Authority For Advance Rulings (Income Tax), New Delhi
Moody’s Analytics Inc., USA, In Re
Section : 9, 90
Justice P.K. Balasubramanyan, Chairman
A.A.R. Nos. 1186 To 1189 Of 2011
July 31, 2012
RULING
1. The applicant in AAR No. 1186 of 2011, Moody’s Analytics, Inc. Co., USA (Moody’s, USA) is a company incorporated in the United States of America. The applicant in AAR 1187 of 2011, Moody’s Group Cyprus Limited (Moody’s Cyprus) is a company incorporated in Cyprus. The applicant in AAR 1188 of 2011, Copal Research Limited Mauritius (Copal, Mauritius) is a company governed by the laws of Mauritius. The applicant in AAR 1189 of 2011, Copal Market Research Limited, Mauritius (CMRL, Mauritius), incorporated on 1.4.2008, is also a company governed by the laws of Mauritius. CRL Mauritius was incorporated on 17.3.2004. It acquired 100 per cent shares of an Indian company, Copal Research India Private Limited (CRIL) on 10.8.2004. A company, Copal Mauritius Limited, Jersey (CPL, Jersey) which was incorporated on 21.7.2006, acquired 100 per cent of the shares in CRL Mauritius. CRL Mauritius acquired 100 per cent of the shares in Copal Market Research Limited, Mauritius (CMRL Mauritius).
2. CMRL Mauritius in turn acquired 100 per cent of the shares in Exevo Inc. US, a company governed by the laws of the United States of America. Exevo Inc. US had acquired 100 per cent of the shares in Exevo India Pvt. Limited.
3. The Rulings are sought for, on two transactions. The first is on a sale by CRL Mauritius of its 100 per cent shares in CRIL Pvt. Limited, to Moody’s Cyprus, being a sale by a Mauritian company of the shares held by it in an Indian company, to a Cyprus company. The other is on the sale by CMRL Mauritius of the 100 per cent shares it holds in Exevo Inc. US, a US company, to another US company, Moody’s USA, being the sale of shares of a US Company by a Mauritian company to another US company. No doubt the US Company, the shares of which are being transferred, holds 100 per cent shares in Exevo India, a company incorporated in India.
4. Learned counsel for the applicant submitted that the two sellers being Mauritian companies, are entitled to claim the benefit of the India-Mauritius Double Taxation Avoidance Convention and going by section 90(2) of the Income-tax Act, the right to claim relief on the basis of the DTAC cannot be disputed. He has submitted that even if by virtue of the amendments to the Income-tax Act brought about by the Finance Act, 2012, the transactions are held to be taxable in India, going by the DTAC, the transactions which give rise to capital gains, can be taxed only in Mauritius, in view of paragraph 4 of Article 13 of the India-Mauritius DTAC. He therefore submitted that the questions raised are liable to be ruled on in favour of the applicants.
5. In support of his arguments, he referred to the tax residency certificates of the seller companies and the decision of the Supreme Court in Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706 / 132 taxman 373 . He submitted that the Tax Residency Certificates are liable to be accepted and in the light of the observations in the decision of the Supreme Court referred to, the transactions have to be accepted and even if no capital gain is actually taxed or is chargeable to tax in Mauritius, the jurisdiction to tax under the DTAC will still be with Mauritius and hence the authorities under the Income-tax Act cannot tax the transactions.
6. On behalf of the Revenue, it was submitted that this was a clear case of devising of a scheme for avoidance of tax. It was pointed out that the beneficial owner of the shares was CPL Jersey and since there existed no convention between India and Jersey, the taxability of the transactions had to be tested on the anvil of the Income-tax Act. So tested, even according to the applicants, they were taxable under the Act as amended by the Finance Act of 2012. In the first case, it was the sale of the shares of an Indian Company by the Mauritius Company to a Cyprus Company and in the second case, though the sale was of the shares of a US Company by a Mauritian company to another US Company, the underlying assets were that of an Indian company. The transactions have been so arranged or designed as to avoid the transactions being taxed in India by invoking the India-Mauritius DTAC. This Authority should not countenance such schemes to avoid the tax payable in this country and apart from the general jurisdiction every authority has to reject schemes for avoidance (really, evasion, according to him) of tax, clause (iii) of the proviso to section 245R(2) of the Act specifically confers jurisdiction on this Authority to do so. This position stands reaffirmed by the insertion of clause (iv) of section 245N(a) of the Act defining ‘advance ruling’ though its coming into force has been postponed to 1.4.2013. He also strenuously contended that the management and control of the two seller Mauritius companies did not lay in Mauritius, but elsewhere, as can be seen from the transactions themselves and hence the applicability of the India-Mauritius DTACs cannot be claimed by these applicants.
7. On behalf of the applicants, it is submitted that the transactions are legally permissible ones between legal entities and that there is not even a case of round-tripping suggested. Taking advantage of a DTAC, even if it is such a case, is not taboo or objectionable as held in Azadi Bachao Andolan. Here, the transactions were sale of shares of an Indian company by a Mauritian company to a Cyprus company and the sale of shares of a US Company by a Mauritius company to another US Company. However one way stretch it, it cannot be said that a scheme for avoidance of tax has been devised. The fact that under the laws of Mauritius, capital gain is not actually taxed cannot be a reason for holding that every sale of shares by a Mauritian company of shares of an Indian company, involves a scheme for avoidance of tax. On the facts here, there is nothing to show that any proximate step has been taken that makes no commercial sense, to bring in the theory of tax avoidance.
8. Learned counsel for the revenue argued that a Tax Residency certificate is not conclusive, though it is prima facie to be accepted. According to him, the position adopted by the Supreme Court in Azadi Bachao Andolan (supra) has been modified to that extent by the decision in Vodafone International Holding B.V. v. Union of India [2012] 204 taxman 408/ 17 taxmann.com 202 (SC). He pointed out that the whole transaction has been left to the discretion and management of one Rishi Khosla, who it appears, is the Director of Exevo Inc., USA, the Director of Copal India and CEO of Copal. It is seen that Rishi Khosla is a resident of United Kingdom. It is the argument of counsel for the Revenue, that the management and control of the companies involved, was not in Mauritius but was with Rishi Khosla and if so, the applicant cannot claim to take advantage of the DTAC between India and Mauritius. The tax residence of the companies, if it is to be determined on the basis of its place of management, then, the effective place of management in this case, is the residence of Rishi Khosla.
9. In this context, learned counsel submitted that the applications filed by the applicants deserve to be dismissed for non-disclosure of full and complete facts. He referred to rule 10 of the Rules of procedure framed by the Authority for Advance Rulings, Rule 44(2) of the Income-tax Rules and Form 34C adopted for approaching this Authority by a Non-resident. He emphasized the need for setting out correct and complete facts and the affirmation that an applicant has to make regarding the facts stated in the application. He submits that the entire facts which are relevant for deciding the applications especially that in relation to the ultimate ownership and control of the companies have not been disclosed and what is found is the devising of a scheme for avoidance of taxes in India, and so, the applications ought to be dismissed and rulings refused. These contentions are met by counsel for the applicants by submitting that the applicants have sought advance rulings on two transactions of sale of shares and the entire facts which are relevant, surrounding those transactions, have been set out. Even otherwise, to the extent possible, all information subsequently demanded by the Revenue, have also been furnished. Nothing was held back. There was no need for going beyond Copal Jersey and set out as to who held shares directly or indirectly in that company and so on. Those facts are not really relevant. The shares have been held for a considerable length of time and they were being transferred. Rishi Khosla with whom there was a Business Advisory Agreement, was only taking care of the details of the transactions as authorized by the Board of Directors of the company and his role did not in any way amount to control and management of the company. The management and control of Copal was vested with the Board of Directors who were in Mauritius. The business advisory agreement entered into with Rishi Khosla was also made available.
10. It is true that certain other facts could also have been set out by the applicants in their applications. But, it cannot be said that the facts relating to the relevant transactions of sale have not been set out fully or correctly. The Revenue had sought various items of information and had been able to get most of it. The Revenue also had conducted a transfer pricing study. I find it not possible to agree in the circumstances of the case with counsel for the Revenue, that the applications ought to be rejected at the threshold or rulings refused. I hold that the Rules of Procedure have been substantially followed and there is no failure to disclose a vital fact. I therefore overrule that contention.
11. Assuming that learned counsel for the Revenue is right in his submission that the decision in Vodafone has modified the ratio of the decision in Azadi Bachao Andolan 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 and that the management and control is from United Kingdom of which Rishi 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.
12. It was contended that Rishi Khosla has not acted in terms of the Board Resolution relied on and that he had varied the terms of the transaction at his pleasure and this demonstrates that he had dominion over the companies. He had in fact acted beyond the authority conferred on him by the resolution of the Board relied on. The Board Resolution was a sham put forward to achieve the object of avoidance of tax. Though there may be some substance in the argument that Rishi Khosla has not merely played the role of a normal agent, the circumstances relied on are not sufficient to warrant an inference that the control and management of the seller companies rested with Rishi Khosla and not with the Board of Directors of these companies.
13. 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 facts, 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.
14. The argument that the source of funds for investment by the Mauritian companies is not properly explained, is sought to be rebutted by the applicants. In its submission by CRL, it is stated that the two shareholders of CRIPL were Rishi Khosla and Milan Khosla, two UK residents. The share capital of CRL was only £ 552 which was pending receipt from its shareholders. The investment made by CRL in CRIPL was in August 2004 amounting to Rs. 11,44,250 (£ 13,750). In that submission filed subsequent to the hearing, it is stated that the funds invested by CRL in CRIPL did not proceed from the shareholders of CRL and therefore there cannot be any question of round tripping. From where that investment proceeded is not clarified by that submission, though it has referred to the audited accounts of CRL for March 2005. It is also stated that the balance 8% of shares held by Rishi Khosla and Milan Khosla amounting to Rs. 1,00,000 were sold to CRL in 2010 and that those shares were purchased from operational income and it is stated that since the entire investment from CRL in CRIPL was funded from operational income, there cannot be any question of round tripping. There may be at best some suspicion. Even then, the investments have been made by the companies. Even if the funds were made available by the American company or investors from UK, that cannot deprive the Mauritian companies of the ownership of the shares and the questions raised have to be considered only on that basis.
15. On behalf of the Revenue, a strenuous attempt was made to contend that the beneficial owner of the shares was CPL Jersey and since there was no DTAC between India and Jersey, the transactions were taxable under the Income-tax Act and even otherwise the DTAC would not apply. In the first case, it was clearly the shares of an Indian company that were being dealt with and in the second case, the sale involved the underlying assets of an Indian company. The Revenue’s contention that since capital gain is not actually taxed in Mauritius and is liable to be taxed only in India and a person who earns the income by way of capital gains by dealing with the assets of an Indian company has to pay tax in one jurisdiction or the other and cannot rely upon the DTAC between India and Mauritius to evade the tax, may sound plausible.
16. Chapter IX of the Income-tax Act deals with “Double Taxation Relief. For the relief to be obtained, there must be a taxation. Taxation means actual taxation and not a mere power to tax or the possibility of taxation. Is it not possible to say that unless a person is actually taxed or sought to be taxed in both the contracting states, the provisions in this chapter are not attracted?
17. Sec.90(1) re-emphasizes this position. It empowers the Central Government to enter into an agreement with the Government of another country for the grant of relief in respect of “income on which have been paid both income-tax under this Act and income-tax in that country or specified territory, as the case may be” or income-tax chargeable under the Act and the corresponding law in force in that country [Emphasis supplied]
18. The conventions between India and other states entered into in terms of section 90(2) of the Act are described as “Double Taxation Avoidance Convention”. It shows that the purpose of entering into it is to avoid double taxation. When does double taxation occur? It appears to me that it occurs when tax is actually imposed on an income twice, or in this case, in two countries. Can one say that the existence of a power to tax in one of the contracting states alone or by itself will lead to double taxation? The practical view and a purposive interpretation would be to say that there must be actual taxation before the operation of DTAC can be said to be attracted.
19. I find that in Cyril Eugene Pereira, In re [1999] 239 ITR 650/ 105 taxman 273 (ARR-New Delhi) this view was taken by this Authority, but the same was disapproved by the Supreme Court in Union of India v. Azadi Bacho Andolan. Therefore, the argument in this behalf cannot be accepted in view of the clear pronouncement on the question in Azadi Bachao Andolan, that what is relevant in the context of the DTAC, is not whether the income is actually taxed in Mauritius but whether in terms of the DTAC, it can be taxed in Mauritius. The contention raised on behalf of the Revenue has necessarily to be raised before the Supreme Court and cannot be entertained by this Authority which is bound by the decision in Azadi Bachao Andolan (supra). Suffice it to say that it is for the Revenue to raise its questions in challenge to the reasoning in Azadi Bachao Andolan, if it wants to persist in this line of argument, before the Supreme Court. The arguments are of no avail before this Authority.
20. Learned counsel for the Revenue argued that the beneficial ownership of the shares vested with Copal Jersey and that ownership should determine the applicatory law. India did not have a treaty with Jersey and hence on the application of the Income-tax Act, the capital gains are taxable in India. He pointed out that there was no dispute that the gains were taxable under the Act. Counsel for the applicants in answer pointed out that the test of beneficial ownership has not been applied in such circumstances and the legal ownership of the shares vested in the company that held it. The fact that the owner company is a 100% subsidiary of another company will not alter the legal ownership. Every corporation is an independent legal entity.
21. 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.
22. The share purchase agreement also provided for the seller to get ‘earn-out’ consideration calculated as per a formula contained in clause 5.3 of the agreement and subject to clause 3.8 and 5.5 of the agreement. The applicant has argued primarily that this payment is part of the sale consideration and hence, it will form part of the capital gains the seller makes and same rules as taxing capital gains should apply. The Revenue has not specifically dealt with this position or contradicted the stand of the applicants. No arguments were also raised before me in that behalf. I am, therefore, proceeding as if there is no dispute between the parties on this question and giving a ruling on this question on that basis.
23. In view of this, I am also not discussing the aspects involved in questions 3 to 6.
24. Now the questions posed can be ruled on.
25. In AAR No. 1186 of 2011 filed by Moody Analytics Inc. USA, the purchaser of the shares of Exevo Inc. US from CMRL Mauritius, the following questions are admitted for Rulings.
(1) Whether on facts and in law, the applicant is justified in its view that capital gains arising on the sale of shares of Exevo Inc., US (‘Exevo lnc’) by Copal Market Research Ltd. (“CMRL”) to the applicant would not be chargeable to tax in India in the hands of CMRL?
(2) Whether on facts and in law, the Applicant is justified in its view that the full value of consideration receivable by CMRL for the sale of shares of Exevo Inc. to the applicant shall be the total consideration including the ‘earn-out’ consideration for the purposes of computing ‘Capital Gains’?
(3) If the ‘earn-out’ consideration is to be treated as business profits, whether such profits would be taxable in India under the Act in the absence of any ‘Business Connection’ of CMRL in India?
(4) If the answer to question no. 3 above is in the affirmative, whether the ‘earn-out’ consideration would be chargeable to tax in the assessment year relevant to the previous year in which transfer took place or the year in which Earn-Out consideration is received by CMRL?
(5) If the ‘Earn-Out’ consideration is to be treated as other income, whether such income would be taxable under the Act by virtue of any income having accrued or arisen to CMRL in India through or from:
(i) Any property in India; or
(ii) Any asset or source in India.
(6) If the answer to question No. 5, is in the affirmative, whether the ‘Earn-Out’ consideration would be chargeable to tax in the assessment year relevant to the previous year in which transfer took place or the year in which Earn-Out is received by CMRL?
(7) Whether on the stated facts, the Applicant, being a foreign company and in absence of a place of business in India, would be subject to tax under the provisions to section 115JB of the Act?
(8) Whether on the facts and in law, the Applicant is required to withhold tax under section 195 of the Act on the income chargeable to tax in India in the hands of CMRL from sale of shares in Exevo Inc. to the Applicant?
(9) If the answer to question 8 is in the affirmative, then, whether the Applicant would be liable to interest under section 201(1A) of the Act?
26. In the light of the discussion above, the Rulings are as follows:-
(1) On question No.1, the Ruling is that the capital gains arising are not chargeable to tax in India in the hands of CMRL.
(2) On question No. 2, the ruling is that Earn-out would be part of the full value of consideration receivable by CMRL.
(3) On question Nos. 3 to 6, no ruling is called for in view of the rulings on question No.2.
(4) On question No. 7, I decline to give a ruling since nothing was argued on it, though I am of the view that section 115JB of the Act would apply even to a foreign company.
(5) On question No. 8, I rule that there would be no liability in the applicant to withhold tax under section 195 of the Act, in view of the ruling on question No. 1.
(6) On question No. 9, no ruling is called for in view of the rulings on questions 1 and 8.
27. In AAR No. 1189 of 2011, the seller of the shares of Exevo Inc. USA to the American Company Moody’s, the questions framed for rulings are the same as above. The rulings on them are also the same as above.
28. In AAR No. 1188 of 2011 filed by Copal Research Limited Mauritius, the seller of the shares of CRIPL, the Indian company, the following questions are raised for Rulings.
(1) Whether on facts and in law, the applicant is justified in its view that capital gains, if any, arising on the sale of shares of Copal Research India Private Limited (‘CRIPL) by the applicant to Moody’s Group Cyprus Ltd. (Moody’s) will not be chargeable to tax in India in the hands of the applicant, as per the provisions of paragraph 4 of Article 13 of the Double Taxation Avoidance Agreement entered into between India and Mauritius (‘the DTAA’/’the Treaty’)?
(2) Whether on facts and in law, the Applicant is justified in its view that the full value of consideration receivable by the Applicant for the sale of shares of CRIPL to Moody’s shall be the total consideration including the ‘Earn-Out’ consideration for the purposes of computing ‘Capital Gains’?
(3) If the ‘Earn-Out’ consideration is to be treated as business profits, whether such profits shall be taxable in India as per the provisions of Article 7 read with Article 5 of DTAA?
(4) If the answer to question No. 3 above is in the affirmative, whether the Earn-Out would be chargeable to tax in the assessment year relevant to the previous year in which transfer took place of or the year in which Earn-Out is received by the Applicant?
(5) If the ‘Earn-out’ consideration is to be treated as Other Income, whether such income shall be taxable in India as per the provisions of Article 22 of the DTAA?
(6) If the answer to question 5 above is in the affirmative, whether the Earn-Out would be chargeable to tax in the assessment year relevant to the previous year in which transfer took place or the year in which Earn-Out is received by the Applicant?
(7) Whether on the stated facts, the Applicant, being a foreign company and in absence of a place of business or a Permanent Establishment (‘PE’) in India, would be subject to tax under the provisions of section 115JB of the Act?
(8) Whether on the stated facts and in law, Moody’s Group Cyprus Ltd. another non-resident is required to withhold tax under section 195 of the Act on the income chargeable to tax in India in the hands of the applicant from the sale of shares?
29. On question No.1, the Ruling is that the Capital Gains arising on the sale of shares of Copal Research India Private Limited are not chargeable to tax in India in the hands of the applicant.
30. On question No.2, the Ruling is that the Earn-Out consideration would be part of the full value of consideration receivable by the applicant.
31. In view of the Rulings on questions 1 and 2, rulings are not necessary on question Nos. 3 to 6.
32. On question No. 7, I decline to give a ruling though I am of the view that section 115JB of the Act would apply equally to a foreign company.
33. On question No. 8, I rule that there is no obligation on Moody’s Group Cyprus Limited, Cyprus to withhold tax under section 195 of the Act.
34. In AAR No. 1187 of 2011 filed by Moody’s Group Cyprus Ltd., the purchaser of shares of the Indian company, CRI Pvt. Ltd. From CRL Mauritius, the questions admitted for rulings are the same as in the application AAR No. 1188 of 2011 and the rulings are also the same.
[Citation : 348 ITR 205]
