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Gauhati High Court detailed elaboration on Shell Companies
 103 taxmann.com 160 (Gauhati)
HIGH COURT OF GAUHATI
Assam Co. India Ltd.
Union of India
UJJAL BHUYAN, J.
CASE NO. WP(C) NO. 2572 OF 2018
MARCH 7, 2019
14. Submissions made by learned counsel for the parties have been carefully considered.
15. Since the entire lis centers around declaration of petitioner No.1 as a shell company and thereafter initiating proceeding against petitioner No.1 as a shell company, it would be apposite to discuss what is a shell company or its legal connotation at the outset.
16. The expression shell company has not been defined under any law in India. Therefore, there is no statutory definition of shell company, be it in fiscal statutes or in penal statues. Neither the Companies Act, 1956 nor the Companies Act, 2013 defines the expression shell company. In the interim order passed on 12.07.2018, this Court observed that in the Concise Oxford English Dictionary, 11th Revised Edition, shell company has been defined as a non-trading company used as a vehicle for various financial manoeuvres.
16.1. In popular parlance, a shell company is understood as having only a nominal existence; it exists only on paper without having any office and employee. Just like a shell which has a thick outer covering but is hollow inside, a shell company is a corporate entity without having active business operations or significant assets. It may be used as a deliberate financial arrangement providing service as a tool or vehicle of others without itself having any significant assets or operations i.e., acting as a front. Popularly shell companies are identified as companies which are used for tax evasion or money laundering, i.e., channelizing crime tainted money or proceeds of crime into the formal economy.
16.2. But just being a paper company and not having any assets or business operations per se is no offence. A corporate entity may be set up in such a fashion with the objective of carrying out corporate activities in future. That would not make it an illegal entity.
17. The Organisation for Economic Cooperation and Development (OECD) has prepared a glossary of foreign direct investment terms and definitions. OECD, which was established on December 14, 1960, is now a group of 34 member countries that discuss and develop economic and social policy. OECD members are democratic countries that support free market economies. OECD led a two year effort with G 20 nations to encourage tax reform worldwide and to eliminate tax-avoidance by profitable corporations. In the said glossary, shell company has been defined as a company which is formally registered, incorporated or otherwise legally organized in an economy but which does not conduct any operations in that economy other than in a pass-through capacity. Shells tend to be conduits or holding companies and are generally included in the description of special purpose entities.
17.1. As per the glossary, special purpose entities have been described as legal entities with little or no employment or operations or physical presence in the jurisdiction in which they are created by their parent enterprises which are typically located in other jurisdictions (economies). They are often used as devices to raise capital or to hold assets and liabilities and usually do not undertake significant production. An enterprise is usually considered as a special purpose entity if it meets the following criteria:-
(1) The enterprise is a legal entity -(a) formally registered with a national authority, and(b) subject to fiscal and other legal obligations of the economy in which it is resident;(2) The enterprise is ultimately controlled by a non-resident parent, directly or indirectly;(3) The enterprise has no or few employees, little or no production in the host economy and little or no physical presence;(4) Almost all the assets and liabilities of the enterprise are the investments in or from other countries;(5) The core business of the enterprise consists of group financing or holding activities, i.e., chanelling of funds from non-residents to other non-residents.
18. Shri Amit Bhaskar, Assistant Professor in Law, Nirma University, Ahmedabad has carried out a study on the subject ‘Tackling the Menace of Shell Companies in India’ whereafter he has published an article on the subject. He has stated that there has been a spurt in economic crimes, such as, money laundering, benami transaction, tax evasion, generation of black money, round tripping of black money, etc which not only causes revenue and foreign exchange loss to the Government but also creates economic inequality in the society. It may compromise economic sovereignty of the State. According to him, such illegal activities are committed through incorporation of companies which have neither any asset nor liability nor any operational businesses. These companies exist only on paper to facilitate illegal financial transactions, such as, money laundering and tax evasion. According to him, these kind of companies are called shell companies.
18.1. In the United States of America, a shell company is defined as a registrant with no or nominal operations and either no or nominal assets, assets consisting solely of cash and cash equivalents or assets consisting of any amount of cash and cash equivalents and nominal other assets.
18.2. However, it is no offence to be a shell company per se. The maximum Registrar of Companies can do is to strike off the name of such company from the register of companies. But if the shell company is involved in money laundering or tax evasion or for other illegal purposes, then relevant provisions of laws under the Prevention of Money Laundering Act, 2002, Prohibition of Benami Transactions Act, 2016, Income Tax Act, 1961 and the Companies Act, 2013 would be attracted.
18.3. As per the study, the necessity for curbing shell companies stems from the fact that these companies are incorporated extensively for carrying out illegitimate transactions which aims at money laundering, tax evasion, generation of black money, carrying out benami transactions, shifting of corporate profit to tax haven jurisdictions and round tripping of such profit or black money by taking advantage of double tax avoidance treaties thereby causing huge loss in tax revenue. Apprehension has been expressed by the Financial Action Task Force (FATF) that shell companies may be used for financing terrorism. FATF is an inter-governmental policy making body established in the year 1989 to set standards and promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system.
18.4. As per the study, SEBI has proposed to the Government of India that there should be a legal definition of shell company as there is no law in India which defines shell company at present. Such definition besides giving legal clarity will also enable investigative agencies to carry out investigation more swiftly and in a structured manner.
18.5. Parliamentary Standing Committee on Finance has suggested that shell companies be defined under the Companies Act, 2013. The Committee was of the view that all shell companies may not have fraudulent intention. Therefore, the expression shell company needs to be defined as having fraudulent intent as one of the characteristic features of such a company.
19. Government of India has entered into various treaties with Governments of different countries for avoidance of double taxation and for prevention of fiscal evasion. One such treaty or agreement is the Indo-Mauritius Double Taxation Avoidance Convention, 1983. To give effect to such agreement, Central Board of Direct Taxes (CBDT) issued notification dated 13-04-2000. As per such treaty and the notification, corporate entities incorporated in Mauritius would be liable to taxation only in Mauritius and not in India. Objection was raised to such arrangement on the ground that offshore companies have been incorporated under the laws of Mauritius only as shell companies which carry on no business there and are incorporated only with the motive of taking undue advantage of the treaty between India and Mauritius. It was contended that it amounted to unethical and illegal treaty shopping i.e., an act of a resident of a third country taking advantage of a fiscal treaty between two contracting countries. However, in Union of India v. Azadi Bachao Andolan,  10 SCC 1, Supreme Court repelled such contention and declared the CBDT notification to be valid.
20. The question of foreign investments in India being routed through offshore finance centres and also through countries with whom India has entered into treaties came up for consideration in Vodafone International Holdings BV v. Union of India,  6 SCC 613. In the said decision, Supreme Court turned down the plea for reconsideration of Azadi Bachao Andolan (supra). Justice Radhakrishnan in his concurring judgment examined the expressions tax haven, treaty shopping, shell companies and round tripping. In that context, it was held as under :-
“318. ………….. The term “shell companies” finds no definition in the tax laws and the term is used in its pejorative sense, namely, as a company which exists only on paper, but in reality, they are investment companies. ……………..”
21. Thus, from the above, what can be deduced is that though a shell company is defined in other jurisdictions, in India there is no statutory definition of a shell company. However, in popular parlance as well as from the perspective of the Government and its agencies, a shell company is ordinarily identified with dubious activities concerning serious economic offences, such as, tax evasion, money laundering, benami transaction, conversion of black money into white, round-tripping with host of other associated offences. The general perception is that presence of shell companies and its potential use for illegal activities threatens the very economic foundation of the country and severely compromises its economic foundation and ultimately sovereignty.