The Bombay High Court has, in the past few weeks, decided two important issues: one pertaining to direct taxation, and the other to indirect.
A Division Bench headed by Justice D.Y. Chandrachud has upheld the constitutional validity of service tax on renting of immovable property, as reported by Legally India. The arguments raised by the Petitioners were primarily that a “service” tax on renting of immovable property was in substance a tax on land and building, and was within the competence of the State Legislature under Entry 49, List II. The Union of India, on the other hand, contended that a tax on land and building (Entry 49, List II) was different from a tax on income arising from land and building, and on services pertaining to land and building. It was further contended that as long as there was no transgression into List II, it was open for Parliament to artificially define a taxable “service”.
Insofar as this challenge is concerned, the issue really turns on the scope of Entry 49. In Assistant Commissioner of Urban Land Tax v. Buckingham & Carnatic Co., [1970] 1 SCR 268, it was held that to fall under Entry 49, List II, two tests must be satisfied. First, the tax must be directly imposed on land/buildings. Secondly, the tax must bear a definite relation to the land and buildings. In the case of tax on renting of immovable property, the tax may be one bearing a definite relationship to land/buildings, but is the tax really imposed directly on land and buildings? Further, in State of West Bengal v. Kesoram Industries, (2004) 10 SCC 201, the Supreme Court also clarified the earlier decision in India Cements v. State of Tamil Nadu, and in this context observed, “There is a clear distinction between ‘tax directly on land’ and ‘tax on income arising from land’.” A tax on renting of immovable property would perhaps be closer to the latter, and not the former.
On the direct tax front, a bench headed by Justice J.P. Devadhar had cast doubts on the efficacy of the “Mauritius route” in tax planning, in Aditya Birla Nuvo v. Union of India. The Court appears to have read down the judgment of the Supreme Court in Azadi Bachao Andolan. The facts are summarized by ITAT Online thus:
“Idea Cellular Ltd, an Indian company, was set up as a joint venture company pursuant to a JV agreement between AT&T Corp, USA, and the Birla Group. As provided by the agreement 49% of Idea Cellular’s equity was allotted to AT&T Mauritius, being 100% subsidiary & “permitted transferee” of AT&T, USA. Though the shares were allotted to AT&T Mauritius, all rights of voting, management, right to sell etc were vested in AT&T USA (subsequently known as “New Cingular Wireless Services Inc, USA” (“NCWS”). Subsequently, Tata Industries was inducted as a joint venture partner in Idea Cellular. Thereafter, 50% of the shares of Idea Cellular held by AT&T Mauritius were sold by AT&T Mauritius to Aditya Birla Nuvo (nominee of the Birla group) and 100% of the shares of AT&T Mauritius (which held the balance 50% of the shares of Idea Cellular) were sold by NCWS to Tata Industries. Aditya Birla Nuvo obtained a NOC u/s 195(2) permitting it to remit the sale consideration to AT&T Mauritius without TDS. The Court had to consider the validity of three proceedings initiated by the AO (i) Order u/s 163 treating Aditya Birla Nuvo as agent of NCWS USA on the ground that though the transferor was AT&T Mauritius, the gains from sale of the Idea Cellular shares was taxable in the hands of NCWS USA, (ii) Order u/s 163 treating Tata Industries as agent of NCWS USA on the ground that though the shares of AT&T Mauritius were purchased, effectively the underlying shares of Idea Cellular were purchased and (iii) Notice u/s 148 asking NCWS to file a return in respect of the gains arising from (indirect) transfer of the Idea Cellular shares…”
The essential question, in the words of the Court, was “whether the ICL shares were owned by AT&T Mauritius or by NCWS (USA).” The Revenue contended that the shares were owned by NCWS (USA), and not by the Mauritius company. It was contended by the assessee that the shares were owned by the Mauritius company, and an enquiry as to the “real” ownership would amount to lifting the corporate veil over a company which had a tax residency certificate in Mauritius. This (the assessee argued) was not permissible in view of the Supreme Court decision in Azadi Bachao Andolan.
The Court distinguished Azadi, by holding that in Azadi, the ownership of shares itself was not in issue. In the present case (the Court reasoned), “It is AT&T USA which has subscribed to and owned 49% equity shares (later on reduced to 32.91%) of the JVC under the JVA. It is at the instance of AT&T USA the shares subscribed were issued in the name of its 100% subsidiary as a permitted transferee. It is AT&T USA as a shareholder of the JVC, entered into a Shareholders Agreement wherein the shareholding was reduced with the induction of the Tata Group. It is AT&T USA which has agreed with the other joint venture partner that irrespective of issuance of the shares in the name of a permitted transferee, all rights relating to those shares including the right to sell the shares shall vest in AT&T USA. Therefore, in the facts of the present case, where the investments are made by AT&T USA and not by AT&T Mauritius, the ratio laid down by the Apex court in the case of Azadi Bachao Andolan (supra) would not apply…” Casting doubts on the effectiveness of structuring investments through “permitted transferees”, the Court held “Once it is prima facie established that the investments in the shares of the JVC were made by AT&T USA and the allotment of shares in the name of AT&T Mauritius was as a permitted transferee of AT&T USA, then the fact that AT&T Mauritius held a Tax Residence Certificate issued by the Republic of Mauritius and that certificate was valid on the date of sale of ICL shares would become wholly irrelevant. Since the shares of the JVC were subscribed and owned by AT&T USA as a joint venture partner and AT&T USA had agreed to sell the shares of ICL along with AT&T Mauritius to Indian Rayon by a Sale and Purchase Agreement dated 28th September 2005, the amount of sale consideration received by AT&T USA through AT&T Mauritius would be taxable in the hands of the AT&T USA (now represented by NCWS).”