Case: The Commissioner of Income-Tax (International Taxation) Vs. Jsh (Mauritius) Limited

1. The present Respondent applied for an advance ruling to the Authority for Advance RulingsNew Delhi (hereinafter referred to as "AAR" for the sake of brevity) to ascertain whether capital gains in respect of the transfer of shares of Tata Industries Limited (hereinafter referred to as "TIL" for the sake of brevity) to Tata Sons Limited (hereinafter referred to as "TSL" for the sake of brevity) are taxable in India in the hands of the Respondent/Applicant by virtue of theTax Treaty.The Applicant sought ruling on following questions :"Question 1 : Whether on the facts and circumstances of the case, the Applicant will be entitled to the benefits of the Agreement between the Government of Mauritius and the Government of the Republic of India for the avoidance of double taxation and prevention of fiscal evasion (thetax treaty) with respect to taxes on income and capital gains Question 2 : If the answer to Question 1 is in the affirmative, whether on the facts and circumstances of the case, the gains arising to the Applicant from transfer of shares in Tata Industries Limited (TIL) to Tata Sons Limited (TSL) would not be liable to tax in India having regard to the provisions of Article 13 of thetax treaty Question 3 : Whether on the facts and circumstances of the case, if answer to Question 2 is in affirmative, the Applicant, being a foreign company and in absence of a Permanent Establishment (PE) in India, would not be subject to tax under the provisions of Section 115JB of the Act "2. The Authority for Advance RulingsNew Delhi answered the aforesaid three questions in favour of the Respondent. Aggrieved thereby, the Commissioner of(International Taxation)3 has filed present Writ Petition.

Court's reasoning:
7. The factual matrix that the Respondent is incorporated in Mauritius, holds a Category 1 Global Business License issued by Financial Services Authority of Mauritius and is incorporated on 04/04/1996, is not disputed. It is also not disputed that the Certificate is issued by the Mauritius Revenue Authority to the Respondent evidencing that it is a tax resident in Mauritius during the relevant period. The Respondent had acquired shares of Tata Industries Limited (TIL) in June 1996 is a matter of record. The Respondent sold shares of TIL on 10th July 2009 is also a matter of record.8. Section 90(2) of the Act specifically provides that where the Government of India had entered into Double Taxation Avoidance Conveyance (hereinafter referred to as "DTAC" for the sake of brevity) with the Government of any other country for granting relief of tax or any avoidance of double taxation, then in relation to the Assessee to whom said agreement applies, the provisions of Tax Treaty shall apply to the extent they are more beneficial to the Assessee. The Circular dated 30th October 1995 so also above referred Circulars of the year 2003 and 2013 clarifies the said aspect. The Apex Court in a case of Azadi Bachao AndolanAnr. (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 tolerated in a developing economy, in the interest of long term development. Deficit financing, for example, is one; treaty shopping, in our view, is another. Despite the sound and fury of the respondents over the so called "abuse" of "treaty shopping", perhaps, it may have been intended at the time when theDTAC was entered into. Whether it should continue, and, if so, for how long, is a matter which is best left to the discretion of the executive as it is dependent upon several economic and political considerations. This court cannot judge the legality of treaty shopping merely because one section of thought considers it improper. A holistic view has to be taken to adjudge which is perhaps regarded in contemporary thinking as a necessary evil in a developing economy."9. The Apex Court in the said Judgment further observed that Section 90 is specifically intended to enable and empower the Central Government to issue a notification for implementation of the Double Tax Avoidance Agreement. When that happens, the provisions of such an agreement with respect to cases to which they apply would operate even if inconsistent with the provisions of Income Tax Act. The Apex Court further observed that the Circulars issued by the CBDT under Section 119 of the Act are binding on all officers and employees employed in the execution of the Act, even if they deviate from the provisions of the Act. The Apex Court in the said Judgment observed that the whole purpose of DTAC is to ensure that the provisions thereunder are available even if they are inconsistent with the provisions of Indian Income Tax Act. The further observation is made by the Apex Court that the principle of piercing the veil of incorporation can hardly apply to a situation as the one before it. The Apex Court further made the following observations :"If the court finds that notwithstanding a series of legal steps taken by an assessee, the intended legal result has not been achieved, the court might be justified in overlooking the intermediate steps, but it would not be permissible for the court to treat the intervening legal steps as non est based upon some hypothetical assessment of the "real motive" of the assessee. In our view, the court must deal with what is tangible in an objective manner and cannot afford to chase a willo the wisp.""We are unable to agree with the submission that an act which is otherwise valid in law can be treated as non est merely on the basis of some underlying motive supposedly resulting in some economic detriment or prejudice to the national interests, as perceived by the respondents."10. In the present matter, it would be relevant to note that the shares were purchased by the Respondent in the year 1996 and were held for long period of 13 years and were sold in the year 2009. This goes to suggest the bona fide of the applicant. The said shares were again invested in the another company of the same group in India and the same are being held by the Respondent. Considering this aspect, it has been observed by the AAR that the Respondent is not a Fly By Night or a Shell Company. It does not appear that while considering the factual matrix of the matter, the AAR has perversely recorded any finding. It has based its finding on the basis of evidence on record. The said findings is a findings of fact arrived at on the basis of appreciation of evidence. With regard to the objection raised by the Petitioner under Section 245(R) (2)(iii) of the Act, the same would not arise at this stage. The said provision reads as under :"245R. Procedure on receipt of application.(1).......(2) The Authority may, after examining the application and the records called for, by order, either allow or reject the application: Provided that the Authority shall not allow the application where the question raised in theis already pending before anyauthority or Appellate Tribunal [except in the case of a resident applicant falling in(iii) of clause (b) of section 245N] or any court;(ii)involves determination of fair market value of any property;(iii) relates to a transaction or issue which is designed prima facie for the avoidance of income tax [except in the case of a resident applicant falling in(iii) of clause (b) of section 245N.Provided further that no application shall be rejected under this subsection unless an opportunity has been given to the applicant of being heard:Provided also that where the application is rejected, reasons for such rejection shall be given in the order.(3) A copy of every order made under subsection (2) shall be sent to the applicant and to the Commissioner."11. The said provision would come into operation when the application by the party relates to a transaction or an issue which is designed prima facie for the avoidance of income tax. On 14th day of September 2011, the AAR passed an Order stating that the issue with regard to the investment made by holding company would be considered while considering the application for ruling under Section 245(R) (4) of the Act. The said Order was never assailed by the Petitioner. The Petitioner thereafter submitted to the jurisdiction of the AAR and contested the matter on merits. The Ruling is given by the AAR. The AAR on considering the application and the documents and the facts on record had conclusively held that the transaction is not designed for avoidance ofOnce such conclusive finding is given, it would not be open for the Petitioner to fall back on Section 245(R)(2)(iii).12. The reliance placed on Section 9(1)(i) and Explanation 5 thereto by the learned counsel for the Petitioner would not be of any avail to the Petitioner. In the present case, the Respondent has placed reliance on the Double Taxation Avoidance Agreement between India and Mauritius. It is clear from the said Agreement that the capital gains from alienation of the shares situated in India could only be taxed in Mauritius and not in India. The Apex Court in a case of Azadi Bachao AndolanAnr.(supra) has clearly observed that the terms and provisions of the Agreement i.e. DTAA shall operate even if they are inconsistent with the provisions of the Income Tax Act. The Petitioner could have relied on Section 9(1)(i) and Explanation 5 if the present case would have not been covered by the DTAA.13. Though the question of limitation/delay/laches would not be inconsequential we refrain from going into said aspect as we have decided this Petition on merits itself.