Wp/3070/2016 Of Commissioner Of Income Tax (Intetnational Taxation) - 3 v. Jsh (Mauritius) Ltd

IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDITION WRIT PETITION NO.3070 OF 2016 The Commissioner of Income-Tax (International Taxation)-3,1[st] Floor, Schindia House, N.M.Marg,Bellard Pier, Mumbai 400 038.…PetitionerV/s.JSH (Mauritius) Ltd.,C/o. S.R.Batliboi & Co., CA,14[th] Floor, The Ruby,29, Senapati Bapat Marg, Dadar (W),Mumbai – 400 028. …Respondent ..... Ms.Minal Lad a/w. Ms.Namita Shirke i/b. Mr.Charanjeet,Advocate for the Petitioner. Mr.Porus Kaka, Senior Counsel a/w. Mr.Divesh Chawla i/b.Mr.Atul K. Jasani, Advocate for the Respondent. .... CORAM :S.V.GANGAPURWALA &A.M.BADAR JJ. DATED :28[th] July 2017. ORAL JUDGMENT: (PER S.V.GANGAPURWALA J.) 1The present Respondent applied for an advance rulingto the Authority for Advance Rulings (Income-Tax), New Delhi(hereinafter referred to as “AAR” for the sake of brevity) to ascertain whether capital gains in respect of the transfer of sharesof Tata Industries Limited (hereinafter referred to as “TIL” for thesake of brevity) to Tata Sons Limited (hereinafter referred to as“TSL” for the sake of brevity) are taxable in India in the hands ofthe Respondent/Applicant by virtue of the India-Mauritius TaxTreaty. The Applicant sought ruling on following questions :“Question 1 : Whether on the facts and circumstances ofthe case, the Applicant will be entitled to the benefits ofthe Agreement between the Government of Mauritiusand the Government of the Republic of India for theavoidance of double taxation and prevention of fiscalevasion (the 'India-Mauritius tax treaty') with respect totaxes on income and capital gains ? Question 2 : If the answer to Question 1 is in theaffirmative, whether on the facts and circumstances ofthe case, the gains arising to the Applicant from transferof shares in Tata Industries Limited ('TIL') to Tata SonsLimited ('TSL') would not be liable to tax in India havingregard to the provisions of Article 13 of the India-Mauritius tax treaty ? Question 3 : Whether on the facts and circumstances ofthe case, if answer to Question 2 is in affirmative, the Applicant, being a foreign company and in absence of aPermanent Establishment ('PE') in India, would not besubject to tax under the provisions of Section 115JB ofthe Act ?” 2The Authority for Advance Rulings (Income-Tax), NewDelhi answered the aforesaid three questions in favour of theRespondent. Aggrieved thereby, the Commissioner of Income-Tax(International Taxation)-3 has filed present Writ Petition. 3Mr.Chandarpal, the learned counsel for the Petitionerin a lucid manner canvassed following submissions : (a)The Respondent is a Shell and Fly-by-night Company. TheOriginal investment proposal was made to FIBP depicting 'JardineMatheson Bermuda' as proposed investor. However, a letter ofrequest was made to FIBP stating that investment will now berouted through Mauritius and Jardine Matheson Ltd. wasincorporated in Mauritius on 04/04/1996. The said JSH(Mauritius) Limited had never nominated anyone on the Board ofTIL at any point of time. The active employees of JardineMatheson Group were only on the Board of Tata IndustriesLimited. This clearly suggest that the actual beneficial investor wasJardine Matheson and not JSH (Mauritius) Ltd. (b)The fact that the Respondent is a Shell Company isfurther fortified by the fact that the Respondent has never incurredexpenses of wages, salaries of staff, electricity, water andtelephone charges, rent, directors of emoluments. The onlyincome and expenses shown in the financial statement are onaccount of interest received or paid to or from the group entitiesbesides profits of sale of share in question. It demonstrates thatJSH (Mauritius) Limited was not having business/commercialsubstance of its own. (b)The fact that the Respondent is a Shell Company isfurther fortified by the fact that the Respondent has never incurredexpenses of wages, salaries of staff, electricity, water andtelephone charges, rent, directors of emoluments. The onlyincome and expenses shown in the financial statement are onaccount of interest received or paid to or from the group entitiesbesides profits of sale of share in question. It demonstrates thatJSH (Mauritius) Limited was not having business/commercialsubstance of its own. (c)The JSH (Mauritius) Limited was created only for thepurpose of taking advantage of Tax Treaty with Mauritius and nothaving any commercial or business substance. The AAR hasobserved that the Respondent is not a shell Company on the basisof balance-sheet of the Company but has not discussed basis ofarriving at said view. No such discussion and evidence has beenconsidered by the AAR while arriving at such conclusion. (d)According to the learned counsel, in case whereRevenue finds that any holding structure and entity which has nocommercial/business substance has been interposed only to avoidtax, then in such case, applying the case of 'Fiscal Nullity', it wouldbe open to the Revenue to discard such interposing of that entity. (919)WPNo.30702016(J) (e)The learned counsel further submits that this is a fitcase of abuse of Tax Treaty and it amounts to Treaty Shopping.Such Treaty Shopping is undesirable since it frustrates the spirit ofthe Treaty. (f)Only because the Respondent held shares of TIL for 13years would not lead to presumption that Respondent is not ShellCompany. Totality of the facts is required to be considered. (g)The learned counsel submits that after the Judgment ofthe Apex Court in the case of Vodafone International Holdings v.Union of India reported in 2012 (341) IRT 1, the legislature hasamended Section 9(1) of the Income Tax Act, 1961. SinceExplanation 5 and similar explanation have been added “forremoval of doubts”, all such transactions, as in the present case,are covered in regular assessment retrospectively with effect from1962. The AAR has committed a gross error in not consideringthis vital change in the legal position. The explanatorymemorandum clearly provides that amendment of Section 9(1)(i)was to reiterate the legislative intent in respect of taxability ofgains having economic nexus with India irrespective of the modeof realisation of such gains. The amendment sought to clarify thesource rule of taxation in respect of income arising from indirecttransfer of assets situated in India as explicitly mentioned in thememorandum. Explanation 5 would be applicable in relation to deeming any income arising outside India from any transaction inrespect of any share or interest in a foreign company which hasthe effect of the transferring directly or indirectly the underlyingassets located in India as income accrued and arose in India. Thelearned counsel submits that period of holding of the share wouldbe immaterial and irrelevant. (h)The learned counsel also relied on Section 245(R)(2)(iii) and submits that the said provisions takes away power of theAAR to decide cases which involve the subject of tax evasion. Itdoes not recognize admission or final stage. This vital aspect hasbeen lost sight by the AAR. (i)The learned counsel further submits that the Circularsrelied by the Respondent are of no avail to the Respondent in viewof the amendment to Section 9(1)(i) and Explanation 5 of the Act. (j)The learned counsel further submits that ground ofdelay raised by the Respondent would not be much relevant. Nostrict period of limitation is prescribed in filing Writ Petition.Considering the administrative exigency, some time was lost. It isalso not a case of inordinate delay. 4Mr.Kaka, the learned Senior Advocate for theRespondent during the course of his erudite arguments, put forthfollowing propositions : (i)The learned counsel further submits that the Circularsrelied by the Respondent are of no avail to the Respondent in viewof the amendment to Section 9(1)(i) and Explanation 5 of the Act. (j)The learned counsel further submits that ground ofdelay raised by the Respondent would not be much relevant. Nostrict period of limitation is prescribed in filing Writ Petition.Considering the administrative exigency, some time was lost. It isalso not a case of inordinate delay. 4Mr.Kaka, the learned Senior Advocate for theRespondent during the course of his erudite arguments, put forthfollowing propositions : (a)The statute does not provide any appeal against theorder of the AAR. Finality is given to the Order passed by theAAR. This Court in exercise of its jurisdiction under Article 226 ofthe Constitution of India would not sit as an Appellate Authorityover the decision of AAR, but would only be concerned with dueadherence to the decision making process and the AAR has strictlyfollowed the decision making process. No error has beencommitted in the decision making process by the AAR. (b)The Petition is filed after much delay i.e. after a periodof eight months from the date of the Order. If such a Petition isentertained, it would frustrate the very object behind introductionof Scheme of AAR. No explanation has been given for belatedlyfiling Petition. (c)The Respondent Company is incorporated in Mauritiuson 4[th] April 1996. The Respondent is resident as per Section 6 ofthe Act and does not have any business presence or permanentestablishment in India. The Respondent is engaged in business ofinvestment and financing activities. The Respondent is holding aCategory 1 Global Business Company License issued by theFinancial Services Authority of Mauritius. The Mauritius RevenueAuthority has issued TRC to the Respondent evidencing that it is atax resident in Mauritius and it is renewed from time to time. TheRespondent has filed its advance return in Mauritius offering its (919)WPNo.30702016(J) income to tax and also paid taxes in Mauritius. It is a residentunder Article 4(1) of India-Mauritius Double Taxation AvoidanceAgreement (hereinafter referred to as “DTAA” for the sake ofbrevity) and is eligible to claim the benefits under the Treaty. (d)The learned Senior Advocate further states that theRespondent had made investment in shares of TIL in June 1996after obtaining Government approval including approval in May1996 from Department of Industrial Policy & Promotion. (e)The Investment in shares of TIL was made with anintention of long term investment. The shares were held for aperiod of 13 years and were transferred only in June 2009. Post-transfer of shares of TIL, the entire sale proceeds have beenreinvested by the Respondent in another Tatagroup Company(Tata Power Limited) in July 2009. (f)The learned Senior Advocate submits that theRespondent is resident under Article 4(1) of the DTAA, henceeligible to claim benefit of the Article 13(4) of the DTAA. As perprovisions of Article 13(4) of the said DTAA, the long term capitalgain arising on transfer of shares in TIL is not chargeable to tax inIndia. (g)The learned Senior Advocate relies on the Circulardated 30[th] March 1994 and submits that the said Circular was (e)The Investment in shares of TIL was made with anintention of long term investment. The shares were held for aperiod of 13 years and were transferred only in June 2009. Post-transfer of shares of TIL, the entire sale proceeds have beenreinvested by the Respondent in another Tatagroup Company(Tata Power Limited) in July 2009. (f)The learned Senior Advocate submits that theRespondent is resident under Article 4(1) of the DTAA, henceeligible to claim benefit of the Article 13(4) of the DTAA. As perprovisions of Article 13(4) of the said DTAA, the long term capitalgain arising on transfer of shares in TIL is not chargeable to tax inIndia. (g)The learned Senior Advocate relies on the Circulardated 30[th] March 1994 and submits that the said Circular was specifically issued giving clarification regarding the taxation ofcapital gain tax under Article 13 of the Treaty. The Circularclarifies that any resident of Mauritius deriving income ofalienation of shares of Indian Companies will be liable to capitalgains tax only in Mauritius and will not have any capital gains taxliability in India. Further, the Circular dated 13[th] April 2000 isrelied and submits that this Circular provides that the Certificate ofResidence issued by the Mauritius Tax Authority is sufficientevidence for accepting the status of residence. Further reliance isplaced on press release dated 1[st] March 2013 stating that theGovernment has provided a clarification to the words introducedin the Act under Sub-Section 5 of Section 90. It clarifies that theTRC provided by the resident of contracting State will be acceptedas evidence and Income-Tax Authority in India will not go behindthe TRC and question his residential status. Further Circular dated13[th] April 2000 would continue to be in force, so also clarified thatthe Circular issued by CBDT would be binding on the TaxAuthorities and cannot be ignored. The learned Senior Advocaterefers to the Judgment of the Apex Court in a case of Union ofIndia and Anr. v. Azadi Bachao Andolan & Anr. reported in2003 ITR Volume 263 page 706 and submits that in the saidJudgment the Apex Court upheld the validity of the Circular dated13[th] March 1994 and 13[th] April 2000 issued by the CBDT and heldthat once the Certificate of Residence is granted, that would beconclusive evidence for determining the status of residence under (919)WPNo.30702016(J) the Treaty. Relying upon the said Judgment, the learned SeniorAdvocate submits that the Treaty Shopping is not illegal. (h)The learned Senior Advocate submits that theobjection with regard to maintainability of the application beforethe AAR qua Section 245(R)(2)(iii) of the Act is not tenable. TheAAR on 14[th] September 2011 observed that “the investment madeby the Holding company of Bermuda are required to be lookedinto. It reserved for consideration the question whether thetransaction is designed for avoidance of tax in India, when itconsiders the application for Ruling under Section 245(R)(4) ofthe Act. The said Order is not challenged by the Petitioner and ithas become final. Now they cannot turn around and raise the saidissue. Moreover, the AAR has concluded that the Respondent isnot a Shell or Fly By Night Company and has not indulged in taxavoidance. 5We have considered the submissions canvassed by thelearned counsel for the respective parties. 6This Court in exercise of its writ jurisdiction underArticle 226 of the Constitution of India would not sit as anAppellate Authority over the finding of the AAR. This Court wouldexercise its writ jurisdiction if the appreciation of facts and findingarrived at by the AAR is perverse or if the provisions of law are notproperly construed. 10/17 5We have considered the submissions canvassed by thelearned counsel for the respective parties. 6This Court in exercise of its writ jurisdiction underArticle 226 of the Constitution of India would not sit as anAppellate Authority over the finding of the AAR. This Court wouldexercise its writ jurisdiction if the appreciation of facts and findingarrived at by the AAR is perverse or if the provisions of law are notproperly construed. 10/17 7The factual matrix that the Respondent is incorporatedin Mauritius, holds a Category 1 Global Business License issued byFinancial Services Authority of Mauritius and is incorporated on04/04/1996, is not disputed. It is also not disputed that theCertificate is issued by the Mauritius Revenue Authority to theRespondent evidencing that it is a tax resident in Mauritius duringthe relevant period. The Respondent had acquired shares of TataIndustries Limited (TIL) in June 1996 is a matter of record. TheRespondent sold shares of TIL on 10[th] July 2009 is also a matter ofrecord. 8Section 90(2) of the Act specifically provides thatwhere the Government of India had entered into Double TaxationAvoidance Conveyance (hereinafter referred to as “DTAC” for thesake of brevity) with the Government of any other country forgranting relief of tax or any avoidance of double taxation, then inrelation to the Assessee to whom said agreement applies, theprovisions of Tax Treaty shall apply to the extent they are morebeneficial to the Assessee. The Circular dated 30[th] October 1995so also above referred Circulars of the year 2003 and 2013clarifies the said aspect. The Apex Court in a case of Azadi BachaoAndolan & Anr. (referred to supra) has observed as under : “There are many principles in fiscal economy which,though at first blush might appear to be evil, are (919)WPNo.30702016(J) tolerated in a developing economy, in the interest oflong-term development. Deficit financing, for example, isone; treaty shopping, in our view, is another. Despite thesound and fury of the respondents over the so-called“abuse” of “treaty shopping”, perhaps, it may have beenintended at the time when the Indo-Mauritius DTAC wasentered into. Whether it should continue, and, if so, forhow long, is a matter which is best left to the discretionof the executive as it is dependent upon several economicand political considerations. This court cannot judge thelegality of treaty shopping merely because one section ofthought considers it improper. A holistic view has to betaken to adjudge which is perhaps regarded incontemporary thinking as a necessary evil in a developingeconomy.” 9The Apex Court in the said Judgment further observedthat Section 90 is specifically intended to enable and empower theCentral Government to issue a notification for implementation ofthe Double Tax Avoidance Agreement. When that happens, theprovisions of such an agreement with respect to cases to whichthey apply would operate even if inconsistent with the provisionsof Income Tax Act. The Apex Court further observed that theCirculars issued by the CBDT under Section 119 of the Act arebinding on all officers and employees employed in the execution of (919)WPNo.30702016(J) the Act, even if they deviate from the provisions of the Act. TheApex Court in the said Judgment observed that the whole purposeof DTAC is to ensure that the provisions thereunder are availableeven if they are inconsistent with the provisions of Indian IncomeTax Act. The further observation is made by the Apex Court thatthe principle of piercing the veil of incorporation can hardly applyto a situation as the one before it. The Apex Court further madethe following observations : (919)WPNo.30702016(J) the Act, even if they deviate from the provisions of the Act. TheApex Court in the said Judgment observed that the whole purposeof DTAC is to ensure that the provisions thereunder are availableeven if they are inconsistent with the provisions of Indian IncomeTax Act. The further observation is made by the Apex Court thatthe principle of piercing the veil of incorporation can hardly applyto a situation as the one before it. The Apex Court further madethe following observations : “If the court finds that notwithstanding a series of legalsteps taken by an assessee, the intended legal result hasnot been achieved, the court might be justified inoverlooking the intermediate steps, but it would not bepermissible for the court to treat the intervening legalsteps as non est based upon some hypotheticalassessment of the “real motive” of the assessee. In ourview, the court must deal with what is tangible in anobjective manner and cannot afford to chase a will-o'-the-wisp.” “We are unable to agree with the submission that an actwhich is otherwise valid in law can be treated as non estmerely on the basis of some underlying motivesupposedly resulting in some economic detriment orprejudice to the national interests, as perceived by therespondents.” 10In the present matter, it would be relevant to note thatthe shares were purchased by the Respondent in the year 1996and were held for long period of 13 years and were sold in theyear 2009. This goes to suggest the bona fide of the applicant.The said shares were again invested in the another company of thesame group in India and the same are being held by theRespondent. Considering this aspect, it has been observed by theAAR that the Respondent is not a Fly By Night or a ShellCompany. It does not appear that while considering the factualmatrix of the matter, the AAR has perversely recorded any finding.It has based its finding on the basis of evidence on record. Thesaid findings is a findings of fact arrived at on the basis ofappreciation of evidence. With regard to the objection raised bythe Petitioner under Section 245(R) (2)(iii) of the Act, the samewould not arise at this stage. The said provision reads as under : “Procedure on receipt of application. 245R. (1)....... (2) The Authority may, after examining theapplication and the records called for, byorder, either allow or reject theapplication: Provided that the Authority shall not allowthe application where the question raised inthe application,— (i) is already pending before any income-tax (919)WPNo.30702016(J) authority or Appellate Tribunal [except inthe case of a resident applicant falling insub- clause (iii) of clause (b) of section245N] or any court;(ii)involves determination of fair marketvalue of any property; (iii) relates to a transaction or issue whichis designed prima facie for the avoidanceof income-tax [except in the case of aresident applicant falling in sub-clause(iii) of clause (b) of section 245N. Provided further that no application shall berejected under this sub-section unless anopportunity has been given to the applicantof being heard: Provided also that where the application isrejected, reasons for such rejection shall begiven in the order. (3) A copy of every order made under sub-section (2) shall be sent to the applicantand to the Commissioner.” 11The said provision would come into operation whenthe application by the party relates to a transaction or an issuewhich is designed prima facie for the avoidance of income tax. On14[th] day of September 2011, the AAR passed an Order stating thatthe issue with regard to the investment made by holding companywould be considered while considering the application for rulingunder Section 245(R) (4) of the Act. The said Order was neverassailed by the Petitioner. The Petitioner thereafter submitted tothe jurisdiction of the AAR and contested the matter on merits. Gaikwad RD 15/17 Provided also that where the application isrejected, reasons for such rejection shall begiven in the order. (3) A copy of every order made under sub-section (2) shall be sent to the applicantand to the Commissioner.” 11The said provision would come into operation whenthe application by the party relates to a transaction or an issuewhich is designed prima facie for the avoidance of income tax. On14[th] day of September 2011, the AAR passed an Order stating thatthe issue with regard to the investment made by holding companywould be considered while considering the application for rulingunder Section 245(R) (4) of the Act. The said Order was neverassailed by the Petitioner. The Petitioner thereafter submitted tothe jurisdiction of the AAR and contested the matter on merits. Gaikwad RD 15/17 The Ruling is given by the AAR. The AAR on considering theapplication and the documents and the facts on record hadconclusively held that the transaction is not designed foravoidance of income-tax. Once such conclusive finding is given, itwould not be open for the Petitioner to fall back on Section245(R)(2)(iii). 12The reliance placed on Section 9(1)(i) and Explanation5 thereto by the learned counsel for the Petitioner would not be ofany avail to the Petitioner. In the present case, the Respondenthas placed reliance on the Double Taxation Avoidance Agreementbetween India and Mauritius. It is clear from the said Agreementthat the capital gains from alienation of the shares situated inIndia could only be taxed in Mauritius and not in India. The ApexCourt in a case of Azadi Bachao Andolan & Anr.(supra) hasclearly observed that the terms and provisions of the Agreementi.e. DTAA shall operate even if they are inconsistent with theprovisions of the Income Tax Act. The Petitioner could have reliedon Section 9(1)(i) and Explanation 5 if the present case wouldhave not been covered by the DTAA. 13Though the question of limitation/delay/laches wouldnot be inconsequential we refrain from going into said aspect aswe have decided this Petition on merits itself. 14On perusal of the Judgment of the AAR, it transpiresthat the AAR has considered all the relevant aspects of the matterand has arrived at the just conclusion. The Treaty has also beenrightly considered. 15In view of conspectus of the matter, the Writ Petitionstands dismissed, however, with no order as to costs. ( A.M.BADAR J.) ( S.V.GANGAPURWALA J.)