Case Law Details
Brief of the Case
Authority for Advance Rulings held In the case of Dow AgroSciences Agricultural Products Ltd, Mauritius that the Article 13 of the Indo-Mauritius DTAA which deals with the taxation of capital gains is not applicable in the present case. The reason is that the applicant does not have a PE in India. There is no material on record brought forth by the Revenue that the applicant has a PE in India. It was suggested that the presence of DAS India itself should be taken to be PE. We do not think that such a broad proposition can be pressed in service for the finding that the applicant has PE in India. No material has been brought before us to that effect. Hence there would be no question of any taxation of Indian Law on the capital gains arising from the proposed transfer of shares of DAS India by the applicant to the DAS Singapore.
Facts of the Case
The applicant is a company incorporated in Mauritius and it is a part of Dow group of companies. Dow Agrosciences India Private Limited (DAS India), a company incorporated in India, is a part of Dow Group and is engaged in manufacturing and trading of pesticides and insecticides. The Applicant had acquired 61,836,990 shares of Rs 10 each in DAS India for an amount of Rs. 618, 369, 900, during the period sep.1995 to January, 2005. The applicant proposes to transfer these shares in favour of a Dow Group Entity Singapore. This transfer is pleaded with an objective of the group re-organization.
DAS Mauritius proposes to contribute shares held in Dow India as its capital in DAS Singapore. By virtue of this, DAS India would become 100% subsidiary of DAS Singapore. The Applicant also state that it does not have an office, or employee or agents in India and hence no permanent establishment in India as per Article 5 of the India Mauritius Double Taxation Avoidance Agreement. It is reiterated by the applicant that it is not required to maintain any books of accounts in India as prescribed in Section 211 of the Companies Act, 1956 and further it is not required to comply with the propositions of Section 594 of theCompanies Act, 1956 relating to companies incorporated outside India provisions and establishing of places of business in India.
The applicant raised the followings questions – Whether investment held by applicant in DAS India would be considered as capital asset under Sec.2 (14), Whether capital gains arising from the proposed transfer of shares of DAS India by the Applicant to DAS Singapore would be subject to tax in India, whether the gains arising to the Applicant from the proposed transfer of equity shares of DAS India will be taxable in India in the absence of a Permanent Establishment of the Applicant in India and in light of the provisions of Article 7 read with Article 5 of the India Mauritius DTAA, whether the Applicant would be liable to pay minimum alternate tax under the provisions of section 115JB, Whether if the proposed transfer of shares by the Applicant to DAS Singapore is not taxable, whether the provisions of section 92 to section 92F of the Act relating to transfer pricing would still be applicable, whether the sale consideration receivable by the Applicant should suffer any withholding tax as per section 195 and whether if the proposed transfer of shares of DAS India is not taxable in India, whether the Applicant is required to file any return of income under section 139.
Submission of Applicant
As regards the first question, the applicant pleads that its investment in DAS India as a capital asset. In support of this proposition, the applicant relies on Instruction No. 181-1-89-IT (AI)dated 31.8.1989 or Instruction No.1827 and Supplementary Circular No.4/2007 dated 15.6.2007 issued by Central Board of Direct Taxes (CBDT). It is reiterated that considering the accounting test and intention test as also quantum test and further relying on G.Venkata Swami Naidu and Company vs. CIT [1959] (35 ITR 594)(SC) as also Raja Bahadur Kamakhya Narain Singh vs. CIT [1970] (77 ITR 253) (SC) as also the Ruling of this Authority in Praxair Pacific Ltd. AAR 855 of 2009. The equity shares held by it in DAS India should be considered as capital asset and not stock in trade.
As regards the 2nd question it is suggested that capital gains earned by the applicant would not be liable to tax in India by virtue of Article 34 of India- Mauritius DTAA read with section 90(2) of the Act since the assessee is a tax resident of Mauritius. In its submissions, the applicant has referred to the provisions of section 9(1)(i), as also the provisions of DTAA between India and Mauritius and more particularly Article 13(4). It is also pointed out on the basis of reported decisions in : (1) UOI vs. Azadi Bachao Andolan 2003 263 ITR 706 (SC) and (2) CIT vs. Paul Kulangal Chettiyar 2004 267 ITR 654 (SC) that where the provisions of DTAA are more beneficial the applicant could be able to avail of the same. The applicant also pleads that the CBDT Circulars are binding on the Revenue Authorities and as per the case law referred to above and some other decisions by the Delhi ITAT, there would be no liability for the capital gains.
The applicant has also relied upon the quoted decision of Azadi Bachao Andolan [2003] 263 ITR 706 wherein the Hon’ble Supreme Court declared that treaty shopping is not taboo. The applicant has also relied on the decision of AAR in ETrade Mauritius Limited (324 ITR 1) which also reiterates the principles of treaty shopping. The other decisions relied upon by the applicant are M/s. Sanofi Pasteur Holding SA (354 ITR 316), Castleton Investment Ltd. (AAR No.999 of 2010) (252 CTR 131), Deere & Co. (337 ITR 277), Ardex Investments Mauritius Limited (AAR) (340 ITR 272), Armstrong World Industries Mauritius Multiconsult Limited (AAR) (349 ITR 303). In Ardex Investments Mauritius Limited it is clearly mentioned that mere investment through a Mauritian company cannot be viewed or characterized as objectionable treaty shopping, when investments have been held for a period 10 years and the arrangement has not come all of a sudden. If setting-up Mauritius Company is with an eye on the DTAA, it by itself will not make it a tax avoidance arrangement.
Submission of Department
The Revenue contended that the applicant is a shell company in Mauritius. It is then contended by the Revenue that nothing has been brought on record to suggest in support of the applicant’s plea that it does not have a PE in India. The Revenue then pleads about there has been a scheme to avoid the payment of income-tax in India. A reference then is made to the observations of the Hon’ble Supreme Court in Azadi Bachao Andolan case and Vodafone International Holdings BV case. It is again reiterated that the whole scheme of the transfer of shares in favour of Singapore, amounted to a scheme to avoid payment of taxes.
Held by AAR’s
The AAR held that this is a transaction which began almost 20 years back, could not have been a scheme to avoid the payment of taxes. The shares were acquired 20 years or as the case may be 18 years, 14 years and 10 years back. For a substantial cost of about Rs.61 crores and if they are sought to be now transferred to a Singapore concern which is the own subsidiary of the applicant, it cannot amount to a design or a scheme to avoid payment of taxes in India. The investment made in the DAS India was with the prior approval of Department of Industrial Policy & Promotion (DIPP). The subsequent investment also were with the approval of RBI and hence it cannot be said the shares were acquired with a view to sell in future through the Mauritian company and thus to avoid the taxes on possible capital gains.
Further Singapore is one of the upcoming countries in Asia-Pacific region in the opinion of the applicant and therefore, the Dow group contemplated to shift the share holding of DAS India from Mauritius to Singapore. All this exercise is also more than 5 years old from the date of the last acquisition of the shares. Thus, it cannot be said that the proposed transfer of shares was amounting to a scheme to avoid payment of taxes in India. It was clearly for the business considerations. We, therefore, reject the contention of the Revenue that this amounting to a scheme to avoid payment of taxes in India.
As regards the contention raised by the Revenue that the applicant has a PE in India, the applicant has produced a Tax Residency Certificate and also a declaration in the AAR application itself that it has no PE. Nothing has been brought by the Revenue that there is a PE in India. We therefore, do not hold that the applicant has a PE in India in the absence of any inputs which could have been provided by the Revenue. We accept the reiteration by the applicant that the applicant does not have an office or employees or agents in India and has also made declaration to this effect. The applicant has also reiterated that unless it has a PE in India, profits arising to applicant from the sale of equity shares of DAS India would not be liable to tax in India particularly because of DTAA between India and Mauritius.
We do not accept the contention of the department that DAS India has not declared and distributed dividends since 2004 and therefore, to the extent of accumulated profits, sale proceeds should have to be assessed in India. We ignore this contention as it is not relevant. Considering the other factors like investment function made 20 years back etc., we are of the clear opinion that there is no scheme for the tax avoidance. We also do not accept the contention of the Revenue that it is a colorable device.
Capital Asset
In their application and during the debate the applicant has pointed out that these shares could not be held to be stock in trade. It is pointed out that in so far the intention test is concerned; the objection was not to trade the shares which the applicant had in DAS India. It is also pointed out that the acquisition is from 1994and obviously the intention was to hold these shares as investment. It is also pointed out that there has been no transaction in relation to the sale of these shares and the proposed transaction is the only transaction. Considering the whole long subject, we are of the opinion that these shares have to be held as capital asset.
Capital gain taxability in India
As per the provision of Article 13 of the Indo-Mauritius DTAA which deals with the taxation of capital gains arising to the resident of contracting state would suggest that clause 1 and 3 are not applicable in the present case. Considering the nature of the assets (equity shares in an Indian Company) being transferred, even clause 2 will not be applicable for the simple reason that the applicant does not have a PE in India. There is no material on record brought forth by the Revenue that the applicant has a PE in India. It was haltingly suggested that the presence of DAS India itself should be taken to be PE. We do not think that such a broad proposition can be pressed in service for the finding that the applicant has PE in India. No material has been brought before us to that effect.
Further, the applicant has already pointed out that the applicant company is 100% subsidiary of the parent company and DAS Singapore has been incorporated 100% subsidiary of the appellant and this has been done to achieve the objective of proposed restructuring. The applicant proposes to contribute shares in DAS India as its capital in DAS Singapore. However, the shares of DAS India are held by the applicant and after the proposed transfer they will be held by DAS Singapore in its own capacity and as a representative of DAS LLC. The applicant, therefore, plead that DAS LLC cannot be regarded as a beneficiary of transfer of shares.
We have taken a view that such company which is a Mauritian company would be fully entitled to the benefit of Article 13(4) in our Ruling dated 10.10.2015 in AAR No.995 of 2010 in the case of JSH Mauritius Ltd. The factual circumstances were almost extremely similar if not identical. There also it was a Mauritian company which was gaining by the transfer of shares of the Indian company. There would be no question of any taxation of Indian Law on the capital gains arising from the proposed transfer of shares of DAS India by the applicant to the DAS Singapore.
Application of Sec.115JB
This question of applicability of section 115JB had arisen earlier before this Authority in case of Castleton Investment Ltd. AAR No 999 of 2010 where this Authority had held that the sub-section applies to all the foreign companies/firms. However, that judgment was appealed against before the Hon’ble Supreme Court by way of Civil Appeal No.445 of 2013. The said appeal is stated to have been disposed of by the Hon’ble Apex Court by its Order dated 30.9.2015 in favour of the appellant therein on the basis of a statement made before the Hon’ble Court to the effect that government did not press to apply section 115JB to FII and FPIs for the period prior to 1.4.2015. It was pointed out that a Circular dated 2.9.2015 was issued by Govt. of India and the same was filed before the Hon’ble Supreme Court and a statement was made by the Attorney General for India that the said Circular would be followed. The said Circular clearly mentions that the FIIs/FPIs having no PE/place of business in India would not be covered by section 115JB. In fact, a press release dated 24.9.2015 was also pressed in service. In the press release, it was clarified that with effect from 1.4.2015, the provisions of section 115JB would not be applicable to foreign company if the foreign company is a resident of a country having DTAA with India and such foreign company does not have a PE within the definition of the term in relevant DTAA or to the foreign company which is a resident of a country which does not have a DTAA with India and such foreign company is not required to seek registration under section 592 of the Companies Act, 1956 or section 380 of the Companies Act, 1956. It is clear that the present applicant is clearly covered as it is a company in Mauritius, which country has DTAA or as the case may be DTAC with India. Again we have already given a finding that the applicant does not have a PE in India. As such we answer this question in favour of the applicant holding that there will be no applicability of section 115JB to the applicant.
Applicability of transfer pricing provisions
It has to be borne in mind that unless the transaction is taxable in India, there would be no application of Sections 92 to 95. Section 92 is not an independent charging section and would be applicable only if there is any chargeable income arising from the international transaction. In the present case even though the proposed transfer of shares could result in income/capital gain from the international transaction since this income is not chargeable to tax in India in accordance with Article 13, there will be no question of the applicability of section 92 to 92F. The applicant rightly relies on the 3 Rulings: Dana Corporation [2010] (227 CTR 441) (AAR), M/s. Praxair Pacific Limited (326 ITR 276) and Vanenburg Group B.V. vs. CIT (289 ITR 464).
Applicability of Section 195
The capital gains earned out of proposed transaction is not taxable there will be no question of the applicability of section 195 of the Act. As per the Ruling of the Hon’ble Supreme Court in Transmission Corporation of AP Ltd. vs. CIT 239 ITR 587.
Filing of return u/s 139
The applicant relying on the Rulings of this Authority in FactSet Research Systems Inc. reported in (317 ITR 169) and Vanenburg Group B.V. vs. CIT AAR No.727 of 2006, submitted that he is not required to file any tax return. The law laid down in the judgments of Factset Research Systems Inc. and Vanenburg Group BV vs. CIT was not considered in the Castleton judgment (AAR No.999 of 2010), so also the judgment of the Federal Court in Chatturam vs. CIT was also not considered in Castleton judgment, we, therefore respectfully disagree with the Castleton judgment in so far the applicability of section 139(1) of the Act to the present applicant and answer the question in negative.
Accordingly, application disposed of.
