[By Ashish Kumar Jha]
The author is a student at Gujarat National Law University.
Introduction
The recent acquisition of Ambuja Cements and its subsidiary ACC cement from the Swiss company has been in the limelight for a while. According to CEO Holcim, Jan Jenisch, the transaction worth USD 6.38 billion is totally tax-free. Since then, the structure of this tax-free transaction has perplexed everyone. This article tries to uncover the probable rationale behind claiming this transaction tax-free, and analyses how DTAA is used as an avenue for tax avoidance. For that, it is necessary to understand the ownership structure of both the groups, i.e. Adani and Holcim, at the outset.
Ownership Structure
This transaction involves Holderfin B.V., a Netherlands based company, as the seller, and Endeavour Trade & Investment Ltd., a Mauritius based company, as the buyer. Holderfin B.V., owned by Holcim Group, has a subsidiary company Holderind Investment Ltd. incorporated in Mauritius. Holderind Investment Ltd. holds 63.20% and 4.48% shares in Ambuja Cements Ltd. (India) and ACC Ltd. (India), respectively. Ambuja Cements Ltd. holds 50.05% shares in ACC Ltd. Endeavour Trade and Investment Ltd. is owned by Acropolis Trade and Investment Ltd., which is a subsidiary of Adani Group.
Taxability of the Transaction under Income Tax (IT) Act, 1961
It is being claimed that this transaction involves the acquisition of a Mauritius based Company (Holderind Investment Ltd.) by a Mauritius based company (Endeavour Trade & Investment Ltd.). However, since Holderind Investment Ltd. derives its value from Indian assets, i.e. ACC & Ambuja cement, this transaction indirectly tantamount to a transfer of ownership of the Indian companies to a Mauritius based company.
Recourse is being taken of Vodafone International Holding B.V. v Union of India (UOI) and Ors. where it was held that Section 9(1)(i) covers only income arising or accruing directly or indirectly or through the transfers of a capital asset situated in India and this Section cannot, by process of “interpretation” or “construction”, be extended to cover “indirect transfers” of capital assets/property situate in India. The Court explicitly mentioned that if a foreign company transfers the ownership of its subordinate company, which holds shares in an Indian Company, to a non-resident off-shore, it does not tantamount to the transfer of shares of an Indian Company. Therefore, according to this judgment, the transaction does not involve an Indian Company, and hence there is no tax liability.
However, Explanation 5 of Section 9(1)(i) of the Income Tax Act introduced by the Finance Act, 2012 reads— “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.” In the present case, the capital asset of Holderind Investment Ltd. derives its value substantially from the asset located in India, i.e. ACC & Ambuja Cement; hence, it should be deemed to be situated in India, and the transaction should be taxable.
Section 195 of the IT Act, 1961 mandates the person responsible for paying a sum chargeable to tax in India to a non-resident to deduct tax at source. Here, it was the duty of the buyer to deduct tax at the source since the seller is deemed to be situated in India. In the present case, the India-Netherlands Double Tax Avoidance Agreement Comes into play.
India-Netherlands Double Tax Avoidance Agreement
India and Netherlands have signed a Double Tax Avoidance Agreement (DTAA) which has prevailing power under Section 90(2) of the Income Tax Act, 1961. Section 90(2) of the IT Act, 1961 provides that the Provisions of IT Act shall apply to the extent they are more beneficial to that assessee; otherwise, the agreement entered into the by the government will prevail. In the Union of India v Azadi Bachao Andolan and CIT v PVLK Chettiar case, it was held that the latter would prevail in the case of conflict between IT Act, 1961 and DTAA.
Article 13 of the DTAA contains the provision regarding the taxing right of the income in the nature of capital gain. The case, on the hand, falls under Article 13(5) of the DTAA, which gives the power to collect tax, under certain conditions, to that state only of which the alienator is a resident. The domestic law of the Netherlands does not prescribe levying tax on capital gains. Therefore, this transaction is claimed to be tax-free.
Implication of Multi-Lateral Instrument (MLI)
India and Netherlands both are signatories to the MLI. MLI entered into force in India on 1st October 2019. Netherlands is one of the countries that have notified tax treaty with India and have deposited their ratification instruments with the Organisation for Economic Co-operation and Development (OECD).
Paragraph 1 of Article 6 of the MLI mandates the ratifying country to modify and include the texts “Intending to eliminate double taxation with respect to the taxes covered by this agreement without creating opportunities for non-taxation or reduced taxation through tax evasion and avoidance.” India and Netherlands DTAA contain similar wordings in the preamble to eliminate tax avoidance and tax evasion.
Paragraph 1 of Article 7 reads, “Notwithstanding any provisions of a Covered Tax Agreement, a benefit under the Covered Tax Agreement, a benefit under the Covered Tax Agreement shall not be granted in respect of an item of income or capital if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining benefit was one of the principal purposes of any agreement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of the Covered Tax Agreement”.
In the present acquisition process, a holding company (Adani Group) incorporated in India through its off-shore special purpose vehicle is acquiring two Indian companies (Ambuja & ACC Cement) indirectly by purchasing the company (Holderind Investment Ltd.) of which both the target company are subsidiaries, without paying any tax in any jurisdiction. This arrangement is not going to help both the parties in any other way, and there does not seem to be any business purpose. Therefore, it can reasonably be concluded from the relevant fact that the sole aim of the agreement was to obtain the tax benefits. Hence, it is reasonable for the Tax department to examine this transaction and prevent the abuse of DTAA.
Applicability of General Anti Avoidance Rule (GAAR)
The provisions of GAAR are in Section X-A of the IT Act, 1961. GAAR codifies the doctrine of ‘substance over form’, which looks into the real intention and the purpose of the agreement of the parties, irrespective of the legal structure of the agreement. The non-obstante clause of this rule gives it overriding applicability. Moreover, Section 90(2A) of IT Act, 1961 also reads, “Notwithstanding anything contained in Section 90(2), provision of Chapter X-A of the Act shall apply to assessee even if such provisions are not beneficial to him”.
Section 95(1) of the IT Act, 1961 gives the power to the Income Tax department to declare certain agreements as Impermissible Avoidance Arrangement (IAA). Section 96(1) of the said Act prescribes certain conditions under which an arrangement can be declared as Impermissible Avoidance Arrangement. The Act defines IAA as an arrangement, the main purpose of which is to obtain tax benefits. One of the conditions mentioned in Section 96(1)(a) of the Act is that if an arrangement lacks commercial substance under Section 97, in whole or in part, then, in that case, the arrangement will be IAA.
In the present case, the leading holding company of Endeavour Trade & Investment Ltd. is Adani Group, a resident of India. Had Adani Group acquired the shares of the target companies (Ambuja & ACC) directly, it would have been mandatory for them to deduct tax at source. Since Adani Group used its off-shore special purpose vehicle for the acquisition without any substantial commercial purpose other than that of obtaining a tax benefit, it can easily be concluded that the arrangement lacks commercial substance. This arrangement is also an example of round-trip financing described under Section 97(2) of the IT Act. Therefore, in this case, if the parties are not able to show a substantial commercial purpose, then the General Anti Avoidance Rule must be enforced.
Conclusion
DTAA was mainly introduced to save the assessee from the burden of double taxation and lure foreign investors for investments in India. The present case is in clear disregard for the whole purpose of the DTAA. Both of the parties in this agreement are engineering the methods to avoid the payment of taxes. The act which is prohibited directly must not be allowed to be done indirectly. This multibillion deal needs an examination by the tax department authorities in order to avoid any tax avoidance and set a precedent for the future.