Sale of shares by Mauritius Co can be treated as sale by 100% USA parent. Sale of shares of foreign company taxable if object is to acquire the Indian assets
Idea Cellular Ltd, an Indian company, was set up as a joint venture company pursuant to a JV agreement between AT&T Corp, USA, and the Birla Group. As provided by the agreement 49% of Idea Cellular’s equity was allotted to AT&T Mauritius, being 100% subsidiary & “permitted transferee” of AT&T, USA. Though the shares were allotted to AT&T Mauritius, all rights of voting, management, right to sell etc were vested in AT&T USA (subsequently known as “New Cingular Wireless Services Inc, USA” (“NCWS”). Subsequently, Tata Industries was inducted as a joint venture partner in Idea Cellular. Thereafter, 50% of the shares of Idea Cellular held by AT&T Mauritius were sold by AT&T Mauritius to Aditya Birla Nuvo (nominee of the Birla group) and 100% of the shares of AT&T Mauritius (which held the balance 50% of the shares of Idea Cellular) were sold by NCWS to Tata Industries. Aditya Birla Nuvo obtained a NOC u/s 195(2) permitting it to remit the sale consideration to AT&T Mauritius without TDS. The Court had to consider the validity of three proceedings initiated by the AO (i) Order u/s 163 treating Aditya Birla Nuvo as agent of NCWS USA on the ground that though the transferor was AT&T Mauritius, the gains from sale of the Idea Cellular shares was taxable in the hands of NCWS USA, (ii) Order u/s 163 treating Tata Industries as agent of NCWS USA on the ground that though the shares of AT&T Mauritius were purchased, effectively the underlying shares of Idea Cellular were purchased and (iii) Notice u/s 148 asking NCWS to file a return in respect of the gains arising from (indirect) transfer of the Idea Cellular shares. HELD deciding in favour of the department:
(i) Aditya Birla Nuvo’s argument that the shares of Idea Cellular were beneficially owned by AT&T Mauritius and that the gains would not be taxable in India under the India-Mauritius DTAA is not acceptable because under the JV agreement, AT&T Mauritius was merely the “permitted transferee” and acted “for and on behalf” of NCWS, USA. It was NCWS, USA which was the “beneficial owner” of the shares of idea Cellular and not AT&T Mauritius. Accordingly, Azadi Bachao Andolan 263 ITR 706 (SC) has no application;
(ii) The argument that s. 163 applies only with respect to income “deemed to accrue or arise” in India u/s 9 and not to income “accruing or arising” is not acceptable. Pursuant to Eli Lily 312 ITR 225 (SC), the income accruing or arising in India to NCWS, USA on transfer of a capital asset situate in India, (shares of Idea Cellular) is deemed to accrue or arise in India to NCWS and can be assessed either in the hands of NCWS or in the hands of the payer as agent of the non-resident u/s 163;
(iii) The argument that the AO having issued a NOC u/s 195(2) permitting Aditya Birla Nuvo to remit the sale proceeds without TDS could not recover the tax from the payer by treating it as agent is not acceptable because the said order was obtained by “suppressing material facts” relating to the circumstances in which the shares of Idea Cellular were issued in the name of AT&T Mauritius. As the payer had obtained the s. 195(2) Certificate by making a representation which was incorrect to its knowledge, it could not claim that the s. 195(2) Certificate was validly issued. Further, the proceedings u/s 163 & 195 operate in different fields;
(iv) The argument that once the AO exercises his option u/s 166 to assess the non-resident NCWS USA directly by issuing notice u/s 148, the proceedings initiated against the payer must come to an end is not acceptable because there is nothing in the Act to suggest that the option to assess either in the hands of the representative assessee or in the hands of the non-resident must be exercised at the threshold itself and not at the end of the assessment proceedings. While ordinarily, the AO must not proceed against the representative assessee once proceedings are initiated against the non-resident, in exceptional cases like the present one where complex issues are involved and the AO is unable to make up his mind on account of suppression of material facts, it is open to the AO to continue with the assessment proceedings against the representative assessee and the non-resident simultaneously till he decides to assess either of them;
(v) NCWS’ argument that the s. 148 notice is without jurisdiction is not acceptable because the prima facie belief of the AO that the transaction was in fact a transaction for transfer of a capital asset situate in India (shares of Idea Cellular) was with substance. It is open to NCWS to prove to the contrary by placing all material facts in the assessment proceedings;
(vi) Tata Industries’ argument that no gains are taxable in India as the subject matter of sale were shares of AT&T Mauritius and not the shares of Idea Cellular is not acceptable because prima facie it appears that the transaction for sale of shares of AT&T Mauritius was a “colourable transaction” and was in fact for sale of the shares of Idea Cellular.