For Appellant/Petitioner/Plaintiff: Nishith Desai, Adv. Shefali Goradia and Sudhir Kapadia, Chartered Accountants For Respondents/Defendant: S.N.L. Agarwala, CIT and P.M. Sharma, Addl.
CIT In Re: Advance Ruling P. No. 10 of 1996, [1997] 224 ITR 473 (AAR); In Re: Advance Ruling P. No. 9 of 1995, [1996] 220 ITR 377 (AAR) 1. The applicant is incorporated as a limited liability company in Mauritius. It belongs to a group of companies known as Donaldson Lufkin and Jenerette, Inc. (DLJ Inc., for short). It has filed this application under Section 245Q(1) of the Income-tax Act, 1961 ("the Act"), seeking the ruling of this Authority on the following questions : " 1. Whether, on the facts and circumstances of the case, DLJMB Mauritius Investment Company (hereinafter referred to as the "applicant") will he entitled to the benefits of the Convention for Avoidance of Double Taxation and Prevention of Fiscal Evasion with respect to taxes on income and capital gains and for encouragement of mutual trade and investment with Mauritius, entered into between the Government of the Republic of India and the Government of Mauritius, as notified on December 6, 1983, along with the Protocol (hereinafter referred to as the "treaty") 2. Whether, on the facts and circumstances of the case, the dividends received by the applicant will be subject to a withholding tax at the rate of five per cent, if the applicant holds 10 per cent, or more of the capital of the Indian company paying dividends, and 15 per cent, in other cases 3. Whether, on the facts and circumstances of the case, interest received by the applicant pursuant to a loan agreement in respect of debentures and/or any other debt claims issued pursuant to the approval of the Reserve Bank of India (hereinafter referred to as the "RBI")/Government will be exempt from tax under Article 11 of the Treaty 4. Whether, on the facts and circumstances of the case, the applicant will not be taxable in India on capital gains (whether long-term or short-term) arising from the transfer of securities it holds in Indian companies 5. Whether, on the facts and circumstances of the case, the activities of the Indian advisor will constitute a permanent establishment of the applicant in India 6. Whether, on the facts and circumstances of the case, any other income earned by the applicant, not being in the nature of dividends, interest or capital gains, will be taxed in Mauritius only and not in India ?" 2. The background in which these questions have been raised may now be briefly stated. DLJ is stated to be a leading investment and merchant bank which serves institutional, corporate, Governmental and individual clients both domestically and internationally. It is a holding company which conducts its business through various subsidiaries. Its operations can be divided into three principal operating groups, namely, the banking group, the capital market group and the financial services group. The net revenue generated by these three principal operating groups for the year ended March 31, 1995, is said to be 2088.77 million U.S. dollars. The applicant-company, as already stated, has been organised as a limited liability company in Mauritius. The two subscribers to its memorandum are Tiger Nominees Limited and Orchin Nominees Limited, each of which holds one management share in the company. According to the memorandum of the company, the nominal capital of the company is 20 U.S. dollars divided into 1000 participating shares of 0.01 U.S. dollars each and 1000 management shares of 0.01 U.S. dollars each. The ordinary shares of the company are to be issued at a price determined in accordance with the articles and management shares other than those initially taken up by the subscribers can be taken only at par value. The rights of the shareholders are governed by the memorandum and articles of association of the company which were registered on December 27, 1996.
3. It is stated that there are several entities, mainly companies or partnerships, organised in the United States of America (USA) and the Netherlands Antilles (said to be a protectorate of the Netherlands situated in the Carribeans), in which U.S. investors and non-U.S.investors have invested and which are all managed by DLJ. A list of these entities has been given in the statement of facts and may be briefly indicated here. They are : Some of them are owned by U.S. investors while some others, such as DLJOP and DDPL, have considerable non-U.S. investor holdings as well.
It is stated that they are all interested in investing in the applicant by taking up shares therein and it is expected that other DLJ affiliates may also join in later.
4. The DLJ affiliated entities identified above are a part of its three million merchant banking funds. It is said that each of these entities is committed to invest a certain portion of its committed capital on a side by side basis with DLJ in DLJ's Merchant Banking Investments, about 25 per cent, of which is expected to be made outside U.S. and Canada. Certain additional DLJ affiliated entities, not part of the DLJ's merchant banking fund, are also expected to become shareholders of the applicant.
5. The applicant expects that, with all these funds pouring into it from various affiliated entities, it would be able to make investments in Indian shares, debentures and other debt instruments to the tune of 100 million U.S. dollars. Since the applicant is a resident of Mauritius and there is a Double Taxation Avoidance Agreement (DTAA) in force between India and Mauritius, the applicant expects to be entitled to benefits under Articles 10, 11, 13 and 22 of the said treaty. The questions raised before the Authority seek confirmation of the above expectation by a ruling of this Authority.
6. Before proceeding further, it may be mentioned that before the time of the hearing, the applicant sought to make three changes in its application : (i) Firstly, it desires to withdraw question No. 2 from the purview of the application. It is said that, since the Finance Act, 1997, abolishes tax on dividends, any dividend that may be received by the applicant from Indian companies would automatically be exempt from tax and so the question of withholding of tax on such dividends will pose no problem.
(ii) It is said that the applicant had originally raised question No. 5 as to whether the activities of an Indian advisor proposed to be appointed by it would result in the applicant being considered to have a permanent establishment (P.E.) in India. However, the applicant's letter dated July 1, 1996, states that till that date, the arrangements regarding an investment advisor or Indian advisor had not been finalised. In view of this, it is said, the applicant wishes to withdraw question No. 5. The same request was also repeated at the time of the hearing.
" Whether, on the facts and the circumstances of the case, any other income earned by the applicant, not being in the nature of dividends, interest, capital gains, business income or any other income which is not expressly covered by any other article under the Treaty, for example income from units of a mutual fund in India, will be taxed in Mauritius only and not in India ?" 7. So far as the amendment proposed to question No. 6 is concerned, it will be dealt with later. So far as questions Nos. 2 and 5 are concerned, this Authority refrains from giving a ruling as the applicant does not want it, but it should not be understood to have expressed any view on the correctness or otherwise of the assumption under which the questions are withdrawn. Only questions Nos. 1, 3, 4 and 6 are, therefore, discussed below.
8. Before proceeding to discuss the questions on their merits, it is necessary to deal with two preliminary objections raised on behalf of the Department. The first is to the maintainability of the present application. It is based on Clause (c) of the proviso to Sub-section (2) of Section 245R which reads as follows : (2) The Authority may, after examining the application and the records called for, by order, either allow or reject the application : Provided that the Authority shall not allow the application where the question raised in the application,--. . .
(c) relates to a transaction which is designed prima facie for the avoidance of income-tax ; " 9. It is pointed out, on behalf of the Department, that all the various entities which are proposing the invest their monies are all corporations or partnerships located in the USA. They could have directly invested those monies in India and if they had done so they might not have been able to receive the benefits which are available under the Mauritian Treaty with India. The scope of their exemptions would have been restricted to those available under the Double Taxation Avoidance Treaty between India and the USA. The plea made on behalf of the Department is that clearly these U.S. entities, which desire to invest in India, have chosen the vehicle of a nominee company registered in Mauritius in order that the investments, if channelled through the Mauritius company, could attract the better advantages available under the Indo-Mauritius Treaty. This, they say, is clearly a situation governed by Clause (c) of the proviso referred to above and, therefore, this Authority should reject the application on the simple ground that it is not maintainable in view of the terms of the proviso.
In support of this argument, reliance is placed on the decision of this Authority in Advance Ruling No. P. 9 of 1995, [1996] 220 ITR 377 (AAR).
10. Obviously, anticipating this objection, the applicant has put forward the following justification for the formation of the applicant company and the channelling of the investments through it. The applicant's reasoning in this regard may be. extracted : "5. Each investment into India will require the approval of the RBI or the Foreign Investment Promotion Board (hereinafter referred to as the "FIPB"), as the case may be. In order to avoid the multiple approvals that will have to be obtained simultaneously by all the investors from the RBI or the FIPB for making investment in Indian investee companies, the investors find it more convenient to invest into India through a single entity, which will result in a single application to either of the aforementioned authorities. This will considerably facilitate the investment approval process as it would be very lengthy and time consuming if each of the investors were to apply separately to the RBI or the FIPB for approval to invest in the investee companies. Also, if the application is being considered by the FIPB, the aggregate amount of the investment is taken into account and, therefore, it is better for the entities to invest through a single entity rather than independently.
Organising a single entity in India for the purposes of making venture capital investments requires certain regulatory and tax approvals. The guidelines for setting up venture capital funds or companies in India are very restrictive and are in the evolutionary phase. In order to take advantage of certain tax benefits, venture capital entities cannot invest in more than 40 per cent, of the paid-up capital of a single company. Furthermore, they cannot invest more than five per cent, of the total capital they have raised in any single company. Also, within a period of three years from the date it is organised, it must invest at least 80 per cent, of the amount it has raised, in unlisted companies. Venture capital entities cannot also invest in certain high technology areas (like bio-technology) and certain service sectors. For these reasons, it was decided not to invest through an entity organised in India.
7. Since the shareholders in the applicant are organised in different countries and since the shareholders have a varied investor base, it was essential for the applicant to be domiciled in a cost effective tax-neutral jurisdiction. Mauritius has emerged as a low cost offshore financial centre where a large number of funds have been set up for investment in India and other countries. As a result of this, offshore investors prefer to set up their funds or invest through vehicles in Mauritius- In addition, Mauritius is also preferred by offshore investors in view of its well developed low-cost financial services sector and also its favourable double taxation avoidance treaty with India. It was, therefore, decided to organise the applicant there." 11. Reliance is placed on behalf of the applicant on the decision of this authority in Advance Ruling P. No. 10 of 1996 in [1997] 224 ITR 473 (AAR).
12. It is not necessary to discuss at very great length the pros and cons of the arguments since the situation in the present case is, in the opinion of the Authority, governed by its decision of 14th August, 1996, in Advance Ruling P. No. 10 of 1996, In re [1997] 224 ITR 473 (AAR). It would seem indeed that, in all probability, the present arrangements have been patterned on the investment in that case. The applicant has given explanations why it was necessary to channel all the funds through a single entity and the several difficulties faced in organising a company in India for the purpose. It has also been explained that, while the tax advantage under the DTAA with Mauritius may also have been a relevant factor taken into account by the applicant, there were several other factors which influenced the decision of locating the applicant in Mauritius. For the reasons discussed by the Authority in the earlier ruling referred to above, the Authority is of the opinion that the transaction in the present case cannot be said to be, prima facie, designed for the avoidance of tax in India within the meaning of Clause (c) of the proviso to Section 245R(2). The facts of the present case are different from those considered by the Authority in the decision in Advance Ruling No. P. 9 of 1995, In re [1996] 220 ITR 377 (AAR). The Authority is of the opinion that the facts of the present case are not distinguishable from those considered in Advance Ruling No. P. 10 of 1996, In re [1997] 224 ITR 473 (AAR) and, therefore, rejects the preliminary objection raised on behalf of the Department to the maintainability of the application.
13. It is next contended by the Department that the Treaty benefits are available only to a person who is "resident" in Mauritius within Article 4 of the DTAA. It will be convenient, therefore, to set out the terms of the said article here (see [1984] 146 ITR (St.) 214, 216) : 1. For the purposes of the Convention, the term 'resident of a Contracting State' means any person who, under the laws of that State, is liable to taxation therein by reason of his domicile, residence, place of management or any other criterion of similar nature. The terms 'resident of India' and 'resident of Mauritius' shall be construed accordingly . . .
3. Where by reason of the provisions of paragraph 1, a person other than an individual is a resident of both the Contracting States, then it shall be deemed to be a resident of the Contracting State in which its place of effective management is situated. " 14. The contention urged is that if the applicant is to be treated as resident in Mauritius because it is incorporated there, it should equally be treated as resident in India under paragraph 1 of the above article because it is liable to tax in India. In this situation, it is said, paragraph 3 of the article is attracted and, hence, the applicant-company cannot be entitled to the benefits of the agreement unless it can be said that its place of effective management is in Mauritius. It is pointed out that though the company is formally incorporated in Mauritius and regulated by its laws, it is a subsidiary of DLJ and, therefore, the place of its effective management is only in the USA and not in Mauritius.
15. On the other hand, it is contended on behalf of the applicant that the seat of its effective management and control is only in Mauritius and nowhere else. It is pointed out that the applicant has obtained a tax residency certificate in Mauritius. This has been granted only on compliance with the following conditions : 4. Banking transactions must be channelled through an offshore bank account in Mauritius ; 5. Accounting records must be maintained in Mauritius in accordance with the Companies Act ; 7. All statutory records, such as minutes and members' register, must be kept at the registered office ; 16. Also, being incorporated in Mauritius as an offshore ordinary company, the appellant will be regulated by the Mauritius Offshore Business Activities Authority (the "MOBAA"). A copy of the letter received by the applicant from the MOBAA shows that the applicant will have to comply with the different provisions detailed in the MOBAA letter which clearly show that the applicant's place of effective management will be in Mauritius only. Thus, the applicant will : have to make such disclosures as due diligence requires to the MOBAA ; maintain its banking transactions through a bank account in Mauritius ; hold its directors' meetings in Mauritius ; maintain its accounting records in Mauritius ; report on a quarterly basis on its investment operations to the MOBAA ; comply with such enactments or conditions as may from time to time be adopted and imposed by Mauritian authorities in relation to investment funds, collective investment schemes, and conduct of investment business.
In addition, the following circumstances also confirm that the place of effective management of the applicant will be in Mauritius : Investors from different jurisdictions will be investing in the applicant ; in addition, the directors in the applicant will be appointed from different jurisdictions ; and the dividends will be remitted to Mauritius, from India." 17. The contention urged on behalf of the respondent has to be rejected. A similar argument was also put forth in the case in Advance Ruling No. P-9 of 1995, In re [1996] 220 ITR 377 (AAR), but was rejected by the Authority in the following words (page 385) : " For the above reasons, the Authority is of the view that the applicants must be considered to be residents both in Mauritius and in India within the meaning of paragraph 1 of Article 4. One has, therefore, to turn to paragraph 3 of that Article 4 to ascribe the residence to one of these two Contracting States. The effect of that paragraph is that the applicants are to be considered as residents of that one of the two Contracting States in which the place of their effective management is situated. On this issue, the applicants' argument that this can only be Mauritius appears to be well founded based as it is on the terms of the memoranda and articles of association of the applicant companies. A difficulty in this line of argument arose by a disclosure made by the applicant's counsel in the course of his arguments before us. He stated that the applicant was a fully owned subsidiary of a banking company of Britain. However, this was not borne out in the papers before us which, as stated earlier, showed two other companies as the shareholders of the applicant companies. It was not clear whether the British bank was holding shares in the names of the two ostensible shareholders who are just its nominees (a type of situation envisaged under Section 49(3) of the Companies Act, 1956) or whether it was the sole shareholder in each of the applicant companies. We, therefore, asked the applicant to clarify the position. By a letter dated December 7, 1995, a list of shareholders of the companies duly certified by the company secretary was filed.
This shows that the whole of the share capital of the applicant companies is held by the British bank. In other words, the entire shareholding of the applicant company is in the hands of only one shareholder and that is a banking company in Britain.
We take it that such a single shareholder company is permissible under the laws of Mauritius as it is in several other countries, including England now--since a certificate of such shareholding has been issued by the company secretary of the applicants. If this position is accepted, it could perhaps be argued that though the directors of the companies--at least two of the three--are located and their meetings are said to be held in Mauritius, the place of effective management of the company should be held to be in England where the sole shareholder of the company, which has got the ultimate management of the company, is located.
This conclusion will not, however, be correct for three reasons. The first is that it is equally plausible to say that the words 'place of effective management' refer to the place from where, factually and effectively, the day to day affairs of the companies are carried on and not to the place in which may reside the ultimate control of the company, Secondly, it has been stated in the papers filed here that the general meetings of the company are also held in Mauritius and, if this is correct, the fact that the holding bank is in Britain may not be material. The third and most important reason is that what paragraph 3 of Article 4 contemplates is not the location of a place of effective management generally but the location of the place of effective management as between the two Contracting States entering into the Double Taxation Avoidance Agreement. Looked at from this point of view, the applicants do not have any place of management at all in India while they do have one in Mauritius. On a proper construction of Article 4 of the Double Taxation Avoidance Agreement, therefore, the applicant companies have to be treated as residents of Mauritius for the purposes of the Double Taxation Avoidance Agreement." 18. These reasons are equally applicable in the present case. For the same reasons, it is held that the applicant is resident in Mauritius within the meaning of Article 4 of the Treaty and is entitled, therefore, to the benefits that flow under the Treaty. This disposes of questions Nos. 1 and 4 raised on behalf of the applicant.
19. By the third question, the applicant desires to know whether the interest received by it pursuant to loan agreements in respect of debentures and/or any other debt claims issued pursuant to the approval of the Reserve Bank of India/Government will be exempt from tax under Article 11 of the Treaty. Article 11 reads as follows in so far as it is relevant for our present purpose (see [19841 146 ITR (St.) 214, 222) : 1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.
2. However, subject to the provisions of paragraphs 3 and 4 of this Article, such interest may also be taxed in the Contracting State in which it arises and according to the laws of that State.
3. Interest arising in a Contracting State shall be exempt from tax in that State provided it is derived and beneficially owned by : (a) the Government or a local authority of the other Contracting State ; (b) any agency or entity created or organised by the Government of the other Contracting State ; or (c) any bank carrying on a bona fide banking business which is a resident of the other Contracting State.
4. Interest arising in a Contracting State shall be exempt from tax in that Contracting State to the extent approved by the Government of that State if it is derived and beneficially owned by any person (other than a person referred to in paragraph 3) who is a resident of the other Contracting State provided that the transaction giving rise to the debt-claim has been approved in this regard by the Government of the first-mentioned Contracting State." 20. On behalf of the applicant, reliance is placed on the terms of paragraph 4 above extracted. It is contended that under this paragraph any interest receivable by the applicant, though arising in India, shall be exempt from tax in India provided three conditions are satisfied : - (1) The interest is to be to the extent approved by the Government of India.
(2) It is derived and beneficially owned by a person resident in Mauritus.
(3) The transaction giving rise to the debt-claim has been approved "in this regard" by the Indian Government.
In the present case, there is no doubt that the interest is received beneficially by a person resident in Mauritius. It is then pointed out that no investment of monies in debentures or other debt instruments in India by a foreign national is possible except with the approval of the Reserve Bank of India (RBI) or the Foreign Investment Promotion Board (FIPB). These bodies do not give approval unless the transaction giving rise to the debt-claim fulfils the conditions laid down by the Government policies pertaining to foreign investments. Such terms and conditions take into account not only the nature of the debt, the number of instalments, the purpose of the loan, the terms of repayment and other relevant circumstances but also specifically consider whether the interest payable under the agreement is reasonable or not in the view of the Government. It is, therefore, submitted that any interest that may be receivable by the applicant can only be under a transaction which has been approved by the Government and to the extent approved by the Government. The terms of paragraph 4 of Article 11 are, therefore, it is said, satisfied by any investment in debt-instruments that may be made by the applicant in pursuance of its objects.
21. On the other hand, on behalf of the Department, it is argued that the factual background necessary for a decision of the question has not been fully given by the applicant. No details are given as to the nature of the investments in which the applicant proposes to invest or the terms and conditions thereof. No reference has been made to any application made to the RBI or FIPB for necessary approval. The argument is vague and general and without the necessary factual contents. No ruling can be given on the question raised by the applicant in such a situation. That apart, it is submitted that the terms of paragraph 4 will not apply unless the transaction giving rise to the debt-claim "has been approved in this regard" by the Government.
In other words, what this clause contemplates is not a general approval embodied in a policy declared by the Government in relation to foreign investments but a specific approval given by the Government that the transaction in question is approved for the purposes of paragraph 4 of Article 4 of the DTAA. Further it is argued that paragraph 4 does not grant an exemption in respect of interest merely because the rate of interest may be approved by the Government as a matter of general policy or even with regard to the particular transaction in question ; the terms of the paragraph make it clear that the interest "shall be exempt from tax ... to the extent approved by the Government of that State". In other words, the exemption extends not to the entirety of interest paid to the applicant but only to that portion of it as may be exempt under the Indian income-tax law.
22. The issue raised is an interesting one. The first and third conditions specified in the paragraph will seem to overlap if, as contended by the applicant, the words "to the extent approved" are taken to refer to the quantum of interest payable to the non-resident, for this aspect is also included in the last words of the clause which require that the transaction should have been approved by the Government "in this regard". The words "in this regard" mean, in the context, "in regard to the aspect of interest under the contract in question" and not "for purposes of the DTAA" as argued for the Department. It is difficult to conceive of the paragraph as stipulating that, in regard to every contract, an application that the contract be approved for the purposes of the DTAA is to be filed and an approval obtained. The applicant argues, however, that there is no real overlapping and that, though the last few words stipulate that the contract must be approved by the Government in regard to the question of interest payable to the non-resident thereunder, a reference may have been made also in the first part of the paragraph just to emphasise that the exemption of income will be available only to the extent of the rate and quantum approved by the Government and not beyond.
23. On the other hand, for the Department, it is contended that this construction makes the language of the paragraph repetitive. Its plea is that the reference of the words "to the extent" is to the extent of tax exemption that is available under law and not to the extent of interest which has been permitted to be paid, This, it is said, is the only way to interpret both parts of the paragraph harmoniously. There are two points made for the applicant in reply to this plea. The first is that if the intention of the treaty had been that the quantum of exemption should be governed by the Indian tax law, it would have been easy to have said so. The rate of tax exemption prescribed under the Income-tax statute is not ever described as an extent of tax exemption "approved by the Government." The State grants exemption in respect of a particular quantum of interest ; it does not "approve" such exemption. This difficulty in language apart, it is pointed out by Shri Desai, that if the quantum of interest is already exempted under the law of the State, there was no necessity for a provision in this regard in the DTAA. The only intention of the DTAA could have been to grant an exemption in respect of something which may have been otherwise liable to tax by reason of paragraphs 1 and 2 of Article 4 of the DTAA.24. There is some force in the first point. But the Authority agrees with the Department that the interpretation of the reference to approval in the first part as related to the quantum of interest renders the wording repetitive. On the other hand, it seems correct to link that approval to the extent of exemption from tax given by the Government. There is no doubt an inaptness in the expression used but it is not correct to argue that it will render the first condition useless. Though one of the conditions for exemption is that the transaction and the interest stipulated therein should be approved by the Government, the first condition was necessary because it also seems to have been intended that only such part of the interest as may be entitled to exemption under the Indian law should be available to the applicant, even though a larger amount of interest may have been paid in terms of an approved contract. If the words imposing the first condition were not to be found in the paragraph, it would have been open to a Mauritian investor to claim that the entire interest paid under the approved transaction would be eligible for exemption although the Indian statute limits exemption in respect of such payments only to a smaller extent or to nil. In this view of the matter, the first condition cannot be said to be redundant. It is true that if the interest paid is exempt under the Indian law, the agreement does not confer any higher benefits on the non-resident than are already available under the law. But this can be no objection because it is very much open to the DTAA to limit the quantum of exemption on any item to that available under the Indian law. It cannot be presumed that it intended to confer on the non-resident an exemption of tax in respect of all approved interest even if it exceeds the limit of exemption provided in respect of such payments under the Indian statute. The discussion becomes relevant because Section 10(15) of the Act grants an exemption in respect of the entirety of such interest if the transaction, including the question of interest, is approved by the Government only where the borrowal is by the categories of persons, from the bodies or institutions or for the purposes, outlined therein.
In other cases, where no specific exemption from tax like this is available or the exemption is restricted, the recipient non-resident cannot claim the exemption or will have to restrict it to the extent granted, as the case may be. There is nothing in paragraph 4 to support the view that a full exemption was intended to be extended to such cases as well.
25. After considering the pros and cons of both view-points, the Authority is of the opinion that notwithstanding some inappropriateness in the wording of the first part of the paragraph, conditions Nos. 1 and 3 should be read harmoniously and that any interest received in respect of a debt transaction will be exempt only if it is paid under a transaction that has been approved by the Government and only subject to such limits of exemption as may be provided for in respect of such payments under the Indian income-tax law.
26. While expressing the above view, the Authority wishes to make it clear that the above opinion proceeds on the assumption that the transaction which the applicant enters into will be one specifically approved by the Government. A question may be raised whether the FIPB or the RBI can be said to be the Government of India for the purposes of this article. Though the tax treaty does not define the expression "Government", under Article 3(2), any term not defined therein will, unless the context otherwise requires, have the meaning which it has under the laws in force in India. Both under the Constitution of India and, on general principles, the Reserve Bank of India which is a Government agency completely owned by the Government of India and the FIPB which is only a committee of the Government of India can be appropriately described as "Government" for the purposes of this clause. If, therefore, a transaction entered into by the applicant is approved by the FIPB or the RBI or by any other governmental body entitled to grant such approval to the terms of that transaction, the interest receivable by the applicant thereunder will be exempt within the meaning of Article 11(4) from Indian income-tax to the extent such exemption is available under the provisions of the Indian tax laws in respect of this category of income in the hands of a non-resident.
27. The sixth question raised by the applicant may be described as a residuary question. The question, as originally raised and as proposed to be amended, by the applicant has been set out earlier. The point made by the applicant is that under Article 22(1) of the DTAA all items of income of a resident of a Contracting State, wherever arising, which are not expressly dealt with in the earlier articles of the Convention, shall be taxable only in that Contracting State. In other words, if the applicant derives any item of income which does not fall within the provisions of any other article of the DTAA, it will be taxable only in Mauritius and not in India. In this view of the matter, question No. 6, as originally framed by the applicant, was a verbatim repetition of the language of Article 22 of the DTAA and it is not the function of the Authority to give what may be described as a "comfort ruling". Perhaps realising this, the applicant sought for an amendment. The amended question placed before the Authority reads : " Whether on the facts and the circumstances of the case, any other income earned by the applicant, not being in the nature of dividends, interest, capital gains, business income or any other income which is not expressly covered by any other article under the treaty, for example income from units of a mutual fund in India, will be taxed in Mauritius only and not in India ?" 28. It has been clarified in the amended question that what the applicant has in mind is about the taxability of income from units of mutual funds in India. It is pointed out that mutual funds are either run by companies or by other entities such as a trust. The income distributions made by companies will be dividends and fall under Article 12. But this is no longer possible because dividend income has been exempted in the hands of the shareholder from the assessment year 1998-99. True, earlier, the income received from the Unit Trust of India could have been considered to be dividends because, under Section 32 of the Unit Trust of India Act, 1963, the UTI was deemed to be a company for income-tax purposes. With the Finance Act of 1997, this will cause no difficulty to the applicant. Thus, income from the UTI will be any how exempt and income from mutual funds run by domestic companies will be exempt from the assessment year 1998-99 onwards in view of the provisions of the Finance Act, 1997. If the income distribution is by any body other than a company, it would not be in the nature of dividend and it would also not fall under any of the categories specified in Articles 7, 11, 12 and 13 of the DTAA. Article 22 will, therefore, apply to such income. This argument of the applicant is well-founded and accepted. Question No. 6 is disposed of accordingly.
29. In the result, the Authority pronounces the following rulings on the questions raised by the applicant : 1. Whether, on the facts and circumstances of the case, the DLJMB Mauritius Investment Company (hereinafter referred to as the "Applicant") will be entitled to the benefits of the Convention for Avoidance of Double Taxation and Prevention of Fiscal Evasion with respect to taxes on income and capital gains and for encouragement of mutual trade and investment with Mauritius, entered into between the Government of the Republic of India and the Government of Mauritius, as notified on December 6, 1983, along with the Protocol- (hereinafter referred to as the "Treaty") 2. Whether, on the facts and circumstances of the case, the dividends received by the applicant will be subject to a withholding tax at the rate of 5 per cent, if the applicant holds 10 per cent, or more of the capital of the Indian company paying dividends, and 15 per cent, in other cases 3. Whether, on the facts and circumstances of the case, interest received by the applicant pursuant to a loan agreement in respect of debentures and/or any other debt claims issued pursuant to the approval of the Reserve Bank of India (hereinafterreferred to as the "RBI")/Government will be exempt from tax under article 11 of die Treaty Yes, but only to the extent the Indian tax laws confer exemption in respect of such interest or to the extent any such exemption is conferred by the Government.
4. Whether, on the facts and circumstances of the case, the applicant will not be taxable in India on capital gains whether long-term or short-term) arising Hum the transfer of securities it holds in Indiancompanies 5. Whether, on the facts and circumstances of the case, the activities of the Indian advisor will constitute a permanent establishment of the applicant in India 6. Whether, on the facts and the circumstances of the case, any other income earned by the applicant not being in the nature of dividends, interest, capital gains, business income or any other income which is not expressly covered by any other article under the Treaty, for example income from units of a mutual fund in India, will be taxed in Mauritius only and not in India ?" Yes, income derived from units of mutual funds will not be liable to tax in India.