and

the bank statements filed show that the Applicant has paid for such subscription of

shares. In these circumstances the Applicant cannot be termed as a ‘permitted


transferee’ as was the case in Aditya Birla Nuvo...…….. .Once it is established that

the Applicant has made investment on its own and Shinsei Bank Ltd was party to

SPA only in its capacity as sponsor and in order to comply with mutual fund

regulations, there is no bar on application of Article 13(4) of the India-Mauritius

DTAC in this case…...”

6.14 The Applicant submits that the customary principle of “pactasuntservanda”

should be applied, and the India – Mauritius DTAC shall be applied in good faith and

also refers to the ruling of the Hon’ble Punjab and Haryana High Court in case of

Serco BPO (supra) which has held that “……..30……This is a convention/treaty

entered into between two sovereign states. A refusal to accept the validity of a

certificate issued by the contracting states would be contrary to the convention and

constitute an erosion of the faith and trust reposed by the contracting states in each

other…..”

Considering the above submissions and factual matrix in the case of the Applicant, it

is submitted that the allegation of the Revenue that Applicant is name lender/ benami

of ‘C’ Group is untenable and needs to be dismissed.

6.15 The Applicant states that the transaction has to be looked at holistically in

view of the decision of the Hon’ble Supreme Court in case of Vodafone International

BV which lays down various factors which must be kept in mind in taking a holistic

view.

6.16 The Applicant submits that the reason for opting to select Mauritius as a base

for investment holding company is very well documented in the business plan

submitted to the FSC in Mauritius.

6.17 Regarding Revenue’s alternative plea in invoking section 93, the Applicant

submits that this is an anti-abuse provision and takes its color from the erstwhile

section 44D of the Income-tax Act, 1922. It refers to the Law Commission Report of

September 26, 1958, which says that the provisions of section 44D of the Income tax

Act, 1922 were intended to be applied in the hands of the residents, and that the

reference to first mentioned person appearing even in the Income tax Act, 1922 was


intended to effectively refer to persons who are residents in India. To support the

above inference, the Applicant relies on the Hon’ble Supreme Court ruling in case of

M.C.T.M. Chidambaram Chettair&Ors v. CIT (60 ITR 28), to say that this provision

was applicable only to residents.

617.1 It is submitted that the objective behind introducing section 93 is to tax income

arising out of transaction which residents may undertake to externalize the assets,

while continuing to enjoy the rights over such income or assets. In its case there is

no externalizing of asset in the form of capital/loan nor the Applicant or ‘C’ Group

are residents of India. Hence, the provisions of section 93 of the Act are not

applicable to the subject transaction in Applicant’s case. Otherwise also, Sec 93(3),

exempts bonafide transactions.

6.17.2 Without prejudice to the above, it is submitted that the provisions of India –

Mauritius DTAC cannot be overridden by the provisions of the Act. The provision of

section 90(2) of the Act is very clear that the provisions of the DTAC shall prevail

over the provisions of the Act (including section 93), to the extent such provisions are

beneficial for the assessee. Further, neither section 90 nor section 93 of the Act

provide for a DTAC override vis-à-vis section 93 of the Act. If the Parliament in its

wisdom chooses to provide for an override of DTAC provisions by the domestic tax

laws, it would make such a provision, like GAAR, which specifically provides for

DTAC override.

7. We have considered the questions posed to us by the Applicant, the details,

documents and Financial Statements submitted, and the objections raised by the

Revenue, as also the response of the Applicant company, as set out in the preceding

paragraphs.

7.1 It is not in dispute that the Applicant is a tax resident of Mauritius and would

ordinarily be covered under the India – Mauritius DTAC, and also that it was not a fly

by night operator. It was incorporated in Mauritius on 7 October 2008 and possesses

a valid Tax Residency Certificate granted by the Mauritius tax authorities, and holds

a Category 1 Global Business License. Approval from the RBI, in the form of FIRC

has been obtained. It is mainly part of the ‘C’ Equity Portfolio II LP and ‘C’ Affiliates


Fund LP (‘’C” Group), which cumulatively hold 87.56% shares of the Applicant. One

of its Directors, Mr “S” is the principal investor and MD of the ‘C’ Group, as also

Director in other group companies.

7.2 It was set up to act as in investment holding company, to invest in ‘S’ sector in

India and other Asian markets. It accordingly made investment in ‘AB’ International

on different dates, between 2008 and 2015, and finally divested its investment in

‘AB’ International, in favour of ‘AB’ Singapore, a group company. It is also clear

that both the setting up of the Applicant company, as also its investments were done

through proper banking channels, as seen from the copies of its bank accounts in

Mauritius, copies of which have been furnished. It is seen in the financial statements

that the amounts were received as investment from the holding company and

subsequently invested in ‘AB’ International. Hence the flow of actual funds for initial

investment, as also subsequent ones stand explained and accounted for. ‘AB’

International recognized the Applicant as the shareholder, as also the members’

register maintained as per the Companies Act, 1956.Nothing unusual or peculiar is

noticed, and these facts are not disputed by Revenue as well.

7.3 The transfer of shares from ‘AB’ International to ‘AB’ Singapore, a group

company, in 2012 was done along with shares of other Group companies also, as

part of a re-organisation, which indicates a long term business and commercial

purpose. In fact, later ‘AB’ Singapore made further investments in ‘AB’

International in 2013, showing a long term business perspective of the holding

company, as also ongoing business of investment, spread over almost 7 years, and

not short term or overnight transactions for avoiding tax. We find nothing that invites

any curious investigation on this issue also.

7.4 Before proceeding, a couple of things must be mentioned to put these issues

in the right perspective. Firstly, as held in Sanofi Pasteur Holding SA(W.P. 14212 of

2010, 3339 and 3358 of 2012) (AP):

“…….creating wholly owned subsidiaries or joint ventures either for domestic or

overseas investment is a well-established business/commercial organizational


protocol; and investment is of itself a legitimate, established and globally well

recognized business/commercial avocation.”

7.4.1 Secondly, it must be understood that it would be inconceivable that the ‘C’

Group , being the Holding Company, would not be involved in any important

decision making, be it the funding of the subsidiary company, deciding its objectives,

its target markets, and making investments and disinvestments, etc. It can be no

one’s case that the holding company would have no role at all to play in the affairs of

its subsidiary, whose activities have to be necessarily in consonance with the overall

goals of the holding company. Though, of course, and this must be emphasised, it is

not permissible to it to participate in its affairs in a manner that renders the subsidiary

a puppet.

7.5 Viewed in the above context, setting up a subsidiary for purposes of

investment cannot be questioned. Further, as regards role of the holding company,

and its control and management, it is seen that the principal investor and MD in the

holding company, Mr. ‘S’ was also a Director in the Applicant company, as also in

many other companies of the group. Being in investment business and having

identified the ‘S’ sector in India, and elsewhere, as an investment destination, it is

only logical that he would have a persuasive influence on the investment decisions of

the company, irrespective of where he was located. His presence may be required at

all or any of these places. His travel details show that he had made as many as 11

trips to India and Mauritius, where the investee company and the Applicant were

located, between the period September 2005 to October 2009, when important

decisions were taken. So, it cannot be said that he had no presence in Mauritius,

where the Applicant company was registered and located, or in India, where the

investee company was located. Yet, with immense technological advancement in the

present world of communication, it is unrealistic to expect all Directors, who are also

Directors in many other companies, to be physically present in each and every

meeting, and communication is validly done through electronic audio and video

devices. In the totality of circumstances, Mr. ‘S’ and the other Directors’ movements

in and out of Mauritius at different times, alone cannot lead to the conclusion that the


control and management of the company was not in Mauritius, or that it was with the

holding company.

7.5.1 As regards the role of the other Directors on the Board, as referred to by

Revenue, it is seen from the details furnished that Ms. PS had a LLB (Hons.) degree

from Univ. of London; Mr ‘AR’ was a Certified Chartered Accountant; Ms. ‘KPR’ was

an MSc in Finance and a Fellow member of the Assocn. of Certified Accountants.

Thus, they were well qualified to engage in meaningful discussions with reference to

the Applicant’s business, and it has only been assumed by Revenue that they had

no role in the decision-making process. In fact, the Resolutions of the Board indicate

the decisions taken by the Board with regard to the investments. For example,

written resolution dated 17 November 2008, regarding approval to the investment in

‘AB’ International amounting to USD 1,800,000; of 14 May 2009 regarding

additional investment of USD 272,400; of 12 July 2011regarding establishment of a

subsidiary and investment in Singapore; and one of 21 February 2012 regarding

reorganization of the group, were signed by a Director, Ms. ‘KPR’. These indicate

that the meetings were held at the registered office of the Applicant, as mentioned

therein, where these Directors are located. The Share Purchase Agreements with

subsequent sellers of shares, Ms. LG and Dr. BN duly signed by the sellers and a

Director of the Applicant company, Ms. PS. When a Director signs an agreement or

a resolution, it has to be assumed that he is in the know of things and represents a

company decision regarding purchase of shares, unless something is amiss in the

document itself or is done on hindsight, is backdated or is deduced from some

unwritten clauses, as was pointed out by Revenue in the case of ‘AB’ Mauritius

dealt with in AAR 1128 of 2011, and in which we have taken an adverse view.

7.5.2 Regarding the office / place of management, Mauritian tax authorities have

certified that the place of business of the Applicant is at the given address in

Mauritius, the returns filed show this address and Board meetings also take place at

this address, as mentioned in the Resolutions. Further, in the case of Investment

companies, investment decisions do not require huge offices and staff. In this case,

the auxiliary services have been outsourced to International Management

(Mauritius), which provides all secretarial assistance. Revenue admits that for the

FYs 2009, 2010 and 2011, expenses under the head “Administrative expenses” have


been shown at USD 20,586, USD 21,796 and USD 27,661 respectively. Further,

“Legal and Professional fees” has been incurred to the extent of USD 42,450, USD

5,718 in the FYs 2009 and 2010 respectively. At the cost of repetition, it has to be

mentioned that this is not a manufacturing or trading company, requiring day to day

dealings with buyers and sellers, distributors, financers, marketing staff, logistics

etc., so as to have several accounts under which payments are received or paid.

7.6 In view of the foregoing factual position, and keeping the context of an

Investment holding company in mind, where its only business is of making

investments and gaining from capital appreciation, we are unable to draw any

adverse inference as to the Applicant’s independent status, its investment decisions

as also the control and management of its business.

7.7 When no adverse finding has been possible on the facts of the case, we are

inclined to accept the circulars, decisions and rulings cited by the Applicant, as also

its plea that it was not a benami, or set up for tax avoidance as a colourable device

and only for treaty shopping, which in any case is not taboo.

7.7.1 First and foremost, we consider Circular 789 dated April 14, 2000 issued by

the CBDT, which states as follows:

“It is hereby clarified that wherever a certificate of residence is issued by the

Mauritius authorities, such certificate will constitute sufficient evidence for accepting

the status of residence as well as beneficial ownership for applying the DTAC

accordingly”.

The above position has further been clarified by the Finance Ministry vide issuance

of a clarification regarding TRC on March 1, 2013.

When the intent and activities of the Applicant are found to be in order, we find that

this Circular is sufficient to support the case of the Applicant.

7.8 With regard to Revenue’s allegation that the Applicant is a benami

shareholder / a name lender and the actual owner of shares of ‘AB’ International is


the ‘C’ Group. Reference has been made to decision of the Hon’ble Supreme Court

in the case of Jaya Dayal Poddar (1974 AIR 171), which laid down key principles

and basis on which a transaction could be held as benami. These are: (i) the source

from which the money came; (ii) the nature and possession of the property after the

purchase; (iii) the motive in giving the transaction a benamicolour; (iv) the position

and relationship of the parties; (v) the custody of the title deeds; and (vi) the conduct

of the parties after the sale of the property. Of these, the source from which the

money came is considered the most important.

7.8.1 In the instant case, the money was invested by the Applicant through banking

channels in the initial as well as subsequent investments out of its own sources.

Since the Applicant is an independent legal entity, it is not material that the money

was received from the holding company, as held in several decisions, including

Vodafone, Ardex, E*trade, JSH Mauritius etc. The shares were held and registered

in its own name, both beneficially and legally; the motive was to invest in the ‘S’

sector in India and other Asian markets as disclosed to various regulatory

authorities; it was a subsidiary of the ‘C’ Group but acted independently; and it had

the custody of the share certificates which were dematerialized in 2012, being the

shareholder. Thus, it met all the requirements and no adverse conclusion is possible,

such as to hold that it was a benami of the holding company.

7.8.1 In Vodafone International Holdings BV (341 ITR 1),the Hon’ble Supreme

Court held that:

Every strategic foreign direct investment coming to India, as an investment

destination, should be seen in a holistic manner. While doing so, the Revenue/

Courts should keep in mind the following factors: the concept of participation in

investment; the duration of time during which the holding structure exits; the period

of business operations in India; the generation of taxable Revenues in India; the

timing of the exit; the continuity of business on such exit….

95 ………… No presumption can be drawn that the Union of India or the Tax

Department is unaware that the quantum of both FDI and FII do not originate from

Mauritius but from other global investors situate outside Mauritius…..


96….. on a subsequent sale/ transfer/disinvestment of shares by the Mauritius

company, after a reasonable time, the sale proceeds would be received by the

Mauritius company as the registered holder/ owner of such shares, such benefits

could be sent back to the foreign principal/ 100 per cent shareholder of Mauritius

company either by way of a declaration of special dividend by the Mauritius company

and/or by way of repayment of loans received by the Mauritius company from the

foreign principal/ shareholder for the purpose of making the investment….

97. We are, therefore, of the view that in the absence of LOB clause and the

presence of Circular No. 789 of 2000 and TRC, 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 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

loan received; or the real owner/beneficial owner of the shares was the foreign

principal company. Setting up of a WOS Mauritius subsidiary/ SPV by

principal/genuine substantial long-term FDI in India from/ through Mauritius, pursuant

to the DTAC and Circular No. 789 can never be considered to be set up for tax

evasion.”

On the facts of the instant case, the Applicant fulfills all the criterion laid out

above, and its investments in the Indian company cannot be questioned, when no

other peculiarity or illegality is noticed, especially with regard to the flow of actual

funds for investment in ‘AB’ International. It is the legal and beneficial owner of

shares and fully competent to transfer the same.


7.9 We also find that the Applicant’s attempt to take support from the cases of

E*Trade, Ardex, and JSH Mauritius was justified, in the facts of the instant case.

7.9.1 This Authority has held in the case of E*Trade Mauritius Ltd. (AAR No. 826 of

2009), that:

“10… In this fact situation, ex facie, it is difficult to assume that the capital gain

has not arisen in the hands of the Applicant, more so when according to the binding

pronouncement of the Supreme Court, the motive of tax avoidance is not relevant so

long as the act is done within the framework of law, the treaty shopping through

conduit companies is not against law and the lifting of corporate veil is not

permissible to deny the benefits of a tax treaty……..”

7.9.2 In the case of Ardex Investments Mauritius Ltd. (AAR /866 /2010), we held

that:

“6. It is true that the funds for acquisition of shares in the Indian company was

provided by the principal, a company incorporated in the United Kingdom. The

shares in the Indian company were first acquired in the year 2000. Subsequently

further shares were acquired in the years 2001, 2002 & 2009. These shares are

sought to be transferred by the Applicant company to another subsidiary of the

Group, incorporated in Germany.It is not clear how far the theory of beneficial

ownership could be invoked to come to a conclusion that the holder of the shares in

the Indian company in this case would be the company in UK……………..At worst it

might be an attempt to take an advantage of a Treaty. But, that by itself cannot be

viewed or characterized as objectionable treaty-shopping………. . The decision in

Azadi Bachao Andolan has even gone to the extent of holding that treaty-shopping

itself is not taboo…..”

7.9.3 In JSH Mauritius (supra) we held that:

“16. We have examined the rulings and we find in all the rulings a heavy

reliance is placed on the aforementioned ruling of the Supreme Court in Azadi

Bachao Andolan. We are in complete agreement with the above rulings.

17. ……….We are quite convinced that the Applicant is not a “fly by night” or “shell


company”. We therefore, answer the first question in favor of the assesse and

against the Revenue.”

This Ruling was upheld by the Bombay High Court, in W.P. 3070 of 2016, wherein it

was held that the AAR on considering the application and the documents and the

facts on record had conclusively held that the transaction is not designed for

avoidance of income tax.

7.9.4 The case in hand is similar and calls for a similar treatment, as the Applicant

is the legal and beneficial owner of the shares that have been lawfully and

accounting wise correctly invested in ‘AB’ International, as per legitimate and

independent decisions of its Board of Directors.

7.10 Revenue has referred to the cases of Azadi Bachao Andolan (263 ITR 706),

Vodafone case (341 ITR 1), and to Adtya Birla Nuvo (342 ITR 308). However, these

are not applicable on the facts of this case, which are clearly distinguishable and do

not portray the entire transaction as a colourable device, or place the Applicant in the

category of an exception, or even that it had not acted independently. As mentioned

above, the applicant was acting as an independent company, taking its own

decisions, had made investments out of its own funds through banking channels,

signed proper agreements for acquisition of shares, and doing business over a

considerable period of time, had its business objective of being an investment

holding company, and had invested in other companies as well, namely ‘PTN’ and

‘AB’ Philippines on the lines of many of its group companies in the ‘S’ sector in India

and other countries in Asia. Hence, the Revenue’s argument that the investment

was with an eye on the India – Mauritius Treaty only, is unacceptable, even though

this was itself not taboo.

7.11 In conclusion, on this issue, we have to say that unless there are

extraordinary and exceptional circumstances, as we noticed in the case of ‘AB’

Mauritius, and as dealt with in AAR 1128 of 2011, we would not like to interfere with

the benefits available to any applicant, under a DTAC between two sovereign states.

Hence, in the instant case, and on the facts discussed above, the benefit under the

India- Mauritius DTAC shall be available to the Applicant, in the spirit of Circular no.


789, and on the principle Pacta Sunt Servanda, that the treaty should be honoured in

good faith.

7.12 We have perused the Revenue’s reference to the provisions on tax avoidance

contained in section 93 of the Act, and the Applicant’s response to the same.

Considering the fact that we have ruled that the investments made by the Applicant

in ‘AB’ International were not for tax avoidance, and suffered from no such infirmity

as would take away the benefit of the India - Mauritius DTAC, this issue of section 93

becomes academic, in fact inapplicable to the facts of the case. We do not,

therefore, consider it necessary to deal with the same, especially as that is not one

of the questions posed to us by the Applicant.

8. Regarding question no. III on the applicability of section 195, (refer para 4.3)

i.e. whether tax has to be withheld on the gains arising from the sale of shares, it has

been held in GE Technology Centre P. Ltd. v. CIT [327 ITR 456(SC)] by the Hon’ble

Supreme Court that in cases where there is no chargeability to tax under the

provisions of the Act, as per expressions used in the section itself (unlike section 92),

there will be no obligation to withhold tax. Respectfully following that decision, we are

of the view that there is no obligation on the Applicant to withhold tax in this case, as

we have held that the capital gains arising in the hands of the Applicant was not

chargeable to tax in view of paragraph 4 of Article 13 of the India – Mauritius DTAC.

9. In respect of Question IV, against the Applicant’s contention (refer para 4.4)

that transfer pricing provisions would not apply, the Revenue submits that Chapter X

of the Act does not contain any such requirement of taxability of income. As per

section 92, any income arising from an international transaction has to be computed

having regard to arm’s-length price, if the same is between two or more ‘associated

enterprises’. Hence this transaction of sale of shares in the Indian company should

be subjected to and benchmarked as per the transfer pricing provisions contained in

Chapter X of the Act. Reference has been made to our Ruling in the case of

Castleton Investments Limited (AAR 999 of 2010).


9.1 We have considered the matter. In a detailed finding on the issue, in the case

of Castleton Investments Limited (AAR 999 of 2010), it was ruled by this Authority

that:

“the applicability of section 92 does not depend on the chargeability under the Act.

Literally in this case, the capital gains are chargeable to tax under the Act. They

escape only in view of paragraph 4 of Article 13 of the DTAC and the ratio of the

decision in Azadi Bachao Andolan on the applicability of the DTAC even when there

is actually no double taxation”.

In coming to this conclusion the earlier Rulings of this Authority in M/s. Praxair

Pacific Limited (326 ITR 276), Vanenburg Group BV (289 ITR 464), and Dana

Corporation (AAR 788 of 2008) were also considered and not followed.

9.2 We are in agreement with the view in the case of Castleton. As against the

position in section 195 of the Act, there is no such requirement in section 92 that the

transaction should result in income chargeable to tax under the Act for TP provisions

to get attracted. Hence, the transaction in the instant case of sale of shares in ‘AB’

International will have to be benchmarked as per the transfer pricing provisions

contained in Chapter X of the Act.

10. In respect of Question V, with regard to applicability of section 115JB of the

Act on the subject transaction, the Applicant as well Revenue agree that the

provisions of the said section shall not be applicable to foreign companies, as per the

retrospective amendment to section 115JB by Finance Act, 2016, and the

clarification issued by the CBDT dated 24 September 2015.This being so, we have

no reason to disagree.

11. In conclusion, the questions referred to us for our Ruling are answered as

under:

11.1 Questions I and II: Yes, the Applicant would be entitled to the benefits of the

Agreement between the Government of Mauritius and the Government of the

Republic of India for the avoidance of double taxation and prevention of fiscal


evasion; and the income and capital gains arising to the Applicant from the proposed

sale of shares in ‘AB’ International to a group company in Singapore would not be

liable to tax in India in terms of Article 13 of the said Treaty.

11.2 Question number III: No, there will be no obligation to withhold tax under

section 195 of the Act.

11.3 Question IV: Yes, the transfer pricing provisions contained in sections 92 to

92F of the Act would apply to the proposed transaction.

11.4 Question V: No, the provisions of section 115JB shall not be applicable.

The Ruling is accordingly given and pronounced on this day of 8th November,

2017.

Sd/- (Ashutosh Chandra) Member (Revenue)

Sd/- (R.S. Shukla)

In-charge Chairman

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