Government Law College, Mumbai
th
9 Nani Palkhivala National Tax Moot Court Competition 2012 11th – 13th October, 2012 In association with
ITAT Bar Association Mumbai
All India Federation of Tax Practitioners
Case Study FoolTheWorld (Mauritius) Company Ltd. v Commissioner of Income-tax
1.
Fool The World (Mauritius) Company Ltd. (herein after referred to as “FMC” ) i s a c o m p a n y r e g i s t e r e d i n M a u r i t i u s . F M C i s h o l d i n g a T ax ax
R es es id i d en en cy cy
C er e r ti t i fi f i ca c a te te
i ss s s ue ue d
by
t he he
T ax ax
A ut ut ho ho rrii ti t i es es
in
M au a u ri r i ti t i us u s . F MC MC i s n o ott a c om o m pa p a ny n y r es e s id i d en e n t i n I nd n d ia i a u nd n d er e r t he he Income-tax Act. FMC was set up in Mauritius in the year 1971 by FMC Australia, a company registered in Australia. On 1 July, 1998, f or o r a c on o n si s i de d e ra r a ti t i on o n o f U SD S D 1 00 0 0 0, 0, F MC M C a cq c q ui u i re r e d 3 43 4 3 e qu q u it it y o f R i ch c h iR i R i ch ch C or o r po p o r at at i on o n ( he h e re r e i n a ft f t er e r r ef e f er e r re r e d t o a s “ RichiRich ” ) . RichiRich is a company registered in United States of America and its shares are listed in the New York Stock Exchange. The holding of FMC in RichiRich comes to 0.00073%. FMC has no business activity other then holding the shares in RichiRich.
2.
R ic i c hi h i Ri R i ch c h i s e ng n g ag a g ed e d i n t he he B u uss in i n es e s s o f p ro r o vi v i di d i ng ng B a acc k O ff ff ic ic e S u p po po r t S e r vi vi c e s t o c o m pa pa n i es e s a l l o v e r t h e w o r l d . R i c h i Ri Ri c h h a s a w ho h o ll l l y o wn w n ed e d s ub u b s id i d i ar ar y i n B r it it i sh s h V i rg rg i n I sl s l an a n d w hi h i c h i n t ur ur n holds 100 % shares in B.O.S.S. B.V. Netherlands. B.O.S.S. holds 100% shares in an Indian Company. The Indian Company is providing the B ac a c k O ff f f ic i c e S up u p p or or t S e rv rv i ce ce s f ro r o m I nd n d i a. a. T he h e v a lu lu e o f s h ar ar es es o f RichiRich to the extent of 52% is derived from the business carried o n b y t he h e I nd n d ia ia n C o om m pa p a ny n y . T he h e b al a l an a n ce c e v al a l ue u e o f t he he s ha ha re re s i s d er e r i ve ve d f r om om i t s o t he he r o pe p e ra r a t in i n g c o mp mp an a n y w hi h i c h i s s i tu t u at at e d i n Philippines.
3.
FMC sold the shares of RichiRich on the New York Stock Exchange o n 4 t h August 2007 for a consideration of UDS 4,000.
4.
F M C f i l e d a “NIL” return of income for the assessment year 200809, without offering offer ing the capital gains earned on the sale of share of RichiRich.
5.
T he he
A s se s e ss s s in in g
O f fi fi ce ce r
p as as se se d
t he he
a ss s s es es sm s m en en t
o r de de r
on
20 t h
December, December, 2010, holding that the capital gains earned by FMC from transfer transfer of shares of RichiRich is chargeable to tax under the Act as it is a transfer of a capital asset situated in India. The Assessing Officer further held that the benefit of the Indo-Mauritius Double T a x at at i o n A v oi o i d a nc nc e A g re r e e m en en t ( h er er e i n a f t e r r e fe f e r re re d t o a s “ t h e Treaty ”) would not be available to FMC as the Treaty is a pplicable o nl n l y w he h e n t he h e s ha h a re r e s o f a c o mp mp an a n y r eg e g i st st e re re d i n e it i t he h e r o f t he he contracting state is transferred. The Assessing Officer further did not allow the benefit of indexation in computing the capital gains to FMC relying on the first proviso to section 48 of the Act holding that as the capital gains is computed in USD, indexation benefit is not available to FMC.
6.
F MC M C p re r e fe f e rr r r ed e d a n a pp p p ea e a l t o t he he C o om m mi m i ss s s io io n ne e r o f I nc n c om om e e-- ta ta x ( A pp p p e a ls ls ) a g a in i n s t t h e o r d e r o f t h e A s s e s s in i n g O f fi f i c e r. r. T h e C I T ( A ) v i d e o r d e r d a t e d 2 0 t h December, 2011, allowed the appeal of FMC holding that the shares of RichiRich is not a capital asset situated in India within the meaning of section 9(1)(i) of the Act and, hence, capital gains is not chargeable to tax in India. The CIT(A) further h e ld l d t h a t F M C i s a l s o e n ti t i t l ed ed t o t h e b e n e fi fi t o f t h e T r e at at y a n d a s per A. 13(4) of the Treat, capital gains earned by a person resident resident in Mauritius is not chargeable to tax in India.
7.
The Revenue preferred an appeal before the Income-t ax Appellate T r i b u n a l ( h e r e i n a f t e r r e f e r r e d t o a s “ the Tribunal ” ) a g a i n s t t h e order of the CIT(A). The matter came up for hearing on 13 2012 wherein: The Revenue argued as under:
th
July,
7.1. B y
v i rt rt ue u e o f t he h e E xp x p la l a na n a t io i o n 5 t o s e ct ct i on o n 9 (1 ( 1 )( ) ( i ), ), i n se s e r te te d w it it h
retrospective effect from 1-4-1962, the shares of RichiRich would b e d e e m ed e d t o b e a c a p it it a l a s s e t s i t u at a t e d i n I n d ia ia a n d , h e n ce ce , F M C would be chargeable to capital gains tax in India under the Act. 7.2. In
computing capital gains, the benefit of indexation ought not to be
g ra r a nt n t ed e d t o F MC MC a s i nd n d ex ex a att io i o n b en e n ef e f it it i s n o ott a va v a il i l ab a b le l e t o a ny ny acquisition and transfer of shares in foreign exchange.
7.3.
As the shares transferred are of a company resident in USA, the Treaty is not applicable as A. 13(4) is applicable only when the s h ar ar es e s t ra r a n sf s f er e r re r e d a re r e o f a c om o m p an an y r es e s i de de n t i n e i th th er e r o f t he he contracting state.
7.4.
FMC is otherwise also not entitled to the treaty be nefit as it is not carrying on any activity in Mauritius. FMC on the other hand argued as under:
7.5.
Explanation 5 to section 9(1)(i) although inserted w.e.f. 1-41962 is not applicable to transactions which have been completed before the Explanation was inserted.
7.6.
W i t ho ho u t p r e j u di d i c e , t h e s h ar a r e s o f R i c hi hi R i c h d o n o t d e r i v e ‘directly or indirectly’ any value from the Indian asset. The term “ i nd n d i re re c tl tl y ” w ou o u ld l d m ea e a n t ha h a t t he h e r ev e v en e n ue u e c a n l oo o o k o nl n l y a t t he he assets of the British Virgin Island company whose shares are held b y R ic i c hi h i Ri R i ch c h a nd n d c an a n no n o t g o b ey e y on o n d t he he B rrii ti t i sh s h V ir i r gi g i n I sl s l an an d Company to determine whether the shares derive any value from any assets in India.
7.7.
In any way of the matter, it cannot be said that the shares of RichiRich derives its value ‘substantially from the assets located in India’ as it derives only 52% value from the assets located in India.
Even if the Explanation 5 to section 9(1)(i) is applicable, only
7.8.
proportionate capital gains attributable to the value of the assets located in India ought to be charged to tax in India. FMC is entitled to the benefit of indexation in computing the
7.9.
capital gains as the first proviso to section 48 of the Act is not applicable in the present case.
7.10.
As FMC is a resident of Mauritius, the treaty is applicable and
i n t e rm rm s o f A . 1 3 (4 (4 ) , t h e c a p i t al a l g a i ns ns e a r n e d b y F M C , b e i n g a t a x resident of Mauritius is not chargeable to tax in India.
8.
The Tribunal allowed the appeal of the Revenue holding as follows:
8.1.
Explanation Explanation 5 to section 9(1)(i) of the Act is applicable on the f ac a c ts t s o f t he h e p re r e se s e nt n t c as a s e a nd n d , h en e n ce c e , t he h e c ap a p it i t al al g a aii ns n s t ax ax i s c ha h a rg rg e ea a bl b l e u nd n d er e r t he h e A ct c t i n I nd n d ia i a . T he h e T ri r i bu b u na n a l r ej e j ec e c te t e d t he he a rg r g um um e en n t o f F MC M C t ha h a t t he h e s ha h a re r e o f R ic i c hi h i Ri R i ch c h d oe oe s n o ott d er er iv iv e “ di d i re r e ct c t ly l y o r i nd n d ir i r ec e c tl t l y” y ” a ny n y v al a l ue u e f ro r o m t he h e I nd nd ia i a n a ss s s et e t . T he he T r ib i b un u n al a l a ls l s o h el e l d t ha h a t t he h e v al a l ue u e o f t he h e s h ar ar es e s o f R i ch ch iR i R i ch ch i s s u bs bs t an a n ti t i a ll ll y f ro r o m a ss s s e ts t s i n I nd n d i a a nd n d , h en e n c e, e, E xp x p la l a na n a t io io n 5 t o section 9(1)(i) is applicable.
8.2.
The Tribunal held that although FMC is entitled to the benefit of the Indo-Mauritius Indo-Mauritiu s Tax treat, the transaction of sale of shares of RichiRich is not covered under A. 13 of the Treaty. Indo-Mauritius Treat would apply only when the shares are of company situate in either of the contracting states and not otherwise.
8.3.
The Tribunal further held that benefit of indexation would not be available to FMC in computing the capital gains.
T he h e T r ib ib u na na l f ur u r t he he r h el e l d t ha h a t a s t he h e s h ar ar e s i ts t s e lf l f a re re
8.4.
r e ga ga rd r d ed e d a s c a pi pi ta t a l a s se se t s i tu t u at a t ed e d i n I nd n d i a, a, t he h e f ul u l l a mo m o un un t o f c ap a p it i t al a l g ai a i ns n s w ou o u ld l d b e c ha h a rg r g ea e a bl b l e t o t ax a x i n I nd n d ia i a a nd nd n o ott t he he proportionate amount. Against the order of the Tribunal, FMC filed an Appeal in to the
9.
H i gh gh C ou o u r t a t B om o m ba b a y. y . T he h e H ig i g h C o ur ur t a dm d m i tt t t ed e d t h e a p p ea e a l o f t he he assessee on the following questions – 9.1. W h e t h e r
on the facts and in the circumstances of the case and in
law the Tribunal was right in law in holding that the shares of R ic i c hi hi Ri R i ch c h c an a n b e s ai ai d t o b e d er er iv i v in i n g a ny n y v al a l ue ue “ di d i re re ct c t ly ly o r indirectly” from any asset in India? 9.2. W h e t h e r
on the facts and in the circumstances of the case and in
law the Tribunal was right in holding that the shares of RichiRich derives its value “substantially” from the assets located in India? 9 .3 .3 .
W he he th th er er on o n th t h e fa f a ct c t s a nd nd in i n th t h e ci c i rc r c um um st s t an a n c es e s of o f th t h e ca c a se se an an d i n l aw a w t he h e T r ib i b un u n al a l w as a s r i gh g h t i n h ol o l d in in g t ha h a t E xp x p l an an at a t i on on 5 t o section 9(1)(i) is applicable on the sale of shares of RichiRich?
9.4. W h e t h e r
on the facts and in the circumstances of the case and in
law the Tribunal was right in holding that full capital gains would be chargeable to tax in India and not capital gain proportionate to the assets situated in India? 9.5. W h e t h e r
on the facts and in the circumstances of the case and in
l aw a w t h e T r i bu b u na n a l w as a s r i gh gh t i n h ol o l di d i n g t ha h a t t he h e a s se se s se s e e i s n ot ot e nt n t it i t le l e d t o i nd n d ex ex a att io i o n b en e n ef e f it i t i n c om o m pu p u ti t i ng n g t he h e c ap a p it i t al al g a aii ns ns chargeable to tax in India? 9.6. W h e t h e r
on the facts and in the circumstances of the case and in
law, the Tribunal was right in holding that the capital gains on the
sale of the shares of RichiRich by FMC would not come within the ambit of the Treaty?
10.
The Appeal is now fixed for final hearing and disposal by the Hon’ble Bombay High Court.
