Indostar Capital v. Asst. Commissioner Of Income Tax,(International Taxation) 2(2)(1) & Ors

IN THE HIGH COURT OF JUDICATURE AT BOMBAYO.O.C.J. WRIT PETITION NO. 3296 OF 2018 Indostar Capital..Petitioner Versus Asst. Commissioner of Income Tax,(International Taxation) 2(2)(1) & Ors. ..Respondents ................... Mr. Jehangir Mistri, Sr. Counsel a/w Mr. Sameer Dalal for thePetitioner Mr. Jehangir Mistri, Sr. Counsel a/w Mr. Sameer Dalal for thePetitioner Mr. Charanjeet Chanderpal a/w Ms. Shista Hadi for RespondentNos. 1 and 2Mr. Charanjeet Chanderpal a/w Ms. Shista Hadi for RespondentNos. 1 and 2 Ms. Aasifa Khan for Respondent No. 4Ms. Aasifa Khan for Respondent No. 4 ................... CORAM : AKIL KURESHI & SARANG V. KOTWAL, JJ. DATE : APRIL 26, 2019. ORAL JUDGMENT(Per Akil Kureshi, J.) 1.This petition is filed by one Indostar Capita, a Mauritiusbased company to challenge an order dated 20.6.2018passed by respondent No. 1 - Assistant Commissioner ofIncome Tax under Section 197 of the Income Tax Act, 1961("the Act" for short). By the said order, he rejected theapplication filed by the petitioner. 2. We may record facts as briefly as possible. 2.1The petitioner was incorporated as a privatelimited company in October 2010 under the laws of Republicof Mauritius. The petitioner holds a Category 1 GlobalBusiness Licence issued by the Financial ServicesCommission of Mauritius to act as an investment holdingcompany. The petitioner has also been issued the certificateas a "company resident in Mauritius for income tax purposes"which is popularly referred to as a Tax Residency Certificate("TRC" for short) by Mauritius Revenue Authority. 2.2The case of the petitioner is that it was formedwith an intent to promote an Indian Non-banking FinancialCompany named Indostar Capital Finance Limited ("ICFL" forshort). In order to acquire shares of ICFL, the petitionerraised capital from various groups of internationalinstitutional investors located across the world. In a span ofover four years between 31.3.2011 to 17.8.2015, thepetitioner acquired 7.13 Crores (rounded off) shares of ICFLwhich corresponds to 97.30% of its share capital. Thesetransactions were duly reported to the Reserve Bank of India. 2.3To appreciate the corporate structure which wasconstituted in order to enable the petitioner to makeinvestment by acquiring shares in IFCL, we may reproducethe precise chain of holding of shares of different companiesinvolved in this structure. 2.4The petitioner desired to ofÒoad some 1.85 Crores(rounded of) of its shares of IFCL through IPO. The petitionerapplied to the Assistant Commissioner of Income Tax underletter dated 14.5.2018 for grant of the certificate underSection 197 of the Act. In such application, the petitionerplaced before the said authority the corporate structure and 2.3To appreciate the corporate structure which wasconstituted in order to enable the petitioner to makeinvestment by acquiring shares in IFCL, we may reproducethe precise chain of holding of shares of different companiesinvolved in this structure. 2.4The petitioner desired to ofÒoad some 1.85 Crores(rounded of) of its shares of IFCL through IPO. The petitionerapplied to the Assistant Commissioner of Income Tax underletter dated 14.5.2018 for grant of the certificate underSection 197 of the Act. In such application, the petitionerplaced before the said authority the corporate structure and the source of funds for acquisition of the shares. Theassessee pointed out that the assessee expected to receiveRs. 570/- to Rs. 572/- per share from sale of such sharesthrough the IPO and that upon sale of 1.85 Crores of shares,the petitioner expected to receive a total sale considerationof Rs. 1058.68 crores. The petitioner made detailedaverments why according to it, the capital gain arising out ofsale of such shares is not taxable in the hands of thepetitioner. The petitioner referred to the Double TaxationAvoidance Agreement ("DTAA" for short) between India andMauritius to argue that as per the provisions contained in thesaid treaty, the income out of sale of shares cannot be taxedin the hands of the assessee in India. The assessee pointedout that in absence of the certificate issued by the Authorityunder Section 197 of the Act, the payer would be underobligation to deduct tax at source in terms of Section 195 ofthe Act while remitting the proceeds in to the assessee. Theassessee's main contention, therefore, was that in absenceof any tax liability in India, deduction of tax at source wouldnot be permissible and therefore, the certificate as requiredmay be granted. Along with this application, the petitioner produced several documents including a copy of TRC. 2.5 The Assistant Commissioner carried out detailedinquiry in relation to such application of the petitioner. Hecalled upon the petitioner to provide several documentswhich the petitioner did. At the end of the inquiry, the saidAuthority passed the impugned order dated 13.6.2018. Herejected the application of the petitioner. His reasons forrejection can be summarized as under:- i. Apart from making investment and advancing loan toEverstone Capital Limited, Mauritius, the petitioner has notmade any business transaction or engaged itself in othercommercial activities. Only revenue gained by the assessee isthrough interest income;Everstone Capital Limited, Mauritius, the petitioner has notmade any business transaction or engaged itself in othercommercial activities. Only revenue gained by the assessee isthrough interest income; ii. The assessee does not maintain any establishment or hadincurred any administrative expenses at Mauritius. It was notclear where the assessee would hold the director's functions.The assessee had no employees at Mauritius;incurred any administrative expenses at Mauritius. It was notclear where the assessee would hold the director's functions.The assessee had no employees at Mauritius; ii. The assessee does not maintain any establishment or hadincurred any administrative expenses at Mauritius. It was notclear where the assessee would hold the director's functions.The assessee had no employees at Mauritius;incurred any administrative expenses at Mauritius. It was notclear where the assessee would hold the director's functions.The assessee had no employees at Mauritius; iii.The assessee is a majority shareholder of ICF Limited. Theshareholding pattern of the petitioner, in turn, shows that theshares are held in different proportions by some eightcompanies in equity funds. These companies have beenconstituted but they do not have office or employees. Theassessee had failed to produced TRC of these companies.The assessee failed to furnish details of the ultimatebeneficiaries of the assets being transferred;shareholding pattern of the petitioner, in turn, shows that theshares are held in different proportions by some eightcompanies in equity funds. These companies have beenconstituted but they do not have office or employees. Theassessee had failed to produced TRC of these companies.The assessee failed to furnish details of the ultimatebeneficiaries of the assets being transferred; iv. As a culmination of these factors, he was of the opinion thatpresent was a case where the company had given the colourof genuineness of the transactions but it appears that thetransactions were fake.The sum and substance of theAssistant Commissioner rejecting the application of thepetitioner for certificate under Section 197 of the Act was thatthe entire transaction was not genuine. In his opinion, theentire tax structure was crated to avoid legitimate tax liability. present was a case where the company had given the colourof genuineness of the transactions but it appears that thetransactions were fake.The sum and substance of theAssistant Commissioner rejecting the application of thepetitioner for certificate under Section 197 of the Act was thatthe entire transaction was not genuine. In his opinion, theentire tax structure was crated to avoid legitimate tax liability. 2.6On 13.6.2018, the Assessing OfÏcer passed theconsequential order authorizing the payer of the saleproceeds of the shares to make the payment after deductingtax @ 10% on the entire amount of receipt. On 20.6.2018,he passed further order asking the payee to deduct incometax @ 10% of the actual gain. He thereafter passed anotherorder on 20.6.2018 directing the payer to deduct tax @7.73% on the entire amount and release the rest in favour ofthe payee. It is not necessary to go into the details of suchconsequential orders. SufÏce it to record, if the order passedby the ofÏcer under Section 197 of the Act stands, his finalconsequential order dated 20.6.2018 would beunexceptionable. 3. In the background of the said facts, learnedcounsel Mr. Mistri for the petitioner raised following contentions:- i. The petitioner being a Mauritius based company, in terms ofDTAA between India and Mauritius, it had no tax liability oncapital gain arising out of sale of shares in question. Once thisis established, there cannot be any direction for deduction oftax at source while remitting the sale proceeds of such shares.The Authority, therefore, committed an error in refusing thecertificate under Section 197 of the Act;DTAA between India and Mauritius, it had no tax liability oncapital gain arising out of sale of shares in question. Once thisis established, there cannot be any direction for deduction oftax at source while remitting the sale proceeds of such shares.The Authority, therefore, committed an error in refusing thecertificate under Section 197 of the Act; contentions:- i. The petitioner being a Mauritius based company, in terms ofDTAA between India and Mauritius, it had no tax liability oncapital gain arising out of sale of shares in question. Once thisis established, there cannot be any direction for deduction oftax at source while remitting the sale proceeds of such shares.The Authority, therefore, committed an error in refusing thecertificate under Section 197 of the Act;DTAA between India and Mauritius, it had no tax liability oncapital gain arising out of sale of shares in question. Once thisis established, there cannot be any direction for deduction oftax at source while remitting the sale proceeds of such shares.The Authority, therefore, committed an error in refusing thecertificate under Section 197 of the Act; ii. The petitioner is a company incorporated under the laws ofMauritius. It enjoys TRC issued by the Mauritian Authority.The Indian Revenue Authorities cannot dispute this TRC. Aslong as this certificate is in existence, the Income TaxAuthorities cannot go beyond the certificate and deny the taxresidency status of the petitioner at Mauritius. This would becontrary to the settled principles of law as well as circularsissued by Central Board of Direct Taxes ("CBDT" for short).Learned counsel submitted that CBDT circulars are binding onthe Revenue Authorities even if the same may not be strictly inconsonance with the statutory provisions contained in the Act;Mauritius. It enjoys TRC issued by the Mauritian Authority.The Indian Revenue Authorities cannot dispute this TRC. Aslong as this certificate is in existence, the Income TaxAuthorities cannot go beyond the certificate and deny the taxresidency status of the petitioner at Mauritius. This would becontrary to the settled principles of law as well as circularsissued by Central Board of Direct Taxes ("CBDT" for short).Learned counsel submitted that CBDT circulars are binding onthe Revenue Authorities even if the same may not be strictly inconsonance with the statutory provisions contained in the Act; iii. The Assessing Officer carried out a detail inquiry which is notenvisaged at the stage of deciding an application for issuanceof certificate under Section 197 of the Act. The assessmentcan always be carried out with full investigation. However, atthe stage of deciding whether the certificate under Section 197of the Act should be issued, the Assessing Officer cannotconduct a full fledged investigation;envisaged at the stage of deciding an application for issuanceof certificate under Section 197 of the Act. The assessmentcan always be carried out with full investigation. However, atthe stage of deciding whether the certificate under Section 197of the Act should be issued, the Assessing Officer cannotconduct a full fledged investigation; iv. Learned counsel submitted that the prima facie finding of thetransactions being not genuine is not supported by anymaterial on record. The petitioner company was constitutedfor the purpose of making investment in India. The petitionerreceived funds from various international financial institutions.transactions being not genuine is not supported by anymaterial on record. The petitioner company was constitutedfor the purpose of making investment in India. The petitionerreceived funds from various international financial institutions. Through, ICFL, the petitioner invested its such funds in Indianmarket. When the time was ripe, the petitioner decided toencash some of its gain. All the transactions were reported tothe respective statutory authorities. There is no evidence toestablish the allegation of sham or bogus transaction; Through, ICFL, the petitioner invested its such funds in Indianmarket. When the time was ripe, the petitioner decided toencash some of its gain. All the transactions were reported tothe respective statutory authorities. There is no evidence toestablish the allegation of sham or bogus transaction; v. Learned counsel submitted that the assessment in the presentcase is yet to be made. The petitioner would file the return ofincome and participate in the proceedings. In order to protectthe interest of the Revenue, the petitioner may offer certainsecurity till the assessment order is passed. However, towithhold a substantial portion of the petitioner's proceeds outof sale of shares at this stage till the assessment is completed,which would consume considerable time, would be whollyunjust; vi.Learned counsel referred to certain documents and reliedupon certain decisions reference to which would be made atan appropriate stage.upon certain decisions reference to which would be made atan appropriate stage. 4.On the other hand, learned counsel Mr. Chanderpal for the Department vehemently opposed thepetition raising following contentions which we are recordingin a summary format from the written arguments which hepresented before us today. i. Once it is prima facie shown that the transaction is notgenuine, the petitioner must participate in the assessmentproceedings and only if the petitioner succeeds in suchassessment, the amount deducted by way of tax at source canbe refunded. At the stage of passing the order under Section197 of the Act, there was sufficient material to enable thegenuine, the petitioner must participate in the assessmentproceedings and only if the petitioner succeeds in suchassessment, the amount deducted by way of tax at source canbe refunded. At the stage of passing the order under Section197 of the Act, there was sufficient material to enable the Assessing Officer to reject the application; ii. The petitioner is not a genuine Mauritius based company andas recorded by the Assessing Officer in the impugned order,various factors emerging from the record would establish thatthe entire transaction is non-genuine; iii. The Assessing Officer has applied the tests laid down by theSupreme Court in case of Vodafone International HoldingsB.V. Vs. Union of India[1] to come to such conclusion which isfully supported by the evidence on record; iv.The petitioner also has an alternate remedy against theimpugned order which can be challenged before theCommissioner under Section 264 of the Act. In thealternative, the petitioner can also file return of income andclaim refund if it succeeds in establishing that it has no taxliability. In the context of availability of the alternate efficaciousremedy, reliance was placed on the decision of the SupremeCourt in case of CIT Vs. Chhabil Dass Agarwal[2]; v. We must record that the learned counsel for the respondentshad orally argued that after the decision of the Supreme Courtin the case of Vodafone International Holdings (supra),Explanation 5 below sub-section (1) to Section 9 of the Actwas inserted with retrospective effect from inception by virtueof which, the petitioner would be liable to pay tax on thereceipts in question. However, we may record that this wasneither raised in the written arguments presented before usand more importantly not a ground pressed in service by theAssessing Officer in the impugned order. Learned counsel forthe respondents has also referred to certain decisionsreference to which would me made at appropriate stage. 1[2012] 341 ITR 12[2013] 357 ITR 3572[2013] 357 ITR 357 v. We must record that the learned counsel for the respondentshad orally argued that after the decision of the Supreme Courtin the case of Vodafone International Holdings (supra),Explanation 5 below sub-section (1) to Section 9 of the Actwas inserted with retrospective effect from inception by virtueof which, the petitioner would be liable to pay tax on thereceipts in question. However, we may record that this wasneither raised in the written arguments presented before usand more importantly not a ground pressed in service by theAssessing Officer in the impugned order. Learned counsel forthe respondents has also referred to certain decisionsreference to which would me made at appropriate stage. 1[2012] 341 ITR 12[2013] 357 ITR 3572[2013] 357 ITR 357 5.At the outset, we make it clear that our entireconsideration in the present judgment would be revolvingaround the correctness of the order passed by the AssessingOfÏcer under Section 197 of the Act. Necessarily, we willhave to touch on the question of taxablity of the receipts. Allobservations made in this judgment, therefore, would beprima facie in nature and would prejudice neither thepetitioner nor the Department in the assessment which is yetto be done. 6.Sub-section (1) of Section 195 of the Act essentiallyprovides that any person responsible for paying to a non-resident any sum chargeable under the provisions of theAct, would at the time of credit of such income to theaccount of the payee or at the time of payment thereof incash or by the issue of a cheque or draft or any other mode,whichever is earlier, deduct income tax thereon at the ratesin force. 7.Section 197 of the Act pertains to certificate fordeduction at lower rate. Sub-section (1) of Section 197 ofthe Act provides that subject to the rules made under sub- section (2A), where in the case of any income of any person,tax is required to be deducted at the time of credit, or as thecase may be, at the time of payment at the rates in forceunder the provisions including Section 195 and the AssessingOfÏcer is satisfied that the total income of the recipientjustifies the deduction of income tax at any lower rates or nodeduction of income tax, he shall, on an application made bythe assessee in this behalf, give to him such certificate asmay be appropriate. Sub-section (2) of Section 197 providesthat where any such certificate is given, the personresponsible for paying the income shall, until such certificateis cancelled, deduct income tax at the rates specified in suchcertificate or deduct no tax, as the case may be. 8.Section 201 of the Act pertains to consequences offailure to deduct or pay. As per sub-section (1) of Section201, a person who is required to deduct any sum inaccordance with the act but does not deduct the same ordoes not pay, or after so deducting fails to pay, the whole orany part of the tax, he would be deemed to be an assesseein default in respect of such tax. 8.Section 201 of the Act pertains to consequences offailure to deduct or pay. As per sub-section (1) of Section201, a person who is required to deduct any sum inaccordance with the act but does not deduct the same ordoes not pay, or after so deducting fails to pay, the whole orany part of the tax, he would be deemed to be an assesseein default in respect of such tax. 9. Combined reading of all the above noted provisionswould show that in absence of a certificate of deduction oftax at source at a lower rate or no deduction, a payer whoseliability to deduct tax at source under Section 195 of the Actis likely to arise incurs a risk of being declared a defaulter.However, as long as the certificate under Section 197 of theAct is in operation, in relation to the payments made by thepayer such unpleasant consequences would not arise.Certificate issued under Section 197 of the Act, thus,provides an immunity to the payer from being declared adeemed defaulter. However, as is well settled, theproceedings under Section 197 of the Act would not decidethe taxability of the certain receipts in the hands of thepayee. In other words, even if a certificate under the saidSection is issued, the Revenue can always in normalassessment bring the income to tax if otherwise permissiblein law. Conversely, even if there is no certificate either askedfor or granted, the assessee can always contest the taxabilityof the income in the assessment. 10. The question of deducting tax at source would ariseonly if the income in the hands of the payee is taxable. This well settled principle would need no reference to anyauthority. Nevertheless, we may note that the SupremeCourt in the case of GE India Technology Cen P Ltd Vs. CIT[3]. held and observed that mere remittances to non-resident does not give rise to the duty to deduct tax atsource under Section 195 of the Act. It was emphasized thatimportant expression in Section 195(1) of the Act which dealswith deduction of tax at source consists of the words,"chargeable under the provisions of the Act.". In case ofVodafone International (supra) also, the Supreme Court inthis context had held and observed as under:- "89. Section 195 casts an obligation on the payer to deduct tax atsource ("TAS" for short) from payments made to non-residents whichpayments are chargeable to tax. Such payment(s) must have anelement of income embedded in it which is chargeable to tax in India.If the sum paid or credited by the payer is not chargeable to tax thenno obligation to deduct the tax would arise." 11.With this background, we may address the question oftaxability of income in question. We may recall, theassessee, a Mauritius based company had made sizableinvestment in an Indian Non-banking Financial Company ofwhich the assessee was a majority stakeholder. At the 3[2010] 327 ITR 456 appropriate time, when the share prices were high, theassessee decided to book its profits in part. A portion of theshareholding was ofÒoaded. This gave rise to a net gain tothe tune of Rs. 800/- and odd Crores. Section 9 of the Actpertains to income deemed to accrue or arise in India. Sub-section (1) of Section 9 lists various receipts, incomes whichcannot be deemed to accrue or arise in India. Reference toall the clauses under sub-section (1) is not necessary. Wemay record that Explanation 5 was added below sub-section(1) by Finance Act 2012 but with retrospective effect from 1.4.1962. This explanation reads as under:- "Explanation 5.—For the removal of doubts, it is hereby clarified thatan asset or a capital asset being any share or interest in a companyor entity registered or incorporated outside India shall be deemed tobe and shall always be deemed to have been situated in India, if theshare or interest derives, directly or indirectly, its value substantiallyfrom the assets located in India." 1.4.1962. This explanation reads as under:- "Explanation 5.—For the removal of doubts, it is hereby clarified thatan asset or a capital asset being any share or interest in a companyor entity registered or incorporated outside India shall be deemed tobe and shall always be deemed to have been situated in India, if theshare or interest derives, directly or indirectly, its value substantiallyfrom the assets located in India." 12.Learned counsel for the Revenue was correct inpointing out that this explanation was added as a fallout ofthe judgment of the Supreme Court in case of VodafoneInternational (supra). We would take note of the discussionin the judgment of the Supreme Court later on. However, aswould be clear from the discussion to follow, this explanation would not further the case of the Revenue. As noted earlier,the Assessing OfÏcer in the impugned order has not evenbased his case on this explanation. 13.Chapter IX of the Act pertains to double taxation relief.Section 90 contained in the said chapter pertains toagreement with foreign countries or specified territories.Sub-section (1) of Section 90 provides that CentralGovernment may enter into an agreement with theGovernment of any country outside India or specifiedterritory outside India interalia for avoidance of doubletaxation of income under the said Act and under thecorresponding law in force of such country or territory and byNotification in OfÏcial Gazette make such provision, as maybe necessary for implementing the agreement. Sub-section(2) of Section 90 provides that where the CentralGovernment has entered into an agreement with theGovernment of any country outside India or specifiedterritory outside India under sub-section (1) for relief of taxor avoidance of double taxation, then in relation to theassessee to whom such agreement applies, the provisions ofthis Act shall apply to the extent they are more beneficial to that assessee. 14.In terms of powers contained in sub-section (1) ofSection 90 of the Act, the Government of India has enteredinto DTAA with Mauritius. Article 13 of the DTAA pertains tocapital gains. Paragraph 1 of Article 13 provides that gainsfrom the alienation of immovable property as defined inparagraph 2 of Article 6, may be taxed in the contractingState in which such property is situated. Paragraph 3A of thesame Article provides that gains from alienation of sharesacquired on or after 1.4.2017 in a company which is aresident of a contracting state may be taxed in that state.This was inserted in Article 13 by Notification dated10.8.2016 and would come into effect from 1.4.2017.Simultaneously, paragraph 4 was also substituted.Previously, paragraph 4 provided that gains derived by aresident of a contracting state from the alienation of anyproperty other than that is mentioned in paragraphs 1, 2 and3, shall be taxable only in that state. To align this paragraph4 with the insertion of paragraph 3A, it was amended underthe same Notification dated 10.8.2016. Paragraph 4 nowprovides that gains from the alienation of any property but other than that referred to in paragraphs 1, 2, 3 and 3A shallbe taxable only in contracting state of which the alienator isthe resident. 15.As per paragraph 4 as it stood at the relevanttime, the capital gain arising out of the sale of shares, in caseof a company like the present petitioner, could be taxed if atall in Mauritius. In other words, the gain arising the sale ofshares acquired on or before 31.3.2017, in a company whichis resident of India, could not be taxed in Indian territory. 16. It was in this context that the petitioner had moved theAssessing OfÏcer for issuance of the certificate under Section197 of the Act. This is a main plank of the petitioner onwhich the entire case was based. Prima facie, such case wasalso valid. other than that referred to in paragraphs 1, 2, 3 and 3A shallbe taxable only in contracting state of which the alienator isthe resident. 15.As per paragraph 4 as it stood at the relevanttime, the capital gain arising out of the sale of shares, in caseof a company like the present petitioner, could be taxed if atall in Mauritius. In other words, the gain arising the sale ofshares acquired on or before 31.3.2017, in a company whichis resident of India, could not be taxed in Indian territory. 16. It was in this context that the petitioner had moved theAssessing OfÏcer for issuance of the certificate under Section197 of the Act. This is a main plank of the petitioner onwhich the entire case was based. Prima facie, such case wasalso valid. 17.Division Bench of this Court in the case of CIT(International Taxation) -3, Mumbai Vs. JSH(Mauritius) Ltd.[4] had held that when the assessee hadplaced reliance on DTAA between two countries, reference toSection 9(1)(i) and Explanation 5 thereto would be of no 4[2017] 84 taxmann.com 37 (Bombay) importance. It was observed as under:- "12. The reliance placed on Section 9(1)(i) and Explanation 5thereto by the learned counsel for the Petitioner would not be of anyavail to the Petitioner. In the present case, the Respondent hasplaced reliance on the Double Taxation Avoidance Agreementbetween India and Mauritius. It is clear from the said Agreement thatthe capital gains from alienation of the shares situated in India couldonly be taxed in Mauritius and not in India. The Apex Court in a caseof Azadi Bachao Andolan (supra) has clearly observed that the termsand provisions of the Agreement i.e. DTAA shall operate even if theyare inconsistent with the provisions of the Income Tax Act. ThePetitioner could have relied on Section 9(1)(i) and Explanation 5 if thepresent case would have not been covered by the DTAA" Likewise, the Division Bench of Punjab and Haryana High Court in case of Serco BPO (P) Ltd Vs. Authority for Advance Rulings, New Delhi[5] had held and observed asunder:- "14. The DTAC is itself clear. We are however, saved the exercise ofanalyzing it in depth on its own terms in view of the circulars issuedby the Central Board of Direct Taxes under Section 119 in respect ofDTAC which are of crucial importance. Our task is made simpler stillin view of the judgment of the Supreme Court in Union of India v.Azadi Bachao Andolan, (2004) 10 SCC 1. We will, therefore, refer tothe circulars immediately." 18. In terms of the provisions of the Act and the relevant articles of DTAA, it would prima facie appear that the petitioner's income arising out of the sale of shares was not 5[2015] 379 ITR 256 (Punjab & Haryana) taxable in India. Learned counsel for the petitioner hadplaced heavy reliance on the TRC issued by MauritiusGovernment and contended that as long as such certificate isin force, the Income Tax Authorities in India cannot disputethe same or go behind such circular. Our attention wasdrawn to the circular of CBDT dated 13.4.2000 which readsas under:- "734. Clarification regarding taxation of income from dividendsand capital gains under the Indo-Mauritius Double TaxAvoidance Convention (DTAC) 1.The provisions of the Indo-Mauritius DTAC of 1983 apply to‘residents’ of both India and Mauritius. Article 4 of the DTAC definesa resident of one State to mean "any person who, under the laws ofthat State is liable to taxation therein by reason of his domicile,residence, place of management or any other criterion of a similarnature." Foreign Institutional Investors and other investment funds,etc., which are operating from Mauritius are invariably incorporated inthat country. These entities are ‘liable to tax’ under the Mauritius Taxlaw and are, therefore, to be considered as residents of Mauritius inaccordance with the DTAC. "734. Clarification regarding taxation of income from dividendsand capital gains under the Indo-Mauritius Double TaxAvoidance Convention (DTAC) 1.The provisions of the Indo-Mauritius DTAC of 1983 apply to‘residents’ of both India and Mauritius. Article 4 of the DTAC definesa resident of one State to mean "any person who, under the laws ofthat State is liable to taxation therein by reason of his domicile,residence, place of management or any other criterion of a similarnature." Foreign Institutional Investors and other investment funds,etc., which are operating from Mauritius are invariably incorporated inthat country. These entities are ‘liable to tax’ under the Mauritius Taxlaw and are, therefore, to be considered as residents of Mauritius inaccordance with the DTAC. 2.Prior to 1-6-1997, dividends distributed by domestic companieswere taxable in the hands of the shareholder and tax was deductibleat source under the Income-tax Act, 1961. Under the DTAC, tax wasdeductible at source on the gross dividend paid out at the rate of 5%or 15% depending upon the extent of shareholding of the Mauritiusresident. Under the Income-tax Act, 1961, tax was deductible atsource at the rates specified under section 115A, etc. Doubts havebeen raised regarding the taxation of dividends in the hands of investors from Mauritius. It is hereby clarified that wherever aCertificate of Residence is issued by the Mauritian Authorities,such Certificate will constitute sufficient evidence for acceptingthe status of residence as well as beneficial ownership forapplying the DTAC accordingly. 3.The test of residence mentioned above would also applyin respect of income from capital gains on sale of shares.Accordingly, FIIs, etc., which are resident in Mauritius would notbe taxable in India on income from capital gains arising in Indiaon sale of shares as per paragraph 4 of article 13. Circular :No. 789, dated 13-4-2000." 19.This circular thus provided that foreign institutionalinvestors and other investment funds which are operatingfrom Mauritius are invariably incorporated in that country.These entities are liable to tax under the Mauritius tax lawsand therefore, to be considered as residents of Mauritius, inaccordance with DTAC. In the said circular, it is furtherclarified that certificate of residence is issued by theMauritius Authorities. Such certificate will constitutesufÏcient funds for accepting status of the residence as wellas beneficial ownership for applying the DTAC. 20.The fact that the CBDT circular issued in exercise ofpowers under Section 119(2) of the Act would bind the Revenue Authorities is undisputable. The Supreme Court incase of Union of India Vs. Azadi Bachao Andolan[6] hademphasized on this aspect. Reference was made to theearlier decision in case of UCO Bank Vs. CIT[7]. 21.The contention of the Revenue, however, is that theentire transaction is a colourable device and shamtransaction. From the impugned order passed by theAssessing OfÏcer and the written submissions presentedbefore us, we gather that this is the principal line that thesaid ofÏcer has taken in the present case. Legal position thatthe Assessing OfÏcer has taken, cannot be grudged. Despitethe existence of DTAA, despite the availability of the TRC ofthe petitioner issued by the Mauritius Authorities and despitethe CBDT circular that such certificate as long as in operationwould be a valid consideration for applying the DTAA, we donot find that as laid down by the Supreme Court throughseries of judgments has shut out the case of the Revenuetotally when it comes to a fraudulent or fictitious transaction. 6[2003] 263 ITR 706 (SC) 7[1999] 237 ITR 889 (SC) 6[2003] 263 ITR 706 (SC) 7[1999] 237 ITR 889 (SC) In Azadi Bachao Andolan (supra) also, while explaining theobservations made in the earlier judgment of the case ofMcDowell & Co Ltd Vs. CTO[8], this small window was notclosed. More recently, the Supreme Court in the case ofVodafone International (supra) made elaborate observationsin this regard. Vodafone International (supra) was the casein which the question of taxing the capital gain in the handsof the foreign based company came up for considerationbefore the Supreme Court. Principally, the question itselfwas did the complex corporate structuring give rise totransfer of capital asset? Bombay High Court having ruled infavour of the Revenue, the assessee was in appeal beforethe Supreme Court. The three judge bench of the SupremeCourt overruled the Bombay High Court's view and in anelaborate decision held that the transaction in question didnot give any rise to tax liability. We are not concerned withthe finer aspects of this central issue that the Supreme Courtwas called upon and had decided. We would, however, referto the certain portions of this judgment in which the SupremeCourt had provided caveats where the logic derived wouldnot apply in case of certain situations such as fraudulent or8[1985] 154 ITR 148 (SC) fictitious transactions. The decision was rendered by S.H.Kapadia, J. speaking for himself and Swatante Kumar, J. Aseparate concurring opinion was expressed by K.S.Radhakrishnan, J. In the judgment authered by S.H. Kapadia,J, it was observed that the Westminster Principle states thatgiven that the document or transaction is genuine, the Courtcannot go behind it to some supposed underlying substance.In paragraph 69 of the judgment, it was observed that in theapplication of a judicial anti-avoidance rule, the Revenuemay invoke the "substance over form" principle or "piercingthe corporate veil" test only after it is able to establish on thebasis of the facts and circumstances surrounding thetransaction that the impugned transaction is sham or taxavoidant. In the concluding portion in paragraph 90 of thejudgment, it was observed that offshore transactionevidences participative investment and not a sham or taxavoidant preordained transaction. It was, therefore, held thatthe Indian Tax Authority had no territorial tax jurisdiction totax the said offshore transaction. In a separate opinion, K.S. Radhakrishnan, J. alsodiscussed the concept of doctrine of lifting of corporate veil. It was observed that such doctrine can be applied in taxmatters even in the absence of any statutory authorisationto that effect. Such principle can be applied even in cases ofholding and subsidary companies where in spite of beingseparate legal personalities, if the facts reveal that theyindulge in dubious methods for tax evasion. In paragraphs98 and 99, referring to DTAA between India and Mauritius and the circulars issued by CBDT, it was observed as under:- In a separate opinion, K.S. Radhakrishnan, J. alsodiscussed the concept of doctrine of lifting of corporate veil. It was observed that such doctrine can be applied in taxmatters even in the absence of any statutory authorisationto that effect. Such principle can be applied even in cases ofholding and subsidary companies where in spite of beingseparate legal personalities, if the facts reveal that theyindulge in dubious methods for tax evasion. In paragraphs98 and 99, referring to DTAA between India and Mauritius and the circulars issued by CBDT, it was observed as under:- "98. LOB and look through provisions cannot be read into a taxtreaty but the question may arise as to whether the TRC is soconclusive that the Tax Department cannot pierce the veil and look atthe substance of the transaction. DTAA and Circular No. 789 dated13.4.2000, in our view, would not preclude the Income TaxDepartment from denying the tax treaty benefits, if it isestablished, on facts, that the Mauritius company has beeninterposed as the owner of the shares in India, at the time ofdisposal of the shares to a third party, solely with a view toavoid tax without any commercial substance. Tax Department, insuch a situation, notwithstanding the fact that the Mauritiancompany is required to be treated as the beneficial owner of theshares under Circular No. 789 and the Treaty is entitled to lookat the entire transaction of sale as a whole and if it isestablished that the Mauritian company has been interposed asa device, it is open to the Tax Department to discard the deviceand take into consideration the real transaction between theparties , and the transaction may be subjected to tax. In otherwords, TRC does not prevent enquiry into a tax fraud, forexample, where an OCB is used by an Indian resident for round-tripping or any other illegal activities, nothing prevents the Revenue from looking into special agreements, contracts orarrangements made or effected by Indian resident or the role ofthe OCB in the entire transaction. 99.No court will recognise sham transaction or a colourabledevice or adoption of a dubious method to evade tax, but to saythat the Indo-Mauritian Treaty will recognise FDI and FII only if itoriginates from Mauritius, not the investors from third countries,incorporating company in Mauritius, is pitching it too high,especially when statistics reveals that for the last decade theFDI in India was US$ 178 billion and, of this, 42% i.e. US$ 74.56billion was through Mauritian route. Presently, it is known, FII inIndia is Rs.450,000 crores, out of which Rs. 70,000 crores isfrom Mauritius. Facts, therefore, clearly show that almost theentire FDI and FII made in India from Mauritius under DTAA doesnot originate from that country, but has been made by MauritiusCompanies / SPV, which are owned by companies/individuals ofthird countries providing funds for making FDI by suchcompanies/individuals not from Mauritius, but from thirdcountries." In concluding portion, the learned Judge observed thatsale in the said case was not the fall out of an artificial taxavoidance scheme or an artificial device, pre-ordained, orpre-conceived with the sole object of tax avoidance, but wasa genuine commercial decision to exit from the IndianTelecom Sector. 22. The important element of this judgment, therefore, isthat the entire discussion of the Supreme Court proceeds on the basis that in case of genuine transactions flowing out ofcommercial relations, certain set of principles would apply inrelation to taxability of a non-resident. At the same time, thecommon thread of the judgment in both opinions expressedby the leaned Judges is that in case of sham or bogustransaction, no such parameters would apply. In concluding portion, the learned Judge observed thatsale in the said case was not the fall out of an artificial taxavoidance scheme or an artificial device, pre-ordained, orpre-conceived with the sole object of tax avoidance, but wasa genuine commercial decision to exit from the IndianTelecom Sector. 22. The important element of this judgment, therefore, isthat the entire discussion of the Supreme Court proceeds on the basis that in case of genuine transactions flowing out ofcommercial relations, certain set of principles would apply inrelation to taxability of a non-resident. At the same time, thecommon thread of the judgment in both opinions expressedby the leaned Judges is that in case of sham or bogustransaction, no such parameters would apply. 23.Therefore, had the Assessing OfÏcer in the presentcase sufÏcient prima facie material to demonstrate that theentire transaction from the inception was sham andcolourable device and a bogus transaction to simply avoidtax, it was still open for him to express his opinionaccordingly and refuse to grant certificate under Section 197of the Act. In the present case, however, perusal of theimpugned order would convince us that the material at hiscommand fell short of this requirement. We havesummarized principle factors which the Assessing OfÏcerpressed in service. Mere fact that the assessee company hasnot transacted any other business by itself may not beconclusive. The reference to the assessee unable to produceTRC of the companies which hold shares in the assesseecompany is erroneous. The petitioner would point out that such certificates were produced before the Assessing OfÏcer.The observation that mere transfer of money though bankingchannel would not be conclusive, may be quite correct butthe same cannot be a ground against the assessee unlessthere is adverse material. It is true that the extent ofadministrative expenditure and the employment structuremay be some of the factors which eventually would go toestablish whether the transaction was sham and the veryexistence of the assessee was fraudulent, however bythemselves may not be sufÏcient. All these aspects can andneed to be gone into in the assessment proceedings. 24.We have noticed the provisions contained in Section197 of the Act. One of the main benefits for an assesseewho obtains a certificate under Section 197 of the Act for nodeduction of tax at source or for deduction of tax at low ratewould be to receive full payment from the payer withoutexposing the payer to the possibility of being declared asdeemed defaulter. Yet another purpose of Section 197 of theAct would be to secure the interest of the Revenue.Particularly, in a case where the payee is non-resident, therecovery of possible tax if such