SURANA AND SURANA NATIONAL CORPORATE LAW MOOT COURT COMPETITION

TEAM CODE -

BEFORETHE AUTHORITY FOR ADVANCE RULINGS

(INCOME TAX)
NEW DELHI
FEBRUARY 2015
AAR NO. 100 OF 2015

Intaxicate India Pvt. Ltd., BangaloreApplicant

Vs.

Commissioner of Income Tax, Bangalore..Respondent

-MEMORIAL FOR THE RESPONDENTINCOME TAX DEPARTMENT

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TABLE OF CONTENTS

1. INDEX OF AUTHORITIES

2. STATEMENT OF JURISDICTION

3. STATEMENT OF FACTS

4. STATEMENT OF ISSUES

5. SUMMARY OF ARGUMENTS

10

6. ARGUMENTS ADVANCED
I.
II.

The application is not maintainable

The amount paid by IIPL to IML for buyback of shares is a payment of

dividend and is liable to DDT

III.

12

18

The payments made by IIPL to IML on buyback of CCDs are interest

payments and liable to WHT

7. PRAYER

26

29

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INDEX OF AUTHORITIES
LIST OF ABBREVIATIONS:
AIR

All India Reporter

ITD

Income Tax Decisions

CIT

Commissioner of Income Tax

SC

Supreme Court

HC

High Court

AAR

Authority for Advanced Rulings

AO

Assessing Officer

CTR

Current Tax Reporter

Honble

Honourable

SCC

Supreme Court Cases

Art.

Article

Sec.

Section

Act

Income Tax Act, 1961

Tribunal/ ITAT :
GBL -1

Income Tax Appellate Tribunal

Category 1 Global Business License.

DTAA

Double Tax Avoidance Agreement

CCDs

Compulsorily Convertible Debentures

IML

Intaxicate Mauritius Ltd

IIPL

Intaxicate India Pvt. Ltd.

DDT

Dividend Distribution Tax

WHT

Withholding Tax.

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INDEX OF CASES REFERRED:

SR NO.

CASE LAW

CITATION

1.

Hindustan Power plus Ltd.

267 ITR 685 (AAR)

2.

Connectuers Cintch

268 ITR 29 (AAR)

3.

Netapp B.V. vs The Authority For Advance 253 CTR 164 (AAR)
Rulings.

4.

Auto and Metal Engineers &Ors v Union 229 (ITR) 399

of India

5.

Wave Field Inseis ASA

343 ITR 146 (AAR)

6.

SEPCO III Electric Power Construction (2012) 342 ITR 213 (AAR)
Corporation

7.

Nuclear Power Corporation of India Ltd

A.A.R. No.1011 of 2010

8.

Sadhana v CIT

188 ITR 318

9.

Star v CIT

203 ITS 11.

10.

Otis Elevator Company (India) Ltd

AAR 957 2010

11.

Re : A

Re (343 ITR 455)

12.

[Link] Shetty

128 ITR 284

13.

McDowell & Company v. C.T.O

154 ITR 148(SC)

14.

Vodafone International Holdings BV v. (2012) 6 SCC 613

Union of India.

15.

Commissioner of Income Tax v. Sri AIR 1967 SC 819

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Meenakshi Mills Ltd., Madurai

16.

In Life Insurance Corporation of India v. (1986) 1 SCC 264

Escorts Limited and Others

17.

Juggilal Kampalpat vs

Commissioner of AIR 1969 SC 932

Income Tax, U.P.

18.

CIT v. A. Raman and Co

(1968) 1 SCC 10

19.

CIT v. B. M. Kharwar

(1969) 1 SCR 651

20.

Bank of Chettinad Ltd. V. CIT

(1940) 8 ITR 522 (PC)

21.

Jiyajeerao

Cotton

Mills

Ltd.

v. Bombay AIR 1959 SC 270

Commissioner of Income Tax and Excess

Profits Tax.
22.

CIT v. Vadilal Lallubhai

(1973) 3 SCC 17

23.

CWT v. Spencer & Co

(1973) 88 ITR 429

24.

LMN India Ltd.v . CIT

307 ITR 40 (AAR)

25.

Zs case

AAR no 1048 of 2011

26.

CWT vs. Spencer & Co

88 ITR 429

27.

Eastern Investments Ltd. vs. CIT

AAR No.769 of 2007

28.

Cauvery mills Ltd vs Dy CIT

340 ITR 550

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AUTHENTIC WEB SOURCES:

I.

[Link]

II.

[Link]

III.

[Link]

BOOKS REFERRED:
1. Kanga and Palkhivala, The Law and Practice of Income Tax 10 th Edition (2014)
Vol 1, Vol 2., Lexis Nexis
2. Taxmanns Guide on Corporate Laws, 9th Edition
3. Taxmanns Income Tax Act, 1961.
STATUTES REFERRED TO:
1. Income Tax Act, 1961
2. Companies Act, 1956
3. Companies Act, 2013

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STATEMENT OF JURISDICTION

SECTION 245N OF THE INCOME TAX ACT 1961 STATES THAT

(a) "Advance ruling" means

(i) a determination by the Authority in relation to a transaction which has been undertaken or
is proposed to be undertaken by a non-resident applicant;
(ii) a determination by the Authority in relation to [the tax liability of a non-resident arising
out of] a transaction which has been undertaken or is proposed to be undertaken by a
resident applicant with [such] non-resident; or,
and such determination shall include the determination of any question of law or of fact
specified in the application;
ITD CONTENDS THAT AAR HAS NO JURISDICTION AND THE APPLICATION IS NOT
MAINTAINABLE AB INITIO.

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STATEMENT OF FACTS

Intaxicate India Pvt. Ltd. (IIPL or the Company) is a private limited company incorporated as per the
Indian Companies Act, 1956 having its registered office in India and invests in the stocks of Indian
infrastructure and other related companies.
It is a 100% subsidiary of a Mauritian company (barring one nominee member/ director situated in
India) of Intaxicate Mauritius Ltd. (IML) IIPL used to declare huge cash dividends to its sole
shareholder i.e. IML. Till March 2003.
IIPL as a stopped declaring cash dividends from 2003 and instead started issuing its equity shares to
IML at a face value and then bought them back at large premiums out of its current and accumulated
profits which was a way of huge capital gains to IML. This was nothing but a way of profit repatriation
to IML.
As a measure of corporate strategy in 2013 IIPL started to issue compulsorily convertible debentures
(CCDs) to IML. These CCDs were issued with lock-in period of five years. There were certain terms
and conditions for issuance of CCDs which said that if IIPL bought back the CCDs in less than a
years period from IML then IIPL in addition to the principal payment, accumulated interests and
premiums, is also required to pay huge additional sum called an additional sale consideration.
In March 2014IIPL bought back much of the CCDs issued to IML and paid the principal amount,
accumulated interests and premiums along with a huge one time premium/ sale consideration to IML .
IIPL filed its return of income (ROI) for Assessment Year (AY) 2014-15
The ITD randomly scrutinized the companys ROI and was surprised to know that IIPL had not
withheld tax on any interest payments made to its parent company in Mauritius. The ITD 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. The SCN alleged that
the payments made on buy back of shares by IIPL to IML were nothing but dividend payments made to

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avoid paying Dividend Distribution tax (DDT) and that the payment made on redemption of CCDs
were interest payments on which IIPL had not paid WHT. In 2014, 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.
The SCN is time marred as regards the payment of [Link] ITD argued that the entire transaction of
IIPL from the beginning was sham and done as a means to avoid tax. It also argued that that the
application before the AAR was ab initio not maintainable as the Assessee-in-Default (AID)
proceedings have already been initiated by issuing SCN and that no remedy lies before this forum. The
matter is now up for final hearing before this Honble court.

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STATEMENT OF ISSUES

THE ISSUES BEFORE THE HONBLE AUTHORITY FOR ADVANCE RULINGS,

NEW DELHI ARE:

I.

WHETHER THE APPLICATION BEFORE THE AAR IS MAINTAINABLE

UNDER SECTION 245N OF THE INCOME TAX ACT, 1961.

II.

WHETHER THE AMOUNT PAID BY THE APPLICANT TO IML FOR BUY

BACK OF ITS SHARES IS A PAYMENT OF DIVIDEND THAT IS LIABLE
TO DDT UNDER SECTION 115-O OF THE INCOME TAX ACT, 1961.

III.

WHETHER PAYMENTS MADE BY IIPL TO IML ON BUYBACK OF CCDS

ARE INTEREST PAYMENTS LIABLE TO WHT UNDER SECTION 195 OF
THE INCOME TAX ACT, 1961.

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SUMMARY OF ARGUMENTS

I.

The application before the AAR is not maintainable section 245N of the Income
Tax Act, 1961.
It is humbly submitted by the department that the Application before the AAR is not
maintainable as IIPL is a resident and applications can be filed by only non-residents..
The application before the AAR is not maintainable as the Assesse in Default
proceedings have already been initiated by issuing of a SCN under Section 201 of the
Income Tax Act to IIPL to have failed to withhold tax on any interest payments made
to its parent company in Mauritius.

II.

The amount paid by the Applicant to IML for buy back of its shares is a
payment of Dividend that is liable to Dividend Distribution Tax under Section
115- O of the Income Tax Act, 1961.
It is humbly submitted that the amount paid as premium by IIPL to IML on buyback of
shares is nothing but dividend under Section 2 (22)(a) of the Income Tax Act,
1961andIIPL is liable to payment of DDT under Section 115- O of the Act for the period
from 2003-2013. Also, this buy back of shares is just a way device of tax avoidance and
all the transactions of IIPL from the beginning are sham.

III.

The payments made by IIPL to IML on buy back of CCDS are Interest
payments liable to WHT under section 195 of the Income Tax Act, 1961.

It is humbly submitted that the entire payment made (other than the principal repayment)
by IIPL to IML on the redemption of CCDs is nothing but interest payments. CCD which
were issued by IIPL to IML is a debt till it is repaid or discharged on which Interest was

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paid by IIPL which makes it liable to pay With Holding Taxes (WHT) under S. 195 of the
Income Tax Act, 1961.

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ARGUMENTS IN DETAIL

I.

THE APPLICATION BEFORE THE AAR IS AB INITIO NOT

MAINTAINABLE

1. The Application before the AAR is not maintainable as the taxpayer, i.e., IIPL is a
resident and only applications filed by non-residents are maintainable with AAR
Section 6 of the Income Tax Act states that:
(3) A company is said to be resident in India in any previous year, if
(i) it is an Indian company ; or
(ii) during that year, the control and management of its affairs is situated wholly in India.
IIPL is a private limited company incorporated as per the Indian Companies Act, 1956 in the
year April 2000 having its registered office in, Bangalore, India.1
Two Alternative tests are provided for determining the residence of companies. A company is
resident here (i) if it is an Indian Company, (ii) if its control and management of affairs are
situated wholly in India in the accounting year. Thus, every Indian Company, as that
expression is defined in section 2 sub section 26 of the Income Tax Act, 1961 is deemed to be
residing in India even if its control and management is situated wholly or partly abroad.2
Thus this proves the fact that IIPL is a resident.

Section 245N of the Income Tax Act states that:

(a) advance ruling means
(i) a determination by the Authority in relation to a transaction which has been undertaken or
is proposed to be undertaken by a non-resident applicant; or
1
2

Compromis, paragraph 1
Paragraph 8, Page no. 318, Kanga & Palkhivalas Income Tax Tenth Edition

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(ii) a determination by the Authority in relation to [the tax liability of a non-resident arising
out of] a transaction which has been undertaken or is proposed to be undertaken by a
resident applicant with [such] non-resident,
and such determination shall include the determination of any question of law or of fact
specified in the application;
(b) applicant means any person who
( i ) is a non-resident referred to in sub-clause ( i ) of clause ( a ); or
( ii ) is a resident referred to in sub-clause ( ii ) of clause ( a ); or
( iii ) is a resident falling within any such class or category of persons as the Central
Government may, by notification in the Official Gazette 8 , specify in this behalf; and
Sub-clause (ii) and sub-clause (iii) of Clause (b) of Section 245N does not apply to IIPL as
tax liability of IML is not in question. The Show cause notice was issued under section 201 of
the Income tax act to IIPL as IIPL had not withheld tax under section 195 of the Income Tax
Act on any interest payments made to IML.3
In the Case of Hindustan Powerplus Ltd4, the Judge held that,
After the addition of the words the tax liability of a non-resident arising out of to section
245N(1)(a)(ii), it is not possible for the AAR, on an application by s resident, to look into
transactions involving non-residents that affect the tax liability of residents.
In the Case of Connectuers Cintch5, the judge finalised the case by saying,
Thus the question whether the wholly owned Indian Subsidiarys income would be exempt is
not determinable by the AAR.

Compromis, Paragraph 7

267 ITR 685 (AAR)

268 ITR 29 (AAR)

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2. The application before the AAR is not maintainable as the Assesse in Default
proceedings have already been initiated by issuing of a SCN under Section 201 of the
Income Tax Act to IIPL to have failed to withhold tax on any interest payments made to
its parent company in Mauritius.

Section 139(1) states that :

Every person,
(a) being a company [or a firm]; or
(b) being a person other than a company [or a firm], if his total income or the total income of
any other person in respect of which he is assessable under this Act during the previous
year exceeded the maximum amount which is not chargeable to income-tax,
shall, on or before the due date, furnish a return of his income or the income of such other
person during the previous year, in the prescribed form and verified in the prescribed
manner and setting forth such other particulars as may be prescribed;
Section143(2) of the Income Tax Act states that :
Section 143(2) Where a return has been furnished u/s.139, or in response to a notice u/ss.(1)
of section 142, the Assessing Officer shall,
(ii) notwithstanding anything contained in clause (i), if he considers it necessary or expedient
to ensure that the assessee has not understated the income or has not computed excessive loss
or has not underpaid the tax in any manner, serve on the assessee a notice requiring him, on
date to be specified therein, either to attend his office or to produce, or cause to be produced,
any evidence on which the assessee may rely in support of the return;

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In the case of Netapp B.V. vs. The Authority For Advance Rulings6, the division bench
held that :
When returns are filed before it, the Authority stated that merely by filing the return, all
questions that can possibly arise, are ushered into the proceeding, and every question is left
at large, such that the AAR cannot exercise jurisdiction to entertain the question. All
questions that can possibly arise with respect to that transaction are then within the purview
of the assessing authority. This means that once returns are filed before the assessing
authority, there are no questions that cannot be raised, and no questions left for the AAR to
entertain, thereby effectively ousting its jurisdiction.
In the case of Auto and Metal Engineers & Ors v Union of India7, it was held that:
The process of assessment thus commences with the filing of the return or when the return is
not filed by the issuance by the Assessing Officer of the notice to file the return under Section
142(1) and it culminates with the issuance of the notice of demand under Section 156. The
making of the order of assessment is, therefore, an integral part of the process of assessment.
Having regard to the fact that the object underlying the explanation is to extend the period
prescribed for making the order of assessment, the expression "assessment proceeding" in the
explanation must be construed to comprehend the entire process of assessment starting from
the stage of filing of the return under Section 139 or issuance of notice under Section 142(1)
till the making of the order of assessment under Section 143(3) or Section 144.
Thus a notice issued by the Assessing officer who comes under the Income Tax Department
means that assessment proceedings have been initiated.

253 CTR 164 (AAR)

229 (ITR) 399

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(B) Section 245R Clause(2) of the Income Tax Act states that :
The Authority may, after examining the application and the records called for, by order,
either allow or reject the application: Provided that the Authority shall not allow the
application where the question raised in the application,(a) is already pending in the applicant' s case before any income- tax authority, the Appellate
Tribunal or any court8;
(b) involves determination of fair market value of any property;
(c) relates to a transaction which is designed prima facie for the avoidance of income- tax9;
Assessment in Default proceedings had already begun
In the Case of Netapp B.V. vs. the Authority for Advance Rulings10, the judges held:
Once the returns are filed, the Authority's jurisdiction to entertain the application for
advance ruling is taken away, because the Income Tax authority concerned would then be
seized of the matter, and would potentially possess a multitude of statutory powers to
examine and rule on the return. Conversely, if the authority is approached before an income
tax return is filed, or any other income tax authority is approached, the application can be
entertained, and the AAR would be exclusively dealing with the matter before it.

Also in the case of WaveField Inseis ASA,11the judges held:

When the Assesse files his returns prior to filing the application for an advance ruling before
the Authority, it is rightfully rejected.

David Kenneth v CIT 231 ITR 464 (AAR) ; Hyder Consulting v CIT 236 ITR 640 (AAR)

Monte Harris v CIT 218 ITR 413 (AAR)

10

253 CTR 164 (AAR)

11

343 ITR 146 (AAR)

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In the case of SEPCO III Electric Power Construction Corporation12, AAR dismissing
the application held that,
When a Return of income is filed under Section 139 of the Act either voluntarily or on being
called upon to do so by a notice under Section 142(1) of the Act, all the claims raised by the
person who furnishes the return relating to the assessment are before the Assessing Officer
for consideration and decision. Section 143(2)(ii) enables the Assessing Officer to require the
person to attend his office to establish his claims. Under Section 143(3)(ii) the Assessing
Officer has to pass an order making an assessment of the total income or loss of the person
and determining the tax payable or the refund if any due to him as the case may be on the
basis of the assessment. Thus, assessment before an Assessing officer would be hit by bar of
Section 245R.
Following the decision in SEPCO III Electric, supra, the AAR in the case of Wave Field
Inseis ASA13held that:
When a return is filed, so many aspects arise out of that return. The question of computation
of total income, of computation of the exemptions and exclusions, acceptance or nonacceptance of an item of expenditure and ultimately the determination of chargeable income
and the determination of the tax due, are all questions that arise. Therefore filing of a return
ushers in all these questions. By filing a return, an assessee invites an adjudication on all the
questions arising out of that return. Subsection (2) of section 245R only speaks of the
question arising before the Authority. So if an answer to that question would be involved in
the return filed or would arise out of the return filed, it would be a case where the bar is
attracted.

12

(2012) 342 ITR 213 (AAR)

13

343 ITR 146 (AAR)

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Further, in the case of Nuclear Power Corporation of India Ltd14, The Authority went into
the scope of dropping of the words In applicants case and stated that :
On observing the words in the applicants case, what is barred by the proviso to Section
245R(2) of the Act in the context of clause (1) thereof is the allowing of an application under
section 245R(2) of the Act where "the question raised in the application is already pending
before any income-tax authority, or Appellate Tribunal or any Court." It is not necessary that
when the question is sought to be raised by the applicant, the proceeding already pending
must be against him. The significance of the dropping of the words, "in the applicant's case"
cannot be wholly ignored. That apart, the question raised, arises out of a transaction and the
question can arise at the instance of either party to the transaction, the payer or the payee in
the context of the obligation imposed respectively on them by the Act.
Thus according to clause (a) applicants case is already pending before the AO and according
to clause (c) the whole transaction is devised in a way to avoid tax.

II.

THE AMOUNT PAID BY IIPL ON BUY-BACK OF SHARES AT A

PREMIUM OUT OF ITS ACCUMULATED PROFITS IS DIVIDEND AND
THUS IIPL IS LIABLE TO PAY DDT FROM 2003-2013 WITH INTEREST.

Definition of the term DIVIDEND under Section 2 (22) of the Income Tax Act, 1961.
(22) dividend1 includes
(a) any distribution by a company of accumulated profits, whether capitalised or not, if
such distribution entails the release by the company to its shareholders of all or any
part of the assets of the company ;

14

A.A.R. No.1011 of 2010 dated December 21, 2011

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This clause would apply to a holding company and a subsidiary company as stated in
Sadhana v CIT 15followed in Star v CIT16
IIPL has paid the premiums for buy back of shares out of its ' current and accumulated profits'
which it received through its operations in India.
This itself is enough proof to say that the payment of premium for buy back of shares was
nothing but a payment of dividend by IIPL to IML.
Explanation 2 of section 2 (22) of the Income Tax Act defines ' accumulated profits' as
including all profits of the company upto the date of distribution or payment for the purpose
of all sub clauses except sub clause (c).
DIVIDEND DISTRIBUTION TAX
Section 115-Oof the Income Tax Act 1961 says that:
(1) Notwithstanding anything contained in any other provision of this Act and subject to the
provisions of this section, in addition to the income-tax chargeable in respect of the total
income of a domestic company for any assessment year, any amount declared, distributed or
paid by such company by way of dividends (whether interim or otherwise) on or after the
1st day of April, 2003, whether out of current or accumulated profits shall be charged to
additional income-tax (hereafter referred to as tax on distributed profits) at the rate
of [fifteen] per cent.] (2) Notwithstanding that no income-tax is payable by a domestic
company on its total income computed in accordance with the provisions of this Act, the
tax on distributed profits under sub-section (1) shall be payable by such company.
(4) The tax on distributed profits so paid by the company shall be treated as the final
payment of tax in respect of the amount declared, distributed or paid as dividends and no
15

188 ITR 318

16

203 ITS 11.

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further credit therefore shall be claimed by the company or by any other person in respect
of the amount of tax so paid.
(5) No deduction under any other provision of this Act shall be allowed to the company or a
shareholder in respect of the amount which has been charged to tax under sub-section (1) or
the tax thereon.
As we can see the dividend distribution tax is levied on dividend paid out of the current and
accumulated profits of a company. The amount paid on buy back of shares by IIPL at a
premium was out of its current and accumulated profits. Under Section 2 (22)(1) we can
firmly establish that this amount is nothing but a dividend.
The Dividend distribution tax was introduced in 2003 by insertion of Section 115-O. Just as
this section was introduced IIPL stopped declaring cash dividends to avoid DDT and started
issuing shares at a face value, then buying them back at large premiums just to avoid paying
DDT. Buy back of shares resulted in large profit repatriation to IML. This was just a
colourable scheme to avoid tax . Buy back of shares at a premium was nothing but a way of
paying dividends to IML.

In the case of Otis Elevator Company (India) Ltd

17

Otis India had approached AAR for

taxability of capital gains in the hands of Mauritius counterpart and also the withholding tax
obligations u/s [Link] had raised an argument that before the introduction of DDT
in 2003, Otis India had a history of declaring and paying dividends to its shareholders.
However, after the introduction of DDT, the company refrained from declaring, distributing
or paying dividends and allowed itsaccumulated reserves to grow substantially. Thus, Otis

17

AAR 957 2010

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India now was attempting by way of the proposed buyback scheme to distribute the
accumulated reserves to Otis Mauritius without paying any tax in India.
AAR held that Otis India was unable to offer a reasonable explanation as to why it
discontinued declaring dividends after the introduction of DDT even though it continued to
be profitmaking.
Other shareholders of Otis India i.e. USA and Singapore entities did not accept the
buyback offer due to resultant capital gain taxes in India. Accordingly AAR concluded that
the proposed buy back scheme is a devise for tax avoidance.
In the case of A, 18, the applicant, an Indian company, 48.87 %, of whose shares were held by
a group holding company in the U.S.A, 25.06 % by a group holding in Mauritius & 27.37%
by a group holding company in Singapore. The board of directors of the applicant passed a
resolution proposing a scheme of buy back of its shares from its existing shareholders in
accordance with section 77A of the Companies Act 1956. Mauritius Company which
acquired the shares sought advance ruling on whether the capital gains that may arise were
chargeable to tax in India in terms of DTAA. AAR held that, the proposal of buy-back in the
instant case is a scheme devised for avoidance of tax. Capital gains exemption under IndiaMauritius DTAA is not available. AAR further held that the remittance is in the nature of
dividend and hence tax is required to be deducted at source u/s 195.
In the above case the AAR observed that: 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 genuine buyback of shares.

On our finding that the proposed buy back is

colourable, the distribution in question will satisfy the definition of dividend under the

18

Re (343 ITR 455)

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Act and consequently taxable as such.

22

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 [Link]
the light of the reasoning and conclusion as above, we rule that the amount that would be
payable by the applicant to A(M) would be taxable in India in terms of Article 10 of
the DTAC between India and Mauritius.
Where parties have a common intention not to create legal rights and obligations which they
give the appearance of creating, the transaction is sham, as held in [Link] Shetty 19
CORPORATE VEIL
The ITD contends that the entire transaction of IIPL from the beginning was sham. As soon
as Indian income tax laws were changing, IIPL changed its policies in the name of corporate
strategy just to avoid paying Indian income tax. It was just a colourable device of tax
avoidance. As the law laid down in the below mentioned case laws clearly states that the
authorities can lift the corporate veil of a company if it finds that its transactions are merely a
colourable device to avoid tax.
Having regard to the law laid down by the Supreme Court in McDowell &
Company v. C.T.O20, it is open to the Income Tax Officer in a given case to lift the corporate
veil for finding out whether the purpose of the corporate veil is avoidance of tax or not. It is
19
20

128 ITR 284

154 ITR 148(SC)

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one of the functions of the assessing officer to ensure that there is no conscious avoidance of
tax by anassessee, and such function being quasi-judicial in nature, cannot be interfered with
or prohibited.
In the landmark case of Vodafone International Holdings BV v. Union of India,

21

while

examining the International taxation holding structure the Supreme court remarked that if an
actual controlling Non-Resident Enterprise (NRE) makes an indirect transfer through "abuse
of organisation form/legal form and without reasonable business purpose" which results in
tax avoidance or avoidance of withholding tax, then the Revenue may disregard the form of
the arrangement or the impugned action through use of Non-Resident Holding Company, recharacterize the equity transfer according to its economic substance and impose the tax on the
actual controlling Non-Resident Enterprise.
Lifting the corporate veil doctrine is readily applied in the cases coming within the Company
Law, Law of Contract, Law of Taxation. Once the transaction is shown to be fraudulent,
sham, circuitous or a device designed to defeat the interests of the shareholders, investors,
parties to the contract and also for tax evasion, the Court can always lift the corporate veil
and examine the substance of the transaction. The Supreme Court in Commissioner of
Income Tax v. Sri Meenakshi Mills Ltd., Madurai22held that the Court is entitled to lift the
veil of the corporate entity and pay regard to the economic realities behind the legal facade
meaning that the court has the power to disregard the corporate entity if it is used for tax
evasion.

21

(2012) 6 SCC 613

22

AIR 1967 SC 819

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In Life Insurance Corporation of India v. Escorts Limited and Others23, the Court held
that the corporate veil may be lifted where a statute itself contemplates lifting of the veil or
fraud or improper conduct intended to be prevented or a taxing statute or a beneficial statute
is sought to be evaded or where associated companies are inextricably as to be, in reality
part of one concern.
Lifting the Corporate Veil doctrine was also applied in Juggilal Kampalpat v.
Commissioner of Income Tax, U.P.24 wherein this Court noticed that the assessee firm
sought to avoid tax on the amount of compensation received for the loss of office by claiming
that it was capital gain and it was found that the termination of the contract of managing
agency was a collusive transaction. The Court held that it was a collusive device, practised by
the managed company and the assessee firm for the purpose of evading income tax, both at
the hands of the payer and the payee.
In the Vodafone Case it was observed by the Supreme court that Lifting the corporate veil
doctrine can, therefore, be applied in tax matters even in the absence of any statutory
authorization to that effect. Principle is also being applied in cases of holding company subsidiary relationship- where in spite of being separate legal personalities, if the facts
reveal that they indulge in dubious methods for tax evasion.
In the cases of CIT v. A. Raman and Co.25, CIT v. B. M. Kharwar 26, Bank of Chettinad
Ltd. v. CIT27, Jiyajeerao Cotton Mills Ltd. v. Commissioner of Income Tax and Excess
Profits Tax,28; CIT v. Vadilal Lallubhai29 the following principle was enunciated-

23

(1986) 1 SCC 264

24

AIR 1969 SC 932 :(1969) 1 SCR 988

25

(1968) 1 SCC 10

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"Tax planning may be legitimate provided it is within the framework of law. Colourable
devices cannot be part of tax planning and it is wrong to encourage or entertain the belief
that is honourable to avoid the payment of tax by resorting to dubious methods. It is the
obligation of every citizen to pay the taxes honestly without resorting to subterfuges."
The contention of the Revenue is that 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 buyback of shares.

This amounts to clear avoidance of

tax in India. A scheme has been devised for such avoidance.

It is argued on behalf of the Revenue, that what is devised is a colourable
transaction and the authorities under the Act and the courts are free not to accept them.
It was submitted that 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.
IIPL has only devised a scheme of buy back of shares for 10 years for avoidance of payment
of Dividend Distribution Tax (DDT) under Section 115-O of the Income Tax Act,1961 and is
liable to pay DDT from 2003-2003 with 100% interest on it.

26

(1969) 1 SCR 651

27

(1940) 8 ITR 522 (PC)

28

Bombay AIR 1959 SC 270

29

(1973) 3 SCC 17

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III.

26

THE PAYMENTS MADE BY IIPL TO IML ON BUYBACK OF CCDS ARE

INTEREST PAYMENTS AND SUBJECT TO WHT

ITD contends that the entire payment made (other than the principal repayment) by IIPL to
IML on the redemption of Compulsorily Convertible Debentures (CCDs) is nothing but
interest payments because, as held by Supreme Court in the case of CWT v. Spencer & Co30
and in LMN India Ltd.v . CIT31,a CCD creates or recognizes the existence of a debt, which
remains to be so till it is repaid or discharged
Also, in the case of Z32, it was held, Issuance of debentures is a mode of borrowing money.
If the mode of discharging the debenture debt is by issuing equity shares in lieu of payment in
cash, it does not in any way detract from its legal character as debt.
In the case of CWT v. Spencer and Co, supra and in Eastern Investments Ltd. v.
CIT33and also in the case of, the court held,The mode of discharging a liability does not
change its true character.
Therefore the CCD which were issued by IIPL to IML is a debt till it is repaid or discharged.
1. The sale consideration paid by IIPL to IML on the redemption of CCDs in terms of
the agreement include a component of income by way of interest under the Act or the
DTAC
Section 2 (28A) of the Income tax Act, 1961 defines interest as follows:-

30

(1973) 88 ITR 429 (AAR)

31

307 ITR 40 (AAR)

32

AAR no 1048 of 2011

33

AAR No.769 of 2007)

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Interest means interest payable in any manner in respect of any moneys borrowed or debt
incurred (including a deposit, claim or other similar right or obligation) and includes any
service fee or other charge in respect of the moneys borrowed or debt incurred or in respect
of any credit facility which has not been utilized;

Article 11 of the DTAC with Mauritius defines interest as follows:(5) The term interest as used in this Article means income from debt-claims of every
kind whether or not secured by mortgage and whether or not carrying a right to participate
in the debtor's profits, and, in particular, income from government securities, and income
from bonds or debentures, including premiums or prizes attaching to such securities, bonds,
or debentures.
In the case of Ge Strategic Investments v. CIT34 it was held, We note here that the term
interest has been defined both in the Act and in the DTAC to mean any type of income that
becomes payable on a debenture and the definitions are substantially similar. Moreover,
Article 11.5 specifically includes any type/form of income from bonds or debentures
within the ambit of interest . and is wide both under the Act and under the DTAA to
include premiums paid by IIPL to IML on the redemption of CCDs and is therefore taxable
as per as per the DTAA.
In the case of Cauvery Spinning and weaving mills ltd v. Dy CIT35, the court held, To call
an amount received as interest within the definition of this clause, at least one of the
conditions that should be satisfied is that the amount should have been received as a due on
account of any money either borrowed or debt incurred.

34

A.A.R. No. 769 of 2007

35

340 ITR 550

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Therefore, the amount payable by the issuer of debenture, i.e., IIPL to its holder i.e. IML,
would be interest in the hands of the IML because payments made by IIPL are made on
account of a debt incurred.

It was incumbent upon IIPL to deduct tax at source from interest other than interest on
securities in the case of non-residents only36 under clause 1 of Section 195 of the IT Act
which states that
Any person responsible for paying to a non- resident, not being a company, or to a foreign
company, any interest (not being interest on securities) or any other sum chargeable under
the provisions of this Act (not being income chargeable under the head" Salaries" 3 ]) shall,
at the time of credit of such income to the account of the payee or at the time of payment
thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is
earlier, deduct income- tax thereon at the rates in force37
But IIPL failed to withhold the taxes on interest it paid to IML as per India Mauritius DTAA
because Article 11(2) of the DTAA specifically states that However, subject to the
provisions of paragraphs (3) and (4) of this article, such interest may also be taxed in the
Contracting State in which it arises and according to the laws of that State.38 meaning that
interest can also be charged in in India subject to clause 3 and 4 both of which are not
applicable in our case.

36

Pg 2473of Kanga & Palkhiwala, Law and Practice of Income tax, 10th Edition,Volume 2

37

Section 195of the Income Tax Act 1961

38

11(2) of the Income Tax Act, 1961

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29

PRAYER

In the light of the issues raised, arguments advanced and cases cited it is prayed on behalf of
the Income Tax Department that(a) That the payments made by IIPL on buy back of shares at a premium were nothing
but dividend under Section 2 (22) of the Income Tax Act, 1961 and thus IIPL is
liable to Dividend Distribution Tax (DDT) under Section 115-O of the Income Tax
Act, 1961 along with interest penalty at the rate of 100%.
(b) That the payments made by IIPL on redemption of CCDS as an extra sale
consideration are nothing but interest payments and thus IIPL must pay Withholding
tax (WHT) under Section 195 of the Income Tax Act, 1961 with interest penalty at the
rate of 100%.
THE COURT MAY ALSO MAKE ANY SUCH ORDER AS IT MAY DEEM FIT IN TERMS OF EQUITY,
JUSTICE AND DUE CONSCIENCE.
ALL OF WHICH RESPECTFULLY SUBMITTED
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