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TEAM CODE: ___

IN THE HONBLE 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

1ST

K.R.RAMAMANI MEMORIAL NATIONAL TAXATION MOOT COURT COMPETITION

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 REPRESENTATIVE

BE TAXED AS A

ASSESSEE....................................................................................................................................7 PRAYER....................................................................................................................................11 MEMORIAL ON BEHALF OF THE APPELLANT

Index of Authorities

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,Taxmanns Indian Double Taxation Agreements & Tax Laws, Vol 1, 2 & 3, 5th Ed., 2008 Dr.Vinod K Singh & Kapil Singhania, Taxmanns 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 Iyengars Law of Income Tax, Vol 1 & 2, 10th Ed., 2001

DICTIONARIES
Aiyar K.J., Judicial Dictionary, 13th Ed., Butterworths (New Delhi) Aiyar P.R., The Law Lexicon, 2nd Ed. Wadhwa & Company, (Nagpur 1999) Osborns Concise Law Dictionary 8th Ed. Universal Law Publishing Co. Pvt. Ltd. (Reprint 1999) Blacks 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 MEMORIAL ON BEHALF OF THE APPELLANT

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

ii

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

MEMORIAL ON BEHALF OF THE APPELLANT

Index of Authorities 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

iii

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

MEMORIAL ON BEHALF OF THE APPELLANT

Index of Authorities 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

iv

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

MEMORIAL ON BEHALF OF THE APPELLANT

List of Abbreviations

LIST OF ABBREVIATIONS

AAR AC Ahd AIR All ER AP Bom CA CCE Comp Cas Comp LJ CTO CTR CWT DTAA ELT F.2d HL ILR ITAT ITJ ITO ITR JT Kar KB LR Mad

: Paragraph No. : Authority for Advanced Rulings : Appeal Cases (L.R.) : Ahemdabad : All India Reporter : All England Reporter : Andhra Pradesh : Bombay : Court of Appeals : Commissioner of Central Excise : Company Cases : Company Law Journal : Commercial Tax Officer : Current Tax Reporter : Commissioner of Wealth Tax : Double Taxation Avoidance Agreement : Excise Law Times : Fedral Reporter : House of Lords (L.R.) : Indian Law Reports : Income Tax Appellate Tribunal : Income Tax Journal : Income Tax Officer : Income Tax Reporter : Judgements Today : Karnataka : Kings Bench : Law Reports : Madras MEMORIAL ON BEHALF OF THE APPELLANT

List of Abbreviations SC SCALE SLT TC WLR : Supreme Court : Supreme Court Almanac : Scotts Law Times : Official Tax Case Reports : Weekly Law Reports

vi

MEMORIAL ON BEHALF OF THE APPELLANT

Statement of Jurisdiction

vii

STATEMENT OF JURISDICTION

THE REVENUE APPROACHES THE HONBLE HIGH COURT AT MADRAS


IN APPEAL UNDER SECTION 260A OF THE INCOME TAX ACT, 1961 AGAINST THE ORDER OF THE ITAT, CHENNAI

MEMORIAL ON BEHALF OF THE APPELLANT

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 MEMORIAL ON BEHALF OF THE APPELLANT

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 HONBLE HIGH COURT Against the order of the appellant Tribunal, the Deputy Director of Income Tax, International Taxation, Chennai has filed an appeal to the Honble 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.

MEMORIAL ON BEHALF OF THE APPELLANT

Question of Law

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?

MEMORIAL ON BEHALF OF THE APPELLANT

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 subsubsidiaries 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 ones business, or the interest in ones 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 MEMORIAL ON BEHALF OF THE APPELLANT

xii Summary of Arguments 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 Aahlins 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.

MEMORIAL ON BEHALF OF THE APPELLANT

Arguments Advanced

ARGUMENTS ADVANCED
CONTENTION 1: THE INCOME CAN BE DEEMED
TO HAVE

ACCRUED

OR

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


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 revenue3. 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 Aahlin 5. 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)

MEMORIAL ON BEHALF OF THE APPELLANT

2 Arguments Advanced 10 treating the subsidiary as agent or alter ego of the parent . 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 faade, its corporate personality must be disregarded14. Secondly, there is finding of fact that INKO and MCO are faade, and this Honble 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 faade. 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 Honble Court inquires whether a finding of faade 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 11

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

MEMORIAL ON BEHALF OF THE APPELLANT

3 Arguments Advanced 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 19

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

MEMORIAL ON BEHALF OF THE APPELLANT

4 Arguments Advanced 25 Court can look beyond the form . 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 Departments 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 assessees 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 asset 30. The right to manage ones business, or the interest in ones business, is a capital asset 31. 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 26

Supra 24 at 748 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)

MEMORIAL ON BEHALF OF THE APPELLANT

Arguments Advanced 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

MEMORIAL ON BEHALF OF THE APPELLANT

Arguments Advanced

CONTENTION 2: THAT NO DTAA APPLIES IN THE PRESENT CASE


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 38

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

MEMORIAL ON BEHALF OF THE APPELLANT

Arguments Advanced

7
LTD.

CONTENTION 3: THAT INDICETEL INDIA REPRESENTATIVE ASSESSEE

CAN

BE TAXED AS A

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

MEMORIAL ON BEHALF OF THE APPELLANT

8 Arguments Advanced 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 worldwide 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 51

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

MEMORIAL ON BEHALF OF THE APPELLANT

9 Arguments Advanced 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

MEMORIAL ON BEHALF OF THE APPELLANT

10 Arguments Advanced 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 Aahlins 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.

MEMORIAL ON BEHALF OF THE APPELLANT

Prayer

11

PRAYER

In the light of the issues raised, arguments advanced and authorities cited, the counsel for the Appellant humbly pray before this Honble 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 Honble 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

MEMORIAL ON BEHALF OF THE APPELLANT