The author argues that the adverse outcome of the Aditya Birla Nuvo matter was the result of shoddy drafting of the JV agreements by AT&T’s lawyers which the department’s lawyers exploited to the hilt. But its too early to write an obituary for the India-Mauritius DTAA says the author.
The judgement of the Bombay High Court in Aditya Birla Nuvo vs. DDIT must have sent a chill down the spine of foreign investors hoping to escape tax in India by routing their investments through Mauritius.
On paper, Aditya Birla Nuvo had a seemingly cast-iron case. Like hundreds of foreign investors before it, AT&T USA set up a 100% subsidiary in Mauritius, funded it with enough capital and got it to invest in the shares of Idea Cellular.
So what if AT&T Mauritius was a dummy company with no operations worth its name. It had the ‘precious’ Tax Residency Certificate from the Mauritius tax authorities and that is all that was required to wish away all tax headaches as per the CBDT’s Circular Nos 682 & 789 dated 30.3.1994 and 30.4.2000 and the judgement of the Supreme Court in UOI vs. Azadi Bachao Andolan 263 ITR 706.
Mohan Parasaran knew that arguing against Azadi Bachao Andolan would meet with a deaf ear from the judges. So, while Aditya Birla Nuvo’s counsel went hoarse reading pages and pages of Azadi Bachao Andolan, Mohan Parasaran gently goaded the Court “But MiLord, AT&T Mauritius is not the beneficial owner of the shares of Idea Cellular. It is a mere nominee of AT&T USA. So, how will Azadi Bachao Andolan at all apply?”
Aditya Birla Nuvo, well known for its conservatism, was not content with the paper work that AT&T Mauritius produced and so it went to the AO dutifully asking whether it needed to deduct income-tax at source while buying the shares from AT&T Mauritius.
Once the AO replied on the negative and said that the remittance could be made without deduction of tax at source, there was nothing for Aditya Birla Nuvo or AT&T to worry, or was there?
But, truly it is said by the wise folk that when you play with fire, you must not complain of burnt fingers. AT&T’s lawyers made several mistakes in the joint venture agreement that they caused AT&T to enter into with Aditya Birla Nuvo. For one, the lawyers forgot to make AT&T Mauritius a party to the agreement. Instead, they provided that AT&T USA would “nominate” AT&T Mauritius as its “permitted transferee” to hold the shares of Idea Cellular. More surprising, AT&T’s lawyers provided that despite the shares being held by AT&T Mauritius, the voting and all other rights like rights of management, right of sale or alienation etc absolutely vested in AT&T USA.
Now, such fatal drafting blunders can never go unpunished for long.
Mohan Parasaran, the soft-spoken but wily Additional Solicitor General, is a battle scarred veteran of many tax skirmishes including the celebrated Vodafone International Holdings vs. UOI 329 ITR 126 (Bom) where he single-handed brought glory to the department. He spotted this achilles heal in Aditya Birla Nuvo’s defence and carefully planned his strategy around it. Mohan Parasaran knew that arguing against Azadi Bachao Andolan would meet with a deaf ear from the judges. So, while Aditya Birla Nuvo’s counsel went hoarse reading pages and pages of Azadi Bachao Andolan, Mohan Parasaran gently goaded the Court “But MiLord, AT&T Mauritius is not the beneficial owner of the shares of Idea Cellular. It is a mere nominee of AT&T USA. So, how will Azadi Bachao Andolan at all apply?”
This sealed Aditya Birla Nuvo’s fate and the judges had no option but to solemnly hold “it is evident that the payments made by AT&T Mauritius to the JVC was obviously for and on behalf of AT&T USA, because, under the JVA, the obligation to subscribe and own the shares of the JVC was on AT&T USA”.
Aditya Birla Nuvo’s second line of defense was the s. 195(2) order passed by the AO permitting it to remit the sale proceeds without deduction of tax at source. “How can the AO permit us to remit without deduction and then demand that we pay up the taxes?” Aditya Birla Nuvo argued with righteous indignation.
But the department outwitted Aditya Birla Nuvo here as well. Mohan Parasaran, with his years of experience, would have instinctively known that if he argued that the AO was entitled to change his mind, the Judges would throw him out. Instead, he had to find ways to discredit Aditya Birla Nuvo and show that it had obtained the 195(2) certificate through unfair means. So, Mohan Parasaran dug deep and pulled out a letter dated 8.9.2005 written by Aditya Birla Nuvo to the AO in which it stated that “We would like to submit as these shares were directly allotted by the Idea Cellular Limited to the AT&T Cellular Pvt. Limited, Mauritius, there is no specific agreement relating to purchase of shares”. This was a fatal mistake because the shares had been allotted pursuant to the Joint Venture Agreement between AT&T USA and the Birlas. To say that “there was no specific agreement relating to purchase of shares” is a suppression of material facts argued Mohan Parasaran.
With that, Aditya Birla Nuvo’s ‘righteous indignation’ came a cropper and did not impress the Court. Instead, the Judges came down quite heavily on Aditya Birla Nuvo stating that “it could not claim to be an innocent purchaser unaware of the circumstances in which the shares were issued in the name of AT&T Mauritius”. Aditya Birla Nuvo also suffered the ignominy of being told that it had “knowingly made incorrect representations” to the AO to obtain the s. 195(2) certificate. The Court thundered that Aditya Birla Nuvo had not only “failed to disclose the material facts” but had also “wrongly represented the facts” to the AO. “Having wrongly represented to the AO, it is not open to Indian Rayon to contend that the AO is precluded from taking corrective steps as is permissible in law” the Court added.
Tata International lost sight of the fact that it had, in exercise of its right of first refusal in the Shareholders Agreement, agreed to purchase the shares of Idea Cellular for $150 Million and that instead of that it had purchased the entire shareholding of AT&T Mauritius for the same price. The department pounced on this and argued that the Mauritius company was merely an indirect way of acquiring the Idea Cellular shares given that the Mauritius company had no other assets
Tata International was also done in by poor drafting and shoddy planning. On paper, Tata International structured the agreement as a purchase of shares of a Mauritius company (AT&T Mauritius) instead of buying the shares of Idea Cellular that were held by AT&T Mauritius and propounded the seemingly irresistible argument that the gains arising from the sale of the shares of a Mauritius Company was never taxable in India.
However, Tata International lost sight of the fact that it had, in exercise of its right of first refusal in the Shareholders Agreement, agreed to purchase the shares of Idea Cellular for $150 Million and that instead of that it had purchased the entire shareholding of AT&T Mauritius for the same price. The department pounced on this and argued that the Mauritius company was merely an indirect way of acquiring the Idea Cellular shares given that the Mauritius company had no other assets. What compounded the problem for Tata International was that it provided in the shareholders’ agreement that the sale of the shares of the Mauritius Company would take place only after the Mauritius company had sold 50% of the shares of Idea Cellular to Aditya Birla Nuvo.
After that, there was not much left for the Court to do but to discard Tata International’s defense that it had “merely” bought the shares of a Mauritius company as a “colourable transaction” and to hold that the scheme was in fact one for the sale and purchase of the shares of Idea Cellular.
Of course, all may not yet be lost for Aditya Birla Nuvo & Tata International. The argument that the gains on Idea Cellular’s shares are exempt u/s 10(23G) is still open for it to argue. If it does succeed on that ground, everything else becomes academic because Mauritius or no Mauritius, the gains are exempt.
From a larger perspective, while the judgement has sent shock waves in the international community, it may be too early to write an obituary for the India-Mauritius DTAA. The Court was careful to formulate its judgement on the basis of the agreement between the parties and emphasized that AT&T Mauritius was acting “for and on behalf” of AT&T USA and was not the “beneficial owner” of the Idea Cellular shares. I dare say that if the joint venture and shareholders’ agreements had been drafted differently, Azadi Bachao Andolan would have prevailed and the outcome of the litigation might have been entirely different.
CA Vellalapatti Swaminathan Iyer