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Tax liability based on real owner and not legal owner Bombay HC ruling in the case of Aditya Birla Nuvo Ltd.
In brief
In a recent ruling
1
, the Bombay High Court (HC) held that capital gains arising
from the sale of shares in Idea Cellular Ltd. (Idea) by its Mauritian shareholder
AT&T Cellular Pvt. Ltd. (AT&T-Mauritius) are not protected by the India-
Mauritius Double Taxation Avoidance Agreement (the tax treaty), as the beneficial
owner and investor was New Cingular Wireless Services Inc, USA (NCWS). It was

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Aditya Birla Nuvo Ltd. v. DDIT [2011-TII-26-HC-MUM-INTL]

also held that these gains can be assessed in the hands of Aditya Birla Nuvo Ltd.
(ABNL) and TATA Industries Ltd. (TIL) as agents of NCWS.
Facts
The shareholding structure of Idea and the transactions under consideration
are shown in the diagram below:
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News Alert
22 July, 2011


Transaction A: Transfer of stake in Idea from AT&T-Mauritius to ABNL
Transaction B: Subsequent to transaction A above, transfer of 100% stake in
AT&T-Mauritius from NCWS to TIL
The sequence of events was as follows:
- Idea (earlier known as Birla Communications Ltd) was incorporated on 4
March, 1995 by the Birla Group of companies in India.
- Subsequently, on 5 December, 1995, the Birla Group entered into a joint
venture agreement (JVA) with AT&T Wireless Services Inc., U
US) which was controlled by AT&T Corp., US, for carrying o
telecommunication services in India. Under the JVA, AT&T
a 49% stake in Idea. Birla Group continued to own the balance
stake in Idea.

Mauritius to ABNL
above, transfer of 100% stake in
Idea (earlier known as Birla Communications Ltd) was incorporated on 4
Birla Group of companies in India.
Subsequently, on 5 December, 1995, the Birla Group entered into a joint
venture agreement (JVA) with AT&T Wireless Services Inc., US (AT&T-
US) which was controlled by AT&T Corp., US, for carrying out wireless
the JVA, AT&T-US acquired
to own the balance, i.e., a 51%
- The JVA allowed shares in Idea
either in their own name or through a permitted transferee, who would
be the 100% subsidiary of the joint venture partners. However, all the
rights and obligations pertaining to shares in Idea would vest
Joint Venture partners, who would be the owners of shares of Idea for all
practical purposes.
- Under this agreement, 49% shares in Idea were held by AT&T
(the permitted transferee of AT&T
ABNL (the permitted transferee of Birla group).
- On 15 December, 2000, TIL was inducted as a joint venture partner on
account of the merger of Tata Cellular with Idea, and a fresh
shareholders agreement (SHA) was entered into by all the three Joint
Venture partners.
- In October 2004, Cingular Wireless LLC, USA, acquired AT&T
AT&T Corp and AT&T-US was renamed
Inc, USA (NCWS).
- NCWS decided to exit the venture during 2005 and offered the shares to
ABNL and TIL, since both had the right
Both the Birla and the Tata Group
shares for a total consideration of USD 300 million, divided equally
between the two.
- ABNL acquired the shares
representing the Tata Group,
- ABNL made an application before the Assessing Officer
withholding tax order under section 195 of the Income
PwC News Alert
July 2011
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res in Idea to be held by AT&T-US and Birla group
in their own name or through a permitted transferee, who would
be the 100% subsidiary of the joint venture partners. However, all the
rights and obligations pertaining to shares in Idea would vest with the
Joint Venture partners, who would be the owners of shares of Idea for all
, 49% shares in Idea were held by AT&T-Mauritius
permitted transferee of AT&T-US) and the 51% balance was held by
itted transferee of Birla group).
On 15 December, 2000, TIL was inducted as a joint venture partner on
merger of Tata Cellular with Idea, and a fresh
shareholders agreement (SHA) was entered into by all the three Joint
Cingular Wireless LLC, USA, acquired AT&T-US from
was renamed New Cingular Wireless Services
NCWS decided to exit the venture during 2005 and offered the shares to
ABNL and TIL, since both had the right of first refusal under the SHA.
Both the Birla and the Tata Groups accepted the offer of purchasing the
consideration of USD 300 million, divided equally
ABNL acquired the shares in Idea from AT&T-Mauritius and TIL,
acquired AT&T-Mauritius from NCWS.
ABNL made an application before the Assessing Officer for a Nil
withholding tax order under section 195 of the Income-tax Act, 1961 (the
PwC News Alert
July 2011

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Act) to remit the consideration to AT&T-Mauritius, citing the availability
of a capital gains tax exemption under Article 13 of the tax treaty read
with the CBDT Circular No. 682 and 789. ABNL also placed reliance on
the decision of the Supreme Court in the case of Azadi Bachao Andolan
2
.
The assessing officer subsequently issued the Nil withholding tax order.
- ABNL remitted the consideration to AT&T-Mauritius. This was
immediately remitted to NCWS as dividends and repayment of loans. TIL
acquired the entire share capital of AT&T-Mauritius and paid the
consideration to NCWS.
- Subsequently, the assessing officer issued a notice to ABNL seeking to
assess ABNL as a representative assessee on the ground that the
beneficial owner in Idea was NCWS and not AT&T-Mauritius. Notices
were also issued to TIL treating it as an assessee-in-default for failure to
withhold taxes on the remittances made to NCWS. Further, notices were
also issued to the alleged seller, NCWS.
- As a result, all the parties filed separate writs against these notices before
the HC.






2
Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706 (SC)
Issues before the HC
Was tax treaty protection available on capital gains arising from sale of shares
in Idea by AT&T-Mauritius?
Can ABNL be considered as an agent of NCWS under section 163 of the Act,
and are simultaneous assessment proceedings against NCWS and ABNL (as an
agent of NCWS) sustainable?
Can TIL be considered a representative agent of NCWS under section 163 of
the Act?
Issue 1: - Was tax treaty protection available for capital gains arising
from the sale of shares in Idea by AT&T-Mauritius?
Assessees contentions
Gains accruing from the sale of shares in Idea by AT&T-Mauritius (a tax
resident of Mauritius which holds a valid tax residency certificate of
Mauritius) were not taxable in India.
The Revenue cannot lift the corporate veil when a valid tax residency
certificate from AT&T-Mauritius was on record. Therefore, utilisation of the
sale consideration received by AT&T-Mauritius for the repayment of loan and
payment of dividends to NCWS and related disclosures of NCWS before the
Securities Exchange Commission of the USA were irrelevant considerations.
AT&T-Mauritius was the owner of the shares in Idea, a fact which had been
approved by Reserve Bank of India (RBI).
PwC News Alert
July 2011

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NCWS was a party to the share purchase agreement because it had given
warranties to ABNL to the effect that the shares in Idea were free from
encumbrances and that ABNL would acquire good and valid title to the shares
upon completion of transfer.
Assets of a wholly owned subsidiary cannot be regarded as assets of its parent
company
3
.
HC Ruling
Idea was formed with a view to enable NCWS to carry out its
telecommunication business in India.
Shares in Idea were allotted to AT&T-Mauritius as a permitted transferee of
NCWS under the terms of the JVA and the SHA. Accordingly, AT&T-
Mauritius had no obligation to pay for the allotment of shares.
AT&T-Mauritius did not have any right in the shares of Idea. Rather, NCWS
continued to exercise all rights in the shares of Idea as the ownership of the
shares, according to the terms of the JVA and SHA, was vested in NCWS.
Furthermore, the shares in Idea could not be sold by AT&T-Mauritius without
the consent of NCWS.
There is no document on record to suggest that AT&T-Mauritius had agreed
to subscribe to/purchase the shares in Idea.
RBI merely approved allotment of shares in Idea in the name of AT&T-
Mauritius prior to and subsequent to the SHA as a permitted transferee of
NCWS.

3
Reliance placed on the Supreme Court ruling in the case of Mrs. Bacha F. Guzdar v. CIT [1955] 27
ITR 1 (SC) and Carew and Company Ltd. v. UOI [1976] 46 Com. Cas 121 (SC).
It cannot be said that by seeking to tax NCWS on capital gains arising on sales
of shares, the Revenue is trying to lift the corporate veil to find out the real
owner of the shares. The investment in shares in Idea was made by NCWS (in
its capacity as successor of AT&T-US) by subscribing to the shares under the
JVA and on sale of these shares, capital gains accrued to NCWS.
CBDT Circulars, tax treaty and decision of Supreme Court in the case of Azadi
Bachao Andolan (above) would not apply to this case as the investment in
Idea was made by an entity other than the entity incorporated in Mauritius
i.e. NCWS.
Issue 2 - Can ABNL can be considered as an agent of NCWS under
section 163 of the Act and are simultaneous assessment proceedings
against NCWS and ABNL (as agent of NCWS) sustainable?
Assessees contentions
Once it is held that income on sale of shares of Idea has accrued or received in
India then this is not deemed to accrue or arise in India under section 9 of the
Act. Accordingly, ABNL cannot be treated as an agent of NCWS under the
provisions of section 160(1)(i) read with section 9(1)
4
of the Act.
Having taken the steps to assess income in the hands of NCWS under section
148 of the Act, the Revenue cannot simultaneously continue with its
proceedings against ABNL in the capacity of an agent
5
.


4
Reliance placed on the Supreme Court ruling in the case of CIT v. Eli Lilly Company (India) Pvt. Ltd.
[2009] 312 ITR 225 (SC)
5
Reliance placed on Mrs. Arundhati Balkrishna Shri Ambica Mills Premises v. CIT [1989] 177 ITR 275
(SC) and CIT v. Alfred Herbert (India) Pvt. Ltd. [1986] 159 ITR 583 (HC).
PwC News Alert
July 2011

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HC Ruling
The Supreme Court, in the case of Eli Lilly Company (India) Pvt. Ltd. (above),
has held that any income which accrues in India or is received in India within
the meaning of section 5 of the Act would be income deemed to accrue or
arise in India if such income falls within the categories of income specified in
section 9(1) of the Act. Furthermore, the Supreme Court held that an agent is
vicariously liable in respect of income specified in section 9(1) of the Act.
Accordingly, income accruing or arising in India to NCWS from the transfer
of capital assets situated in India would be income deemed to accrue or arise
in India to NCWS and can be assessed in the hands of NCWS or ABNL, as an
agent of the non-resident, under section 163 of the Act.
There is nothing in section 166 of the Act or any other provisions of the Act to
suggest that the decision about whether to assess income either in the hands
of the representative assessee or in the hands of the non-resident must be
taken at the threshold itself rather than at the end of the assessment
proceedings.
The Department may continue with assessment proceedings against the
representative assessee and the non-resident simultaneously till they decide
to assess.
The HC further observed that the Nil withholding tax certificate was obtained
by ABNL by furnishing incorrect facts and by providing misleading
information, and would not therefore preclude the Revenue from initiating
proceedings under section 163 of the Act.

Issue 3 - Can TIL can be considered as a representative agent of NCWS
under section 163 of the Act?
Assessees contentions
The capital gains arising from the transfer of shares in AT&T-Mauritius by
NCWS to TIL is not taxable in India as the capital asset transferred is not
situated in India. Accordingly, no income accrues or arises or is deemed to
accrue or arise in India.
The case of TIL cannot be compared with that of ABNL because ABNL
purchased shares in Idea from AT&T-Mauritius, whereas TIL purchased
shares in AT&T-Mauritius from NCWS. Acquisition of shares in AT&T-
Mauritius by TIL does not, therefore, tantamount to transfer in shares in
Idea, which continued to be held by AT&T-Mauritius.
A shareholder does not own the assets of a company. Accordingly, shares in
Idea were held by AT&T-Mauritius and not by TIL.
HC Ruling
TIL cannot be said to be unaware of the fact that all the rights in respect of
shares in Idea vested in NCWS and not with AT&T- Mauritius.
Furthermore, sale of shares in AT&T-Mauritius only took place after
acquisition of shares in Idea by ABNL. Hence, on the date of the transfer of
shares in AT&T-Mauritius to TIL, 50% of shares in Idea were with AT&T-
Mauritius which was the only asset of AT&T-Mauritius.
PwC News Alert
July 2011

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The prima facie opinion of the Revenue that the transaction between TIL and
NCWS was a colourable transaction for the transfer of shares in Idea to TIL
cannot be said to be devoid of any merit.
TIL could be assessed as an agent of NCWS. However, it would be open to TIL
to establish that the income accrued to NCWS was not taxable in India and
that, consequently, no amount can be recovered from TIL.

Conclusion
Though the decision of the Bombay High Court is based on the specific facts of this
case, it has reaffirmed the importance of exercising adequate caution when
structuring cross-border transactions. Given the HC ruling, similar joint venture
agreements and entities would need to tread with caution.

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