2011 (11) TMI 804 - AAR - Income Tax

Summary

Issues Involved:
1. Taxability of capital gains from the sale of shares of a French company to another French company under the Indo-French Tax Treaty.
2. Whether controlling interest is liable to be taxed in France under Article 14(6) of the Indo-French Tax Treaty.

Detailed Analysis:

1. Taxability of Capital Gains:
The primary issue was whether the capital gains arising from the sale of shares of ShanH, a French entity, by MA and GIMD, also French entities, to Sanofi, another French entity, were taxable in India or France under the Indo-French Tax Treaty.

The applicants contended that the transaction involved only the sale of shares in a French company, ShanH, and not the shares of the Indian company, Shantha Biotechnics Ltd. They argued that the capital gains should be taxed in France as per Article 14.5 of the Indo-French Tax Treaty, which states that gains from the alienation of shares representing a participation of at least 10% in a company resident in a contracting state may be taxed in that state.

The Revenue argued that ShanH was merely a front and that the real transaction involved the transfer of controlling interest and assets of Shantha, an Indian company. They claimed that the transaction was designed to avoid tax in India and should be taxed in India.

The Authority observed that the transaction was a scheme to avoid tax in India. It noted that ShanH was created solely for the purpose of acquiring shares in Shantha and had no other business or assets. The Authority concluded that the transaction amounted to a transfer of the underlying assets and control of Shantha, and thus, the gain from the transaction was taxable in India under Article 14.5 of the Indo-French Tax Treaty.

2. Controlling Interest:
The second issue, raised only by MA, was whether controlling interest, assuming it is a separate asset, is liable to be taxed in France under Article 14(6) of the Indo-French Tax Treaty.

Since the Authority ruled that the transaction was taxable in India under Article 14.5, it did not find it necessary to address the second question. Article 14.6 applies only if Article 14.5 does not, and hence, the question of controlling interest being taxed in France did not arise.

Conclusion:
The Authority ruled that the capital gains arising from the sale of shares of ShanH by MA and GIMD to Sanofi were taxable in India under Article 14.5 of the Indo-French Tax Treaty. The second question regarding the taxability of controlling interest in France under Article 14.6 was not considered as it was rendered moot by the ruling on the first issue. The ruling emphasized that the transaction was part of a scheme to avoid tax in India and should not be accepted at face value.