Case Law Details
Court: Delhi bench of the Income Tax Appellate Tribunal
Citation: M/s SMR Investments Limited Vs. DDIT (2010-TII-66-ITAT-DEL-INTL),
Brief : Recently, the Delhi bench of the Income Tax Appellate Tribunal dealt with the issue of tax ability on sale of shares under India-Mauritius tax treaty (tax treaty). The Tribunal asked for either third party evidence or evidence by any government agency either situated in Mauritius or in India to be brought on record to substantiate taxpayer’s claim regarding holding board meetings in Mauritius. The Tribunal held that the documents placed on record needed examination regarding their authenticity and relevance, accordingly restored the case back to the Assessing Officer (AO) to decide the same afresh.
Facts of the Case
• The taxpayer, a company incorporated in Mauritius, sold shares of M/s HCL Technologies & BFL Software earning long term capital gains of INR 87.8 million and INR 3.39 respectively. The taxpayer claimed the gains from the sale of shares to be exempt under Para 4 of Article 13 of the tax treaty as there is no tax on capital gains in Mauritius.
• The taxpayer further contended that it did not have a Permanent Establishment (PE) since business was carried on from Mauritius and stock brokers in India carried out the instructions given by the taxpayer from Mauritius.
• The AO observed that orders for sale of shares were placed on telephone by Mr. Suresh Rajpal, who held 99 percent of the shares of the taxpayer, to an Indian brooking firm.
• The AO further observed that if the telephone calls were made from India, the effective place of management of the taxpayer would be in India and consequently the taxpayer would be resident in India as per clause 3 of Article 4 (See Note- 1) of the tax treaty. The AO called for the Passport of Mr Suresh Rajpal to determine the place from where the telephone calls were made however despite giving adequate opportunity the passport was not furnished before the AO.
• Since the passport of Mr. Suresh Rajpal was not furnished, the AO held that he was residing in India when the shares were sold and hence effective place of management of the taxpayer was in India and accordingly its capital gains on account of sale of shares were liable to be taxed as per Income-tax Act, 1961.
Taxpayer’s Contention
• The taxpayer relied on the decision in the case of Radha Rani Holdings (P.) Ltd. Vs. ADIT [2007] 16 SOT 495 (Del) where it was held that in case of non-resident company, since all the meetings of the board of directors were held in Singapore, control and management of the company was situated in Singapore and the residency certificate issued by the Singapore government was furnished, the company was treated as non-resident in India, therefore not liable to tax.
• Passport of Mr. Ashraf Ramtoola, former director of the taxpayer, was furnished which showed that he was in Mauritius on the dates on which the board meetings of the taxpayer were held. The taxpayer contended that this fact clearly indicated the effective control was in Mauritius.
• The taxpayer is incorporated in Mauritius and has its office in Mauritius, hence the general presumption shall be that the board meetings of the taxpayer were held in Mauritius and the control and management is also in Mauritius. As per Section 114 of the Indian Evidence Act, 1872 if any party rebuts the general presumption then the onus to prove such allegation is on the party making the allegation. Since both the AO and Commissioner of Income Tax Appeals [CIT (A)] have failed to discharge this onus, the income earned by the taxpayer cannot be assessed in India.
Tax department’s contention
• The taxpayer purchased the shares in AY 1996-97 during which Mr. Suresh Rajpal was a resident of India. Thus at the time of investment of these shares, the effective management of the taxpayer was in India. The source of investment in these shares was also from India.
• The taxpayer was registered in Mauritius in AY 1995-96 during which Mr. Suresh Rajpal was residing and working in India. The purpose of setting up a company in Mauritius with 99 percent share holding was merely to escape capital gains liability in India since there is no tax on capital gains in Mauritius.
• The shares sold during the year were held by the taxpayer with HDFC Bank Ltd. in India for 8 years in demat form.
• Reliance was placed on the decision of Unit Construction Company Limited v. Bullock [1981] 42 ITR 340 (HL) where it was held that it is the actual place of management of a company and not the place where it ought to be managed fixes the residence of a company. The decision in the case of CIT Vs. Nandlal Gandalal [2002] 40 ITR 1 (SC) was also discussed where it was held that expression ‘control and management’ means de facto control and management and not merely the right or power to control and manage.
• In the case of Radha Rani Pvt. Ltd. minutes of the board meetings held in Singapore had been duly authenticated by the Indian Commission in Singapore however in the taxpayer’s case there is no such authentication either by the Indian High Commission or by any of the third party.
Tribunal’s ruling
• The Tribunal after considering all the documents placed on record found it essential to again examine their authenticity and relevance with regard to board meetings held in Mauritius. The Tribunal asked for either third party evidence or evidence by any government agency either situated in Mauritius or in India to be brought on record to substantiate taxpayer’s claim regarding holding board meetings in Mauritius.
• The Tribunal restored the appeal back to the AO for deciding the same afresh taking into consideration its observations.
Our Comments
In Radha Rani Holding (P) Ltd’s case the Tribunal while reinforcing the principles laid down by the Supreme Court and various other courts, held that the situs of the Board of Directors is an important factor to determine the place of control and management of a company. Being an investment company, all the investment decisions were taken outside India, therefore, the company would not be ‘resident’ in India. Further, the residential status of the shareholders and directors, location of the bank account and investment of entire funds in India were held as not relevant factors to determine the place of control and management of a company. This decision affirmed the view expressed by the Supreme Court in Azadi Bachao Andolan that Tax Residency Certificate issued by the other country would be a conclusive proof of residential status of the company.
Even though the case has been remanded back to the AO, it reinforces the importance of proving substance in an intermediate jurisdiction by maintaining robust documentation and managing affairs in a tax efficient manner.
See Note- 1- As per para 3 of Article 4 of the tax treaty if a person other than an individual is a resident of both the Contracting States, then it shall be deemed to be a resident of the Contracting State in which its place of effective management is situated.
