Ab Holdings, In Re

(by Ashutosh Chandra) AB Holdings Mauritius-II (the Applicant), filed an application on 13 September 2011, requesting an advance ruling on taxability of capital gains arising on account of transfer of shares held in AB International Private Limited (AB International) to a group company, AB Singapore Pte. (AB Singapore). The Application was admitted by the AAR on 27 July 2015, keeping the question of tax avoidance open.

2. As per the details accompanying the application and subsequent submissions, the facts of the case are stated to be as under: 2.1 The Applicant is a company incorporated in Mauritius in the year 2008, having its registered office at Mauritius with a valid Tax Residency Certificate granted by the Mauritius tax authorities, and holds a Category 1 Global Business License. 2.2 The Applicant is a part of C Equity Portfolio II LP and C Affiliates Fund LP (C Group), which cumulatively hold 87.56% shares of the Applicant and the

2 AB Holdings Mauritius-II AAR / 1129 / 2011 balance 12.44% shares are held by other individual investors. Its business activities are carried on from Mauritius and managed by its Board of Directors, comprising of 3 Directors, out of which 2 were residents of Mauritius, at the time of making the investments. The sole purpose of its incorporation was to invest in S sector in India and other Asian markets, and has invested in AB International and companies in Philippines and Indonesia, which are engaged in S business. The shares of AB were acquired as under: Particulars Number of shares Share purchase on 10 Dec. 2008 9,900 Share purchase on 14 May 2009 75,52,000 Share purchase on 6 November 2009 12,90,358 Total shares 88,52,258 2.3 The Applicant made further investment from time to time as mentioned below: Dates of Capital infusion Number of shares

27 June 2013 662,878

29 July 2015 7,081,938 2.4 The initial and subsequent investment decisions have been discussed and approved by the Board of Directors in its meetings held on 17 November 2008 and

14 May 2009. The original SPA dated 25 November 2008 was executed by the director of the Applicant. The considerations were limited to the banking channels. Details of the investments were provided to the RBI under FEMA, 1999. FIRC was obtained from the RBI which shows that remittances were for the acquisition of shares and the money had come from the Applicant. 2.5 As part of the corporate strategy of the Group, to support its business in the Asia Pacific region in the medium to long term, and to obtain operational and cost benefits from centralizing the ownership of investments and operations in Asia Pacific region, a regional headquarters in Singapore was proposed. Pursuant to filing

3 AB Holdings Mauritius-II AAR / 1129 / 2011 the Application, AB Singapore was incorporated in August 2011. The Group re- organization has the following objectives:

a) AB Singapore shall function as a regional headquarters of the Group for the entire Asia-Pacific region covering India, Singapore, Thailand, Vietnam, Philippines and Indonesia; b) Function as a research and development centre for the Group in the Biotech Park Singapore to perform research on field and vegetable crops; c) Undertake the business of promoting, marketing and trading in hybrid S; d) Acting as an investment holding and management company for the Group in Asia- Pacific region; Keeping in view the above objectives, the Group and AB Singapore have invested substantial amount in Singapore (more than USD 3 million) since its inception, including a state of art biotechnology lab in Singapore and hired specialist scientist to run the lab. 2.6 In order to achieve the above objectives, the Applicant proposed to transfer the shares held in AB International to AB Singapore, a Group company. Ultimately the shares were transferred by the Applicant to Singapore on 30 March 2012. The shares of other Group companies were also transferred to AB Singapore in exchange of shares to achieve the objective. This was done solely for business and commercial reasons. 2.7 Further, AB Singapore made investments in AB International as under: Date of capital infusion Number of shares

27 June 2013 662,878

29 July 2013 7,081,938 2.8 It is submitted that as its business objective of being an investment holding company, it had also invested in other companies, namely PTN and AB Philippines. The transfer of shares held for almost 3 years in AB International and other Group companies was undertaken with a view to implement the overall

4 AB Holdings Mauritius-II AAR / 1129 / 2011 Group strategy and business re-organisation. Further, the Applicant continued to hold the shares of AB International for another 4+ years indirectly through its subsidiary, AB Singapore.

3. On the above facts, as submitted by the Applicant, the following Questions on which advance ruling is sought, have been framed:

I. 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 with respect to taxes on income and capital gains (the India-Mauritius tax treaty)?

II. 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 the proposed sale of shares in AB India Private Limited (AB India) to a Group Company (Transferee) would not be liable to tax in India having regard to the provisions of Article 13 of the India-Mauritius tax treaty?

III. If answer to Question 2 is in affirmative i.e. holding that the gains arising from the proposed sale of shares by Mauritian company are not chargeable to tax in India, whether there will be any obligation to withhold tax under section 195 of the Income Tax Act, 1961?

IV. If answer to Question 2 is in affirmative i.e holding that the gains arising from the proposed sale of shares by Mauritian company are not chargeable to tax in India, whether the transfer pricing provisions of section 92 to section 92F of the Act will apply?

V. Whether on the facts and circumstances of the case the Applicant will be liable to tax under the provisions of section 115JB of the Act in relation to income earned from the proposed transaction?

4. Further to the above, the Applicant has summarized its question-wise arguments as under:

5 AB Holdings Mauritius-II AAR / 1129 / 2011 4.1 In respect of Question I, that it is a company incorporated and a tax resident of Mauritius, which is evidenced by the certificate of incorporation issued by the Mauritius authorities. Hence, it is entitled to the benefits under the India-Mauritius DTAC. It holds a valid TRC issued by the Mauritius tax authorities, which serves as sufficient evidence of its residence in Mauritius and is entitled to benefits under the DTAC, which has been upheld in the following rulings:UOI v AzadiBachaoAndolan [(263 ITR 706) (SC)]; CIT v. P. V. A. L. KulandaganChettiar [(267 ITR 654) (SC)], Circular 333 [F. No. 506/42/81-FTD], dated April 2, 1982, Circular 728 dated October 30, 1995, and Circular 789, dated April 14, 2000.Reference has been made to Article

1 of the Treaty regarding its entitlement to the benefits thereunder. It is also stated that the Circulars issued by the CBDT have been upheld in a number of cases, including those of KP Varghese and AzadiBachaoAndolan. Support has also been taken from AAR Ruling numbers 826, 855, 878 and 879 and the case of DLJMB Mauritius (228 ITR 268). 4.2 In respect of Question II, it is stated that being eligible to avail benefits under the DTAC, by virtue of Article 13(4) thereof, capital gains earned by the Applicant from transfer of shares of AB International would not be liable to tax in India, in view Circular nos. 682 and 789, and decisions in UOI v Azadi Bachao Andolan (263 ITR 706) (SC); E*Trade Mauritius Ltd., Praxair Pacific Ltd., DB Zwirn Mauritius Trading. 4.3 In respect of Question III, the Applicant contends that since the gain on transfer of shares is not taxable in India, the consideration received by the Applicant would not be subject to any withholding tax as per section 195 of the Act. It relies on the decision of Supreme Court in case of GE India Technology Centre (P) Ltd vs CIT [(2010) 327 ITR 456]and Transmission Corporation of AP Ltd and Another vs CIT [(1999) 239 ITR 587]; and recent rulings of the Honble AARin case of JSH Mauritius Ltd, Dow Agri and Shinsei (supra). 4.4 In respect of Question IV, that sale of shares by the Applicant would not give rise to any tax incidence in India and hence the transfer pricing provisions contained in section 92 to section 92F of the Act would not apply to the proposed transaction it

6 AB Holdings Mauritius-II AAR / 1129 / 2011 relies on the ruling of Bombay High Court in case of Vodafone India Services Private (368 ITR 1), Shell India Markets Private Limited, AAR rulings in cases of Hershey (AAR No. 1470 of 2013) and Dow Agri (supra). 4.5 In respect of Question V, with regard to application of section 115JB of the Act on the subject transaction, the Applicant contends that the provisions of the said section shall not be applicable as per the retrospective amendment to section 115JB by Finance Act, 2016, and relies on the Supreme Court ruling in cases of Castleton Investments Limited, Dow Agriand Shinsei(supra) and the press release issued by the Government dated 24 September 2015.

5. The Revenue has submitted detailed reports in the context of the details filed with the Application, as also in response to its subsequent contentions and defence, as filed and argued during the course of these proceedings. The same are, as under: 5.1 Revenue has contended that companies of the C Group USA, are the ultimate holding company and Mr. S, MD of 'C partners LP is director in majority of the group companies. The Applicant is a paper company incorporated in Mauritius by the C Group USA, whose main business is to buy different businesses, sell them at appropriate value and time. As part of its business strategy, the Applicantcompany was formed in Mauritius whereas its control and management are located in the US. 5.2 The Applicant company has no address of its own except that of the management company M/s IM Mauritius, with functions consisting of filing of returns of income, filing of audited accounts, financial service etc. The Applicant has no assets or employees of its own in Mauritius, and all its activities are done by the Management company. Its expenses consisted only of legal and professional fees. 5.3 Two out of the three directors of the company are employees of the management company, and Mr. S , managing partner of C Group is the key director of the company. As per his passport details he was not present in Mauritius when key decisions were said to have been taken by the Board, as per his passport details. Therefore, he was mainly operating from the US, where the control and management are located.

7 AB Holdings Mauritius-II AAR / 1129 / 2011 5.4 The transaction under consideration amounts to tax avoidance and is structured in such a way that increases the value of shares of the Applicant company as a result of appreciation in value of Indian assets, and it is neither taxed in India nor in Singapore, when the shares are finally sold. Hence, the incorporation of the Applicant is a device to avoid tax qua India and it is incorporated in Mauritius only to take advantage of the India Mauritius DTAC. 5.5 As a part of business re-organization, the Applicant sold its entire shareholding in AB International to another company AB Singapore, for a consideration of shares of Singapore company equalling the fair market value of shares of the Indian company. 5.6 It is submitted that the nature of the transactions give an impression of a colourable/artificial device that is employed for the purpose of avoiding tax. As seen from the annual returns which are submitted as part of the enclosed documents with the application, the Applicant does not have any business activity other than holding the shares. The holding company as part of C Group is involved in business of middle market buyouts. The Group buys different businesses, sells them at appropriate time and value. Its expenses under the heads of wages and salaries and other staff cost are nil. This shows that it has no employees at all. This shows also that it is a paper company without any business purpose. 5.7 Revenue submits that the Applicant fails the substance over form test because the place of effective management of the Applicant company is not in Mauritius but only in the US because its shares are held by C Equity Portfolio II LP and C Affiliates Fund LP, both US companies. As per the India - US DTAC, India has the right to tax the gains as per its laws. To avoid incidence of tax in India as per its laws, instead of transferring from the holding companies of the Applicant in US directly, transfer of shares has been routed through Mauritius, as a conduit, to avoid capital gains tax in India, which is a clear evidence of treaty shopping. 5.8 On an examination of the details filed by the Applicant, various factual discrepancies are noticed, which support the stand of Revenue, that the control and

8 AB Holdings Mauritius-II AAR / 1129 / 2011 management of the Applicant was located in the US. In the application filed before the AAR, it has mentioned the following persons to be its Board of Directors:

1. Mr. S, an American national residing in the US,

2. Mrs.KPR, residing in Mauritius,

3. Mr. AS, residing in Mauritius. From the information available, it is stated that Revenue found that Mrs. KPR is a financial services consultant catering to about 400 client companies, in the areas of accounting, corporate secretarial service, as an employee of International Management, as seen from the website of the stock exchange of Mauritius. The role of Mrs.KPR, if any, in the affairs of the Applicant is that of providing accounting, legal compliance to the laws of Mauritius, and therefore renders her status of Finance/legal manager or non-executive director, at best. Mr. AS is also a financial services consultant from the same company and his role too is of providing accounting, legal compliance to local laws of Mauritius, and therefore renders his status also of a finance/legal manager or a non-executive director. He cannot be treated at par with Mr. S. 5.8.1 The Mauritian company law makes it compulsory for companies incorporated in Mauritius to include at least two Mauritius residents in the board of directors. Applicant company has complied with the above stipulation by having these two non- executive directors, who are residents of Mauritius. Thus, it can be seen that Mr. S is the person who takes key decisions in the board of directors. 5.9 However documents supplied by the Applicant prove beyond doubt that the important decisions regarding investment and disinvestment the Applicant are not taken by the above board of directors in Mauritius. 5.9.1 The Applicant company was incorporated in the year 2008. As per audited accounts of the company the following individuals are directors:

a) Mr. AR;

b) Mr.PS;

9 AB Holdings Mauritius-II AAR / 1129 / 2011

c) Mrs.KPR; and

d) Mr. S. Though it is argued by the Applicant that Mr. S participated in the meetings conducted in Mauritius via telephone, videoconference etc, but evidence for the same has not been produced so far. Minutes of some select board meetings submitted by the Applicant are not complete to know as to who all were actually present in the meeting physically, or through any other mode. 5.9.2 On this basis Revenue is of the view that Mr. S was the key director who takes all the key decisions on behalf of the company. If he was always participating in the board meetings through telephone or videoconference from the US, then the place from where he operates should be taken as the place of effective management but not where the non-executive directors sit. 5.10 Further the minutes of the board meeting of 14 May 2009 refer to the decision taken by the board of directors with regard to the additional investment of USD 272,400 by the Applicant company. For the year 2009, the Board of Directors consisted of Mr. AS, Mrs. KPR and Mr S. Passport data furnished by the Applicant shows that Mr.S was not present in Mauritius on the said date and Mrs. AR was in the US. It cannot be conceived that the board met without the quorum, and that without a majority of the directors, took the important decision of additional investment in a subsidiary company. Again this leads to the inference that there were no board meetings conducted in Mauritius. Thus it is clear that the place of effective management of the Applicant was in the US and not Mauritius, as been claimed by the Applicant. Mere presence of accounting professionals does not render the site a place of management decisions to be in Mauritius. 5.11 It is also contended by the Revenue that it is a clear attempt to benefit the Singapore entity with capital gains earned/accrued on sale of assets in India, but avoided tax qua India, which will never be taxed in India or Singapore. It is noteworthy that, not only the supposed appreciation on the Indian assets earned by

10 AB Holdings Mauritius-II AAR / 1129 / 2011 the Singapore entity, after the date of transfer from the Applicant, will ever be liable to tax in Singapore, if any, but not even the gains earned out of the instant transaction in Singapore. More importantly, in view of the compliance undertaken by the Applicant Group, with respect to LOB Clause, it is no more possible to tax any future gains also, likely to be earned by the Singapore entity on the assets in India. Thus, the proposed restructuring is a good consolidation exercise that limits the rights of India to tax the capital gains avoided through the Mauritian paper company,

i.e. the Applicant. This fact was also confirmed by the fact that BCS, USA has purchased AB India in June 2015. 5.12 Revenue has referred to the case of AzadiBachaoAndolan, 263 ITR 706, wherein the Honble Supreme Court held that, a colourable device, as in the instant case, is impermissible tax avoidance. It is stated that seen in the background of the Vodafone case, 341 ITR 1, it would fall under the exception, as the Apex court held that the subsidiary which acts as a puppet in the hands of its parent has to be disregarded. 5.13 Revenue has argued at length the importance of the subsidiary acting as a separate and independent entity, on which treaty law is based. It has referred extensively to the case of Vodafone International, to highlight that when the parent takes all decisions and actions for the subsidiary, the latter is reduced to a puppet and becomes ineligible for the benefits of the treaty with that state. 5.14 Revenue has cited the case of Aditya Birla Nuvo, 342 ITR 308, where the Honble High Court, Bombay, held that there was no document on record to suggest that AT &T, Mauritius had agreed to subscribe/purchase the shares of JVC. Hence the payments made by AT&T, Mauritius could not be said to be payments for subscribing/purchasing the shares of the JVC in the name of AT&T, Mauritius. Referring to the cases of Ardex Investments Mauritius Ltd. (AAR 866 of 2010), Castleton Investment Ltd. (AAR 999 of 2010), and Dow Agri Sciences (AAR 1123 of 2011), from which the Applicant has taken support, Revenue says that in all these decisions the only argument for tax avoidance was the involvement of a Mauritian entity, and unlike the present case, no peculiarity in the conduct of the Group was demonstrated.

11 AB Holdings Mauritius-II AAR / 1129 / 2011 5.15 Revenue has cited the OECD, and para 22 of its commentary, to make a case for substance over form, and to say that States do not have to grant the benefits of DTAC with arrangements that constitute an abuse of those provisions. The UN has also subscribed to this view in its commentary at para 21 of Article 1.It is submitted that the form and the manner in which the actual transaction takes place is of paramount importance. The look at versus the look through test propounded by the Honble Supreme Court in the case of Vodafone holds importance here. 5.16 Revenue has taken an alternative plea that the transaction is squarely covered by the provisions of section 93 of the Act, and the resultant capital gains from the sale of shares in AB India should be considered as the income of the C Group as per Sec 9(1) of the Act, denying the DTAC benefit. 5.16.1 It is submitted that the applicability of sec 93 depends on four conditions, namely that there must be a transfer of assets, and as a result of this transfer, either alone or in conjunction with associated operations, any income becomes payable to a non-resident; any person by means of such transfer acquires a right by virtue of which he has the power to enjoy the income of the non-resident person; and if the income had been the income of the said first mentioned person, it should have been chargeable to income tax. It is stated that in the present case all these four conditions were met. Hence the income arising to the Mauritian entity should be deemed to be the income of the US entity. 5.16.2 It is submitted that treaty provisions override the domestic law to the extent there exists a conflict between the two. Such conflict is usually seen in the context of distribution of income sources between the countries. However in the case of treaty abuse, there does not exist any conflict between the domestic law and the treaty, and therefore the question of treaty override does not arise. It was further submitted that the correct import of the expression any person has to be derived from the definition of the word in section 2 (31) of the Act, and applies to non residents as well.

12 AB Holdings Mauritius-II AAR / 1129 / 2011

6. In its written submissions and during the course of these proceedings, the Applicant, represented by Mr. Rajan Vora, CA, strongly refuted all the allegations made by Revenue, and submitted that Revenues interpretation of the facts that the Applicant is a name lender and benami, and that it was set up for tax avoidance and treaty shopping, is completely misplaced and inaccurate. 6.1 The Applicant was the legal and beneficial owner of the shares held in AB International. The original Share Purchase Agreement (SPA) was executed by the Director of the Applicant. Further, the purchase price and additional investments made were through the Applicants bank account. 6.2 The BOD in their meetings have considered and approved the investments in AB International. The Applicant and AB International recognized the acquisition of the shares by the Applicant in their balance sheets. 6.3 Further, AB International recognized the Applicant as the shareholder in the members register maintained as per the Companies Act, 1956 and in the first balance sheet (year ending 31 March 2009). 6.4 The Applicant submits that the fund for acquisition of the shares of AB International came from the bank account of the Applicant. C Group being shareholders of the Applicant had subscribed to the equity share capital of the Applicant and also advanced loans. The Applicant based on the decision of its BOD, invested and acquired shares of AB International, PTN and AB Philippines. 6.5 The contention of the Revenue that Applicant was created to take advantage of the India Mauritius DTAC is also misplaced. The Applicant has its business objective of being an investment holding company, and had invested in other companies as well, namely PTN and AB Philippines. Hence, the Revenues argument that the investment was with an eye on the India Mauritius DTAC is not correct. The following sequence of events would further support the contention of the Applicant:

13 AB Holdings Mauritius-II AAR / 1129 / 2011 Particulars Date reference Date of incorporation 7 October 2008 Financial Services Approval for Category 1 Global Business License

9 October 2008 Date of Foreign Investment Promotion Board (FIPB) approval 22 October 2003 Stock Purchase Agreement (SPA) for acquisition of 9,900 shares

25 November 2008 Subsequent investment 1 10 December 2008 Subsequent investment 2 14 May 2009 Subsequent investment 3 6 November 2009 Subsequent investment -4 (by AB Singapore post restructuring)

27 June 2013 Subsequent investment 5 (by AB Singapore post restructuring)

31 January 2014 Subsequent investment 6 (by AB Singapore post restructuring)

29 July 2015 The Applicant held the shares of AB International directly for a period3+ years and indirectly through its Group company for a period of 4+ years, ie. total holding of 7+ years. Considering this, it is clear that the intention of the Applicant was to hold the shares for a long term with an objective of earning long term capital appreciation and not with an objective of availing benefits of the India Mauritius DTAC. 6.6 The Applicant submits that pursuant to transfer of shares of AB International to AB Singapore, the Applicant became the shareholder of AB Singapore and not of the C Group. Accordingly, the Applicant continued to hold shares in AB International indirectly (through AB Singapore) post the subject transaction and no benefit was passed onto the C Group as a result of the said transaction. Hence, the shares held by the Applicant were in its own name legally and beneficially and not as a benami or name holder of C Group, as alleged by the Revenue.

14 AB Holdings Mauritius-II AAR / 1129 / 2011 6.7 It is submitted that the reliance placed by the Revenue on the decision of the Honble High Court in the case of Aditya Birla to contend that the beneficial owner of shares of AB International is the C Group and not the Applicant is factually distinguishable. Relying on the Honble AAR ruling in case of Shinsei Investment (supra), the Applicant submits that it had acquired the shares of AB International and C Group was not even a party to the SPA, hence the ruling of the Bombay High Court in the case of Aditya Birla shall not apply to the Applicant. 6.8 The Applicant places reliance on Circular 789 dated April 14, 2000 issued by the CBDT, as also the clarification issued by the Finance Ministry vide clarification regarding TRC on March 1, 2013. 6.9 With regard to Revenues allegation that the Applicant is a benami shareholder / a name lender and the actual owner of shares of AB International is C Group, it has relied on the ruling of Honble Supreme Court in the case of Jaya Dayal Poddar (1974 AIR 171), which laid down key principles and basis on which a transaction could be held as benami. 6.10 In support of its contentions, support has also been taken from the following cases: 6.10.1 Vodafone International BV (368 ITR 1) (SC); wherein it was held that: Setting up of a WOS Mauritius subsidiary/SPV by principal/genuine substantial long- term FDI in India from/through Mauritius, pursuant to the DTAC and circular no. 789 can never be considered to be set up for tax evasion. 6.10.2 Support has also been taken from other cases, to bolster its arguments against Revenue, such as: Sanofi Pasteur Holding SA(W.P. 14212 of 2010, 339 and 3358 of 2012) (AP), Vodafone InternationalBv(341 ITR 1), E*Trade Mauritius Ltd. (AAR No. 826 of 2009), Ardex Investments Mauritius Ltd. (AAR /866 /2010), AAR ruling as well as the decision of the Bombay High Court in the case of JSH Mauritius,(W.P. 3070 of 2016); and Dow Agri Sciences (AAR).

15 AB Holdings Mauritius-II AAR / 1129 / 2011 6.11 As regards Revenues allegation that the Applicantwasa name lender or benami of C Group, it is submitted that the investments have been made out of its own resources, as reflected in its financial statements. Also, as per the Companies Act, the name of the shareholder that appears in the shareholders registers is the lawful owner of the shares. In case the shares are held on behalf of someone nominee shareholder, then the nominee shareholder is required to report the beneficial ownership of the shares to the company. In the present context, the Applicant submits that it was the registered and beneficial owner of the shares as per the shareholders register. The Applicant places reliance on the Honble Supreme Court ruling in case of Howrah Trading Co Ltd v CIT [1959] 36 ITR 215 (SC). 6.12 Regarding the allegation that the decision making of the Applicant is in the hands of the C Group, it is submitted that the Applicant, through its Board of Directors takes all its decisions for its day to day operations, strategic decisions, etc., as evidenced from its board minutes, whereby the Board of Directors of the Applicant meet in Mauritius to take all the decisions of the Company. In fact, the acquisition of shares of AB International was done by the Applicant after due consideration by its Board of Directors. Subsequently also the Board of Directors has from time to time reviewed their investments, made decisions with respect to further investment and disinvestment, independently from its parent company, the C Group. 6.13 In addition to the above, the Applicant submits that it satisfies all the conditions laid down by the Supreme Court in case of Jaya Dayal Poddar (1974 AIR 171), which is being relied upon by the Revenue and states that it is the beneficial owner of the shares. Further, the Applicant has factually distinguished the ruling of Aditya Birla Nuvo Ltd [2011] 12 taxmann.com 141 (Bom), as the shares are registered in its own name, and not any Permitted Transferee. Further, it is submitted that the AAR in case of Shinsei Investment I Ltd (AAR 1017 of 2010) has also examined the Aditya Birla Nuvo Ltd (supra) facts in case of an investmentthrough Mauritius, and has held:

7 .that shares have been subscribed by the Applicant in its own name and the bank statements filed show that the Applicant has paid for such subscription of shares. In these circumstances the Applicant cannot be termed as a permitted

16 AB Holdings Mauritius-II AAR / 1129 / 2011 transferee as was the case in Aditya Birla Nuvo..... .Once it is established that the Applicant has made investment on its own and Shinsei Bank Ltd was party to SPA only in its capacity as sponsor and in order to comply with mutual fund regulations, there is no bar on application of Article 13(4) of the India-Mauritius DTAC in this case... 6.14 The Applicant submits that the customary principle of pactasuntservanda should be applied, and the India Mauritius DTAC shall be applied in good faith and also refers to the ruling of the Honble Punjab and Haryana High Court in case of Serco BPO (supra) which has held that ..30This is a convention/treaty entered into between two sovereign states. A refusal to accept the validity of a certificate issued by the contracting states would be contrary to the convention and constitute an erosion of the faith and trust reposed by the contracting states in each other.. Considering the above submissions and factual matrix in the case of the Applicant, it is submitted that the allegation of the Revenue that Applicant is name lender/ benami of C Group is untenable and needs to be dismissed. 6.15 The Applicant states that the transaction has to be looked at holistically in view of the decision of the Honble Supreme Court in case of Vodafone International BV which lays down various factors which must be kept in mind in taking a holistic view. 6.16 The Applicant submits that the reason for opting to select Mauritius as a base for investment holding company is very well documented in the business plan submitted to the FSC in Mauritius. 6.17 Regarding Revenues alternative plea in invoking section 93, the Applicant submits that this is an anti-abuse provision and takes its color from the erstwhile section 44D of the Income-tax Act, 1922. It refers to the Law Commission Report of September 26, 1958, which says that the provisions of section 44D of the Income tax Act, 1922 were intended to be applied in the hands of the residents, and that the reference to first mentioned person appearing even in the Income tax Act, 1922 was

17 AB Holdings Mauritius-II AAR / 1129 / 2011 intended to effectively refer to persons who are residents in India. To support the above inference, the Applicant relies on the Honble Supreme Court ruling in case of M.C.T.M. Chidambaram Chettair&Ors v. CIT (60 ITR 28), to say that this provision was applicable only to residents. 617.1 It is submitted that the objective behind introducing section 93 is to tax income arising out of transaction which residents may undertake to externalize the assets, while continuing to enjoy the rights over such income or assets. In its case there is no externalizing of asset in the form of capital/loan nor the Applicant or C Group are residents of India. Hence, the provisions of section 93 of the Act are not applicable to the subject transaction in Applicants case. Otherwise also, Sec 93(3), exempts bonafide transactions. 6.17.2 Without prejudice to the above, it is submitted that the provisions of India Mauritius DTAC cannot be overridden by the provisions of the Act. The provision of section 90(2) of the Act is very clear that the provisions of the DTAC shall prevail over the provisions of the Act (including section 93), to the extent such provisions are beneficial for the assessee. Further, neither section 90 nor section 93 of the Act provide for a DTAC override vis--vis section 93 of the Act. If the Parliament in its wisdom chooses to provide for an override of DTAC provisions by the domestic tax laws, it would make such a provision, like GAAR, which specifically provides for DTAC override.

7. We have considered the questions posed to us by the Applicant, the details, documents and Financial Statements submitted, and the objections raised by the Revenue, as also the response of the Applicant company, as set out in the preceding paragraphs. 7.1 It is not in dispute that the Applicant is a tax resident of Mauritius and would ordinarily be covered under the India Mauritius DTAC, and also that it was not a fly by night operator. It was incorporated in Mauritius on 7 October 2008 and possesses a valid Tax Residency Certificate granted by the Mauritius tax authorities, and holds a Category 1 Global Business License. Approval from the RBI, in the form of FIRC has been obtained. It is mainly part of the C Equity Portfolio II LP and C Affiliates

18 AB Holdings Mauritius-II AAR / 1129 / 2011 Fund LP (C Group), which cumulatively hold 87.56% shares of the Applicant. One of its Directors, Mr S is the principal investor and MD of the C Group, as also Director in other group companies. 7.2 It was set up to act as in investment holding company, to invest in S sector in India and other Asian markets. It accordingly made investment in AB International on different dates, between 2008 and 2015, and finally divested its investment in AB International, in favour of AB Singapore, a group company. It is also clear that both the setting up of the Applicant company, as also its investments were done through proper banking channels, as seen from the copies of its bank accounts in Mauritius, copies of which have been furnished. It is seen in the financial statements that the amounts were received as investment from the holding company and subsequently invested in AB International. Hence the flow of actual funds for initial investment, as also subsequent ones stand explained and accounted for. AB International recognized the Applicant as the shareholder, as also the members register maintained as per the Companies Act, 1956.Nothing unusual or peculiar is noticed, and these facts are not disputed by Revenue as well. 7.3 The transfer of shares from AB International to AB Singapore, a group company, in 2012 was done along with shares of other Group companies also, as part of a re-organisation, which indicates a long term business and commercial purpose. In fact, later AB Singapore made further investments in AB International in 2013, showing a long term business perspective of the holding company, as also ongoing business of investment, spread over almost 7 years, and not short term or overnight transactions for avoiding tax. We find nothing that invites any curious investigation on this issue also. 7.4 Before proceeding, a couple of things must be mentioned to put these issues in the right perspective. Firstly, as held in Sanofi Pasteur Holding SA(W.P. 14212 of 2010, 3339 and 3358 of 2012) (AP): .creating wholly owned subsidiaries or joint ventures either for domestic or overseas investment is a well-established business/commercial organizational

19 AB Holdings Mauritius-II AAR / 1129 / 2011 protocol; and investment is of itself a legitimate, established and globally well recognized business/commercial avocation. 7.4.1 Secondly, it must be understood that it would be inconceivable that the C Group , being the Holding Company, would not be involved in any important decision making, be it the funding of the subsidiary company, deciding its objectives, its target markets, and making investments and disinvestments, etc. It can be no ones case that the holding company would have no role at all to play in the affairs of its subsidiary, whose activities have to be necessarily in consonance with the overall goals of the holding company. Though, of course, and this must be emphasised, it is not permissible to it to participate in its affairs in a manner that renders the subsidiary a puppet. 7.5 Viewed in the above context, setting up a subsidiary for purposes of investment cannot be questioned. Further, as regards role of the holding company, and its control and management, it is seen that the principal investor and MD in the holding company, Mr. S was also a Director in the Applicant company, as also in many other companies of the group. Being in investment business and having identified the S sector in India, and elsewhere, as an investment destination, it is only logical that he would have a persuasive influence on the investment decisions of the company, irrespective of where he was located. His presence may be required at all or any of these places. His travel details show that he had made as many as 11 trips to India and Mauritius, where the investee company and the Applicant were located, between the period September 2005 to October 2009, when important decisions were taken. So, it cannot be said that he had no presence in Mauritius, where the Applicant company was registered and located, or in India, where the investee company was located. Yet, with immense technological advancement in the present world of communication, it is unrealistic to expect all Directors, who are also Directors in many other companies, to be physically present in each and every meeting, and communication is validly done through electronic audio and video devices. In the totality of circumstances, Mr. S and the other Directors movements in and out of Mauritius at different times, alone cannot lead to the conclusion that the

20 AB Holdings Mauritius-II AAR / 1129 / 2011 control and management of the company was not in Mauritius, or that it was with the holding company. 7.5.1 As regards the role of the other Directors on the Board, as referred to by Revenue, it is seen from the details furnished that Ms. PS had a LLB (Hons.) degree from Univ. of London; Mr AR was a Certified Chartered Accountant; Ms. KPR was an MSc in Finance and a Fellow member of the Assocn. of Certified Accountants. Thus, they were well qualified to engage in meaningful discussions with reference to the Applicants business, and it has only been assumed by Revenue that they had no role in the decision-making process. In fact, the Resolutions of the Board indicate the decisions taken by the Board with regard to the investments. For example, written resolution dated 17 November 2008, regarding approval to the investment in AB International amounting to USD 1,800,000; of 14 May 2009 regarding additional investment of USD 272,400; of 12 July 2011regarding establishment of a subsidiary and investment in Singapore; and one of 21 February 2012 regarding reorganization of the group, were signed by a Director, Ms. KPR. These indicate that the meetings were held at the registered office of the Applicant, as mentioned therein, where these Directors are located. The Share Purchase Agreements with subsequent sellers of shares, Ms. LG and Dr. BN duly signed by the sellers and a Director of the Applicant company, Ms. PS. When a Director signs an agreement or a resolution, it has to be assumed that he is in the know of things and represents a company decision regarding purchase of shares, unless something is amiss in the document itself or is done on hindsight, is backdated or is deduced from some unwritten clauses, as was pointed out by Revenue in the case of AB Mauritius dealt with in AAR 1128 of 2011, and in which we have taken an adverse view. 7.5.2 Regarding the office / place of management, Mauritian tax authorities have certified that the place of business of the Applicant is at the given address in Mauritius, the returns filed show this address and Board meetings also take place at this address, as mentioned in the Resolutions. Further, in the case of Investment companies, investment decisions do not require huge offices and staff. In this case, the auxiliary services have been outsourced to International Management (Mauritius), which provides all secretarial assistance. Revenue admits that for the FYs 2009, 2010 and 2011, expenses under the head Administrative expenses have

21 AB Holdings Mauritius-II AAR / 1129 / 2011 been shown at USD 20,586, USD 21,796 and USD 27,661 respectively. Further, Legal and Professional fees has been incurred to the extent of USD 42,450, USD 5,718 in the FYs 2009 and 2010 respectively. At the cost of repetition, it has to be mentioned that this is not a manufacturing or trading company, requiring day to day dealings with buyers and sellers, distributors, financers, marketing staff, logistics etc., so as to have several accounts under which payments are received or paid. 7.6 In view of the foregoing factual position, and keeping the context of an Investment holding company in mind, where its only business is of making investments and gaining from capital appreciation, we are unable to draw any adverse inference as to the Applicants independent status, its investment decisions as also the control and management of its business. 7.7 When no adverse finding has been possible on the facts of the case, we are inclined to accept the circulars, decisions and rulings cited by the Applicant, as also its plea that it was not a benami, or set up for tax avoidance as a colourable device and only for treaty shopping, which in any case is not taboo. 7.7.1 First and foremost, we consider Circular 789 dated April 14, 2000 issued by the CBDT, which states as follows: It is hereby clarified that wherever a certificate of residence is issued by the Mauritius authorities, such certificate will constitute sufficient evidence for accepting the status of residence as well as beneficial ownership for applying the DTAC accordingly. The above position has further been clarified by the Finance Ministry vide issuance of a clarification regarding TRC on March 1, 2013. When the intent and activities of the Applicant are found to be in order, we find that this Circular is sufficient to support the case of the Applicant. 7.8 With regard to Revenues allegation that the Applicant is a benami shareholder / a name lender and the actual owner of shares of AB International is

22 AB Holdings Mauritius-II AAR / 1129 / 2011 the C Group. Reference has been made to decision of the Honble Supreme Court in the case of Jaya Dayal Poddar (1974 AIR 171), which laid down key principles and basis on which a transaction could be held as benami. These are: (i) the source from which the money came; (ii) the nature and possession of the property after the purchase; (iii) the motive in giving the transaction a benamicolour; (iv) the position and relationship of the parties; (v) the custody of the title deeds; and (vi) the conduct of the parties after the sale of the property. Of these, the source from which the money came is considered the most important. 7.8.1 In the instant case, the money was invested by the Applicant through banking channels in the initial as well as subsequent investments out of its own sources. Since the Applicant is an independent legal entity, it is not material that the money was received from the holding company, as held in several decisions, including Vodafone, Ardex, E*trade, JSH Mauritius etc. The shares were held and registered in its own name, both beneficially and legally; the motive was to invest in the S sector in India and other Asian markets as disclosed to various regulatory authorities; it was a subsidiary of the C Group but acted independently; and it had the custody of the share certificates which were dematerialized in 2012, being the shareholder. Thus, it met all the requirements and no adverse conclusion is possible, such as to hold that it was a benami of the holding company. 7.8.1 In Vodafone International Holdings BV (341 ITR 1),the Honble Supreme Court held that: Every strategic foreign direct investment coming to India, as an investment destination, should be seen in a holistic manner. While doing so, the Revenue/ Courts should keep in mind the following factors: the concept of participation in investment; the duration of time during which the holding structure exits; the period of business operations in India; the generation of taxable Revenues in India; the timing of the exit; the continuity of business on such exit.

95 No presumption can be drawn that the Union of India or the Tax Department is unaware that the quantum of both FDI and FII do not originate from Mauritius but from other global investors situate outside Mauritius..

23 AB Holdings Mauritius-II AAR / 1129 / 2011 96.. on a subsequent sale/ transfer/disinvestment of shares by the Mauritius company, after a reasonable time, the sale proceeds would be received by the Mauritius company as the registered holder/ owner of such shares, such benefits could be sent back to the foreign principal/ 100 per cent shareholder of Mauritius company either by way of a declaration of special dividend by the Mauritius company and/or by way of repayment of loans received by the Mauritius company from the foreign principal/ shareholder for the purpose of making the investment.

97. We are, therefore, of the view that in the absence of LOB clause and the presence of Circular No. 789 of 2000 and TRC, on the residence and beneficial interest/ ownership, tax department cannot at the time of sale/disinvestment/exit from such FDI, deny benefits to such Mauritius companies of the Treaty by stating that FDI was only routed through a Mauritius company, by a company/principal resident in a third country; or the Mauritius subsidiary is controlled/managed by the foreign principal; or the Mauritius company had no assets or business other than holding the investment/shares in the Indian company; or the foreign principal/100 per cent shareholder of Mauritius company had played a dominant role in deciding the time and price of the disinvestment/sale/transfer; or the sale proceeds received by the Mauritius company had ultimately been paid over by it to the foreign principal/ its 100 per cent shareholder either by way of special dividend or by way of repayment of loan received; or the real owner/beneficial owner of the shares was the foreign principal company. Setting up of a WOS Mauritius subsidiary/ SPV by principal/genuine substantial long-term FDI in India from/ through Mauritius, pursuant to the DTAC and Circular No. 789 can never be considered to be set up for tax evasion. On the facts of the instant case, the Applicant fulfills all the criterion laid out above, and its investments in the Indian company cannot be questioned, when no other peculiarity or illegality is noticed, especially with regard to the flow of actual funds for investment in AB International. It is the legal and beneficial owner of shares and fully competent to transfer the same.

24 AB Holdings Mauritius-II AAR / 1129 / 2011 7.9 We also find that the Applicants attempt to take support from the cases of E*Trade, Ardex, and JSH Mauritius was justified, in the facts of the instant case. 7.9.1 This Authority has held in the case of E*Trade Mauritius Ltd. (AAR No. 826 of 2009), that:

10 In this fact situation, ex facie, it is difficult to assume that the capital gain has not arisen in the hands of the Applicant, more so when according to the binding pronouncement of the Supreme Court, the motive of tax avoidance is not relevant so long as the act is done within the framework of law, the treaty shopping through conduit companies is not against law and the lifting of corporate veil is not permissible to deny the benefits of a tax treaty.. 7.9.2 In the case of Ardex Investments Mauritius Ltd. (AAR /866 /2010), we held that:

6. It is true that the funds for acquisition of shares in the Indian company was provided by the principal, a company incorporated in the United Kingdom. The shares in the Indian company were first acquired in the year 2000. Subsequently further shares were acquired in the years 2001, 2002 & 2009. These shares are sought to be transferred by the Applicant company to another subsidiary of the Group, incorporated in Germany.It is not clear how far the theory of beneficial ownership could be invoked to come to a conclusion that the holder of the shares in the Indian company in this case would be the company in UK..At worst it might be an attempt to take an advantage of a Treaty. But, that by itself cannot be viewed or characterized as objectionable treaty-shopping. . The decision in Azadi Bachao Andolan has even gone to the extent of holding that treaty-shopping itself is not taboo.. 7.9.3 In JSH Mauritius (supra) we held that:

16. We have examined the rulings and we find in all the rulings a heavy reliance is placed on the aforementioned ruling of the Supreme Court in Azadi Bachao Andolan. We are in complete agreement with the above rulings.

17. .We are quite convinced that the Applicant is not a fly by night or shell

25 AB Holdings Mauritius-II AAR / 1129 / 2011 company. We therefore, answer the first question in favor of the assesse and against the Revenue. This Ruling was upheld by the Bombay High Court, in W.P. 3070 of 2016, wherein it was held that 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 of income tax. 7.9.4 The case in hand is similar and calls for a similar treatment, as the Applicant is the legal and beneficial owner of the shares that have been lawfully and accounting wise correctly invested in AB International, as per legitimate and independent decisions of its Board of Directors. 7.10 Revenue has referred to the cases of Azadi Bachao Andolan (263 ITR 706), Vodafone case (341 ITR 1), and to Adtya Birla Nuvo (342 ITR 308). However, these are not applicable on the facts of this case, which are clearly distinguishable and do not portray the entire transaction as a colourable device, or place the Applicant in the category of an exception, or even that it had not acted independently. As mentioned above, the applicant was acting as an independent company, taking its own decisions, had made investments out of its own funds through banking channels, signed proper agreements for acquisition of shares, and doing business over a considerable period of time, had its business objective of being an investment holding company, and had invested in other companies as well, namely PTN and AB Philippines on the lines of many of its group companies in the S sector in India and other countries in Asia. Hence, the Revenues argument that the investment was with an eye on the India Mauritius Treaty only, is unacceptable, even though this was itself not taboo. 7.11 In conclusion, on this issue, we have to say that unless there are extraordinary and exceptional circumstances, as we noticed in the case of AB Mauritius, and as dealt with in AAR 1128 of 2011, we would not like to interfere with the benefits available to any applicant, under a DTAC between two sovereign states. Hence, in the instant case, and on the facts discussed above, the benefit under the India- Mauritius DTAC shall be available to the Applicant, in the spirit of Circular no.

26 AB Holdings Mauritius-II AAR / 1129 / 2011 789, and on the principle Pacta Sunt Servanda, that the treaty should be honoured in good faith. 7.12 We have perused the Revenues reference to the provisions on tax avoidance contained in section 93 of the Act, and the Applicants response to the same. Considering the fact that we have ruled that the investments made by the Applicant in AB International were not for tax avoidance, and suffered from no such infirmity as would take away the benefit of the India - Mauritius DTAC, this issue of section 93 becomes academic, in fact inapplicable to the facts of the case. We do not, therefore, consider it necessary to deal with the same, especially as that is not one of the questions posed to us by the Applicant.

8. Regarding question no. III on the applicability of section 195, (refer para 4.3)

i.e. whether tax has to be withheld on the gains arising from the sale of shares, it has been held in GE Technology Centre P. Ltd. v. CIT [327 ITR 456(SC)] by the Honble Supreme Court that in cases where there is no chargeability to tax under the provisions of the Act, as per expressions used in the section itself (unlike section 92), there will be no obligation to withhold tax. Respectfully following that decision, we are of the view that there is no obligation on the Applicant to withhold tax in this case, as we have held that the capital gains arising in the hands of the Applicant was not chargeable to tax in view of paragraph 4 of Article 13 of the India Mauritius DTAC.

9. In respect of Question IV, against the Applicants contention (refer para 4.4) that transfer pricing provisions would not apply, the Revenue submits that Chapter X of the Act does not contain any such requirement of taxability of income. As per section 92, any income arising from an international transaction has to be computed having regard to arms-length price, if the same is between two or more associated enterprises. Hence this transaction of sale of shares in the Indian company should be subjected to and benchmarked as per the transfer pricing provisions contained in Chapter X of the Act. Reference has been made to our Ruling in the case of Castleton Investments Limited (AAR 999 of 2010).

27 AB Holdings Mauritius-II AAR / 1129 / 2011 9.1 We have considered the matter. In a detailed finding on the issue, in the case of Castleton Investments Limited (AAR 999 of 2010), it was ruled by this Authority that: the applicability of section 92 does not depend on the chargeability under the Act. Literally in this case, the capital gains are chargeable to tax under the Act. They escape only in view of paragraph 4 of Article 13 of the DTAC and the ratio of the decision in Azadi Bachao Andolan on the applicability of the DTAC even when there is actually no double taxation. In coming to this conclusion the earlier Rulings of this Authority in M/s. Praxair Pacific Limited (326 ITR 276), Vanenburg Group BV (289 ITR 464), and Dana Corporation (AAR 788 of 2008) were also considered and not followed. 9.2 We are in agreement with the view in the case of Castleton. As against the position in section 195 of the Act, there is no such requirement in section 92 that the transaction should result in income chargeable to tax under the Act for TP provisions to get attracted. Hence, the transaction in the instant case of sale of shares in AB International will have to be benchmarked as per the transfer pricing provisions contained in Chapter X of the Act.

10. In respect of Question V, with regard to applicability of section 115JB of the Act on the subject transaction, the Applicant as well Revenue agree that the provisions of the said section shall not be applicable to foreign companies, as per the retrospective amendment to section 115JB by Finance Act, 2016, and the clarification issued by the CBDT dated 24 September 2015.This being so, we have no reason to disagree.

11. In conclusion, the questions referred to us for our Ruling are answered as under: 11.1 Questions I and II: Yes, the Applicant would 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

28 AB Holdings Mauritius-II AAR / 1129 / 2011 evasion; and the income and capital gains arising to the Applicant from the proposed sale of shares in AB International to a group company in Singapore would not be liable to tax in India in terms of Article 13 of the said Treaty. 11.2 Question number III: No, there will be no obligation to withhold tax under section 195 of the Act. 11.3 Question IV: Yes, the transfer pricing provisions contained in sections 92 to 92F of the Act would apply to the proposed transaction. 11.4 Question V: No, the provisions of section 115JB shall not be applicable. The Ruling is accordingly given and pronounced on this day of 8th November, 2017. Sd/- (Ashutosh Chandra) Member (Revenue) Sd/- (R.S. Shukla) In-charge Chairman