Respondent Team M

7/29/2019 Respondent Team M

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TEAMCODE:M

INTHEHONBLEHIGHCOURTOFBOMBAY

MUMBAI,INDIA

INCOME TAX APPEAL NO.____/2012

UNDER SECTION 260A(2) OF THE INCOME TAX ACT,1961 OF INDIA.

_______________________________________________________

FOOLTHEWORLD(MAURITIUS)COMPANYLTD.

(APPELLANT)

V.

COMMISSIONEROFINCOMETAX

(RESPONDENT)

_______________________________________________________

MEMORIALFORTHE RESPONDENT

2012


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~Memorial For The Respondent~

ii

TABLE OF CONTENTS

[A]. LIST OF ABBREVIATIONS .............................................................................. iv

[B]. INDEX OF AUTHORITIES ................................................................................ vi

I. LIST OF STATUTES/RULES/BILLS. ..................................................................... vi

II. LIST OF INTERNATIONAL INSTRUMENTS ............................................................ vi

III. LIST OF CASES ................................................................................................. vi

1. Indian Cases .................................................................................................. vi

2. Foreign Cases .............................................................................................. viii

IV. LIST OF BOOKS............................................................................................... viii

V. LIST OF JOURNALS/ONLINE RESOURCES............................................................ ix

VI. LIST OF REPORTS............................................................................................... x

[C]. STATEMENT OF JURISDICTION ..................................................................... xi

[D]. STATEMENT OF FACTS .................................................................................. xii

[E]. QUESTIONS PRESENTED .............................................................................. xiv

[F]. SUMMARY OF PLEADINGS............................................................................ xv

[G]. PLEADINGS ADVANCED .................................................................................. 1

ISSUEI. THE SHARES OF RICHIRICH ARE SAID TO BE DERIVING VALUE DIRECTLY

OR INDIRECTLYFROM ASSET LOCATED IN INDIA. ............................................ 1

I.A. Sufficient Economic Nexus With The Assets Located In India. ..................... 1

I.B. Lifting Of The Corporate Veil. ....................................................................... 3

ISSUEII. THE SHARES OF RICHIRICH TRADED BY FMC DERIVE ITS VALUE

SUBSTANTIALLYFROM THE ASSETS LOCATED IN INDIA. ................................ 5

ISSUEIII. THAT EXPLANATION 5 TO SECTION 9(1)(I)IS APPLICABLE ON THE SALE OF

SHARES OF RICHIRICH. ..................................................................................... 6

III.A. Retrospective Effect Of Amendment To Section 9(1) (i). ............................... 6

III.B. Power Of Legislature To Enact A Retrospective Law With Extra-Territorial

Applicability. ................................................................................................. 8

ISSUEIV. THAT FULL CAPITAL GAINS WOULD BE CHARGEABLE TO TAX IN INDIA

AND NOT CAPITAL GAINS PROPORTIONATE TO THE ASSETS SITUATED IN INDIA.

11


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IV.A. Shares Are Recognized As An Asset. ........................................................... 11

IV.B. Apportionment Principle Applies Only To Business. ................................... 12

IV.C. The Nexus Is Holistic And Not Proportionate. ............................................. 13

IV.D. The Transaction Is Not Composite. .............................................................. 13

ISSUEV. THE ASSESSEE IS NOT ENTITLED TO INDEXATION BENEFIT IN COMPUTING

THE CAPITAL GAINS CHARGEABLE TO TAX IN INDIA. ...................................... 14

V.A. The transaction is carried out in foreign currency. ....................................... 14

V.B. Arguendo: Non Availability Of Indexation Benefit Amounts To

Discrimination.............................................................................................. 16

ISSUEVI. THAT THE CAPITAL GAINS ON THE SALE OF THE SHARES OF RICHIRICH

BY FMCWOULD NOT COME WITHIN THE AMBIT OF THE TREATY. ................. 17

VI.A. RichiRich Is Not A Company Registered In Either Of The Contracting States.

..................................................................................................................... 17

VI.B. Abuse Of Treaty ........................................................................................... 18

[H]. PRAYER FOR RELIEF ...................................................................................... 20


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iv

[A]. LIST OF ABBREVIATIONSS.No. ABBREVIATION EXPANSION

1. / Paragraph/Paragraphs2. A.P. Andhra Pradesh3. AC Appeal Cases4. AIR All India Reporter5. All Allahabad High Court6. All ER All England Law Reports7. Anr. Another8. Art. Article9. Bom Bombay High Court10. BomLR Bombay Law Report11. C.J. Honourable Chief Justice12. CIT Commissioner of Income Tax13. Corp. Corporation14. CTR Current Tax Reporter15. DEL Delhi High Court16. DLR Dominion Law Reports17. DTAA Double Taxation Avoidance Agreement18. DTC Direct Tax Code19. Ed. Edition20. HC High Court21. I.R.C. Internal Revenue Code22. Inc. Incorporation23. Inds. Industries24. ITAT Income Tax Appellate Tribunal25. ITR Income Tax Reporter26. J. Honourable Justice27. Kar. Karnataka28. Ltd. Limited29. MAD Madras High Court30. NYSE New York Stock Exchange


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31. OECD Organization For Economic Co-OperationAnd Development

32. Ors. Others33. p/pp Page/Pages34. QB Queen's Bench35. S.T.C. Simon36. SC Supreme Court37. SCC Supreme Court Cases38. SCR Supreme Court Reports39. SLP Special Leave Petition40. Supp. SCR Supplementary Supreme Court Reports41. T.T.J. Tax Tribunal Judgment42. TDS Tax Deduction at Source43. U.O.I. Union of India44. U.P. Uttar Pradesh45. U.S.A United State of America46. UN United Nations47. USD Unites States Dollar48. v. Versus49. Vol. Volume50. w.e.f With effect from


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[B]. INDEX OF AUTHORITIESCONSTITUTION OF INDIA.

I. LIST OF STATUTES/RULES/BILLS.1. INCOME TAX ACT,1961.2. INCOME TAX RULES,1962.3. DIRECT TAX CODE,2010.4. FINANCE ACT,2012.

II. LIST OF INTERNATIONAL INSTRUMENTS1. INDIA-MAURITIUS DOUBLE TAXATION AVOIDANCE AGREEMENT.2. INDIA-USDOUBLE TAXATION AVOIDANCE AGREEMENT.3. INDIA-AUSTRALIA DOUBLE TAXATION AVOIDANCE AGREEMENT.4. OECDMODEL TAX CONVENTION.5. UNITED NATIONS MODEL DOUBLE TAX CONVENTION.6. INDIA-NETHERLANDS DOUBLE TAXATION AVOIDANCE AGREEMENT.

III.LIST OF CASES1. INDIAN CASES

1. A.h.Wadia v. CIT,(1949) 17 ITR 63 (FC) ............................................................ 92. Anglo-French Textile Co. Ltd. v. Commissioner of Income Tax, Madras, (1954)

25 ITR 27 ........................................................................................................... 12

3. Basf Aktiengesellschaftv.Deputy Director of Income Tax, InternationalTaxation, 2007 293 ITR 1 Mum, ........................................................................ 15

4. Behariji Dass, Civil & Sessions Judge, Sultanpur and Ors . v. Chandra Mohan,Civil & Sessions Judge, Fatehpur and Ors. , AIR 1969 All 594 .......................... 10

5. Chainrup Sampatram v. Commissioner of Income Tax, West Bengal , (1953) 24ITR 481 .............................................................................................................. 12

6. Chinmoy pathakv. standard chartered bank ltd., on 14 june, 2010 in the HighCourt at Calcutta ................................................................................................. 19

7. CITv. Kerala Electric Lamp Works Ltd., 2003 129 TAXMAN 549 Ker ............... 78. CITv. Orissa Cement Ltd., (2002) 173 CTR (Del) 317 ........................................ 79. CITv. Sri Meenakshi Mills Ltd., AIR 1967 SC 819 .............................................. 3


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10.CIT, New Delhi v.M/s. Eli Lilly and Company (India) Pvt. Ltd, (Appeal No. 5114of 2007), decided on: 25/3/2007. ...................................................................... 1, 7

11.Commissioner of Income Tax v.Eli Lilly and Co. (India) Private Limited, (1009)15 SCC 1 .............................................................................................................. 8

12.Commr. of Agrl. ITv. Plantation Corporation of Kerala Ltd. , (2000) 164 C.T.R.(SC) 502 ............................................................................................................... 7

13.Electronics Corporation of India Ltd.,. v. CIT, 83 ITR 43 (SC)............................ 914.Farhad J Bottlewalla, Mumbai v. Assessee, on 31 August, 2012 in the Income

Tax Appellate Tribunal Mumbai ......................................................................... 19

15.In the matter of Cauvery Water Disputes Tribunal , AIR 1992 SC 522 ................. 916.Income Tax Officerv.Maruti Countrywide Auto Financial Services (P) Ltd. ,

[2008] 307 ITR 165 (Delhi). ................................................................................. 6

17.Indra Sawhney v. Union of India, AIR 1993 SC 477 .......................................... 1018.Ishikawajma-Harima Heavy Industries Ltd. v.Director of Income Tax, Mumbai,

AIR 2007 SC 929 ........................................................................................... 1, 13

19.Juggilal Kampalpatv. Commissioner of Income Tax, U.P., AIR 1969 SC 932 :(1969) 1 SCR 988 ................................................................................................. 3

20.K K Baskaran v. State, (2011) 3 SCC 793 ............................................................ 821.K. Sankaran Nair (Dead) through L.Rs. v.Devaki Amma Malathy Amma and

Ors,.(1996) 11 SCC 428 ....................................................................................... 9

22.Maneka Gandhi v. Union of India, (1978) 1 SCC 248: AIR 1978 SC 597 ............ 923.Mc Dowell & Company Limitedv. The Commercial Tax Officer, 1986 AIR 649 .. 324.Municipal Corporation of the City of Ahmedabad etc. v.New Shorock Spg. &

Wvg. Co., Ltd. etc., [1971] 1 SCR 288 .................................................................. 9

25.S. Sundaram v. V.R. Pattabhiraman, [1985] 2 SCR 643 ....................................... 726.Sheraton International Inc. v. Deputy Director Of Income Tax, 2007 293 ITR 68

(Delhi) .............................................................................................................. 1, 2

27.Shri Prithvi Cotton Mills Ltd. & Anr., v. Broach Borough Municipality & Ors.,1970 AIR 192 ....................................................................................................... 8

28.Shri Shiva Kant Jha v. Union Of India (UOI) And Ors., 2002 256 ITR 563 Delhi........................................................................................................................... 19

29.Virender Singh Hooda And Ors. v. State Of Haryana And Anr., AIR 2005 SC 137........................................................................................................................... 11


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30.Vodafone International Holdings B.Vv. Union of India &amp, CIVIL APPEALNO.733 OF 2012 in the Supreme Court of India ................................................... 2

31.Vodafone International Holdings B.V. v. Union of India (UOI) and Anr. 2010(112) BomLR 3792 ............................................................................................... 1

32.Wood Polymer Ltd. v. Bengal Hotels Limited, 40 Company Cases, 597 ............... 433.Workmen Employed In Associated Rubber Industry Ltd. Bhavnagarv. The

Associated Rubber Industry Ltd. Bhavnagar, AIR 1986 SC .................................. 3

2. FOREIGN CASES1. Barclays Mercantile Business Finance Limitedv.Mawson, (2005) AC 685 (HL) 32. Furniss v.Dawson, [1984] 1 All ER 530. ............................................................. 43. Inland Revenue Commissioners v. Burmah Oil Co. Ltd., [1982] S.T.C. 30, H.L.

(Sc.). ..................................................................................................................... 4

4. MacNiven v. Westmoreland Investments Limited, (2003) 1 AC 311...................... 35. Re Cairn UK Holdings Ltd., (2011) TII 16 ARM-INTL..................................... 166. Transworld Garnet Company Ltd. v.DIT., (2011) TII 02 ARA-Intl, .................. 167. W. T. Ramsay Ltd. v. Inland Revenue Commissioners, [1981] S.T.C. 174 ............ 4

IV.LIST OF BOOKS1. Adrian Ogley, The Principles of International Tax-A Multinational Perspective

(3rd

ed., Interfisc Publishing London 1996).

2. Charles H. Gustafson et al., Taxation Of International Legal Transactions:Materials, Text And Problems 14 (2

nded., Georgetown Publishing 2001).

3. Cornelis Van Raad,Nondiscrimination In International Tax Law (1986).4. Dicey, Morris and Collins, The Conflict of Laws (14th ed., Vol. 2, Sweet &

Maxwell).

5. Girish Ahuja & Ravi Ahuja, Concise Commentary on Income Tax (8th ed., JainBook Agency 2007).

6. Henry J. Steiner et al., Transnational Legal Problems: Material And Text (4th ed.,1994).

7. Julie Rogers-Glabush, IBFD International Tax Glossary (6th ed., IBFDPublishing 2009).


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8. Justice G.P Singh, Principles of Statutory Interpretation (9th ed., Lexis NexisWadhwa 2010).

9. K.B. Bhatnagar,Direct Tax Digest (8th ed., Lexis Nexis Wadhwa 2010).10.K. Chaturvedi,Income Tax Law (6th ed., Ahuja Book House 2006).11.Kanga & Palkhivala, The law and Practice of Income Tax (Dinesh Vyas ed.,

Lexis Nexis 2004).

12.Rutsel Silvestre J. Martha, Extraterritorial Taxation In International Law, InExtraterritorial Jurisdiction In Theory And Practice (Dr. Karl M. Meessen ed.,

Windsor Publishing Company 1996).

V. LIST OF JOURNALS/ONLINE RESOURCES1. David W. Williams, Trends In International Taxation 101 (1991).2. Rutsel Silvestre j. Martha, The Jurisdiction To Tax In International Law: Theory

And Practice Of Legislative Fiscal Jurisdiction 15 (1986).

3. Schanz,Zur Frage Der Steuerpflicht, 9 Finanz-Archiv 365, 372 (1892).4. Alfred Nizamiev, The Main Characteristics of State's Jurisdictin to Tax in

International Dimension, LLM Theses and Essays, Georgia Law (2003).

5. Victor Thuronyi,International Tax Cooperation and a Multilateral Treaty ,26BROOKLIN J. INTL L. 1641 (2001).

6. "Launderers Anonymous." The Economist. The Economist Newspaper, 22 Sept.2012. Last accessed on. 22 Sept. 2012.

.

7. "Reviewing Tax Treaty with Mauritius: Chidambaram." N.p., 5 Sept. 2012. Lastaccessed on 15 Sept. 2012.

.

8. "Tax Haven Mauritius." Tax Havens of the World. N.p., n.d. . Last accessed on.14 Sept. 2012.

.

9. William Chung. "Mauritius Highlights 2012." N.p., n.d. Last accessed on. 16Sept. 2012.


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.

10.Tax Edge Special,BMR Advisors (2010) Vol. 4 Issue 8.4 P. 1.

VI.LIST OF REPORTS1. First Law Commission, 12th Report titled Income Tax Act, 1922, Law

Commission of India, dated 26.9.1958..2


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[C]. STATEMENT OF JURISDICTIONThe Appellant has approached the Honorable High Court of Bombay under Section 260A

(2) of the Income Tax Act, 1961. The Respondent most humbly and respectfully submits

to the jurisdiction of the Honorable High Court of Bombay.


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[D]. STATEMENT OF FACTS1. The present matter concerns a tax dispute involving Fool The World (Mauritius)

Company Ltd. (hereinafter referred to as FMC) is a company registered in

Mauritius which was set up in 1971 by FMC Australia. FMC is holding a Tax

Residency Certificate issued by the Tax Authorities in Mauritius.

2. On 1 July, 1998, FMC acquired 343 equity of RichiRich Corporation (herein afterreferred to as RichiRich) for USD 1000. RichiRich is a company registered in

USA and its shares are listed in the NYSE. The holding of FMC in RichiRich

comes only to 0.00073%. FMC has no business activity other than holding the

shares in RichiRich.

3. RichiRich is engaged in the Business of providing Back Office Support Services tocompanies all over the world. RichiRich has a wholly owned subsidiary in British

Virgin Island which in turn holds 100 % shares in B.O.S.S. B.V. Netherlands.

B.O.S.S. holds 100% shares in an Indian Company. 52% of the value of the shares of

RichiRich is derived from the business carried on by the Indian Company. The

balance value of the shares is derived from its other operating company which is

situated in Philippines.

4. FMC sold the shares of RichiRich on the New York Stock Exchange on 4th August2007 for a consideration of UDS 4,000. FMC filed a NIL return of income for the

assessment year 2008- 09, without offering the capital gains earned on the sale of

share of RichiRich.

5. The Assessing Officer passed the assessment order on 20th December, 2010, holdingthat:

The capital gains earned by FMC are taxable as it is a transfer of a capital assetsituated in India.

The benefit of the Indo-Mauritius Double Taxation Avoidance Agreement(herein after referred to as the Treaty) would not be applicable.

Further FMC was not allowed the benefit of indexation in computing the capitalgains.


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6. FMC appealed to the Commissioner of Income-tax (Appeals). On 20th December2011, CIT(A) allowed the appeal of FMC holding that:

The shares of RichiRich is not a capital asset situated in India within themeaning of section 9(1)(i) of the Act and, hence, capital gains is not taxable.

FMC is entitled to the Treaty benefits.7. The Revenue appealed before the Income-tax Appellate Tribunal (hereinafter

referred to as the Tribunal). On 13th July 2012, the Tribunal allowed the appeal

of the Revenue holding that:

Explanation 5 to section 9(1)(i) of the Act is applicable. The value of the sharesof RichiRich is substantially from assets in India and, hence, the capital gainsare taxable.

The transaction of sale of shares of RichiRich is not covered under the Treaty. Benefit of indexation would not be available to FMC. The full amount of capital gains would be chargeable to tax in India and not the

proportionate amount.

8. FMC filed an Appeal in the Honourable High Court of Bombay against the order ofthe Tribunal. The Appeal is now fixed for final hearing on this date.

HENCE, THE PRESENT MATTER IS BEFORE THIS HONOURABLE COURT.


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[E]. QUESTIONS PRESENTEDI. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN

LAW THE TRIBUNAL WAS RIGHT IN LAW IN HOLDING THAT THE SHARES OF

RICHIRICH CAN BE SAID TO BE DERIVING ANY VALUE DIRECTLY OR

INDIRECTLYFROM ANY ASSET IN INDIA?

II. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND INLAW THE TRIBUNAL WAS RIGHT IN HOLDING THAT THE SHARES OF

RICHIRICH DERIVES ITS VALUE SUBSTANTIALLY FROM THE ASSETS

LOCATED IN INDIA?

III. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND INLAW THE TRIBUNAL WAS RIGHT IN HOLDING THAT EXPLANATION 5 TO

SECTION 9(1)(I)IS APPLICABLE ON THE SALE OF SHARES OF RICHIRICH?

IV. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND INLAW THE TRIBUNAL WAS RIGHT IN HOLDING THAT FULL CAPITAL GAINS

WOULD BE CHARGEABLE TO TAX IN INDIA AND NOT CAPITAL GAIN

PROPORTIONATE TO THE ASSETS SITUATED IN INDIA?

V. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND INLAW THE TRIBUNAL WAS RIGHT IN HOLDING THAT THE ASSESSEE IS NOT

ENTITLED TO INDEXATION BENEFIT IN COMPUTING THE CAPITAL GAINS

CHARGEABLE TO TAX IN INDIA?

VI. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND INLAW, THE TRIBUNAL WAS RIGHT IN HOLDING THAT THE CAPITAL GAINS ON

THE SALE OF THE SHARES OF RICHIRICH BY FMC WOULD NOT COME

WITHIN THE AMBIT OF THE TREATY?


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[F]. SUMMARY OF PLEADINGS

I. THAT THE SHARES OF RICHIRICH ARE SAID TO BE DERIVING VALUEDIRECTLY OR INDIRECTLYFROM ASSET LOCATED IN INDIA.

When there exists, sufficient territorial connection or nexus between the personsought to be charged and the country seeking to tax him, then the income tax

may extend to that person in respect of his foreign income.

In Section 9 of the Income Tax Act, where deemed to gives wide amplitudeso as to bring out the sufficient economic nexus with the assets located in

India.

By way of explanation 5 the companies incorporated outside the territory ofIndia, but gaining substantial value from their subsidiary located in India, will

be always deemed to be located in India for the purpose of taxation.

The Income Tax authorities or the Court can lift the corporate veil and lookthrough the transaction made by the company, when the company is

incorporated with the improper motive.

II. THAT THE SHARES OF RICHIRICH TRADED BY FMC DERIVE ITS VALUESUBSTANTIALLYFROM THE ASSETS LOCATED IN INDIA.

The word substantially is not defined in the Act per say. However, it is ofopinio juris that any quantum above 50 percentage mark shall construe a

substantial proportion.

Also, in the proposed DTC, 2010, the 50 percent mark is recognised assubstantial value attribution from the assets located in India .

India is a signatory to the OECD and UN Model Taxation Convention, wherethe 50 percent attribution is considered to be the substantial level.

III. THAT EXPLANATION 5 TO SECTION 9(1)(I) IS APPLICABLE ON THE SALE OFSHARES OF RICHIRICH.

Explanation 5 is enacted through the Financial Act, 2012 with a retrospectiveeffect. Hence, the amendment will be applicable even to all pending cases in

appellate stage in the Courts.


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The legislature by way of the clarificatory amendment has made clear that theinterpretation shown via explanation 5 already existed under the main section.

The legislature has been conferred with all powers under our Constitution tomake retrospective laws provided they are competent on the subject matter.

IV. THAT FULL CAPITAL GAINS WOULD BE CHARGEABLE TO TAX IN INDIA ANDNOT ONLY THE CAPITAL GAINS PROPORTIONATE TO THE ASSETS SITUATED IN

INDIA.

Shares are recognised as Capital Assets and being a conjugation of rights,cannot be apportioned or dissected.

The principles of apportionment do not apply to transactions which take placeentirely in one state.

The principle of apportionment applies only to business per say. The principle of apportionment applies to composite transaction and in the

present matter the transaction is single without any multiplicity of activities.

The nexus established between FMC and India i.e. the taxing state is holistic.

V. THAT THE ASSESSEE IS NOT ENTITLED TO INDEXATION BENEFIT INCOMPUTING THE CAPITAL GAINS CHARGEABLE TO TAX IN INDIA.

The first proviso read with second proviso to section 48 of the Act states thatthe benefit of indexation is not available to non-residents as non-residents are

protected from vagaries of fluctuation in currency rates.

VI. THAT THE CAPITAL GAINS ON THE SALE OF THE SHARES OF RICHIRICH BYFMCWOULD NOT COME WITHIN THE AMBIT OF THE TREATY.

RichiRich is registered in America. It has been clarified vide Circular No. 682that the shares traded of an Indian Company only will come under the ambit of

the Treaty.

The purpose of the Treaty is to avoid tax evasion and the transaction carriedout by FMC would lead to the abuse of Treaty.


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[G]. PLEADINGS ADVANCED

ISSUE I. THE SHARES OF RICHIRICH ARE SAID TO BE DERIVING VALUED

IRECTLY OR INDIRECTLY

FROM ASSET LOCATED IN INDIA.

I.A. SUFFICIENT ECONOMIC NEXUS WITH THE ASSETS LOCATED IN INDIA.1. The word deemed under the section 9(1) of Income Tax Act, 1961,1 gives wide

amplitude so as to include all kinds of income derived by non-resident from every

other source within the ambit of the provision.2

Clause (i) of Section 9(1) provides

that income is deemed to accrue or arise in India whether directly or indirectly inter

alia through or from (a) a business connection in India; (b) property in India; (c ) anyasset in India; (d) any source of income in India; or (e) through the transfer of a

capital asset situated in India. The common thread is that the income should have

sufficient territorial or economic nexus with India.3

India has a wide net of source

based taxation to preserve its tax base which is granted by the Section 9 of the

Income Tax Act, 1961.

2. The jurisdiction of a state to tax non-residents is based on the existence of a nexusconnecting the person sought to be taxed with the jurisdiction which seeks to tax.4

The nexus of a non-resident with the taxing jurisdiction arises where the source of

income originates in the jurisdiction.5

A country may tax income having its source in

that country, regardless of the residence of the tax payer.6

3. A sufficient territorial connection or nexus should exist between the person sought tobe charged and the country seeking to tax him, income tax may extend to that person

1 Section 9Income deemed to accrue or arise in India.

2 CIT, New Delhi v. M/s. Eli Lilly and Company (India) Pvt. Ltd, (Appeal No. 5114 of 2007), decided on:

25/3/2007.

3 Vodafone International Holdings B.V. v. Union of India (UOI) and Anr. 2010 (112) BomLR 3792,

[Hereinafter Vodafone Bom. HC Case].

4Ishikawajma-Harima Heavy Industries Ltd. v.Director of Income Tax, Mumbai, AIR 2007 SC 929.

5 Sheraton International Inc. v. Deputy Director Of Income Tax, 2007 293 ITR 68 (Delhi), [Hereinafter

Sheraton Case].

6Julie Rogers-Glabush (ed.),IBFD International Tax Glossary, IBFD publications, 6th edn, p. 294, 394.
http://fnopenglobalpopup%28%27/ba/disp.asp','40465','1');http://fnopenglobalpopup%28%27/ba/disp.asp','40465','1');http://fnopenglobalpopup%28%27/ba/disp.asp','40465','1');http://fnopenglobalpopup%28%27/ba/disp.asp','40465','1');


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in respect of his foreign income.7

In the present case, the transaction in question had

a significant nexus with India. The shares transacted by FMC derives its value

substantially from the assets located in India.8

Henceforth, the capital gain arising on

sale of shares by FMC has nexus with Indian jurisdiction.9

Moreover a controlling

interest is not required for the purpose of constituting a distinct capital asset under

the Income Tax Act, 1961.10

Thus FMC is required to pay tax in India for indirectly

transacting assets located in India by way of sale of share in RichiRich.11

4. More so, the Explanation 5 to Section 9(1)(i) of Income Tax Act, 1961 insertedthrough Financial Act, 2012 clarifies the legislative intent behind the main provision

of the section. The amendment comes as the clarification of doubt in regard to

legislative intent, prior to which the section has attracted a different interpretation

by the Honble Supreme Court in the Vodafone Case.12

The bare reading of the

explanation to Section follows,

Explanation 5 -For the removal of doubts, it is hereby clarified that an asset or

a capital asset being any share or interest in a company or entity registered or

incorporated outside India shall be deemed to be and shall always be deemed to

have been situated in India, if the share or interest derives, directly or indirectly,

its value substantially from the assets located in India

Thus the companies incorporated outside the territory of India, but gaining

substantial value from their subsidiary located in India, will be always deemed to be

located in India for the purpose of taxation. Hence, when a Non-resident trades on

one such company incorporated outside the territory of India will always be liable to

pay taxes in India, as there are more than sufficient territorial nexus and economic

nexus established.

7Sheraton Case.

8 Proposition 3.

9Vodafone Bom. HC Case.

10Ibid.

11 Proposition 4.

12

Vodafone International Holdings B.V v. Union of India &amp, CIVIL APPEAL NO.733 OF 2012 in theSupreme Court of India, 163, [Hereinafter Vodafone Case].


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I.B. LIFTING OF THE CORPORATE VEIL.5. The Income tax Authorities were entitled to pierce the veil of corporate entity and to

look through the reality of the transaction to examine whether the corporate entity

was being used for tax evasion.13 Further, the principle can be invoked when a

separate legal entity was brought into existence outside the taxable territory, with the

ulterior motive of evading the tax obligation by the assessees.14

6. The Courts may even lift the Corporate Veil when an interest is being considered, 15more so a company is incorporated with improper objective.

16Tax evasion is an

improper objective. Courts will not knowingly permit people abusing the legal entity

and status granted to a company when that status is being abused.17

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.18

7. Lifting the corporate veil doctrine can be applied in tax matters even in the absenceof any statutory authorisation 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

13Mc Dowel l & Company Limited v. The Commercial Tax Officer, 1986 AIR 649, [Hereinafter Mc

Dowell Case], (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 one of the functions of theAssessing Officer to ensure that there is no conscious avoidance of tax by an assessee, and such functionbeing quasi-judicial in nature, cannot be interfered wi th or prohibited).

14CIT v. Sri Meenakshi Mills Ltd., AIR 1967 SC 819, [Hereinafter Meenakshi Mills Case]; See alsoLife

InsuranceCorporation Of India v.Escorts Ltd. & Ors., 1986 AIR 1370.

15Juggilal Kampalpatv. Commissioner of Income Tax, U.P., AIR 1969 SC 932 : (1969) 1 SCR 988.

16Workmen Employed In Associated Rubber Industry Ltd. Bhavnagar v. The Associated Rubber Industry Ltd.

Bhavnagar, AIR 1986 SC 1.

17Meenakshi Mills Case.

18Vodafone Case.


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evasion.19

The existing tax statutes must be interpreted in a purposive manner to

achieve the intention of the Legislature.20

8. Learned Judge Desai in Wood Polymer Ltd. v. Bengal Hotels Limited,21 where herefused to accord sanction to the amalgamation of companies as it would lead to

avoidance of tax. It is neither fair nor desirable to expect the legislature to intervene

and take care of every device and scheme to avoid taxation. It is up to the Court to

take stock to determine the nature of the new and sophisticated legal devices to avoid

tax and consider whether the situation created by the devices could be related to the

existing legislation with the aid of 'emerging' techniques of interpretation as was

done inRamsay22

,Burma Oil23

andDawson24

, to expose the devices.

9. It is submitted that the facts of the case are clearly stating the conduit nature ofholdings, from Indian subsidiary to RichiRich, located in U.S.A. via subsidiaries in

Netherlands and British Virgin Islands25

. Thus the whole complex structure of the

RichiRich holdings are evidently part of tax evading scheme,26

more so the

subsidiaries in Netherlands and British Virgin Islands are just an offshore registered

office and has no business activity other than holding the shares of the subsidiaries.27

19Ibid.

20MacNiven v. Westmoreland Investments Limited, (2003) 1 AC 311; See alsoBarclays Mercantile Business

Finance Limitedv.Mawson, (2005) AC 685 (HL).

21Wood Polymer Ltd. v. Bengal Hotels Limited, 40 Company Cases, 597.

22W. T. Ramsay Ltd. v. Inland Revenue Commissioners, [1981] S.T.C. 174.

23

Inland Revenue Commissioners v. Burmah Oil Co. Ltd., [1982] S.T.C. 30, H.L. (Sc.).

24Furniss v.Dawson, [1984] 1 All ER 530.

25Proposition 3.

26Mc Dowell Case, ("I have referred to the English cases at some length, only to show that in the very country

of its birth, the principle of Westminister has been given a decent burial and in that very country where the

phrase 'tax avoidance' originated the judicial attitude towards tax avoidance has changed and the smile, cynical

or even affectionate though it might have been at one time, has now frozen into a deep C frown. The courts are

now concerning themselves not merely with the genuineness of a transaction, but with the intended effect of it

for fiscal purposes. No one can now get away with a tax avoidance project with the mere statement that there is

nothing illegal about it").

27Ibid.


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5

10.Further, it is submitted that the income accrued by RichiRich from the businessoperations in India is indirectly attributed to the shares of RichiRich transacted by

FMC, i.e., 52 percent of every share of RichiRich derives its value from Indian

operations.28

Thus the foreign income accrued by FMC on sale of shares of RichiRich

is liable to be taxed in India.

Hence, it is humbly submitted that the shares of RichiRich derive value Directly or

Indirectly from the assets located in India.

ISSUE II.THE SHARES OF RICHIRICH TRADED BY FMCDERIVE ITS VALUESUBSTANTIALLYFROM THE ASSETS LOCATED IN INDIA.

11.The shares of RichiRich acquire 52 percent value from the assets located in Indiawhile the rest of value is accrued from the operations in Philippines.

29The Financial

Act, 2012 did not carry what is meant by deriving value substantially from the

assets located in India.

12.It is ofopinio juris that50 percent and anything above 50 percent shall be consideredto construe substantial value, and this has been the general common prudence that

has been in practice. E.g. In Income Tax Act, 1960 in order to determine who is

resident and non-resident30

for the purpose this Act is by half way mark in a year i.e.,

182 days or more in a year. Thus the contribution of 52 percent by Indian subsidiary

to the shares of RichiRich can be very well accounted as the substantial contribution

made.

28Proposition 3.

29 Proposition 3.

30Section 6 Residence in India (An individual is said to be resident in India in any previous year, if

he (a) is in India in that year for a period or periods amounting in all to one hundred and eighty-two

days or more ; or (c) having within the four years preceding that year been in India for a period or

periods amounting in all to three hundred and sixty-five days or more, is in India for a period or periods

amounting in all to sixty days or more in that year).


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6

13.Moreover India is a member to both OECD31 and UN Model Tax Conventions, theseconventions allows a country to tax its non-residents gain from the alienation of

shares in a foreign company only if more than 50 percent of the value of the

companys share is acquired directly or indirectly from the assets situated in the

taxing State.32

14.The DTC bill as introduced in Parliament contemplates that income earned from thetransfer of any foreign companys shares outside India will be taxable in India, if at

any time in the previous 12 months at least 50 percent of the foreign companys total

assets were held in India.33

15.It is submitted that from the OECD, UN Model Tax Convention, and DTC Bill it canbe ascertained that the recognised substantial mark is 50 percent and in the present

case the sale of shares of RichiRich by FMC derives 52 percent value from the assets

located in India34

which is shall be considered as substantial value.

Hence, it is humbly submitted that the shares of RichiRich, traded by FMC, derives its

value substantially from the assets located in India.

ISSUE III. THAT EXPLANATION 5 TO SECTION 9(1)(I)IS APPLICABLE ON THESALE OF SHARES OF RICHIRICH.

III.A. RETROSPECTIVE EFFECT OF AMENDMENT TO SECTION 9(1)(I).16.The explanation 5 to Section 9(1) (i) of the Income Tax Act was introduced as a part

of Financial Act, 2012 which was made effective retroactively from 1962. Moreover

the explanation starts with the words for removal of doubts, which implies that

31Stefano Simontacchi, Taxation of Capital Gains Under the OECD Model Convention: With Special

Regard to Immovable Property (Kluwer ed., 2007), (India reserved the right to tax gains from Indian

shares, reserved its position on Article 13(4), and did not reserve its position on Article 13(5), which

prohibits source State taxation of gains not enumerated in the preceding paragraphs).

32 Article 13(4) of OECD Model Tax Convention - Gains derived by a resident of a Contracting State

from the alienation of shares deriving more than 50 per cent of their value directly or indirectly from

immovable property situated in the other Contracting State may be taxed in that other State.

33 Direct Tax Code, 2010.

34Proposition 3.


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7

legislature has not amended the existing provision as such, but guiding the courts to

interpret the main provision with respect to the legislative intent.35

In the instant case,

the explanation not only clarified the doubt, but also provides an additional support

to the dominant object of the Act to make it meaningful and purposeful.36

17.Whenever the legislature wanted to convey their intention to give retrospective effectto a provision, It can be effected either by enforcing its commencement from an

earlier date by introducing a specific provision in regard to its commencement or by

using such other language or expression conveying such meaning has always been in

provision.37

18.The scope of an "Explanation" to a statutory provision was explained in the case CITv. Orissa Cement Ltd.,38 as:

the object of an Explanation to a statutory provision is: (a) to explain the meaning

and intendment of the Act itself,39

(b) where there is any obscurity or vagueness in

the main enactment, to clarify the same so as to make it consistent with the dominant

object which it seems to sub serve,40

(c) to provide an additional support to the

dominant object of the Act in Order to make it meaningful and purposeful;41

(d) An

Explanation cannot in anyway interfere with or change the enactment or any part

thereof; but where some gap is left which is relevant for the purpose, the

Explanation, in Order to suppress the mischief and advance the object of the Act, can

35Income Tax Officer v. Maruti Countrywide Auto Financial Services (P) Ltd. , [2008] 307 ITR 165

(Delhi).

36S. Sundaram v. V.R. Pattabhiraman, [1985] 2 SCR 643.

37CITv. Kerala Electric Lamp Works Ltd., 2003 129 TAXMAN 549 Ker.

38CITv. Orissa Cement Ltd., (2002) 173 CTR (Del) 317.

39CITv. Kerala Electric Lamp Works Ltd., (2008) 114 TTJ Delhi 676, (Explanation in a statute is to clarify or

explain or settle any doubt or ambiguity or controversy. It may even widen the scope of the main provision in

rare cases. The words used alone can reflect the true intend and they should be construed on their own terms).

40 Commr. of Agrl. IT v. Plantation Corporation of Kerala Ltd., (2000) 164 C.T.R. (SC) 502 , (An

Explanation is intended to either explain the meaning of certain phases and expressions contained in a

statutory provision or depending upon its language it might supply or take away something from the

content of a provision and at times even, by way of abundant caution, to clear any mental cobwebs

surrounding the meaning of a statutory provision spun by interpretative process to make the position

beyond controversy or doubt).

41Ibid.


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help or assist the Court in interpreting the true purpose and intendment of the

enactment, and the right with which any person under a statute has been clothed.

19.It is submitted that the explanation introduced via amendment was a mereclarification to state that the meaning carried in the explanation was already there in

the main section. Hence irrespective of the fact that the amendment was introduced in

appellate stage,42

the interpretation brought via explanation will be applicable to the

assesse, FMC. Moreover it is a settled position of law, that when the Legislature

enacts the law it is aware of the ground realities and there is presumption qua

constitutionality.43

III.B. POWER OF LEGISLATURE TO ENACT A RETROSPECTIVE LAW WITHEXTRA-TERRITORIAL APPLICABILITY.

20.The power of legislature over a subject-matter and competence to make a valid law isconsidered, when this condition is met, then at any point of time the legislature can

make such a valid law retrospectively so as to bind even on past transactions.44

The

validity of a Validating law, therefore, depends upon whether the legislature

possesses the competence over the subject-matter.45

21.Article 246 of the Constitution gives Parliament the authority to make laws which areextra-territorial in application.

46Further, Article 245(2) says that no law made by the

Parliament shall be deemed to be invalid on the ground that it would have extra

territorial operation.47

Therefore, the Parliament undoubtedly has power to enact law

having extra-territorial application.48

42 Proposition 6.

43K K Baskaran v. State, (2011) 3 SCC 793.

44Shri Prithvi Cotton Mills Ltd. & Anr., v.Broach Borough Municipality & Ors., 1970 AIR 192.

45Ibid.

46Commissioner of Income Tax v.Eli Lilly and Co. (India) Private Limited, (1009) 15 SCC 1, ("Section 9 was a

typical example of a combination of a machinery provision which also provides for chargeability. The Court

held that the 1961 Act has extraterritorial operations in respect of subject-matters and subjects which is

permissible under Article 245 of the Constitution and the provisions are enforceable within the area where the

Act extends through the machinery provided under it").

47

Vodafone Case 183; Electronics Corporation of India Ltd.,. v. CIT, 83 ITR 43 (SC); A.h.Wadia v. CIT,(1949) 17 ITR 63 (FC), (PerChagla, J. in his concurring opinion, no limitation is placed upon the Legislature

that the provisions of the Act of the Legislature passed should be intra-territorial in their character. It is entirely


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9

22.The power to impose tax is essentially a legislative function which finds in itsexpression Article 265 of the Constitution of India. Article 265 states that no tax

shall be levied except by authority of law. Further, it is also well settled that the

subject is not to be taxed without clear words for that purpose.49

Thus the explanation

5 comes as amendment with clear words from the constitutional authority to levy tax

on indirect transfer of shares, wherein the non-resident company holding an Indian

subsidiary, similarly RichiRich holds Indian subsidiary and thus the capital gain

arising out of sale of shares of RichiRich by FMC will be liable to tax in India.50

23.The legislatures under the Constitution have, within the prescribed limits, power tomake laws prospectively as well as retrospectively. In exercise of the plenary powers

conferred upon the legislature by Articles 245 and 246 of the Constitution, render a

judicial decision by a competent court ineffective by enacting a valid law

fundamentally altering or changing the conditions on which such a decision is

based,51

which in turn may affect a class of persons and events at large.52

However, it

cannot set aside an individual decision inter-parties and affect their rights and

liabilities alone.53

24.It is observed that Article 141 of Constitution of India states, the law declared by theSupreme Court shall be binding on all Courts within the territory of India. Further,

Article 141 does not prevent the appropriate Legislature from amending the law

which was earlier interpreted by Courts, nor does Article 141 take away Parliament's

a matter of State policy to what extent the Indian Legislature should enact extra-territorial statutes. No

Legislature would like to stultify itself and no Legislature would pass laws which it could not enforce; but those

are not matters for a Court of laws).

48Maneka Gandhi v. Union of India, (1978) 1 SCC 248: AIR 1978 SC 597.

49Ibid.

50Proposition 2, 3.

51Municipal Corporation of the City of Ahmedabad etc. v.New Shorock Spg. & Wvg. Co., Ltd. etc. ,

[1971] 1 SCR 288; See alsoK. Sankaran Nair (Dead) through L.Rs. v. Devaki Amma Malathy Amma and

Ors,.(1996) 11 SCC 428.

52In the matter of Cauvery Water Disputes Tribunal, AIR 1992 SC 522, 65.

53Ibid.
http://fnopenglobalpopup%28%27/ba/disp.asp','17231','1');http://fnopenglobalpopup%28%27/ba/disp.asp','17232','1');http://fnopenglobalpopup%28%27/ba/disp.asp','17066','1');http://fnopenglobalpopup%28%27/ba/disp.asp','17066','1');http://fnopenglobalpopup%28%27/ba/disp.asp','17232','1');http://fnopenglobalpopup%28%27/ba/disp.asp','17231','1');


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10

power to amend the Constitution according to the prescribed procedure.54

Hence it is

on part of legislature to make or amend the laws,55

which may even result in

nullifying the Courts earlier judgments.56

25.Substantial territorial nexus57 between the income and the territory which seeks to taxthat income is of prime importance to levy tax.

58It is submitted that the explanation 5

clarifies beyond reasonable doubt to cover up indirect transactions, for that matte r the

non-resident company will be deemed to be located in India and thus, the nexus

between the income and the territory to tax is established, whereby sale of shares of

RichiRich by FMC and the income accrued out of such transaction is liable to be

taxed in India.59

26.The Central Board of Direct Taxes issued a circular 60 vide 29th May, 2012 stating theamendment under The Financial Act, 2012 will be enforced by Tax department only

from 1st April, 2012 and cases closed prior to the mentioned date shall not be re-

opened. The retrospective applicability may affect some person, but what is to be

54Behariji Dass, Civil & Sessions Judge, Sultanpur and Ors. v. Chandra Mohan, Civil & Sessions Judge,

Fatehpur and Ors., AIR 1969 All 594.

55Nawaz B. Mody, The Press in India: The Shah Bano Judgment and Its Aftermath Asian Survey , Vol.

27, No. 8 (Aug., 1987), pp. 935-953, (InMohd. Ahmed Khan v. Shah Bano Begum and Ors. , 1985 AIR

945, a controversial divorce lawsuit. The judgment created considerable debate and controversy affecting

the sentiments of Muslim community in India. Events followed by the Late Mr. Rajiv

Gandhis government, with its absolute majority, to pass the Muslim Women (Protection of Rights onDivorce) Act, 1986 which diluted the secular judgment of the Supreme Court and, in reality, denied even

utterly destitute Muslim divorces the right to alimony from their former husbands).

56(It is submitted that on relying upon the recommendations of the Mandal Commission and Supreme Court's

directions in Indra Sawhney v. Union of India, AIR 1993 SC 477 the reservations were introduced for otherbackward classes in the Central Government jobs, thereby excluding reservations in promotions and put 50%

ceiling on the reservations, the Govt. again strike back by the 77th Constitutional amendment to article 16(4A)

was introduced and reservation was introduced in promotions also, and 16(4B) was introduced to make the

judgment invalid and excluded 50% ceiling and carry forward rule was propounded. To negate SC's mandate by

85th constitutional amendment promotions in reservations with 'consequential seniority' was granted, although

these amendments have been upheld in k Naagraj v. Union of India).

57See Kanga and Palkhivala, The Law and Practice of Income Tax 10 (7th Ed.,).

58Vodafone Case 168.

59 Proposition 5.

60CBDT Circular, [F.No.500/111/2009-FTD-1(Pt.)], dated 29 May 2012.
http://en.wikipedia.org/wiki/Rajiv_Gandhihttp://en.wikipedia.org/wiki/Rajiv_Gandhihttp://en.wikipedia.org/wiki/Rajiv_Gandhihttp://en.wikipedia.org/wiki/The_Muslim_Women_(Protection_of_Rights_on_Divorce)_Act_1986http://en.wikipedia.org/wiki/The_Muslim_Women_(Protection_of_Rights_on_Divorce)_Act_1986http://en.wikipedia.org/wiki/The_Muslim_Women_(Protection_of_Rights_on_Divorce)_Act_1986http://en.wikipedia.org/wiki/The_Muslim_Women_(Protection_of_Rights_on_Divorce)_Act_1986http://en.wikipedia.org/wiki/Rajiv_Gandhihttp://en.wikipedia.org/wiki/Rajiv_Gandhi


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11

taken into account is the greater public good,61

as the tax money is for the welfare of

the nation.62

Hence, it is humbly submitted that explanation 5 to Section 9(1)(i) is applicable on the

sale of shares of RichiRich.

ISSUE IV. THAT FULL CAPITAL GAINS WOULD BE CHARGEABLE TO TAX ININDIA AND NOT CAPITAL GAINS PROPORTIONATE TO THE ASSETS

SITUATED IN INDIA.

IV.A. SHARES ARE RECOGNIZED AS AN ASSET.27.It is contended that the shares of a company are recognized as an asset under the Act,

referring to the definition of capital assets given in Section 2(14) which states that

capital asset means property of any kind held by an assesse, whether not connected

with his business or profession subject to some certain exclusions as mentioned in the

Act.

28.Referring to Section 2(47) of the Act, it is contended that in case there is transfer of acapital asset, it is a transfer of a bundle of rights attached with that capital asset.

The shares of the company, being a conjugation of rights, cannot be apportioned or

dissected particularly, in the absence of such apportionment principles under the law.

It is submitted that apportionment principles are a result of enactment by the

legislature and not by principles of interpretation. In the light of the principles of

effects doctrine, he submitted that there is transfer of a capital asset with a bundle of

rights encompassed in such assets; it is a single transfer and not multiple transfers.

29.The principles of apportionment do not apply to transactions which take placeentirely in one state. The Bombay High Court has held that the income accrued due

to activities in a single state is taxable only in that state.63

61Virender Singh Hooda And Ors. v. State Of Haryana And Anr., AIR 2005 SC 137, 35.

62 Craies, Craies on Statute Law 396 (7th Ed.) (observes that If a statute is passed for the purpose of

protecting the public against some evil or abuse, it may be allowed to operate retrospectively, although by such

operation it will deprive some person or persons of a vested right. Thus public interest at large is one of the

relevant considerations in determining the constitutional validity of a retrospective legislation).

63C.I.T. v. Chunilal B. Mehta, AIR 1938 PC 232. See also Commissioner of Income Tax, Bombay v.Ahmedbhai

Umarbhai, (1950) 18 ITR 472.


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12

IV.B. APPORTIONMENT PRINCIPLE APPLIES ONLY TO BUSINESS.30.Apportionment principle applies only to income from business and not to income

derived from capital gains. It is contended that different rules apply to different heads

of income. Even the tax treaties have been compartmentalized under different heads

of income i.e. salary, business, capital gains etc. Therefore, unless lawmakers come

up with specific artificial rules, there can be no apportionment principles on income

under capital gains. Certain countries have legislated laws by which underlying

assets such as immovable property are taxed if there is sale of shares of the

companies which owns the immovable property. However, Indian law does not have

such provisions.64

31.It is submitted that no question of apportionment arises as it presupposes mult iplicityof activities from which income accrues or arises. If law compels us to adhere to

legal form of transaction without chasing substance, then where there is a transfer of

capital asset which gives rise to income, unless in the rarest of cases where situs of

asset could be at more than one place, the source based taxation of such capital gains

must be in that jurisdiction where the asset is situated.

32.It is submitted that the apportionment of income, profits or gains between thosearising from business operations carried on in taxable territories and those arising

from activities carried on without the taxable territories is based on general principles

of apportionment of income only.65

33.Thus, apportionment is applied where an assessee carries on multiple activities aspart of a composite business which straddles more than one taxing jurisdiction. The

income which results from those activities has to be apportioned so as to determine

what part of the income can be attributable to the business which is carried on in the

taxing jurisdiction.66

64 Tax Edge Special,BMR Advisors (2010) Vol. 4 Issue 8.4 P. 1.

65

Anglo-French Textile Co. Ltd. v. Commissioner of Income Tax, Madras, (1954) 25 ITR 27.

66Chainrup Sampatram v. Commissioner of Income Tax, West Bengal, (1953) 24 ITR 481.


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IV.C. THE NEXUS IS HOLISTIC AND NOT PROPORTIONATE.34.It is submitted that Explanation 5 is applicable in the present matter and that FMC

has a holistic nexus with India. The shares of RichiRich derive its value substantially

from the Indian operations. The Indian business of RichiRich contributes up to 52%

of the value of its shares.67

As a result, Revenue is authorised to tax capital gains

accruing from trading the shares of RichiRich.

35.The nexus between the Revenue and FMC is not affected by the proportionality ofthe revenue earned by RichiRich. The proportion is essential only to establish that

whether there is substantial contribution by the Indian operations to establish the

nexus. Once, the nexus is established, and then the principle of apportionment will

apply only if there is multiplicity of activities. In the present case shares of

RichiRich transacted by FMC drives its value substantially from Indian subsidiary, so

the nexus is established.68

Thereafter capital gain has been accrued with FMC due to

sale of shares which doesnt have a multiplicity of activities which renders principle

of apportionment inapplicable.

IV.D. THE TRANSACTION IS NOT COMPOSITE.36.The principle of apportionment can be applied in cases where different severable

parts of the composite contract are performed in different places.69

When a

transnational corporation carries on multiple activities as part of a composite

business which straddles more than one taxing jurisdiction, the income which results

from activities has to be apportioned so as to determine what part of the income can

be attributable to the business which is carried on in the taxing jurisdiction.

Hence, it is humbly submitted that full capital gains would be chargeable to tax in

India and not capital gain proportionate to the assets situated in India.

67Proposition 3.

68 Proposition 3, 4.

69Ishikawajma-Harima Heavy Industries Ltd. v.Director of Income Tax, Mumbai, AIR 2007 SC 929.


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ISSUE V. THE ASSESSEE IS NOT ENTITLED TO INDEXATION BENEFIT INCOMPUTING THE CAPITAL GAINS CHARGEABLE TO TAX IN INDIA.

V.A. THE TRANSACTION IS CARRIED OUT IN FOREIGN CURRENCY.37.When the shares are purchased in foreign currency, the first proviso to Section 48 70

of the Act requires that the sale consideration must be converted in the same foreign

currency in which the shares are purchased and then the gain or loss is to be

determined in the foreign currency, which again is to be re-converted into Indian

currency.71

38.A perusal of the two provisos to Section 48 shows that computation of capital gainsis bifurcated into two parts:

(i) The first proviso covers those cases where the capital asset being the shares in ordebentures of an Indian company are acquired by a non-resident by utilizing the

foreign currency and in such cases, the cost of acquisition, expenditure incurred

wholly and exclusively in connection with transfer of such shares, and the sale

consideration is required to be converted in the same foreign currency which was

utilized for acquiring such shares/debentures so as to compute the capital gain in

foreign currency, which is then reconverted into Indian currency for the purpose of

computing tax thereon. This method is applicable to short-term as well as long-

term capital asset, asset being shares in or debentures of an Indian company. For

assets other than shares or debentures of an Indian company this proviso did not

apply.

(ii) On the other hand, second proviso to Section 48 provides the method of computinglong-term capital gains in respect of any long-term capital assets acquired by any

assessee irrespective of his status except the long-term capital gain arising to non-resident from the transfer of long-term capital asset specified in the first proviso to

Section 48. According to this method "the cost of acquisition" and the cost of

improvement mentioned in Section 48(ii) shall be substituted by "the indexed cost

of acquisition" and "the indexed cost of improvement" which shall be deducted

from the sale consideration for computing the long-term capital gain.

70

Section 48Mode of Computation.

71Tax Payers Information Series - 3, Income Tax Department (2011).


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39. This indicates the provision of two different categories for computing the long-termcapital gain. The intention of the Legislature appeared to be that no gains was to be

taxed to the extent it related to general inflation of price in the market. However, the

application of this method was restricted to the cases falling within the scope of the

second proviso to Section 48 and a different method was provided to the cases falling

within the scope of first proviso to Section 48 considering the rapid devaluation of

Indian currency. Foreign investors represented that capital gain be computed in

accordance with the increase in the value of asset in terms of foreign currency.

Accepting such representations of non-residents, the legislature has provided the

different method for computing capital gain in the first proviso to Section 48. The

legislature has also used the word "shall" in the first and second proviso to Section

48 vis--vis the computation of capital gain. On the other hand, the case of non-

resident falling within the ambit of the first proviso has been specifically excluded

from the computation of long-term capital gain in the second proviso.72

40.In the present matter, FMC traded the shares of RichiRich in USD.73 Therefore thecapital gains accrued were not in Indian currency which makes the case of assesse to

fall within the ambit of the first proviso to Section 48 of the Act. The Act provides

relief from currency fluctuations to such transactions but has no provisions tosafeguard them from currency inflation risks i.e. no indexation benefits.

41.The Legislature was well aware of the first and second provisos to Section 48 andhad used the words "second proviso to Section 48" in Sub-section (2) of Section

115AB and the words "first and second provisos to Section 48" in Sub-section (3) of

Section 115AD of the Act indicating that "if the Legislature had intended to give

benefit of marginal relief of tax to all non-residents it could have easily used the

words "first and second provisos of Section 48" in the proviso to Section 112(1) of

the Act."74

Therefore, applicable rate of tax on long-term capital gain accrued to

assessee was held to be 20 per cent since it had to be computed under first proviso to

Section 48, wherefore proviso to Section 112 could not be applied i.e. benefit of 10

72Basf Aktiengesellschaftv.Deputy Director of Income Tax, International Taxation, 2007 293 ITR 1 Mum,

[Hereinafter Basf Case].

73

Proposition 4.

74Ibid.


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16

per cent is not available to cases where computation is made by applying the first

proviso to Section 48.

42.Thus, the relief provided for by the proviso to section 112(1) of the Act is intended tocover cases where effect of inflation is not provided for. That is why the proviso

specifies that the calculation of 10 percent of the capital gain should be before

giving effect to indexation. Before giving effect to connotes that effect has

otherwise to be given. That means, the asset must be one qualified for indexation

under the second proviso to section 48 of the Act. There is no justification in not

giving effect to the words used in the proviso. Nothing stood in the way of the

legislature in specifying that all assets will qualify for protection and that has not

been done.75

V.B. ARGUENDO:NON AVAILABILITY OF INDEXATION BENEFIT AMOUNTS TODISCRIMINATION.

43.The first proviso read with second proviso to section 48 of the Act states that thebenefit of indexation is not available to non-residents as non-residents are protected

from vagaries of fluctuation in currency rates.76

Discrimination is understood to be

unequal treatment in an identical situation. Different treatment does not constitute

discrimination unless it is arbitrary.

44.A comparison cannot be made between a resident and national of a state and anational of another State to contend that they must be taxed in the same way. The

State is not obliged to extend the same privileges accorded to its own residents to the

ones who are not.77

Therefore, discrimination on account of nationality other than

residence is prohibited.

45.The terms taxation and tax are not interchangeable. 78 The object clause of everyagreement uses the expression taxation and tax where the purpose is stated to b e

avoidance of double taxation and prevention of fiscal evasion with respect to taxes

75Re Cairn UK Holdings Ltd., (2011) TII 16 ARM-INTL .

76Transworld Garnet Company Ltd. v.DIT., (2011) TII 02 ARA-Intl, [Hereinafter Transworld Garnet Case].

77Ibid.

78Id.


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17

on income and wealth. Avoidance of discrimination is the object of the former and

avoidance of double taxation is the object of the latter.

46.Furthermore, the Act expressly permits79 taxing a foreign company at a rate higherthan the Indian company and states that this shall not be regarded as discrimination

under the relevant tax treaty.

47.The AAR has reiterated the fact that the State is not obliged to extend the sameprivileges offered to its own residents to nonresidents and that mere differentiation in

tax treatment because of the residential status of the assessee would not amount to

discrimination, as set out in the tax treaty.80

Hence, it is humbly submitted that the assessee is not entitled to indexation benefit incomputing the capital gains chargeable to tax in India.

ISSUE VI. THAT THE CAPITAL GAINS ON THE SALE OF THE SHARES OFRICHIRICH BY FMCWOULD NOT COME WITHIN THE AMBIT OF THE

TREATY.

VI.A. RICHIRICH IS NOT A COMPANY REGISTERED IN EITHER OF THECONTRACTING STATES.

48.The benefit of the Treaty was extended to the residents of the Contracting Stateswhile dealing with shares of companies of the Contracting States. When legislature

comes up with a law, it cannot think of all the possible malpractices. Thus, the Court

has to look into facts of the case and decide whether a particular provision has been

misused.

49.The intension of the legislature while entering into this agreement was to extend thebenefit to the companies and the residents of the contracting states. In the present

matter RichiRich is neither the resident company of India nor the resident company

of Mauritius.

79

Sec 90(2).

80Transworld Garnet Case.


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VI.B. ABUSE OF TREATY50.India and Mauritius entered into an agreement with a particular objective. The

objective reads as follows,

"Whereas the annexed Convention between the Government of the Republic of India

and the Government of Mauritius for the avoidance of double taxation and the

prevention of fiscal evasion with respect to taxes on income and capital gains and for

the encouragement of mutual trade and investment."

Thus, the purpose was avoidance of double taxation but not at the cost of fiscal

evasion. Mauritius has become an attractive route for companies to invest in Indian

companies.81

51.Unlike India, capital gains accrued from shares are not taxed in Mauritius. 82ShellCompanies is the term used in its pejorative sense to describe companies which

exist only on paper, but in reality, are investment companies.83

These companies

acquire a Tax Residency Certificate (hereinafter referred to as TRC) from the

Mauritius Tax Authorities and serve as a vehicle for investment purposes. These

structures have no other activities or operations per se.

52.One of the tests to examine the genuineness of the structure is the timing test thatis timing of the incorporation of the entities or transfer of shares etc. Structures

created for genuine business reasons are those which are generally created or

acquired at the time when investment is made, at the time where further investments

are being made at the time of consolidation etc.84

81 "Reviewing Tax Treaty with Mauritius: Chidambaram." N.p., 5 Sept. 2012. Last accessed on 15 Sept. 2012.

.

82 "Tax Haven Mauritius." Tax Havens of the World. N.p., n.d. . Last accessed on. 14 Sept. 2012.

; See also William Chung. "Mauritius

Highlights 2012." N.p., n.d. Last accessed on. 16 Sept. 2012. .

83 "Launderers Anonymous." The Economist. The Economist Newspaper, 22 Sept. 2012. Last accessed on. 22

Sept. 2012. .

84Vodafone Case.


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53.No law encourages opaque system to prevail. 85 Such activities result in fiscal evasionand the Honourable Court is pleaded to adopt functional

86and purposive

87approach.

The Honourable Supreme Court has categorically held that TRC though can be

accepted as a conclusive evidence for accepting status of residents as well as

beneficial ownership for applying the tax treaty, it can be ignored if the treaty is

abused for the fraudulent purposes of evasion of tax.88

85Shri Shiva Kant Jha v. Union Of India (UOI) And Ors., 2002 256 ITR 563 Delhi.

86Chinmoy pathakv. standard chartered bank ltd., on 14 june, 2010 in the High Court at Calcutta.

87Farhad J Bottlewalla, Mumbai v. Assessee, on 31 August, 2012 in the Income Tax Appellate Tribunal

Mumbai.

88Vodafone Case.


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[H]. PRAYER FOR RELIEF

Wherefore in the light of the facts stated, questions presented, authorities cited and

pleadings advanced, it is most humbly prayed before this Honourable Court that it may

be pleased to dismiss the appeal and hold that:

1. The Shares of RichiRich are said to be deriving value directly or indirectlyfrom asset located in India.

2. The shares of RichiRich traded by FMC derive its value substantially from theassets located in India.

3. Explanation 5 to Section 9(1) (i) is applicable on the sale of shares of RichiRich.4. Full capital gains would be chargeable to tax in India and not only the capital

gains proportionate to the assets situated in India.

5. The assessee is not entitled to indexation benefit in computing the capital gainschargeable to tax in India.

6. The capital gains on the sale of the shares of RichiRich by FMC would not comewithin the ambit of the treaty.

And pass any other order that it deems fit in the interests of justice, equity and

good conscience. All of which is respectfully submitted.

Date: S/d 1. .

Place: Mumbai, India. 2. .

(COUNSELS FOR THE RESPONDENT)

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