Case: Aditya Birla Nuvo Limited &amp; Others Vs. The Deputy Director of Incometax &amp; Others

4. On 4th March 1995, a Company known as Birla Communications Limited (presently known as Idea Cellular Limited) was formed by the Birla Group of Companies in India. At that time, the Birla Group consisted of Grasim Industries Limited, Hindalco Industries Limited, Indian Rayon and Industries Limited and IndoGulf Fertilizers and Chemicals Corporation Limited.5. On 5th December 1995,Corp, a Company incorporated in the United States of America and Grasim Industries Limited representing the Birla Group entered into a Joint Venture Agreementfor short), under which, Birla Communications Limited was to be the Joint Venture Companyfor short) for carrying on the wireless telecommunication service in India by obtaining requisite licence from the Department of Telecommunications in Indiafor short). Under the joint venture, 51% equity shares of the JVC were to be subscribed and owned by the Birla Group and 49% of the equity shares of the JVC were to be subscribed and owned byCorp. The JVA was executed by the Executive Vice President,Wireless Services Inc, USA. Thus,Wireless Services Inc, USAUSA for short) and the Birla Group were the two joint venture partners holding 100% shares of the JVC.6. The salient features of the JVA dated 5th December 1995 were :a)the Birla Group, as founders under JVA, were to jointly own and operate the JVC, namely Birla Communications Limited [see preamble and Article 2.01]b) The Joint Venture was to provide wireless telecommunication services in India by obtaining a licence from the DoT, Government of India. [See Article 1.01]c) The founders were vested with the control, namely power to direct the management and policies, whether through the ownership of voting securities or by agreement or otherwise. [Article 1.01]d)USA was to subscribe to and pay for the number of common shares constituting 49% of the issued equity capital and the remaining 51% were to be subscribed by the Birla Group. [Article 2.01, 2.03 and 2.03].e) Owner of the equity capital of the JVC who are parties to the JVAUSA and Birla Group) would be party shareholders [see definitions]f) Thewere to exercise their rights as members /shareholders of the Company and ensure that the Articles of Association of the JVC are amended so as to incorporate the provisions of the JVA to the extent possible under the laws of India [Article 2.05].g) Each of the party shareholders who are founders agree that it will vote or cause to be voted all shares of equity capital owned by it. The shares of the JVC shall be held by thein their own name or through a party fulfilling the role of ated transferee shall be bound by the terms of JVA. Each founder agrees that its permitted transferees would perform their obligations in accordance with the terms of the JVA. Each founder is jointly and severally liable, as principal obligor for due performance of the obligations imposed on the permitted transferee under the JVA. Each of the party shareholders agree that it will vote or cause to be voted all shares of equity capital owned by it. If any director elected by the founder refuses to follow the terms of the JVA, then the founder shall take steps to remove such director. Any party may proceed against thewithout first proceeding against thetransferee. [Article 3.04].h) Thetransferee could be any Corporation which is a 100% subsidiary of the founder who owns the equity shares of the JVC. Each founder shall retain directly or indirectly, ownership of all the voting stock of the permitted transferee. Theted transferee were jointly and severally liable for all obligations and on fulfillment of various conditions only would shares for convenience of arrangement be transferred to the subsidiary as atransferee. [Article 12.04]i) The Board of the JVC shall consist of four directors appointed by Birla Group, four directors appointed byUSA and four independent directors with the consent of both theOne director representing each founder shall be a nonretiring Director. The chairman shall be appointed by the Birla Group and both the founders shall designate one board member each to act as theFounding Member. No director shall be removed without the consent of thewhom he represents. [Article 5.01].j) The company shall have a President nominated byUSA with the concurrence of the Birla Group. Birla Group shall nominate CFO with the consent ofUSA [Article 5.02].k) Certain key decisions of the group require an affirmative vote of theFounding Member representingUSA and one director representing Birla Group, thus both the founders haverights. [Article 5.03].l) At the general meeting of the company, thewill exercise their vote and act in such a manner so as to comply with and to fully and effectively implement the terms of the JVA.undertake to ensure that their representatives or agents who represents them at the Annual General Meeting of the company to implement the agreement. Entire obligation rests onted transferee is no more than a representative of the[Article 6.02].m) Theshall take place within 60 days of receipt of all approvals from Government of India and RBI. Further, at the time of closing, the company shall take steps to allot the shares to the representatives of the[Article 8.01].n) It is further stipulated that the approval of the Government of India and RBI shall be, for offer, allotment and subscription of equity shares of the company to the founders as per Section 2.02 of the agreement. [Article 8.01]o) AfterUSA, shall allot shares as stated in Article 2.02 [Article 2.02 contemplates allotment to Birla Group andUSA, being the founders in the ratio of 51% : 49%. [Article 8.03].p)USA represents and warrants to Birla Group thatUSA has full power to execute and deliver the JVA and the material agreements and to consummate the transactions contemplated under the JVA and material agreements. [Article 9.01]q) The JVA, the material agreements and all such other agreements and written obligations entered into and undertaken in connection with the transactions contemplated under the JVA and other agreements would be legally binding obligations ofUSA and enforceable againstUSA [Article 9.02]r) The JVA shall survive until six months after such time as the JVC no longer has any licenses to provide wireless communication service in India or until eithersells all of its shares of equity capital. [Article 11.01].s) The equity shares of the JVC cannot be sold by any party shareholder till the third anniversary of the closing date and only subject to the terms of the agreement after that date. [Article 12.02].t) The Share Certificate of equity capital held by theshall carry an endorsement imprinted on it to the effect that any sale of the shares shall be only subject to the JVA and the holder of shares cannot sell, assign or pledge the shares independent of the terms of the JVA. [Article 12.03].u) Theis allowed to transfer all its shares to the permitted transferee with a prior written notice to the other founder. No such transfer shall be effective until such permitted transferee agrees to be bound by the terms and conditions of the JVA. The founder and the Permitted Transferee shall be jointly and severally liable for all the obligations of the Founder. Upon meeting the above requirements for transfer, the JVC at the closing or thereafter shall issue Equity Capital directly to a permitted transferee. [Article 12.04].v) If any party shareholder receives any offer for purchase of its shares, the other founder shall have the right of first refusal. [Article 12.07].w) Notices in relation to the Joint Venture Agreement are to be sent toWireless Services Inc, a US company and a 100% subsidiary ofCorp, USA.Thus, under the JVA dated 5th December 1995, theUSA as a founder was to own and hold 49% equity shares in Birla Communications Limited [now known as Idea Cellular Limited]. Under the JVA, the equity shares subscribed by the founders as party shareholders could be issued in the name of a permitted transferee which is a 100% subsidiary of the founder.Cellular Private Limited, MauritiusMauritius for short), being a 100% subsidiary ofUSA was eligible to hold 49% equity shares of JVC as a permitted transferee of theUSA subscribed to the shares of the JVC and equity shares of the JVC were allotted in the name ofMauritius, as a permitted transferee ofUSA. As noted above, though the equity shares were issued in the name ofMauritius under the JVA as a permitted transferee ofUSA, all rights in respect of the said equity shares of the JVC, like voting rights, rights of management, right of sale or alienation etc absolutely vested inUSA.7. On 12th December 1995, the DoT granted a licence to the JVC (Birla Communications Limited) to provide the telecommunication services in the Maharashtra and Gujarat Telecom Circle.8. With effect from 30th May 1996, the name of Birla Communications Limited was changed to Birla ATCL for short). The change in the name was effected to take advantage of the worldwide brand equity of the Joint Venture Partner namelyUSA.9. In October 1997,Mauritius and the Birla Group executed a document titled aswith respect to closing of Joint Venture Agreement dated 5th December 1995, which reads thusrelation to the Joint Venture Agreement dated December 5, 1995 between the undersigned (thewe hereby confirm thata) all the Conditions to Closing as stipulated in Article 8.01 of the JVA have been satisfied, andb) the actions and deliveries required to be made at Closing as provided in Article 8.03 of the JVA have been made.The Closing Date, for the purposes of Article 8.01 is September 29, 1997 being the date when the Support Services Agreement and Secondment Agreement were exchanged between the parties; all other actions and deliveries referred to in Article 8.03 having taken place prior to September 29, 1997.10.Mauritius was neither a party to the JVA nor was it obliged to pay any amount under the JVA to hold the equity shares of ICL as a permitted transferee ofUSA. However, the liability ofUSA to pay for the equity shares of the JVC were discharged byMauritius during the period from 1996 to 2003. Equity shares of the JVC allotted in the name ofMauritius were approved by the Reserve Bank of India under Section 19(1)(a), 19(1)(b) and Section 29(1)(b) of the Foreign Exchange Regulation Act, 1973for short).11. On 15th December 2000, a Shareholders Agreement was entered into by and betweenWireless Services Inc, USA(acting on behalf of itself and theWireless Group), Grasim Industries Limited, India,(acting on behalf of itself and theAV Birla Group) and Tata Industries Limited, (acting on behalf of itself, the Tata Group), wherein it was agreed that the Tata Cellular Limitedfor short) would merge with BACL and the respective share holdings of the three groups in BACL would be restructured as per the Shareholders Agreement. According to Indian Rayon, after the merger of TCL the shareholding of the JVC were as follows :BirlaGroup33.70 per cent.TataGroup91 per cent.Financial Institutions1.70 per cent.The Shareholders Agreement specifically records thatWireless Services Inc. (signatory to the JVA dated 5th December 1995) is operating Cellular Services in Maharashtra and Gujarat telecom through its wholly owned subsidiaryMauritius. The Shareholders Agreement further records thatWireless Services Inc,The Shareholders Agreement records thatUSA, the joint venture partner under the JVA would, under the Shareholders Agreement, represent theWireless Group. The Shareholders Agreement further records that the terms of the said Agreement would be incorporated in the Articles of Association of BACL. Thus, as a result of the Shareholders Agreement, the shareholdings of the Birla Group as well asUSA (now representing theWireless Group) in BACL stood reduced from 51% to 33.70% and from 49% to 32.91% respectively. Under the Shareholders Agreement, the power ofUSA to appoint directors as per the JVA was reduced from four to three to accommodate the directors to be appointed by the Tata Group. All other clauses in the Shareholders Agreement remained the same as in the JVA dated 5th December 1995.12. The name of BACL after the merger of TCL was changed to Birla TataLimited with effect from 6th November 2001. Subsequently, the name of Birla TataLimited was once again changed to Idea Cellular Limitedfor short) with effect from 12th September 2003.13. In October 2004, Cingular Wireless LLC, USA acquired shares ofWireless Services Inc,Corporation, USA and renamed it as New CingularWireless Services Inc,. On 26th July 2005, NCWS received an irrevocable offer from India Tele Ventures Limited, an unrelated party, to purchase the interest of NCWS in ICL being the entire shareholdings of 74,35,61,480 equity shares forming 32.91% interest at a price of US$ 0.4035 per share aggregating to US$ 300 million.15. NCWS found the purchase price of equity shares of ICL offered by India Tele Ventures Limited to be reasonable. However, in terms of Article 10.06 of the Shareholders Agreement, NCWS was obliged to offer the shares of ICL first to the other two founders namely, the Birla Group and the Tata Group (as they had the rights of first refusal) and it was only if these two founders refused to purchase the shares of ICL, NCWS could sell those shares to third parties like India Televentures Limited. Accordingly, NCWS by its letter dated 26th July 2005 called upon the Birla Group and the Tata Group to exercise their rights of first refusal in purchasing the shares of ICL owned by NCWS.16. Grasim Industries Limited, acting on behalf of the Birla Group and Tata Industries Limited acting on behalf of the Tata Group accepted the offer in identically worded letters dated 29th July 2005 and 30th July 2005 respectively and informed NCWS about their willingness to purchase the shares of ICL offered by NCWS. As both the Groups, namely the Birla Group and the Tata Group were interested in purchasing the entire 74,35,61,480 equity shares of ICL offered by NCWS for US$ 300 million, each Group could get 37,17,80,740 equity shares of ICL on payment of US$ 150 million.17. Before entering into an agreement for purchase of 37,17,80,740 equity shares of Idea Cellular Limited (ICL) offered by NCWS, Indian Rayon representing the Birla Group applied to the Director of Income Tax (Intl Taxn), Mumbai on 29th August 2005 seekingcertificate under Section 195 of the 1961 Act to remit US$ 150 million toMauritius towards the purchase price of 37,17,80,740 equity shares of ICL. In the said application, it was inter alia stated that they were purchasing ICL shares fromMauritius and as per the provisions of Article 13 of the Double Taxation Avoidance Agreement (DTAA) between India and Mauritius as also Circular No.682 dated 30th March 1994 and Circular No.789 dated 13th April 2000, capital gains derived by a resident of Mauritius on alienation of shares in an Indian Company shall be taxed only in Mauritius. After considering the application as also the particulars furnished by Indian Rayon and after obtaining approval from DIT (Intl Taxn.), the Assistant Director of Income Tax (Intl. Taxn) by his communication dated 15th September 2005 authorized Indian Rayon to make payment of US$ 150 million toMauritius after deducting income tax at source at the ratetherefrom under Section 195(1) of the 1961 Act.18. Thereupon, Indian Rayon entered into an agreement withNCWS, USA on 28th September 2005 for purchase of 37,17,80,740 equity shares of ICL for US$ 150 million. On 29th September 2005, Indian Rayon deposited US$ 150 million in the bank account of

Reasoning:
29. In the present case, Indian Rayon pursuant to a Sale and Purchase Agreement dated 28th September, 2005 has purchased 37,17,80,740 equity shares of ICL fromMauritius and NCWS (USA) for US$ 150,000,000.Admittedly, the shares of ICL were registered in the name ofMauritius. However, the Sale and Purchase Agreement was executed jointly byMauritius and NCWS on 28th September 2005 and on 29th September, 2005, Indian Rayon paid the sale consideration of US$ 150,000,000 toMauritius. On the same day that is 29th September 2005 itselfMauritius transmitted an amount of US$ 150,000,475/to NCWS,joint venture was betweenCorp, USA duly executed byWireless Services Inc,T USA) and the Birla Group (which inter alia includes Indian Rayon). In October 2004, Cingular Wireless LLC, USA acquiredWireless Services Inc,USA and renamed it as New Cingular Wireless Services). As a result, the interest ofUSA in the JVC stood vested in NCWS which is also a Company incorporated in USA. The joint venture was entered into with a view to facilitateUSA to carry on wireless telecommunication business in India. The joint venture partnersUSA and the Birla Group) were to own 100% equity shares of the JVC as party shareholders. As per the JVA, the joint venture partners were entitled to hold the shares of the JVC in the name of a permitted transferee, however, all right, title and interest attached to the said shares were to vest in the joint venture partners only.Since the equity share amount was paid byMauritius and the equity shares were allotted in the name ofMauritius with the approval of the RBI, it is contended by Indian Rayon, that the beneficial ownership in those shares vested inMauritius and not in NCWS.Apart from the JVA there is no other document on record to show thatMauritius had independently entered into any transaction for acquiring the equity shares of the JVC. The obligation under the JVA to pay for the equity shares of the JVC was onUSA. 74,35,61,480 equity shares of the JVC allotted in the name ofMauritius corresponds to the shares subscribed byUSA under the JVA and the Shareholders Agreement. Out of 74,35,61,480 shares allotted toMauritius, 43,82,81,480 shares were allotted prior to the execution of the Shareholders Agreement. Obviously, the said 43,82,81,480 equity shares were allotted in the name ofMauritius in terms of thethe JVA, no director appointed by the founder could be removed without the consent of the founding member. The JVA specifically provides that the share certificates of equity capital issued in the name of a permitted transferee shall carry an endorsement to the effect that the sale of the said shares shall be subject to the JVA and the holder of those shares cannot sell, assign or pledge the shares independent of the terms of the JVA. In these circumstances, in the absence of any document to show thatMauritius had entered in to any transaction to subscribe to or purchase the shares of JVC in its own name, theview of the Revenue that the allotment of 43,82,81,480 equity shares of the JVC in the name ofMauritius was only as a permitted transferee ofUSA under the JVA and such allotment of shares in the name ofMauritius did not confer any beneficial ownership to theMauritius as expressly provided under the terms of the JVA, cannot be faulted.37. The fact thatMauritius made payments to the JVC towards the equity shares would not make it to be owner of the equity shares, because, firstly, under the JVA, the joint venture partners alone were to subscribe and own 100% equity shares of JVC and admittedlyMauritius was not a joint venture partner and, therefore, there was no obligation onMauritius to pay for the shares. Secondly, it is only because the JVA was implemented by the joint venture partners by subscribing to the shares of the JVC, the shares could be allotted in the name ofMauritius as a permitted transferee ofUSA. In other words, it is only because, the joint venture partners viz.USA and the Birla Group subscribed and owned the shares of the JVC, shares of the JVC were allotted to the joint venture partners or permitted transferee of the joint venture partners. Thirdly, there is no document on record to suggest that theMauritius had agreed to subscribe / purchase the shares of JVC. In these circumstances, the payments made byMauritius cannot be said to be payments for subscribing / purchasing the shares of the JVC in the name ofMauritius. Therefore, it is evident that the payments made byMauritius to the JVC was obviously for and on behalf ofUSA, because, under the JVA, the obligation to subscribe and own the shares of the JVC was on, on the date of the Shareholders Agreement allotment of 43,82,81,480 (see page 58 of the petition) equity shares of the JVC in favour ofMauritius was approved by RBI. Thus, in spite of the fact that 43,82,81,480 equity shares of the JVC were allotted in the name ofMauritius, it isUSA which has entered into the Shareholders Agreement as a shareholder of the JVC. Moreover, in the Shareholders Agreement, it is specifically recorded thatWireless Services Inc,T USA) is carrying on the telecommunication business in India through its wholly owned subsidiaryUSA could carry on business in India only in terms of the JVA by subscribing and owning the shares of the JVC to the extent permitted under the JVA. Thus, from the Shareholders Agreement it becomes clear that though the shares were allotted in the name ofMauritius the said shares were held byMauritius as a permitted transferee ofthe owner of the shares namely,e JVA expressly makes it clear that the permitted transferee shall have no right whatsoever in those shares. Thus, it is evident that 43,82,81,480 equity shares of the JVC were allotted toMauritius as a permitted transferee ofUSA as per the terms of the JVA. The ownership of the said shares, as per the terms of JVA vested inUSA. Even in respect of the shares of the JVC issued after the execution of the Shareholders Agreement, the ownership in the shares vested inUSA, because, the Shareholders Agreement did not make any departure in the ownership of the shares already issued or to be issued after the Shareholders Agreement. Thus, 74,35,61,480 equity shares allotted in the name ofMauritius were allotted as per the terms of the JVA and the Shareholders Agreement under which the ownership of the shares were to vest inUSA. That is why NCWS (successor toUSA) offered to sell the shares of ICL to the Birla Group and Indian Rayon representing the Birla Group intimated its acceptance of the offer to NCWS. Moreover, NCWS is a party to the Sale and Purchase Agreement. IfMauritius was the beneficial owner of the shares, then the Sale and Purchase Agreement would have been solely withMauritius and not jointly withMauritius and NCWS. Therefore, the argument of India Rayon that since the shares of the JVC stood in the name ofMauritius, it must be treated as beneficial owner of the shares cannot be accepted. Similarly, the argument that NCWS became a party to the Sale and Purchase Agreement on account of the warranties given by NCWS is without any merit, because, as per the clauses in the JVA and the Shareholders Agreement, shares of the JVC allotted in the name ofMauritius could not be sold byMauritius without the consent ofUSA (now NCWS). Thus, sale of ICL shares could be effected byMauritius only if NCWS consented to the sale. NCWS could give consent only if it wanted to get out of the joint venture partnership. Therefore, the argument that NCWS was a party to the Sale and Purchase Agreement, because of the warranties given by it cannot be accepted.41. Even while granting approval for allotment of shares in the name ofMauritius, the RBI recorded (see page 60 of the petition) thatMauritius is the wholly owned subsidiary ofUSA and that the allotment of equity shares of the JVC in favour ofMauritius shall not exceed 49% (later on reduced to 32.91% under the Shareholders Agreement) of the paid up capital of the JVC. These facts noted by RBI clearly suggests that the RBI approval was in terms of the JVA, wherein the ownership of the shares allotted in the name ofMauritius was to vest inUSA. Thus, the approval granted by RBI for allotment of shares in the name ofMauritius support the contention of the Revenue that the equity shares of the JVC were issued in the name ofMauritius under the JVA as a permitted transferee ofs noted earlier, out of 74,35,61,480 equity shares, 43,82,81,480 equity shares were allotted prior to the execution of the Shareholders Agreement and the remaining shares were allotted after the execution of the Shareholders Agreement. RBI approval does not make any distinction between the shares of the JVC allotted in the name ofMauritius prior to the Shareholders Agreement and subsequent to the Shareholders Agreement. In other words, RBI has merely approved allotment of shares of the JVC in the name ofMauritius prior to and subsequent to the Shareholders Agreement as a permitted transferee ofUSA. Therefore, the fact that the allotment of shares in the name ofMauritius were in accordance with the provisions of FERA does not support the argument of Indian Rayon thatMauritius held the shares of the JVC as a partydoubt, clause 12.07 of the Shareholders Agreement dated 15th December 2000 records that the understanding arrived at between the three parties therein in respect of the subject matter of the Shareholders Agreement shall be final and any understanding to the contrary under any other agreement between the parties shall stand superseded. Obviously, clause 12.07 of the Shareholders Agreement seeks to supersede the terms of the JVA to the extent they are in conflict with the Shareholders Agreement. The Shareholders Agreement does not deal with the rights vested inUSA in respect of the 43,82,81,480 equity shares of JVC already subscribed and owned byUSA but allotted in the name of the permitted transferee5. Relying on the CBDT circulars No.682 and 789 as also the Apex Court decision in the case of case of AzadiBachao Andolan (supra) wherein the above CBDT circulars have been held to be legal and binding, it is argued on behalf of India Rayon that once Tax Residence Certificate is issued toMauritius by the Republic of Mauritius, then it would constitute sufficient evidence for accepting the status of residence as well as beneficial ownership for applying DTAA between India and Mauritius and it would not be open to the tax authorities to go behind the Tax Residence Certificate and find out as to who are the beneficial owners of the shares of the JVC.46. In our opinion, the CBDT circulars explaining the DTAA between India and Mauritius as also the decision of the Apex Court in the case of AzadiBachao Andolan (supra) have no relevance to the facts of the present case for the following reasons :(a) The CBDT circulars relied upon by Indian Rayon were issued in the context of extending the benefits of the DTAA between India and Mauritius to the investments made in India by the entities incorporated in Mauritius. The said circulars would not apply where the investments are made in India by entities other than the entities incorporated in Mauritius. In the present case, the investments in India are made byUSA under the JVA dated 5th December 1995 (as modified by the Shareholders Agreement) and not by a company incorporated in Mauritius. As noted earlier, it isUSA which carried on the business in India by subscribing and owning the shares of the JVC. The fact thatUSA discharged its obligation to pay for the equity shares throughMauritius and the fact thatUSA as a joint venture partner of the JVC got the shares in the name of its permitted transfereeT Mauritius, it cannot be said that the investments in India are made byMauritius. In other words, in the present case,USA carried on business in India by entering into a JVA with the Birla Group and by investing funds in India by subscribing to the shares of the JVC. The fact that