Introduction
The Mumbai Bench of the Income Tax Appellate Tribunal (Tribunal) ruled in favour of Tata Industries Limited (Taxpayer) on the invocation of Section 93 of the Income Tax Act, 1961 (IT Act). The Tribunal held that Section 93 is inapplicable to the Taxpayer's case and thereby deleted an addition of capital gains of approximately INR 1 trillion to its income, which arose to the Taxpayer's offshore wholly owned subsidiary on transfer of shares of an Indian company.
As per Section 93 of the IT Act, transfer of an asset to a non-resident by any person (provision does not expressly deal with tax residence of the transferor) results in taxability of income arising from such asset in the hands of the transferor, where the transferor retains the power to enjoy income from such assets and such income would otherwise than for the transfer be taxed in India in the hands of the transferor.
Facts
The Taxpayer, an Indian company, had entered into a shareholders' agreement with Apex Investment (Mauritius) Holdings Private Limited, a Mauritius resident company (Apex) and Birla Group of Companies (Birla) to merge the joint venture promoted by Apex and Birla with one of the group companies of the Taxpayer. The resultant entity was named Idea Cellular Limited, India (Idea). Apex was held by AT&T Corporation, US (AT&T). Subsequently, AT&T merged with New Cingular Wireless Services Inc. (NCW) and the Taxpayer acquired the entire shareholding of Apex from NCW. Thus, Apex became the wholly owned subsidiary of the Taxpayer.
Subsequently, the Taxpayer and Apex sold their respective shareholding in Idea to Birla. The Taxpayer duly paid tax on the capital gains arising out of the sale of shares sold by it. However, since Apex was a Mauritius resident holding a valid Tax Residency Certificate (TRC), Apex claimed an exemption under Article 13(4) of the India-Mauritius Double Taxation Avoidance Agreement (DTAA) where under the gains arising to Apex on transfer of shares of Idea would not be taxable in India.
During the assessment proceedings, the Tax Authorities invoked the provisions of Section 93 of the IT Act and held that capital gains arising out of sale of Idea's shares by Apex should be taxed in the hands of the Taxpayer. The Tax Authorities contended that the Taxpayer had tried to take undue benefit of Article 13(4) of the DTAA by routing the purchase of additional shares of Idea through Apex and not directly, and thus it is a clear attempt to avoid the incidence of tax in respect of capital gains. It was argued that, since there was a transfer of shares of Idea resulting into accrual of capital gains to Apex, the same should be taxable in India in the hands of the Taxpayer, as the Taxpayer being the parent of Apex would ultimately enjoy the income. Therefore, the case squarely fell within the ambit of Section 93 of the IT Act. To further allege that the purchase of Idea's shares through Apex was a conduit for avoiding taxes, the Tax Authorities submitted that Apex had no substantial existence or business operations except for holding shares of Idea and that its income and expenses were also negligible.
The order was confirmed by the first appellate authority. Being aggrieved, the Taxpayer approached the Tribunal in appeal.
The Taxpayer submitted that the transfer of Idea's shares by Apex was bonafide and that it was an arm's length transaction between two unrelated parties.
Decision of the Tribunal
Whilst examining Section 93 of the IT Act, the Tribunal noted the following as the key ingredients of Section 93:
- a transfer of assets;
- by reason of such transfer, income arising from the said assets becomes payable to a non-resident;
- the resident by means of the transfer acquires a right to enjoy such income; and
- the income from the said assets if it was the income of the resident would be chargeable to tax in India.
The Tribunal noted that on meeting the aforementioned criteria, the income of the non‑resident would be deemed to be the income of the resident for all the purposes of the IT Act; unless the transfer was a bona fide transfer.
Analysing the intent of Section 93 of the IT Act, the Tribunal observed that the object of the section is to prevent residents of India from evading the payment of tax by transferring their assets to non-residents, while enjoying the income by adopting questionable methods. The Tribunal laid emphasis on the words of Section 93 which reads "means of any such transfer" to highlight that the consequences flowing from the transfer of assets are of relevance under Section 93. The Tribunal further noted that Section 93 being a 'deeming provision' must be strictly construed and taken to its logical conclusion.
With respect to the transaction in question, the Tribunal observed that one of the essential ingredients for invocation of Section 93 i.e. 'transfer of property by a resident (Taxpayer) to a non-resident (Apex)' was missing. The Tribunal thus held that "Absence of transfer by resident to a non-resident entity takes the transaction out of the ambit of section 93, a deeming provision."
The Tribunal also distinguished the case of M.CT.M Chidambaram Chettiar (60 ITR 128), on facts, wherein Section 44D of the erstwhile Income Tax Act (which is similar to Section 93 of the IT Act) was invoked.
Further, while the treaty eligibility of Apex was not a question before the ITAT, quoting the Supreme Court in Union of India v. Azadi Bachao Andolan (263 ITR 706), the ITAT reiterated the position that provisions under the DTAA would prevail over those under the IT Act.
The decision of the lower Tax Authorities was accordingly set aside and the ground of appeal was decided in favour of the Taxpayer.
Comment
Section 93 has found place in the IT Act right from its inception in the form of a specific anti-avoidance provision. The instances where Tax Authorities have invoked Section 93 have been far and between however, these invocations have never been well founded and have been set aside by tribunals and courts. This is evident from the fact that apart from the case of M.CT.M Chidambaram Chettiar (supra) wherein Section 44D of the erstwhile Income Tax Act, 1922 was invoked, there is no precedent available under Indian legal jurisprudence on Section 93 of the IT Act.
The Tribunal in the instant case had the opportunity to consider the essentials required for invocation of Section 93, and has laid down a basis for reference of Tax Authorities during future litigations. In the instant case, the Tribunal has based its ruling on the absence of a 'transfer' of assets, particularly from a resident to a non-resident. While Section 93 is silent on the tax residence of the transferor and thus, should include a scenario of transfer from a non-resident to another non-resident as well (where other tests are fulfilled), the Tribunal's observations regarding resident to non-resident transfer could be a result of the facts of the instant case which involved a resident Taxpayer and thus, there was not a need to analyse that limb of the provision.
While the scope of Section 93 did not cover the structure in question, under the regime of the General Anti Avoidance Rules (GAAR), unless the taxpayer is able to explain the commercial rationale behind acquiring the shares of an Indian company indirectly, instead of directly, similar structures may be denied any tax benefit sought to be achieved. It seems that since the investments in the instant case took place prior to 1 April 2017, and were thus, grandfathered from a GAAR perspective, the case does not deal with invocation of GAAR.
(Ref: Tata Industries Limited v Assistant Commissioner of Income Tax, ITA No.4894/Mum/2008)
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