The sovereign wealth fund ADIA had invested through its wholly owned entity Equity Trust (Jersey) Ltd (ETL), where the total commitment towards investment in India was to the tune of $200 million in 2013.
In its return of income (RoI) in India, ADIA maintained its income is exempted under the India-UAE Double Tax Avoidance Agreement (DTAA) including income derived from making investment and debt securities in India was not taxable in India as per the India-UAE DTAA.
Subsequently, in order to have clarity on the position and avoid litigation, ADIA filed an application before the Authority of Advance Ruling (AAR) to determine the taxability of the income accruing on the investments made or proposed to be made in the Indian portfolio companies by the trust.
“The Bombay High Court reinforces the principles of taxation of trusts, particularly revocable trusts,” said Amit Singhania, partner at law firm Shardul Amarchand Mangaldas & Co (SAM & Co). “It manifests that specific trusts are pass-through for tax purposes in as much as it should be taxed in the same manner as beneficiaries. This should provide additional comfort to individuals who have used trust structures for succession planning.”
The AAR scheme was introduced under the Income Tax Act to provide the facility of ascertaining the income-tax liability of a non-resident, to plan their income-tax affairs well in advance and to avoid any unnecessary litigation.
The sovereign wealth fund argued that at the time when ADIA was making a decision to invest in India, there was no legal framework in the UAE under which a trust could be formed and also ADIA could not establish a sole shareholder subsidiary company in the UAE.
Also, it argued, it is using Jersey as a jurisdiction for establishing companies and trusts and for making a number of investments around the world.
While the revenue department challenging ADIA’s stand argued that since there was no treaty between India and Jersey, income received or accrued or arising in India to the trust registered in Jersey is taxable in India.
The department also argued that the India-UAE Treaty does not apply to the trust or the trustee.
On March 18, 2020, the AAR rejected the arguments of ADIA and ETL, with the observation that they couldn’t take advantage of the India-UAE DTAA.
Subsequently, ADIA and ETL challenged the AAR’s order in the Bombay High Court. The court, in its order of October 28, 2021, has set aside the AAR ruling in favour of ADIA.
The division bench of Justice KR Shriram and Justice Abhay Ahuja in its 35-page order observed that “Even if, the trust is based out of Jersey and the trust is settled in Jersey, ADIA, being the settlor and sole beneficiary of the trust and a resident of the UAE as per the India-UAE DTAA, the income which arises to it by virtue of its investment in Indian Portfolio companies, will be governed by the beneficial provisions of the India-UAE DTAA.”
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