Mazars Tax Update | Edition 08.19

Direct Tax News

High Court quashed Sec. 197 order denying Mauritius DTAA benefit on sale of shares of Indian company held by Mauritius Company

Facts of the case
Indostar Capita, a Mauritius based company filed the petition to challenge the order passed u/s 197, wherein the application filed by the petitioner was rejected.
The petitioner holds a Category 1 Global Business Licence issued by the Financial Services Commission of Mauritius to act as an investment holding company and has also been issued the certificate as a "company resident in Mauritius for income tax purposes (“TRC”)"by Mauritius Revenue Authority. The petitioner was formed to promote an Indian Non-banking Financial Company (“NBFC”) named Indostar Capital Finance Limited ("ICFL"). In order to acquire shares of ICFL, The petitioner raised capital from various groups of international institutional investors located across the world and acquired 7.13 Crores (97.30%) shares of ICFL. These transactions were duly reported to the Reserve Bank of India.
The petitioner desired to offload some 1.85 Crores of its shares of IFCL through IPO and so applied for grant of the certificate under Section 197 of the Act with expected sale price of Rs. 570/- to Rs. 572/-per share.
Petitioner’s Contentions
The petitioner made detailed averments that capital gain arising out of sale of such shares is not taxable in the hands of the petitioner and raised following contentions:-

• The petitioner being a Mauritius based company, in terms of DTAA between India and Mauritius, it had no tax liability on capital gain arising out of sale of shares in question.
• The petitioner is a company incorporated under the laws of Mauritius. It enjoys TRC issued by the Mauritian Authority. The Indian Revenue Authorities cannot dispute this TRC.
• The Assessing Officer carried out a detail inquiry which is not envisaged at the stage of deciding an application for issuance of certificate under Section 197 of the Act.
• Prima facie finding of the transactions being not genuine is not supported by any material on record. The petitioner company was constituted for the purpose of making investment in India. The petitioner received funds from various international financial institutions. Through, ICFL, the petitioner invested such funds in Indian market. When the time was ripe, the petitioner decided to encash some of its gain. All the transactions were reported to the respective statutory authorities. There is no evidence to establish the allegation of sham or bogus transaction;
• The assessment in the present case is yet to be made. The petitioner would file the return of income and participate in the proceedings.

Tax Departments’ Contentions
The Assistant Commissioner carried out detailed inquiry in relation to such application and rejected the application of the petitioner with following reasons for rejection:-

• Apart from making investment and advancing loan to Everstone Capital Limited, Mauritius, the petitioner has not made any business transaction or engaged itself in other commercial activities. Only revenue gained by the assessee is through interest income;
• The assessee does not maintain any establishment or had incurred any administrative expenses at Mauritius. It was not clear where the assessee would hold the director's functions. The assessee had no employees at Mauritius;
• The assessee is a majority shareholder of ICF Limited. The shareholding pattern of the petitioner, in turn, shows that the shares are held in different proportions by some eight companies in equity funds. These companies have been constituted but they do not have office or employees. The assessee had failed to produced TRC of these companies. The assessee failed to furnish details of the ultimate beneficiaries of the assets being transferred;

As a culmination of these factors, he was of the opinion that present was a case where the company had given the colour of genuineness of the transactions but it appears that the transactions were fake. In his opinion, the entire tax structure was created to avoid legitimate tax liability.
The Assessing Officer passed the consequential order authorizing the payer of the sale proceeds of the shares to make the payment after deducting tax @ 10% on the entire amount of receipt.
Hon’ble High Court Ruled
In the result, the petition is disposed of with following directions:-

• The impugned order dated 20.6.2018 is quashed. The Assessing Officer shall issue necessary certificate of no requirement of deducting tax at source to the petitioner under Section 197 of the Act.
• It took note of the grandfathering clause under amended India-Mauritius DTAA, whereby it provides that the gain arising from sale of shares in an Indian Co. acquired on or before 31.3.2017, could not be taxed in India.
• HC acknowledges that, “Despite the existence of DTAA, despite the availability of the TRC…and despite the CBDT circular that such certificate as long as in operation would be a valid consideration for applying the DTAA, we do not find that as laid down by the Supreme Court through series of judgments has shut out the case of the Revenue totally when it comes to a fraudulent or fictitious transaction.”
• HC states that the Revenue in the present case did not provide sufficient prima facie material to demonstrate that the entire transaction was sham and a colourable device. HC clarifies that the mere fact that the assessee company has not transacted any other business by itself may not be conclusive.
• Further clarifies that assessee's inability to produce TRC of the companies which hold shares in assessee company, the extent of administrative expenditure and the employment structure can be some of the factors which eventually would go to establish whether the transaction was sham, however these factors by themselves may not be sufficient.
• HC holds that, “All these aspects can and need to be gone into in the assessment proceedings.”, directs assessee not to sell minimum 50 lakhs shares of ICFL (whose valuation comes to Rs. 200 cr. approx..) till March 31, 2021 or till assessment order is passed, whichever is earlier, to serve as a security of over 200% of the disputed tax amount.

Indirect Tax News

AAAR West Bengal in the case of ITD Cementation India Ltd. held that works contract service provided to Inland Waterways Authority of India (IWAI) shall be taxable at the rate of 12%.

Facts of the Case:

• The applicant is a supplier of works contract service and has entered into an agreement with IWAI, a statutory body established under the Inland Waterways Authority of India Act, 1985, for construction of a multi-modal IWT terminal at Haldia, west Bengal on EPC (Engineering, procurement, construction) basis.

Ruling:

• AAR held that works contract service provided by the applicant shall be covered under notification no.11/2017 – CT(Rate) and eventually shall be taxable at the rate of 12%.

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