I

Team Code:

BEFORE THE AUTHORITY FOR ADVANCE RULING OF INCOME TAX

NEW DELHI

INTAXICATE INDIA PVT. LTD (IIPL), BANGALORE…. PETITIONER

Vs.

COMMISSIONER OF INCOME TAX, BANGALORE …. RESPONDENT

FOR THE KIND ATTENTION OF THE HONOURABLE CHIEF

JUSTICE AND HIS COMPANION JUSTICES OF THE AUTHORITY FOR

ADVANCE RULING OF INCOME TAX

MEMORANDUM FOR RESPONDENT

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TABLE OF CONTENTS

INDEX OF AUTHORITIES

A. LIST OF ABBREVIATION……………………………………………............................. III

B. BOOKS REFERREED…………………………………………………................................ V
C. WEBSITE REFERRED ……………………………………………................................... VI
D. CASE LAW CITED………………………………………………..................................... VII

STATEMENT OF JURISDICTION………………………………………........................... VIII

STATEMENT OF FACTS………………………………………………….............................. IX

STATEMENT OF ISSUES………………………………………………................................... X

SUMMARY OF ARGUMENTS……………………………………………............................. XI

ARGUMENTS ADVANCED………………………………………………............................ XII

PRAYER OF RELIFE…….........……………….................................................................... XXI

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INDEX OF AUTHORITIES

A. LIST OF ABBREVIATION

AAR……………………………………………………….Authority for Advance Ruling

AO………………………………………………………………….......Assessing Officer

AIR……………………………………………………………………….All India Report

Bom……………………….......…………………………………………………..Bombay

Cal………………….…………..…………………………………………………

CalcuttaCBDT……………………………………….……………..Central Board of

Direct Taxes

CG…………………….………………………………………………….…..Capital Gain

CIT…………………………………………………………Commissioner of Income Tax

Co…………………………………………………………………………...….. Company

CPC……………………………...……………………………...…..Civil Procedure Code

Del………………………………………………………………………………..….Delhi

DTAA……………………………………….….Double Taxation Avoidance Agreement

DTR……………………………………………...…………………….. Daily Tax Report

HC……………………………………………………………………………..High Court

IIPL…………………………………………………………..….Intaxicate India Pvt Ltd

IML…………………………………………………….……….Intaxicate Mauritius Ltd

IT ……….……………………………………………………………………Income Tax

IT Act………………………………………………………….…………Income Tax Act

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ITO……………………………...…………………….………………Income Tax Officer

ITR……………………………………..……………..……………... Income Tax Report

ITD……………………….………………………………Income Tax Tribunal Decisions

Kar…………………………………………………….………………………Karnataka

P & H……………...………………………………….……………...Punjab & Haryana

SC….………………………………………….…………………………Supreme Court

SCC…...……………………………………….………………….Supreme Court Cases

SCN…………………………………………………………………Show Cause Notice

TRC……………………………………………………………Tax Residency Certificate

U/s...…………………………………………………….………………..Under Section

UOI………………………………………………..……..….……………Union of India

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B. BOOKS REFERRED

 LAW OF INCOME TAX :

1. KANGA & PALKHIVALA’S,THE LAW & PRACTICE OF INCOME TAX,ARVIND P

DATAR,LEXISNEXIS,10TH EDITION

2. SAMPATH IYENGAR’S, LAW OF INCOME TAX REVISED BY S.RAJARATNAM

3. MANOHARAN AND G.R. HARI, DIRECT TAX LAW, 23RD EDITION, ASSESSMENT

YEAR 2014-15

4. AHUJA GIRISH,ADVANCE RULING,BHARAT LAW HOUSE

 INTERNATIONAL TAXATION :

5. BHARGAVA & BHARGAVA,INTERNATION TAXATION, VOLUME 7,JULY-

DECEMBER 2012

6. DOUBLE TAXATION AVOIDANCE AGREEMENT :

7. AGREEMENT FOR AVOIDANCEOF DOUBLE TAXATION AND PREVENTION OF

FISCAL EVASION WITH MAURITIUS,INCOME TAX DEPARTMENT,GOVT OF INDIA

8. D.P.MITTAL,INDIAN DOUBLE TAXATION AGREEMENTS AND TAX

LAWS,TAXMANN’S,5TH EDITION,VOLUME 3

 INTERPRETATION OF JUDGEMENTS :

9. ANALYSIS OF JUDGEMENT OF AAR IN CASE NO. 1067 IN YEAR 2011 BY T.P.

JANANI, VIVAIK SHARMA & MANSI SETH.

 LAW LEXICONS :

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10. GARNER, BLACK’S LAW DICTIONARY, THOMAS & WEST, U.S.A, 1990, 9TH

EDITION

C. WEBSITES REFERRED

1. www.lexisnexisacademic.com

2. www.vakilno1.com

3. www.indiakanoon.org

4. www.manupatra.com

5. www.wikipedia.org

6. www.britannica.com

7. www.en.wikisource.org

8. www.legalserviceindia.com

9. www.law.cornell.edu

10. www.thebluebook.com

11. www.worldbank.org

12. www.legalsutra.org

13. www.incometaxindia.gov.in

14. www.slideshare.net

15. www.internationaltaxation.taxmann.com

16. www.taxguru.in

17. www.finmin.in

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D. CASE LAWS CITED

 DLJMB v CIT 228 ITR 268 (AAR)

 Vodafone, ibid pp 130-134 and 59-60

 CIT v NHK Japan Broadcasting corporation 305 ITR 137;

 CIT v Hutchison Essar Telecom Ltd 323 ITR 230;

 CIT v Satluj Jal Vidyut Nigam Ltd 345 ITR 552

 CIT v HMT Ltd 340 ITR 219

 Porbandar State Bank v CIT 18 ITR 134;

 CIT v Cooper Engg. 68 ITR 457;

 J.K. Syntheticv CIT 185 ITR 540

 Islamic Investment Co v UOI 265 ITR 254

 Rockwool (India) Ltd In. Re 268 ITR 20 (AAR)

 Danfoss Industries P. Ltd In re. 268 ITR 1 (AAR);

 Timken India Ltd In re. 273 ITR 67 (AAR)

 Flakt (India) Ltd., In re 267 ITR 727 (AAR)

 IR v Oswald 26 TC 435 (HL): 13 ITR suppl 39.

 CIT v KK Engg 249 ITR 447;

 CIT v Prem Nath Motors 253 ITR 705

 Union of India v Azadi Bachao Andolan 263 ITR 706

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STATEMENT OF JURISDICTION

1. The respondent submits to the jurisdiction of Authority of Advance ruling under section

245Q of the IT Act. The department hereby being the respondent reciprocates to the petition filed

by the assessee in front of the authority.

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STATEMENT OF FACTS

1. IIPL is a 100% subsidiary of an IML a Mauritian company which is a Category 1 Global

Business License holding company with Tax Residency Certificate (TRC) issued by the Mauritian

Tax Authorities.

2. Cash dividends were declared from 2000 to march 2003.IIPL promptly withheld appropriate

taxes on all the dividends it is paid as per INDIA- MAURITIUS tax treaty, from post March

2003. IIPL was issuing several million shares to its parent company and then bought back at huge

premiums which resulted in profit repatriation in a very tax efficient manner. The company

started to issue compulsorily convertible debentures (CCDs) to IML

3. The ITD randomly scrutinized the company’s ROI and was surprised to know that IIPL had

not withheld tax on any interest payments made to its parent company

4. The ITD immediately issued a show cause notice (SCN) under section 201 of the Income-tax

Act, 1961 (the Act) to IIPL to have failed to withhold tax under section 195 of the Act on the

interest payments made to IML.

5. IIPL filed an application with the Authority for Advanced Ruling (AAR) requesting for a

ruling on the transactions undertaken and to be undertaken (i.e. buyback of shares and redemption

of CCDs) that they were only sale of capital assets (equity shares and CCDs) by IML and

therefore, should be taxable only as per India-Mauritius DTAA and payment made for redemption

of CCDs is Capital receipt

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6. Further, the additional payments made were more like a compensation rather than interest

payment. Since the compensation substitutes the source of income itself for IML, it is not liable to

any WHT under the Act or any DTAA.

7. The matter is now pending before the AAR for final hearing on all aspects. The AAR gave

liberty to the parties to frame such issues as per the facts and circumstances of the case.

STATEMENT OF ISSUES

I. Whether the petition filed by the IIPL is maintainable in the Authority for Advance Ruling?

II. Notwithstanding Issue I, whether the monies spent on buy back of shares and redemption of

Compulsorily Convertible Debentures is in the nature of Capital Gains with respect to IML as per

DTAA and Indian Tax Law?

III. Without prejudice to Issue I, II and IV, in light of commercial expediency of transactions of

IIPL weather the show cause notice is valid?

IV. Notwithstanding Issue I & II, whether the tax neutrality can be established?

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SUMMARY OF ARGUMENTS

I. Whether the petition filed by the IIPL is maintainable in the Authority for Advance

Ruling?

Section 245R(2) prohibits some assesses to approach AAR and thus this petition shall be rejected

under clause 1 and clause 3 of the said section as show cause notice is issued and even the

transaction is prima facie for avoidance of taxation in India.

II. Notwithstanding Issue I, whether the monies paid on buy back of shares and

redemption of Compulsorily Convertible Debentures is in the nature of Capital Gains with

respect to IML as per DTAA and Indian Tax Law?

IIPL has not substantial reason to justify the change of strategy of buying back shares. Thus it

clearly amounts to repatriation of money which are in the nature of dividend disguised as

premium on buyback. Thus avoidance of withholding tax as per the Article 10 of the India-

Mauritius Tax treaty is also evident which is not deducted before payment of dividend.

III. Without prejudice to Issue I, II and IV, in light of commercial expediency of

transactions of IIPL weather the show cause notice is valid?

Every transaction undertaken by the assessee, the petitioner in the said case, is a route of avoiding

tax liability in India. The Income tax Authorities cannot be merely spectators to this rampant

practise which exploits the loophole in the law.

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IV. Notwithstanding Issue I & II, whether the tax neutrality can be established?

The income of IIPL is all exempt under section 10 of the IT Act due to tax sops. Section 14A

shall be construed strictly and all interest expense stands disallowed and thus no tax neutrality can

be established.

ARGUMENTS ADVANCED

I. Whether the petition filed by the IIPL is maintainable in the Authority for Advance

Ruling?

Section 245R is the crux of the chapter XIX-B which contains all material for Advance Ruling.

This section gives a clear mandate to reject the petition under clause (2) if any one of the sub

clause stands justified. In the said case, the petitioner is in the purview of the sub clause (i) as

show cause notice stands issued to it and hence proceedings are initiated against it as notice u/s

201 is issued to the petitioner for its TDS fault u/s 195.

Sub clause (iii) also stands justified because the applicant has designed transactions for avoidance

of taxation which is prima facie. Thus any question which relates to an issue or a transaction

which is designed prima facie for the avoidance of transaction of income tax shall not be

allowed.1

The Authority has no discretion to accept or reject the petition as the sub section gives a clear

direction to reject the petition out rightly as two sub clauses stand justified against the petitioner.

Any Assessee who receives a notice is legally obliged to respond to it. He can always submit that

the notice is invalid but he cannot ignore it or simply decide not to respond to it.2

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____________________

1# Advance ruling No P-9 of 1995 , Re 220 ITR 377 (AAR); DLJMB v CIT 228 ITR 268 (AAR)
2# Vodafone, ibid pp 130-134 and 59-60

II. Notwithstanding Issue I, whether the monies paid on buy back of shares and

redemption of Compulsorily Convertible Debentures is in the nature of Capital Gains with

respect to IML as per DTAA and Indian Tax Law?

As per section 47 of income tax act act 1961 Transaction not regarded as transfer:-

Sub section (iv) any transfer of capital asset by a company to its subsidiary company if

I. The parent company or its nominee hold the whole of the share capital of the

subsidiary company

II. Subsidiary company is an Indian company

Hence as per the act and the case given in the facts the buyback of shares and

redemption of CCD’s is not regarded as Capital Gain as it is clearly amounts to

repatriation of money which are in the nature of dividend disguised as premium on

buyback.

As per Article 10 of DTAA tax should be deducted. This was a transaction

designed to avoid payment of tax in India., after the introduction of Section 115-O of the

Act with effect from 1.4.2003, the petitioner had not declared or paid any dividend to its

shareholders, if dividends had been declared and paid as was done prior to 1.4.2003 the

petitioner would have been forced to pay dividend distribution tax and the ruse adopted

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was with a view to avoid that tax payment. Hence the buyback of millions of shares at

huge premium by IIPL would be treated as a Dividend and it is chargeable to tax as per

Income Tax Act, 1961 as this obliged the IIPL to pay a tax on distributed profits.

What would have been payable as tax on distribution of profits in India, is now

evaded and the fund transferred out of the country under the guise of a buy-back of

shares. This amounts to clear avoidance of tax in India. A scheme has been devised for

such avoidance.

Even going by the decision in Azadi Bachao Andolan, the Mc Dowell principle

will apply and hence the present proposed transaction may be ignored and it may be held

that the payment is taxable as dividend under the Income-tax Act read with the India-

Mauritius DTAC. This Authority is reminded of the development of the law from

Ramsay to Vodafone in this context.

It is true that if the receipt in the hands of IIPL is treated as capital gains, it would

be Section 46A of the Act that will be attracted and by the force of paragraph 4 of Article

13 of the concerned DTAC, the receipt would not be taxable in India. But in view of our

finding that the transaction of buy-back proposed to be resorted to, is a colourable

transaction, the question is whether the amount would not be taxable as dividend in terms

of Section 2(22) of the Act as amended with effect from 1.4.2003. When the proposed

transaction is found to be colourable, it is not a transaction in the eye of law and once it is

ignored as such, the arrangement can only be treated as a distribution of profits by a

company to its shareholders which does not attract Section115-O of the Act. Dividend in

terms of the definition includes any distribution by a company of accumulated profits to

its shareholders. The exemption is only in respect of a germin buy-back of shares. On

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our finding that the proposed buy-back is colourable, the distribution in question will

satisfy the definition of dividend under the Act and consequently taxable as such. Under

Article 10, paragraph 2 of the DTAC, dividend paid by a company which is a resident of

India, to a resident of Mauritius, may also be taxed in India, according to the laws of

India but subject to the limitation contained therein,. It may also be noticed that the

payment in question, would also satisfy the definition of dividend in paragraph 4 of

Article 10 of the DTAC between India and Mauritius. We are of the view that the

proposed payment would be taxable in India in terms of paragraph 2 of Article 10 of the

DTAC between India and Mauritius.

This also certainly points towards the fact that the entire transaction and routing

of investments by the US investors was merely a scheme of treaty shopping and minimize

the tax liability. The department, in order to prevent revenue erosion has attempted to

look through the transaction and ensure that the profit is not repatriated out of the country

without payment of taxes thereon.

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III. Without prejudice to Issue I, II and IV, in light of commercial expediency of

transactions of IIPL weather the show cause notice is valid?

The series of transactions of issue of shares and buying them back upto 2013 clearly indicates

malafide intentions to avoid any tax liability in India. Also after introduction of Buyback

transaction tax (which was introduced to curb this practise) the petitioners changed their tax

avoidance route of issuing CCD and redeeming them in one year.

The terms of CCD were such which indicated of them being redeemed in one year. This can be

construed as a different method of buy back. Also petitioner does not have any substantial reason

to support redemption of CCD.

Compulsory convertible debentures shall be a hidden face of equity shares. As held by the Hon

Court in a land mark ruling, CCD shall be considered as application money for equity shares

because these debentures shall be ultimately converted into equity shares after a stipulated period

of time. Thus CCD shall be considered as equity shares in this case.

The terms and conditions of these CCD were also such that it indicated that it shall be redeemed

within one year. The main intention of such redemption is the same which was that of buy back of

shares i.e. to repatriate profits to the holding company without any tax liability in India.

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The understanding of section 201 and 195 also is very relevant in the said issue as the petition

shall be rejected on its basis.

Sub- section (3) and (4) of section 201 were inserted by Finance Act No. 2, 2009 with effect from

April 1 2010 providing a time limit for passing an order under sub section (1). Prior to insertion of

this sub section, no time limit was provided for passing an order under sub section (1). However

on an interpretation of the scheme of the Act, it was held that the period of limitation for initiation

or for completing proceedings in declaring the assessee as an assessee in default under sub section

(1), exercise of jurisdiction should commence in so far as the statutory authority is concerned

within reasonable period of time. The Delhi High Court held that the reasonable time for initiation

proceedings under section 201 should be four years. 1 But the Punjab and Haryana High Court has

held that where no limitation period was prescribed, the courts could not indicate a period of

limitation.2

Section 195 states that tax shall be deducted against any payment made to a non resident if the

income is taxable as per the provisions of the Act.

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______________

1# CIT v NHK Japan Broadcasting corporation 305 ITR 137; CIT v Hutchison Essar Telecom Ltd 323 ITR 230; CIT
v Satluj Jal Vidyut Nigam Ltd 345 ITR 552
2 #CIT v HMT Ltd 340 ITR 219

After July 1, 2012 by insertion of sub-section (7), a person responsible for paying a non resident

in relation to a specific class of persons or cases which are notified by the board, shall make an

application to the AO to determine whether tax is to be deducted or not. This provision was

inserted to partially overcome the decision of Supreme Court in GE India Technology v CIT 3

wherein it was held that the obligation to deduct tax at source arises only when there is a sum

chargeable under the Act i.e. payment which has an element of ‘income’ chargeable to tax in

India.

Under section 195 the tax has to be deducted at source from Interest other than interest on

securities (prior to June 1, 2003) in the case of non residents only, and not in the case of residents.

But the words’ chargeable under the provisions of this Act’ in this section also qualify and govern

‘interest’, and therefore, where interest though payable to a non resident, is not taxable under the

Act , there would be no obligation to make any deduction 4. Interest paid to non residents in

pursuance of a decree will retain the character of a judgement-debt and will not become interest

chargeable under the Act.5

Interest to the account of the non resident for an external commercial borrowing under the

automatic route will not be exempt from withholding tax.6

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____________________

3# 327 ITR 456 (SC)

4# Porbandar State Bank v CIT 18 ITR 134; CIT v Cooper Engg. 68 ITR 457; J.K. Syntheticv CIT 185 ITR
540[section 9(1)(v)]
5# Islamic Investment Co v UOI 265 ITR 254
6# Rockwool (India) Ltd In. Re 268 ITR 20 (AAR)

The Supreme Court in Transmission Corpn v CIT7 has observed that the payer of a sum is not

chargeable, or an application for determination by the AO that such sum or for grant of a

certificate authorising the recipient to receive the amount without deduction, or at any lower rate,

and on such determination, tax has to be deducted in appropriate manner. The Court further held

that if no such application is filed, tax on such sum is to be deducted and it is the statutory

obligation of the person responsible for paying such sum to deduct tax thereon before making

payment.

The amounts payable to a non resident will be chargeable to tax and attract section 195 even if the

payment did not have a profit element8.

For the purpose of this section actual payment is not a pre requisite or pre condition for triggering

the incidence of taxation, mere credit in the books of accounts of payer is sufficient 9. Where

interest is capitalised, there is no payment of interest; but when the capitalised, there is no

payment of interest; but when the capitalised interest is paid off along with the original capital

sum, there is, in law, a payment of interest10.

The levy of Interest under sub section (1A) of section 201 is a compensatory measure and is

mandatory and automatic in nature11.

Penalty for defaults mentioned in notice issued under section 201 shall be levied under section

221.

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________________________

7# 239 ITR 587

8# Danfoss Industries P. Ltd In re. 268 ITR 1 (AAR); Timken India Ltd In re. 273 ITR 67 (AAR)
9# Flakt (India) Ltd., In re 267 ITR 727 (AAR)
10# IR v Oswald 26 TC 435 (HL): 13 ITR suppl 39.
11# CIT v KK Engg 249 ITR 447; CIT v Prem Nath Motors 253 ITR 705

IV. Notwithstanding Issue I & II, whether the tax neutrality can be established?

The petitioner derives its income from ‘tax sops’ and to be even more specific under

infrastructure sector. The full income is mainly in the nature of trading securities and

ancillary income like dividend etc.

This income stand exempt under section 10(47) which states that “any income of an

infrastructure debt fund, set up in accordance with the guidelines as may be

prescribed, which is notified by the Central Government in the Official Gazette for the

purposes of this clause” Thus it can be described as a ‘tax sop’.

Section 14A which states that “no deduction shall be allowed in respect of expenditure

incurred by the assessee in relation to income which does not form part of the total

income under this Act.”

After perusal of both the sections any expense incurred to earn the income by the

petitioner shall be disallowed. Thus interest expense shall be disallowed. The contention

of tax neutrality is totally baseless as the income is not taxable.

Apart from this being a clear violation and an attempt to evade tax as under a veil of tax

neutrality, what is also important to note is that not even the procedural aspect of law has

not been followed either. If for a moment it is assumed, that no tax is payable by the

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petitioner, still the tax should first have been deducted and then if deemed not taxable by

the department would be refunded back to the petitioner.

_________________________

# Union of India v Azadi Bachao Andolan 263 ITR 706

PRAYER:

Wherefore it is prayed in the light of the arguments advanced an authority cited that this

Hon. Authority may be pleased to

1. Declare that the Show cause notice issued by the respondent must be adhered to.

2. Declare that the assessee is liable to all the taxes; interest and penalties levied

upon them must be paid immediately citing that the entire arrangement of issue

of share and CCD thereafter was a mere scheme of tax avoidance.

And pass any other order, direction or relief that may deem fit in the best interest,

justice, fairness, equity and good conscience.

For this act of kindness, the petitioner shall duty bound forever pray.

Sd/-
(Counsel for the respondent).

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MEMORANDUM FOR RESPONDENT