Authority For Advance Rulings (Income Tax), New Delhi
Shinsei Investment (I) Ltd., In Re
Section : 9
Justice V.S. Sirpurkar, Chairman
A.K. Tewary, Member (Revenue) And R.S. Shukla, Member (Law)
A.A.R. No. 1017 Of 2010
August 10, 2016
A.K. Tewary, Member (Revenue) – The applicant is a company incorporated in Mauritius. The applicant holds a valid Tax Residency Certificate (TRC) issued by the Mauritian Revenue authorities and does not have a permanent establishment in India. The applicant is a wholly owned subsidiary of Shinsei Bank Limited, Japan (‘Shinsei Bank’) which is listed on the Tokyo Stock Exchange. The applicant was the owner of 75% of the total paid-up capital of Shinsei Asset Management Company Private Limited, India [Shinsei AMC] (i.e. 72,27,000 shares) and 99.99% of total paid-up capital of Shinsei Trustee Company India Private Limited, India [Shinsei Trustee] (i.e. 3,99,996 shares). Shinsei AMC and Shinsei Trustee are the asset management and trustee company respectively of Shinsei Mutual Fund. Shinsei Bank is the sponsor and settler of Shinsei Mutual Fund, which was established as a trust vide trust deed dated 16 July 2008 executed between Shinsei Bank and Shinsei Trustee Company. Shinsei Asset, Shinsei Trustee and Shinsei Mutual Fund are all registered with the Securities and Exchange Board of India [SEBI] in terms of the SEBI (Mutual Funds) Regulations, 1996 [MF Regulations]. On 19 March 2010, a Share Purchase Agreement (SPA) was entered into between the applicant, Shinsei Investment II Limited, Shinsei Bank, Mr. Rakesh Jhunjhunwala, Freedom Financial Services Private Limited (FFS), Daiwa Securities Group lnc., Japan (Daiwa), Shinsei Asset and Shinsei Trustee. In terms of the said SPA, the applicant and other shareholders proposed to sell their entire shareholding in Shinsei Asset and Shinsei Trustee to Daiwa and its affiliates.
2. The applicant has raised the following questions:—
1. Based on the facts and circumstances of the case and in law, whether the applicant is liable to tax in India in respect of the transfer of 7,227,000 equity shares of AMC and 399,996 equity shares of Trustee Company under the India-Mauritius tax treaty?
2. Based on the facts and circumstances of the case and in law, whether Daiwa and its affiliates would be required to withhold tax as per section 195 of the ITA from payments made to the Applicant?
3. Based on the facts and circumstances of the case and in law, if the applicant’s capital gains are not taxable in India, then whether the applicant would be required to file an income-tax return in India as per section 139 of the ITA?
4. Based on the facts and circumstances of the case and in law, whether the applicant would be liable to tax under the provisions of section 115JB of the ITA?
3. According to the applicant Article 13 (4) of DTAA confers the power of taxation of the gains derived by a resident of a contracting state from the alienation of the specified property only in the state of residence i.e., Mauritius. The fact that capital asset is located in India is of no consequence. Under section 90 of the Act the taxpayer is entitled in law to seek the benefits under the OTAA if the provision therein is more beneficial than the corresponding provision in the domestic law. Thus, in the case of residents of Mauritius, capital gains arising on the sale of shares of Indian companies are taxable only in Mauritius and are not taxable in India. The applicant has relied on Circular No.682 dated 30th March, 1994 and Circular No. 789 dated 13.4.2000 issued by Central Board of Direct Taxes clarifying that any resident of Mauritius deriving income from alienation of shares of Indian companies will be taxable only in Mauritius. The applicant has further relied on decision of the Hon’ble Supreme Court in UOI v. Azadi Bachao Andolan  263 ITR 706/132 Taxman 373 (SC) on the scope and validity of the circular. The apex Court had held that Circular No.789 shall prevail even if inconsistent with the provisions of the Income-tax Act.
4. The Department of Revenue has submitted the following comments:—
(i) Shinsei Bank Ltd., Japan does not have any share-holding in the Indian concerns (AMC and the Trustee Company) whose shares are under transfer. This being the case and if it is a case of share sale simpliciter by the applicant Shinsei Investment I Limited, Mauritius, the reasons or relevance for presence of Shinsei Bank Ltd., Japan (the parent holding company of the Applicant) as Party No.1 in the Share Purchase Agreement are not clear.
The applicant Shinsei Investment I Limited, Mauritius, has been introduced only as a “permitted transferee” into the share sale arrangement and the parent company Shinsei Bank Ltd., Japan holds all rights and obligations in respect of the transaction.
(ii) Even if the shareholding of/by Shinsei Investment .I Limited, Mauritius, is being transferred, Shinsei Bank Ltd. has the rights to notify fulfilment of conditions to other partners viz., Mr. R. Jhunjhunwala and FFS. The applicant has no such rights/responsibility in respect of share sale and raises suspicion about the legal, actual and beneficial capacity of the applicant in the scheme of transaction.
(iii) Shinsei Bank Ltd. Japan has the sole responsibility for the conduct of the transaction and the Mauritius entities are mere nominee shareholders.
(iv) The place of arbitration has primarily and implicitly been limited to Japan and/or India only and not the place of incorporation of the Applicant, i.e. Mauritius.
(v) Section 3.2 of the SPA provides that the revision of composition of Board of the AMC and Trustee Company are to be notified by the Purchaser to the parent Shinsei Bank Ltd., Japan and not to the applicant.
(vi) Tax indemnification and claims are to be notified by the purchasers to Shinsei Bank Ltd., Japan only and the name of the applicant, Shinsei Investment I Limited, Mauritius, appears nowhere. Hence, prima facie, the applicant is merely nominal holder of the transferred shares and not the actual owner.
(vii) Section 9.2 (f) requires the provision of all reasonable information to Shinsei Bank Ltd., Japan, for investigation of tax claim in timely manner. Further, Section 9(3) stipulates that Shinsei Bank Ltd., Japan is required to take over conduct of all proceedings and negotiations in connection with tax claim upon receipt of notice from the purchaser.
(viii) Shinsei Bank Ltd., Japan is the sole party as regards to tax claim liability and the applicant i.e. Shinsei Investment I Ltd., does not figure in.
(ix) The parent company Shinsei Bank Ltd. Japan has been in effective control of the transaction and applicant has merely given its name to the transaction.
5. The Department has submitted that the applicant has been merely introduced into the entire scheme of arrangement as a ‘permitted transferee’ by Shinsei Bank Limited and does not possess any rights and obligations. as regards to the shares of AMC and the trustee company. Department has heavily relied upon the judgment of the Bombay High Court in the case of Aditya Birla Nuvo Ltd 342 ITR 308. The Department has further submitted that circular No.682 and 689 issued by CBDT and the decision of the Apex Court in the case of Azadi Bachao Andolan has no relevance to the facts of the present case as the circulars were issued in the context of extending the benefits of the Tax Treaty to the investments made in India by Mauritian Entities. However, these circulars would not apply where the investments are made in India by non• Mauritian Entities.
6. In its rebuttal the applicant has distinguished the facts of this case with the facts in the case of Aditya Birla Nuvo as under:—
a. In the case of Aditya Birla, the founder (AT&T, USA) was vested with the control of the JV company, namely power to direct the management and policies. AT&T, USA had paid for and subscribed to the shares of the JV Company in India and obtained the shares in the name of AT&T Mauritius as a “permitted transferee”. Accordingly, all rights in respect of the said equity shares absolutely vested in AT&T USA. In the present case, subscription to shares of Shinsei AMC and Shinsei Trustee Company has been made wholly by the applicant in its own name and account and not on behalf or for the benefit of Shinsei Bank. Accordingly, the applicant was not the permitted transferee of the shares.
b. In the case of Aditya Birla, as per the terms of the JVA the owner of the equity capital of the Indian entity would be the main parent company. In the present case, there is no such clause and in fact the applicant is accepted and approved by all the parties to be the real and beneficial owner of the shares as Clearly provided in the SPA and the JVA.
c. In the case of Aditya Birla, the JVA has a clause that the entire obligation rests on the parent company and the subsidiary was not more than a representative of the parent company.
d. In the case of Aditya Birla, the JVA had a clause that the arrangement between the parties and the JV would remain only until the telecom licenses remain. This shows that the investments were routed through the AT&T Mauritius to avail the benefit of the tax treaty.
7. We have considered the submissions of the applicant and the Revenue and have carefully gone through the case laws relied upon by them. The main allegation of the Department is that the applicant has been introduced in this case as a ‘permitted transferee’. This is a matter of fact and can be examined from share purchase agreement and other documents filed by the applicant. Sinshei Bank is a party to, the share purchase agreement because it is the sponsor and settler of the mutual fund in India and as required under the mutual funds regulations, Sinshei Bank Ltd. executed a trust deed dated 16.7.2008 with the trustee company whereby Sinshei Bank Ltd. had established .the mutual fund and contributed to the initial corpus. As Sinshej Bank was the existing sponsor it was required to be part of the SPA for transfer of the sponsorship to the new sponsor i.e. Daiwa Asset Management Company Ltd. It is also noticed that in terms of mutual fund regulation the trustee Sinshei Bank Ltd. is subject to certain requirements and responsibilities and on sale of shares it is required to be released from its obligation and responsibilities. This is the reason that the SPA contains such provisions. The applicant has given para wise reply to the Department’s contentions and the essence of the reply is that Sinshei Bank Ltd. in its capacity as sponsor of the mutual fund is party to SPA and has borne certain responsibility to the regulations, investors of the individual sponsor. The matters regarding place of arbitration, sharing of responsibility to obtain the tax withholding order etc are not relevant particularly in view of the fact that shares have been subscribed by the applicant in its own name and the bank statements filed show that the applicant has paid for such subscription of shares. In these circumstances the applicant cannot be termed as a ‘permitted transferee’ as was the case in Aditya Birla Nuvo. The facts in Aditya Birla Nuvo were entirely different where AT&T had paid for and subscribed to the shares of JV Company in India and obtained the shares in the name of AT&T Mauritius as a ‘permitted transferee’. Here the facts are very clear that the applicant had paid for shares. Once it is established that the applicant has made investment on its own and Sinshei Bank Ltd. was party to SPA only in its capacity as sponsor and in order to comply with mutual funds regulations, there is no bar on application of Article 13(4) of the India-Mauritius DTAA in this case. The applicant is a resident of Mauritius and a valid tax residency certificate has been produced before us. Therefore, the treaty will apply and the applicant is not liable to tax in India.
8. As regards Q.No.3 & Q.No.4 we may mention that we have already taken a view that wherever Article 13(4) of India-Mauritius DTAA applies and the applicant is not liable to capital gains tax in India, there is no need to file return of income in India. As regards application of provision of section 115JB of the Income-tax Act, the Government has also clarified before the Supreme Court that these provisions are not applicable in the case of foreign companies. We have accordingly taken this view in all similar cases. The same will apply in this case also.
9. In view of above the following rulings are pronounced:—
Q. 1 The applicant is not liable to tax in India under India-Mauritius DTAA.
Q.2 There is no liability to withhold tax.
Q.3 The applicant is not required to file Income-tax returns in India.
Q.4 The applicant is not liable to tax under the provisions of section 115 JB of the Income-tax Act.
[Citation : 389 ITR 11]