AAR : These certificates declare that the applicants are “qualified in terms of the aforesaid convention as resident in Mauritius

Authority For Advance Rulings

XYZ, In Re

Sections 245Q(1), 245R(2), proviso first, CL (c)

S. Ranganathan, J., Chairman; D.B. Lal & R.L. Meena, Members

Application No. P-9 of 1995

22nd December, 1995

RULING

These are two applications under s. 245Q(1) of the IT Act, 1961 (“the Act”). The applicants are limited liability companies incorporated in Mauritius on the 22nd Nov., 1994. A certificate issued by the IT Department of the Mauritius has been produced which purports to be a “tax residence certificate” issued under the convention between the Government of the Republic of India and Government of the Republic of Mauritius for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains entered into in 1982 [Notification No. GSR 920 (E) dt. 6th Dec., 1983 printed at (1984) 40 CTR (TLT) 4 : (1984) 146 ITR (St) 214]. These certificates declare that the applicants are “qualified in terms of the aforesaid convention as resident in Mauritius”.

The memoranda as well as the articles of association of the two companies have been filed, which are identical in both cases. The objects of each of the companies include carrying on business as an investment and holding company and for that purpose to acquire and hold, either in the name of the company or that of any nominee, and to use, sell, assign, transfer, mortgage, pledge or otherwise deal with or dispose of shares, stocks, bonds, debentures and securities. The authorised capital of each company is stated to be US $10,000,100 comprising of 100 founder shares of US $1 each and 10,000,000 ordinary shares of US $1 each. Each memorandum shows one share each as having been agreed to be taken by the two subscribers to the memorandum : Company X and Company Y. The address of each of these has been given as “C/o their Chartered

Accountants in Mauritius” and the memorandum has been signed by the two Chartered Accountants, respectively on behalf of these companies. It is also necessary to refer to two of the articles of association of the companies for our present purposes which provide, inter alia, that the number of directors shall not be less than two and more than ten or such other number as the company may by ordinary resolution determine. The first directors appointed under the articles are the two Chartered Accountants referred to above who have signed the memorandum on behalf of the subscriber-shareholders and Mr. P, a banker of Hongkong. It also provides that no director shall be required to hold shares in the company to qualify him for an appointment and presumably none of the directors hold any shares in the companies. It is further provided that the board meetings of the directors are to be held in or chaired from Mauritius. Subject to this, the directors may meet together for the despatch of business, adjourn and otherwise regulate their meetings as they think fit. The address of the registered head office of the companies is also the same as the address of the two shareholders. It is stated that this is also the place where the meetings of the board of directors and the general meetings are held. Each of the two companies, it is stated, carries on the business of investing in the banking and financial sector in India and has invested US $ over 60,00,000 by way of subscription for shares in an Indian Bank. A certificate has been produced from that bank to confirm that each of these companies have been allotted two crores equity shares of that bank of Rs. 10 each (or a total of Rs. 20 crores).

The question posed by the applicants before this Authority is very simple. It is stated that each of these companies will be receiving dividends in respect of its shares in the Indian Bank. It is also possible that at some point of time they may realise capital gains on the transfer of some or all of these shares. The question relates to the tax payable by the applicant on the above dividends and capital gains in the light of the provisions contained in the Double Taxation Avoidance Agreement (“DTAA”) between Mauritius and India discussed below. (a) Paragraphs (1) and (2) of Art. 10 of the DTAA read thus : “10(1). Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other State. 10(2). However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident and according to the laws of that State, but if the recipient is the beneficial owner of the dividends the tax so charged shall not exceed : (a) 5 per cent of the gross amount of the dividends if the beneficial owner is a company which holds directly at least 10 per cent of the capital of the company paying the dividends; (b) 15 per cent of the gross amount of the dividends in all other cases. This paragraph shall not affect the taxation of the company in respect of the profits out of which the dividends are paid.” (b) Article 13 of the DTAA relating to capital gains reads as under : “(1) Gains from the alienation of immovable property, as defined in para. (2) of Art. 6, may be taxed in the Contracting State in which such property is situated. (2) Gains from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State or of movable property pertaining to a fixed base available to a resident of a Contracting State in the other Contracting State for the purpose of performing independent personal services, including such gains from the alienation of such a permanent establishment (alone or together with the whole enterprise) or of such a fixed base, may be taxed in that other State. (3) Notwithstanding the provisions of paragraph (2) of this Article, gains from the alienation of ships and aircraft operated in international traffic and movable property pertaining to the operation of such ships and aircraft, shall be taxable only in the Contracting State in which the place of effective management of the enterprise is situated. (4) Gains derived by a resident of a Contracting State from the alienation of any property other than those mentioned in paragraphs (1), (2) and (3) of this Article shall be taxable only in that State. (5) For the purposes of this Article, the term “alienation” means the sale, exchange, transfer or relinquishment of the property or the extinguishment of any rights therein or the compulsory acquisition thereof under any law in force in the respective Contracting States.”

7. The question on which each of the applicants seeks an advance ruling has been enunciated thus in the application : “The applicant seeks confirmation that the dividends it receives from Indian Bank will be subject to withholding tax which shall not exceed 5% of the gross amount of the dividends and that any gains derived by the applicant from the eventual alienation of its shares in the said Bank will not be taxable in India.” The gains referred to here, it has to be taken, relate to those assessable as “Capital gains” under the Indian Act.

8. To invoke the benefit of Arts. 10 and 13, the applicants should be residents of Mauritius within the meaning of the DTAA. The topic of `residence’ for the purposes of the DTAA is dealt with by Art. 4 thereof which reads as under : “(1) For the purposes of this Convention, the term “resident of a Contracting State” means any person who, under the laws of that State, is liable to taxation therein by reason of his domicile, residence, place of management or any other criterion of similar nature. The terms “resident of India” and “resident of Mauritius” shall be construed accordingly. (2) Where by reason of the provisions of paragraph (1), an individual is a resident of both Contracting States, then his residential status for the purposes of this Convention shall be determined in accordance with the following rules : (a) he shall be deemed to be a resident of the Contracting State in which he has a permanent home available to him; if he has a permanent home available to him in both Contracting States, he shall be deemed to be a resident of the Contracting State with which his personal and economic relations are closer (hereinafter referred to as his “centre of vital interests”); (b) if the Contracting State in which he has his centre of vital interests cannot be determined, or if he does not have a permanent home available to him in either Contracting State, he shall be deemed to be a resident of the Contracting State in which he has an habitual abode; (c) if he has an habitual abode in both Contracting States or in neither of them, he shall be deemed to be a resident of the Contracting State of which he is a national; (d) if he is a national of both Contracting States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement. (3) Where by reason of the provisions of paragraph (1), a person other than an individual is a resident of both the Contracting States, then it shall be deemed to be a resident of the Contracting State in which its place of effective management is situated.” To take up paragraph (1) first, it is not in dispute that the applicant companies are liable to tax under the laws of India as well as Mauritius. This, according to the Department makes them residents of both the States

within the meaning of paragraph (1), a situation which attracts paragraph (3). According to the applicants, however, they are no doubt liable to tax in both the countries, but, while such liability in Mauritius arises as a result of their “residence or place of management” there, the liability in India arises only because, and to the extent to which, they earn income in India. Hence, it is said, they are not liable to tax in India within the meaning of paragraph (1) of Art. 4. In other words, according to the applicants, companies can be considered to be resident in India within the meaning of Art. 4 only if they are taxed here by reason of their place of incorporation or place of management being in India, which is not the case here.

9. This argument is interesting and ingenious but it does not appear to be sound. The precise argument now addressed has been considered by this Authority in Mohsinally Alimohammed Rafik, In re (AAR No. 206 of 1994) [since reported at (1995) 126 CTR (AAR) 311]. The Authority dealt with the argument in the following words in its ruling dt. 23rd Dec., 1994 : “7. Paragraph 1 of Art. 4 is so cumbrously worded that the applicant seeks to make use of its language to argue that he is not a resident of India though, admittedly, he is liable to tax in India and has also been so taxed. It is pointed out that the words `domicile’ and `residence’ used in the paragraph are appropriate to the case of an individual while the expressions `place of management’ and `place of incorporation’ are appropriate to the case of firms, companies or other associations. The argument runs that an individual, on the terms of this paragraph, will be resident in India only if his liability to tax therein arises by reason of either his domicile or his residence in India or some other like criterion. Since the applicant’s liability to India does not so arise, it is said, he should be considered not to be resident in India. At the outset, it may be pointed out that the argument even if accepted, will not really help the applicant. It is not sufficient for him to say that he is not resident in India. He can derive the benefits sought from the DTAA, as already pointed out, only if he is resident in the UAE within the meaning of Art. 4. But, this consideration apart, the argument is not well founded. It is true that if the words “or any other criterion of a similar nature” are given a very narrow meaning as contended for and construed as applicable only where the liability of the person concerned to tax arises out of his continued presence or activity in the country in question, it may be possible to say that the present applicant is not a resident in India. But, it appears to the Authority that such a narrow interpretation would not be correct. What the paragraph contemplates is that the liability to taxation for its purposes should arise out of some nexus between India (or the other country) and the claimant. The four words, `resident’, `domicile’, `place of incorporation’ and `place of management’ have been used only to indicate the need for the existence of some nexus between the applicant and the State concerned which can justify the imposition, by that State, of the tax on the income sought to be taxed. The applicant in this case is, admittedly, liable to tax under the Act on the income that accrues or arises or is deemed to accrue or arise to him in India and the income that is received or deemed to be received by him in India. The nexus for the taxability is the locus of the income which, in international law, can justify the taxation even though the applicant may be a non-resident under the Indian tax laws. This, in the opinion of the Authority, is sufficient to make the applicant a resident of India within the meaning of paragraph 1 of Art. 4. Hence, the applicant is certainly entitled to claim the benefit of the agreement as art. 1 of the agreement clearly declares that it will apply where the person claiming benefits under it is a resident of one of the two Contracting States.”

These observations are directly applicable here.

10. That apart, a reconsideration of the issue does not also seem to justify a contrary view. It is true that, on a first reading, the language of paragraph (1) of Art. 4 seems to imply some restriction as to the manner in which the liability to taxation is imposed in the country in question. The point made on behalf of the applicant is that the last seven words should be construed as applicable analogously to the four words of the clause preceding them. But there is no real force in this argument. It is well known that tax laws impose liabilities on a person by reason of his domicile, residence or its place of management or place of incorporation. It is also usual to find taxing statutes relating the tax liability to the “locale” of the income. It is difficult to conceive of a criterion of liability analogous to domicile, residence, place of management. On the contrary, as stated in the earlier ruling, it appears that what paragraph (1) of Art. 4 requires is that a person will be considered to be a resident in a State if he is liable to tax in that State whether by reason of domicile, residence, place of incorporation or place of management or by any other criterion providing the nexus for taxability under the laws of that State.

The other objection that this interpretation would render paragraph (1) of Art. 4 redundant is also not sustainable. The argument is that, since only a person sought to be made liable to tax in both the Contracting States will seek to invoke the DTAA, all applicants for relief will, on this interpretation, be automatically considered to be residents of both the Contracting States rendering paragraph (1) of Art. 4 meaningless. This argument is unacceptable for two reasons. The first is that Art. 4 has to be read as a whole and paragraphs (2) and (3) thereof proceed to set out the course to be adopted for the exact situation where a person thus becomes resident in both the Contracting States. They lay down rules to assign the residence of that person to one of the two States for the purposes of the DTAA and it is only as such resident that he/it can claim relief under the agreement. The fact that an applicant can be termed `resident’ in both the countries under paragraph (1), far from rendering the application of the DTAA difficult or infructuous actually activates the provisions of paragraphs (2) or (3). Secondly, the plea unduly restricts the scope of the DTAA and results in denial of relief thereunder in many cases although a taxpayer may be actually subjected to tax in both the countries.

For the above reasons, the Authority is of the view that the applicants must be considered to be residents both in Mauritius and in India within the meaning of paragraph (1) of Art. 4. One has, therefore, to turn to paragraph (3) of that Art. 4 to ascribe the residence to one of these two Contracting States. The effect of that paragraph is that the applicants are to be considered as residents of that one of the two Contracting States in which the place of their effective management is situated. On this issue, the applicants’ argument that this can only be Mauritius appears to be well founded based as it is on the terms of the memoranda and articles of association of the applicant companies. A difficulty in this line of argument arose by a disclosure made by the applicant’s counsel in the course of his arguments before us. He stated that the applicant was a fully owned subsidiary of a Banking Company of Britain. However, this was not borne out in the papers before us which, as stated earlier, showed two other companies as the shareholders of the applicant companies. It was not clear whether British Bank was holding shares in the names of the two ostensible shareholders who are just its nominees [a type of situation envisaged under s. 49(3) of the Companies Act, 1956] or whether it was the sole shareholder in each of the applicant companies. We, therefore, asked the applicant to clarify the position. By a letter dt. 7th Dec., 1995 a list of shareholders of the companies duly certified by the Company Secretary was filed. This shows that the whole of the share capital of the applicant companies is held by the British Bank. In other words, the entire shareholding of the applicant company is in the hands of only one shareholder and that is a banking company in Britain. We take it that such a single shareholder company is permissible under the laws of Mauritius as it is in several other countries, including England now—since a certificate of such shareholding has been issued by the Company Secretary of the applicants. If this position is accepted, it could perhaps be argued that though the directors of the companies—at least two of the three—are located and their meetings are said to be held in Mauritius, the place of effective management of the company should be held to be in England where the sole shareholder of the company, which has got the ultimate management of the company, is located.

This conclusion will not, however, be correct for three reasons. The first is that it is equally plausible to say that the word “place of effective management” refers to the place from where, factually and effectively, the day-to-day affairs of the companies are carried on and not to the place in which may reside the ultimate control of the company. Secondly, it has been stated in the papers filed here that the general meetings of the company are also held in Mauritius and, if this is correct, the fact that the Holding Bank is in Britain may not be material. The third and most important reason is that what paragraph (3) of Art. 4 contemplates is not the location of a place of effective management generally but the location of the place of effective management as between the two Contracting States entering into the DTAA. Looked at from this point of view, the applicants do not have any place of management at all in India while they do have in Mauritius. On a proper construction of Art. 4 of the DTAA, therefore, the applicant companies have to be treated as residents of Mauritius for the purposes of the DTAA. To turn now to the questions raised by the applicants, the answers to them depend on Arts. 10 and 13 of the DTAA. Article 13 poses no difficulty at all. In the light of the conclusion set out earlier, the provisions of paragraph 4 of Art. 13 are clearly applicable in respect of the capital gains derived on the alienation of the shares and securities held by the applicants in the Indian Bank. By virtue of this paragraph, such capital gains should be taxable only in Mauritius and not in India. Article 10, however, poses a slight difficulty. Under this Article, the dividends derived by a resident of Mauritius from a company resident in India will be taxable at the rate of 15% on their gross amount. However, a concessional rate of 5% is stipulated where the two conditions set out in sub- paragraph (a) of paragraph 2 of this article are satisfied. That concessional rate will be available if the recipient of the dividend (i) is the beneficial owner of the shares in question and (ii) holds directly at least 10% of the capital of the company paying the dividend. The second of these conditions is clearly satisfied. The question, however, is whether the first condition is also satisfied. On behalf of the applicant it was argued that the applicant companies

are the direct shareholders in the Indian Bank, that neither they nor any other persons have given notice of any beneficial interest in the shares under s. 187C of the Companies Act, 1956 and that, therefore, they should be treated also as the beneficial owners of the shares. it is true that no notice has been given either by the applicant companies or by the British Bank of any beneficial interest in the shares in any person other than the nominal owners of the shares, namely the two applicant companies. The Indian Companies Act, 1956, however, does not forbid shareholdings through nominees. On the other hand, s. 49(3)—referred to earlier—envisages it in certain situations and s. 187C only requires declarations to be filed by the real holder and the nominee holder on pain of certain penalties. Non-filing of such declarations cannot, however, be conclusive of the nature of the holding. It is true that under the Company Law, a corporation is an independent entity and cannot be said to be holding its assets or profits in trust for the shareholders. However, in view of the categorical admission that all the shares of the applicant companies are held by the British Bank and consequently, the entire funds of the applicant-company by way of share capital have been contributed by that bank, the inevitable inference is that it is the British Bank and not the applicants which is the real and beneficial owner of the assets of the applicant companies including the shares in the Indian Bank. The shares as well as the income arising therefrom are held by the applicant only subject to the control and direction of the sole shareholder which can deal with these assets or the income therefrom in whatever manner it likes by virtue of its sole shareholding in the applicant companies. It is, therefore, possible to take the view that the applicant companies are not the beneficial owners of the dividends payable on their shares in the Indian Bank and that, therefore, the dividends received by them from the Indian Bank are liable to be taxed at 15% of the gross amount thereof and not at 5% as claimed.

In this context, it will be useful to make a reference to certain passages from the treatise of Klaus Vogel on Double Taxation Conventions (1991). Noting that the expression “beneficial owner” occurs in Arts. 10 to 12 of the Model Conventions drawn up by the OECD (Organisation for Economic Cooperation & Development) and UN (United Nations), he observes at pages 455 to 457 : “Arts. 10 to 12 of each of the three MCs under review here stipulate that the treaty benefits— reduction of the withholding tax on dividends, on interest and royalties, where applicable, or exemption of interest and royalties in the State of source—shall be available only if `the recipient’ (of the dividends or interest; Art. 12 OECD MC `such resident’) is the `beneficial owner’ of such payments. (a) OECD MC `63 did not contain this restriction. The reason why it was introduced was to help prevent tax avoidance….Persons not entitled to protection by a particular treaty were to be prevented from obtaining its benefits with the help of interposed persons (`treaty shopping’). (b) The term `beneficial owner’ (in French `Beneficiaire effectif’, in German `Nutzungsberechtigter’) is a term which was not generally used before. It appears that in English private law, the terms `beneficiary’ or `beneficial owner’ are used to designate a person who benefits financially from property held by another—such as by a trust. But that is merely a meaning ascribed to it by common usage rather than by a precisely defined legal term. The International Bureau of Fiscal Documentation believes that the terms `beneficial owners’ and `economic owner’ can be equated—in contrast to `legal owner’………..Treaty benefits should not be granted with a view to formal title to dividends, interest or royalties, but to the `real’ title. In other words, the old dispute of `form versus substance’ should be decided in favour of `substance’. In this connection, the entitlement at issue in these instances is determined by reference to domestic—private—law. But—to repeat this once again—the question of when such entitlement is not merely a formal one, is a matter to be decided under treaty law.

The `substance’ of the right to receive certain yields has a dual aspect. The first is the right to decide whether or not a yield should be realized—i.e. whether the capital or other assets should be used or made available for use— the second is the right to dispose of the yield. Ownership is merely formal, if the owner is fettered in regard to both aspects either in law or in fact. On the other hand, recourse to the treaty is justified—i.e. is not improper—if he who is entitled under private law is free to wield at least one of the powers referred to. Hence, the `beneficial owner’ is he who is free to decide (1) whether or not the capital or other assets should be used or made available for use by others or (2) on how the yields therefrom should be used or (3) both. The MCs do not require the beneficial owner also to be the legal owner of the right or property giving rise to the payments… (c) The fetters that exclude beneficial ownership may be legal or merely factual (`effectif’). Where individuals are involved, it will normally hardly be possible to prove the existence of a factual restriction of the individual’s power of disposition. But it may be of significance in cases of control under company law. Of course, a joint stock company which receives dividends, interest or royalties may very well be the beneficial owner of such payments……….Even if such a company were obliged to distribute all of its profits to its shareholders……….. this would not affect its beneficial ownership, as would a commitment to pass on such profits to third parties. If the company is bound by a controlling shareholder’s decision on what should be done with certain assets and the yields theygenerate…………its ownership may be formal, but this depends on the factual situation. On the other hand, even one hundred per cent interest in a subsidiary does not necessarily preclude the latter’s `beneficial ownership’ in the assets held by it. There would have to be other indications of the fact that the subsidiary’s management is not in a position to make decisions differing from the will of the controlling shareholder. If it were so, the subsidiary’s power would be no more than formal and the subsidiary would, therefore, not qualify as a `beneficial owner’ within the meaning of Arts. 10 to 12 MC.”

It will be seen that though the purpose of the restriction is said to be to prevent tax avoidance by persons not entitled to protection by a particular treaty claiming the same with the help of interposed persons, it has been opined that the mere fact that the shares are held by a 100% subsidiary does not preclude necessarily its beneficial ownership in the assets held by it in the absence of other factual indications pointing out the existence of the beneficial ownership in the holding company. A similar view can also be seen in Gore-Browne on Companies, Vol. I, para 1.3.1 where it is said : “In some cases the Courts have found on the particular evidence before them that a holding company was in fact carrying on a business through the agency of its subsidiary company. It is important to note that the mere fact that one company is the subsidiary of another, even a `wholly owned’ subsidiary, is not by itself sufficient to make the subsidiary an agent of its holding company. The activities of the subsidiary must be so closely controlled and directed by the parent company that the latter can be regarded as merely an agent conducting the parent company’s business.”

In the light of these views, it is also possible to suggest that more factual data should be obtained before the applicant companies are held not to be beneficial owners of the shares held by them in the Indian Bank. The Authority does not, however, consider it necessary to give a ruling on this issue as, in its view, the applications are liable to be rejected for reasons to be presently stated. A rather fundamental issue which was considered, in the course of the hearing was whether the Authority should not reject the applications under cl. (c) of the second proviso to s. 245R of the Act [sic—first proviso to sub-s. (2) of s. 245R] on the ground that the questions raised therein relate to a transaction which is designed, prima facie, for the avoidance of tax. This provision assumes great importance consequent on the revelation in the course of the proceedings before the Authority that each of the applicant companies have only one shareholder, namely, the British Bank, a company resident in the United Kingdom. To appreciate the problem it is necessary to consider the position in three different situations : (i) The normal scheme of taxation of dividends received from Indian companies by non-resident companies located in countries which have no double-tax treaty with India is outlined in s. 115A to s. 115AD of the Act. Sec. 115A envisages a tax on dividends at the rate of 20% on the gross dividends. Sec. 115AC provides for a concessional rate of 10% both on dividends and capital gains where the shares of the Indian company have been issued in accordance with a scheme notified under that section. Sec. 115AD provides for a rate of 30% in respect of short- term capital gains and a concessional rate of 10% in respect of long-term capital gains in the case of a company which is a foreign institutional investor notified under that section. In the absence of any material to show that the applicant companies are entitled to any of the concessional rates, they would have been liable to income- tax at the rate of 20% under s. 115A. (ii) If the British Bank, had directly invested in the shares of the Indian Bank, it would have been entitled to the relief provided by the DTAA of 1993 between India and the United Kingdom. Under Art.

11(3) of that agreement, dividends paid to a resident of England by an Indian company will be charged to Indian income-tax at 15% and under Art. 14 of the said agreement any capital gains arising as a result of the alienation of the shares would be chargeable to tax both in India and in England. (iii) A resident of Mauritius investing in Indian shares, as seen already, will be entitled to claim a complete exemption in respect of capital gains. He/it could also claim that the rate of income-tax cannot exceed 5% in certain cases and 15% in any case.

19. The claim sought to be put forward here is that the shares in the Indian Bank are held by two companies of Mauritius beneficially and that, therefore, the dividends from the shares should be charged to income-tax in India at 5% and that any capital gains derived from the shares should not be charged to income-tax in India. It has been pointed out earlier that it is doubtful whether the first of these contentions would succeed as it is possible also to take a view that the dividends would be liable to tax at 15% and not 5%. If this view prevails, it may make no difference whether the shares belong beneficially to the applicant companies or to the British Bank. However, so far as capital gains are concerned, there is a definite advantage in as much as they will be exempt from tax if the

shares are held by companies in Mauritius while that benefit will not be available if the shares are held by an

English company.

The above background coupled with the chronological sequence : (a) that the revised Double Tax Avoidance Agreement between India and the U.K., was notified early in 1994 [Notification GSR No. 91(E) dt. 11th Feb., 1994 printed at (1994) 117 CTR (St) 189], (b) that the applicant companies were incorporated in November, 1994, (c) that the investment in the shares of the Indian Bank, were made in early 1995 and (d) that the present claims of the applicants have been put up before the Authority soon after seem, prima facie, to support the inference that the purpose of the investment in the shares of Indian Bank, in the names of the applicant companies is the avoidance of the taxes that would have fallen on the British Bank had it directly invested in the Indian shares. Unlike in regard to the concept of beneficial ownership discussed earlier, there is no need to delve into greater factual detail here as the proviso to s. 245R(2) refers only to the prima facie impression created in the mind of the Authority on the facts stated before it on behalf of the applicants. Applicant’s Counsel has, however, argued that what is relevant for the purposes of the proviso to s. 245R is the design or purpose of the transaction to which the question relates. That transaction, according to him, in the present case, is the investment by the applicant companies in shares of the Indian Bank. He argues that it was open to the applicant companies to invest their money in shares in any country in the world and, by choosing to invest in India, they have, far from avoiding any income-tax, actually brought themselves within the purview of Indian Income-tax. Even assuming that the British Bank had created two subsidiaries and these two subsidiaries were made to hold shares in the applicant companies, that transaction, namely the formation of subsidiary companies, is, he says, irrelevant for the purposes of s. 245R. This argument is not acceptable. The Authority’s conclusion that the transaction to which the question relates has been designed, prima facie, for the purposes of avoidance of tax does not depend upon any other or anterior transaction as envisaged by the learned counsel. The Authority is only taking note of the fact that the applicant companies are wholly owned subsidiaries of the British Bank and drawn the inference, for the reasons discussed earlier, that the British Bank has invested monies in the Indian Bank, not directly but in the names of two newly formed companies located in Mauritius. Prima facie, and it is the prima facie view that is relevant under s. 245R, the Authority is of the opinion that the purpose of investment in this manner can only be for the purpose of avoidance of income-tax.

For the reasons discussed above, the Authority rejects the applications under cl. (c) of the (first) proviso to s. 245R(2) of the IT Act, 1961.

[Citation : 220 ITR 377]

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