Appellant Army Institute of Law

1ST

K.R.RAMAMANI MEMORIAL NATIONAL TAXATION MOOT COURT COMPETITION

TEAM CODE: ___

IN THE HON’BLE HIGH COURT AT MADRAS

DY. DIRECTOR OF INCOME-TAX, INTERNATIONAL TAXATION 1(1), CHENNAI

Appellant

Versus

INDICETEL INDIA LTD.

Respondent

MEMORIAL ON BEHALF OF THE APPELLANT

Table of Contents


TABLE OF CONTENTS

INDEX OF AUTHORITIES.............................................................................................................i

Statutes......................................................................................................................i

Books........................................................................................................................i

Dictionaries.............................................................................................................i

Table of Cases.........................................................................................................i

Miscellaneous........................................................................................................iv

LIST OF ABBREVIATIONS...........................................................................................................v

STATEMENT OF JURISDICTION................................................................................................vii

STATEMENT OF FACTS...........................................................................................................viii

QUESTION OF LAW...................................................................................................................x

SUMMARY OF ARGUMENTS......................................................................................................xi

ARGUMENTS ADVANCED......................................................................................................1-10

CONTENTION 1: THAT THE INCOME CAN BE DEEMED TO ACCRUE OR ARISE IN INDIA

UNDER SECTION 9 OF THE INCOME TAX ACT, 1961................................................................1

CONTENTION 2: THAT NO DTAA APPLIES IN THE PRESENT CASE ........................................6

CONTENTION 3: INDICETEL INDIA LTD. CAN BE TAXED AS A REPRESENTATIVE

ASSESSEE....................................................................................................................................7

PRAYER....................................................................................................................................11

Index of Authorities


i

INDEX OF AUTHORITIES

TABLE OF STATUTES

The Income Tax Act, 1961

TABLE OF BOOKS

A. N. Aiyar , Indian Tax Laws, Company Law Institute Pvt Ltd, 2006

Chaturvedi & Pirthisaria, Income Tax Laws, 5th

Ed., 2002

D.P. Mittal,Taxmann’s Indian Double Taxation Agreements & Tax Laws, Vol 1, 2 &

3, 5th

Ed., 2008

Dr.Vinod K Singh & Kapil Singhania, Taxmann’s Direct Taxes , 28th

Ed., 2002

Gower, Principles of Modern Company Law (6th

Ed., 1997)

Kailash Rai, Taxation Laws, Allahabad Law Agency, 8th

Ed., 2006

Kanga Palkhivala And Vyas, The Law and practice of Income Tax, Lexis Nexis, 9th

Ed.,

2004

Ramaiya, Guide to the Companies Act (14th

Ed., 1998)

S. Rajaratnam, Sampath Iyengar’s Law of Income Tax, Vol 1 & 2, 10th

Ed., 2001

DICTIONARIES

Aiyar K.J., Judicial Dictionary, 13th

Ed., Butterworth’s (New Delhi)

Aiyar P.R., The Law Lexicon, 2nd

Ed. Wadhwa & Company, (Nagpur 1999)

Osborn’s Concise Law Dictionary 8th

Ed. Universal Law Publishing Co. Pvt. Ltd.

(Reprint 1999)

Black’s Law Dictionary edited by Bryan A. Garner (8th

Ed. Thomsan West)

TABLE OF CASES

A.V. Fernandez v. State of Kerala, AIR 1957 SC 657 –p.9



ii

Adams v. Cape Industries Plc., [1991] 1 All ER 929 (CA) –p.2

Additional Commissioner of Income Tax, Mysore v. Bharat Fritz Werner, 118 ITR

1018 (Kar) –p.7

Apthorpe v. Peter Schoenhofen Brewing Co., (1899) 4 TC 41 –p.1

Azadi Bachao Andolan v. Union of India, (2003) 263 ITR 707 (SC) –p.3

Bangalore Woollen, Cotton and Silk Mills Co. Ltd., by Agents Binny & Co. (Madras)

Ltd. v. CIT, AIR 1951 Mad 361 –p.7

Banyan & Berry v.CIT, (1996) 222 ITR 831(Guj) –p.3

Cape Brandy Syndicate v. IRC (1921) 1 KB –p.9

Chiranjit Lal Anand v. State of Assam, (1985) 2 SCR (Supp) 385 –p.3

CIT v. Associated Clothiers, AIR 1963 Cal 629 –p.1

CIT v. Champalal, (1995) 211 ITR 201 (Raj) –p.2

CIT v. Energomach Exports, 232 ITR 448 (Kar) –p.7

CIT v. Golcha Properties, (1997) 227 ITR 393 (Raj) –p.2

CIT v. Hindustan Shipyard Ltd., 109 ITR 158 (AP) –p.8

CIT v. Indian Express Newspapers, (1999) 238 ITR 70 (Mad) –p.3

CIT v. Paluram Dhanania, (1966) 60 ITR 250 (SC) –p.2

CIT v. Remington Typewriter Company (Bombay) Ltd., L.R. 58 I.A. 42 –p.7

CIT v. Sarita Shirke, (2006) 281 ITR 373 (Bom) –p.2

CIT v. Sri Meenakshi Mills, AIR 1967 SC 819 –p.1

CIT v.National Insurance Co Ltd (1978) 113 ITR 37 (Cal) –p.4

CIT v.New India Assurance Co., (1980) 122 ITR 633 (Bom) –p.4

CIT vs. Panipat Woollen & General Mills Co. Ltd AIR 1976 SC 640 –p.5

CIT, Bombay v. Evans Medical Supplies, AIR 1959 Bom 448 –p.8

CIT, Punjab v. R.D. Aggarwal, AIR 1965 SC 1526 –pp.7,8

Craven vs. White, (1988) 3 ALL ER 495 –p.5

D.H.N. Food Distributors Ltd. v. Tower Hamlets L.B.C., [1976] 1 WLR 852 (CA) –

p.1

Fernis v. Dawson, [1984] AC 474 (HL) –p.3

Firestone Tyre and Rubber Co. v. Lewellin, [1957] 1 WLR 464 –p.2

Forbes Campbell v. CIT, (1984) 150 ITR 529 (Bom) –p.2



iii

Gregory v. Helvering, 293 US 465 (1935) –p.3

Gursahai v. CIT, AIR 1963 SC 1062 –p.9

GVK Industries Ltd. v. Income-Tax Officer, 228 ITR 564 (AP) –p.7

Hackbridge-Hewittic and Easun Ltd v.GEC Distribution Transformers Ltd., (1992) 74

Comp Cas 453 (Mad) –p.1

Harold Holdsworth v. Caddies, [1955] 1 All ER 725 (HL) –p.1

In Re Aggarwala Chamber of Commerce, AIR 1958 SC 269 –p.9

In Re Dinshaw Maneckjee Petit, AIR 1927 Bom 371 –p.1

In Re Nadler Enterprises, [1981] 1 WLR 23 –p.1

In Re P. No. 15of1998, (1999) 235 ITR 565 (AAR) –p.3

In Re Shri Ambica Mills Ltd. [1986] 59 Comp Cas 368 (Guj) –p.1

In Re Speciality Magazines (P) Ltd., 274 ITR 310 (AAR) –p.7

India Waste Energy Development Ltd. v. Government of NCT Delhi, (2003) 114

Comp Cas 82 (Del) –p.1

Jones v. Lipman, [1962] 1 WLR 832 –p.2

Juggilal Kamlapat v. CIT, AIR 1969 SC 932 –p.2

LIC v. Escorts Ltd., 1985 Supp (3) SCC 909 –p.1

Mapp v. Oram, [1969] 3 All ER 215 (HL) –p.9

McDowell v. CTO, (1985) 154 ITR 148 (SC) –p.3

N.B. Sanjana v. Elphinston Spinning and Weaving Mills, AIR 1971 SC 2039 –p.9

Nayantara Agarwala v. CIT, (1994) 207 ITR 639 (Mum) –p.3

New Horizons Ltd. v. Union of India, (1997) 89 Comp Cas 849 (SC) –pp.1,2

Novartis v. Adarsh Pharma, 2004 (3) CTC 95 (Mad) –p.1

R.C. Cooper v. Union of India, [1970] 40 Comp Cas 325 (SC) –p.4

Ransom v. Higgs, [1974] 1 All ER 949 (HL) –p.9

Remimgton Typewriter Company (Bombay) Ltd. v. CIT, ILR 52 Bom 726 –p.7

Revlon Inc. v. Cripps & Lee Ltd., [1980] FSR 85 –p.1

Shaw Wallace & Co. v. CIT, (1979) 119 ITR 399 (Cal) –p.2

Slocom Investment Pvt. ltd vs. Deputy Commissioner of Income Tax, (2006) 101

ITG (ITAT) 558 –p.5

State Bank of Travancore v. CIT, AIR 1986 SC 757 –p.9

http://international.westlaw.com/find/default.wl?vc=0&rp=%2ffind%2fdefault.wl&DB=780&SerialNum=1935123966&FindType=Y&AP=&fn=_top&utid=%7b11DA77E7-5097-4599-8847-627CC3EFE414%7d&rs=WLIN7.07&mt=WorldJournals&vr=2.0&sv=Split&sp=IndiaU-2003



iv

State of Uttar Pradesh v. Renusagar Power Co., (1991) 70 Comp Cas 127 (SC) –

pp.1,2,

State of Uttar Pradesh v. Renusagar Power Co., AIR 1988 SC 1737 –p.3

Tata Engineering and Locomotive Co. Ltd. v. State of Bihar, AIR 1965 SC 40 –p.1

Union of India v. Playworld Electronics, AIR 1990 SC 202 –p.1

UOI v. Gosalia Shipping, (1978) 113 ITR 307 (SC) –p.3

Union of India v. Playworld Electronics, AIR 1990 SC 202 –p.5

V.D. Vachhani v. Asst CIT, (2003) 86 ITD 652 (Guj) –p.3

Vasudev Shelat v. Pranlal Thakkar, [1975] 1 SCR 534 –p.3

West Coast Electric Supply Corporation Ltd. v. CIT, (1977) 107 ITR 483 –p.4

Workmen v. Associated Rubber Ltd., (1985) 2 SCALE 321 –p.3

MISCELLANEOUS

Indo-Mauritius DTAA (1994) 207 ITR (St.) 7

The OECD Commentary on MODEL DTAA

Vienna Convention on the Law of Treaties (May 23, 1969) 1155 UNTS 33

List of Abbreviations


v

LIST OF ABBREVIATIONS

¶ : Paragraph No.

AAR : Authority for Advanced Rulings

AC : Appeal Cases (L.R.)

Ahd : Ahemdabad

AIR : All India Reporter

All ER : All England Reporter

AP : Andhra Pradesh

Bom : Bombay

CA : Court of Appeals

CCE : Commissioner of Central Excise

Comp Cas : Company Cases

Comp LJ : Company Law Journal

CTO : Commercial Tax Officer

CTR : Current Tax Reporter

CWT : Commissioner of Wealth Tax

DTAA : Double Taxation Avoidance Agreement

ELT : Excise Law Times

F.2d : Fedral Reporter

HL : House of Lords (L.R.)

ILR : Indian Law Reports

ITAT : Income Tax Appellate Tribunal

ITJ : Income Tax Journal

ITO : Income Tax Officer

ITR : Income Tax Reporter

JT : Judgements Today

Kar : Karnataka

KB : Kings Bench

LR : Law Reports

Mad : Madras

List of Abbreviations


vi

SC : Supreme Court

SCALE : Supreme Court Almanac

SLT : Scott‟s Law Times

TC : Official Tax Case Reports

WLR : Weekly Law Reports

Statement of Jurisdiction


vii

STATEMENT OF JURISDICTION

THE REVENUE APPROACHES THE HON‟BLE HIGH COURT AT MADRAS

IN APPEAL UNDER SECTION 260A OF THE INCOME TAX ACT, 1961

AGAINST THE ORDER OF THE ITAT, CHENNAI

Statement of Facts


viii

STATEMENT OF FACTS

SHARE HOLDING FACTS

The Assessee Company, IndiceTel. India Ltd., is a limited liability Joint Venture Company

incorporated in India between MCO Mauritius and an Indian Company. It is a leading

telecom operator with a presence in several states in India. 66% of the Assessee company, i.e.

IndiceTel. India Ltd having limited liability, is held by MCO, a Mauritian. Shares of MCO,

Mauritius in turn are held 100% by INKO, Canada whose 100% shares are held by Mobile

Aahlin, a Tokyo based company. The balance shares of the assessee are held by an Indian

group.

TRANSACTION IN QUESTION

In the assessment year 2008-2009; Mobile Aahlin, Tokyo, sold the shares of INKO, Canada

to Mobio, UK resulting in a capital gains of ` 1000 Crore. Subsequently, Mobio, UK entered

into a partnership agreement concerning the business of the assessee with the Indian company

holding the balance shares of the Assessee. The return of income declaring total income of

`34,567,890 filed on 29-10-2009 was processed under Section 143(1) of the Income Tax Act,

1961 („the Act‟).

THE ASSESSEE

The Assessee maintains the stand that Mobile Aahlin did not earn any income from the sale

of shares of INKO and moreover the Assessee further contended that it cannot be regarded as

an agent of the Tokyo Company. Further it was contended that the transaction is merely the

sale of the shares of INKO and not of the business of the assessee. Since the shares of INKO

were not situated in India, there is no question of Capital gains tax.

THE ASSESSEMENT ORDER

The Assessing Officer felt that this transaction attracted capital gains tax in India, and the

assessee was a given a show cause notice as to why it should not be treated as an agent of

Mobile Aahlin, Tokyo for the purpose of fastening tax liability. The Assesses company was

assessed under Section 143(1) of the Act and charged with tax at rates applicable to foreign

companies. It was charged interest under Section 234A, 234B and 234C. It was held in order

Statement of Facts


ix

dated 28.12.2009, that the assessee company should be liable for tax for the capital gains

arising from the shares of sales.

THE COMMISSIONER OF THE INCOME TAX (APPEALS)

The assessee filed an appeal before the Commissioner of Income Tax (Appeals) against the

order passed by the Assessing Officer. This appeal was dismissed by the order of the

Commissioner dated 12.1.2009 and the capital gains amounting to `1000 Crore are sustained

by the AO.

THE INCOME TAX APPELANT TRIBUNAL, CHENNAI

Feeling aggrieved with the order passed by the Commissioner of Income Tax (Appeals) an

appeal was made to the Income Tax Appellant Tribunal by the Assessee against the order

passed by the Commissioner of Income Tax (Appeals). The appeal dated 12.12.2009 was

decided in favour of the Assessee and vide impugned order it was held that the capital gains

arising from the transaction were not taxable in India.

APPEAL BEFORE THE HON’BLE HIGH COURT

Against the order of the appellant Tribunal, the Deputy Director of Income Tax, International

Taxation, Chennai has filed an appeal to the Hon‟ble High Court under Section 260A of the

Income Tax Act, 1961, the appeal has been admitted by the High Court and is fixed for final

hearing. The question of law admitted by the high court is “whether on the facts

circumstances of the case and in law, the Tribunal was correct in holding that the capital

gains in question were not taxable in India.”

Question of Law


x

QUESTION OF LAW

WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN

LAW, THE TRIBUNAL WAS CORRECT IN HOLDING THAT THE CAPITAL

GAINS IN QUESTION WERE NOT TAXABLE IN INDIA?

ISSUES INVOLVED

1. Whether capital gains be deemed to accrue or arise in India under Section 9 of the

Indian Income Tax Act, 1961?

2. Whether the assessee is chargeable to Tax in light of the DTAA?

3. Whether IndiceTel India Ltd. can be taxed as a Representative Assessee?

Summary of Arguments


xi

SUMMARY OF ARGUMENTS

1. THE INCOME IN QUESTION CAN BE DEEMED TO HAVE ACCRUED OR ARISEN IN

INDIA UNDER SECTION 9 OF THE INCOME TAX ACT, 1961.

The corporate entity of INKO and MCO needs to be ignored because they function as single

economic unit along with Mobile Aahlin. The separate existence of subsidiaries or sub-

subsidiaries may be ignored. An agency relationship can be demonstrated, when holding and

subsidiary companies are taken as separate legal persons, this does not preclude treating the

subsidiary as agent. While legitimate tax avoidance is permissible, devices adopted to evade

payment of taxes are not; and Courts may look to the substance of particular transaction in

order to determine whether that transaction amounts to legitimate avoidance or an illegitimate

evasion. Following the transfer of shares, the transferee Mobio UK and the Indian group

owning the balance of shares in the assessee company entered into partnership agreement in

relation to the telecom business of the assessee. Had the transaction been merely transfer of

the shares in INKO, it would have been impossible for Mobio UK to enter into such a

partnership. The partnership, therefore, shows that the transaction effected through the

transfer of shares of INKO was actually a transfer of the business of the assessee. Capital

asset includes, subject to exceptions, property of any kind. „Property‟ means the highest right

a person can have in anything. The right to manage one‟s business, or the interest in one‟s

business, is a capital asset. The asset transferred is the business of assessee and other rights,

such as the rights of management of that business. As such, the asset in question must be

regarded as capital asset.

2. THAT NO DTAA APPLIES IN THE PRESENT CASE

In the light of the facts of the present case, India-Mauritius DTAA is not applicable as Mobile

Aahlin has been incorporated in Tokyo and its place of central management and control is not

Mauritius. Thus under the Mauritius Income Tax Act, Mobile Aahlin does no fall within the

ambit of the term „resident‟ and thus is not entitled to avail benefit of the DTAA. The fact

Summary of Arguments


xii

that MCO is a resident of Mauritius is irrelevant, because MCO is not a party to the transfer.

Even if the DTAA is held to be applicable in the present case, then also the assessee being a

Permanent Establishment of Mobile Aahlin, the gains are attributable to the assessee and thus

taxable in India.

3. THAT INDICETEL INDIA LTD. CAN BE TAXED AS A REPRESENTATIVE

ASSESSEE

In the facts of the instant case, there exists a business connection between IndiceTel India

Ltd. and Mobile Aahlin by the virtue of majority share holding and there exists a common

thread of mutual interest between them. Thus IndiceTel India Ltd. can be considered as the

representative assessee of Mobile Aahlin under Section 163 of the Income Tax Act, 1961.

Hence, by virtue of being the representative assessee, IndiceTel India Ltd. can be taxed for

the entire assessable income of Mobile Aahlin. IndiceTel India Ltd. is a statutory agent of

Mobile Aahlin, and the income resulting from the sale of shares is taxable in India under

Section 9(1). The plain and literal meaning of Section 160 and 161 does not require that the

agent should have in any way contributed to the income sought to be taxed and the literal

meaning should be given to the provisions of the Act. In the event, this Court is of the

opinion that an agent is not liable for all the assessable income of the non-resident, the

alternative stance can be that there needs to be a connection between the income to be

assessed and the agency relationship. The income of Rs 1000 crore, which are in question,

has arisen from the transfer of the Mobile Aahlin‟s capital asset in India, which is the

business of the IndiceTel India Ltd. showing a clear connection between the income and

agency relationship and thus they are entirely taxable.

Arguments Advanced


1

ARGUMENTS ADVANCED

This is a fit case for lifting the corporate veil and concluding that the transfer of shares

of INKO in fact amounted to transfer of the business of IndiceTel India Ltd.

This is an established principle that in certain situations Courts may disregard the

corporate entity1. The horizons of doctrine of piercing the corporate veil are constantly

expanding2 and are permissible for benefit of the revenue

3. The Supreme Court has held that

the Courts have the power to disregard the corporate entity when used for tax evasion or to

circumvent tax obligations4. The corporate entity of INKO and MCO needs to be ignored

because they function as single economic unit along with Mobile Aahlin5. Further, there is no

need to show “unjust or inequitable purpose” before lifting the corporate veil6. The separate

existence of subsidiaries or sub-subsidiaries may be ignored7, particularly in taxation matters

when the question of “controlling interest” is in issue8. Facts on record clearly indicate that

INKO and MCO were wholly-owned subsidiary companies. Thus the entire group of

companies in this case acted as single economic unit for particular purpose, i.e. the holding

shares of assessee company9. Additionally, an agency relationship can be demonstrated, when

holding and subsidiary companies are taken as separate legal persons, this does not preclude

1 CIT v. Sri Meenakshi Mills, AIR 1967 SC 819; Juggilal Kamlapat v. CIT, AIR 1969 SC 932; In Re Dinshaw

Maneckjee Petit, AIR 1927 Bom 371; CIT v. Associated Clothiers, AIR 1963 Cal 629 2 State of Uttar Pradesh v. Renusagar Power Co., (1991) 70 Comp Cas 127 (SC)

3 Apthorpe v. Peter Schoenhofen Brewing Co., (1899) 4 TC 41

4 Juggilal Kamlapat v. CIT, AIR 1969 SC 932; see also, India Waste Energy Development Ltd. v. Government

of NCT Delhi, (2003) 114 Comp Cas 82 (Del) 5 New Horizons Ltd. v. Union of India, (1997) 89 Comp Cas 849 (SC); Union of India v. Playworld

Electronics, AIR 1990 SC 202; CIT v. Associated Clothiers, AIR 1963 Cal 629; In Re Nadler Enterprises,

[1981] 1 WLR 23; Revlon Inc. v. Cripps & Lee Ltd., [1980] FSR 85; D.H.N. Food Distributors Ltd. v. Tower

Hamlets L.B.C., [1976] 1 WLR 852 (CA); Harold Holdsworth v. Caddies, [1955] 1 All ER 725 (HL) 6 Novartis v. Adarsh Pharma, 2004 (3) CTC 95 (Mad); see also, S. Ottolenghi, „From Peeping Behind the

Corporate Veil to ignoring it completely‟, (1990) 53 (3) Modern Law Review 338 7 Tata Engineering and Locomotive Co. Ltd. v. State of Bihar, AIR 1965 SC 40

8 New Horizons Ltd. v. UOI, (1997) 89 Comp Cas 849 (SC); India Waste Energy Development v. Government

of NCT, Delhi, (2003) 66 DRJ 224 9 LIC v. Escorts Ltd., 1985 Supp (3) SCC 909; Hackbridge-Hewittic and Easun Ltd v.GEC Distribution

Transformers Ltd., (1992) 74 Comp Cas 453 (Mad); In Re Shri Ambica Mills Ltd. [1986] 59 Comp Cas 368

(Guj)

CONTENTION 1: THE INCOME CAN BE DEEMED TO HAVE ACCRUED OR

ARISEN IN INDIA UNDER SECTION 9 OF THE INCOME TAX ACT, 1961.

Arguments Advanced


2

treating the subsidiary as agent or alter ego of the parent10

. Where the parent is using the

subsidiary as means by which it can carry its own business, the corporate veil between the

parent and the subsidiary must be discarded11

. In this case INKO and MCO were merely

vehicles through which Mobile Aahlin controlled the business of the assessee company.

It is submitted First, piercing the corporate veil is justified when the companies in

question are mere „facade12

‟, they will be so when found that it was part of an arrangement

designed to enable the parent to function in a certain location while reducing or eliminating

the appearance of any involvement13

. Entity once characterized as façade, its corporate

personality must be disregarded14

. Secondly, there is finding of fact that INKO and MCO are

façade, and this Hon‟ble Court should not reopen a factual inquiry into that. It has been held

that if the AO applies the doctrine of lifting the corporate veil, the Tribunal would be in error

if it does not apply the doctrine even though it has not reversed any finding of fact of the

lower authorities15

. The Tribunal has ignored the entire question and has not reversed the

findings of fact that the intermediate entities constitute a façade. Therefore, the order of

Tribunal in the present case is liable to be set aside. Further, it is a well established principle

that the High Courts should not undertake factual inquiries on appeal; and cannot embark on

a reappraisal of evidence16

. Thirdly, even if this Hon‟ble Court inquires whether a finding of

„façade‟ is sustainable on the facts recorded by authorities below, it is submitted that the

record indicates that such finding is not only sustainable but also indispensable. The record

indicates that INKO is commercially dormant and a non-entity for all practical purposes,

except for the shares it holds in the assessee through MCO and the business is carried out by

the parent company (Mobio)17

. From this, one can draw that MCO is also commercially

dormant except for the holding of shares in assessee. Had MCO been commercially active,

then that would have been specifically mentioned in the assessment order, or at least alleged

10

Adams v. Cape Industries Plc., [1991] 1 All ER 929 (CA) 11

Firestone Tyre and Rubber Co. v. Lewellin, [1957] 1 WLR 464 12

Jones v. Lipman, [1962] 1 WLR 832; Gower, Principles of Modern Company Law (6th

Ed., 1997) at 171;

Palmer, Company Law (25th

Ed., 1992) 13

Jones v. Lipman, [1962] 1 WLR 832; Gower, Principles of Modern Company Law (6th

Ed., 1997) at 171 14

Juggilal Kamlapat v. CIT, AIR 1969 SC 932; State of UPv. Renusagar Power Co. (1991) 70 Comp Cas 127

(SC) 15

CIT v. Golcha Properties, (1997) 227 ITR 393 (Raj) 16

CIT v. Paluram Dhanania, (1966) 60 ITR 250 (SC); CIT v. Sarita Shirke, (2006) 281 ITR 373 (Bom); CIT v.

Champalal, (1995) 211 ITR 201 (Raj) at 205 17

Shaw Wallace & Co. v. CIT, (1979) 119 ITR 399 (Cal), approved in Forbes Campbell v. CIT, (1984) 150

ITR 529 (Bom); Jones v. Lipman, [1962] 1 WLR 832; Principles of Modern Company Law (6th

Ed., 1997) at

171-172

Arguments Advanced


3

in appeal, allowing inference to be drawn that MCO was also commercially dormant. Had

MCO been commercially active, it could not have been said that INKO was commercially

dormant except for “holding shares in the assessee through MCO” and INKO would also be

commercially interested in them as the sole share holder. It is clearly not so. Hence, it is

submitted that the corporate veil must be lifted in this case.

The Court may look at the substance of the transaction

While legitimate tax avoidance is permissible, devices adopted to evade payment of

taxes are not; and Courts may look to the substance of a particular transaction in order to

determine whether that transaction amounts to legitimate avoidance or an illegitimate

evasion18

. It is a well accepted proposition that income tax authorities are entitled to look at

the substance of a transaction and are not restricted by the mere form,19

or by the label given

by the parties20

. The subservience of the substance of a transaction to rigid understanding of

form savours of archaic and outmoded jurisprudence21

. Events surrounding the transaction

can be looked at to determine the nature of the transaction and the relationship between the

parties22

.

It is further submitted that the reliance placed by the assessee on Azadi Bachao

Andolan v. Union of India23

is misplaced. First, it is established principle in Azadi Bachao

Andolan itself, that a judgment has to be read in particular context24

, where the validity of

general CBDT circular was challenged. While refuting that challenge, the Court in no manner

affected the power of the revenue authorities to lift the veil. Thus, this decision cannot be

read as affecting the powers of the AO in particular cases. Secondly, the Court held that

“treaty-shopping” or a “tax-saving motivation” on its own would not constitute sufficient

grounds for ignoring the form of a transaction, the Court has stated that where necessary, the

18

CIT v. Indian Express Newspapers, (1999) 238 ITR 70 (Mad) 19

McDowell v. CTO, (1985) 154 ITR 148 (SC); Chiranjit Lal Anand v. State of Assam, (1985) 2 SCR (Supp)

385; State of Uttar Pradesh v. Renusagar Power Co., AIR 1988 SC 1737 20

UOI v. Gosalia Shipping, (1978) 113 ITR 307 (SC) at 311; see also, Judith Freedman, „Interpreting Tax

Statutes‟, (2007) 123 Law Quarterly Review 53 21

Vasudev Shelat v. Pranlal Thakkar, [1975] 1 SCR 534; Workmen v. Associated Rubber Ltd., (1985) 2

SCALE 321 22

Nayantara Agarwala v. CIT, (1994) 207 ITR 639 (Mum); V.D. Vachhani v. Asst CIT, (2003) 86 ITD 652

(Guj); In Re P. No. 15of1998, (1999) 235 ITR 565 (AAR); Fernis v. Dawson, [1984] AC 474 (HL); Gregory v.

Helvering, 293 US 465 (1935) 23

Azadi Bachao Andolan v. Union of India, (2003) 263 ITR 707 (SC) 24

Azadi Bachao Andolan v. Union of India, (2003) 263 ITR 707 (SC) at 759; Banyan & Berry v.CIT, (1996)

222 ITR 831(Guj) at 850



Arguments Advanced


4

Court can look beyond the form25

. It was held that merely on a hypothetical assessment of the

“underlying motive”, the form of transaction cannot be ignored26

. However, every inquiry

into the substance of the transaction need not look at the motive of the parties27

. In the instant

case, there has been no hypothetical assessment of the motive. The Department‟s decision to

look at the substance of the transaction is based on objective and ascertained facts, and not

merely any imaginary motive of the parties. Therefore, the assessee‟s reliance on Azadi

Bachao Andolan is misplaced. In this case, the form of the transaction was the sale of shares

in INKO which yielded gains worth Rs. 1000 crores and INKO being a commercially

dormant entity, such a huge consideration would have been unimaginable. Thus, it is clearly

reasonable to draw the inference that the transaction involved something more than just the

transfer of shares in a commercially dormant entity.

Additionally, following the transfer of shares, the transferee Mobio UK and the Indian

group owning the balance of shares in the assessee company entered into partnership

agreement in relation to the telecom business of the assessee. Had the transaction been

merely transfer of the shares in INKO, it would have been impossible for Mobio UK to enter

into such a partnership. The partnership, therefore, shows that the transaction effected

through the transfer of shares of INKO was actually a transfer of the business of the assessee.

Business of the Assessee is a Capital Asset under the Act and is Situated in India

„Capital asset28

‟ includes, subject to exceptions, property of any kind. „Property‟ means the

highest right a person can have in anything, and encompasses all other rights within that

highest right29

. A business, or an undertaking as a whole, is not stock-in-trade but amounts to

„property‟; as such, it has been held to be a capital asset30

. The right to manage one‟s

business, or the interest in one‟s business, is a capital asset31

. The asset transferred is the

business of assessee and other rights, such as the rights of management of that business. As

such, the asset in question must be regarded as capital asset. From the facts on record, it is

clear that the business of assessee is situated in India.

25

Supra 24 at 748 26

Supra 24 at 762-63 27

Karen Moore, „The Sham Transaction Doctrine‟, (1989) 41 Florida Law Review 659 28

Section 2(14), Indian Income Tax Act, 1961 29

R.C. Cooper v. Union of India, [1970] 40 Comp Cas 325 (SC) at 353-354 30

West Coast Electric Supply Corporation Ltd. v. CIT, (1977) 107 ITR 483 31

CIT v.National Insurance Co Ltd (1978) 113 ITR 37 (Cal); CIT v.New India Assurance Co., (1980) 122 ITR

633 (Bom)

Arguments Advanced


5

The Transaction between Associated Enterprises Cannot be Seen in Isolation

Mobio and the Indian group which continues to own the balance shares of the assessee

company are referred as the associated enterprises due to the following reasons; Firstly, there

exists a transaction of the sale of shares between Mobile Aahlin and Mobio. Secondly,

Mobile Aahlin controls 66% shares of the assessee company indirectly through INKO and

MCO. Thirdly, there exists a partnership agreement32

between Mobio, who buys the shares

and the Indian group, holding the balance shares of the assessee company i.e. 34% of shares.

Thus, the transaction between two independent enterprises is governed by any

transaction between the two associated enterprises due to the presence of an international

transaction33

. This shows that the transaction of the sale of INKO shares cannot be treated as

an isolated transaction and the entire transaction is to be seen as a whole34

.

The tax authorities have to be governed by substance of the transaction and not the

form35

. The real intention has to be gathered from the terms and conditions agreed upon by the

parties executing the particular contract. As stated in this case, the transaction for the sale of

share cannot be looked as an independent transaction as it has been influenced by the

agreement existing between the two associated enterprises. Thus, the substance of the

transaction36

is to be governed and it should be held that the capital gains are assessable in

India under the Indian tax authorities.

32

Section 4, The Indian Partnership Act, 1932; “Partnership is the relation between persons who have

agreed to share the profits of a business carried on by all or any of them acting for all.” 33

Section 92B(2), Income Tax Act, 1961 term “international transaction” means a transaction between two or

more „associate enterprise‟, either or both of whom are non resident. 34

Craven vs. White, (1988) 3 ALL ER 495, held that “the series of transactions in question, must be regarded

as a whole, so as to ascertain its true effect in law, and finally it must apply the enactment as contented to the

effect of the series of transaction and so decide whether or not the enactment was intended to cover it. The most

important feature of the principal is that the series of the transaction is to be regarded as a whole. In

ascertaining the true legal effect of the series it is relevant to take into account, if it be the case, that all the steps

in it were contractually agreed in advance or had been determined on in advance by guiding will which was in

position, for practically purposes, to secure that all of them wee carried through to completion. It is also

relevant to take into account if be the case, that one or more of the steps was introduced into the series with no

business purposes other than avoidance of tax.”

35 CIT vs. Panipat Woollen & General Mills Co. Ltd AIR 1976 SC 640

36 Slocom Investment Pvt. ltd vs. Deputy Commissioner of Income Tax, (2006) 101 ITG (ITAT) 558

Arguments Advanced


6

No DTAA is applicable in the instant case

A DTAA will be applicable if the party to which the gains are accruing is a resident in

a Contracting State37

. A resident is defined as a person who is liable under the laws of a State

to be taxed therein by reason of domicile, residence, place of management etc38

.

In the instant case, the gains are accruing to Mobile Aahlin, Tokyo. Under the

Mauritius Income Tax Act, 1995, the expression „resident‟, when applied to a „company‟,

means a company which is either incorporated in Mauritius or has its central management

and control in Mauritius39

. Mobile Aahlin has been incorporated in Tokyo, and its place of

central management and control is not Mauritius.

The fact that MCO is a resident of Mauritius is irrelevant, because MCO is not a party

to the transfer; nor are any gains accruing to MCO. Therefore, there is no question of any

DTAA applying. Hence, the provisions of the Act would continue to govern the question of

who is liable to pay the tax on the capital gains.

Arguendo, IndiceTel India Ltd. is a Permanent Establishment and hence is Taxable

The only way that that the DTAA can be held applicable is if the entities of MCO and Mobile

Aahlin are considered part of the same economic unit and hence are one and the same. If it is

so held, it will be sufficient for the purposes of taxing IndiceTel India Ltd.to show that it is a

permanent establishment of Mobile Aahlin. In the instant case, there is a 66% shareholding of

Mobile Aahlin in IndiceTel India Ltd. It is admitted that a holding-subsidiary relationship, in

itself is not sufficient to constitute a permanent establishment40

. However, in the instant case,

not only is there majority shareholding, but also the two entities carry on a common business.

As Mobio, UK entered into a partnership with the Indian Co holding the rest of the 34% shares in the

assessee to carry on the telecom business in India. It is clear that the two entities carry on a common

business, and hence it is a permanent establishment, and thus is taxable.

37

Article 1, Indo-Mauritius DTAA (1994) 207 ITR (St.) 7 38

Article 5, Indo-Mauritius DTAA (1994) 207 ITR (St.) 7 39

Section 73(b), Mauritius Income Tax Act, 1995 40

Article 5(6), Indo-Mauritius DTAA (1994) 207 ITR (St.) 7

CONTENTION 2: THAT NO DTAA APPLIES IN THE PRESENT CASE

Arguments Advanced


7

IndiceTel India Ltd. is a Representative Assessee of Mobile Aahlin

For the income of a non-resident under s. 9(1), an agent or a statutory agent41

can be

considered the representative assessee42

, and can be taxed43

. It is submitted that, in this case

assessee is a statutory agent by virtue of a business connection with Mobile Aahlin.

It has expressly laid down that the definition of business connection in Explanation 2

to Section 9, of the Act is merely inclusive and does not exhaust the meaning of the term, all

the explanation does is to include certain specific situation within the ambit of business

connection44

. The meaning of business connection has to be determined by relying on the

ordinary meaning of the term It has been held that a business connection involves a concept

of control or supervision45

, which can be in the form of majority shareholding and this has

been used as a fact to distinguish a state of affairs comprising business connection from one

which does not46

. A business connection can comprise even a connection arising out of

financial relations. The two entities in question may be separate, but if there is some close

connection or association by reason of some common control, a business connection is said to

be established.47

Thus, existence of control over the assessee is sufficient to constitute a

business connection48

. Thus, majority shareholding constitutes sufficient control for the

purposes of establishing a business connection49

. As argued earlier, the intermediate entities

of MCO and INKO can be ignored and Mobile Aahlin does possess such a majority

41

Section 163, Income Tax Act, 1961 A statutory agent can be an employee of the non-resident, a trustee, a

person with whom he has a business connection, or a person through which he is the receipt of any income. 42

Section 160(1)(i) Income Tax Act, 1961 43

Section 161, Income Tax Act, 1961 44

In Re Speciality Magazines (P) Ltd., 274 ITR 310 (AAR) 45

¶4, Additional Commissioner of Income Tax, Mysore v. Bharat Fritz Werner, 118 ITR 1018 (Kar) 46

¶11, CIT v. Energomach Exports, 232 ITR 448 (Kar) 47

¶8, Bangalore Woollen, Cotton and Silk Mills Co. Ltd., by Agents Binny & Co. (Madras) Ltd. v. CIT, AIR

1951 Mad 361 48

¶22, GVK Industries Ltd. v. Income-Tax Officer, 228 ITR 564 (AP) “control of management or finances or

substantial holding of equity shares”, the essence of business connection is established. 49

Remimgton Typewriter Company (Bombay) Ltd. v. CIT, ILR 52 Bom 726 affirmed in CIT v. Remington

Typewriter Company (Bombay) Ltd., L.R. 58 I.A. 42

CONTENTION 3: THAT INDICETEL INDIA LTD. CAN BE TAXED AS A

REPRESENTATIVE ASSESSEE

Arguments Advanced


8

shareholding in assessee. Hence, by virtue of this shareholding, and the consequent control

over assessee, a business connection exists between IndiceTel India Ltd. and Mobile Aahlin.

Even if majority shareholding is not sufficient, on the facts of the case, a business

connection can be established. The locus classicus on the question of the meaning of a

business connection is the decision of the Apex Court50

. One of the tests of business

connection laid down in that case is that “carrying on a part of the main business or activity

incidental to the main business of the nonresident through an agent51

.” In this case, assessee

is a leading telecom operator in India52

. Mobile Aahlin, is a multinational corporation

carrying on the telecom business worldwide. Thus, there is a direct connection in the business

of the two entities53

. What is being carried on in India is clearly the Indian side of the world-

wide telecom business of the non-resident. Hence, clearly, assessee. is carrying on a part of

the business, or at least an activity, incidental to the business of Mobile Aahlin. Hence,

following the test as aforementioned54

, there is a clear business connection. A common thread

of mutual interest of running through the fabric of the economic activities is sufficient to

constitute a business connection55

. Clearly, in the instant case, all these three requirements are

satisfied: IndiceTel India Ltd. is a telecom operator in India. Relying on the shareholding

structure, there is indirect income by virtue of the payment of dividends which would happen

from IndiceTel India Ltd. to MCO, MCO to INKO, and INKO to Mobile Aahlin.

No nexus with the Agency Relationship is Required

The plain and literal meaning of Section 160 and 161 does not require that the agent

should have in any way contributed to the income sought to be taxed

Under Section 160(1) (i), in respect of the income of a non-resident specified under s.

9(1), the representative assessee is the agent of the non-resident, including persons who are

treated as agents under Section 163. Thus, under Section 160(1)(i), an agent under Section

163 is a representative assessee in respect of the income of the non-resident under Section

9(1). Hence, under Section 161(1), he is taxable for all income of the non-resident under

50

CIT, Punjab v. R.D. Aggarwal, AIR 1965 SC 1526 51

¶13, CIT, Punjab v. R.D. Aggarwal, AIR 1965 SC 1526 52

Annexure E, Assessment Order, Factsheet 53

CIT, Bombay v. Evans Medical Supplies, AIR 1959 Bom 448 “a business connection requires a business in

India, a connection between the non-resident and that business, and direct or indirect earning of income by

virtue of that connection.” 54

Supra 50 55

¶21, CIT v. Hindustan Shipyard Ltd., 109 ITR 158 (AP)

Arguments Advanced


9

Section 9(1) of the Act. Nowhere, under any of these provisions, is there a requirement that

the agent should have, in any way, contributed to this income. Thus, on the literal

interpretation of the provisions, a statutory agent of a non-resident can be taxed for all the

income of the non-resident which is taxable under Section 9(1) of the Act.

In the instant case, as argued earlier, IndiceTel India Ltd. is a statutory agent of

Mobile Aahlin, and the income resulting from the sale of shares is taxable in India under

Section 9(1). Hence, relying on the literal meaning of the provisions, IndiceTel India Ltd.

can be taxed for the entire amount.

The Literal Meaning is Binding

Taxing statutes have to be interpreted literally56

. Considerations of equity, logic,

reason, or the supposed intent of the legislature are irrelevant when the literal meaning of the

statute is clear57

. Hence, in the instant case, the possibility that taxing IndiceTel India Ltd. for

the profits of Mobile Aahlin may be iniquitous cannot be an argument for looking beyond the

literal meaning. Neither can the fact that the result of following the strict interpretation may

lead to illogical or unreasonable results. The literal meaning of the provisions is that a

statutory agent may be taxed for the entire taxable income of a non-resident. Hence, applying

this meaning to the instant case, IndiceTel India Ltd. can be taxed for the income of Mobile

Aahlin assessable under Section 9(1) of the Act.

Even if it is argued that the literal meaning need not always be followed, in the case of

machinery provisions, the correct interpretation is that which best effectuates the purpose of

the provision58

. The relevant provisions here have been categorically and emphatically held

to be machinery provisions59

. In this scenario, if at all the principle of literal interpretation is

to be subordinated, it has to be subordinated for the purpose of better giving effect to the

object of the provision. Now, the object of the provision is to enable the government to

enforce taxation statutes on non-residents. It proceeds on the principle that income should be

taxed where it is found60

, and merely is a means by which the tax leviable under Section 9(1)

56

Cape Brandy Syndicate v. IRC (1921) 1 KB 64 at 71; Gursahai v. CIT, AIR 1963 SC 1062 at 1064; A.V.

Fernandez v. State of Kerala, AIR 1957 SC 657 at 661 57

State Bank of Travancore v. CIT, AIR 1986 SC 757; Ransom v. Higgs, [1974] 1 All ER 949 (HL) at 969;

Mapp v. Oram, [1969] 3 All ER 215 (HL) at 222 58

N.B. Sanjana v. Elphinston Spinning and Weaving Mills, AIR 1971 SC 2039 59

Kanga and Palkhivala, The Law and Practice of Income Tax (9th

Ed., 2004) at 1942 60

In Re Aggarwala Chamber of Commerce, AIR 1958 SC 269 at 273

Arguments Advanced


10

can be effectively collected. This object is also borne out by Section 162 of the Act, which

allows the agent to be compensated for the amount paid as tax for the non-resident. Hence,

the scheme of the Act is that an agent pays the tax for the assessee, which has to be

compensated to the agent by the non-resident. Given this object of the provision, it has to be

interpreted in a way that makes this possible. Applying this principle to the provisions at

hand, holding an agent liable for all the assessable income of a non-resident is the only mode

by which the tax can be effectively collected. In the instant case, if IndiceTel India Ltd. were

not to be taxed for the transfer of the business interest, it would not be possible to enforce the

provisions of Section 9(1) against Mobile Aahlin.

Thus, given the nature of the provisions and the object underlying them, and relying

on the judicial opinion on the point, even the appropriate interpretation of the provisions is

that there need not be a nexus between the business connection and the income sought to be

assessed.

The Income does Arise from the Agency Relationship

In the event, this Court is of the opinion that an agent is not liable for all the

assessable income of the non-resident, the alternative stance can be that there needs to be a

connection between the income to be assessed and the agency relationship. A closer

examination of the fact situation clearly suggests that such a connection does exist in the

instant case. The business connection here is the fact that, for all practical purposes, Mobile

Aahlin owns a majority shareholding in IndiceTel India Ltd. In addition, both being in the

same industry, this is a clear case of IndiceTel India Ltd. carrying on a part of the business of

Mobile Aahlin. As argued above, the income has arisen from the transfer of the Mobile

Aahlin‟s capital asset in India,which is the business of the assessee. Now, the value of this

capital asset and the income arising from the transfer is due to the majority shareholding of

Mobile Aahlin in IndiceTel India Ltd. It is because of majority shareholding that the transfer

would not have yielded the income that it did. Thus, the income has arisen because of the

majority shareholding. Hence, there is a clear connection between the income and agency

relationship and thus they are entirely taxable.

Prayer


11

PRAYER

In the light of the issues raised, arguments advanced and authorities cited, the counsel for the

Appellant humbly pray before this Hon’ble Court to kindly:

ALLOW THE APPEAL SETTING ASIDE THE ORDER OF THE LD. ITAT AND RESTORE

THE ORDER PASSED BY THE ASSESSING OFFICER

ADJUDGE AND DECLARE,

o THAT THE CAPITAL GAINS IN THE PRESENT CASE ARE TAXABLE IN INDIA

o THAT INTEREST BE CHARGED ON THE UNPAID AMOUNT OF TAX

o THAT PENALTY BE LEVIED FOR NON-PAYMENT OF TAX

And pass any other appropriate order as this Hon’ble Court may deem fit.

And for this act of Kindness, the Counsel for the Revenue as in duty bound, shall forever

pray.

Respectfully Submitted

Sd/-

Counsels for Department

Dy. Director of Income-tax, International Taxation 1(1), Chennai

Appellant

Documents

Appellant Army Institute of Law