Some recent reports
have pointed out that the Authority for Authority for Advance Rulings has once
again sanctified the “Mauritius route”.
While the law since Azadi Bachao
Andolan’s case has upheld the sanctity of a tax residency certificate (TRC), the
Revenue has not given up its efforts to find the “hidden reality” or “true
facts”. The Revenue has also met with
some success in its attempts, before the High Court (Aditya Birla Nuvo) and also the AAR (for example, see Re Groupe Industrial Marcel Dassault).
Two recent rulings of the AAR – while on facts ruling in favour of assessee –
do not really forestall the Revenue’s attempt to go behind a TRC.
have pointed out that the Authority for Authority for Advance Rulings has once
again sanctified the “Mauritius route”.
While the law since Azadi Bachao
Andolan’s case has upheld the sanctity of a tax residency certificate (TRC), the
Revenue has not given up its efforts to find the “hidden reality” or “true
facts”. The Revenue has also met with
some success in its attempts, before the High Court (Aditya Birla Nuvo) and also the AAR (for example, see Re Groupe Industrial Marcel Dassault).
Two recent rulings of the AAR – while on facts ruling in favour of assessee –
do not really forestall the Revenue’s attempt to go behind a TRC.
In the case of Dynamic India Fund (AAR 1016/2010 dated
18th July, 2012), it was contended that sale of shares in an Indian
company by a company having a Mauritius TRC was not taxable in India. The Revenue’s objections were that the use of
the Mauritius Company was for evading tax.
Further, only 2 directors were from Mauritius, and three were from
India. These objections were rejected
not by a straight forward reference to the TRC, but because “there is no adequate (factual material to
support this contention (that control vests in a non-Mauritius jurisdiction).”
18th July, 2012), it was contended that sale of shares in an Indian
company by a company having a Mauritius TRC was not taxable in India. The Revenue’s objections were that the use of
the Mauritius Company was for evading tax.
Further, only 2 directors were from Mauritius, and three were from
India. These objections were rejected
not by a straight forward reference to the TRC, but because “there is no adequate (factual material to
support this contention (that control vests in a non-Mauritius jurisdiction).”
Another ruling
is in the case of Moody’s Analytic
(AAR 1186 to 1189/2011 dated 31st July 2012). In this case, the Revenue
contended that the beneficial owner of shareholding was in Jersey, and not
Mauritius. Accordingly, Mauritius treaty benefits were not permissible. Additionally,
the Revenue argued that management and control of seller companies did not lay
in Mauritius. It was argued that the
decision of the Supreme Court in Vodafone
has modified the ratio on the decision in Azadi
Bachao Andolan. The AAR answered
this contention not by rejecting it outright as a matter of principle,
but only on the facts. The AAR held, “… on the conclusiveness of a tax residency certificate, it cannot be said
that it has been shown that the effective management of the companies is not
from where their Board of Directors function.
Normally, the management of a company vests in its Board of Directors as
authorized by the General Body. The role
of Rishi Khosla highlighted by the Revenue is in respect of the sale
transactions undertaken and in pushing them through. It does not appear to be a
role in connection with the running of the businesses of the companies
concerned. It is not shown that the
management of the companies in Mauritius in general, is not with a Board of
Directors of those companies sitting in Mauritius Khosla is a resident. Even if one were to take the Business Advisory
Agreement relied on by the applicants with a pinch of salt, it cannot be said
that the role played by Rishi Khosla in these transactions establish that the
management and control of the Mauritian companies is with Rishi Khosla. It is therefore not possible to accept the
contention of learned counsel for the Revenue that by applying the place of
management test, the seller companies could be held to be non-Mauritian
companies…”
is in the case of Moody’s Analytic
(AAR 1186 to 1189/2011 dated 31st July 2012). In this case, the Revenue
contended that the beneficial owner of shareholding was in Jersey, and not
Mauritius. Accordingly, Mauritius treaty benefits were not permissible. Additionally,
the Revenue argued that management and control of seller companies did not lay
in Mauritius. It was argued that the
decision of the Supreme Court in Vodafone
has modified the ratio on the decision in Azadi
Bachao Andolan. The AAR answered
this contention not by rejecting it outright as a matter of principle,
but only on the facts. The AAR held, “… on the conclusiveness of a tax residency certificate, it cannot be said
that it has been shown that the effective management of the companies is not
from where their Board of Directors function.
Normally, the management of a company vests in its Board of Directors as
authorized by the General Body. The role
of Rishi Khosla highlighted by the Revenue is in respect of the sale
transactions undertaken and in pushing them through. It does not appear to be a
role in connection with the running of the businesses of the companies
concerned. It is not shown that the
management of the companies in Mauritius in general, is not with a Board of
Directors of those companies sitting in Mauritius Khosla is a resident. Even if one were to take the Business Advisory
Agreement relied on by the applicants with a pinch of salt, it cannot be said
that the role played by Rishi Khosla in these transactions establish that the
management and control of the Mauritian companies is with Rishi Khosla. It is therefore not possible to accept the
contention of learned counsel for the Revenue that by applying the place of
management test, the seller companies could be held to be non-Mauritian
companies…”
The AAR then
held, “There may be some substance in the
argument of the learned counsel that this Authority has to consider only the
negative, namely that the control of the companies is not in Mauritius and it
is not necessary for this Authority to find positively that the control and
management is with Rishi Khosla, before coming to a conclusion that the applicants
are not entitled to claim the benefit of the India-Mauritius DTAC. But on the available fact, the presumption
that the control and management of the companies rest with the Board of
Directors cannot be said to have been rebutted by sufficient or cogent material I overrule the arguments in this behalf….”
In other words, a TRC creates at best a rebuttable presumption, and is not
conclusive. On the aspect that beneficial ownership of shares was in Jersey and
not in Mauritius, the AAR rejected the argument clearly: “As things now stand, in such cases the theory of beneficial ownership
has not prevailed over the apparent legal ownership. Company law also recognized the recorded
owner of the shares and not’ the person on whose behalf it may have been held
(even if, possible). I am, therefore,
satisfied that this attempt of counsel for the Revenue must also fail.” In
this background, the issues were answered in favour of the assessee.
held, “There may be some substance in the
argument of the learned counsel that this Authority has to consider only the
negative, namely that the control of the companies is not in Mauritius and it
is not necessary for this Authority to find positively that the control and
management is with Rishi Khosla, before coming to a conclusion that the applicants
are not entitled to claim the benefit of the India-Mauritius DTAC. But on the available fact, the presumption
that the control and management of the companies rest with the Board of
Directors cannot be said to have been rebutted by sufficient or cogent material I overrule the arguments in this behalf….”
In other words, a TRC creates at best a rebuttable presumption, and is not
conclusive. On the aspect that beneficial ownership of shares was in Jersey and
not in Mauritius, the AAR rejected the argument clearly: “As things now stand, in such cases the theory of beneficial ownership
has not prevailed over the apparent legal ownership. Company law also recognized the recorded
owner of the shares and not’ the person on whose behalf it may have been held
(even if, possible). I am, therefore,
satisfied that this attempt of counsel for the Revenue must also fail.” In
this background, the issues were answered in favour of the assessee.
Thus, while the
importance of a TRC must be acknowledged, it is still not clear whether a TRC
is absolutely conclusive. The rulings of
the AAR would suggest that it is not. To what extent Vodafone has affected the correctness of the decision in Azadi on this point is a matter which
will require further judicial examination, particularly in light of the
arguments of the Revenue before the AAR in these two cases.
importance of a TRC must be acknowledged, it is still not clear whether a TRC
is absolutely conclusive. The rulings of
the AAR would suggest that it is not. To what extent Vodafone has affected the correctness of the decision in Azadi on this point is a matter which
will require further judicial examination, particularly in light of the
arguments of the Revenue before the AAR in these two cases.
[Another recent ruling of the AAR – not on the same
issue – is that in Re Castleton Investment
Ltd. The AAR has questioned the correctness of a number of its previous
rulings (including Re Dana Corp and re Timken): this will be further considered in a subsequent post.]
