Tata Industries Ltd. Vs. ACIT (ITAT Mumbai)
Expenditure in raising loans or issuing debentures would be revenue in nature, irrespective of whether the borrowal is a long term or short term one.
Dis allowance of expenditure in the shape of upfront fees and brokerage etc. paid for issuing the non-convertible debentures. The AO concluded that since the term of the debentures was spread over two years, hence benefit arrived at by the assessee was of enduring nature spread over two years. The AO therefore calculated the expenses pertaining to the year under consideration and disallowed the remaining expenses.
This issue is also covered with the decision of the Hon’ble Supreme Court’ in the case of India Cements Ltd. v. CIT  60 ITR 52, wherein the Supreme Court held that the expenditure in raising loans or issuing debentures would be revenue in nature, irrespective of whether the borrowal is a long term or short term one. It was held that the act of borrowing money was incidental to the carrying on of business, the loan obtained was not an asset or an advantage of enduring nature, the expenditure was made for securing the use of money for a certain period and it was irrelevant to consider the object with which the loan was obtained. This issue is accordingly decided in favour of the assesse.
Full Text of the ITAT Order is as follows:-
Challenging the order dated 03.07.20 13 of CIT(A)-6, Mumbai, the assessee and the Assessing Officer (AO) have filed cross-appeal for the above mentioned assessment year(AY). Assessee -company, engaged in the promotion of new business ventures offering consultancy services, web based services etc,filed its return of income on 31/10/2007,declaring total income of Rs. 1816.67 crores.The AO completed assessment,on 27/02/2009,u/s.143(3)of the Act, determining its income at Rs.2929.43 crores,.
During the course of hearing before us, the Authorized Representative (AR) of the assessee stated that considering the smallness of tax effect the assessee was not interested in pursuing Ground No. 4 raised by it.Hence, same stands dismissed, as not pressed.
2. First ground of appeal, raised by the AO,is about dis-allowance made u/s.14A of the Act r.w.r. 8D of the Income-tax Rules, 1962 (Rules). During the assessment proceedings,the AO found that the assessee had earned dividend income of Rs. 106.53 crores and Long Term Capital Gain (LTCG) of Rs. 18.53 lakhs, that both were claimed exempt u/s. 10 of the Act, that the assessee on its own had disallowed interest expenditure of Rs. 10.25 crores and had debited it to its P&L account. He asked the assessee to explain as to why the provisions of section 14A r.w.r.8D should not be applied. After considering the explanation of the assessee, he made a dis allowance of Rs. 52.09 crores as per Rule 8D r.w.s. 14A of the Act. After reducing the suo-motu dis allowance made by the assessee,he worked out the net dis-allowance at Rs.41.84 crores.
2.1. Aggrieved by the order of the AO,the assessee preferred an appeal before the First Appellate Authority (FAA) and also relied upon certain case laws. After considering the available material, he held that the provisions of Rule 8D were not applicable for the year under consideration, in view of the judgment of Hon’ble Bombay High Court in the case of Godrej and Boyce Mfg. Co. Ltd. (328 ITR81),that method of calculation of dis allowance u/s. 14A was devised by the AO in the year 2001-02, that in that year interest payment was disallowed based on the proportion of loan fund employed in investment to the total funds, that the same methodology was followed in AY.2002-03, that the then FAA had confirmed dis allowance, no further appeals were filed against the orders of the then FAA.s,that method adopted for dis allowance for interest had reached its finality, that suo motu dis allowance made by it was only in respect of interest expenditure computed on the basis of formula adopted in AY.s 2001-02 and 2002-03.
2.1.a. He further held that the dis allowance made by the AO did not include any administrative expenditure that must have been necessarily incurred to earn exempt income,that same had to be estimated on a reasonable basis, the average value of investment was around Rs. 1896.84 crores,that the assessee had incurred expenses under the heads salary (Rs. 64,06,96 lakhs), establishment expenses (Rs. 4,520 lakhs) and other expenses (Rs. 1071.02 lakhs). He considered 2% of the aggregate amount (Rs. 11,998.94) to be a reasonable amount out of the expenses which could be held to be attributable to the earning of the exempt income. He computed total dis allowance at Rs. 1,265.69 lakhs and deleted the balance.
2.2. During the course of hearing before us,the Departmental Representative (DR) supported the order of the AO and stated that the AO had rightly made dis allowance under the head interest expenditure. The AR relied upon the judgment of Godrej and Boyce Mfg. Co. Ltd. (supra).
2.3. We have heard the rival submissions.We find that following the judgment of the Hon’ble Bombay High Court the FAA has held that provision of Rule 8D of were not applicable for the year under consideration.We do not see any legal or factual infirmity in the order of the FAA.So,confirming his order we decide first Ground of appeal against the AO.
3. Next ground deals with restricting the dis allowance to Rs. 1.33 crores as against Rs. 39.60 crores, made u/s. 37(1)of the Act. During the assessment proceedings, the AO held that activity of investment for controlling interest in share capital of the other companies could not be treated as business activity, that the head office (HO) expenses claimed by the assessee were to be disallowed u/s. 37 of the Act, that the assessee had claimed total HO expenses of Rs. 91.69 crores,that Rs. 52.09 crores were disallowed u/s. 14A of the Act. Treating the balance amount of Rs. 39.06 crores [91.69(-)52.09], he made a dis allowance of the said amount and held that the expenditure was of capital nature.
3.1. During the appellate proceedings, before the FAA, the assessee made elaborate submissions. After considering the assessment order and the submission of the assessee, he held that at most Rs. 1.33 crores could be treated as capital expenditure. He deleted the balance addition.
3.2. It was brought to our notice that identical issue was decided in favour of the assessee and against AO by the Tribunal, while deciding the appeal for the AY. 2004-05 (ITA/4894/Mum/2008, dated 20/07/ 2016) We find that at para- 19 at pg-42 of the order the Tribunal has held as under:
“19. Though, in the case in hand, issue is not regarding the interest free advance to the sister concerns, yet, the proposition of law laid down by the Hon’ble Supreme court can be very well applied in this case as the assessee being an investment & finance company and a promoter of new companies and having interest in the business of these companies has made the investments for business purposes for having control over these subsidiary and associated companies. In the light of the proposition of law laid down by the Hon’ble Bombay High court in the case of “CIT, Panaji, Goa vs. Phil Corpn. Ltd.” (supra), Honorable Delhi High Court in the case of “Eicher Goodearth Ltd. vs. CIT” (supra) and the Honorable Supreme Court in “S.A. Builders vs. CIT” (supra);it is held that no dis allowance in this case is attracted u/s 36(iii) of the Act.”
Respectfully, following the above order of the Tribunal, we decide the second Ground of appeal against the AO.
4. Last ground pertains to deletion of dis-allowance of Rs. 22.29 lakhs. During the assessment proceedings, the AO found that the assessee had incurred an expenditure of 22.41 lakhs under the head legal and professional fee, that it had paid Rs. 21.56 lakhs to EDICA, LLC, USA, Rs. 35,853/- to Estate Management Services, Colombo, Rs. 34,908/- to Junger and Raidt, Gbr- Germany and Rs. 12,000/- to AR Balsubramaniam,that it was claimed that fee was paid for rendering consulting services for various projects. He held that the assessee should have deducted tax at sources,that services rendered by foreign entities were of technical and professional in nature. Therefore, he disallowed a sum of Rs. 22.20 lakhs paid to the service providers of USA, Srilanka and Germany.
4.1. The FAA, after considering the submission of the assessee and the remand report of the AO,dated 3.5.2010 held that the AO himself had admitted that services by EDICA were rendered in USA and that EDICA did not have any PE in India, that payment made to AR Balasubraniam was below the threshold limit prescribed by 194J of the Act that services provide by Sri Lankan and German entities were also not provided in India, that both of them had no PE in India.Finally, he deleted the dis allowance made by the AO.
4.2. Before us,the DR relied upon the order of the AO.The AR supported the order of the FAA.We find that in the remand report the AO, himself had admitted that foreign entities rendered services outside India and they did not have any PE in India, that payment made to Indian consultant was below the threshold limit envisaged by the provisions of section 194J of the Act. Considering the above facts, we are of the opinion that there is no need to interfere with order of the FAA. Upholding his order,we dismiss Ground No. 3.
5. First Ground of appeal,raised by the assessee, is about dis allowance made u/s. 14A of the Act. Paragraph 2.1.a. our order contains the facts about the dis allowance made by the AO.
5.1. Before us, the AR argued that dis allowance of administrative expenditure should not be made under section 14A in the absence of a precise formula, that the F AA had erroneously made dis allowance at 2% of total expenses as against expenses of the HO, that dis allowance should be restricted to 2% of the expenses of HO.He relied upon the cases of SICOM Ltd.(39 CCH 10).The DR supported the order of the FAA.
5.2. We find that the FAA had considered the total expenditure incurred by the assessee for making dis allowance. In our opinion,expenditure incurred for earning exempt income only can be disallowed. As stated earlier,Rule 8D was not applicable for the year under appeal. But, the honorable Bombay High Court in the case of Godrej Boyce Manufacturing Company has held reasonable dis allowance can be made u/s.14A of the Act for the year under appeal. Therefore, we hold that dis allowance should be restricted to 2% of the expenses of HO. First ground of appeal is decided in favour of the assessee.
5.3. Ground 1.2 is about dis allowance of Rs. 1.33 crores pertaining to projects and investment Department of HO.The FAA had held that expenditure was capital nature and hence was not allowable u/s.37 of the Act.
5.3.1. Before us, the AR stated that identical issue was decided in favour of the assessee by the Tribunal in its order dated 20/07/2016, while deciding the appeal for the assessment year 2004-05 (ITA/4894/Mum/2008). We are reproducing paragraphs 16 to 19 of the said order and it reads as under:
“16. The Hon’ble Supreme Court in the case of “S.A. Builders vs. CIT” (supra) has held that no dis allowance of interest expenditure is called for on account of advancing loans to sister concerns, if it is found that said advances were made for commercial expediency and those sister concerns have not used the amounts for personal purposes. The Hon’ble Apex Court has categorically held that what is to be seen as to whether the assessee has advanced loan to its sister concern or to a subsidiary as a measure of commercial expediency? The Hon’ble Supreme Court, while referring to section 37 of the Act, has held that the expression “for the purpose of business” includes expenditure voluntarily incurred for commercial expediency and it is immaterial if a third party also gets benefited thereby. The Hon’ble Supreme Court further explained the expression “commercial expediency” as under:
“The expression “commercial expediency” is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as a business expenditure if it was incurred on grounds of commercial expediency.”
17. The Hon’ble Supreme Court thereafter considering the various aspects of the matter has concluded as under:
“We agree with the view taken by the Delhi High Court in CIT vs. Dalmia Cement (Bhart) Ltd. (2002) 254 ITR 377 that once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize its profit. The income tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman. As already stated above, we have to see the transfer of the borrowed funds to a sister concern from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits.”
“We wish to make it clear that it is not our opinion that in every case interest on borrowed loan has to be allowed if the assessee advances it to a sister concern. It all depends on the facts and circumstances of the respective case. For instance, if the Directors of the sister concern utilize the amount advanced to it by the assessee for their personal benefit, obviously it cannot be said that such money was advanced as a measure of commercial expediency. However, money can be said to be advanced to a sister concern for commercial expediency in many other circumstances (which need not be enumerated here). However, where it is obvious that a holding company has a deep interest in its subsidiary, and hence if the holding company advances borrowed money to a subsidiary and the same is used by the subsidiary for some business purposes, the assessee would, in our opinion, ordinarily be entitled to deduction of interest on its borrowed loans.”
18. A perusal of the above conclusion reveals that though as per the provisions of section 37, it is not necessary that the loan amount should be exclusively used in the business of the assessee. However, the requirement is that it should be used for the purpose of the business which need not necessarily be the business of the assessee itself. What is to be seen is that the transfer of borrowed funds to a sister concern was out of commercial expediency. The Hon’ble Supreme Court thereafter wished to make it clear that the order of the Hon’ble Supreme Court should not be interpreted as that in every case interest on borrowed loan has to be allowed if the assessee advances it to a sister concern. It all depends upon the facts and circumstances of the respective case. The two conditions which are to be fulfilled are that the loan should be advanced out of commercial expediency and secondly the sister concern should use the loan for its business purpose and not for the personal purpose of its directors or partners etc. The Honorable Supreme Court thereafter held in the said case that since the sister concern was a subsidiary of the assessee company and the assessee company being the holding company had a deep interest in its subsidiary, hence the loan advanced to subsidiary was out of commercial expediency.
19. Though, in the case in hand, issue is not regarding the interest free advance to the sister concerns, yet, the proposition of law laid down by the Hon ’ble Supreme court can be very well applied in this case as the assessee being an investment & finance company and a promoter of new companies and having interest in the business of these companies has made the investments for business purposes for having control over these subsidiary and associated companies. In the light of the proposition of law laid down by the Hon’ble Bombay High court in the case of “CIT, Panaji, Goa vs. Phil Corpn. Ltd.” (supra), Hon’ble Delhi High Court in the case of “Eicher Goodearth Ltd. vs. CIT” (supra) and the Honorable Supreme Court in “S.A. Builders vs. CIT” (supra);it is held that no dis allowance in this case is attracted u/s 36(iii) of the Act.”
Respectfully, following the above Ground 1.2 is allowed.
6. Second ground deals with dis allowance made u/s.40(a)(ia)of the Act. During the assessment proceedings,the AO found that the assessee had not deducted tax at source on interest of Rs. 21.22 crores. Invoking the provisions of section 40(a)(ia), he disallowed the claim made on account of interest payment.
6.1. During the appellate proceedings, the FAA held that the assessee made payment of interest to a trust, that it had not deducted tax at source,that it was not covered by the exceptions provided by section 194A(3)(iii)of the Act, that the AO was justified in disallowing the disputed amount.
6.2. Before us, the AR argued that the recipient of the interest had paid tax, that as per the second proviso to section 40(a)(ia), no dis-allowance could be made if taxes were paid by the recipients, that the proviso had retrospective operation. He referred to the case of M/s. Selprint (ITA/3688/Mum/2012),wherein the matter was restored back to the file of the AO for verification. He also referred to other cases delivered by the Tribunal in that regard. The DR relied upon the order of the FAA.
6.3. We find the AO had made the dis allowance as the assessee had not deducted tax at source while paying interest, that as per the assessee the recipient of the disputed amount had paid the taxes. In our opinion,the matter needs further verification. So, in the interest of Justice,we are restoring that the matter to the file of the AO for verification. We hold that the second proviso to section 40(a) of the Act is retrospective in nature. Respectfully following order of the Tribunal in the case of M/s. Selprint (supra), we direct the AO to decide the issue after affording a reasonable opportunity of hearing to the assessee.Second ground is decided in favour of the assessee, in part.
6.4. Ground 2.2 is an alternative ground.Before us,the AR fairly conceded that the honorable Supreme Court in the case of Palam Gas Services (394 ITR 300) has decided the issue against the assessee. Therefore, we dismiss Ground number 2.2.
7. Dis allowance of Rs. 8.41 lakhs,paid towards brokerage expenses for arranging the term loans and ICD.s,is the subject matter of third Ground of appeal.
It was brought to our notice that while deciding the appeal for the AY. 2004-05 (supra),the Tribunal had decided the issue in favour of the assessee. We are reproducing paragraphs 35 and 36 of the order and same reads as under:
35.“Ground No. 7 relates to the issue of dis allowance of expenditure in the shape of upfront fees and brokerage etc. paid for issuing the non-convertible debentures. The AO concluded that since the term of the debentures was spread over two years, hence benefit arrived at by the assessee was of enduring nature spread over two years. The AO therefore calculated the expenses pertaining to the year under consideration and disallowed the remaining expenses.
36. We find that this issue is also covered with the decision of the Hon’ble Supreme Court’ in the case of India Cements Ltd. v. CIT  60 ITR 52, wherein the Supreme Court held that the expenditure in raising loans or issuing debentures would be revenue in nature, irrespective of whether the borrowal is a long term or short term one. It was held that the act of borrowing money was incidental to the carrying on of business, the loan obtained was not an asset or an advantage of enduring nature, the expenditure was made for securing the use of money for a certain period and it was irrelevant to consider the object with which the loan was obtained. This issue is accordingly decided in favour of the assessee.”
Respectfully, following the above order of the Tribunal ,ground number three is decided in favour of assessee.
8. Last Ground of appeal pertains to taxability of capital gains of Rs. 10,09,44,44,33,898/- in the hands of the assessee on sale of shares of IDEA by its wholly owned subsidiary (WOS), namely Apex Investment (Mauritius) Holdings Pvt. Ltd. (Apex).
8.1. During the assessment proceedings,the AO had found that Apex(earlier AT & T Cellular Pvt. Ltd.)had become WOS of the assessee towards end of the year 2005, that it sold 37.17 lakhs shares of IDEA Cellular Limited, during the year under consideration,for Rs.1,505.71 lakhs to Birla TMT Holdings Pvt. Ltd. (BTHPL). After preliminary inquiry, the AO issued a show cause notice, dated 17/02/2009, to the assessee and directed it to explain as to why the capital gains arising on sale of shares of Apex should not be taxed in its hands as per the provisions of section 93 of the Act. He referred to the order passed by the Addl. DIT (IT)- Mumbai, dated 28/3/2008 passed u/s.201(1) and 201(1A) of the Act in case of the assessee for the AY. 2006 -07. After considering the submission of the assessee in that regard, the AO held that capital gain arising out of sale of the shares of IDEA Cellular Ltd.,by Apex,was taxable in the hands of the assessee.Accordingly, he computed the indexed cost of acquisition of shares at Rs. 496.26 crores and determined the capital gain at Rs. 10,09,44,44,33,898/-. He relied upon the case of M.CT.M Chidambaram Chettiar (60 ITR 28).
8.2. Aggrieved by the order of the AO, the assessee preferred an appeal before the FAA and made elaborate submissions.After considering available material, he held that in Sept, 2005, 371.78 lakhs shares of IDEA were acquired by the assessee, that it renamed the AT & T Cellular Pvt.Ltd. as Apex, that IDEA shares were immediately sold to BTHPL in April 2006, that the assessee had sold its own share holding Rs. 71.60 lakhs shares of IDEA at Rs. 2900.03 crores,that it also sold Rs. 37.17 lakhs shares of Apex at Rs. 1505.71 crores to Birla group,that it offered the capital gain on sale if its own shared holding to tax, that capital gains arising out of sale of IDEA shares,held by Apex, were not offered for taxation,that the AO had invoked the provisions of Section 93 of the Act, that he relied upon the judgment of M.CT.M Chidambaram Chettiar (supra), that AO had held that AT & T was only a paper company,that the investment by the assessee in the share holding of foreign company was against the spirit of FEMA Regulations and Master Circular issued by RBI, that the assessee had tried to take benefit of Article-13 (4) of the DTAA entered into between India and Mauritius, that it had taken undue benefit of the tax treaty, that it had not exercised/ ensured self regulation in terms of the essential ingredients for overseas acquisition and overseas investment.
8.3. The FAA referred to the provisions of section 93 and sub section -3 of the section and held that where there was a transfer of asset resulting into accrual of income the same would be taxable in India, that the income in form of STCG had accrued to WOS of the assessee i.e. AT& T Pvt. Ltd. Mauritius, that the assessee, being its holding company, had power to enjoy income of WOS, that the case of the assessee straight-away fell within the section of 93(1) of the Act.He also referred to case of M.TC.M Chidambaram Chettiar(supra) and held that same was applicable to the facts of the case, that the provisions of section 93(1) did not stipulate as to who had transferred the asset to whom and to whom the income had accrued, that section 93(1) stated that if as a result of transfer of asset income becomes payable to a non resident, then same has to be taxed in India. He further held that benefit of sub section-3 of section 93 were not available to the assessee, that it was the beneficiary from the sale of shares of IDEA held by Apex,that it had power to enjoy the income received by Apex, that Mauritius company had no substantial existence except for holding shares of IDEA, that it had no other business operations, that the income of Mauritius company in last few years was just a few hundreds of dollars, that expenses were incurred under the head audit fee, bank charges etc., that the assessee had argued that transfer of assets was bonafide and that it was an arm’s length transaction between two unrelated parties, that it also contended that it was covered by exemptions provided in section 93 (3)(a) of the Act, that the exceptions of section 93 (3)(a) did not talk of bonafide or malafide of a transaction, that it only talked of transfer of assets, that it was mentioned in the section that transaction should not be designed for purpose of avoiding tax liability, that even if the transaction was bonafide the exemption was not available to the assessee, that transaction was designed for avoiding liability for taxation, that purchase and sale of IDEA through Apex was a conduit for avoiding taxes,that the assessee had no intention of putting any business on a secure foundation by entering into the said transaction, that the 100% subsidiary was not carrying out any business at all, that income accrued in the hands of Apex was not LTCG, that same was in the nature of Short Term Capital gains, that the legal proceedings between Birla Group and the assessee and exit from the share holders agreement were two different issues, that assessee had not offered any explanation as to why it exited from IDEA in a hurried manner at the very first opportunity.
8.4. With regard to the claim of the assessee for exemption provided u/s. 10(34) in respect of dividends and section 10(23G) in respect of LTCG, the FAA held that it was an afterthought, that no exemption was available to assessee u/s. 10(34), that it had exited from agreement with Birla Group to avoid tax liability, that originally the purchase value of shares of IDEA of Mauritius company was around Rs. 20 per share, that assessee sold the shares of IDEA to Birla Group at around Rs. 40 per share, that the profit earned by it per share was around Rs. 20/-, that it did not pay any capital gains tax on the same in India, that it was required to pay tax as per provisions of section 93 of the Act, that it did not purchase shares of IDEA directly, that it purchased entire share holding of AT &T Cellular Pvt.Ltd. He referred to the case of Mc Dowell & Co. (154 ITR148) of the Hon’ble Supreme Court, Akshya Textiles Trading Agencies Pvt. Ltd. (167ITR324) and held that the assessee had planned its affairs and had attempted to avoid tax incidence in respect of capital gains earned by it in the hands if its Mauritius subsidiary. Finally, he upheld the order of the AO.
8.5. Before us,the AR argued that the entire capital gain which arose to Apex upon the transfer of shares of idea was exempt under Article 13 (4) of the India Mauritius treaty, that Apex was a tax resident of Mauritius, capital gain earned by a tax resident of Mauritius was not chargeable to tax in India that on 07/03/1995 AT&T Corporation had set up in Mauritius, 100% subsidiary namely AT&T Mauritius, that later on it was renamed as Apex, that on 19/05/1995 the entity received Tax Residency Certificate (TRC) from the Mauritius incomes Department,that in June, 2006 an agreement was entered into between Apex and Birla group for transfer of shares of Idea. He relied upon the cases of Azadi Bacho (263 ITR 706), Serco BPO(P)Ltd .(379 ITR 256),JSH Mauritius (84taxmann.com.37) Saraswati Holding Corporation (111 TTJ 334)and Vodafone International (326 ITR 276) and referred to stupidity circular number 333, dated 02/04/1982, CBDT circular 682 dated 30/03/1994, CBDT circular 789, dated 30/04/2000, Press release dated 01/03/2013. The DR supported the order of FAA and stated that facts of the case under appeal were identical to the case of M.CT.M Chidambaram Chettiar (supra), that capital gain arising to non-resident assessee was the deemed income of the assessee. He also referred to the provisions of section 160 and 163 of the Act and stated that income of the Mauritius entity was to be deemed to the income of the resident itself as per the provisions section 93, that provisions of the DTAA would not apply.
8.6. We have heard the rival submissions and perused the material before us.We find that AT &T Corporation had entered into a JV with Birla Group in 1995 for providing wireless telecommunication services in India, that the JV obtained license from Government of India- Department of Telecommunication,that AT & T Group made investment in JV through its Mauritius based company namely AT & T Cellular Pvt. Ltd. (subsequently renamed as Apex), that in the year 2000, JV and the assessee entered into a share holders agreement, pursuant to which the three parties (Tatas,Birlas amd AT&T) agreed to a three-way-venture and to merge Tata Cellular Ltd. into Birla AT &T Communications Ltd. (BACL), that later on name of the Company was changed to Idea Cellular Ltd., that in 2004, Cingular Wireless Group acquired AT&T Wireless Services and renamed it as New Cingular Wireless Services,that the assessee acquired 371.78 lakhs shares of IDEA from new Cingular Wireless Services and MMM Holdings LLC,that it paid 1050,00,000 USD to New Cingular and USD 4,50,00,000 to MMM Holdings, that the assessee became holding company of AT & T Cellular Mauritius Ltd. i.e. of Apex,that Apex was resident of Mauritius, that Apex had obtained TRC from Mauritius government in the year 1995, as required by CBDT circular 789, dated 13/04/2000, that Apex and the assessee were holding shares of Idea,that both of them sold those shares to Birla group in the year under appeal,that the assessee paid tax on the capital gains arising out of the sale of shares sold by it,that it did not pay tax for the sale transaction entered in to by Apex, the AO invoked the provisions of section 93 of the Act and held that capital gains arising out of sale of shares by Apex had to taxed in the hands of the assessee,that the FAA confirmed the order of the AO and held that transaction had to be taxed as short term capital gains and not as LTCG.
8.6.1. As far as applicability of the provisions of the India Mauritius tax-treaty is concerned, there is no doubt about it. The FAA has held that by not offering the capital gains for tax of the shares sold by Apex the assessee had violated the restrain imposed by the treaty. Apex being a tax resident of Mauritius had not to pay any tax in India under the head capital gains, as per the provisions of Article 13 (4) of the DTAA. Is
8.6.2. In our opinion,the basic question to be decided is as to whether provisions of section 93 are applicable to the sale of Idea shares by Apex to Birla Group. Section 93 of the Act is successor of section 44D of Indian Income tax, 1922. The object of both the sections is clear from the title itself. The preamble of section talks of ‘avoidance of income-tax by transactions resulting in transfer of income to non-residents’. The only and logical conclusion that can be drawn, from the above mentioned words, is that the object behind the sections (section 44D of 1922 Act and section 93 of the Act) is to prevent residents of India from evading the payment of by transferring their assets to non-residents while enjoying the income by adopting questionable methods. A close scrutiny of the sections reveals that for invoking its provisions following preconditions must exit:
a) there must be a transfer of assets;
b) by reason of such transfer,income arising from the said assets becomes payable to a non-resident(section 44 D of Indian Income tax also covered ‘persons residents but not ordinarily residents’ in its ambit besides the non-resident persons);
c) the resident by means of the transfer acquires a right to enjoy such income;
d) the income from the said assets if it was the income of the resident,would be chargeable in India;
e) in such an event,the income of the non-resident would be deemed to be the income of the resident for all the purposes of the Act.
f) a bona fide transfer is protected by sub-section (3).
The language of section is plain and unambiguous. The purpose of incorporating the provision was to curb the practice of tax avoidance by the resident assessees by transferring their assets to non residents and enjoying the fruits of the assets even after such transfer. It does not say ‘ when any person has transferred any assets’ but it says, ‘by means of a transfer of assets.’ Thus, emphasis of the section is on the consequences flowing from such a transfer. Whosoever effects the transfer, if by such a transfer an assessee acquires a right to enjoy the income, he is liable to tax. The hand transferring assets becomes less important-what matters is the result envisaged by the said section, i.e.a non-resident is the transferee of the assets but the assessee acquires the power to enjoy the income from those assets. In short, it can be stated that if a resident has power to enjoy the income accruing /arising out of the assets transferred to a non-resident, he would be deemed to have received that income and therefore,would be liable to be assessed under the Act.
8.6.3. Here, we would like to mention that,in a sense, section 93 can be considered a charging section. But, there is no doubt that it is a deeming provision. Deeming provisions are intended to enlarge the meaning of a particular word which includes matters which otherwise may or may not fall within the provision. They should, therefore,be extended to the consequences and incidents which shall inevitably follow. In the matter of Trans Asian Shipping Services Ltd. (371ITR194), the Hon’ble Kerala High Court has described the scope of deeming provisions as under:
“A deeming provision is never used by the Legislature to mean what is obvious or to include the natural meaning of the expression. However,sometimes the expression “deemed” is included to give a comprehensive description that includes what is obvious, what is uncertain and what is in the ordinary sense impossible.”
The Hon’ble P& H High Court in the matter of Saroop Krishan(153 ITR 1)has held as follow:
“The Legislature is entitled to en graft a deeming provision in a statute. While interpreting a deeming provision in a statute, the court has to give full effect to it by taking it to its logical conclusion by imagining as real and natural even the consequences flowing from an assumed situation or fact, unless such an interpretation would lead to absurd results.”
In the case of the Hon’ble Court has held that a deeming provision has to be applied like any other provision in an enactment, that while applying such a provision the court must not allow its imagination to boggle, and must apply the provision with all its necessary concepts.
An analysis of the above referred judgments lead to the conclusion that when the law requires that a certain set of circumstances should be assumed for a given purpose,full effect should be given to that deeming provision and no other factor should be taken into consideration which would be inconsistent with the intendment of law.
8.6.4. As stated earlier, being a deeming provision, section 93 has to be strictly construed and has to be taken to its logical conclusion. It means that if the situation specified in the section exists, only then it will be applicable. We find that one of the basic fact i.e. transfer of property by a resident to a non resident is not there in the whole transaction. In the case under appeal, a non-resident company has transferred property i.e.shares to a resident and that resident is an unrelated party. Absence of transfer by resident to a non resident entity takes the transaction out of the ambit of section 93, a deeming provision. As stated earlier, the section has to be construed strictly and full effect has to be given to the consequences flowing from it. The apparent consequence is that the assessee is out of the net of the provisions of section 93 of the Act. Therefore, in our opinion, the departmental authorities have wrongly invoked the provisions of section 93.
8.6.5. Here, we would like to take notice of the case of M.CT.M Chidambaram Chettiar (supra). In that matter, a Hindu undivided family carried on an extensive money-lending business in British India, Burma and elsewhere. There was a partition in the family and the members constituted themselves into a firm to carry on the business. In June, 1929, the firm started a money-lending business at Kuala Lumpur in the Federated Malay States with a capital of Rs. 12 lakhs transferred from its business in Burma. In March, 1932, a company,one of whose purposes was to acquire the Kuala Lumpur business, was formed in Pudukottai outside British India. In November,1933, assets of the business of the firm in Kuala Lumpur of the value of Rs. 12 lakhs were transferred to the company, and, in consideration thereof, the company allotted to the partners of the firm 1,200 shares of Rs. 1,000 each. In 1938 the company distributed bonus shares of the value of Rs. 5 lakhs out of its profits. On 31/12/1938, the partners of the firm held 1,944 shares out of 2,271 shares and the balance was held by their close relatives.For the AY.s 1939-40 to 1941-42, the AO applied section 44D of the Income-tax Act, 1922 and assessed the partners of the firm separately in respect of the income of the company. If we consider the facts of the case under appeal it becomes clear that they are not similar to the facts of M.CT. M Chidambaram Chettiar(supra). If we consider the facts of the case under appeal, it becomes clear that they are not similar to the facts of M.CT. M Chidambaram Chettiar (supra).
8.6.6. As far as applicability of tax treaty provision vis-a-vis section 93 of the Act is concerned,we would like to mention that the treaty would prevail over the local act, as provided in section 90 (2) of the Act. We would like to refer to relevant portions of the judgment of the Azadi Bachao (supra)and same reads as under:
The total income specified in sections 4 and 5 of the Income-tax Act, 1961, chargeable to income-tax is also subject to the provisions of an Agreement of the Central Government with the Government of a country outside India for avoidance of double taxation contemplated by section 90 to the contrary, if any. Such an Agreement operates as a bar on the power of the Government of India and the bar would operate on sections 4 and 5 .
No provision of the Double Taxation Avoidance Agreement can possibly fasten a tax liability where the liability is not imposed by the Act. If a tax liability is imposed by the Act, the Agreement may be resorted to for negativing or reducing it ; and, in case of difference between the provisions of the Act and the Agreement, the provisions of the Agreement would prevail over the provisions of the Act and can be enforced by the appellate authorities and the court.
Section 90 is specifically intended to enable and empower the Central Government to issue notification for implementation of the terms of a Double Taxation Avoidance Agreement. The provisions of such an Agreement, with respect to cases to which they apply, would operate even if inconsistent with the provisions of the Income-tax Act. If it was not the intention of the Legislature to make a departure from the general principles of charge ablility to tax under section 4 and the general principle of ascertainment of taxable income under section 5 , then there was no purpose in making those sections “subject to the provisions of the Act”. Section 90 was brought into the statute book precisely to enable the executive to negotiate a Double Taxation Avoidance Agreement and quickly implement it. Even accepting that the powers exercised by the Central Government under section 90 are delegated powers of legislation, there is no reason why a delegatee of legislative power, in all cases, has no power to grant exemption. The delegate of a legislative power can exercise the power of exemption in a fiscal statute.
When the requisite notification has been issued under section 90 , the provisions of sub-section (2) of section 90 spring into operation and an assessee who is covered by the provisions of the Double Taxation Avoidance Agreement is entitled to seek the benefits there under, even if the provisions of the Double Taxation Avoidance Agreement are inconsistent with those of the Act.
The validity and vires of delegated legislation have to be tested on the anvil of the law-making power. If an authority lacks power, then the legislation is bad. On the contrary, if the authority is clothed with the requisite power, then, irrespective of whether the legislation fails in its object or not, the vires of the legislation is not liable to be questioned. The Indo- Mauritius Double Taxation Avoidance Convention, 1983, reasonably construed, is not ultra vires the powers of the Central Government under section 90 , on account of its susceptibility to “treaty shopping” on behalf of residents of third countries.
Circular No. 789 dated April 13, 2000,issued by the Central Board of Direct Taxes providing clarification that, in the application of the provisions of the Indo- Mauritius Double Taxation Avoidance Convention, 1983, wherever a certificate of residence is issued by the Mauritian authorities, such certificate will constitute sufficient evidence for accepting the status of residence as well as beneficial ownership of shares, is a circular within the meaning of section 90 , and, therefore, it must have the legal consequences contemplated by section 90(2) . In other words, the circular will prevail even if inconsistent with the provisions of the Income-tax Act, 1961, in so far as assessees covered by the provisions of the Convention are concerned.
Circular No. 789 dated April 13, 2000, issued by the Central Board of Direct Taxes falls well within the parameters of the powers exercisable by the Central Board of Direct Taxes under section 119 . The Circular does not in any way crib, cabin or confine the powers of the Assessing Officers with regard to any particular assessment : it merely formulates broad guidelines to be applied in the matter of assessment of assessees covered by the provisions of the Indo- Mauritius Double Taxation Avoidance Convention, 1983.
The test of liability for taxation is not to be determined on the basis of an exemption granted in respect of any particular source of income, but by taking into consideration the totality of the provisions of the income-tax law that prevails in either of the Contracting States. Merely because, at a given time, there may be an exemption from income-tax in respect of any particular head of income, it is not correct to say that the taxable entity is not liable to taxation. Liability to taxation is not the same as payment of tax. Liability to tax is a legal situation : payment of tax is a fiscal fact. It cannot be said that offshore companies incorporated in Mauritius and registered under the Mauritius Offshore Business Activities Act, 1992, are not “liable to taxation” under the Mauritius Income-tax Act ; or that such companies would not be resident in Mauritius within the meaning of article 3 read with article 4 of the Convention.
Since the purpose of the Indo- Mauritius Double Taxation Avoidance Convention, 1983, is to eliminate double taxation, the treaty takes into account only persons who are “liable to taxation” in the Contracting States. Consequently, the benefits there under are not available to persons who are not liable to taxation and the words “liable to taxation” are intended to act as words of limitation.
If it was intended that a national of a third State should be precluded from the benefits of the Indo- Mauritius Double Taxation Avoidance Convention, 1983, then a suitable term of limitation to that effect should have been incorporated in it. There are no disabling or dis entitling conditions under the Convention prohibiting the resident of a third nation from deriving benefits there under. The motives with which the residents of a third country have been incorporated in Mauritius are wholly irrelevant. The whole purpose of the Convention is to ensure that the benefits there under are available even if they are inconsistent with the provisions of the Income-tax Act. The principle of piercing the veil of incorporation cannot apply. The Report of the Working Group on Non-resident Taxation does not render an attempt by the resident of a third country to take advantage of the existing provisions in the Convention illegal.
The principles adopted for interpretation of treaties are not the same as those in interpretation of statutory legislation. The interpretation of provisions of an international treaty, including one for double taxation relief, is that treaties are entered into in a political level and have several considerations as their bases. Many developed countries tolerate or encourage “treaty shopping”, even if it is unintended, improper or unjustified, for other non-tax reasons, unless it leads to significant loss of tax revenue. The court cannot judge the legality of “treaty shopping” merely because one section of thought considers it improper. The court cannot characterize the act of incorporation under the Mauritian law as a sham or a device actuated by improper motives.
If the court finds that notwithstanding a series of legal steps taken by an assessee, the intended legal result has not been achieved, the court might be justified in overlooking the intermediate steps, but it is not permissible for the court to treat the intervening legal step as non est based upon some hypothetical assessment of the real motive of the assessee. An act which is otherwise valid in law cannot be treated as non est merely on the basis of some underlying motive supposedly resulting in some economic detriment or prejudice to the national interests.
Considering the above, we are of the opinion that the FAA was not justified in confirming the order of the AO with regard to applicability of the provisions of section 93 of the Act. So,reversing his order,we decide Ground no. 5 in favour of the assessee.
As a result, appeal filed by the AO is dismissed and the appeal of the assessee stands partly allowed.