MEMORIAL FOR PETITIONER.pdf

1 MEMORIAL ON BEHALF OF PETITIONERS

BEFORE THE AUTHORITY FOR ADVANCE RULINGS

(INCOME TAX)

NEW DELHI

AAR No. 100 of 2015

Between

1. Intaxicate India Pvt. Ltd., Bangalore................................................

Applicant

And

2. Commissioner of Income-tax, Bangalore.........................................

Respondent


TABLE OF CONTENTS

Table of Contents.................................................................................................. 2

List of Abbreviations.............................................................................................3

Index of Authorities...............................................................................................5

Statement of Jurisdiction........................................................................................9

Statement of facts..................................................................................................10

Statement of Issues................................................................................................11

Summary of Arguments.........................................................................................12

Arguments advanced..............................................................................................13

Prayer ....................................................................................................................29


LIST OF ABBREVIATIONS

& And

Anr. Another

AAR Authority for Advance Rulings

AIR All India Reporter

AO Assessment Officer

Art Article

AY Assessment Year

Bom Bombay

CIT Commissioner of Income Tax

Co. Company

Del Delhi

DTAA Double Taxation Avoidance Agreement

HC High Court

IIPL Intaxicate India Private Limited

IML Intaxicate Mauritius Limited

ITAT Income Tax Apellate Tribunal

ITR Income Tax Report

Jour Journal

Kar Karnataka

Ltd. Limited


Mad Madras

Mum Mumbai

Ors Others

Paragraph

Pg. Page

Pvt. Private

ROI Return of Income

SC Supreme Court

SCC Supreme Court Cases

SCL Sebi and Corporate Laws

Sec Section

W.P.(C) Writ Petition Civil

v. Versus


INDEX OF AUTHORITIES

CASES

1. Airports Authority of India, Rajiv Gandhi Bhawan Vs. Director of Income-tax

(international Taxation) Delhi , AAR/ 753-754/2007

2. AfzalUllah v. State of U.PAIR 1964 SC 264,

3. Avasarala Automation Ltd. v. Joint Commissioner of Income Tax,(2003) 185 CTR (Kar) 402

4. Ajay Agarwal v. Union of India AIR 1993 SC1637

5. Aryavart Overseas (P.)Ltd.v. Kay Aar Biscuits (P.)Ltd.C.S.(OS) 1161/1982

6. AzadiBachaoAndolan v. Union of India,(2004) 10 SCC 1

7. Banyan and Berry v. CIT, [1996] 222 ITR 831(Guj)

8. Blue Star Ltd. v. CIT 217 ITR 514 (Bom.),

9. CIT v. P.V.A.L. KulandaganChettiar, (2004) 267 ITR 654 (SC)

10. CITv.Sesa Goa Ltd., [2004] 271 ITR 331 (SC)

11. Commissioner of Income-tax v. RajalakshmiVenkatakrishnan,[1995]215ITR596(Mad)

12. CWT v. Spencer&Co.,(1973) 88 ITR429

13. D. B. Zwirn Mauritius Trading v. Director of Income-tax,AAR NO. 878 OF 2010 & AAR NO.

879 OF 2010

14. Deputy Commissioner of Income Tax v. Ardeshi B. Cursetjee and Sons Ltd. [2008] 11 5 TTJ

(Mum) 916

15. E*trade Mauritius Ltd. C/O Abax Corporate Services Ltd. v. DIT, A.A.R. No.826 of 2009CIT v.

High Energy Batteries (India) Ltd., [2012] 208 ITR 213

16. Goodyear India Ltd., Gedore (India) Pvt. Ltd. v. Kelvinator of India Ltd. AIR 1990 SC 781


17. H.G. CraigHarvey v. Commissioner of Income-tax, [2000] 244 ITR 578 (Mad)

18. Hyosung corporation Korea v. Income Tax Department, AAR No. 1138, 1140-1144, 1150 of

2011

19. Integrated Container Feeder v. JCIT, (2005) 278 ITR 182 (Mum.

20. Ishikawajma-Harima Heavy Industries Ltd.v. Director Of Income Tax, AIR 2007 SC 929

21. Mashreque Bank Vs. Director of Income-tax, (ITA No. 1341/Bom/2007

22. Mc Dowell and Co. v. CIT, (2003) 5 SCC (Jour) 15

23. Munnal and Ors.v. B.S. Baswan and Ors.

24. Padmaraje R. Kadambandev. Commissioner of Income-tax, Pune, AIR 1992 SC 1495

25. R.K Dalmia v. Delhi Administration ,A.I.R 1962 S.C 1821

26. Royal Surgicalv.Collector of Customs,(1997)LC191Tri(Delhi)

27. Raja BahadurKamakhyaNarain Singh v. Commisioner of Income Tax of Bihar[1970]

77 ITR 253 (SC),

28. Satellite Television Asianv.Deputy Commissioner of Income Tax [AAR no 805-

810/2009] ,

29. Vidyut Investments Limited v. Securities and Exchange Board of India,(2008) 86 SCL

35 SAT

30. Vodafone South Limited and Another v. The Deputy Director of Income Tax International

Taxation and Ors, W.P. Nos. 13210-14 of 2014

31. Zaheer Mauritius v. Director of Income TaxW.P. (C) 1648/2013

LEGAL DATABASES

1. Manupatra

2. SCC Online


3. West Law

4. Hein Online

LEXICONS

1. AiyarRamanathanP , Advanced Law Lexicon, 3rd Edition, 2005, Wadhwa Nagpur.

2. Garner Bryana, Blacks Law Dictionary,7th Edition,1999

3. Boston University Law Review, 2012

LEGISLATIONS

Income Tax Act 1961

Companies Act, 2013

India Mauritius Double Taxation Avoidance Agreement

Securites and Exchange Board of India Guidelines

BOOKS

1. Income Tax Act , Taxmann Publications, 2014

2. Ramaiyyas Guide to Companies Act , Ramaiya (Revised by Arvind P Datar, S.

Balasubramanian) , 2014

3. A Comparative Study of Companies Act 2013 with Rules and Companies Act

1956, Taxmann, 2015

4. Treatise on Double Tax Avoidance Treaty, B.V Venkataramaih,2011

5. Company Law, Avatar Singh


STATEMENT OF JURISDICTION

THE RESPONDENT DO HEREBY SUBMIT THE MEMORANDUM FOR THE

RESPONDENT UNDER SECTION 245 (R)OF INCOME TAX ACT ,1961BEFORE

THE AUTHORITY FOR ADVANCE RULINGS.


STATEMENT OF FACTS

Intaxicate India Pvt. Ltd. (IIPL), a private limited company incorporated as per the

Indian Companies Act, 1956 in April 2000, is a wholly owned subsidiary of a

Mauritian Company, Intaxicate Mauritius Ltd.,which has a Tax Residency Certificate

(TRC) issued by the Mauritian Tax Authorities.IML acts as a pooling vehicle where it

attracts investors from across the globe to invest in its securities.IML invests in the

securities of IIPL which invests in various sectors like infrastructure. IIPL was a

prompt taxpayer on its income earned. From 2000-2003, IIPL declared huge cash

dividends to its sole shareholder and withheld appropriate taxes per India Mauritius

tax treaty. However IIPL stopped declaring cash dividends post March 2003 and

resorted to issuing equity shares to IML at a meagre face value, and then buying them

back at a very high premium, thus repatriating profits as capital gains to IML.But post

May 2013, IIPL started to issue compulsorily convertible debentures (CCDs) to IML

in accordance with an agreement between IIPL and IML. In March 2014, IIPL bought

back much of the CCDs issued to IML before the completion of the lock in period and

paid the principal amount accumulated interests and premiums along with the

additional amounts as compensation, as agreed upon.IIPL on filing for its return of

income (ROI) with the Indian income-tax department was found to have failed to

withhold tax under section 195 of the Act on the interest payments made to IML and

was issued a SCN. IIPL filed an application with the Authority for Advanced Ruling

(AAR) requesting for a ruling on the transactions undertaken to be taxable as per

India-Mauritius DTAA. The matter is now pending before the AAR for final hearing.


STATEMENT OF ISSUES

1. WHETHER THE PETITION FILED BY INTAXICATE INDIA PVT LTD.

BEFORE AUTHORITY FOR ADVANCE RULINGS IS MAINTAINABLE.

2. WHETHER THE TRANSACTIONS UNDERTAKEN FOR REDEMPTION

OF CCDS ARE CAPITAL RECEIPTS IN THE HANDS OF IML.

3. WHETHER SALE CONSIDERATION ON BUYBACK OF SHARES ARE

NOT LIABLE TO BE TAXED.

4. WHETHER THE ACTIONS OF THE COMPANY ARE IN COMPLIANCE

WITH THE DOUBLE TAXATION AVOIDANCE AGREEMENT.

5. WHETHER TAX PLANNING CANNOT BE PENALIZED.


SUMMARY OF ARGUMENTS

1. The petition filed by Intaxicate India Pvt.Ltd in before Authority for

Advance Rulings is maintainable.

IIPL can approach the AAR under section 245N of the Income Tax Act as the ruling

sought is with regard to the transactions it has undertaken or proposed to be undertaken

with a foreign company, IML. Further, there is no question of a pending issue before

any Authority and the transaction are merely tax planning and not tax evasion.

2. The transactions undertaken for redemption of CCDs are capital recepits

in the hands of IML.

The amount outstanding the principal do not fall under the ambit of interest under any

law. Further, the compensation awarded substitutes the source of income itself for IML

and it hence considered to be capital receipts and is therefore taxable only as per

DTAA.

3. Sale consideration on buyback of shares are not liable to be taxed.

The buyback of shares was a commercial strategy adopted by IIPL so as they needed

new investments year on year to expand their business.

4. The actions of the company are in compliance with the DTAA.

A corporate body has the right to apply whichever statute is more beneficial to their tax

liabilities. Accordingly, transactions undertaken are in strict compliance with the India

Mauritius DTAA.

5. Tax planning cannot be penalized.

Tax planning is not offence and is different for tax evasion


ARGUMENTS ADVANCED

A. THE PETITION FILED BY INTAXICATE INDIA PVT LTD IN

AUTHORITY BE FORE ADVANCED RULINGS IS MAINTAINABLE

Intaxicate India is Pvt Ltd(IIPL) is a company incorporated in India under Indian

Companies Act 1956 which also a 100% subsidiary of a Mauritius company,Intaxicate

Mauritius Ltd. which is a category 1 global business license holding company 1with tax

residency certificate issued by the Mauritian Authorities2. The Income Tax Authority

has issues a show cause notice alleging that

A1.IIPL Can file a petition before Authority for Advanced Ruling

IIPL is a company incorporated in India under Indian Companies Act 1956,

In Ajay Agarwal v. Union of India3 the Supreme Court held that, Once a company

has been duly registered and incorporated as an India company, it is subject to Indian

laws and regulation, as applicable to other domestic Indian companies. In other

words, aresident.IIPL. being incorporated under the Companies Act, 1956 can hence be

considered a resident.

Under section 245N4 of Income Tax Act, 1961, non-resident or certain categories of

resident can obtain binding rulings from the Authority on question of law or fact arising

1Integrated Container Feederv. JCIT, (2005)278ITR182(Mum.)

2 Moot Proposition ,p. 2 3 A.I.R 1993 SC 1637, See also R.K Dalmia v. Delhi Administration ,A.I.R 1962 S.C 1821

4Under section 245Na(ii) : an advance ruling can be obtained by the following persons: a resident-

undertaking proposing to undertake a transaction with a non-resident can obtain advance ruling in

respect of any question of law or fact in relation to the tax liability of the non-resident arising out of such

transaction a notified public sector company any person, being a resident or non-resident, can obtain an

advance ruling to decide whether an arrangement proposed to be undertaken by him is an impermissible

avoidance arrangements and may be subjected to General Anti Avoidance Rules or not


out of any transaction/proposed transactions which are relevant for the determination of

his tax liability.5

In the instant case, the application was made by IIPL requesting for a ruling on

transactions undertaken and to be undertaken in connection with a transaction with the

non- resident IML .

Hence IIPL a resident can file a petition before Authority for Advanced Ruling.

A2. The question raised before AAR is not pending in any Income Tax Authority

An advance ruling cannot be sought where the question is already pending in the case

of the applicant before any income tax authority, the Appellate Tribunal or any court; or

Involves determination of fair market value of any property; or Relates to a transaction

which is designed prima facie for avoidance of income tax.6

In Hyosung corporation Korea v. Income Tax Department,7it was held that A mere

filing of return of income does not attract the bar unless question raised before

advanced rulings is an issue pending for adjudication in income tax authority.8

5Ishikawajma-Harima Heavy Industries Ltd.v. Director Of Income Tax, AIR2007SC929

6Section 245R of Income Tax Act,1961 : the Authority shall not allow the application where the question raised in the application,( i ) is already pending before any income-tax authority or Appellate Tribunal [except in the case of a resident applicant falling in sub-clause ( iii ) of clause ( b ) of section

245N ] or any court;( ii ) involves determination of fair market value of any property;( iii ) relates to a

transaction or issue which is designed prima facie for the avoidance of income-tax [except in the case of

a resident applicant falling in sub-clause ( iii ) of clause ( b ) of section 245N ]:] See also: Commissioner

of Income-tax v. SakarlalBalabhai , [1968]69ITR186(Guj)

7AAR No. 1138, 1140-1144, 1150 of 2011 8Royal Surgicalv.Collector of Customs,(1997)LC191Tri(Delhi)


This goes on to say that, merely because IIPL has filed a return of income does not

initiate any process as per any act. It was merely performing a procedure prescribed by

law.

Further, inAirports Authority of India, Rajiv Gandhi Bhawan Vs. Director of Income-

tax (international Taxation) Delhi9, this Authority held that,If the question relating to

tax deduction at source which is raised before the Authority was not the question which

was pending for consideration by the Appellate Authority, there is no bar to

approaching the forum. It is true that in the process of deciding the legal obligation of

the applicant in that case under section 195 of the Act, the liability of the applicant to

pay income tax on the said sum had to be decided, but, on that account, the question or

the issue of tax deduction cannot be said to be pending before the Authority10.In a

case where the question raised before the Authority could not be said to be identical nor

can it said to be the very same question pending determination by the Appellate

Authority,the embargo under the proviso to section 245R(2) should be strictly construed

and the applicant should not be denied the remedy to have an early ruling in the

matter11.

9Airports Authority of India, Rajiv Gandhi Bhawanv. Director of Income-tax (international Taxation)

Delhi AAR/ 753-754/2007

See also: Vidyut Investments Limitedv. Securities and Exchange Board of India,(2008)86SCL35SAT

11

Satellite Television Asianv.Deputy Commissioner of Income Tax [AAR no 805-810/2009] See also,

Aryavart Overseas (P.) Ltd.v. Kay Aar Biscuits (P.)Ltd.C.S.(OS) 1161/1982


The Income Tax Department has only asked for a cause for the said tax planning.

However, what is to be noted is that, IIPL has approached AAR in order to seek

adjudge the said transactions to be valid According to the DTAA.

Thus in the instant case IIPL can approach AAR as the question is not pending in any

Income Tax authority.

Also in December 2013, AAR in the case of Mitsubhishi Corporation Ltd, held that the

application filed before but before the issue of notice of assessment cannot be

considered as pending for adjudication before the income tax authorities.

A.3 The transaction is not for avoidance of tax

The strategies developed by IIPL are purely commercial. A corporate body has the right

to choose whichever law is better for their tax liability12.

.The transactions undertaken and to be undertaken were only sale of capital

assets(equity shares and ccds) by IML and theshould only be taxable as per India-

Mauritius DTAA. To be more specific, Article 13, Paragraph 4 of the DTAA confers

the power of taxation of the gains derived by a resident of a contracting State from the

alienation of specified property only in the State of residence i.e. in Mauritius.

There is no doubt that the tax payer is entitled in law to seek the benefit under the

DTAA if the provision therein is more advantageous than the corresponding provision

in the domestic law.13

12Mashreque Bank Vs.Director of Income-tax, (ITA No. 1341/Bom/2007

13 .E*trade Mauritius Ltd. C/O Abax Corporate Services Ltd. v. DIT, A.A.R. No.826 of 2009


In AzadiBachaoAndolanv. Union of India14,the court pronounced the above said

principle. For the proposition which we have just now stated, the following passage in

the said decision would suffice:

Section 90 is specifically intended to enable and empower the Central Government

to issue a notification for implementation of the terms of a double taxation avoidance

agreement. When that happens, the provisions of such an agreement, with respect of

cases to which where they apply, would operate even if inconsistent with the provisions

of the Income-tax Act.

Therefore, the mere fact that the transactions look like a method for tax evasion does

not necessarily mean that it is tax evasion.On the facts presented by the applicant and in

the light of legal position discussed; the applicant has no liability to pay capital gains

tax under section article 13 of DTAA.15Thus the Intaxicate India Pvt Ltd is not entitled

to pay tax under section 195 of Income Tax Act.

14 [(2003)ITR 706 (SC)]

15supra 4;


B. THE TRANSACTIONS UNDERTAKEN FOR REDEMPTION OF CCDs

ARE CAPITAL RECEPITS IN THE HANDS OF IML

Intaxicate India Private Limited(IIPL), a wholly owned subsidiary of a Mauritian Tax

Resident, IntaxicateMauritius Limited(IML), issuedCompulsorily Convertible

Debentures as a commercial strategy. The redemption of these before a specified lock-

in period demanded payment of additional amounts as stipulated in the agreement.

These are not liable for payment of tax as, amount paid for redemption of CCDs does

not come under the ambit of interest[i],The additional amount paid by IIPL is capital

receipts in the hands on IML.[ii], and the additional amount paid by IIPL is capital

receipts in the hands on IML.[iii]

i. Amount paid for redemption of CCDs does not come under the ambit of

interest

The CCD creates or recognizes the existence of a debt, which remains to be so till it is

repaid or discharge,either by payment or by conversion.16A Compulsorily Convertible

Debenture is a debt which is compulsorily liable to be discharged by conversion into

equity.17

16CWT v. Spencer&Co.,(1973) 88 ITR429 17W.P. (C) 1648/2013


In Zaheer Mauritius v. Director of Income Tax,18 the Delhi High Court held that,

The expression interest as defined under Section 2(28A) of the Act cannot apply

to all gains that are received by a debenture holder (lender) irrespective of the

transaction resulting in such gains. As an illustration, a lender may assign its debt

to a third party and if such debt is held as a capital asset, the gain or loss arising

from the transaction would be a capital gain/loss in the hands of a lender and

would not be construed as interest. Similarly, any loss suffered by the lender in

such transaction i.e. where a debt is assigned for a consideration less or greater

than the amount lent, would be a capital loss or gain respectively.

Concededly, gains arising from sale of capital assets would not be in the nature of

interest. Any outstanding amount excluding the principal amount can hence be

considered as gains on the capital of the lender. The amount received by IML is nothing

but compensation for the loss incurred by them as they could have earned much greater

profits, had they invested it elsewhere.

Arguendo, even if it were to be considered as interest, such interest arising in a

contracting state and paid to a resident of the other contracting state maybe taxed only

in the other state.19 Thus, the amount paid by IIPL to IML is not taxable as interest

under any circumstance as IML holds the Tax Residency Certificate 20 issued by

Mauritian authorities.

18 ibid 19 1 of Article 11, India Mauritius Double Taxation Avoidance Agreement, 1983 20Vodafone South Limited and Another v. The Deputy Director of Income Tax International Taxation and

Ors, W.P. Nos. 13210-14 of 2014


ii. The additional amount paid by IIPL is capital receipts in the hands on

IML.

A voluntary payment which is made entirely without consideration but depends on the

whim of the donor cannot fall in the category of income, i.e,unless made under a legal

or contractual obligation, or custom or usage or as a maintenance allowance, they were

not taxable.21

Thetransactions involving is in strict compliance with the provisions agreed upon by

IML and IIPL which stated that if there arises a situation where IIPL is to redeem the

debentures at a much early period, then IIPL, in addition to the principal payment and

accumulated interests is also required to pay an additional sum by whatever name called

such as compensation, penalty, additional premiums, additional sale consideration etc.

Therefore, any additional payment which comes under the ambit of the above

mentioned terms do not falls under the purview of income and is hence not liable to tax.

In Blue Star Ltd. v. CIT,22

A particular income arising from termination of a contract which affects the trading

structure or such cancellation results in the loss of what may be regarded as a source

ofincome, payment made to compensate for such cancellation is a capital receipt.

Since such capital gains are not taxable under India-Mauritius Double Taxation

Avoidance Agreement.

21

Commissioner of Income-tax v. RajalakshmiVenkatakrishnan, [1995]215ITR596(Mad) See

also,Padmaraje R. Kadambandev. Commissioner of Income-tax, Pune, AIR 1992 SC 1495

22 217 ITR 514 (Bom.), See also, Deputy Commissioner of Income Tax v. Ardeshi B. Cursetjee and Sons

Ltd. [2008] 11 5 TTJ (Mum) 916


C. SALE CONSIDERATION ON BUYBACK OF SHARES ARE NOT

LIABLE TO BE TAXED

Any profits or gains arising from the transfer of a capital asset, would be chargeable to

income-tax under the head capital gains23. However in relation to transfer of a capital

asset by a holding company to its Indian subsidiary, section 47(iv) of the Act provides

that such a transfer of a capital asset by a holding company to its subsidiary company

shall not be regarded as transfer for the purpose of section 45 of the Act.24

In Raja BahadurKamakhyaNarain Singh v. Commisioner of Income Tax of Bihar,25

the court held that,

The surplus realized on the sale of shares would be capital gain, if the assessee is an

ordinary investor realizing his holding; but it would be revenue, if he deals with them

as an adventure in the nature of trade. The fact that the original sale was made with

the intention to buyback if an enhanced price could be obtained is by itself not

enough but in conjunction with the conduct of the assessee and other circumstances,

it may point to the trading character of the transaction.

IIPL bought back the shares it had sold to IML as it needed fresh investments for

investments in the securities of Indian companies as the Indian markets had started

doing well at that time.

By the transfer of equity shares in IML to IIPL in the form of buybacks, which is its

wholly owned subsidiary in India, the key conditions under section 47(iv) of the Act

23 Section 45 of Income Tax Act, 1995 24

H.G. CraigHarvey v. Commissioner of Income-tax, [2000]244ITR578(Mad) 25[1970] 77 ITR 253 (SC),


are fulfilled. The gains on the transfer of equity shares is only to IML would not be

taxable in India. In all fairness, the applicant states that in the event the provisions of

section 47A of the Act is found to be attracted on the occurrence of any of the events

stated therein, it will offer to tax any gains arising from the proposed transfer of

equity shares in IML


D. THE ACTIONS OF THE COMPANY ARE IN COMPLIANCE WITH

THE DTAA

As per Section 90(2) of the Act, the income of a non-resident is taxable in India in

accordance with the provisions of the Act or the provisions of DTAA, whichever is

more beneficial to the non-residents. The actions of the IIPL are reasonable and it is

more beneficial for them to rely on the India Mauritius Double Taxation Agreement.

IML has a Tax Residency Certificate issued by the Mauritian Authorities.26A valid TRC

is an ultimate evidence of beneficial ownership of the shares and the gains arising there

from.27

In the case of AfzalUllah v. State of U.P28, the court deemed it pertinent to note that,

Certificate of residence is issued by the Mauritius Authorities, will constitute

sufficient evidence for accepting the status of residence as well as beneficial

ownership for applying the DTAC accordingly. The test of residence mentioned

above would also apply in respect of income from capital gains on sale of shares.

Companies resident in Mauritius would not be liable for tax in India on income from

capital gains arising in India on sale of shares as per paragraph 4 of Article 1329.

Capital gains arising from alienation30 of shares in Indian companies held by the

applicant would not be taxable in India.31

26 Moot Proposition, Page 1, 2 27AzadiBachaoAndolan v. Union of India,(2004) 10 SCC 1 See also,Vodafone South Limited and Another

v. The Deputy Director of Income Tax International Taxation and Ors, W.P. Nos. 13210-14 of 2014 28 AIR 1964 SC 264, See also, Munnal and Ors. v. B.S. Baswan and Ors. 29 India Mauritius Double Taxation Avoidance Agreement, 1983 30 5 of India Mauritius Double Taxation Avoidance Agreement, Alienation: the sale, exchange transfer or relinquishment of the property or the extinguishment of any right in it or its compulsory acquisition

under any law in force in India or in Mauritius.


Here, the transaction the subsidiary company has undertaken has resulted in capital

gains to the holding company.

In D. B. Zwirn Mauritius Trading v. Director of Income-tax,32the Authority for

Advanced Rulings held that, In terms of paragraph 4, capital gains derived by a

resident of Mauritius by alienation of shares of companies shall be taxable only in

Mauritius according to Mauritius tax law. Therefore, any resident of Mauritius deriving

income from alienation of shares of Indian companies will be liable to capital gains tax

only in Mauritius as per Mauritius tax law and will not have any capital gains tax

liability in India.

Under the India Mauritius double taxation avoidance agreement, since such transactions

are not taxable, there is no tax liability at all for IIPL. Since there is no dividend accrued

as such by the subsidiary, Dividend Distribution Tax need not be levied.

By a Circular No. 682 dated 30-3-1994 issued by the Central Board of Direct Taxes in

exercise of its powers under Section 90 of the Act, the Government of India clarified

that capital gains of any resident of Mauritius by alienation of shares of an Indian

company shall be taxable only in Mauritius according to Mauritius taxation laws and

will not be liable to tax in India. 33

As far as capital gains resulting from alienation of shares are concerned, Article 13(4)

provides that the gains derived by a resident of a contracting State shall be taxable only

31CIT v. P.V.A.L. KulandaganChettiar, (2004) 267 ITR 654 (SC) 32AAR NO. 878 OF 2010 & AAR NO. 879 OF 2010 33Supra n 1


in that State. In the instant case, such capital gains derived by a resident of Mauritius

shall be taxable only in Mauritius.

Prior to 1st June, 1997, dividends distributed by domestic companies were taxable in

the hands of the shareholder and tax was deductible at source under the Income-tax Act,

1961. Under the DTAC, tax was deductible at source on the gross dividend paid out at

the rate of 5% or 15% depending upon the extent of shareholding of the Mauritius

resident. Under the Income-tax Act, 1961, tax was deductible at source at the rates

specified under section 115A, etc. It is hereby clarified that 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

for applying the DTAC accordingly.34

34Supra n.13


E. TAX PLANNING CANNOT BE PENALISED

The financial needs of the Welfare State, if backed by the law have to be respected and

met. The residents of Mauritius are not liable to tax in respect of capital gains derived in

India.35Tax avoidance generally refers to legally reducing tax payments.36Transfer of

shares through a legitimate scheme of arrangement is not a tax avoidance device.37

The allegations raised by the Revenue is that the acts of the company is a sham so as to

evade the taxes introduces by the Revenue. However,the term liability to tax in a tax

treaty does not equate to an actual payment of tax; simply because an exemption is

granted on a particular source of income does not mean that an entity is not liable to

tax at all.38Tax planning may be legitimate provided it is within the framework of

law.39

The buybacks and redemption of CCDs exempt the company from the taxes like DDT

and BBdt. However, it is not fair to assume that IIPL has not paid any tax at all. The

company has a very efficient tax planning system which has exempted them from such

taxes.

In Mc Dowell and Co. v. CIT, 40 is reproduced as under: " There is behind taxation

laws as much moral sanction as is behind any other welfare legislation and it is a

35Supra n 12 36 Nigel Feetham, Tax Arbitrage : The trawling of International Tax System, 2 (2011) 37CIT v. High Energy Batteries (India) Ltd., [2012] 208 ITR 213 See also, CITv.Sesa Goa Ltd.,[2004]

271 ITR 331 (SC) 38Goodyear India Ltd., Gedore (India) Pvt. Ltd. v. Kelvinator of India Ltd. AIR1990SC781 39Banyan and Berry v. CIT, [1996] 222 ITR 831(Guj) 40 (2003) 5 SCC (Jour) 15


pretence to say that avoidance of taxation is not unethical and that it stands on no

less a moral plane than honest payment of taxation.

It is open to the assessee to have a tax planning and alltax planning allowable in law

cannot be equated or treated as the planning meant for evasion of tax.41

All transactions undertaken and to be undertaken by IIPL fall within the framework

of DTAA. That being said, there is nothing which suggests that such transactions

were to avoid any tax which can be levied. Therefore, the allegations raised by the

Revenue maybe deemed to be false.

41

Avasarala Automation Ltd. v. Joint Commissioner of Income Tax,(2003)185CTR(Kar)402


PRAYER

In the light of Issues raised, arguments advanced and authorities cited, it humbly prayed

and implored before this Honble Forum to kindly adjudge and declare that:

6. The petition filed by Intaxicate India Pvt Ltd. before Authority for Advance

Rulings is maintainable.

7. The transactions undertaken for redemption of CCDs are capital receipts in the

hands of IML.

8. Sale consideration on buyback of shares are not liable to be taxed.

9. The actions of the company are in compliance with the Double Taxation

Avoidance Agreement.

10. Tax planning cannot be penalized.

And pass any other order that it deems fit in the interest of Justice, Equity and Good

Conscience. And for this, the counsel for the petitioner as in duty bound shall forever

pray.

Respectfully,

Sd/-

COUNSELS FOR PETITIONER

28 MEMORIAL ON BEHALF OF PETITIONER

Documents

MEMORIAL FOR PETITIONER.pdf