1. Private Equity – A case study
June 24, 2008
For information on applying this template onto existing presentations, refer to the notes on slide 2 of this presentation.
The Input area of the Beam can be customized to reflect the content of the presentation. The Input area is an AutoShape with a picture fill. To change this, ensure you have the image you wish to use (ideally a .jpg or a .png file) in an accessible folder. The image should have a ratio of 1:1 to ensure it does not appear distorted.
Acceptable images for importing into the Input area of the Beam are the three approved graphics (lines), and black and white photography or illustrations which follow the principles laid out on The Branding Zone. Color images should never be imported into this area.
To create a thank you slide with a picture in the Input area of the Beam, duplicate this master slide and create a new master slide. If using the graphic on the title slide the same should be used on the thank you slide. If using a picture in the Input area of the Beam in the title slide, the same or different but related picture can be used on the thank you slide.
Customize the Input area of the Beam as described below.
Click on the View tab from the menu bar and select Master>Slide Master
Right-click on the Input graphic and select Format AutoShape
From the Fill menu, under the Color and Lines tab, click on the drop-down arrow next to Color and select the Fill Effects menu
From the Picture tab, click on Select Picture. Navigate to the folder containing the image you wish to insert in the Input area. Highlight the image and tick the Lock picture aspect ratio box. Click on OK.
You can now preview the image before continuing. If you are happy with how it looks, click Ok to continue. Otherwise, repeat the process until you are happy with your selected image
To exit from Master View, click on View>Normal. The change you made to the Input graphic should now be visible on the title slide

2. Contents Typical investment / operating structure
Outline of the structure
Income-tax issues
Analysis
Conclusion

3. Typical investment / operating structure
US investors
Non-US investors
GP Company
US based Fund Manager
100%
Cayman Islands Fund
Investment management agreement
100%
Mauritius Company
Investment advisory agreement
Invest in shares of Indian Cos
Outside India
In India
Indian Co 1
Indian Co 2
Indian Co 3
Indian advisory company

4. Outline of the structure
Offshore investors invest in a Cayman Islands Fund (‘CIF’)
CIF established to make investment in growth companies across geographies (including India). For this purpose, the CIF invests in a Mauritius based subsidiary (‘M Co’) which in turn makes investment in shares of Indian companies and other companies in the Asia Pacific region
A US-domiciled Fund management company (‘FMC’) is appointed to manage the investments of CIF and M Co
The FMC establishes an Indian sub-advisory company (‘IAC’) for provision of investment advisory and incidental support services in respect of potential Indian investments
Decisions to make investments in Indian companies are taken by the Board of Directors of M Co based on recommendations received from investment committee constituted in M Co. Investment committee considers investment recommendations from FMC. Investment committee comprises of individuals with necessary expertise in considering and evaluating investment opportunities

5. Outline of the structure (contd…)
The IAC broadly provides the following services to FMC on a non-discretionary basis:
Undertake research and identify potential investment targets
Make non-binding recommendations to FMC as to the purchase/ sale of investments by M Co
Assist in negotiating purchase and sale of Indian investments
Act as an interface in India with external consultants (including securities firms, investment consultants, investment banks, financial institutions, solicitors and accountants) in relation to investments
Assist in review of agreements relating to acquisition/ sale of shares and other agreements
Send periodic reports on the performance of the investee companies on a regular basis

6. Income-tax issues
Whether IAC constitutes a permanent establishment (‘PE’) in India of FMC/M Co?
Even if IAC constitutes a PE of M Co, can capital gains earned by M Co from divestment of shares of Indian companies be liable to tax in India?

7. Analysis Permanent Establishment Fixed Place PE:
There must be a place of business in India, for example, any office space (owned or rented)
The place of business must have a degree of permanence
Agency PE:
An agent of a non-resident acts in India
The agent is dependent legally and economically on the non-resident principal
The agent has and habitually exercises in India, an authority to negotiate and conclude contracts for or on behalf of the non-resident principal
Capital Gains (India Mauritius tax treaty)
Capital gains from the alienation of movable property forming part of the business property of a permanent establishment may be taxed in India
Capital gains earned from the alienation of Indian securities (other than the above), shall be taxable only in Mauritius

8. Conclusion
The following supports the argument that IAC should not constitute a PE of the FMC/M Co in India:
IAC’s premises not at disposal of the FMC/M Co. Hence, IAC cannot constitute a fixed place PE of the FMC/M Co [Ericsson, Motorola and Nokia ruling (95 ITD 269) Delhi ITAT SB]
IAC represents FMC/M Co vis-à-vis third parties in India. Therefore, IAC will be regarded as an agent of FMC and/or M Co
IAC could be subject to detailed instructions and control with respect to the conduct of its business. Therefore, IAC is potentially legally dependent
IAC is setup as a risk free capital service provider in India. Therefore, the entrepreneurial risks are borne by the enterprise that IAC represents in India. Thus, IAC is economically dependent
IAC cannot therefore be regarded as an agent of independent status
IAC has no authority (express or implied) to negotiate and conclude contracts on behalf of the FMC/M Co
Thus, it will not constitute a agency PE of FMC/M Co [DIT v Morgan Stanley & Co (2007) 292 ITR 416 (SC)]

9. Conclusion
If IAC constitutes an agency PE of M Co in India on the basis that it has and exercises an authority to conclude contracts on behalf of M Co, gains earned by M Co on divestment of Indian securities should still not be subjected to tax in the hands of its PE in India due the following reasons:
The Indian securities are beneficially owned by M Co
The risk arising from the price fluctuations of the investment is borne by M Co
The funding for making the investment is made by M Co out of its own or borrowed capital
Therefore, the Indian securities do not form part of the business property of the IAC (ie PE of M Co).
Hence, the gains arising on sale of investments should not be taxable in India.

10. Thank you