A weekly selection of tax-related court orders

A missed opportunity
The Delhi High Court in the case, Delhi Airport Metro Express vs CAF India & Construcciones Y Auxiliar De Ferrocarriles, SA, faced the question of allowing two Indian parties to choose a foreign seat for arbitration of dispute. Delhi Airport Metro Express' contention was that since both the parties in the dispute were companies incorporated in India, they could not have chosen a foreign seat for the arbitration. The court did not opine on the question as it reached a conclusion that the impugned arbitration agreement was a tripartite agreement where the second defendant - a Spanish entity - was a foreign party thereby dismissing the application. The court concluded that the parties could continue with the arbitration proceedings pending before the arbitral tribunal at London.

ANALYSIS: The legal position on two Indian parties choosing a foreign seat remains untested under Indian law. The court in the present case approached the issue from the perspective of the persons who remained parties to the arbitration agreement, and held that the arbitration continued to remain in the nature of an international commercial arbitration. The case highlights that the grey area in the law could be used to stall arbitration process or delay it. It is advisable for two Indian parties to avoid choosing a foreign seat till there is some clarity on this issue from the courts.

(Courtesy: Excerpts from an analysis by Nishith Desai Associates)

Restricting applicability of indirect transfer taxes
The Delhi High court recently came out with the first high court ruling on the indirect transfer tax provisions, in DIT v. Copal Research Mauritius Limited, Moody's Analytics, USA & Ors.

In a landmark judgment, the HC upholds the non-taxability in India of gains from the sale of shares of overseas entities by the Copal Group to the Moody's group.

The primary issue underlying the writ petition filed by the tax department against the order of the Authority for Advance Rulings, pertained to whether the taxpayer's transaction amounted to a prima facie avoidance of tax. The high court in its judgment lays down important judicial dicta on the scope and extent of applicability of the indirect transfer tax provisions.

The judgment throws light on the issue of whether the transaction structure results in prima facie avoidance of tax, and provides a detailed analysis of the applicability and scope of indirect transfer taxes.

The court held that the transactions were not structured prima facie for avoidance of tax. This also demonstrates the court's affirmation of the Mauritius route provided that there is sufficient commercial rationale. The high court was of the opinion that there should be no Indian tax liability on Copal Group or withholding tax obligations on the Moody's group as a result of the acquisition.

ANALYSIS: This judgment provides the much-needed clarity to foreign investors on the applicability of indirect transfer tax provisions. It is one of the first judgments to have delved into the meaning, scope and extent of the term "substantially" in the context of indirect transfers.

(Courtesy: Excerpts from an analysis by Nishith Desai Associates)

Reversing the AAR ruling
The Delhi High Court recently reversed the ruling of the Authority for Advance Rulings (AAR) in a judgment in the case of Zaheer Mauritius v Director of Income Tax (international taxation).The court held that income arising from sale of Compulsorily Convertible Debentures pursuant to exercise of a call option cannot be characterised as interest income, and must be treated as capital gains. The judgment said that no tax was payable in India as a result of such a sale, since capital gains (to the Mauritius resident) are exempt from tax under the India - Mauritius Tax Treaty.

ANALYSIS: The decision reinforces the principle that the 'form' of transaction must be respected, unless the tax authorities can establish that the dominant purpose behind a transaction is avoidance of tax. While deciding on the true nature of a transaction, tax authorities must consider a multitude of factors, including the commercial rationale for the taxpayer to have structured a transaction in a particular manner.

(Courtesy: Excerpts from an analysis by Khaitan & Co)