The Bombay High Court (the Court), in the case of Aditya Birla Nuvo Limited v Deputy Director of Income Tax [2011 TPI 715], recently gave a common judgment in respect of four writ petitions. Two writ petitions were filed by Aditya Birla Nuvo Limited (ABNL) and the other two were filed by New Cingular Wireless Services Incorporated (NCWS) and Tata Industries Limited (TIL).
A Mauritian company, AT&T Cellular Private Limited Mauritius (AT&T Mauritius), held shares in an Indian Joint Venture Company (JVC). AT&T Mauritius was a wholly owned subsidiary of the American company NCWS.
NCWS decided to exit its investment in JVC through AT&T Mauritius but was obliged to offer the shares to other stakeholders having rights of first refusal. As a result, ABNL bought JVC shares from AT&T Mauritius and TIL bought AT&T Mauritius shares from NCWS.
The first transaction, whereby ABNL bought JVC shares from AT&T Mauritius, should have been protected from capital gains tax in India by reason of Article 13 of the Double Tax Agreement.
The second transaction, whereby TIL bought AT&T Mauritius shares from NCWS, should not have been taxable as it did not relate to the transfer of any capital assets situated in India.
In respect of the first transaction, the Indian tax authority sought to tax the transaction in the hands of ABNL as a representative agent on the basis that the actual seller was not AT&T Mauritius but the American company NCWS. The Court found that in terms of the initial joint venture agreement it was NCWS, and not AT&T Mauritius, who was to invest in JVC even though the agreement allowed for the JVC shares to be allotted to NCWS's nominee, AT&T Mauritius.
NCWS was the true and beneficial owner of the JVC shares and it held all the rights associated with those shares, not AT&T Mauritius. There were no documents on record to show that AT&T Mauritius had independently entered into any transaction for acquiring the equity shares of JVC. NCWS was the investor in the stake in JVC in India and thus the capital gain on the disposal of that stake should be taxable in India even if the transfer related to shares of AT&T Mauritius.
The court held that the provisions of the Double Tax Agreement only apply where the investment is made by an entity incorporated in Mauritius. The provisions do not apply where an American investor invests in India through a permitted nominee in Mauritius. The court felt that the earlier decision in Azadi Bachao Andolan 2003 (263) ITR 0706 SC had no application. The purpose of the transaction was to transfer the entire right, title and interest in JVC by NCWS.
The transfer of the JVC shares constituted a transfer of a capital asset situated in India. Accordingly the court held that the consideration paid to NCWS on the transfer of JVC shares to ABNL could be assessed to tax in India in the hands of ABNL, as a representative agent, in terms of the Indian tax legislation.
In respect of the second transaction, the Indian tax authority was of the view that TIL should have withheld tax on the consideration paid to NCWS in respect of the AT&T Mauritius shares.
TIL argued that in terms of the transaction it was to acquire AT&T Mauritius shares from the American company NCWS, which shares were not situated in India. TIL could therefore not be assessed as a representative agent of NCWS. The Court found that in terms of TIL's right of first refusal, TIL had a right to purchase shares in JVC from NCWS, whereas the subsequent sale agreement provided for the acquisition of shares in AT&T Mauritius from NCWS. The question was whether the transaction that was defined by the sale agreement was not in truth for acquiring the shares of JVC as AT&T Mauritius was not holding any other asset. The Court held that all of these aspects indicated that the entire transaction was a "colourable device" and therefore the treatment by the Indian tax authority of TIL as a representative agent for assessing the gains was justified.
This development emphasises the need for taxpayers to exercise extreme caution when structuring cross-border transactions involving foreign investment into India.