Amicus

Amicus

Region Area

News and developments

Press Releases

Dmi finance announces the closure of a usd 400 million equity investment round led by mitsubishi ufj financial group, inc. With participation from existing investors including sumitomo mitsui trust bank limited

DMI Finance Private Limited (“DMI Finance”) today announced the closure of a USD 400 million equity investment round led by Mitsubishi UFJ Financial Group, Inc. through its consolidated subsidiary MUFG Bank, Ltd (“MUFG”), with participation from existing investor Sumitomo Mitsui Trust Bank Limited (“SuMi TRUST Bank”). This round includes primary and secondary transactions.

05 April 2023

TMT

“the rise of data centers in india: exploring the growth and challenges”.

During recent years, the Indian Data Centre (DC) industry is expanding rapidly. India has become a fast growing DC hub pursuant to a massive and growing internet userbase, explosion of data, and establishment of a favourable environment through the government's Digital India initiative. A Data Centre is a dedicated secure space within a building/ centralized location where computing and networking equipment is concentrated for the purpose of collecting, storing, processing, distributing, or allowing access to large amounts of data.[1] This digital data and applications are stored on cloud servers in a DC and accessible to users via broadband connectivity. Servers at these DCs, compute and process relevant data in response to user requests, making the desired information available to the user.

20 March 2023

Lending

Voting rights: the new arsenal for lenders

In India, it is a common practice for the promoters/directors of a company to pledge their securities to secure the loans raised by such companies. Rights in relation to the pledged securities, including right to exercise voting rights over the shares, transfer the share downstream or constitute a nominee, have always been a bone of contention between the pledgor and pledgee. This has been particularly so in respect of dematerialized securities where, unlike in case of physical shares, the invocation of pledge leads to the transfer of the pledged securities into the dematerialized account of the lender, making the lender the beneficial owner of such shares. The Supreme Court and the Bombay High Court in the cases of PTC India Financial Services Limited v. Venkateswarlu Kari & Ors [1] (“PTC India”) and World Crest Advisors LLP vs Catalyst Trusteeship Ltd & Ors. [2] (“World Crest”) respectively have tried to resolve some of the issues concerning the invocation of pledged securities. This write-up analyses the legal principles laid down by the Indian courts with respect to enforcement of pledge and the special rights available to a pledgee on invocation of a pledge in respect of dematerialized securities. The Conundrum The rights of a pledgee emanate from relevant provisions of the Indian Contract Act, 1872 (“ICA”), which is applicable irrespective of whether securities are in physical or dematerialized form. Section 176 of the ICA deals with Pawnee’s right (when pawnor makes default), inter alia, to sell the pawned property for recovery of its debt after giving the pawnor reasonable notice of sale. On the other hand Section 177 of the ICA protects the defaulting pawnor’s right to redeem [3] the pawned property at any time prior to the actual sale by making payment of the debt and any expenses incurred by the pawnee. In case of dematerialised shares, the pledge is also governed by the Depositories Act, 1996 (“Depositories Act”) and the SEBI (Depositories and Participants) Regulations, 1996 (“DP Regulations”). Regulation 58(8) of the DP Regulations states that subject to the provisions of the pledged documents, the pledgee may invoke the pledge, and, on such invocation, the depository shall register the pledgee as beneficial owner of such securities and amend its records accordingly. In the recent years, as pledge of shares, particularly dematerialised shares of listed companies, became a prevalent collateral, various issues arose on the applicability of provisions of the ICA, particularly on the requirement for notice of sale, in case of sale of the dematerialized shares where the lender (or a security / debenture trustee appointed for the benefit of the lender) becomes the “beneficial owner” of such shares prior to the sale of such shares for recovery of the debt. This seeming divergence between the ICA and the DP Regulations spawned other questions on the nature of rights exercisable by the lender/ trustee as a “beneficial owner”, in particular the right to vote on such shares. The recent decision by the Supreme Court in the case of PTC India Financial Services Limited v. Venkateswarlu Kari & Ors. and the follow-on decision of the Bombay High Court in the case of World Crest Advisors LLP vs Catalyst Trusteeship Ltd & Ors. have clarified these issues significantly. Special Property of the Pledgee The Supreme Court in the case of PTC India Financial Services Limited v. Venkateswarlu Kari & Ors. made extensive observations on issues relating to invocation of pledge, resolving the interplay between the ICA and the DP Regulations by reading them harmoniously. The court, while holding that the right of pledgee in the pledged shares is a special property and not general property, declared that: issuance of notice before sale of pledged shares as required under Section 176 of the ICA is mandatory even in respect of dematerialized shares. right of pledgee to record oneself as the beneficial owner will not amount to actual sale for the purpose of Section 177 of ICA. While the aforesaid judgement clarified that the pledgor, despite becoming the “beneficial owner” of the pledged shares, continues to have only special property in such shares, left ambiguous the scope of what constitutes “special property” of pledgee pursuant to invocation of the pledge. The Supreme Court in the said case, did not delve into the extent of rights available to a pledgee upon invocation of pledge i.e. what is encompassed in the special property of the pledgee and what is excluded from that.  In fact, it raised the question of whether voting rights were excluded from the scope of the pledgee’s special property. Voting Rights of the Pledgee The division bench of Bombay High Court, in the case of World Crest Advisors LLP vs Catalyst Trusteeship Ltd & Ors.  has examined this aspect and shed some light on the scope of the pledgee’s special property. As per the facts of the case, Yes Bank Ltd (“YBL”) advanced loan to certain borrowers. The repayment of the said loan was secured by pledge of shares of Dish TV India Limited (“Dish TV”) held by World Crest Advisors (“World Crest”) in favor of security trustee, Catalyst Trusteeship Limited (“Catalyst”). It was agreed between the parties under the contract of pledge that Catalyst can transfer the pledged share to itself on an event of default. On the event of default, Catalyst transferred the security in its favor and registered itself as ‘beneficial owner’ as per regulation 58(8) of DP Regulations. Thereafter, Catalyst further transferred the shares to YBL. The main point of contention was whether YBL, registered as a beneficial owner (as a nominee of Catalyst), can exercise voting rights over the pledged shares or does it merely hold those shares in its name until it sells the shares to a third-party purchaser after necessary notice or World Crest redeems the pledge. Relying upon the provisions of ICA and PTC Judgement, the applicant Pledgor, while seeking restraint on exercise of voting rights by YBL, contented that: Catalyst can transfer the pledged shares in its name only for limited purpose of holding it safely until they are redeemed, sold or are held as collateral in a recovery suit; The transfer of all rights of general property by the Pledgee to itself is sale to self and prohibited under ICA; and the pledgee can exercise its contractual rights only in a manner not inconsistent with the law declared by the Supreme Court regarding pledges. The Bombay High Court held as below: PTC India restates long-standing law on pledges and does not re-write it; The proposition that the recording of Catalyst’s name under Regulation 58(8) as the beneficial owner results in it having some severely curtailed rights as beneficial owner was not acceptable, particularly as the pledgor could bring those rights to an end in one stroke by exercising its right of redemption. No inference can be made from PTC to state that conferment of voting rights amounts to ‘the general property’ in shares and the contract or pledged document could not provide so. Eventually, the court, finding that the applicant had not been able to make an overwhelming prima facie case and on equitable considerations, dismissed the application. CONCLUSION: In our view, while in the PTC Financial case the Supreme Court reiterated that the pledgee only holds special property in the pledged goods, the Bombay High Court’s decision provides some guidance for understanding the boundaries of such “special property”.  It provides ground for the argument that in the absence of any clear statutory or contractual restrictions, the special property of the pledgee encompasses the entire fullness of rights in relation to the shares, circumscribed only by the pledgor’s right of redemption of pledge and the pledgee’s obligation to follow the process prescribed under law for the sale of pledged shares, including giving reasonable notice of sale and prohibition on sale to self. It also provides ripe ground for lenders to seek express provisions in the pledge documents enabling them to exercise voting rights especially on occurrence of an event of default (which is a common industry practice). It may be noted that the exercise of voting rights by the pledgee as registered beneficial owner also aligns with the provisions of the Companies Act, 2013 and other SEBI regulations, as the records of the company calling a meeting for a shareholders vote, would, in absence of any specific regulatory, statutory or judicial order, reflect the pledgee as the beneficial owner entitled to vote and not make any distinction between a beneficial owner pursuant to a transfer and a beneficial owner. Authored by Shivi Rastogi, Managing Partner and Head of Corporate Commercial Disclaimer - The write-up is for information purposes only and readers should not act on the basis of this information without seeking professional legal advice. [1] Civil Appeal No. 5443 of 2019 decided on May 12, 2022 [2] Interim Application (L) NO. 19253 of 2022. [3] Section 177 of ICA: If a time is stipulated for the payment of the debt, of performance of the promise, for which the pledge is made, and the pawnor makes default in payment of the debt or performance of the promise at the stipulated time, he may redeem the goods pledged at any subsequent time before the actual sale of them; but he must, in that case, pay, in addition, any expenses which have arisen from his default.

03 January 2023

Lending

Recommendations of the working group on digital lending – implementation: fldg

The regulatory framework issued by the Reserve Bank of India (“RBI”) on implementation of the Recommendations of the Working Group on Digital Lending on 10.08.2022 (“Implementation Framework”) [1] has resulted in much discussion on permissibility of first loss default guarantee ("FLDG").

10 October 2022

Tax and Private Client

Tiger global aar ruling: issues for re-consideration

India-Mauritius tax treaty has come under scanner yet again with a recent pronouncement by the Authority for Advance Rulings (“AAR”) in the case of Tiger Global International II Holdings, In re[1]. The AAR was called upon to adjudicate whether capital gains arising from the sale of shares held by Mauritius based Applicant companies [with further holding in a Singapore Company (deriving value substantially from assets located in India)] would be chargeable to capital gains tax in India. AAR rejected the application at the admission stage itself on the basis of clause (iii) of proviso to section 245R(2) of the Income Tax Act, 1961 (“the Act”) which provides that applications relating to a transaction or issue designed prima facie for avoidance of tax shall not be admitted. The following findings and conclusion were recorded by AAR:- Applicants were part of the USA group and have been held through its affiliates through a web of entities based in Cayman Islands and Mauritius. The principal objective of the applicants was to act as an investment holding company for investments outside Mauritius. The investment made by the applicants in the Singapore Company, with Indian subsidiary, was with a prime objective to obtain India -Mauritius treaty benefit. The holding structure, prima facie management and control, would be relevant factors to determine whether the arrangement is designed for avoidance of tax. Based on the structure of organization, decision making authority, financial control and beneficial ownership of the applicant companies, the head and brain of the applicants was situated not in Mauritius but in USA. The applicants were only “see- through entities” set up to avail the benefit of India -Mauritius treaty. The objective of India-Mauritius DTAA was to allow exemption of capital gains on transfer of shares of Indian company only and any such exemption on transfer of shares of the company not resident in India, was never intended by the legislator. The applicants have transferred shares of a Singapore based company and not that of an Indian company, and as such the applicants are not entitled for the treaty benefit. With the above summary of the Ruling, we deep dive into the merits of the Ruling. Analysis Tax planning v. Tax avoidance – Controversy continues despite Vodafone The term tax avoidance has not been defined under section 245R. The OECD defines tax avoidance as “an arrangement of a taxpayer’s affairs that is intended to reduce his liability and that although the arrangement could be strictly legal is usually in contradiction with the intent of the law it purports to follow”[2]. The Apex Court in the case of McDowell[3] has stated that “the art of dodging tax without breaking the law” is tax avoidance. Calcutta High Court in Hela Holdings Pvt. Ltd.[4], held “Tax avoidance is the result of actions taken by the assessee, none of which is illegal or forbidden by the law in itself and no combination of which is similarly forbidden or prohibited.”  The Supreme Court in Azadi Bachao Andolan, while considering the decision in McDowell’s case, observed, that it cannot be said that every attempt at tax planning is illegitimate, or that every transaction or arrangement which is otherwise perfectly permissible under law, but which has the effect of reducing the tax burden of the assessee, must be looked upon with disfavour. The Supreme Court in Vodafone International Holdings B.V.,[5] held, “Section 9 has no “look through provision” and such a provision cannot be brought through construction or interpretation of a word ‘through’ in section 9. In any view, “look through provision” will not shift the situs of an asset from one country to another. Shifting of situs can be done only by express legislation.” This case dealt with the views on tax avoidance laid down in two landmark judgments i.e. McDowell and Azadi Bachao Andolan.  It was concluded that “Revenue cannot tax a subject without a statute to support and in the course we also acknowledge that every tax payer is entitled to arrange his affairs so that his taxes shall be as low as possible and that he is not bound to choose that pattern which will replenish the treasury. Revenue’s stand that the ratio laid down in McDowell is contrary to what has been laid down in Azadi Bachao Andolan, in our view, is unsustainable”. The AAR in Tiger Global Ruling mentioned Vodafone but did not consider the detailed discussion on tax avoidance in Vodafone, where Supreme Court had adopted a liberal attitude towards foreign holding structures that were in place for tax reasons. One fails to see why the AAR thought Tiger Global requires a different treatment. Denying capital gains tax exemption despite grandfathering provision Circular No. 682 dated 30th March, 1994 issued by the Central Board of Direct Taxes (“CBDT”) clarified that a resident of Mauritius deriving income from alienation of shares of Indian companies will be liable to capital gains tax only in Mauritius and will not have any capital gains tax liability in India. The Protocol for Amendment of Convention for Avoidance of Double Taxation between India and Mauritius was signed on 10th May, 2016 which provided that taxation of capital gains arising from alienation of shares acquired on or after 1st April, 2017 in a company resident in India will be taxed on source basis with effect from financial year 2017-18. At the same time investment made before 1st April, 2017 were grandfathered and not subject to capital gains tax in India. Applicants had acquired these shares of the Singapore company prior to the amendment in the tax treaty, and as such these shares were grandfathered. Despite the grandfathering provision, AAR denied capital gains tax exemption to the applicants, who had invested in India prior to 1st April, 2017. The application was rejected at the admission stage itself basis the holding structure coupled with the ‘control and management’ of the applicants as it was observed – “the entire arrangement made by the applicants was with an intention to claim benefit under India – Mauritius DTAA, which was not intended by the lawmakers, and such an arrangement was nothing but an arrangement for avoidance of tax in India.” In coming to such a conclusion, AAR seems to have gone beyond what was intended to be achieved through the grandfathering provision. AAR disregarded the well-settled proposition – “treaty shopping doesn't tantamount to avoidance of tax” which means that any arrangement done within the framework of law, to take benefits of tax treaties doesn't mean avoidance of tax, which was upheld by the Hon’ble Apex Court in Azadi Bachao Andolan[6]. BEPS Action 6 on “Preventing the Granting of Treaty Benefits in Inappropriate Circumstances” targets tax treaty shopping by multinational enterprises that establish ‘letterbox’, ‘shell’ or ‘conduit’ companies in countries with favourable tax treaties to take advantage of the treaty benefits. But the Action Plan has not been converted into a binding provision yet and despite the renegotiation of the DTAAs, the law laid down by the Supreme Court in the Azadi Bachao Andolan remains unchanged at least as far as grandfathered investments are concerned. Indo-Mauritius Treaty and Indirect transfers – a Question Mark? The most surprising and perhaps controversial take from this ruling is the denial of capital gains tax exemption under the India-Mauritius DTAA in case of indirect transfer of shares of Indian companies. AAR observed that – “Even if the Singapore Company derived its value from the assets located in India, the fact remains that what the applicants had transferred was shares of Singapore Company and not that of an Indian company. The objective of India- Mauritius DTAA was to allow exemption of capital gains on transfer of shares of Indian company only and any such exemption on transfer of shares of the company not resident in India, was never intended by the legislator.” Clause 3A of Article 13 (inserted via 2016 Amendment) provides that – “Gains from the alienation of shares acquired on or after 1st April 2017 in a company which is resident of a Contracting State may be taxed in that State.” Thus, clause 3A provides that when shares of a company resident in India (contracting state) are alienated, only then can the gains be taxed in India. Therefore, clause 3A only encompasses direct transfers. In indirect transfers, the alienation is not taking place in the contracting state, to which clause 3A cannot be extended. Further, clause 4 of Article 13 provides – “Gains from the alienation of any property other than that referred to in paragraphs 1, 2, 3 and 3A shall be taxable only in the Contracting State of which the alienator is a resident.” This clause provides taxing right of “any other property” to the country of residence of the alienator. Thus, this residuary clause would include indirect transfer of shares as it would cover gains from alienation of shares in any country, other than shares resident in a Contracting State. Therefore, AAR’s reasoning that while direct transfers were excluded from the taxing right of source state, indirect transfers were still subject to it is anomalous. It is also incongruent with SC’s Vodafone judgment. In Vodafone, it was held that Section 9 of the Act cannot be extended by a process of construction or interpretation to cover indirect transfers of capital assets/property situated in India. The ruling has also diverted from the earlier judicial pronouncements where the benefit of tax treaties has been extended to indirect transfer of shares.[7] Sans Tax Liability in India – Can there be Tax Avoidance? Chapter XIX-B on Advance Rulings was introduced vide Finance Act, 1993 and section 245R(2) that provides for rejection of application where the transaction is designed prima facie for the avoidance of income-tax was introduced, along with rest of the AAR provisions in 1993. Tax avoidance is stricter than tax evasion while also being legal, as opposed to evasion which is per se illegal. But still the term avoidance is used, that means the test to qualify for admission before AAR is a more stringent test. However, for ascertaining whether tax has been avoided in a country, it still needs to be first ascertained if tax liability is arising in that country. In the instant case, the shares sold were held in a Singapore Company, the seller of shares was incorporated in Mauritius and the buyer of shares was in Luxembourg. Given the structure of the companies and the transaction, prima facie, the Mauritius-Singapore tax treaty should govern taxability of gains arising from the transaction. For the sake of argument, even if one accepts that Mauritian entities were shell companies which ought to be disregarded, the transaction would then be deemed to be taking place between companies situated in USA and Singapore. Currently, there is no tax treaty between the two countries. Therefore, the taxability of the transaction should be governed by applicable US/ Singapore Law. AAR in the case has not demonstrated how under the existing treaty network, tax liability of sale of shares would arise in India. Though indirect transfer of shares can be taxed under the Indian Income Tax Act, these provisions do not come into play where the treaty network provides that the liability to tax capital gains is not in India. Beneficial treaty provisions would override Indian domestic law. In this context it is also pertinent to note that the ‘indirect transfer provision’ under Indian Law does not have any treaty overriding clause. In X Ltd., In re[8], applicant companies, resident in Mauritius, were fully owned subsidiaries of a British company and had made investments in shares of an Indian Bank. AAR held that had the British company directly invested in India, capital gains arising on their sale would have been taxable both in India and England, under India-UK DTAA, whereas because of investment in shares in India through applicant companies resident in Mauritius, capital gains was exempt from tax in India. Therefore the purpose of investment by British company through applicant-companies was for avoidance of tax within meaning of clause (c) of first proviso to section 245R(2) and, therefore, the applications deserved to be rejected. In the case of Tiger Global, AAR held that the Mauritius-registered companies were only ‘see-through entities’ and real beneficiary was the USA based parent company. Without establishing tax avoidance in India, AAR rejected the application, holding that entire arrangement was to claim benefit under India-Mauritius tax treaty and avoid tax in India. To conclude, tax avoidance qua USA or Singapore is not the same as Tax Avoidance in India. For the Tax Avoidance bar under section 245R(2) to apply, tax avoidance must be demonstrated with respect to India. In view of the authors, no such case of tax avoidance specific to India has been made out. Comments The Ruling has reignited the controversy surrounding intermediary holding structures and indirect transfer of shares. The increasing scrutiny by tax authorities and judicial inclination towards substance over form has resulted in benefits under the India-Mauritius tax treaty being denied even for grandfathered investments. Though the decision and reasoning adopted by AAR may be questionable, likely to be reviewed by higher courts, it is a timely reminder for global investors to review existing structures and monitor the substance/ business rationales underlying these multi-tier structures. Investors need to be bear in mind the parameters for establishing commercial substance and beneficial ownership. Further, considering the wide ambit of GAAR provisions and that of Principal Purpose Test under MLI provisions, corporates would require robust and meticulous planning to avail treaty benefits and not fall prey to anti-avoidance regulations. The article has been authored by Ashutosh Mohan Rastogi (Partner, Amicus – Advocates & Solicitors) and Amon Parimoo (Associate). [1] Application Nos. AAR / 4, 5 & 7 / 2019. [2] OECD, Glossary of Tax Terms. [3] [1985] 154 ITR 148 (SC). [4] [2003] 263 ITR 129 (Calcutta). [5] [2012] 341 ITR 1 (SC). [6] (2004) 10 SCC 1 (SC). [7] Sanofi Pasteur Holding SA, [2013] 354 ITR 316 (AP); Sofina S.A, ITA No. 7241/MUM/2018. [8] Application No. P-9/1995.

18 August 2020

Tax and Private Client

Extending the reach of indian safe harbour provisions and advance pricing agreement (transfer pricing) - a critical analysis

Few months back, Indian Government in the February 2020 Budget stipulated a number of significant proposals on Transfer Pricing Regime in relation to Safe Harbour Rules and APAs. In this article, we examine the changes to Indian Safe Harbour and APA rules critically evaluating the benefit and implications of these changes for multinational companies insofar as their cross-border compliances are concerned.

22 July 2020

© 2024 Legalease Ltd. All rights reserved

Registered company in England & Wales No. 2423756 VAT 324572722

Registered address: 188 Fleet Street, London, EC4A 2AG