Wp/770/2021 Of Abu Dhabi Investment Authority v. Authority For Advance Ruling (Income Tax) Mumbai Bench And 4 Ors

Abu Dhabi Investment Authority,)a public institution owned by and)subject to the supervision of the)Emirate of Abu Dhabi)Having its office at)211, Corniche, PO Box 3600,)Abu Dhabi, United Arab Emirates)PAN No. )….Petitioner V/s.1. Authority for Advance Ruling)(Income Tax), Mumbai Bench,)Having its office at 5[th] Floor,)Hoechst House, 193, V.K. Shah Marg, )Nariman Point, Mumbai – 400 021.) 2. Dy. CIT (International Taxation))1 (1) (1),Having his office at)517, 5[th] Floor, Air India Building,)Nariman Point, Mumbai – 400 020.)3. Additional CIT – (International)Taxation) – Range – 1 (1))having his office at )Room No.102, Scindia House,)Ballard Pier, Mumbai – 400 038.)4. CIT (International Taxation) – 1)Mumbai Having his office at)Room No.9, Third Floor, B – Wing,)Mittal Court, Nariman Point,)Mumbai – 400 021.)5. Union of India, Ministry of Law,)Aayakar Bhavan, M.K. Road,)Mumbai – 400 020.) …Respondents ALONGWITH WRIT PETITION NO. 709 OF 2021 Equity Trust (Jersey) Limited)representative assessee of)Green Maiden A 2013 Trust (GMT))Level 1, IFC 1, Esplanade)St. Helier Jersey Sip Code – JE23BX )PAN No. ) ….Petitioner V/s. 1. Authority for Advance Ruling)(Income Tax), Mumbai Bench,)5[th] Floor, Hoechst House, )193, V.K. Shah Marg, Nariman Point, )Mumbai – 400 021.) 2. Asst. CIT (International Taxation) )Circle 2 (3) (2) )Room No.1711, 17[th] Floor,)Air India Building, Nariman Point,)Mumbai – 400 021.)3. Additional CIT – (International)Taxation) – Range – 1 (1))having his office at Room No.102,) Scindia House, Ballard Pier, )Mumbai – 400 038.)4. CIT (International Taxation) – 1)Mumbai)Having his office at Room No.9, )Third Floor, B – Wing,)Mittal Court, Nariman Point,)Mumbai – 400 021.)5. Union of India, Ministry of Law)Aayakar Bhavan, M.K. Road,)Mumbai – 400 020.)…Respondents ---- Shri Percy Pardiwalla, Senior Advocate a/w Ms. Aarti Sahte and Ms. Aasavari Kadam for Petitioner in both Writ Petitions. Shri Ashok Kotangle a/w Shri P. A.Narayanan for Respondent Nos.2, 3 and 4in Writ Petition No.709 of 2021 and for Respondent Nos.2, 3, 4 & 6 in WritPetition No.770 of 2021 ---- CORAM : K.R. SHRIRAM &ABHAY AHUJA, JJ. RESERVED ON:7th September, 2021 PRONOUNCED ON: 28[th] October, 2021 JUDGMENT (PER K. R. SHRIRAM J.) : 1Rule. Rule made returnable forthwith and heard and disposed at theadmission stage itself with the consent of the counsel. 2In both the petitions, a common ruling dated 18[th] March 2020 passedby the Authority for Advance Ruling (Income Tax) (hereinafter referred toas AAR) is impugned. Hence both the petitions are taken up together. ShriKotangle did not wish to file any reply since according to him only questionsof law were involved. We shall take Writ Petition No.770 of 2021 filed byAbu Dhabi Investment Authority (hereinafter referred to as ADIA) as leadpetition. 3ADIA is a public institution owned by and subject to the supervision ofthe Emirate of Abu Dhabi. Article 4 (2) (d) of the India-United ArabEmirates (“UAE”) Double Taxation Avoidance Agreement (hereinafterreferred to as the “India-UAE DTAA”) expressly provides that ADIA is aresident of UAE for the purposes of Article 4 thereof and, accordingly, ADIAis entitled to invoke the beneficial provisions of the India-UAE DTAA for thepurpose of determining its tax liability in India. ADIA files its return ofincome (hereinafter referred to as “ROI”) in India, disclosing therein incomethat falls within the scope of Section 5 (2) of the Income Tax Act, 1961 3ADIA is a public institution owned by and subject to the supervision ofthe Emirate of Abu Dhabi. Article 4 (2) (d) of the India-United ArabEmirates (“UAE”) Double Taxation Avoidance Agreement (hereinafterreferred to as the “India-UAE DTAA”) expressly provides that ADIA is aresident of UAE for the purposes of Article 4 thereof and, accordingly, ADIAis entitled to invoke the beneficial provisions of the India-UAE DTAA for thepurpose of determining its tax liability in India. ADIA files its return ofincome (hereinafter referred to as “ROI”) in India, disclosing therein incomethat falls within the scope of Section 5 (2) of the Income Tax Act, 1961 (hereinafter referred to as the “Act”) but in view of the exemption availablein terms of the India-UAE DTAA, reports NIL taxable income in the ROI.ADIA does not have any permanent establishment/fixed place of business orany other form of presence in India and does not have any businessconnection/operations in India. AAR is a statutory authority constitutedunder Section 245-O of the Act to give a ruling on any question raised inrespect of any transaction which has been undertaken or is proposed to beundertaken by a non-resident applicant or the tax liability of a non-residentarising out of a transaction which has been undertaken or is proposed to beundertaken by a resident applicant with such non-resident or whether anarrangement, which is proposed to be undertaken by any person, being aresident or a non-resident, is an impermissible avoidance agreement asreferred to in Chapter X-A. The ruling/order on the questions raised beforeAAR is binding only upon applicant who sought the answer and the revenueauthority assessing such applicant but the same has a persuasive valueinsofar as other assessees are concerned. 4ADIA is challenging the order/ruling dated 18[th] March 2020 passed byAAR in case of ADIA as well as Equity Trust (Jersey) Ltd. (hereinafterreferred to as ETL) as the trustee, which is petitioner in Writ PetitionNo.709 of 2021, denying ADIA the benefit of India-UAE DTAA read withrelevant provisions of the Act in respect of the income accruing on theinvestments made or proposed to be made by Green Maiden A 2013 Trust(hereinafter referred to as the Trust), which was established by ADIA and ETL as settlor and trustee, respectively. The trust is settled by ADIA inJersey. Under the Deed of Settlement dated 22[nd] July 2013 (the Deed ofSettlement), the trust is being set up by and for the benefit of ADIA who is,apart from being the settlor, also the sole beneficiary of the trust. This trust is a revocable and determinable trust. 5The following provisions of the Deed of Settlement are relevant: (aaa) “Settlor” or “Sole Beneficiary” shall mean ADIA; (ccc) “Term” shall mean the term of the Trust, which shall continue untilthe later of : (i) 8 (eight) years from the date of Closing. By the end of the 7th(seventh) year, the Trustee may (on the request of the InvestmentManager) seek a 1 (one) year extension for liquidation of the Trust andsuch extension shall be subject to the consent of the Sole Beneficiary; and (ii) the date on which the remaining Receipts in the Trust Fund aredistributed to the Sole Beneficiary after payment and discharge of allaccrued expenses (including Operating Expenses), fees and liabilities ofthe Trust. (eee) “Trust” shall have the meaning provided in the Recitals above; (ggg) “Trust Fund” shall mean the Initial Settlement Sum, the CapitalContributions, Receipts, any accretions, all other cash and property heldby the Trustee pursuant to the terms of this Deed in trust for the SoleBeneficiary together with all of the Trustee’s interest in PortfolioInvestments. (ii) the date on which the remaining Receipts in the Trust Fund aredistributed to the Sole Beneficiary after payment and discharge of allaccrued expenses (including Operating Expenses), fees and liabilities ofthe Trust. (eee) “Trust” shall have the meaning provided in the Recitals above; (ggg) “Trust Fund” shall mean the Initial Settlement Sum, the CapitalContributions, Receipts, any accretions, all other cash and property heldby the Trustee pursuant to the terms of this Deed in trust for the SoleBeneficiary together with all of the Trustee’s interest in PortfolioInvestments. 3.1 The Settlor has on or before the execution of this instrumenttransferred to the Trustee, by way of wire transfer or a cheque or suchother instrument, the Initial Settlement Sum and the Trustee herebyadmits, acknowledges and declares that the Trust Fund shall be held by itin trust for the Sole Beneficiary and shall be applied and governed by theterms and conditions of this Deed. 9.2 Receipts may, subject to the terms of this Deed, be distributed by theTrustee to the Sole Beneficiary as and when deemed appropriate by theTrustee but subject to payment of all accrued Operating Expenses andaccrued fees then payable under the Investment Management Agreementwhich are not subject to a bona fide dispute. In the event that any feespayable under the Investment Management Agreement are the subject of abona fide dispute, the Trustee may distribute Receipts subject towithholding a sum from the Receipts which the Trustee deems to bereasonable to discharge the anticipated liability. 9.3 The Trustee shall make distributions to the Sole Beneficiary, at suchintervals as it deems fit. 12. TERMINATION OF THE TRUST 12.1 The Trustee shall, if directed by the Sole Beneficiary, at any timebefore the expiry of the Term and following confirmation from theInvestment Manager that the Trust has exited from all its PortfolioInvestments, terminate the Trust. 12.2 At the expiry of the Term, the Trustee will take steps to realize ordistribute any remaining Portfolio Investments together with any, all andother remaining parts of the Trust Fund. 12.3 Upon termination, the proceeds from the dissolution of the Trust willbe distributed to the Sole Beneficiary after payment of all accrued fees,expenses, applicable taxes and the Trustee withholding a reasonable sumto discharge, future obligations, liabilities, fees, cost, expenses and taxeswhich are likely to accrue. 6By virtue of the provisions of the Deed of Settlement, it is ADIA’s case that the trust is a revocable trust. Pursuant to the Deed of Settlement, ADIAmade a capital commitment of USD 200,000,000 (USD Two HundredMillion only) in the trust in its capacity as settlor. The reason for ADIAsettling the trust and making investment in India using the Trust are asfollows: - (i) At the time when ADIA was making a decision to invest in India, therewas no legal framework in the UAE under which a trust could be formedand also ADIA could not establish a sole shareholder subsidiary company inthe UAE. (ii) ADIA for commercial and administrative reasons has made all its illiquidinvestments through separate legal entities (including this one) in order toensure it does not have to directly deal with various portfolio companies. ADIA also invests through separate legal entities for limitation of liabilitypurpose. (iii) ADIA has been using Jersey as a jurisdiction for establishing companiesand trusts and for making a number of investments around the world.Jersey’s regulatory regime is complaint with international standards andJersey has also entered into information exchange agreements with anumber of countries and is generally not considered an obstructive oropaque jurisdiction. In view of the aforesaid reasons ADIA set up the trust to makeinvestments in India and claimed the benefit of the India-UAE DTAA. ADIA also invests through separate legal entities for limitation of liabilitypurpose. (iii) ADIA has been using Jersey as a jurisdiction for establishing companiesand trusts and for making a number of investments around the world.Jersey’s regulatory regime is complaint with international standards andJersey has also entered into information exchange agreements with anumber of countries and is generally not considered an obstructive oropaque jurisdiction. In view of the aforesaid reasons ADIA set up the trust to makeinvestments in India and claimed the benefit of the India-UAE DTAA. 7The Trust was registered with the Securities and Exchange Board ofIndia (SEBI) as Foreign Institutional Investor (FII) under the SEBI (ForeignInstitutional Investors) Regulations, 1995 and later on as Foreign PortfolioInvestor under the SEBI (Foreign Portfolio Investors) Regulations 2014. ETLas trustee has entered into an Investment Management Agreement dated24[th] July 2013 with Kotak Mahindra (International) Ltd. (hereinafterreferred to as KMIL). One of the obligations cast on KMIL in terms of theagreement is that a KMIL group Subsidiary will invest in each and everyportfolio company alongside the Trust. The Deed of Settlement providesthat the capital contributions made or proposed to be made by ADIA to theTrust would be a revocable transfer. According to ADIA, the income derivedfrom making investment and debt securities in India was not assessable totax in India having regard to the provisions Article 24 of the India-UAE DTAA read with sections 61 and 161 of the Act. 8In view to have clarity on the position and avoid needless litigation ifthe revenue adopted a stand contrary to what ADIA was advancing, ADIAfiled an application before AAR to determine taxability of the incomeaccruing on the investments made or proposed to be made in the Indianportfolio companies by the Trust. ADIA raised the following questions fordetermination by AAR:- (i) On the stated facts and in law, whether the capitalcontribution made / proposed to be made / transferred byADIA to Green Maiden A 2013 Trust be treated as arevocable transfer for the purpose of Section 63 of the Act ?(ii) If the answer to the above question is in the affirmativethen, whether on the stated facts and in law, the entireincome which may arise from the investments made by theTrust in Indian Companies (Portfolio companies) bechargeable to income-tax in the hands of ADIA as perSection 61 of the Act or be chargeable to income-tax in thehands of any other person as defined under the Act ? (iii) If the answer to the first and second question is in theaffirmative then, whether on the states facts and law, theentire income in the hands of ADIA which may accrue orarise from the investments made by the Trust in thePortfolio Companies be exempted from tax in India basedon the provisions of Article 24 of the India-UAE DTAA ? (iv) If the answer to the third question is in the affirmativethen, whether the Portfolio Companies or any other personresponsible for paying any sum, to the Trust, are requiredto deduct tax at source under the provisions of the Act, onany sum payable by them to the Trust, the income / assetsof the Trust being subject to the provisons of Section 61and Section 63 of the Act ? 9The office of CIT (IT)-1 Mumbai, filed a report under Section 245R (2) of the Act opposing admission of the application filed by ADIA. According to CIT(IT), ADIA had furnished incomplete/incorrect informationto AAR and sought additional clarifications and also sought rejection of theapplication. (iv) If the answer to the third question is in the affirmativethen, whether the Portfolio Companies or any other personresponsible for paying any sum, to the Trust, are requiredto deduct tax at source under the provisions of the Act, onany sum payable by them to the Trust, the income / assetsof the Trust being subject to the provisons of Section 61and Section 63 of the Act ? 9The office of CIT (IT)-1 Mumbai, filed a report under Section 245R (2) of the Act opposing admission of the application filed by ADIA. According to CIT(IT), ADIA had furnished incomplete/incorrect informationto AAR and sought additional clarifications and also sought rejection of theapplication. 10By order dated 11[th] April 2016, AAR admitted the application filed byADIA. The CIT(IT) filed a rectification application dated 9[th] June 2016before AAR, seeking a review of the order of admission apparently due to anerror that had crept into the order. The said application was rejected by AARon 15[th] November 2018. ADIA also had filed a rectification applicationdated 21[st] June 2016 since in the order of admission the words used are“irrevocable trust” whereas it should be “revocable trust”. ADIA madefurther submissions and addressed various communications to AAR. TheCIT(IT) gave its final report dated 1[st] November 2019 under Section245R(4) of the Act reiterating the submissions/contentions raised by themin their earlier report dated 6[th] August 2019. AAR also held hearing oncouple of days where ADIA reiterated its submissions made in their earlierletters and written submissions. Certain case laws were also relied upon byADIA. 11AAR did not accept any of the contentions raised by ADIA regardingthe income accrued on the investments made or proposed to be made by theTrust in Indian portfolio companies and passed a common order/rulingdated 18[th] March 2020, which is impugned in both these petitions, denyingADIA and ETL the benefit of the India-UAE DTAA. AAR, inter alia,concluded:- (i) The income from investment in debt portfolios in India is received andaccrues to the Trust in India and is taxable under Section 5 read withSection 9 (1) (i) of the Act. (ii) Since there is no treaty between India and Jersey, income received oraccrued or arising in India to the Trust registered in Jersey is taxable inIndia. (iii) India-UAE Treaty does not apply to the Trust or the Trustee. (iv) Since India has not ratified the Hague Convention on the LawApplicable to Trust and on their recognition (“Hague Trust Convention”,Convention of 1st July 1985), trust laws of a foreign jurisdiction are notapplicable in India. (v) In case of a trust, the settlor cannot be the sole beneficiary. Otherwisethe trust would serve no purpose as the trustee is the legal owner of theproperty in trust, as fiduciary for the beneficiary or beneficiaries who are theequitable owner (s) of the trust property. In the present case, since ADIA isthe settlor and the sole beneficiary, it does not satisfy the essentialingredients of a trust. (vi) ADIA’s arguments on application of Section 61 of the Act was rejectedby holding that “if Ld AR insists in enforcing sec 61 to present case, it mayamount to case of prima facie tax avoidance by ADIA and application maybe hit by threshold bar under clause (iii) to proviso to sec 245R(2) of theAct. Hence, the references to these sections are not pertinent.” (vii) Bifurcate the accrual and receipt of income by the trust and the beneficiary in three stages – Stage 1 is the accrual/receipt of mainly interestincome to the trust as sub-account of FII. Stage 2 is transfer of income to thetrustee of the trust and Stage 3 is receipt of income by ADIA as and whentransferred by trustee by virtue of deed of settlement between ADIA and theTrustee. (vi) ADIA’s arguments on application of Section 61 of the Act was rejectedby holding that “if Ld AR insists in enforcing sec 61 to present case, it mayamount to case of prima facie tax avoidance by ADIA and application maybe hit by threshold bar under clause (iii) to proviso to sec 245R(2) of theAct. Hence, the references to these sections are not pertinent.” (vii) Bifurcate the accrual and receipt of income by the trust and the beneficiary in three stages – Stage 1 is the accrual/receipt of mainly interestincome to the trust as sub-account of FII. Stage 2 is transfer of income to thetrustee of the trust and Stage 3 is receipt of income by ADIA as and whentransferred by trustee by virtue of deed of settlement between ADIA and theTrustee. In stage 1, the income is taxable in India as there is no treaty betweenIndia and Jersey. Even if it is presumed that the income accrues or arises tothe trustee, it is still taxable in India as the income has arisen in India andthe trustee being a private limited company is registered in Jersey withwhom there is no treaty. (viii) The Trust is not a trust under the Indian Trust Act, 1882 and,therefore, does not fall under Section 160 (1) (iv). The income has accruedto the sub-account, i.e., the Trust. No income has accrued directly to thetrustee and, hence, it cannot be taxed in the like manner and to the sameextent as ADIA would have been taxable. (ix) Rejected the argument of ADIA that even if the trust is to be ignored,the income would still accrue to ADIA and would be exempt under theIndia-UAE DTAA. Piercing the veil or lifting of veil of an arrangement is forthe benefit of the Revenue to check if conception is used for tax evasion ornot. In the present scenario, piercing the veil is not warranted. (x) Accrual of income to trust is not income derived by ADIA. Hence, thesaid income does not fall under article 24 of India-UAE Treaty. (xi) Had ADIA routed the funds through an entity or structure based in UAE and ADIA being the beneficial owner, then interest income would have beenexempt under article 11(3) of India-UAE Treaty. The said view is fortified bythe amendment proposed in the Finance Bill, 2020 (exemption for certainincome of wholly owned subsidiaries of ADIA). [AAR relied on thisamendment in spite of the fact that the same was introduced in the Act postthe hearing of the application and was never put to ADIA, for them to makeany submissions thereon]. (xii) Section 115AD of the Act, applicable to FIIs, is a code in itself. Hencethe income earned by the Trust is taxable in India as per Section 115AD ofthe Act. 12Shri Pardiwalla submitted that the term transfer and revocabletransfer have been defined under Section 63 of the Act, which reads asunder: “63. "Transfer" and" revocable transfer" defined For the purposes of sections 60, 61 and 62 and of this section,- (a) a transfer shall be deemed to be revocable if- (i) it contains any provision for the re-transfer directly or indirectly ofthe whole or any part of the income or assets to the transferor, or(ii) it, in any way, gives the transferor a right to re-assume powerdirectly or indirectly over the whole or any part of the income orassets; (b) " transfer" includes any settlement, trust, covenant, agreement orarrangement.” Shri Pardiwalla submitted: (a)That Section 63 clearly provides that the capital contribution made and/or proposed to be made by ADIA as Settlor in the trust are transfers for the purpose of Section 63(b) of the Act since it defines transfers to include any settlement or trust; (b)In view of the provisions of the Deed of Settlement, the capitalcontribution made and/or proposed to be made by ADIA for the Trust willbe in the nature of revocable transfer; (c)The trust fund will be held by trustee, i.e., ETL in trust for the solebeneficiary, which expressly mean that the funds held by the trust are heldon behalf of ADIA as settlor for the benefit of ADIA as beneficiary; (b) " transfer" includes any settlement, trust, covenant, agreement orarrangement.” Shri Pardiwalla submitted: (a)That Section 63 clearly provides that the capital contribution made and/or proposed to be made by ADIA as Settlor in the trust are transfers for the purpose of Section 63(b) of the Act since it defines transfers to include any settlement or trust; (b)In view of the provisions of the Deed of Settlement, the capitalcontribution made and/or proposed to be made by ADIA for the Trust willbe in the nature of revocable transfer; (c)The trust fund will be held by trustee, i.e., ETL in trust for the solebeneficiary, which expressly mean that the funds held by the trust are heldon behalf of ADIA as settlor for the benefit of ADIA as beneficiary; (d)The Deed of Settlement also provides for re-transfer of the entireincome arising on the investments made by the Trust in the portfoliocompanies and the principal amount invested in the portfolio companiesand the trustee is obliged to distribute receipts from portfolio investmentsonly to the sole beneficiary, i.e., ADIA; (e)The Deed of Settlement also provides ADIA as settlor with the right toterminate the Trust at any time before the expiry of the term and will beentitled to proceeds of dissolution of the Trust. This means that ADIA assettlor has a right to re-assume power over the entire income arising on theinvestments made by the Trust in the portfolio companies and the principalamount invested in the portfolio companies. Upon such revocation as perthe right, ADIA as settlor having revoked the trust, all the remainingprincipal amount would revert absolutely to ADIA as settlor; (f)Therefore, since the Deed of Settlement expressly provides for re-transfer of right to re-assume power over the entire income arising on theinvestments made by the Trust in the portfolio companies as well as the principal amount invested in the portfolio companies, the transfer of thecontribution that have been made and/or will be made by ADIA to the Trustare/will each be a revocable transfer under the provisions of Section 63 ofthe Act. 13Shri Pardiwalla also relied upon Section 61 of the Act which containsprovisions relating to taxability of income arising by virtue of revocabletransfer of assets and the same reads as under: “ Revocable Transfer of Assets 61. All income arising to any person by virtue of a revocable transferof assets shall be chargeable to income-tax as the income of thetransferor and shall be included in his total income.” Shri Pardiwalla submitted as the capital contribution made and/or to be made by ADIA in the trust will be a revocable transfer under Section 63of the Act, any income on the investment that is proposed to be made by thetrust in the portfolio companies, in view of the provisions of Section 61 ofthe Act, shall be chargeable to income-tax as the income of ADIA (settlor)and shall be included in the total income of ADIA as settlor only. 14Shri Pardiwalla also submitted, in the alternative and in addition, thatby the Deed of Settlement between ADIA and ETL as settlor and trustee,respectively, the trust has been set up for the benefit of ADIA, the solebeneficiary of the trust. Therefore, it is a determinating trust and even ifone says provisions of Section 61 are not applicable, then also the Trusteescan only be assessed in a representative capacity. Accordingly, the provisionsof Section 160(1)(iv) of the act, will be applicable. Since the trustee isentitled to receive income on behalf of the sole beneficiary, it should be considered as representative assessee of the sole beneficiary. “Section 160 - Representative assessee(1) For the purposes of this Act, “representative assessee” means:- 14Shri Pardiwalla also submitted, in the alternative and in addition, thatby the Deed of Settlement between ADIA and ETL as settlor and trustee,respectively, the trust has been set up for the benefit of ADIA, the solebeneficiary of the trust. Therefore, it is a determinating trust and even ifone says provisions of Section 61 are not applicable, then also the Trusteescan only be assessed in a representative capacity. Accordingly, the provisionsof Section 160(1)(iv) of the act, will be applicable. Since the trustee isentitled to receive income on behalf of the sole beneficiary, it should be considered as representative assessee of the sole beneficiary. “Section 160 - Representative assessee(1) For the purposes of this Act, “representative assessee” means:- ……...(iv) in respect of income which a trustee appointed under a trustdeclared by a duly executed instrument in writing whethertestamentary or otherwise including any wakf deed which is validunder the Mussalman Wakf Validating Act, 1913 (6 of 1913), receivesor is entitled to receive on behalf or for the benefit of any person,such trustee or trustees;” ………... Shri Pardiwalla further submitted that the provisions with respect to the liability of representative assessee are covered under Section 161 of the Act, which reads as under: Section 161- “Liability of representative assessee (1) Every representative assessee, as regards the income in respect ofwhich he is a representative assessee, shall be subject to the sameduties, responsibilities and liabilities as if the income were incomereceived by or accruing to or in favour of him beneficially, and shallbe liable to assessment in his own name in respect of that income; butany such assessment shall be deemed to be made upon him in hisrepresentative capacity only, and the tax shall, subject to the otherprovisions contained in this Chapter, be levied upon and recoveredfrom him in like manner and to the same extent as it would beleviable upon and recoverable from the person represented by him. 1A) Notwithstanding anything contained in sub-section (1), whereany income in respect of which the person mentioned in clause (iv) ofsub-section (1) of section 160 is liable as representative assesseeconsists of, or includes, profits and gains of business, tax shall becharged on the whole of the income in respect of which such person isso liable at the maximum marginal rate : Provided that the provisions of this sub-section shall not apply wheresuch profits and gains are receivable under a trust declared by anyperson by will exclusively for the benefit of any relative dependent onhim for support and maintenance, and such trust is the only trust sodeclared by him. (2) Where any person is, in respect of any income, assessable underthis Chapter in the capacity of a representative assessee, he shall not,in respect of that income, be assessed under any other provision ofthis Act.” In view thereof, even if the income is taxed in the hands of theTrustee, in terms of Section 161(1) of the Act, it will be taxed in the “likemanner and to the same extent” as the beneficiary. As the tax on incomereceived by or accruing to the Trust from the investments made or proposedto be made in portfolio companies is to be levied in the hands of the trusteeand recovered from the trustee in the like manner and to the same extent asit would be leviable upon and recoverable from the sole beneficiary and aspetitioner is the sole beneficiary of the Trust, the income assessed in thehands of the Trustee will take colour of that of petitioner’s income andthereby, the benefit of the India-UAE DTAA must be granted. 15Shri Pardiwalla relied upon Article 24 of Agreement for Avoidance ofDouble Taxation and Prevention of Fiscal Evasion with UAE entered intobetween Government of India and Government of UAE which reads asunder:- “Article 24: Income of Government & Institutions:- 15Shri Pardiwalla relied upon Article 24 of Agreement for Avoidance ofDouble Taxation and Prevention of Fiscal Evasion with UAE entered intobetween Government of India and Government of UAE which reads asunder:- “Article 24: Income of Government & Institutions:- 1. Notwithstanding the provisions of Article 13, the Government ofone contracting State shall be exempt from tax, including capitalgains tax, in the other contracting State in respect of any incomederived by such Government from that other contracting State. 2. For the purposes of paragraph (1) of this Article, the term“Government”- (a) in the case of India means the Government of India, and shallinclude: (i) the political sub-divisions, the local authorities, the localadminstrations, and the local Governments; (ii) the Reserve Bank of India;(iii) any such institution or body as may be agreed from time to timebetween the two contracting States; (b) in the case of UAE means the Government of the United ArabEmirates and shall include: (i) the political sub-divisions, the local authorities, the localadministrations, and the local Governments; (ii) The Central Bank of the United Arab Emirates, Abu DhabiInvestment Authority and Abu Dhabi Fund for EconomicDevelopment; (iii) any such institution or body as may be agreed from time to timebetween the two contracting States.” Shri Pardiwalla submitted that as per Article 24 of the India-UAE DTAA, ADIA is covered under the meaning of the term ‘Government’ of theUnited Arab Emirates and any income derived by ADIA from India will beexempt from tax in India in the hands of ADIA. Shri Pardiwalla also submitted that under Section 90(2) of the Act the provisions that are more beneficial to the assessee should apply. Section 90(2) of the Act reads as under: Section 90 - Double Taxation Relief: …….. (2) Where the Central Government has entered into an agreementwith the Government of any country outside India under sub- section(1) for granting relief of tax, or as the case may be, avoidance ofdouble taxation, then, in relation to the assessee to whom suchagreement applies, the provisions of this Act shall apply to the extentthey are more beneficial to that assessee. ……... Therefore, the provisions of Article 24 of India-UAE DTAA should apply as it is more beneficial than the provisions of the Act. Thus, ADIA should not be liable to pay tax on any income which may arise frominvestments made by the Trust in portfolio companies. 16Shri Pardiwalla thereafter relied upon Section 166 of the Act. Section 166 of the Act reads as under: Section 166- “Direct assessment or recovery not barred.Nothing in the forgoing sections in this Chapter shall prevent eitherthe direct assessment of the person on whose behalf or for whosebenefit income therein referred to is receivable, or the recovery from such person of the tax payable in respect of such income.” Shri Pardiwalla submitted:- (a)Under Section 166 of the Act, in the case of representative assessee,the revenue has an option embodied in Section 166 to assess thebeneficiaries instead of the trustees or having assessed the trustees it mayproceed to recover the tax from the beneficiaries. (b)The basic idea underlying section 166 is that the liability of thetrustee should be co-extensive with that of the beneficiaries and in no sensewider or a larger liability and when the question of payment of tax arise, thesection mandates to the taxation department that when they are dealingwith the income of trustee, they must levy the tax and recover it in themanner laid down in Section 161(1) of the Act; such person of the tax payable in respect of such income.” Shri Pardiwalla submitted:- (a)Under Section 166 of the Act, in the case of representative assessee,the revenue has an option embodied in Section 166 to assess thebeneficiaries instead of the trustees or having assessed the trustees it mayproceed to recover the tax from the beneficiaries. (b)The basic idea underlying section 166 is that the liability of thetrustee should be co-extensive with that of the beneficiaries and in no sensewider or a larger liability and when the question of payment of tax arise, thesection mandates to the taxation department that when they are dealingwith the income of trustee, they must levy the tax and recover it in themanner laid down in Section 161(1) of the Act; (c)The trustees would be assessed in the representative capacity asrepresenting the beneficiary. This, of course, does not mean that therevenue cannot proceed to make direct assessment on the beneficiary inrespect of the interest in the trust properties which belongs to him. Thebeneficiary would always be assessable in respect of his interest in the trustproperties, since such interest belongs to him and the right of the Revenueto make direct assessment on him in respect of such interest standsunimpaired by the provision enabling assessment to be made on the trusteein a representative capacity. The Revenue, therefore, may either assess suchincome in the hands of the trustee in a representative capacity under sub- The trustees would be assessed in the representative capacity as section (1) of Section 161 or assess it directly in the hands of the beneficiaryby including it in the net wealth of the beneficiary. What is important tonote is that in either case what is taxed is the interest of the beneficiary inthe trust properties and not the corpus of the trust properties. So alsowhere beneficiaries are more than one, and their shares are indeterminateor unknown, the trustees would be assessable in respect of their totalbeneficial interest in the trust properties. It is provided that the assessmentmay be made on the trustee as if the beneficiaries for whose benefit thetrust properties are held were an individual; (d)The beneficial interest is treated as if it belonged to one individualbeneficiary and assessment is made on the trustees in the same manner andto the same extent as it would be on such fictional beneficiary; (e)Wherever there is a trust, it is obvious there must be beneficiariesunder the trust, because the very concept of a trust connotes that though thelegal title vests in the trustee, he does not own or hold the trust propertiesfor his personal benefit but he holds the same for the benefit of others,whether individuals or otherwise; (f)It must follow inevitably from this premise that since it is thebeneficial interests which are taxable in the hands of the trustee in arepresentative capacity, the liability of the trustee cannot be greater than theaggregate liability of the beneficiaries and no part of the corpus of the trustproperties can be assessed in the hands of the trustee. 17Shri Pardiwalla also submitted that if the act was to extend to only Indian Trust, it would have expressly provided like it is provided in Section10 (23FB) of the Act, which provides for venture capital fund means a fundoperating under a trust deed registered under the provisions of theRegistration Act, 1908. Shri Pardiwalla submitted that Sections 60 to 63 orSection 160 or 161 of the Act does not provide for any such qualification.Therefore, Sections 60 to 63 and 160, 161 and 166 are applicable to aforeign trust. 18Shri Pardiwalla relied upon the following judgments: (a)Columbia Sportswear Company Vs. Director of Income Tax,Bangalore[1] to submit that there is no alternate remedy against advanceruling by AAR and the proper forum to challenge will be the Division Benchof High Court under Articles 226 and 227 of the Constitution of India. Indian Trust, it would have expressly provided like it is provided in Section10 (23FB) of the Act, which provides for venture capital fund means a fundoperating under a trust deed registered under the provisions of theRegistration Act, 1908. Shri Pardiwalla submitted that Sections 60 to 63 orSection 160 or 161 of the Act does not provide for any such qualification.Therefore, Sections 60 to 63 and 160, 161 and 166 are applicable to aforeign trust. 18Shri Pardiwalla relied upon the following judgments: (a)Columbia Sportswear Company Vs. Director of Income Tax,Bangalore[1] to submit that there is no alternate remedy against advanceruling by AAR and the proper forum to challenge will be the Division Benchof High Court under Articles 226 and 227 of the Constitution of India. (b)Union of India & Anr. Vs. Azadi Bachao Andolan & Anr[2] to submitthat the terms of the agreement for avoidance of double taxation wouldautomatically override the provisions of Income Tax Act in the matter ofascertainment or chargeability to income tax and ascertainment of totalincome to the extent of inconsistency with the terms of double taxationagreement. In other words, in case of inconsistency between the terms ofthe agreement and the taxation statute, the agreement alone would prevail. (c)Bhavana Nalinkant Nanavati Vs. Commissioner of Gift Tax[3], to submitthat there is no bar in the settlor being the sole beneficiary. Relying on thisjudgment Shri Pardiwalla submitted that the ownership of a trust is a matter 1(2012) 11 Supreme Court Cases 224 2 (2004) 10 SCC 1 3(2002) 255 ITR 0529 of form rather than of substance. The property may belong to thebeneficiary but for obligation and use of it, the property vests in the trust.The trustee is under an obligation to use the ownership rights for the benefitof those to whom the ownership rights really belong, i.e., beneficiary. ShriPardiwalla states that though trustee comes in possession of the property,the possession is for the benefit of another, i.e., beneficiary. Thus, thetrustee is merely a conduit or a vehicle by means of which the donor passeson the interest which donor had in the trust property in favour of thebeneficiary, and there is no bar in the settlor and the sole beneficiary beingone and the same. (d)Commissioner of Wealth Tax Vs. Estate of Late Hmm Vikramsinhji ofGondal[4] to submit that even Foreign Trusts are recongnised in Indian TaxLaws. (e)The Commissioner of Wealth Tax, Andhra Pradesh, Hyderabad Vs.Trustees of H. E. H. Nizam’s Family (Remainder Wealth Trust), Hyderabad[5]to submit that when an assessment is contemplated to be made on thetrustee, it is really the beneficiaries who are sought to be assessed in respectof their interest in the trust properties through the trustee. 19Shri Kotangle made very brief submissions. Shri Kotangle submitted:- (a)There was no treaty between India and Jersey and, therefore, the trustwas taxable as a non resident under Section 5(2) of the Act, which dealswith the scope of total income of a person, who is a non resident. Therefore,was taxable as a non resident under Section 5(2) of the Act, which dealswith the scope of total income of a person, who is a non resident. Therefore, 4(2014) 363 ITR 0679 5 (1977) 3 SCC 362 if any income is received by or accrues or arise in India to a trust, it will beincome due to having accrued or arisen in India and hence taxable; (b)As there is no treaty between India and Jersey where the trust issettled, the India-UAE DTAA will not be applicable; (c)Under Section 1 of the Indian Trust Act 1882, it only extends to thewhole of India and hence will not be applicable to the Foreign Trust and forthe trust, the liability for trust prevalent will be applicable and as there is notreaty between India and Jersey, Sections 63 or 161 to 164 does not apply.Shri Kotangle, however, did not elaborate; (d)Shri Kotangle, however, fairly conceded that India-UAE DTAAoverrides the provisions of the Act as held by the Apex Court inAzadibachao Andolan (Supra). 5 (1977) 3 SCC 362 if any income is received by or accrues or arise in India to a trust, it will beincome due to having accrued or arisen in India and hence taxable; (b)As there is no treaty between India and Jersey where the trust issettled, the India-UAE DTAA will not be applicable; (c)Under Section 1 of the Indian Trust Act 1882, it only extends to thewhole of India and hence will not be applicable to the Foreign Trust and forthe trust, the liability for trust prevalent will be applicable and as there is notreaty between India and Jersey, Sections 63 or 161 to 164 does not apply.Shri Kotangle, however, did not elaborate; (d)Shri Kotangle, however, fairly conceded that India-UAE DTAAoverrides the provisions of the Act as held by the Apex Court inAzadibachao Andolan (Supra). Shri Kotangle, however, fairly conceded that India-UAE DTAA To a specific query raised by the court, Shri Kotangle in fairness, also agreed that there are no provisions in the Act which says that the provisionsof Sections 61 to 63 or 161 to 166 are not applicable to Foreign Trust. 20Shri Kotangle also submitted that ADIA received income through adevice and not from direct or immediate receipt or transfer of income bytrust and, therefore, income received from Indian debt investment is notderived by ADIA and as Article 24 of the Indian-UAE DTAA only exemptfrom tax the income derived by one government from other confirmingState, the treaty is not applicable. Shri Kotangle submitted that ADIA couldhave directly invested in the instruments or investments in which the trusthad invested but chose not to invest directly. When the court asked as to whether there is any bar for any entity to make investments through anyspecial purpose vehicle, Shri Kotangle agreed that there was no bar. Whenthe court mentioned to Shri Kotangle when the purposes of chapter V, ascontained in Act, is to tax the amount in the hands of the transferor whomade the transfer, amounts / income in the name of a third party or abeneficiary so that the tax on the income derived from the transferredamount is not avoided, and in this case since ADIA itself is not liable to payany tax as it is directly mentioned in Article 24 of the India-UAE DTAA, therewas no benefit for ADIA to adopt this method to invest which they havedone, Shri Kotangle did not disagree. 21The following facts are not disputed:- a) income earned through ADIA’s investment in the Indian debt portfoliosdirectly would have been exempted under Article 24 of India UAE treaty; b) ADIA was registered as FII and later FPI with SEBI; c) The Deed of Settlement with ETL regarding the trust; d) ADIAhas made a capital commitment of USD 200 million in the Trust inthe capacity of the settlor of the Trust, ETL is the trustee of the trust andADIAis also the sole beneficiary of the trust; e) The Trust is registered as FPI with SEBI; 22According to the impugned order dated 18[th] March 2020 the incomefrom investment in debt portfolio in India received and/or accrued to thetrust in India is taxable under Section 5, read with Section 9(1)(i) of theAct. This is because:- a) the trust is registered in Jersey and there is no treaty between India and Jersey. b) Sections 61 and 63 of the act would apply only to those trust which fall under the Indian Trust Act 1882 and as thetrust does not meet the definition, characteristics andfeatures of trust as per Indian Law. c) India has not ratified the Hague Trust Convention