The assessees, private companies incorporated under the laws of Mauritius, were set up with the primary objective of undertaking investment activities with the intention of earning long-term capital appreciation and investment income. The assessees had three directors on the board of directors, of whom two were Mauritian residents and one was a resident of the United States. They maintained their principal bank account and accounting records in Mauritius. They held office premises in Mauritius since incorporation and had two employees there. The assessees held valid tax residency certificates issued by the Mauritius Department Authority, and on the basis thereof, claimed to be tax residents of Mauritius for the purposes of the Double Taxation Avoidance Agreement between India and Mauritius. The assessees engaged TGM, a company incorporated in the United States of America, to provide services in relation to their investment activities. The assessees also held valid permanent account numbers issued by the Indian income-tax authorities. The assessees held shares in F Ltd., a company incorporated under the laws of Singapore. The Singapore company invested in multiple companies in India, and the value of its shares was derived substantially from assets located in India. The assessees transferred shares held by them in the Singapore company to F, a company incorporated under the laws of Luxembourg. These transfers were undertaken as part of a broader transaction involving the majority acquisition of the Singapore company, by W Inc., a company incorporated in the United States of America, from several shareholders, including the assessees. The assessees approached the Indian tax authorities in applications under section 197 of the Act, seeking certification of nil withholding prior to the transfer. The tax authorities instead issued certificates prescribing withholding rates in respect of the sale of shares by the assessees. The assessees filed applications under section 245Q(1) of the Act before the Authority for Advance Rulings, seeking an advance ruling on the question, inter alia, whether the gains arising to the assessees (private companies incorporated in Mauritius) from the sale of shares held by them in F Ltd. (a private company incorporated in Singapore which held shares in Indian companies) to F (a company incorporated in Luxembourg) would be chargeable to tax in India under the Act read with the Double Taxation Avoidance Agreement between India and Mauritius. The Authority held that the assessees had invested in shares of F, a Singapore company, and thus, the immediate investment destination was Singapore and not India, that in the absence of any strategic foreign direct investment in India, there was neither any business operation in India nor any taxable revenue generated, that the arrangement was held to be a pre-ordained transaction created for the purpose of tax avoidance, that what was transferred were shares of the Singapore company and not of an Indian company, that the actual control and management of the assessees were not in Mauritius but in the United States of America with C, the beneficial owner of the entire group structure, that the assessees were mere conduit companies, lacking commercial substance, and were not entitled to claim benefits under the Double Taxation Avoidance Agreement. The Authority ruled that the applications preferred by the assessees related to a transaction prima facie designed for the avoidance of income-tax and therefore, rejected them as being barred by clause (iii) of the proviso to section 245R(2). The assessees filed writ petitions before the High Court, which quashed the order of the Authority for Advance Rulings, rejecting argument that the assessees lacked beneficial ownership, and holding that “treaty shopping” per se was not impermissible unless it was clearly shown to be a device for tax evasion or contrary to the intent of the treaty, that the issuance of a tax residency certificate by the Mauritian authorities established a presumption of legitimate tax residency and beneficial ownership, that the transaction was not designed for avoidance of tax and stood grandfathered by virtue of article 13(3A) of the Double Taxation Avoidance Agreement and that the assessees were entitled to the benefits of the Double Taxation Avoidance Agreement and that their income would not be chargeable to tax in India. On appeals by the Department: allowing the appeals, (i) that though it prima facie appeared that assessees acquired the capital gains before the cut-off date, i. e., April 1, 2017, the proposal for transfer of investments commenced only on May 9, 2018. A share purchase agreement was executed between W Inc., a U.S. corporation, described as the “purchaser”; the shareholders of F identified and collectively described as the “sellers”; and F LLC, a Delaware limited liability company, described as the “sellers’ representative” According to the share purchase agreement, the sale of shares held by the assessees was approved by the board in its meeting held on May 4, 2018. The subject had arisen for discussion in the meeting held on June 12, 2018, when the board took note of W’s offer to purchase a controlling stake in F of Singapore for USD 16 billion, and the assessees considered selling 74 per cent. of their stake therein and closing the transaction, which occurred after the cut-off date prescribed under rule 10U(1)(d). The General Anti-Avoidance Rules were applicable to the assessment year under consideration, empowering the Department to declare the subject transaction to be an impermissible arrangement. That even if the General Anti-Avoidance Rules were held inapplicable, the Department had invoked the Judicial Anti-Avoidance Rules, grounded in the doctrine of substance over form, consistently recognised in Indian jurisprudence, including in McDowell and Co. Ltd. v. CTO, (1985) 154 ITR 148 (SC);and Vodafone International Holdings B.V. v. Union of India, (2012) 341 ITR 1 (SC). That the assessees sought exemption from the Indian income-tax while, at the same time, contending that the transaction was also exempt under Mauritian law, which ran contrary to the spirit of the Double Taxation Avoidance Agreement and presented a strong case for the Department to deny the benefit as such an arrangement was impermissible. There was clear and convincing prima facie evidence to demonstrate that the arrangement was designed with the sole intent of evading tax, and the assessees had failed to furnish sufficient material to rebut this presumption. The Department was, therefore, entitled to enquire into the transaction to determine whether the claim of the assessees for exemption was lawful.That once it was factually found that the unlisted equity shares, from the sale of which the assessees derived capital gains, were transferred pursuant to an arrangement impermissible under law, the assessees were not entitled to claim exemption under article 13(4) of the Agreement. The Department had proved that the transactions were impermissible tax avoidance arrangements, and the evidence prima facie established that they did not qualify as lawful. Consequently, Chapter X-A became applicable. The applications were rightly rejected by the Authority for Advance Rulings as being hit by the threshold jurisdictional bar to maintainability, as enshrined in proviso (iii) to section 245R(2). Accordingly, capital gains arising from the transfers effected after the cut-off date, i. e., April 1, 2017, were taxable in India under the Income-tax Act read with the applicable provisions of the Double Taxation Avoidance Agreement. That the High Court was not right in relying upon judgments rendered prior to the amendment of the provisions, wherein, by necessary amendment, the mere existence of a tax residency certificate was now held to be insufficient to establish the resident status of the applicant in the other State. (AY. 2018-19)<\/p>\n","protected":false},"excerpt":{"rendered":"
S. 9(1)(i) : Income deemed to accrue or arise in India-Business connection-Object of Agreement is to prevent Double taxation avoidance double taxation and not to facilitate avoidance or evasion of tax-Assessee must prove transaction is taxable in its State of residence Assessee must establish that it is a resident of contracting State Tax residency certificate alone not sufficient-Sale is of shares of Indian company not germane Onus on assessee to disprove presumption of tax avoidance-Capital gains-Transfer of shares in foreign entity-Advance rulings-Jurisdiction of authority-An arrangement impermissible under law-Not entitled to claim exemption under Agreement-Capital gains arising from transfers effected after cut-off date, i. e., 1-4-2017 taxable in India-Interpretation of taxing statutes-Double taxation avoidance-Conventions Must be read harmoniously with other provisions of Act-International taxation Power to enter into treaties is an incident of sovereign authority of State-Sovereign right to impose tax on global income of its residents and on income that accrues or arises within its territorial limits-Legislative powers-Parliament Right to bring in a law to remove basis of a judicial-Central Board of Direct Taxes-Circulars-Effect regime in which issued-Cannot override subsequent statutory amendments-Avoidance of tax-General principles-That the High Court was not right in relying upon judgments rendered prior to the amendment of the provisions, wherein, by necessary amendment, the mere existence of a tax residency certificate was now held to be insufficient to establish the resident status of the applicant in the other State-DTAA-India-Mauritius [S.90, Art. 13, 27A] <\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_feature_clip_id":0,"_jetpack_memberships_contains_paid_content":false,"footnotes":"","jetpack_post_was_ever_published":false},"categories":[21],"tags":[],"class_list":["post-64265","post","type-post","status-publish","format-standard","hentry","category-income-tax-act"],"acf":[],"jetpack_shortlink":"https:\/\/wp.me\/p9S2Rw-gIx","jetpack-related-posts":[],"jetpack_sharing_enabled":true,"jetpack_featured_media_url":"","_links":{"self":[{"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/posts\/64265","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/comments?post=64265"}],"version-history":[{"count":1,"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/posts\/64265\/revisions"}],"predecessor-version":[{"id":64266,"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/posts\/64265\/revisions\/64266"}],"wp:attachment":[{"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/media?parent=64265"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/categories?post=64265"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/tags?post=64265"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}