Bombay High Court
Equity Trust (Jersey) Limited vs Authority For Advance Ruling ... on 28 October, 2021
Bench: K.R. Sriram, Abhay Ahuja
Digitally
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signed by
MEERA
MEERA MAHESH
MAHESH JADHAV
JADHAV Date:
2021.10.28
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
16:44:18
+0530 ORDINARY ORIGINAL CIVIL JURISDICTION
WRIT PETITION NO. 770 OF 2021
Abu Dhabi Investment Authority, )
a public institution owned by and )
subject to the supervision of the )
Emirate of Abu Dhabi )
Having its office at )
211, Corniche, PO Box 3600, )
Abu Dhabi, United Arab Emirates )
PAN No. AAACA4380N ) ....Petitioner
V/s.
1. Authority for Advance Ruling )
(Income Tax), Mumbai Bench, )
Having its office at 5th Floor, )
Hoechst House, 193, V.K. Shah Marg, )
Nariman Point, Mumbai - 400 021. )
2. Dy. CIT (International Taxation) )
1 (1) (1),Having his office at )
517, 5th Floor, Air India Building, )
Nariman Point, Mumbai - 400 020. )
3. Additional CIT - (International )
Taxation) - Range - 1 (1) )
having his office at )
Room No.102, Scindia House, )
Ballard Pier, Mumbai - 400 038. )
4. CIT (International Taxation) - 1 )
Mumbai Having his office at )
Room No.9, Third Floor, B - Wing, )
Mittal Court, Nariman Point, )
Mumbai - 400 021. )
5. Union of India, Ministry of Law, )
Aayakar Bhavan, M.K. Road, )
Mumbai - 400 020. ) ...Respondents
ALONGWITH
WRIT PETITION NO. 709 OF 2021
Meera Jadhav
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Equity Trust (Jersey) Limited )
representative assessee of )
Green Maiden A 2013 Trust (GMT) )
Level 1, IFC 1, Esplanade )
St. Helier Jersey Sip Code - JE23BX )
PAN No. AABTG9795M ) ....Petitioner
V/s.
1. Authority for Advance Ruling )
(Income Tax), Mumbai Bench, )
5th Floor, Hoechst House, )
193, V.K. Shah Marg, Nariman Point, )
Mumbai - 400 021. )
2. Asst. CIT (International Taxation) )
Circle 2 (3) (2) )
th
Room No.1711, 17 Floor, )
Air India Building, Nariman Point, )
Mumbai - 400 021. )
3. Additional CIT - (International )
Taxation) - Range - 1 (1) )
having his office at Room No.102, )
Scindia House, Ballard Pier, )
Mumbai - 400 038. )
4. CIT (International Taxation) - 1 )
Mumbai )
Having his office at Room No.9, )
Third Floor, B - Wing, )
Mittal Court, Nariman Point, )
Mumbai - 400 021. )
5. Union of India, Ministry of Law )
Aayakar Bhavan, M.K. Road, )
Mumbai - 400 020. ) ...Respondents
----
Shri Percy Pardiwalla, Senior Advocate a/w Ms. Aarti Sahte and Ms.
Aasavari Kadam for Petitioner in both Writ Petitions.
Shri Ashok Kotangle a/w Shri P. A.Narayanan for Respondent Nos.2, 3 and 4
in Writ Petition No.709 of 2021 and for Respondent Nos.2, 3, 4 & 6 in Writ
Petition No.770 of 2021
----
Meera Jadhav
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CORAM : K.R. SHRIRAM &
ABHAY AHUJA, JJ.
RESERVED ON:7th September, 2021
PRONOUNCED ON: 28th October, 2021
JUDGMENT (PER K. R. SHRIRAM J.) :
1 Rule. Rule made returnable forthwith and heard and disposed at the
admission stage itself with the consent of the counsel.
2 In both the petitions, a common ruling dated 18 th March 2020 passed
by the Authority for Advance Ruling (Income Tax) (hereinafter referred to
as AAR) is impugned. Hence both the petitions are taken up together. Shri
Kotangle did not wish to file any reply since according to him only questions
of law were involved. We shall take Writ Petition No.770 of 2021 filed by
Abu Dhabi Investment Authority (hereinafter referred to as ADIA) as lead
petition.
3 ADIA is a public institution owned by and subject to the supervision of
the Emirate of Abu Dhabi. Article 4 (2) (d) of the India-United Arab
Emirates ("UAE") Double Taxation Avoidance Agreement (hereinafter
referred to as the "India-UAE DTAA") expressly provides that ADIA is a
resident of UAE for the purposes of Article 4 thereof and, accordingly, ADIA
is entitled to invoke the beneficial provisions of the India-UAE DTAA for the
purpose of determining its tax liability in India. ADIA files its return of
income (hereinafter referred to as "ROI") in India, disclosing therein income
that falls within the scope of Section 5 (2) of the Income Tax Act, 1961
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(hereinafter referred to as the "Act") but in view of the exemption available
in terms of the India-UAE DTAA, reports NIL taxable income in the ROI.
ADIA does not have any permanent establishment/fixed place of business or
any other form of presence in India and does not have any business
connection/operations in India. AAR is a statutory authority constituted
under Section 245-O of the Act to give a ruling on any question raised in
respect of any transaction which has been undertaken or is proposed to be
undertaken by a non-resident applicant or the tax liability of a non-resident
arising out of a transaction which has been undertaken or is proposed to be
undertaken by a resident applicant with such non-resident or whether an
arrangement, which is proposed to be undertaken by any person, being a
resident or a non-resident, is an impermissible avoidance agreement as
referred to in Chapter X-A. The ruling/order on the questions raised before
AAR is binding only upon applicant who sought the answer and the revenue
authority assessing such applicant but the same has a persuasive value
insofar as other assessees are concerned.
4 ADIA is challenging the order/ruling dated 18 th March 2020 passed by
AAR in case of ADIA as well as Equity Trust (Jersey) Ltd. (hereinafter
referred to as ETL) as the trustee, which is petitioner in Writ Petition
No.709 of 2021, denying ADIA the benefit of India-UAE DTAA read with
relevant provisions of the Act in respect of the income accruing on the
investments made or proposed to be made by Green Maiden A 2013 Trust
(hereinafter referred to as the Trust), which was established by ADIA and
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ETL as settlor and trustee, respectively. The trust is settled by ADIA in
Jersey. Under the Deed of Settlement dated 22nd July 2013 (the Deed of
Settlement), the trust is being set up by and for the benefit of ADIA who is,
apart from being the settlor, also the sole beneficiary of the trust. This trust
is a revocable and determinable trust.
5 The following provisions of the Deed of Settlement are relevant:
(aaa) "Settlor" or "Sole Beneficiary" shall mean ADIA;
(ccc) "Term" shall mean the term of the Trust, which shall continue until
the later of :
(i) 8 (eight) years from the date of Closing. By the end of the 7 th
(seventh) year, the Trustee may (on the request of the Investment
Manager) seek a 1 (one) year extension for liquidation of the Trust and
such extension shall be subject to the consent of the Sole Beneficiary; and
(ii) the date on which the remaining Receipts in the Trust Fund are
distributed to the Sole Beneficiary after payment and discharge of all
accrued expenses (including Operating Expenses), fees and liabilities of
the Trust.
(eee) "Trust" shall have the meaning provided in the Recitals above;
(ggg) "Trust Fund" shall mean the Initial Settlement Sum, the Capital
Contributions, Receipts, any accretions, all other cash and property held
by the Trustee pursuant to the terms of this Deed in trust for the Sole
Beneficiary together with all of the Trustee's interest in Portfolio
Investments.
3.1 The Settlor has on or before the execution of this instrument
transferred to the Trustee, by way of wire transfer or a cheque or such
other instrument, the Initial Settlement Sum and the Trustee hereby
admits, acknowledges and declares that the Trust Fund shall be held by it
in trust for the Sole Beneficiary and shall be applied and governed by the
terms and conditions of this Deed.
9.2 Receipts may, subject to the terms of this Deed, be distributed by the
Trustee to the Sole Beneficiary as and when deemed appropriate by the
Trustee but subject to payment of all accrued Operating Expenses and
accrued fees then payable under the Investment Management Agreement
which are not subject to a bona fide dispute. In the event that any fees
payable under the Investment Management Agreement are the subject of a
bona fide dispute, the Trustee may distribute Receipts subject to
withholding a sum from the Receipts which the Trustee deems to be
reasonable to discharge the anticipated liability.
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9.3 The Trustee shall make distributions to the Sole Beneficiary, at such
intervals as it deems fit.
12. TERMINATION OF THE TRUST
12.1 The Trustee shall, if directed by the Sole Beneficiary, at any time
before the expiry of the Term and following confirmation from the
Investment Manager that the Trust has exited from all its Portfolio
Investments, terminate the Trust.
12.2 At the expiry of the Term, the Trustee will take steps to realize or
distribute any remaining Portfolio Investments together with any, all and
other remaining parts of the Trust Fund.
12.3 Upon termination, the proceeds from the dissolution of the Trust will
be distributed to the Sole Beneficiary after payment of all accrued fees,
expenses, applicable taxes and the Trustee withholding a reasonable sum
to discharge, future obligations, liabilities, fees, cost, expenses and taxes
which are likely to accrue.
6 By virtue of the provisions of the Deed of Settlement, it is ADIA's case
that the trust is a revocable trust. Pursuant to the Deed of Settlement, ADIA
made a capital commitment of USD 200,000,000 (USD Two Hundred
Million only) in the trust in its capacity as settlor. The reason for ADIA
settling the trust and making investment in India using the Trust are as
follows: -
(i) At the time when ADIA was making a decision to invest in India, there
was no legal framework in the UAE under which a trust could be formed
and also ADIA could not establish a sole shareholder subsidiary company in
the UAE.
(ii) ADIA for commercial and administrative reasons has made all its illiquid
investments through separate legal entities (including this one) in order to
ensure it does not have to directly deal with various portfolio companies.
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ADIA also invests through separate legal entities for limitation of liability
purpose.
(iii) ADIA has been using Jersey as a jurisdiction for establishing companies
and trusts and for making a number of investments around the world.
Jersey's regulatory regime is complaint with international standards and
Jersey has also entered into information exchange agreements with a
number of countries and is generally not considered an obstructive or
opaque jurisdiction.
In view of the aforesaid reasons ADIA set up the trust to make
investments in India and claimed the benefit of the India-UAE DTAA.
7 The Trust was registered with the Securities and Exchange Board of
India (SEBI) as Foreign Institutional Investor (FII) under the SEBI (Foreign
Institutional Investors) Regulations, 1995 and later on as Foreign Portfolio
Investor under the SEBI (Foreign Portfolio Investors) Regulations 2014. ETL
as trustee has entered into an Investment Management Agreement dated
24th July 2013 with Kotak Mahindra (International) Ltd. (hereinafter
referred to as KMIL). One of the obligations cast on KMIL in terms of the
agreement is that a KMIL group Subsidiary will invest in each and every
portfolio company alongside the Trust. The Deed of Settlement provides
that the capital contributions made or proposed to be made by ADIA to the
Trust would be a revocable transfer. According to ADIA, the income derived
from making investment and debt securities in India was not assessable to
tax in India having regard to the provisions Article 24 of the India-UAE
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DTAA read with sections 61 and 161 of the Act.
8 In view to have clarity on the position and avoid needless litigation if
the revenue adopted a stand contrary to what ADIA was advancing, ADIA
filed an application before AAR to determine taxability of the income
accruing on the investments made or proposed to be made in the Indian
portfolio companies by the Trust. ADIA raised the following questions for
determination by AAR:-
(i) On the stated facts and in law, whether the capital
contribution made / proposed to be made / transferred by
ADIA to Green Maiden A 2013 Trust be treated as a
revocable transfer for the purpose of Section 63 of the Act ?
(ii) If the answer to the above question is in the affirmative
then, whether on the stated facts and in law, the entire
income which may arise from the investments made by the
Trust in Indian Companies (Portfolio companies) be
chargeable to income-tax in the hands of ADIA as per
Section 61 of the Act or be chargeable to income-tax in the
hands of any other person as defined under the Act ?
(iii) If the answer to the first and second question is in the
affirmative then, whether on the states facts and law, the
entire income in the hands of ADIA which may accrue or
arise from the investments made by the Trust in the
Portfolio Companies be exempted from tax in India based
on the provisions of Article 24 of the India-UAE DTAA ?
(iv) If the answer to the third question is in the affirmative
then, whether the Portfolio Companies or any other person
responsible for paying any sum, to the Trust, are required
to deduct tax at source under the provisions of the Act, on
any sum payable by them to the Trust, the income / assets
of the Trust being subject to the provisons of Section 61
and Section 63 of the Act ?
9 The office of CIT (IT)-1 Mumbai, filed a report under Section 245R
(2) of the Act opposing admission of the application filed by ADIA.
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According to CIT(IT), ADIA had furnished incomplete/incorrect information
to AAR and sought additional clarifications and also sought rejection of the
application.
10 By order dated 11th April 2016, AAR admitted the application filed by
ADIA. The CIT(IT) filed a rectification application dated 9 th June 2016
before AAR, seeking a review of the order of admission apparently due to an
error that had crept into the order. The said application was rejected by AAR
on 15th November 2018. ADIA also had filed a rectification application
dated 21st June 2016 since in the order of admission the words used are
"irrevocable trust" whereas it should be "revocable trust". ADIA made
further submissions and addressed various communications to AAR. The
CIT(IT) gave its final report dated 1st November 2019 under Section
245R(4) of the Act reiterating the submissions/contentions raised by them
in their earlier report dated 6th August 2019. AAR also held hearing on
couple of days where ADIA reiterated its submissions made in their earlier
letters and written submissions. Certain case laws were also relied upon by
ADIA.
11 AAR did not accept any of the contentions raised by ADIA regarding
the income accrued on the investments made or proposed to be made by the
Trust in Indian portfolio companies and passed a common order/ruling
dated 18th March 2020, which is impugned in both these petitions, denying
ADIA and ETL the benefit of the India-UAE DTAA. AAR, inter alia,
concluded:-
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(i) The income from investment in debt portfolios in India is received and
accrues to the Trust in India and is taxable under Section 5 read with
Section 9 (1) (i) of the Act.
(ii) Since there is no treaty between India and Jersey, income received or
accrued or arising in India to the Trust registered in Jersey is taxable in
India.
(iii) India-UAE Treaty does not apply to the Trust or the Trustee.
(iv) Since India has not ratified the Hague Convention on the Law
Applicable to Trust and on their recognition ("Hague Trust Convention",
Convention of 1st July 1985), trust laws of a foreign jurisdiction are not
applicable in India.
(v) In case of a trust, the settlor cannot be the sole beneficiary. Otherwise
the trust would serve no purpose as the trustee is the legal owner of the
property in trust, as fiduciary for the beneficiary or beneficiaries who are the
equitable owner (s) of the trust property. In the present case, since ADIA is
the settlor and the sole beneficiary, it does not satisfy the essential
ingredients of a trust.
(vi) ADIA's arguments on application of Section 61 of the Act was rejected
by holding that "if Ld AR insists in enforcing sec 61 to present case, it may
amount to case of prima facie tax avoidance by ADIA and application may
be hit by threshold bar under clause (iii) to proviso to sec 245R(2) of the
Act. Hence, the references to these sections are not pertinent."
(vii) Bifurcate the accrual and receipt of income by the trust and the
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beneficiary in three stages - Stage 1 is the accrual/receipt of mainly interest
income to the trust as sub-account of FII. Stage 2 is transfer of income to the
trustee of the trust and Stage 3 is receipt of income by ADIA as and when
transferred by trustee by virtue of deed of settlement between ADIA and the
Trustee.
In stage 1, the income is taxable in India as there is no treaty between
India and Jersey. Even if it is presumed that the income accrues or arises to
the trustee, it is still taxable in India as the income has arisen in India and
the trustee being a private limited company is registered in Jersey with
whom there is no treaty.
(viii) The Trust is not a trust under the Indian Trust Act, 1882 and,
therefore, does not fall under Section 160 (1) (iv). The income has accrued
to the sub-account, i.e., the Trust. No income has accrued directly to the
trustee and, hence, it cannot be taxed in the like manner and to the same
extent as ADIA would have been taxable.
(ix) Rejected the argument of ADIA that even if the trust is to be ignored,
the income would still accrue to ADIA and would be exempt under the
India-UAE DTAA. Piercing the veil or lifting of veil of an arrangement is for
the benefit of the Revenue to check if conception is used for tax evasion or
not. In the present scenario, piercing the veil is not warranted.
(x) Accrual of income to trust is not income derived by ADIA. Hence, the
said income does not fall under article 24 of India-UAE Treaty.
(xi) Had ADIA routed the funds through an entity or structure based in UAE
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and ADIA being the beneficial owner, then interest income would have been
exempt under article 11(3) of India-UAE Treaty. The said view is fortified by
the amendment proposed in the Finance Bill, 2020 (exemption for certain
income of wholly owned subsidiaries of ADIA). [AAR relied on this
amendment in spite of the fact that the same was introduced in the Act post
the hearing of the application and was never put to ADIA, for them to make
any submissions thereon].
(xii) Section 115AD of the Act, applicable to FIIs, is a code in itself. Hence
the income earned by the Trust is taxable in India as per Section 115AD of
the Act.
12 Shri Pardiwalla submitted that the term transfer and revocable
transfer have been defined under Section 63 of the Act, which reads as
under:
"63. "Transfer" and" revocable transfer" defined
For the purposes of sections 60, 61 and 62 and of this section,-
(a) a transfer shall be deemed to be revocable if-
(i) it contains any provision for the re-transfer directly or indirectly of
the whole or any part of the income or assets to the transferor, or
(ii) it, in any way, gives the transferor a right to re-assume power
directly or indirectly over the whole or any part of the income or
assets;
(b) " transfer" includes any settlement, trust, covenant, agreement or
arrangement."
Shri Pardiwalla submitted:
(a) That Section 63 clearly provides that the capital contribution made
and/or proposed to be made by ADIA as Settlor in the trust are transfers for
the purpose of Section 63(b) of the Act since it defines transfers to include
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any settlement or trust;
(b) In view of the provisions of the Deed of Settlement, the capital
contribution made and/or proposed to be made by ADIA for the Trust will
be in the nature of revocable transfer;
(c) The trust fund will be held by trustee, i.e., ETL in trust for the sole
beneficiary, which expressly mean that the funds held by the trust are held
on behalf of ADIA as settlor for the benefit of ADIA as beneficiary;
(d) The Deed of Settlement also provides for re-transfer of the entire
income arising on the investments made by the Trust in the portfolio
companies and the principal amount invested in the portfolio companies
and the trustee is obliged to distribute receipts from portfolio investments
only to the sole beneficiary, i.e., ADIA;
(e) The Deed of Settlement also provides ADIA as settlor with the right to
terminate the Trust at any time before the expiry of the term and will be
entitled to proceeds of dissolution of the Trust. This means that ADIA as
settlor has a right to re-assume power over the entire income arising on the
investments made by the Trust in the portfolio companies and the principal
amount invested in the portfolio companies. Upon such revocation as per
the right, ADIA as settlor having revoked the trust, all the remaining
principal amount would revert absolutely to ADIA as settlor;
(f) Therefore, since the Deed of Settlement expressly provides for re-
transfer of right to re-assume power over the entire income arising on the
investments made by the Trust in the portfolio companies as well as the
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principal amount invested in the portfolio companies, the transfer of the
contribution that have been made and/or will be made by ADIA to the Trust
are/will each be a revocable transfer under the provisions of Section 63 of
the Act.
13 Shri Pardiwalla also relied upon Section 61 of the Act which contains
provisions relating to taxability of income arising by virtue of revocable
transfer of assets and the same reads as under:
" Revocable Transfer of Assets
61. All income arising to any person by virtue of a revocable transfer
of assets shall be chargeable to income-tax as the income of the
transferor and shall be included in his total income."
Shri Pardiwalla submitted as the capital contribution made and/or to
be made by ADIA in the trust will be a revocable transfer under Section 63
of the Act, any income on the investment that is proposed to be made by the
trust in the portfolio companies, in view of the provisions of Section 61 of
the Act, shall be chargeable to income-tax as the income of ADIA (settlor)
and shall be included in the total income of ADIA as settlor only.
14 Shri Pardiwalla also submitted, in the alternative and in addition, that
by the Deed of Settlement between ADIA and ETL as settlor and trustee,
respectively, the trust has been set up for the benefit of ADIA, the sole
beneficiary of the trust. Therefore, it is a determinating trust and even if
one says provisions of Section 61 are not applicable, then also the Trustees
can only be assessed in a representative capacity. Accordingly, the provisions
of Section 160(1)(iv) of the act, will be applicable. Since the trustee is
entitled to receive income on behalf of the sole beneficiary, it should be
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considered as representative assessee of the sole beneficiary.
"Section 160 - Representative assessee
(1) For the purposes of this Act, "representative assessee" means:-
.........
(iv) in respect of income which a trustee appointed under a trust
declared by a duly executed instrument in writing whether
testamentary or otherwise including any wakf deed which is valid
under the Mussalman Wakf Validating Act, 1913 (6 of 1913), receives
or is entitled to receive on behalf or for the benefit of any person,
such trustee or trustees;"
............
Shri Pardiwalla further submitted that the provisions with respect to
the liability of representative assessee are covered under Section 161 of the
Act, which reads as under:
Section 161- "Liability of representative assessee
(1) Every representative assessee, as regards the income in respect of
which he is a representative assessee, shall be subject to the same
duties, responsibilities and liabilities as if the income were income
received by or accruing to or in favour of him beneficially, and shall
be liable to assessment in his own name in respect of that income; but
any such assessment shall be deemed to be made upon him in his
representative capacity only, and the tax shall, subject to the other
provisions contained in this Chapter, be levied upon and recovered
from him in like manner and to the same extent as it would be
leviable upon and recoverable from the person represented by him.
1A) Notwithstanding anything contained in sub-section (1), where
any income in respect of which the person mentioned in clause (iv) of
sub-section (1) of section 160 is liable as representative assessee
consists of, or includes, profits and gains of business, tax shall be
charged on the whole of the income in respect of which such person is
so liable at the maximum marginal rate :
Provided that the provisions of this sub-section shall not apply where
such profits and gains are receivable under a trust declared by any
person by will exclusively for the benefit of any relative dependent on
him for support and maintenance, and such trust is the only trust so
declared by him.
(2) Where any person is, in respect of any income, assessable under
this Chapter in the capacity of a representative assessee, he shall not,
in respect of that income, be assessed under any other provision of
this Act."
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In view thereof, even if the income is taxed in the hands of the
Trustee, in terms of Section 161(1) of the Act, it will be taxed in the "like
manner and to the same extent" as the beneficiary. As the tax on income
received by or accruing to the Trust from the investments made or proposed
to be made in portfolio companies is to be levied in the hands of the trustee
and recovered from the trustee in the like manner and to the same extent as
it would be leviable upon and recoverable from the sole beneficiary and as
petitioner is the sole beneficiary of the Trust, the income assessed in the
hands of the Trustee will take colour of that of petitioner's income and
thereby, the benefit of the India-UAE DTAA must be granted.
15 Shri Pardiwalla relied upon Article 24 of Agreement for Avoidance of
Double Taxation and Prevention of Fiscal Evasion with UAE entered into
between Government of India and Government of UAE which reads as
under:-
"Article 24: Income of Government & Institutions:-
1. Notwithstanding the provisions of Article 13, the Government of
one contracting State shall be exempt from tax, including capital
gains tax, in the other contracting State in respect of any income
derived by such Government from that other contracting State.
2. For the purposes of paragraph (1) of this Article, the term
"Government"-
(a) in the case of India means the Government of India, and shall
include:
(i) the political sub-divisions, the local authorities, the local
adminstrations, and the local Governments;
(ii) the Reserve Bank of India;
(iii) any such institution or body as may be agreed from time to time
between the two contracting States;
(b) in the case of UAE means the Government of the United Arab
Emirates and shall include:
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(i) the political sub-divisions, the local authorities, the local
administrations, and the local Governments;
(ii) The Central Bank of the United Arab Emirates, Abu Dhabi
Investment Authority and Abu Dhabi Fund for Economic
Development;
(iii) any such institution or body as may be agreed from time to time
between the two contracting States."
Shri Pardiwalla submitted that as per Article 24 of the India-UAE
DTAA, ADIA is covered under the meaning of the term 'Government' of the
United Arab Emirates and any income derived by ADIA from India will be
exempt from tax in India in the hands of ADIA.
Shri Pardiwalla also submitted that under Section 90(2) of the Act
the provisions that are more beneficial to the assessee should apply. Section
90(2) of the Act reads as under:
Section 90 - Double Taxation Relief:
........
(2) Where the Central Government has entered into an agreement
with the Government of any country outside India under sub- section
(1) for granting relief of tax, or as the case may be, avoidance of
double taxation, then, in relation to the assessee to whom such
agreement applies, the provisions of this Act shall apply to the extent
they are more beneficial to that assessee.
.........
Therefore, the provisions of Article 24 of India-UAE DTAA should
apply as it is more beneficial than the provisions of the Act. Thus, ADIA
should not be liable to pay tax on any income which may arise from
investments made by the Trust in portfolio companies.
16 Shri Pardiwalla thereafter relied upon Section 166 of the Act. Section
166 of the Act reads as under:
Section 166- "Direct assessment or recovery not barred.
Nothing in the forgoing sections in this Chapter shall prevent either
the direct assessment of the person on whose behalf or for whose
benefit income therein referred to is receivable, or the recovery from
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such person of the tax payable in respect of such income."
Shri Pardiwalla submitted:-
(a) Under Section 166 of the Act, in the case of representative assessee,
the revenue has an option embodied in Section 166 to assess the
beneficiaries instead of the trustees or having assessed the trustees it may
proceed to recover the tax from the beneficiaries.
(b) The basic idea underlying section 166 is that the liability of the
trustee should be co-extensive with that of the beneficiaries and in no sense
wider or a larger liability and when the question of payment of tax arise, the
section mandates to the taxation department that when they are dealing
with the income of trustee, they must levy the tax and recover it in the
manner laid down in Section 161(1) of the Act;
(c) The trustees would be assessed in the representative capacity as
representing the beneficiary. This, of course, does not mean that the
revenue cannot proceed to make direct assessment on the beneficiary in
respect of the interest in the trust properties which belongs to him. The
beneficiary would always be assessable in respect of his interest in the trust
properties, since such interest belongs to him and the right of the Revenue
to make direct assessment on him in respect of such interest stands
unimpaired by the provision enabling assessment to be made on the trustee
in a representative capacity. The Revenue, therefore, may either assess such
income in the hands of the trustee in a representative capacity under sub-
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section (1) of Section 161 or assess it directly in the hands of the beneficiary
by including it in the net wealth of the beneficiary. What is important to
note is that in either case what is taxed is the interest of the beneficiary in
the trust properties and not the corpus of the trust properties. So also
where beneficiaries are more than one, and their shares are indeterminate
or unknown, the trustees would be assessable in respect of their total
beneficial interest in the trust properties. It is provided that the assessment
may be made on the trustee as if the beneficiaries for whose benefit the
trust properties are held were an individual;
(d) The beneficial interest is treated as if it belonged to one individual
beneficiary and assessment is made on the trustees in the same manner and
to the same extent as it would be on such fictional beneficiary;
(e) Wherever there is a trust, it is obvious there must be beneficiaries
under the trust, because the very concept of a trust connotes that though the
legal title vests in the trustee, he does not own or hold the trust properties
for his personal benefit but he holds the same for the benefit of others,
whether individuals or otherwise;
(f) It must follow inevitably from this premise that since it is the
beneficial interests which are taxable in the hands of the trustee in a
representative capacity, the liability of the trustee cannot be greater than the
aggregate liability of the beneficiaries and no part of the corpus of the trust
properties can be assessed in the hands of the trustee.
17 Shri Pardiwalla also submitted that if the act was to extend to only
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Indian Trust, it would have expressly provided like it is provided in Section
10 (23FB) of the Act, which provides for venture capital fund means a fund
operating under a trust deed registered under the provisions of the
Registration Act, 1908. Shri Pardiwalla submitted that Sections 60 to 63 or
Section 160 or 161 of the Act does not provide for any such qualification.
Therefore, Sections 60 to 63 and 160, 161 and 166 are applicable to a
foreign trust.
18 Shri Pardiwalla relied upon the following judgments:
(a) Columbia Sportswear Company Vs. Director of Income Tax,
Bangalore1 to submit that there is no alternate remedy against advance
ruling by AAR and the proper forum to challenge will be the Division Bench
of High Court under Articles 226 and 227 of the Constitution of India.
(b) Union of India & Anr. Vs. Azadi Bachao Andolan & Anr 2 to submit
that the terms of the agreement for avoidance of double taxation would
automatically override the provisions of Income Tax Act in the matter of
ascertainment or chargeability to income tax and ascertainment of total
income to the extent of inconsistency with the terms of double taxation
agreement. In other words, in case of inconsistency between the terms of
the agreement and the taxation statute, the agreement alone would prevail.
(c) Bhavana Nalinkant Nanavati Vs. Commissioner of Gift Tax 3, to submit
that there is no bar in the settlor being the sole beneficiary. Relying on this
judgment Shri Pardiwalla submitted that the ownership of a trust is a matter
1(2012) 11 Supreme Court Cases 224
2 (2004) 10 SCC 1
3(2002) 255 ITR 0529
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of form rather than of substance. The property may belong to the
beneficiary but for obligation and use of it, the property vests in the trust.
The trustee is under an obligation to use the ownership rights for the benefit
of those to whom the ownership rights really belong, i.e., beneficiary. Shri
Pardiwalla states that though trustee comes in possession of the property,
the possession is for the benefit of another, i.e., beneficiary. Thus, the
trustee is merely a conduit or a vehicle by means of which the donor passes
on the interest which donor had in the trust property in favour of the
beneficiary, and there is no bar in the settlor and the sole beneficiary being
one and the same.
(d) Commissioner of Wealth Tax Vs. Estate of Late Hmm Vikramsinhji of
Gondal4 to submit that even Foreign Trusts are recongnised in Indian Tax
Laws.
(e) The Commissioner of Wealth Tax, Andhra Pradesh, Hyderabad Vs.
Trustees of H. E. H. Nizam's Family (Remainder Wealth Trust), Hyderabad 5
to submit that when an assessment is contemplated to be made on the
trustee, it is really the beneficiaries who are sought to be assessed in respect
of their interest in the trust properties through the trustee.
19 Shri Kotangle made very brief submissions. Shri Kotangle submitted:-
(a) There was no treaty between India and Jersey and, therefore, the trust
was taxable as a non resident under Section 5(2) of the Act, which deals
with the scope of total income of a person, who is a non resident. Therefore,
4(2014) 363 ITR 0679
5 (1977) 3 SCC 362
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if any income is received by or accrues or arise in India to a trust, it will be
income due to having accrued or arisen in India and hence taxable;
(b) As there is no treaty between India and Jersey where the trust is
settled, the India-UAE DTAA will not be applicable;
(c) Under Section 1 of the Indian Trust Act 1882, it only extends to the
whole of India and hence will not be applicable to the Foreign Trust and for
the trust, the liability for trust prevalent will be applicable and as there is no
treaty between India and Jersey, Sections 63 or 161 to 164 does not apply.
Shri Kotangle, however, did not elaborate;
(d) Shri Kotangle, however, fairly conceded that India-UAE DTAA
overrides the provisions of the Act as held by the Apex Court in
Azadibachao Andolan (Supra).
To a specific query raised by the court, Shri Kotangle in fairness, also
agreed that there are no provisions in the Act which says that the provisions
of Sections 61 to 63 or 161 to 166 are not applicable to Foreign Trust.
20 Shri Kotangle also submitted that ADIA received income through a
device and not from direct or immediate receipt or transfer of income by
trust and, therefore, income received from Indian debt investment is not
derived by ADIA and as Article 24 of the Indian-UAE DTAA only exempt
from tax the income derived by one government from other confirming
State, the treaty is not applicable. Shri Kotangle submitted that ADIA could
have directly invested in the instruments or investments in which the trust
had invested but chose not to invest directly. When the court asked as to
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whether there is any bar for any entity to make investments through any
special purpose vehicle, Shri Kotangle agreed that there was no bar. When
the court mentioned to Shri Kotangle when the purposes of chapter V, as
contained in Act, is to tax the amount in the hands of the transferor who
made the transfer, amounts / income in the name of a third party or a
beneficiary so that the tax on the income derived from the transferred
amount is not avoided, and in this case since ADIA itself is not liable to pay
any tax as it is directly mentioned in Article 24 of the India-UAE DTAA, there
was no benefit for ADIA to adopt this method to invest which they have
done, Shri Kotangle did not disagree.
21 The following facts are not disputed:-
a) income earned through ADIA's investment in the Indian debt portfolios
directly would have been exempted under Article 24 of India UAE treaty;
b) ADIA was registered as FII and later FPI with SEBI;
c) The Deed of Settlement with ETL regarding the trust;
d) ADIA has made a capital commitment of USD 200 million in the Trust in
the capacity of the settlor of the Trust, ETL is the trustee of the trust and
ADIA is also the sole beneficiary of the trust;
e) The Trust is registered as FPI with SEBI;
22 According to the impugned order dated 18th March 2020 the income
from investment in debt portfolio in India received and/or accrued to the
trust in India is taxable under Section 5, read with Section 9(1)(i) of the
Act. This is because:-
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a) the trust is registered in Jersey and there is no treaty
between India and Jersey.
b) Sections 61 and 63 of the act would apply only to those
trust which fall under the Indian Trust Act 1882 and as the
trust does not meet the definition, characteristics and
features of trust as per Indian Law.
c) India has not ratified the Hague Trust Convention of 1 st
July 1985 and hence trust laws of foreign jurisdiction are
not applicable in India.
d) The settlor cannot be the sole beneficiary.
e) Sections 60 to 64 are designed to over take and
circumvent the counter design by a taxpayer to reduce its
tax liability by parting its property in such a way that the
income should no longer be received by him but at the
same time he retains certain powers over property/income.
f) Though Section 160(1)(i) or 160(1)(iv) provides that
trustee can be representative assessee, in this case trustee
being a resident of Jersey cannot be an agent of ADIA.
g) No authority or material has been placed before AAR to
suggest that the provisions of Section 161 would be
applicable to Foreign trust/trustee.
h) The assessee's representative could not satisfactorily
answer the query as to why ADIA would like to route its
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investment in non-convertible debenture funds through
Jersey route for investment in Indian market and ADIA
itself being an FII registered with SEBI could have directly
invested in Indian Portfolios and taken advantage of
Article 24 of India-UAE DTAA.
i) As ADIA is receiving income through a device and not
from direct or immediate receipt and, therefore, income
received from Indian debt investment is not derived by
ADIA and does not fall under Article 24 of the India-UAE
DTAA.
j) There was a proposed amendment (it has come into
effect only from 1st April 2021) which supports the view
that if an entity is resident of UAE and through this entity
ADIA is in receipt of some income then the income would
be exempted from tax under Section 10 of the Act and the
proposed amendment suggest that indirect accrual of
income is not eligible for treaty benefit.
We do not agree with the conclusions arrived at by AAR.
24 As regards to the reasoning given by AAR that the trust is registered
in jersey, there is no treaty between India and Jersey and Section 61 and 63
of the Act would apply only to those trust which fall under the Indian Trust
Act 1882, it has to be noted that Shri Kotangale himself agreed that there is
no provision in the Act which provides that these provisions shall apply only
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to Indian Trust. Section 61 of the Act provides that any income arising to
any person by virtue of revocable transfer shall be chargeable to tax as the
income of the transferor. The Deed of Settlement and particularly clauses
from the Deed of Settlement quoted earlier, show that there is a revocable
transfer by settlor, i.e., ADIA to trustee ETL and as such any income
arising to the trustee should be chargeable in the hands of ADIA. Nothing in
Section 61 requires involvement of a trust in revocable transfer. Section 61
is plain and simple in as much as, it provides for income arising to any
person by virtue of a revocable transfer of assets shall be chargeable to
income tax as the income of the transferor and shall be included in his total
income. Further Section 61 is not dependent on Section 63 of the Act. A
transfer can be revocable transfer on its own merits without reference to
Section 63 of the Act. Clause (a) of Section 63 of the Act merely extends
the provisions of Section 61 of the Act to cases which might not otherwise
be covered by Section 61 by extending the meaning of word revocable.
Clause (b) in Section 63 extends the meaning of the word transfer in
Section 61 to cases which might not otherwise amount to transfer.
25 A settlement or a trust are merely instances of what could amount to
transfer for the purposes of Section 61. Section 63 (b) includes in the
definition of transfer any settlement or trust or covenant or agreement or
arrangement. Moreover, Section 63 is not restricted only to trust. It is an
inclusive definition. So long as the conditions provided in Section 63 (a)
are fulfilled, any transfer whether connected with the trust or not will be a
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revocable transfer. The case of AAR that if the transaction does not qualify
as a trust, the provisions of Section 63 and/or Section 61 are not
applicable, is erroneous. In any event, under Section 63 there is no
requirement that a trust covered by it must necessarily be an Indian trust
falling under the Indian Trust Act. Such restriction which is not there in the
Act cannot be imported into Sections 61 and 63 of the Act. As noted earlier,
where such restriction is provided for the Act says so as noted in section
10(23FB) of the Act where it specifically provides that venture capital fund
means a fund operating under the trust deed registered under the provisions
of Registration Act, 1908.
26 As regards the stand that India has not ratified the Hague Convention
on the Law Applicable to Trust and on their recognition ("Hague Trust
Convention", Convention of 1 July 1985), trust laws of a foreign jurisdiction
are not applicable in India, the word 'trust' first of all is not defined under
the Act or General Clauses Act, 1897. The word trust has to be interpreted
as per its general meaning. The trust is defined under Section 3 of the
Indian Trust Act to be an obligation annexed to the ownership of the
property, and arising out of a confidence reposed in and accepted by the
owner or declared and accepted by him for the benefit of another, or of
another and the owner. A trust can be an Indian Trust or a Foreign Trust.
There is nothing in Sections 61 and 63 of the Act to restrict its applicability
only to trust settled in India and, therefore, one cannot rule out their
applicability to a Foreign Trust. Even if the definition of the trust under the
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Indian Trust Act can be held to say that it does not cover 'The Trust', i.e.,
Green Maiden A 2013 Trust, still the word trust in Section 63 covers all trust
within its ambit. Hague Trust Convention referred to by AAR does not
decide the issue one way or the other. There is nothing to even suggest in
the ruling of AAR as to how the ratification of Hague Trust Convention
would affect the status of Foreign Trust in India. If we accept what AAR has
opined that Foreign Trust can be recognised in India only if and after India
ratified the Hague Trust Convention that would imply that no Foreign Trust
can be treated as trust for the purpose of the Act. In the case of H.M.M.
Vikramsinghjit of Gondal (Supra) shows that even Foreign Trusts are
recognised in Indian Tax Laws. The Apex Court held that certain trust set up
outside India are discretionary trust within the meaning of Section 164 of
the Act. Therefore, even a Foreign Trust is a trust under the Act, which
shows AAR's preposition that a Foreign Trust cannot be treated as a trust for
the purposes of the Act unless the Hague Trust Convention is ratified by
India, is incorrect. Shri Pardiwalla submitted that even Income Tax Return
form prescribed under the Act requires the details of trust created under the
laws of a country outside India. It was not denied by Shri Kotangle. This
presupposes that a Foreign Trust is a trust for the purposes of the Act. If one
has to accept AAR's contention that the word trust can only be an Indian
Trust for the purposes of the Act it has to be based on some statutory
provisions which is not the case.
Shri Pardiwalla showed a comparison between India and Jersey laws
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on the subject. As per Section 3 of Indian Trust Act the trust is an
obligation annexed to the ownership of property and arising out of a
confidence reposed in and accepted by the owner, or declared and accepted
by him, for the benefit of another, or of another and the owner.
Article 2 of the Trusts (Jersey) Laws 1984 reads as under:
"A trust exists where a person (known as a trustee) holds or has
vested in the person or is deemed to hold or have vested in the person
property (of which the person is not the owner in the person's own
right)-
(a) for the benefit of any person (known as a beneficiary) whether or
not yet ascertained or in existence;
(b) for any purpose which is nor for the benefit only of the trustee; or
(c) for such benefit as is mentioned in sub-paragraph (a) and also for
any such purpose as is mentioned in sub-paragraph(b)."
Therefore, as can be seen from the definitions, the Trust created in terms
of the deed of settlement is consistent with the requirements of both, the
Indian Trusts Act as well as Trust (Jersey) Law, 1984 as to what constitutes a
trust.
27 As to the ground that the settlor cannot be a sole beneficiary, as ADIA
was settlor as well as sole beneficiary, first of all the Act does not make any
such provision. Secondly, there is no provision under the Indian Trust Act
also which debars the settlor from being beneficiary. In the case of Bhavna
Nalinkant Nanavati (supra), the settlor of the trust was also the sole
beneficiary in the Deed of Settlement. The Gujarat High Court, while
interpreting Section 3 of the Indian Trust Act observed as under:
.................
"The ownership of trust property has to be for the benefit of a person
or more than one person of whom the settlor may himself be one but
never for the benefit of an owner alone, viz the trustee. There cannot
be a case where the creator of the trust would also be the trustee and
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also the sole beneficiary, because in such cases a man cannot enforce
a trust against himself."
Thus, it follows that the settlor cannot be the trustee and sole
beneficiary. In the present instance, the settlor is not the trustee but
is the sole beneficiary which is clearly permissible.
28 As regards AAR's view that Sections 60 to 64 are designed to overtake
and circumvent the counter design by a taxpayer to reduce its tax liability by
parting its property in such a way that the income should no longer be
received by him but at the same time he retains certain powers over
property/income, that is not the case as regards petitioner. In the case at
hand, if ADIA had invested the amount directly, the income derived from
such investment would exempted under Article 24 of India-UAE DTAA.
ADIA has not created the trust to avoid tax and that is not AAR's case either.
AAR says if ADIA had directly invested they would not have been liable to
pay tax. AAR failed to understand why would someone not invest directly if
the returns on such investment would be exempt from tax. AAR fails to
appreciate that ADIA routed its investment on certain instruments through
the trust only for commercial expediency. According to AAR the assessee's
representative could not satisfactorily answer the query as to why ADIA
routed its investments in non-convertible debenture funds through Jersey
route for investment in Indian market and ADIA itself being an FII
registered with SEBI could have directly invested in Indian Portfolios and
taken advantage of Article 24 of India-UAE treaty. But the fact is ADIA has
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explained in detail in its letter dated 13 th November 2018 and letter dated
25th September 2019 to AAR, why it routed its investment in non convertible
debentures through Jersey route for Indian market.
29 As regards the ground that Section 160(1)(i) or 160(1)(iv) of the Act,
provides that trustee can be representative assessee but in this case trustee
being a resident of Jersey cannot be an agent of ADIA, in our view that is
not sustainable as the Act does not provide anywhere that only trustee who
is resident of India can be an agent under Section 160 of the Act.
30 As regards the ground of proposed amendment in the Finance Bill
2020 (Exemption from certain income of wholly owned subsidiaries of
ADIA), Shri Pardiwalla submitted that AAR relied on the amendment despite
the fact that the same was introduced in the Act post the hearing of the
application and was never put to ADIA for them to make any submissions
thereon. We would agree with Shri Pardiwalla. It was improper for AAR
to have relied upon the proposed amendment. If, AAR wanted to, it could
have given notice to ADIA to make their submissions thereon. Therefore, the
contents of the proposed amendment could not have been relied upon by
AAR.
31 In our view, therefore, the Deed of Settlement dated 22 nd July 2013,
whereby the trust was set up, contained specific clauses which established
the revocable nature of the trust. As the ADIA has settled the trust on the
terms mentioned in the Deed of Settlement, the contribution made by it to
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the trust would be a transfer as defined in Section 63 of the Act. As Section
63 does not anywhere specify that a trust covered by it must necessarily be a
trust falling under the Indian Trust Act 1882 and as per Section 63(b) of the
Act, any settlement or trust is included within the meaning of 'transfer' and
Section 63(b) does not provide that the trust described therein needs to be
an Indian Trust, the provisions of Sections 61 to 63 of the Act are applicable
to the case at hand. As the term 'trust' is not defined either in Section 63 or
Section 2 of the Act 'trust' would clearly be a trust as one understands the
term in its common parlance. Even if one has to have recourse to the
definition of the term "trust" in Section 3 of the Indian Trust Act 1882, i.e.,
an obligation annexed to the ownership of property, and arising out of a
confidence reposed in and accepted by the owners, or declared and accepted
by him, for the benefit of another, or of another and the owner, there is
nothing in the language of Section 61 or 63 that restricts its applicability
only to trusts settled in India and accordingly, AAR was not justified in
concluding that a Foreign Trust will not be covered under the said
provisions. AAR while expressing its view that India has not ratified Hague
Convention on the law applicable to trust has overlooked the fact that ADIA
is not seeking to apply Foreign Law to India but is merely seeking an
application of Section 61 which in no manner excludes, from it applicability,
a trust settled outside India. A Foreign Trust can be treated as a trust under
the Act also appears from the income tax return forms prescribed under the
Act wherein Schedule FA, Para F, in form ITR-5, require the disclosure of
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"details of trusts" created under the laws of a country outside India, in
which one is trustee, beneficiary or settlor. There are similar requirements
in Form ITR-2, ITR-6 and ITR-7. Therefore, the Act presupposes that a
Foreign Trust is a trust for the purposes of the Act. In Vikramsinghjit of
Gondal (Supra), the Apex Court has applied the provisions of Section 164
and 166 of the Act to tax the beneficiary of a trust settled in U.K.
32 Even if, the trust is based out of Jersey and the trust is settled in
Jersey, ADIA being the settlor and sole beneficiary of the trust and resident
of UAE as per Article 24 of the India-UAE DTAA, the income which arises to
it by virtue of investment in Indian Portfolio companies will be governed by
the beneficial provisions of the India-UAE DTAA. To take it further, even if
the trust structure were to be discarded, then it must necessarily follow that
the investment must be regarded as having been made by ADIA and hence
the income would arise in the hands of ADIA which income would not be
taxable in India by virtue of provisions of India-UAE DTAA. We have to note
that there was no attempt whatsoever to reduce the tax liability by using the
trust structure. When the provisions of the Trust Deed provided that ADIA
has right to re-assume power over the entire income arising on the
investments made by the trust in the portfolio companies, the entire income
arising therefrom has to be in terms of Section 61 of the Act to be assessed
in the hands of ADIA. This would mean the exemption under Article 24 of
India-UAE DTAA would be attracted. Even if for a moment we say that for
any reason the provisions of Section 61 are not applicable, then also the
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trustee can only be assessed in a representative capacity and, accordingly
the provisions of Section 160(i)(iv) will be applicable. Therefore, even if the
income is taxed in the hands of the trustee in terms of Section 161(1), it will
be taxed in the "like manner and to the same extent" as the beneficiary.
Once again, ADIA is the sole beneficiary of the trust, the income assessed in
the hands of the trustee will take colour of that of ADIA's income and
thereby, the benefit of India-UAE DTAA must be granted.
33 As there is no bar to the settlor and beneficiary being the same person
and in view of the judgment in Bhavana Nalinkant Nanavati (supra) where
the court has interpreted Section 3 of the Indian Trust Act, 1882 as creating
a fiduciary relationship between the trustee and the beneficiary, where the
ownership of the trust property has to be for the benefit of another person
which can include the settlor himself, if one reads Sections 61 and 63 of the
Act, it is quite clear that Section 61 is independent of Section 63 of the Act
and a transfer can be a revocable transfer on its own merits and is not
restricted only to trusts. A "settlement" or a "trust" are instances of what
amount to transfer. So long as the settlor has a right to reassume power
over the assets settled, the same would amount to revocable transfer. In the
facts of the case at hand, ADIA could reassume the power and hence the
contribution to the trust was a revocable transfer thereby making the
income arising to the trust taxable in the hands of ADIA which was exempt
under Article 24 of India-UAE DTAA. The tax liability of a trust has to be
determined by applying the provisions of the Act alongwith the provisions of
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India-UAE DTAA and not apply the law as applicable in Jersey.
34 In the circumstances, the ruling dated 18 th March 2020 has to be
quashed. The income that accrues to the trust would not be chargeable to
tax in India either by virtue of application of Section 61 read with Section
63 or on an application of Section 161 of the Act conjointly with the
provisions of Article 24 of the India-UAE DTAA. Since we have quashed the
Ruling dated 18th March 2020 of the AAR, the steps taken in furtherance of
the Ruling order passed therein are also quashed and set aside. Ordered
accordingly.
35 Petitions disposed with no order as to costs.
(ABHAY AHUJA, J.) (K.R. SHRIRAM, J.)
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