TEAM CODE: M

IN THE HONBLE HIGH COURT OF BOMBAY MUMBAI, INDIA

INCOME TAX APPEAL NO.____/ 2012 UNDER SECTION 260A (2) OF THE INCOME TAX ACT, 1961 OF INDIA .

_______________________________________________________ FOOL THE WORLD (MAURITIUS) COMPANY LTD. (APPELLANT)

V.

COMMISSIONER OF INCOME TAX (RESPONDENT) _______________________________________________________

MEMORIAL FOR THE RESPONDENT 2012

~Memorial For The Respondent~

TABLE OF CONTENTS

[A]. [B]. I. II. III. 1. 2. IV. V. VI. [C]. [D]. [E]. [F]. [G].

LIST OF ABBREVIATIONS .............................................................................. iv INDEX OF AUTHORITIES ................................................................................ vi LIST OF S TATUTES/RULES/BILLS. ..................................................................... vi LIST OF INTERNATIONAL INSTRUMENTS ............................................................ vi LIST OF CASES ................................................................................................. vi Indian Cases .................................................................................................. vi Foreign Cases .............................................................................................. viii LIST OF BOOKS ............................................................................................... viii LIST OF J OURNALS/ONLINE RESOURCES ............................................................ ix LIST OF R EPORTS ............................................................................................... x STATEMENT OF JURISDICTION ..................................................................... xi STATEMENT OF FACTS .................................................................................. xii QUESTIONS PRESENTED .............................................................................. xiv SUMMARY OF PLEADINGS............................................................................ xv PLEADINGS ADVANCED .................................................................................. 1 THE SHARES OF R ICHIR ICH ARE SAID TO BE DERIVING VALUE DIRECTLY OR INDIRECTLY FROM ASSET LOCATED IN INDIA. ............................................ 1

ISSUE I.

I.A. I.B.

Sufficient Economic Nexus With The Assets Located In India. ..................... 1 Lifting Of The Corporate Veil. ....................................................................... 3 THE SHARES O F R ICHIR ICH TRADED BY FMC DERIVE ITS VALUE

ISSUE II.

SUBSTANTIALLY FROM THE ASSETS LOCATED IN INDIA. ................................ 5 ISSUE III. THAT EXPLANATION 5 TO SECTION 9(1) (I) IS APPLICABLE ON THE SALE OF

SHARES OF R ICHIR ICH. ..................................................................................... 6 III.A. Retrospective Effect Of Amendment To Section 9(1) (i). ............................... 6 III.B. Power Of Legislature To Enact A Retrospective Law With Extra-Territorial

Applicability. ................................................................................................. 8 ISSUE IV.

AND

THAT FULL CAPITAL GAINS WOULD BE CHARGEABLE TO TAX IN INDIA NOT CAPITAL GAINS PROPORTIONATE TO THE ASSETS S ITUATED IN INDIA. 11 ii

~Memorial For The Respondent~

IV.A. Shares Are Recognized As An Asset. ........................................................... 11 IV.B. Apportionment Principle Applies Only To Business. ................................... 12 IV.C. The Nexus Is Holistic And Not Proportionate. ............................................. 13 IV.D. The Transaction Is Not Composite. .............................................................. 13 ISSUE V. THE ASSESSEE IS NOT ENTITLED TO INDEXATION BENEFIT IN COMPUTING

THE CAPITAL GAINS CHARGEABLE TO TAX IN INDIA. ...................................... 14 V.A. V.B. The transaction is carried out in foreign currency. ....................................... 14 Arguendo: Non Availability Of Indexation Benefit Amounts To

Discrimination.............................................................................................. 16 ISSUE VI. THAT THE CAPITAL GAINS ON THE SALE OF THE SHARES O F R ICHIR ICH

BY FMC WOULD NOT C OME W ITHIN THE AMBIT OF THE TREATY. ................. 17 VI.A. RichiRich Is Not A Company Registered In Either Of The Contracting States. ..................................................................................................................... 17 VI.B. Abuse Of Treaty ........................................................................................... 18 [H]. PRAYER FOR RELIEF ...................................................................................... 20

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[A]. LIST OF ABBREVIATIONS S.No. ABBREVIATION 1. 2. 3. 4. 5. 6. 7. 8. 9. / A.P. AC AIR All All ER Anr. Art. Bom EXPANSION Paragraph/Paragraphs Andhra Pradesh Appeal Cases All India Reporter Allahabad High Court All England Law Reports Another Article Bombay High Court Bombay Law Report Honourable Chief Justice Commissioner of Income Tax Corporation Current Tax Reporter Delhi High Court Dominion Law Reports Double Taxation Avoidance Agreement Direct Tax Code Edition High Court Internal Revenue Code Incorporation Industries Income Tax Appellate Tribunal Income Tax Reporter Honourable Justice Karnataka Limited Madras High Court New York Stock Exchange iv

10. BomLR 11. C.J. 12. CIT 13. Corp. 14. CTR 15. DEL 16. DLR 17. DTAA 18. DTC 19. Ed. 20. HC 21. I.R.C. 22. Inc. 23. Inds. 24. ITAT 25. ITR 26. J. 27. Kar. 28. Ltd. 29. MAD 30. NYSE

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31. OECD 32. Ors. 33. p/pp 34. QB 35. S.T.C. 36. SC 37. SCC 38. SCR 39. SLP 40. Supp. SCR 41. T.T.J. 42. TDS 43. U.O.I. 44. U.P. 45. U.S.A 46. UN 47. USD 48. v. 49. Vol. 50. w.e.f

Organization For Economic Co-Operation And Development Others Page/Pages Queen's Bench Simon Supreme Court Supreme Court Cases Supreme Court Reports Special Leave Petition Supplementary Supreme Court Reports Tax Tribunal Judgment Tax Deduction at Source Union of India Uttar Pradesh United State of America United Nations Unites States Dollar Versus Volume With effect from

~Memorial For The Respondent~

[B]. INDEX OF AUTHORITIES CONSTITUTION OF INDIA. I. LIST OF STATUTES/RULES/BILLS. 1. INCOME TAX ACT, 1961. 2. INCOME TAX RULES , 1962. 3. DIRECT TAX CODE, 2010. 4. FINANCE ACT, 2012. II. LIST OF INTERNATIONAL INSTRUMENTS 1. INDIA-MAURITIUS DOUBLE TAXATION AVOIDANCE AGREEMENT. 2. INDIA-US DOUBLE TAXATION AVOIDANCE AGREEMENT. 3. INDIA-A USTRALIA DOUBLE TAXATION AVOIDANCE AGREEMENT. 4. OECD MODEL TAX CONVENTION. 5. UNITED NATIONS MODEL DOUBLE TAX CONVENTION. 6. INDIA-N ETHERLANDS DOUBLE T AXATION AVOIDANCE A GREEMENT. III. LIST OF CASES 1. INDIAN CASES 1. A.h.Wadia v. CIT, (1949) 17 ITR 63 (FC) ............................................................ 9 2. Anglo-French Textile Co. Ltd. v. Commissioner of Income Tax, Madras, (1954) 25 ITR 27 ........................................................................................................... 12 3. Basf Aktiengesellschaft v. Deputy Director of Income Tax, International Taxation, 2007 293 ITR 1 Mum, ........................................................................ 15 4. Behariji Dass, Civil & Sessions Judge, Sultanpur and Ors. v. Chandra Mohan, Civil & Sessions Judge, Fatehpur and Ors., AIR 1969 All 594 .......................... 10 5. Chainrup Sampatram v. Commissioner of Income Tax, West Bengal, (1953) 24 ITR 481 .............................................................................................................. 12 6. Chinmoy pathak v. standard chartered bank ltd., on 14 june, 2010 in the High Court at Calcutta ................................................................................................. 19 7. CIT v. Kerala Electric Lamp Works Ltd., 2003 129 TAXMAN 549 Ker ............... 7 8. CIT v. Orissa Cement Ltd., (2002) 173 CTR (Del) 317 ........................................ 7 9. CIT v. Sri Meenakshi Mills Ltd., AIR 1967 SC 819 .............................................. 3

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10. CIT, New Delhi v. M/s. Eli Lilly and Company (India) Pvt. Ltd, (Appeal No. 5114 of 2007), decided on: 25/3/2007. ...................................................................... 1, 7 11. Commissioner of Income Tax v. Eli Lilly and Co. (India) Private Limited, (1009) 15 SCC 1 .............................................................................................................. 8 12. Commr. of Agrl. IT v. Plantation Corporation of Kerala Ltd., (2000) 164 C.T.R. (SC) 502 ............................................................................................................... 7 13. Electronics Corporation of India Ltd.,. v. CIT, 83 ITR 43 (SC)............................ 9 14. Farhad J Bottlewalla, Mumbai v. Assessee, on 31 August, 2012 in the Income Tax Appellate Tribunal Mumbai ......................................................................... 19 15. In the matter of Cauvery Water Disputes Tribunal, AIR 1992 SC 522 ................. 9 16. Income Tax Officer v. Maruti Countrywide Auto Financial Services (P) Ltd., [2008] 307 ITR 165 (Delhi). ................................................................................. 6 17. Indra Sawhney v. Union of India, AIR 1993 SC 477 .......................................... 10 18. Ishikawajma-Harima Heavy Industries Ltd. v. Director of Income Tax, Mumbai, AIR 2007 SC 929 ........................................................................................... 1, 13 19. Juggilal Kampalpat v. Commissioner of Income Tax, U.P., AIR 1969 SC 932 : (1969) 1 SCR 988 ................................................................................................. 3 20. K K Baskaran v. State, (2011) 3 SCC 793 ............................................................ 8 21. K. Sankaran Nair (Dead) through L.Rs. v. Devaki Amma Malathy Amma and Ors,.(1996) 11 SCC 428 ....................................................................................... 9 22. Maneka Gandhi v. Union of India, (1978) 1 SCC 248: AIR 1978 SC 597 ............ 9 23. Mc Dowell & Company Limited v. The Commercial Tax Officer, 1986 AIR 649 .. 3 24. Municipal Corporation of the City of Ahmedabad etc. v. New Shorock Spg. & Wvg. Co., Ltd. etc., [1971] 1 SCR 288 .................................................................. 9 25. S. Sundaram v. V.R. Pattabhiraman, [1985] 2 SCR 643 ....................................... 7 26. Sheraton International Inc. v. Deputy Director Of Income Tax, 2007 293 ITR 68 (Delhi) .............................................................................................................. 1, 2 27. Shri Prithvi Cotton Mills Ltd. & Anr., v. Broach Borough Municipality & Ors., 1970 AIR 192 ....................................................................................................... 8 28. Shri Shiva Kant Jha v. Union Of India (UOI) And Ors., 2002 256 ITR 563 Delhi ........................................................................................................................... 19 29. Virender Singh Hooda And Ors. v. State Of Haryana And Anr., AIR 2005 SC 137 ........................................................................................................................... 11

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30. Vodafone International Holdings B.V v. Union of India &amp, CIVIL APPEAL NO.733 OF 2012 in the Supreme Court of India ................................................... 2 31. Vodafone International Holdings B.V. v. Union of India (UOI) and Anr. 2010 (112) BomLR 3792 ............................................................................................... 1 32. Wood Polymer Ltd. v. Bengal Hotels Limited, 40 Company Cases, 597 ............... 4 33. Workmen Employed In Associated Rubber Industry Ltd. Bhavnagar v. The Associated Rubber Industry Ltd. Bhavnagar, AIR 1986 SC .................................. 3

2.

FOREIGN CASES

1. Barclays Mercantile Business Finance Limited v. Mawson, (2005) AC 685 (HL) 3 2. Furniss v. Dawson, [1984] 1 All ER 530. ............................................................. 4 3. Inland Revenue Commissioners v. Burmah Oil Co. Ltd., [1982] S.T.C. 30, H.L. (Sc.). ..................................................................................................................... 4 4. MacNiven v. Westmoreland Investments Limited, (2003) 1 AC 311...................... 3 5. Re Cairn UK Holdings Ltd., (2011) TII 16 ARM-INTL..................................... 16 6. Transworld Garnet Company Ltd. v. DIT., (2011) TII 02 ARA-Intl, .................. 16 7. W. T. Ramsay Ltd. v. Inland Revenue Commissioners, [1981] S.T.C. 174 ............ 4

IV. LIST OF BOOKS 1. Adrian Ogley, The Principles of International Tax-A Multinational Perspective (3rd ed., Interfisc Publishing London 1996). 2. Charles H. Gustafson et al., Taxation Of International Legal Transactions: Materials, Text And Problems 14 (2nd ed., Georgetown Publishing 2001). 3. Cornelis Van Raad, Nondiscrimination In International Tax Law (1986). 4. Dicey, Morris and Collins, The Conflict of Laws (14th ed., Vol. 2, Sweet & Maxwell). 5. Girish Ahuja & Ravi Ahuja, Concise Commentary on Income Tax (8th ed., Jain Book Agency 2007). 6. Henry J. Steiner et al., Transnational Legal Problems: Material And Text (4th ed. , 1994). 7. Julie Rogers-Glabush, IBFD International Tax Glossary (6th ed., IBFD Publishing 2009). viii

~Memorial For The Respondent~

8. Justice G.P Singh, Principles of Statutory Interpretation (9th ed., Lexis Nexis Wadhwa 2010). 9. K.B. Bhatnagar, Direct Tax Digest (8th ed., Lexis Nexis Wadhwa 2010). 10. K. Chaturvedi, Income Tax Law (6th ed., Ahuja Book House 2006). 11. Kanga & Palkhivala, The law and Practice of Income Tax (Dinesh Vyas ed., Lexis Nexis 2004). 12. Rutsel Silvestre J. Martha, Extraterritorial Taxation In International Law, In Extraterritorial Jurisdiction In Theory And Practice (Dr. Karl M. Meessen ed., Windsor Publishing Company 1996). V. LIST OF JOURNALS/ONLINE RESOURCES 1. David W. Williams, Trends In International Taxation 101 (1991). 2. Rutsel Silvestre j. Martha, The Jurisdiction To Tax In International Law: Theory And Practice Of Legislative Fiscal Jurisdiction 15 (1986). 3. Schanz, Zur Frage Der Steuerpflicht, 9 Finanz-Archiv 365, 372 (1892). 4. Alfred Nizamiev, The Main Characteristics of State's Jurisdictin to Tax in International Dimension, LLM Theses and Essays, Georgia Law (2003). 5. Victor Thuronyi, International Tax Cooperation and a Multilateral Treaty, 26BROOKLIN J. INTL L. 1641 (2001). 6. "Launderers Anonymous." The Economist. The Economist Newspaper, 22 Sept. 2012. Last accessed on. 22 Sept. 2012. <http://www.economist.com/node/21563286>. 7. "Reviewing Tax Treaty with Mauritius: Chidambaram." N.p., 5 Sept. 2012. Last accessed on 15 Sept. 2012. <http://www.hindustantimes.com/India-news/NewDelhi/Reviewing-tax-treatywith-Mauritius-Chidambaram/Article1-925011.aspx>. 8. "Tax Haven Mauritius." Tax Havens of the World. N.p., n.d. . Last accessed on. 14 Sept. 2012. <http://www.taxhavens.biz/other_tax_havens/tax_haven_mauritius/>. 9. William Chung. "Mauritius Highlights 2012." N.p., n.d. Last accessed on. 16 Sept. 2012.

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<http://www.deloitte.com/assets/DcomGlobal/Local%20Assets/Documents/Tax/Taxation%20and%20Investment%20Gui des/2012/dttl_tax_highlight_2012_Mauritius.pdf>. 10. Tax Edge Special, BMR Advisors (2010) Vol. 4 Issue 8.4 P. 1.

VI. LIST OF REPORTS 1. First Law Commission, 12th Report titled Income Tax Act, 1922, Law Commission of India, dated 26.9.1958..2

~Memorial For The Respondent~

[C]. STATEMENT OF JURISDICTION The Appellant has approached the Honorable High Court of Bombay under Section 260A (2) of the Income Tax Act, 1961. The Respondent most humbly and respectfully submits to the jurisdiction of the Honorable High Court of Bombay.

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~Memorial For The Respondent~

[D]. STATEMENT OF FACTS 1. The present matter concerns a tax dispute involving Fool The World (Mauritius) Company Ltd. (hereinafter referred to as FMC) is a company registered in Mauritius which was set up in 1971 by FMC Australia. FMC is holding a Tax Residency Certificate issued by the Tax Authorities in Mauritius. 2. On 1 July, 1998, FMC acquired 343 equity of RichiRich Corporation (herein after referred to as RichiRich) for USD 1000. RichiRich is a company registered in USA and its shares are listed in the NYSE. The holding of FMC in RichiRich comes only to 0.00073%. FMC has no business activity other than holding the shares in RichiRich. 3. RichiRich is engaged in the Business of providing Back Office Support Services to companies all over the world. RichiRich has a wholly owned subsidiary in British Virgin Island which in turn holds 100 % shares in B.O.S.S. B.V. Netherlands. B.O.S.S. holds 100% shares in an Indian Company. 52% of the value of the shares of RichiRich is derived from the business carried on by the Indian Company. The balance value of the shares is derived from its other operating company which is situated in Philippines. 4. FMC sold the shares of RichiRich on the New York Stock Exchange on 4th August 2007 for a consideration of UDS 4,000. FMC filed a NIL return of income for the assessment year 2008- 09, without offering the capital gains earned on the sale of share of RichiRich. 5. The Assessing Officer passed the assessment order on 20th December, 2010, holding that: The capital gains earned by FMC are taxable as it is a transfer of a capital asset situated in India. The benefit of the Indo-Mauritius Double Taxation Avoidance Agreement (herein after referred to as the Treaty) would not be applicable. Further FMC was not allowed the benefit of indexation in computing the capital gains.

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6. FMC appealed to the Commissioner of Income-tax (Appeals). On 20th December 2011, CIT(A) allowed the appeal of FMC holding that: The shares of RichiRich is not a capital asset situated in India within the meaning of section 9(1)(i) of the Act and, hence, capital gains is not taxable. FMC is entitled to the Treaty benefits.

7. The Revenue appealed before the Income-tax Appellate Tribunal (hereinafter referred to as the Tribunal). On 13th July 2012, the Tribunal allowed the appeal of the Revenue holding that: Explanation 5 to section 9(1)(i) of the Act is applicable. The value of the shares of RichiRich is substantially from assets in India and, hence, the capital gains are taxable. The transaction of sale of shares of RichiRich is not covered under the Treaty. Benefit of indexation would not be available to FMC. The full amount of capital gains would be chargeable to tax in India and not the proportionate amount. 8. FMC filed an Appeal in the Honourable High Court of Bombay against the order of the Tribunal. The Appeal is now fixed for final hearing on this date. HENCE, THE PRESENT MATTER IS BEFORE THIS HONOURABLE COURT .

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[E]. QUESTIONS PRESENTED I. WHETHER ON T HE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE TRIBUNAL WAS RIGHT IN LAW IN HOLDING THAT THE SHARES O F RICHIRICH CAN BE SAID TO BE DERIVING ANY VALUE DIRECTLY OR INDIRECTLY FROM ANY ASSET IN INDIA?

II.

WHETHER ON T HE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE TRIBUNAL WAS RIGHT IN H OLDING T HAT T HE SHARES O F RICHIRICH DERIVES ITS VALUE SUBSTANTIALLY FROM THE ASSETS LOCATED IN INDIA?

III.

WHETHER ON T HE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE TRIBUNAL WAS RIGHT IN HOLDING T HAT E XPLANATION 5 T O SECTION 9(1)(I) IS APPLICABLE ON THE SALE OF SHARES OF RICHIRICH?

IV.

WHETHER ON T HE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE TRIBUNAL WAS RIGHT IN HOLDING THAT FULL CAPITAL GAINS WOULD BE CHARGEABLE TO TAX IN I NDIA AND NOT CAPITAL GAIN PROPORTIONATE T O THE ASSETS SITUATED I N INDIA?

V.

WHETHER ON T HE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE TRIBUNAL WAS RIGHT IN HOLDING THAT T HE ASSESSEE IS NOT ENTITLED TO INDEXATION BENEFIT IN COMPUTING THE CAPITAL GAINS CHARGEABLE TO TAX IN INDIA?

VI.

WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE TRIBUNAL WAS RIGHT IN H OLDING THAT THE C APITAL GAINS O N THE SALE OF THE SHARES OF RICHIRICH BY FMC W OULD NOT COME WITHIN THE AMBIT OF THE TREATY?

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[F]. SUMMARY OF PLEADINGS

I.

THAT THE SHARES

OF

RICHI RICH ARE SAID TO BE DERIVING VALUE

DIRECTLY OR INDIRECTLY FROM ASSET LOCATED IN INDIA. When there exists, sufficient territorial connection or nexus between the person sought to be charged and the country seeking to tax him, then the income tax may extend to that person in respect of his foreign income. In Section 9 of the Income Tax Act, where deemed to gives wide amplitude so as to bring out the sufficient economic nexus with the assets located in India. By way of explanation 5 the companies incorporated outside the territory of India, but gaining substantial value from their subsidiary located in India, will be always deemed to be located in India for the purpose of taxation. The Income Tax authorities or the Court can lift the corporate veil and look through the transaction made by the company, when the company is incorporated with the improper motive.

II.

THAT THE SHARES

OF

RICHIRICH TRADED BY FMC DERIVE ITS VALUE

SUBSTANTIALLY FROM THE ASSETS LOCATED IN INDIA. The word substantially is not defined in the Act per say. However, it is of opinio juris that any quantum above 50 percentage mark shall construe a substantial proportion. Also, in the proposed DTC, 2010, the 50 percent mark is recognised as substantial value attribution from the assets located in India. India is a signatory to the OECD and UN Model Taxation Convention, where the 50 percent attribution is considered to be the substantial level.

III.

THAT EXPLANATION 5 TO SECTION 9(1)(I) I S APPLICABLE ON THE SALE OF SHARES OF RICHIRICH. Explanation 5 is enacted through the Financial Act, 2012 with a retrospective effect. Hence, the amendment will be applicable even to all pending cases in appellate stage in the Courts.

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The legislature by way of the clarificatory amendment has made clear that the interpretation shown via explanation 5 already existed under the main section. The legislature has been conferred with all powers under our Constitution to make retrospective laws provided they are competent on the subject matter.

IV.

THAT FULL C APITAL GAINS WOULD BE CHARGEABLE T O TAX IN INDIA AND NOT ONLY THE CAPITAL GAINS PROPORTIONATE TO T HE ASSETS SITUATED IN INDIA. Shares are recognised as Capital Assets and being a conjugation of rights, cannot be apportioned or dissected. The principles of apportionment do not apply to transactions which take place entirely in one state. The principle of apportionment applies only to business per say. The principle of apportionment applies to composite transaction and in the present matter the transaction is single without any multiplicity of activities. The nexus established between FMC and India i.e. the taxing state is holistic.

V.

THAT THE ASSESSEE IS NOT ENTITLED TO INDEXATION BENEFIT IN COMPUTING T HE CAPITAL GAINS CHARGEABLE TO TAX IN I NDIA. The first proviso read with second proviso to section 48 of the Act states that the benefit of indexation is not available to non-residents as non-residents are protected from vagaries of fluctuation in currency rates.

VI.

THAT THE CAPITAL GAINS ON THE SALE OF THE SHARES OF RICHIRICH BY FMC W OULD NOT COME WITHIN THE AMBIT OF THE TREATY. RichiRich is registered in America. It has been clarified vide Circular No. 682 that the shares traded of an Indian Company only will come under the ambit of the Treaty. The purpose of the Treaty is to avoid tax evasion and the transaction carried out by FMC would lead to the abuse of Treaty.

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[G]. PLEADINGS ADVANCED

ISSUE I. THE SHARES OF RICHI RICH ARE SAID TO BE DERIVING VALUE DIRECTLY OR INDIRECTLY FROM ASSET LOCATED IN INDIA. I.A. SUFFICIENT ECONOMIC NEXUS WITH THE ASSETS LOCATED IN INDIA . 1. The word deemed under the section 9(1) of Income Tax Act, 1961, 1 gives wide amplitude so as to include all kinds of income derived by non-resident from every other source within the ambit of the provision. 2 Clause (i) of Section 9(1) provides that income is deemed to accrue or arise in India whether directly or indirectly inter alia through or from (a) a business connection in India; (b) property in India; (c ) any asset in India; (d) any source of income in India; or (e) through the transfer of a capital asset situated in India. The common thread is that the income should have sufficient territorial or economic nexus with India. 3 India has a wide net of source based taxation to preserve its tax base which is granted by the Section 9 of the Income Tax Act, 1961. 2. The jurisdiction of a state to tax non-residents is based on the existence of a nexus connecting the person sought to be taxed with the jurisdiction which seeks to tax. 4 The nexus of a non-resident with the taxing jurisdiction arises where the source of income originates in the jurisdiction. 5 A country may tax income having its source in that country, regardless of the residence of the tax payer. 6 3. A sufficient territorial connection or nexus should exist between the person sought to be charged and the country seeking to tax him, income tax may extend to that person
1

Section 9 Income deemed to accrue or arise in India.

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

Vodafone International Holdings B.V. v. Union of India (UOI) and Anr. 2010 (112) BomLR 3792, [Hereinafter Vodafone Bom. HC Case].
4

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

Sheraton International Inc. v. Deputy Director Of Income Tax, 2007 293 ITR 68 (Delhi), [Hereinafter Sheraton Case].
6

Julie Rogers-Glabush (ed.), IBFD International Tax Glossary, IBFD publications, 6th edn, p. 294, 394.

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in respect of his foreign income. 7 In the present case, the transaction in question had a significant nexus with India. The shares transacted by FMC derives its value substantially from the assets located in India. 8 Henceforth, the capital gain arising on sale of shares by FMC has nexus with Indian jurisdiction. 9 Moreover a controlling interest is not required for the purpose of constituting a distinct capital asset under the Income Tax Act, 1961. 10 Thus FMC is required to pay tax in India for indirectly transacting assets located in India by way of sale of share in RichiRich. 11 4. More so, the Explanation 5 to Section 9(1)(i) of Income Tax Act, 1961 inserted through Financial Act, 2012 clarifies the legislative intent behind the main pro vision of the section. The amendment comes as the clarification of doubt in regard to legislative intent, prior to which the section has attracted a different interpretation by the Honble Supreme Court in the Vodafone Case. 12 The bare reading of the explanation to Section follows, Explanation 5 - For the removal of doubts, it is hereby clarified that an asset or a capital asset being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be and shall always be deemed to have been situated in India, if the share or interest derives, directly or indirectly, its value substantially from the assets located in India Thus the companies incorporated outside the territory of India, but gaining substantial value from their subsidiary located in India, will be always deemed to be located in India for the purpose of taxation. Hence, when a Non-resident trades on one such company incorporated outside the territory of India will always be liable to pay taxes in India, as there are more than sufficient territorial nexus and economic nexus established.
7

Sheraton Case. Proposition 3. Vodafone Bom. HC Case. Ibid. Proposition 4.

10

11

12

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

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I.B.

LIFTING OF THE CORPORATE VEIL.

5. The Income tax Authorities were entitled to pierce the veil of corporate entity and to look through the reality of the transaction to examine whether the corporate entity was being used for tax evasion. 13 Further, the principle can be invoked when a separate legal entity was brought into existence outside the taxable territory, with the ulterior motive of evading the tax obligation by the assessees. 14 6. The Courts may even lift the Corporate Veil when an interest is being considered, 15 more so a company is incorporated with improper objective. 16 Tax evasion is an improper objective. Courts will not knowingly permit people abusing the legal entity and status granted to a company when that status is being abused. 17 Once the transaction is shown to be fraudulent, sham, circuitous or a device designed to defeat the interests of the shareholders, investors, parties to the contract and also for tax evasion, the Court can always lift the corporate veil and examine the substance of the transaction. 18 7. Lifting the corporate veil doctrine can be applied in tax matters even in the absence of any statutory authorisation to that effect. Principle is also being applied in cases of holding company-subsidiary relationship, where in spite of being separate legal personalities, if the facts reveal that they indulge in dubious methods for tax

13

Mc Dowell & Company Limited v. The Commercial Tax Officer, 1986 AIR 649, [Hereinafter Mc Dowell Case], (it is open to the Income-tax Officer in a given case to lift the corporate veil for finding out whether the purpose of the corporate veil is avoidance of tax or not. It is one of the functions of the Assessing Officer to ensure that there is no conscious avoidance of tax by an assessee, and such function being quasi-judicial in nature, cannot be interfered with or prohibited).
14

CIT v. Sri Meenakshi Mills Ltd., AIR 1967 SC 819, [Hereinafter Meenakshi Mills Case]; See also Life Insurance Corporation Of India v. Escorts Ltd. & Ors., 1986 AIR 1370.
15

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

16

Workmen Employed In Associated Rubber Industry Ltd. Bhavnagar v. The Associated Rubber Industry Ltd. Bhavnagar, AIR 1986 SC 1.
17

Meenakshi Mills Case. Vodafone Case.

18

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evasion. 19 The existing tax statutes must be interpreted in a purposive manner to achieve the intention of the Legislature. 20 8. Learned Judge Desai in Wood Polymer Ltd. v. Bengal Hotels Limited, 21 where he refused to accord sanction to the amalgamation of companies as it would lead to avoidance of tax. It is neither fair nor desirable to expect the legislature to intervene and take care of every device and scheme to avoid taxation. It is up to the Court to take stock to determine the nature of the new and sophisticated legal devices to avoid tax and consider whether the situation created by the devices could be related to the existing legislation with the aid of 'emerging' techniques of interpretation as was done in Ramsay22, Burma Oil23 and Dawson 24, to expose the devices. 9. It is submitted that the facts of the case are clearly stating the conduit nature of holdings, from Indian subsidiary to RichiRich, located in U.S.A. via subsidiaries in Netherlands and British Virgin Islands 25. Thus the whole complex structure of the RichiRich holdings are evidently part of tax evading scheme, 26 more so the subsidiaries in Netherlands and British Virgin Islands are just an offshore registered office and has no business activity other than holding the shares of the subsidiaries. 27

19

Ibid.

20

MacNiven v. Westmoreland Investments Limited, (2003) 1 AC 311; See also Barclays Mercantile Business Finance Limited v. Mawson, (2005) AC 685 (HL).
21

Wood Polymer Ltd. v. Bengal Hotels Limited, 40 Company Cases, 597. W. T. Ramsay Ltd. v. Inland Revenue Commissioners, [1981] S.T.C. 174. Inland Revenue Commissioners v. Burmah Oil Co. Ltd., [1982] S.T.C. 30, H.L. (Sc.). Furniss v. Dawson, [1984] 1 All ER 530. Proposition 3.

22

23

24

25

26

Mc Dowell Case, ("I have referred to the English cases at some length, only to show that in the very country of its birth, the principle of Westminister has been given a decent burial and in that very country where the phrase 'tax avoidance' originated the judicial attitude towards tax avoidance has changed and the smile, cynical or even affectionate though it might have been at one time, has now frozen into a deep C frown. The courts are now concerning themselves not merely with the genuineness of a transaction, but with the intended effect of it for fiscal purposes. No one can now get away with a tax avoidance project with the mere statement that there is nothing illegal about it").
27

Ibid.

~Memorial For The Respondent~

10. Further, it is submitted that the income accrued by RichiRich from the business operations in India is indirectly attributed to the shares of RichiRich transacted by FMC, i.e., 52 percent of every share of RichiRich derives its value from Indian operations. 28 Thus the foreign income accrued by FMC on sale of shares of RichiRich is liable to be taxed in India. Hence, it is humbly submitted that the shares of RichiRich derive value Directly or Indirectly from the assets located in India.

ISSUE II. THE SHARES OF RICHI RICH TRADED BY FMC DERIVE ITS VALUE SUBSTANTIALLY FROM THE ASSETS LOCATED IN INDIA. 11. The shares of RichiRich acquire 52 percent value from the assets located in India while the rest of value is accrued from the operations in Philippines. 29 The Financial Act, 2012 did not carry what is meant by deriving value substantially from the assets located in India. 12. It is of opinio juris that 50 percent and anything above 50 percent shall be considered to construe substantial value, and this has been the general common prudence that has been in practice. E.g. In Income Tax Act, 1960 in order to determine who is resident and non-resident 30 for the purpose this Act is by half way mark in a year i.e., 182 days or more in a year. Thus the contribution of 52 percent by Indian subsidiary to the shares of RichiRich can be very well accounted as the substantial contribution made.

28

Proposition 3. Proposition 3.

29

30

Section 6 Residence in India (An individual is said to be resident in India in any previous year, if he (a) is in India in that year for a period or periods amounting in all to one hundred and eighty -two days or more ; or (c) having within the four years preceding that year been in India for a period or periods amounting in all to three hundred and sixty-five days or more, is in India for a period or periods amounting in all to sixty days or more in that year).

~Memorial For The Respondent~

13. Moreover India is a member to both OECD 31 and UN Model Tax Conventions, these conventions allows a country to tax its non-residents gain from the alienation of shares in a foreign company only if more than 50 percent of the value of the companys share is acquired directly or indirectly from the assets situated in the taxing State. 32 14. The DTC bill as introduced in Parliament contemplates that income earned from the transfer of any foreign companys shares outside India will be taxable in India, if at any time in the previous 12 months at least 50 percent of the foreign companys total assets were held in India. 33 15. It is submitted that from the OECD, UN Model Tax Convention, and DTC Bill it can be ascertained that the recognised substantial mark is 50 percent and in the present case the sale of shares of RichiRich by FMC derives 52 percent value from the assets located in India 34 which is shall be considered as substantial value. Hence, it is humbly submitted that the shares of RichiRich, traded by FMC, derives its value substantially from the assets located in India.

ISSUE III. THAT E XPLANATION 5 TO SECTION 9(1) (I) IS APPLICABLE ON THE SALE OF SHARES OF RICHIRICH. III.A. RETROSPECTIVE EFFECT OF AMENDMENT TO SECTION 9(1) (I).

16. The explanation 5 to Section 9(1) (i) of the Income Tax Act was introduced as a part of Financial Act, 2012 which was made effective retroactively from 1962. Moreover the explanation starts with the words for removal of doubts, which implies that
31

Stefano Simontacchi, Taxation of Capital Gains Under the OECD Model Convention: With Special Regard to Immovable Property (Kluwer ed., 2007), (India reserved the right to tax gains from Indian shares, reserved its position on Article 13(4), and did not reserve its position on Article 13(5), which prohibits source State taxation of gains not enumerated in the preceding paragraphs).
32

Article 13(4) of OECD Model Tax Convention - Gains derived by a resident of a Contracting State from the alienation of shares deriving more than 50 per cent of their value directly or indirectly from immovable property situated in the other Contracting State may be taxed in that other State.
33

Direct Tax Code, 2010. Proposition 3.

34

~Memorial For The Respondent~

legislature has not amended the existing provision as such, but guiding the courts to interpret the main provision with respect to the legislative intent. 35 In the instant case, the explanation not only clarified the doubt, but also provides an additional support to the dominant object of the Act to make it meaningful and purposeful. 36 17. Whenever the legislature wanted to convey their intention to give retrospective effect to a provision, It can be effected either by enforcing its commencement from an earlier date by introducing a specific provision in regard to its commencement or by using such other language or expression conveying such meaning has always been in provision. 37 18. The scope of an "Explanation" to a statutory provision was explained in the case CIT v. Orissa Cement Ltd.,38 as: the object of an Explanation to a statutory provision is: (a) to explain the meaning and intendment of the Act itself, 39 (b) where there is any obscurity or vagueness in the main enactment, to clarify the same so as to make it consistent with the dominant object which it seems to sub serve, 40 (c) to provide an additional support to the dominant object of the Act in Order to make it meaningful and purposeful; 41 (d) An Explanation cannot in anyway interfere with or change the enactment or any part thereof; but where some gap is left which is relevant for the purpose, the Explanation, in Order to suppress the mischief and advance the object of the Act, can

35

Income Tax Officer v. Maruti Countrywide Auto Financial Services (P) Ltd., [2008] 307 ITR 165 (Delhi).
36

S. Sundaram v. V.R. Pattabhiraman, [1985] 2 SCR 643. CIT v. Kerala Electric Lamp Works Ltd., 2003 129 TAXMAN 549 Ker. CIT v. Orissa Cement Ltd., (2002) 173 CTR (Del) 317.

37

38

39

CIT v. Kerala Electric Lamp Works Ltd., (2008) 114 TTJ Delhi 676, (Explanation in a statute is to clarify or explain or settle any doubt or ambiguity or controversy. It may even widen the scope of the main provision in rare cases. The words used alone can reflect the true intend and they should be construed on their own terms).
40

Commr. of Agrl. IT v. Plantation Corporation of Kerala Ltd., (2000) 164 C.T.R. (SC) 502, (An Explanation is intended to either explain the meaning of certain phases and expres sions contained in a statutory provision or depending upon its language it might supply or take away something from the content of a provision and at times even, by way of abundant caution, to clear any mental cobwebs surrounding the meaning of a statutory provision spun by interpretative process to make the position beyond controversy or doubt).
41

Ibid.

~Memorial For The Respondent~

help or assist the Court in interpreting the true purpose and intendment of the enactment, and the right with which any person under a statute has been clothed. 19. It is submitted that the explanation introduced via amendment was a mere clarification to state that the meaning carried in the explanation was already there in the main section. Hence irrespective of the fact that the amendment was introduced in appellate stage, 42 the interpretation brought via explanation will be applicable to the assesse, FMC. Moreover it is a settled position of law, that when the Legislature enacts the law it is aware of the ground realities and there is presumption qua constitutionality. 43 III.B. POWER OF LEGISLATURE TO ENACT A RETROSPECTIVE LAW WITH EXTRA -TERRITORIAL APPLICABILITY . 20. The power of legislature over a subject-matter and competence to make a valid law is considered, when this condition is met, then at any point of time the legislature can make such a valid law retrospectively so as to bind even on past transactions. 44 The validity of a Validating law, therefore, depends upon whether the legislature possesses the competence over the subject-matter. 45 21. Article 246 of the Constitution gives Parliament the authority to make laws which are extra-territorial in application. 46 Further, Article 245(2) says that no law made by the Parliament shall be deemed to be invalid on the ground that it would have extra territorial operation. 47 Therefore, the Parliament undoubtedly has power to enact law having extra-territorial application. 48
42

Proposition 6. K K Baskaran v. State, (2011) 3 SCC 793. Shri Prithvi Cotton Mills Ltd. & Anr., v. Broach Borough Municipality & Ors., 1970 AIR 192. Ibid.

43

44

45

46

Commissioner of Income Tax v. Eli Lilly and Co. (India) Private Limited, (1009) 15 SCC 1, ("Section 9 was a typical example of a combination of a machinery provision which also provides for chargeability. The Court held that the 1961 Act has extraterritorial operations in respect of subject-matters and subjects which is permissible under Article 245 of the Constitution and the provisions are enforceable within the area where the Act extends through the machinery provided under it").
47

Vodafone Case 183; Electronics Corporation of India Ltd.,. v. CIT, 83 ITR 43 (SC); A.h.Wadia v. CIT, (1949) 17 ITR 63 (FC), (Per Chagla, J. in his concurring opinion, no limitation is placed upon the Legislature that the provisions of the Act of the Legislature passed should be intra-territorial in their character. It is entirely

~Memorial For The Respondent~

22. The power to impose tax is essentially a legislative function which finds in its expression Article 265 of the Constitution of India. Article 265 states that no tax shall be levied except by authority of law. Further, it is also well settled that the subject is not to be taxed without clear words for that purpose. 49 Thus the explanation 5 comes as amendment with clear words from the constitutional authority to levy tax on indirect transfer of shares, wherein the non-resident company holding an Indian subsidiary, similarly RichiRich holds Indian subsidiary and thus the capital gain arising out of sale of shares of RichiRich by FMC will be liable to tax in India. 50 23. The legislatures under the Constitution have, within the prescribed limits, power to make laws prospectively as well as retrospectively. In exercise of the plenary powers conferred upon the legislature by Articles 245 and 246 of the Constitution, render a judicial decision by a competent court ineffective by enacting a valid law fundamentally altering or changing the conditions on which such a decision is based, 51 which in turn may affect a class of persons and events at large. 52 However, it cannot set aside an individual decision inter-parties and affect their rights and liabilities alone. 53 24. It is observed that Article 141 of Constitution of India states, the law declared by the Supreme Court shall be binding on all Courts within the territory of India. Further, Article 141 does not prevent the appropriate Legislature from amending the law which was earlier interpreted by Courts, nor does Article 141 take away Parliament's

a matter of State policy to what extent the Indian Legislature should enact extra-territorial statutes. No Legislature would like to stultify itself and no Legislature would pass laws which it could not enforce; but those are not matters for a Court of laws).
48

Maneka Gandhi v. Union of India, (1978) 1 SCC 248: AIR 1978 SC 597. Ibid. Proposition 2, 3.

49

50

51

Municipal Corporation of the City of Ahmedabad etc. v. New Shorock Spg. & Wvg. Co., Ltd. etc., [1971] 1 SCR 288; See also K. Sankaran Nair (Dead) through L.Rs. v. Devaki Amma Malathy Amma and Ors,.(1996) 11 SCC 428.
52 53

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

~Memorial For The Respondent~

power to amend the Constitution according to the prescribed procedure. 54 Hence it is on part of legislature to make or amend the laws, 55 which may even result in nullifying the Courts earlier judgments. 56 25. Substantial territorial nexus 57 between the income and the territory which seeks to tax that income is of prime importance to levy tax. 58 It is submitted that the explanation 5 clarifies beyond reasonable doubt to cover up indirect transactions, for that matte r the non-resident company will be deemed to be located in India and thus, the nexus between the income and the territory to tax is established, whereby sale of shares of RichiRich by FMC and the income accrued out of such transaction is liable to be taxed in India. 59 26. The Central Board of Direct Taxes issued a circular 60 vide 29th May, 2012 stating the amendment under The Financial Act, 2012 will be enforced by Tax department only from 1st April, 2012 and cases closed prior to the mentioned date shall not be reopened. The retrospective applicability may affect some person, but what is to be

54

Behariji Dass, Civil & Sessions Judge, Sultanpur and Ors. v. Chandra Mohan, Civil & Sessions Judge, Fatehpur and Ors., AIR 1969 All 594.
55

Nawaz B. Mody, The Press in India: The Shah Bano Judgment and Its Aftermath Asian Survey, Vol. 27, No. 8 (Aug., 1987), pp. 935-953, (In Mohd. Ahmed Khan v. Shah Bano Begum and Ors., 1985 AIR 945, a controversial divorce lawsuit. The judgment created considerable debate and controversy affecting the sentiments of Muslim community in India. Events followed by the Late Mr. Rajiv Gandhis government, with its absolute majority, to pass the Muslim Women (Protection of Rights on Divorce) Act, 1986 which diluted the secular judgment of the Supreme Court and, in reality, denied even utterly destitute Muslim divorces the right to alimony from their former husbands).
56

(It is submitted that on relying upon the recommendations of the Mandal Commission and Supreme Court's directions in Indra Sawhney v. Union of India, AIR 1993 SC 477 the reservations were introduced for other backward classes in the Central Government jobs, thereby excluding reservations in promotions and put 50% ceiling on the reservations, the Govt. again strike back by the 77th Constitutional amendment to article 16(4A) was introduced and reservation was introduced in promotions also, and 16(4B) was introduced to make the judgment invalid and excluded 50% ceiling and carry forward rule was propounded. To negate SC's mandate by 85th constitutional amendment promotions in reservations with 'consequential seniority' was granted, although these amendments have been upheld in k Naagraj v. Union of India).
57

See Kanga and Palkhivala, The Law and Practice of Income Tax 10 (7th Ed.,). Vodafone Case 168. Proposition 5. CBDT Circular, [F.No.500/111/2009-FTD-1(Pt.)], dated 29 May 2012.

58

59

60

10

~Memorial For The Respondent~

taken into account is the greater public good, 61 as the tax money is for the welfare of the nation. 62 Hence, it is humbly submitted that explanation 5 to Section 9(1)(i) is applicable on the sale of shares of RichiRich.

ISSUE IV. THAT FULL CAPITAL GAINS WOULD BE CHARGEABLE TO TAX IN INDIA AND NOT CAPITAL GAINS PROPORTIONATE TO THE ASSETS SITUATED IN INDIA. IV.A. SHARES ARE RECOGNIZED AS AN ASSET.

27. It is contended that the shares of a company are recognized as an asset under the Act, referring to the definition of capital assets given in Section 2(14) which states that capital asset means property of any kind held by an assesse, whether not connected with his business or profession subject to some certain exclusions as mentioned in the Act. 28. Referring to Section 2(47) of the Act, it is contended that in case there is transfer of a capital asset, it is a transfer of a bundle of rights attached with that capital asset. The shares of the company, being a conjugation of rights, cannot be apportioned or dissected particularly, in the absence of such apportionment principles under the law. It is submitted that apportionment principles are a result of enactment by the legislature and not by principles of interpretation. In the light of the principles of effects doctrine, he submitted that there is transfer of a capital asset with a bundle of rights encompassed in such assets; it is a single transfer and not multiple transfers. 29. The principles of apportionment do not apply to transactions which take place entirely in one state. The Bombay High Court has held that the income accrued due to activities in a single state is taxable only in that state. 63
61

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

62

Craies, Craies on Statute Law 396 (7th Ed.) (observes that If a statute is passed for the purpose of protecting the public against some evil or abuse, it may be allowed to operate retrospectively, although by such operation it will deprive some person or persons of a vested right. Thus public interest at large is one of the relevant considerations in determining the constitutional validity of a retrospective legislation).
63

C.I.T. v. Chunilal B. Mehta, AIR 1938 PC 232. See also Commissioner of Income Tax, Bombay v. Ahmedbhai Umarbhai, (1950) 18 ITR 472.

11

~Memorial For The Respondent~

IV.B.

APPORTIONMENT PRINCIPLE APPLIES ONLY T O BUSINESS.

30. Apportionment principle applies only to income from business and not to income derived from capital gains. It is contended that different rules apply to different heads of income. Even the tax treaties have been compartmentalized under different heads of income i.e. salary, business, capital gains etc. Therefore, unless lawmakers come up with specific artificial rules, there can be no apportionment principles on income under capital gains. Certain countries have legislated laws by which underlyin g assets such as immovable property are taxed if there is sale of shares of the companies which owns the immovable property. However, Indian law does not have such provisions. 64 31. It is submitted that no question of apportionment arises as it presupposes mult iplicity of activities from which income accrues or arises. If law compels us to adhere to legal form of transaction without chasing substance, then where there is a transfer of capital asset which gives rise to income, unless in the rarest of cases where situs of asset could be at more than one place, the source based taxation of such capital gains must be in that jurisdiction where the asset is situated. 32. It is submitted that the apportionment of income, profits or gains between those arising from business operations carried on in taxable territories and those arising from activities carried on without the taxable territories is based on general principles of apportionment of income only. 65 33. Thus, apportionment is applied where an assessee carries on multiple activities as part of a composite business which straddles more than one taxing jurisdiction. The income which results from those activities has to be apportioned so as to determine what part of the income can be attributable to the business which is carried on in the taxing jurisdiction. 66

64

Tax Edge Special, BMR Advisors (2010) Vol. 4 Issue 8.4 P. 1. Anglo-French Textile Co. Ltd. v. Commissioner of Income Tax, Madras, (1954) 25 ITR 27. Chainrup Sampatram v. Commissioner of Income Tax, West Bengal, (1953) 24 ITR 481.

65

66

12

~Memorial For The Respondent~

IV.C.

THE NEXUS IS HOLISTIC AND NOT PROPORTIONATE .

34. It is submitted that Explanation 5 is applicable in the present matter and that FMC has a holistic nexus with India. The shares of RichiRich derive its value substantially from the Indian operations. The Indian business of RichiRich contributes up to 52% of the value of its shares. 67 As a result, Revenue is authorised to tax capital gains accruing from trading the shares of RichiRich. 35. The nexus between the Revenue and FMC is not affected by the proportionality of the revenue earned by RichiRich. The proportion is essential only to establish that whether there is substantial contribution by the Indian operations to establish the nexus. Once, the nexus is established, and then the principle of apportionment will apply only if there is multiplicity of activities. In the present case shares of

RichiRich transacted by FMC drives its value substantially from Indian subsidiary, so the nexus is established. 68 Thereafter capital gain has been accrued with FMC due to sale of shares which doesnt have a multiplicity of activities which renders principle of apportionment inapplicable. IV.D. THE TRANSACTION IS NOT COMPOSITE .

36. The principle of apportionment can be applied in cases where different severable parts of the composite contract are performed in different places. 69 When a transnational corporation carries on multiple activities as part of a composite business which straddles more than one taxing jurisdiction, the income which results from activities has to be apportioned so as to determine what part of the income can be attributable to the business which is carried on in the taxing jurisdiction. Hence, it is humbly submitted that full capital gains would be chargeable to tax in India and not capital gain proportionate to the assets situated in India.

67

Proposition 3. Proposition 3, 4. Ishikawajma-Harima Heavy Industries Ltd. v. Director of Income Tax, Mumbai, AIR 2007 SC 929.

68

69

13

~Memorial For The Respondent~

ISSUE V. THE ASSESSEE IS NOT ENTITLED TO INDEXATION BENEFIT IN COMPUTING T HE CAPITAL GAINS CHARGEABLE TO TAX IN I NDIA. V.A. THE TRANSACTION IS CARRIED OUT IN FOREIGN CURRENCY.

37. When the shares are purchased in foreign currency, the first proviso to Section 48 70 of the Act requires that the sale consideration must be converted in the same foreign currency in which the shares are purchased and then the gain or loss is to be determined in the foreign currency, which again is to be re-converted into Indian currency. 71 38. A perusal of the two provisos to Section 48 shows that computation of capital gains is bifurcated into two parts: (i) The first proviso covers those cases where the capital asset being the shares in or debentures of an Indian company are acquired by a non-resident by utilizing the foreign currency and in such cases, the cost of acquisition, expenditure incurred wholly and exclusively in connection with transfer of such shares, and the sale consideration is required to be converted in the same foreign currency which was utilized for acquiring such shares/debentures so as to compute the capital gain in foreign currency, which is then reconverted into Indian currency for the purpose of computing tax thereon. This method is applicable to short-term as well as longterm capital asset, asset being shares in or debentures of an Indian company. For assets other than shares or debentures of an Indian company this proviso did not apply. (ii) On the other hand, second proviso to Section 48 provides the method of computing long-term capital gains in respect of any long-term capital assets acquired by any assessee irrespective of his status except the long-term capital gain arising to nonresident from the transfer of long-term capital asset specified in the first proviso to Section 48. According to this method "the cost of acquisition" and the cost of improvement mentioned in Section 48(ii) shall be substituted by "the indexed cost of acquisition" and "the indexed cost of improvement" which shall be deducted from the sale consideration for computing the long-term capital gain.

70

Section 48 Mode of Computation. Tax Payers Information Series - 3, Income Tax Department (2011).

71

14

~Memorial For The Respondent~

39. This indicates the provision of two different categories for computing the long-term capital gain. The intention of the Legislature appeared to be that no gains was to be taxed to the extent it related to general inflation of price in the market. However, the application of this method was restricted to the cases falling within the scope of the second proviso to Section 48 and a different method was provided to the cases falling within the scope of first proviso to Section 48 considering the rapid devaluat ion of Indian currency. Foreign investors represented that capital gain be computed in accordance with the increase in the value of asset in terms of foreign currency. Accepting such representations of non-residents, the legislature has provided the different method for computing capital gain in the first proviso to Section 48. The legislature has also used the word "shall" in the first and second proviso to Section 48 vis--vis the computation of capital gain. On the other hand, the case of nonresident falling within the ambit of the first proviso has been specifically excluded from the computation of long-term capital gain in the second proviso. 72 40. In the present matter, FMC traded the shares of RichiRich in USD.73 Therefore the capital gains accrued were not in Indian currency which makes the case of assesse to fall within the ambit of the first proviso to Section 48 of the Act. The Act provides relief from currency fluctuations to such transactions but has no provisions to safeguard them from currency inflation risks i.e. no indexation benefits. 41. The Legislature was well aware of the first and second provisos to Section 48 and had used the words "second proviso to Section 48" in Sub-section (2) of Section 115AB and the words "first and second provisos to Section 48" in Sub-section (3) of Section 115AD of the Act indicating that "if the Legislature had intended to give benefit of marginal relief of tax to all non-residents it could have easily used the words "first and second provisos of Section 48" in the proviso to Section 112(1) of the Act."74 Therefore, applicable rate of tax on long-term capital gain accrued to assessee was held to be 20 per cent since it had to be computed under first proviso to Section 48, wherefore proviso to Section 112 could not be applied i.e. benefit of 10

72

Basf Aktiengesellschaft v. Deputy Director of Income Tax, International Taxation, 2007 293 ITR 1 Mum, [Hereinafter Basf Case].
73

Proposition 4. Ibid.

74

15

~Memorial For The Respondent~

per cent is not available to cases where computation is made by applying the first proviso to Section 48. 42. Thus, the relief provided for by the proviso to section 112(1) of the Act is intended to cover cases where effect of inflation is not provided for. That is why the proviso specifies that the calculation of 10 percent of the capital gain should be before giving effect to indexation. Before giving effect to connotes that effect has otherwise to be given. That means, the asset must be one qualified for indexation under the second proviso to section 48 of the Act. There is no justification in not giving effect to the words used in the proviso. Nothing stood in the way of the legislature in specifying that all assets will qualify for protection and that has not been done. 75 V.B. ARGUENDO: NON AVAILABILITY OF INDEXATION BENEFIT AMOUNTS TO DISCRIMINATION .

43. The first proviso read with second proviso to section 48 of the Act states that the benefit of indexation is not available to non-residents as non-residents are protected from vagaries of fluctuation in currency rates. 76 Discrimination is understood to be unequal treatment in an identical situation. Different treatment does not constitute discrimination unless it is arbitrary. 44. A comparison cannot be made between a resident and national of a state and a national of another State to contend that they must be taxed in the same way. The State is not obliged to extend the same privileges accorded to its own residents to the ones who are not. 77 Therefore, discrimination on account of nationality other than residence is prohibited. 45. The terms taxation and tax are not interchangeable. 78 The object clause of every agreement uses the expression taxation and tax where the purpose is stated to b e avoidance of double taxation and prevention of fiscal evasion with respect to taxes

75

Re Cairn UK Holdings Ltd., (2011) TII 16 ARM-INTL . Transworld Garnet Company Ltd. v. DIT., (2011) TII 02 ARA-Intl, [Hereinafter Transworld Garnet Case]. Ibid. Id.

76

77

78

16

~Memorial For The Respondent~

on income and wealth. Avoidance of discrimination is the object of the former and avoidance of double taxation is the object of the latter. 46. Furthermore, the Act expressly permits 79 taxing a foreign company at a rate higher than the Indian company and states that this shall not be regarded as discrimination under the relevant tax treaty. 47. The AAR has reiterated the fact that the State is not obliged to extend the same privileges offered to its own residents to nonresidents and that mere differentiation in tax treatment because of the residential status of the assessee would not amount to discrimination, as set out in the tax treaty. 80 Hence, it is humbly submitted that the assessee is not entitled to indexation benefit in computing the capital gains chargeable to tax in India.

ISSUE VI. THAT THE CAPITAL GAINS ON THE SALE OF THE SHARES OF RICHIRICH BY FMC W OULD NOT COME WITHIN THE AMBIT OF THE TREATY. VI.A. RICHIRICH IS NOT A COMPANY REGISTERED IN EITHER OF THE CONTRACTING STATES.

48. The benefit of the Treaty was extended to the residents of the Contracting States while dealing with shares of companies of the Contracting States. When legislature comes up with a law, it cannot think of all the possible malpractices. Thus, the Court has to look into facts of the case and decide whether a particular provision has been misused. 49. The intension of the legislature while entering into this agreement was to extend the benefit to the companies and the residents of the contracting states. In the present matter RichiRich is neither the resident company of India nor the resident company of Mauritius.

79

Sec 90(2). Transworld Garnet Case.

80

17

~Memorial For The Respondent~

VI.B.

ABUSE OF TREATY

50. India and Mauritius entered into an agreement with a particular objective. The objective reads as follows, "Whereas the annexed Convention between the Government of the Republic of India and the Government of Mauritius for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains and for the encouragement of mutual trade and investment." Thus, the purpose was avoidance of double taxation but not at the cost of fiscal evasion. Mauritius has become an attractive route for companies to invest in Indian companies. 81 51. Unlike India, capital gains accrued from shares are not taxed in Mauritius.
82

Shell

Companies is the term used in its pejorative sense to describe companies which exist only on paper, but in reality, are investment companies. 83 These companies acquire a Tax Residency Certificate (hereinafter referred to as TRC) from the Mauritius Tax Authorities and serve as a vehicle for investment purposes. These structures have no other activities or operations per se. 52. One of the tests to examine the genuineness of the structure is the timing test that is timing of the incorporation of the entities or transfer of shares etc. Structures created for genuine business reasons are those which are generally created or acquired at the time when investment is made, at the time where further investments are being made at the time of consolidation etc. 84

81

"Reviewing Tax Treaty with Mauritius: Chidambaram." N.p., 5 Sept. 2012. Last accessed on 15 Sept. 2012. <http://www.hindustantimes.com/India-news/NewDelhi/Reviewing-tax-treaty-with-MauritiusChidambaram/Article1-925011.aspx>.
82

"Tax Haven Mauritius." Tax Havens of the World. N.p., n.d. . Last accessed on. 14 Sept. 2012. <http://www.taxhavens.biz/other_tax_havens/tax_haven_mauritius/>; See also William Chung. "Mauritius Highlights 2012." N.p., n.d. Last accessed on. 16 Sept. 2012. <http://www.deloitte.com/assets/DcomGlobal/Local%20Assets/Documents/Tax/Taxation%20and%20Investment%20Guides/2012/dttl_tax_highlight_ 2012_Mauritius.pdf>.
83

"Launderers Anonymous." The Economist. The Economist Newspaper, 22 Sept. 2012. Last accessed on. 22 Sept. 2012. <http://www.economist.com/node/21563286>.
84

Vodafone Case.

18

~Memorial For The Respondent~

53. No law encourages opaque system to prevail. 85 Such activities result in fiscal evasion and the Honourable Court is pleaded to adopt functional 86 and purposive 87 approach. The Honourable Supreme Court has categorically held that TRC though can be accepted as a conclusive evidence for accepting status of residents as well as beneficial ownership for applying the tax treaty, it can be ignored if the treaty is abused for the fraudulent purposes of evasion of tax. 88

85

Shri Shiva Kant Jha v. Union Of India (UOI) And Ors., 2002 256 ITR 563 Delhi. Chinmoy pathak v. standard chartered bank ltd., on 14 june, 2010 in the High Court at Calcutta.

86

87

Farhad J Bottlewalla, Mumbai v. Assessee, on 31 August, 2012 in the Income Tax Appellate Tribunal Mumbai.
88

Vodafone Case.

19

~Memorial For The Respondent~

[H]. PRAYER FOR RELIEF

Wherefore in the light of the facts stated, questions presented, authorities cited and pleadings advanced, it is most humbly prayed before this Honourable Court that it may be pleased to dismiss the appeal and hold that:

1. The Shares of RichiRich are said to be deriving value directly or indirectly from asset located in India. 2. The shares of RichiRich traded by FMC derive its value substantially from the assets located in India. 3. Explanation 5 to Section 9(1) (i) is applicable on the sale of shares of RichiRich. 4. Full capital gains would be chargeable to tax in India and not only the capital gains proportionate to the assets situated in India. 5. The assessee is not entitled to indexation benefit in computing the capital gains chargeable to tax in India. 6. The capital gains on the sale of the shares of RichiRich by FMC would not come within the ambit of the treaty.

And pass any other order that it deems fit in the interests of justice, equity and good conscience. All of which is respectfully submitted.

Date: Place: Mumbai, India.

S/d

1. . 2. .

(COUNSELS FOR THE RESPONDENT )

20