July 29, 2010
SMR Ruling: Tax Department Attempts to Deny Treaty Benefits to Mauritius Company
The Tax department recently1 attempted to deny tax benefits in respect of capital gains arising from sale of shares, available to a company incorporated and resident in Mauritius (“Taxpayer”) under Article 13(4) of the India-Mauritius tax treaty (“Treaty”). It contented that an Indian resident, who held 99% shares in the Taxpayer, had ordered the sale of shares (of an Indian company) held by the Taxpayer, and hence, the effective place of management of the Taxpayer was in India. Consequently, the Taxpayer was liable to be treated as a resident in India, and not eligible for benefits of the Treaty, as a Mauritius resident.
However, in appeal, the Income Tax Appellate Tribunal (“ITAT”) has remanded the matter back to the Assessing Officer (“AO”) for the AO to re-examine evidence pertaining to the residential status of the Taxpayer’s directors at the time of holding of the meeting of the board of directors (“Board”) in the relevant financial year. Interestingly, the ITAT had sought third party evidence or evidence by any government agency to substantiate the Taxpayer’s claim.
The tax department contented before the ITAT that since the Taxpayer was being effectively managed from India, it should be deemed to be a resident of India under Article 4(3) of the Treaty. It submitted that since the order for sale of shares were given by the Taxpayers shareholder in India, its effective place of management was in India. The T axpayer relied on the ruling of Radha Rani Holdings Limited, [(2007) 110 TTJ (Delhi) 920] where it was held that the place of control and management of a company is where all the meetings of its board of directors were held. The Taxpayer argued that the AO failed to appreciate that its director was at all relevant times (when the Board meetings were held) in Mauritius and there were no facts to substantiate that the meetings of the Board were held outside Mauritius.
The tax department distinguished the Taxpayer’ case from the case of Radha Rani Holdings Limited on the ground that unlike in that case, minutes of meetings of the Board of the Taxpayer were not authenticated by the Indian High Commission in Mauritius, or by any third party. Further, it contended that there was no documentary evidence available in the Taxpayer’s case to indicate that the meetings of the Board were held in Mauritius. The tax department also raised serious doubts as to the correctness of the signature of the director, on various documents and disputed their genuineness. The Taxpayer argued that the AO had not substantiated its allegation that its control and management was situated in India with any documentary evidence. As per section 114 of the Indian Evidence Act, 1872, the onus of proving the allegations of the tax department was to be borne by the department itself.
The ITAT noted that the Taxpayer had submitted a copy of the passport of a director of the Taxpayer indicating his presence in Mauritius on dates of holding the Board meetings. The ITAT held that considering the arguments of the taxpayer, it was essential to examine the authenticity of the evidence placed before the AO in respect of the Board meetings and directed the AO to decide the matter afresh in terms of the observations of the ITAT. It also observed that any third party evidence or an evidence by a government agency situated in India or Mauritius, relevant to the Board meetings being held in Mauritius should be brought on record to substantiate the Taxpayer’s claim.
In our view, this judgment has not considered some essential points. Firstly, as per section 6(3) of the ITA, for an offshore company to be a resident in India in a financial year, its entire control and management has to be in India for the relevant financial year. Therefore, in the case of a foreign company, even if a slightest control and management is exercised from outside India it should not fall within the ambit of Section 6(3)(ii) and the company should be treated as a non-resident.2 Mere ordering of sale of shares etc. held by the Taxpayer, which could be a pure execution function, may not necessarily mean that the Taxpayer’s entire control and management was in India. Further, in the case of Radha Rani Holdings3 the ITAT, Delhi had held that the control and management of a company lies where the place where the board of directors meet, since the board was the head and brain of the company. Generally, the management decisions of a company are taken by its board of directors, which actually control and manage the affairs of the company, subject to the overall supervision of the shareholders. Moreover, as rightly contented by the Taxpayer, the general presumption under law of evidence would be that the Board meetings of a Mauritian activity would have been held in Mauritius. The onus of proving the contrary should have been shouldered by the department.
Interestingly, the ITAT has observed that any third party evidence, or an evidence by a government agency situated in India or Mauritius, relevant to the Board meetings being held in Mauritius should be brought on record to substantiate the Taxpayer’s claim. However, considering that the maintenance of minutes of the board meetings is an internal compliance procedure of a company, it could be a bit challenging for companies to get an authentication of such minutes from a government agency. Further, the ITAT’s decision in this case is quite relevant for many FIIs and hedge funds trading on Indian stock exchanges, which in the interests of time and efficiency in getting trades executed, many times give Indian residents the authority to give orders based on a prior approval of the Mauritius Board. In such a case, where the board of directors of a company has sanctioned a particular action to be performed in the name of a company, the mere execution of that action by another person should not be relevant for ascertaining the situs of the company’s control and management. Therefore, the effective place of control and management of the company, in such cases, should still be where its board of directors ordinarily meets.