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Income-tax authorities have received yet another booster dose from the judiciary enabling taxmen to better scrutinise deals involving companies incorporated in Mauritius.
The Bombay High Court's recent order may encourage Indian tax authorities to go behind the tax residence certificate issued by Mauritius so as to reveal the actual beneficial shareholders of an Indian company.
Simply put, a tax residence certificate issued by Mauritius may henceforth not constitute as sufficient evidence for accepting the status of residence and beneficial ownership while applying treaty benefits under Indo-Mauritius Double Taxation Avoidance Agreement.
If the investments are being made by companies not incorporated in Mauritius, the Indo-Mauritius treaty benefits may not be protected even if such investments are routed through special purpose vehicles established in the island nation, say tax experts.
In the Aditya Birla Nuvo Ltd (ABNL) case, the Bombay High Court has now held that capital gains arising from the sale of shares in Idea Cellular Ltd by its Mauritian shareholder, AT&T Cellular Pvt Ltd (AT&T Mauritius), are not protected by the India-Mauritius DTAA.
The court has affirmed the revenue department stance that the beneficial owner and investor in this case was New Cingular Wireless Inc, USA, (NCWS) and not AT&T Mauritius.
The High Court has also held that the capital gains can be assessed in the hands of ABNL and Tata Industries Ltd (TIL), as agents of NCWS.
It was contended before the High Court that gains accruing from the sale of shares in Idea by AT&T-Mauritius (a tax resident of Mauritius which holds a valid tax residency certificate of the island nation) were not taxable in India. However, the Bombay High Court pointed out that shares in Idea were allotted to AT&T Mauritius as a permitted transferee of NCWS under the terms of joint venture agreement and the shareholders' agreement.
Accordingly, AT&T Mauritius had no obligation to pay for the allotment of shares and also did not have any right in the shares of Idea.
tax liability
The High Court ruling noted that NCWS exercised all rights in the shares of Idea as the ownership vested in NCWS. Also, it was pointed out that the shares in Idea could not be sold by AT&T Mauritius without the consent of NCWS.
So, the tax liability will be on the real owner — NCWS — and not the legal owner, which is AT&T Mauritius.
“The High Court has given the prima facie view on the aspect of beneficial ownership in the given facts for consideration. This order again emphasizes the recent approach where the Courts and authorities are not persuaded by the form only, and are keenly reviewing the transactional and other underlying documentation in cross-border investment situations,” Mr Aseem Chawla, Partner, Amarchand and Mangaldas, told Business Line .
Idea (earlier known as Birla Communications) was incorporated in March 1995 by the Birla Group.
In December 1995, Birla Group entered into a joint venture with AT&T Wireless Services Inc, US (AT&T-US). Under the agreement, AT&T-US acquired 49 per cent stake in Idea. Birla Group held the rest.
As the agreement allowed for the concept of “permitted transferee”, 49 per cent shares in Idea were held by AT&T-Mauritius (permitted transferee of AT&T-US) and the 51 per cent balance was held by ABNL (permitted transferee of Birla Group).
In December 2000, Tata Industries was inducted as joint venture partner on account of merger of Tata Cellular with Idea. A fresh shareholder agreement was entered into by all three joint venture partners.
In October 2004, Cingular Wireless LLC, USA, acquired AT&T-US from AT&T Corp. AT&T-US was renamed New Cingular Wireless Services Inc, USA (NCWS).
NCWS decided to exit the venture in 2005 and offered the shares to ABNL and TIL, as both had the right of first refusal under the shareholder agreement. Both the Birla and the Tata Groups accepted the offer of purchasing the shares for $300 million, divided equally between the two.
ABNL acquired the shares in Idea from AT&T-Mauritius. TIL, representing the Tata Group, acquired AT&T-Mauritius from NCWS.
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