R.S. Shukla JUDGMENT
A.K. Tewary, Member (R)
1. The applicant is Mahindra - BT Investment Company (Mauritius) Limited, Mauritius (MBTM). Mahindra Overseas Investment Co. (Mauritius) Limited, a company incorporated in Mauritius and BT Holding Limited, (United Kingdom) hold 57% and 43% stakes respectively in MBTM. The Applicant's Board of Directors comprises of three directors resident in Mauritius, one director resident in the United Kingdom and one director resident in India. The control and management of the affairs of the Applicant is exercised by the Board of directors of the applicant whose meetings are conducted in and chaired from Mauritius.
The applicant had acquired 9,931,638 shares (representing about 8.12% - holding) in Tech Mahindra Limited, India ("TML") which is listed on Bombay stock exchange and National Stock Exchange in India. These shares were acquired in two tranches, in financial years 2005-06 and 2006-07, through a preferential allotment at a price of INR 67 per share.
AT&T International, Inc. ("AT&T"), earlier known as SBC International Inc., TML, Mahindra & Mahindra Limited ("M&M"), British Telecommunications plc ("BT") and the applicant entered into an Option Agreement dated 10 May 2005. Pursuant to the Option Agreement, AT&T was given an option to purchase up to 9,931,638 equity shares of TML held by the applicant on achieving certain milestones stipulated in the Option Agreement. AT&T achieved the milestones and decided to exercise the options. The applicant consequently transferred 98,70,912 shares of TML to AT&T at USD 3,5022 per share on 22 March 2010 and realized long-term capital gain of INR 900,127,390.52. This gave rise to the issue of taxability of gains because the applicant has transferred shares to AT&T. The chronology of events is as under:--
"(i) 19th August 1986
Joint venture agreement signed between Mahindra & Mahindra Ltd.(M&M) an Indian co. and British Telecommunication PLC (BT) a British Company incorporated in England to form Mahindra British Telecom Ltd. (now known as Tech Mahindra Ltd. (TML). M&M and BT held 57% and 43% shares respectively in TML.
(ii) 28th December 2004
A Commercial agreement signed between TML and SBC Services (now AT & T).
(iii) 9th May 2005
MBTM, the applicant, incorporated in Mauritius.
(iv) 10th of May 2005
MBTM, AT&T, M&M, BT & TML, enter into an option agreement which provided that AT&T will be granted options over the shares representing 8.12% of enlarged fully diluted shares of TML on achieving certain specified milestones.
(v) 23rd of June 2005
Shares subscription agreement entered between MBTM and TML. As per the said agreement, MBTM agreed to subscribe and to invest in TML on partly paid basis, MBTM agreed to subscribe 99,31,638 equity shares at a price of Indian rupees 67 per share.
(vi) 09.07.2005
First payment of US $ 22.09m made by MBTM as allotment money for purchase of shares of TML.
(vii) 23 May 2006
Second payment of US $ 124.36m made by MBTM for purchase of share being final call money.
(viii) 22nd March 2010
AT & T exercised its option and purchased share of TML from MBTM."
2. The applicant has raised following questions:
"(i) Whether the Applicant, a tax resident of Mauritius, is not chargeable to capital gains tax in India under Article 13(4) of the DTAA between India and Mauritius in respect of transfer of 9,870,912 shares of an Indian Company, to AT&T International, Inc. a corporation, organized and existing under the laws of Delaware, United States of America.
(ii) In the event of the answer to question (i) being in the negative, i.e., if the applicant is chargeable to capital gains tax in India, whether the Applicant will be chargeable on the long term capital gains at the rate of 10% under the proviso to Section 112(1) of the Income Tax Act, 1961."
3. In this case this authority had considered the application and passed an order on 27.8.2012 refusing the ruling on the ground that Tech Mahindra made a public issue by circumventing clause 2.6.1 of the SEBI Guidelines, 2000 by a circuitous arrangement by entering into a contract with the applicant and by entering into another agreement (even prior in point of time) to sell those shares to be allotted, for a consideration of USD 1,000. Thus the obligation of Tech Mahindra was shifted to the applicant and the result reached by providing for the applicant to part with the shares to whom Tech Mahindra had an outstanding obligation to issue shares which would have stood in the way of a public issue. The matter went before the Bombay High Court which took note of a communication dated 7th May, 2013 from SEBI to the Director of Income-tax and noted that the agreement entered into in 2004 between TML and AT&T was not acted upon due to commercial reasons and that the draft prospectus filed with SEBI in 2006 had disclosed the agreement entered into by it with AT&T. The High Court noted that in this case SEBI had concluded that there had been no breach of SEBI guidelines and SEBI had not issued any show cause notice or adjudication order for contravention of its guidelines, The High Court restored the questions to this authority for a ruling.
4. The applicant has mentioned that it is a tax resident of Mauritius, holding a tax residency certificate issued by the Mauritian tax authorities and the control and management of its affairs is situated in Mauritius. It has referred to the provisions of the India-Mauritius DTAA which provided exemptions on capital gains realized by Mauritius residents in India. It has also referred to Circular No. 682 : MANU/DTCR/0009/1994 dated 30th March, 1994 and Circular No. 789 : MANU/DTCR/0005/2000 dated 13th April, 2000 clarifying that whenever a TRC is issued by the Mauritian Tax Authorities, that will constitute sufficient evidence for accepting the status of residence of the Mauritian Entity and accordingly the India Mauritius DTAA will be applied. It has also mentioned that the Hon'ble Supreme Court in the case of UOI v. Azadi Bachao Andolan MANU/SC/1219/2003 : (2003) 263 ITR 706 has upheld the validity of Circular No. 789 : MANU/DTCR/0005/2000.
5. The gist of objections of the Department of Revenue is as under:--
"(i) The applicant MBTM is a nominee of the founder companies M&M and BT and its only activity is acquisition of shares of TML and holding the same for transferring to AT&T as per the Option Agreement.
(ii) The Incorporation of MBTM was without any economic substance with sole purpose to hold the shares to facilitate a tax neutral transfer of shares as mandated in clause 14.4 of the Option Agreement.
(iii) The shareholders agreement dated 25.6.2005 confirms the above mentioned fact.
(iv) Clause 27 of the Shareholder Agreement says that MBTM will cease to exist on execution of the transfer of shares to AT&T.
(v) The financial statements of the applicant show no business activity other than holding investment in TML."
6. Relying on various clauses of the Option Agreement and Share Purchase Agreement the Department has concluded that the real transaction was between TML and AT&T. According to the Department the incidence of tax on the sale of shares by TML was transferred through a holding structure and series of agreements to the applicant to take advantage of India-Mauritius Treaty whereas the control and management of the affairs of the applicant remained in India. The Department has referred to Article 4(3) of the Treaty saying that the applicant is taxable in India for its transaction to transfer the shares to AT&T. The Department has also referred to Section 6(3)(c) of the Income-tax Act saying that the control and management of the applicant is situated only in India and, therefore, Article 4(3) of the Treaty should apply.
7. The applicant has refuted the objections of the Department saying that the applicant was set up for a commercial purpose and there is nothing in law that prohibits incorporating a company for a special purpose. It has been further clarified that the arguments of the Revenue that the incorporation and existence of the applicant was for the sole purpose of transferring shares of TML to AT & T is factually incorrect as the applicant even today continues to hold 2,42,904 shares of TML without any obligation to transfer them to AT & T or anyone else. The applicant has further submitted that:
"a) The Applicant has been managed independently by its Board of Directors constituted in Mauritius.
b) A majority of the directors of the Applicant have been resident outside India. Even during the relevant year, out of the 5(five) directors constituting the board of the Applicant, only 1 (one) was resident in India and the remaining 4 (four) directors were non-residents of India (one of them being a resident of the UK);
c) All meetings of the Board of Directors have been conducted from Mauritius and have been chaired by a Mauritius resident director;
d) Statutory books of account and records have been maintained and kept at the registered office of the Applicant in Mauritius;
e) The statutory auditors appointed by the Applicant have been resident in Mauritius;
f) The company Secretary has been appointed in Mauritius and has been a resident of and is functioning from Mauritius;
g) The Applicant has had its bank account in Mauritius and all the Applicant's banking transactions have been conducted through that bank account.
h) The Applicant has regularly made its statutory filings and returns as required by the Companies Act, 2001 in Mauritius with Mauritian Registrar of Companies;
i) The Applicant has filed its tax returns in Mauritius as required under the Mauritius domestic law; and
j) All Annual Meetings of the shareholders of the Applicant have been held in Mauritius."
8. In its rejoinder relating to control and management of affairs of the applicant situated wholly in India the applicant has submitted that neither its control and management nor its affairs were wholly, or even partly, situated in India during the relevant year. The applicant has pointed out that all decisions of financial matters, approval of financial budgets and statements, decisions on declaration of dividends, decisions on buy-back of shares decisions in respect of shares in question including the control of the Option Agreement were taken in Mauritius by the applicant's Board of Directors which included representatives of BT Holdings Limited, a company resident in UK which hold 43% of share capital in the applicant. The applicant has relied on the ruling of the Hon'ble Supreme Court in the case of Erin Estate v. CIT MANU/TN/0128/1959 : 34 ITR 1 wherein it was held that the Act of approval of the budget itself was an act of exercising the right of control and management of a company. They have also relied on the case of VVRNM Subbayya Chettiar v. CIT MANU/SC/0024/1950 : 1951 AIR 101 where it was held that as a general rule the control and management of a business remains in the hand of a person or a group of persons, and the question to be asked is wherefrom the person or a group of persons controls or directs the business. They have further relied on the ruling of the Bombay High Court in the case of Narrotam v. CIT MANU/MH/0013/1953 : 1953 23 ITR 454 wherein it considered the place of meeting of Board of Directors, keeping of records and place where it keeps house and does business to determine the place of control and management of the affairs of a company. The Hon'ble Bombay HC categorically cautioned against confusing the act of doing business with the central control and management of that business. It observed that mere doing of business in one jurisdiction cannot constitute having controlling and directing power in that jurisdiction. Further, the Hon'ble Bombay HC observed that as a rule, the direction, management and control, 'the head and seat and directing power' of a company's affairs is situated at a place where the directors' meetings are held and, consequently, a company would be resident in India only if the meetings of directors who manage and control the business are held in India. According to the applicant even if it is considered to be a special purpose vehicle, this will not make it a company wholly controlled and managed from India. The applicant has, however, mentioned that it has earned income by way of dividends on the shares held and interest income on the deposits kept with the bank.
9. We have considered the arguments of the applicant and the Department. At the outset we may observe that the Revenue's emphasis on the fact that the applicant was not set up for a commercial purpose and was holding shares only for ultimately transferring the same to AT & T is misplaced. The facts show that it was in order to motivate AT & T to give business to TML, it was agreed commercially between TML and AT & T that the latter would be offered an opportunity to become a shareholder of TML only when AT & T had given a certain level of business to TML for which certain milestones were set. It was only after such milestones were achieved that the option was exercised. There is nothing unusual or abnormal about such conditions in the Option Agreement. During the course of hearing the arguments mainly centered around the place of control and management of the affairs of the applicant company in view of reliance of the Department on Article 4(3) of the DTAA which provides that a resident of both the contracting states shall be deemed to be the resident of the contracting state in which its place of effective management is situated. As regards section 6(3) of the Income-tax Act we note that a foreign company can be a resident in India only if during the year, control and management of its affairs is situated wholly in India. Therefore, the main issue to be examined is whether control and management of its affairs is situated wholly in India. The applicant was able to establish before us that the following decisions were taken in Mauritius by the applicant's Board of Directors:--
"a) Decisions on financial matters: The instruction by the applicant to Standard Chartered Bank, Mauritius for placing fixed deposits with the latter.
b) Approving of financial budgets and statements: The Board resolution of the applicant dated 11 May 2007.
c) Decision on declaration of dividends: The Board resolution of the applicant dated 27 May 2010.
d) Decision on buyback of shares after considering the financial solvency test under Mauritius law: The Board resolution of the applicant dated 22 November 2006 and 11 May 2007.
e) Decisions in respect of shares in question including--
(i) The approving of the Option Agreement (The Board resolution of the applicant dated 9 May 2005).
(ii) The signing of the Option Agreement
(iii) The amendment of Option Agreement (The Board resolution of the applicant dated 20 January 2010)."
We perused the minutes of proceedings of the Board meetings held in Mauritius relating to buyback of shares, final closing for sale of shares held in TML, appointment of KPMG India Private Limited as tax advisor, approval of financial statements, dividend declaration and distribution etc. We also noted that the Board of Directors included representatives of BT Holdings Limited, a UK company, holdings 43% of shares. These Board meetings and the nature of decisions taken in such meetings clearly indicate that control and management of affairs of the company, particularly all financial affairs were situated only in Mauritius. We have also gone through the cases cited by the applicant and have noticed that decision of the apex court in Erin Estate (supra) and VVRNM Subbayya Chethiyar (supra) support the applicant's case. We further note that the Hon'ble Supreme Court held in the case of CIT V. Nandlal Gandalal MANU/SC/0183/1960 : 40 ITR 1 (SC) that the expression 'control and management' means de facto control and management and not merely the right or power to control and manage. The word 'affairs' means the affairs of a HUF which are capable of being controlled and managed by the family as such. In the case of VVRNM Subbayya Chethiyar also the apex court held that the word 'affairs' must mean affairs which are relevant for the purpose of the Income-tax Act and which have some relation to income. On the basis of facts mentioned above, it cannot be said that the control and management of the affairs of the applicant company were wholly situated in India. The Department of Revenue has not given any substantial evidence to show that any important affairs of the company relevant for the purpose of the Income-tax Act were being controlled from India. The only argument of the Department seems to be that the real transaction was between TML and AT&T and, therefore, the control and management of the applicant should be treated as in India. There is no force in this argument as there is nothing wrong in the applicant holding the shares and transferring the same at a later stage as per the options agreement and on fulfillment of conditions by AT & T as per the agreement. Therefore, we are unable to agree with the objections raised by the Department of Revenue and hold that the applicant is not chargeable to tax in India under Article 13(4) of India-Mauritius Treaty. In view of this the following ruling is pronounced:--
"Q.1 The applicant is not chargeable to capital gains tax in India under Article 13 (4) of India-Mauritius Treaty?
Q.2 In view of answer to Q. No. 1, this question does not arise."
The Ruling is accordingly given and pronounced on this 8th day of August, 2016
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