Case nº AAR Nos. 647 to 650 of 2004 of Authority for Advance Rulings, July 29, 2005 (case In Re: Citicorp Trustee Company Ltd. Vs)

JudgeFor Appellant: Porus Kaka, Adv. and For CIT: T.N. Chopra, Adv.
PresidentSyed Shah Mohammed Quadri, J. (Chairman) and A.S. Narang, Member
Resolution DateJuly 29, 2005


Syed Shah Mohammed Quadri, J. (Chairman)

  1. The following common question is set forth in these four applications, under Section 245Q(1) of the IT Act, 1961 (for short the "Act"):

    "Whether, in respect of the transaction, being the reorganization described in Annex. 2 of this application, the applicant is chargeable to tax in India under the provisions of the IT Act, 1961, or the Agreement for Avoidance of Double Taxation between India and the United Kingdom".

  2. Inasmuch as the said common question arises out of identical facts, we shall refer to the facts narrated in the first mentioned application (AAR/647/2004). The applicant is a limited company incorporated in Great Britain and is a tax resident of the United Kingdom (UK). The applicant was initially a trustee for a group of funds including Invesco Perpetual Global Smaller Companies Fund (Invesco Funds). Those funds were managed by Invesco Funds Managers Ltd., a company incorporated in Great Britain and a tax resident of UK. The said funds were constituted as unit trusts under various trust deeds for the purpose of providing an investment vehicle to investors to earn profits. The applicant was registered with the Securities and Exchange Board of India (SEBI) as Foreign Institutional Investors (FIIs) under the SEBI (Foreign Institutional Investors) Regulations, 1995, and made investments in Indian securities in accordance with the said regulations. The applicant states that it does not have a branch office or a place of business in India nor does it have any employee of its own or any investment advisor or agent in India. The transactions of purchase or sale of securities in India are carried on through brokers. The Indian securities of the applicant are held by the local custodian--"Citi Bank, Mumbai" which renders services to several other entities in ordinary course of its business.

  3. With a view to avail of various advantages in terms of flexibility, transparency, cost and services in accordance with the regulations prescribed by Financial Services Authority (FSA) in UK, it was decided to convert unit trusts into sub-funds of Open-Ended Investment Companies (OEIC's). The Invesco Funds including Invesco Perpetual Global Smaller Companies Fund were reorganized under a scheme in September, 2003. The reorganisation involved appropriating the assets of each unit trust into two separate and distinct funds--(1) liquidation fund and (2) unit-holders fund. The liquidation fund was created to meet outstanding liabilities, if any, of the unit trusts and the unit-holders fund, which comprises of the balance of the assets of unit trust, was to be appropriated for the purpose of corresponding sub-funds of OEICs'. Each unit holder was given shares on the basis of one share for one unit and consequently, every unit was deemed to be cancelled and the trust deeds ceased to have effect. It is asserted that there was no sale, exchange, or extinguishments of underlying assets (including the Indian securities) as a result of change from the unit trusts to the OEICs. There was also no payment of consideration by the OEICs to the unit trusts. The applicant continued to be the owner of shares in Indian companies as before but it would, after reorganization, act as the depository of the OEICs instead of as the trustee of the Invesco funds. There was no change in the beneficial ownership of the unit trusts nor was there any change in the effective beneficial ownership of the assets of the unit trusts. All the investors in the unit trusts became shareholders in the OEICs in the same proportions in which they originally held units. The aforementioned reorganization, it is stated, has the approval of Financial Services Authority (FSA) and enjoys exemption under the tax law of UK. After reorganisation, the applicant intimated SEBI of the change in the nomenclature for purposes of continuity of the operations. SEBI approved the change in the name of the Invesco Funds and continuation of portfolio investment in Indian securities by the OEICs.

  4. In the comments submitted by the Director of IT (International Taxation), Mumbai, the facts stated by the applicant are not disputed. However, the applicant was put to proving the same. The material portion of the comments contained in para 9 reads as follows:

    The assertions made by CTCL above are questions of fact, and as such, may be determined by learned AAR. The issue of transfer of Indian securities will arise if the applicant fails to establish that:

    (i) as trustee of the unit trusts it was the 'owner' of the Indian securities.

    (ii) as 'Depository' of the OEICs, it still is the 'owner' of the Indian securities.

    (iii) the scheme of arrangement is tax exempt in the UK.

    (iv) It is permitted under the UK regulations to act as a 'Depository' and trustee.

    In a case of such failure, it is submitted that the Authority may be pleased to hold that the provisions of Section 2(47) will be attracted and capital gains will arise as a transfer will have taken place.

  5. Mr. Porus Kaka, learned counsel appearing for the applicant, would submit that the reorganization of the applicant in UK is...

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