2011 (11) TMI 74 - AAR - Income Tax

DTAA with French Republic - whether the Capital gains arising from the sale of shares of ShanH (French incorporated Entity) by the Applicant (French Incorporated Entity) to Sanofi (French Incorporated Entity) is liable to tax in France or in India - whether controlling interest (assuming while denying that it is a separate asset) is liable to be taxed in France under Article 14(6) of the Indo-French Tax Treaty. - Held that - the transactions of sale of shares by them in ShanH to Sanofi are taxable in India in terms of paragraph 5 of Article 14 of the Double Taxation Avoidance Convention between India and France. Tax Avoidance - held that - the transaction involved is not one to be taken at face value by the Taxing Statute since it is one intended to avoid payment of tax on capital gains in India. The questions posed have to be answered in this context. Scope of section 245R - This Authority had allowed the application under Section 245R(2) of the Act but had clarified that the bar created by Section 245R(2) of the Act will be reconsidered while giving a ruling under section 245R(4) of the Act. This behaves us to consider the questions on merits and to give rulings on them. A ruling is also necessary for a completion of this proceeding and to avoid a remit of this matter to this Authority, in case, on the question of tax avoidance, the Supreme Court were to disagree with our conclusion. It will be unjust to leave open the question raised and argued.

Issues Involved:
1. Taxability of capital gains from the sale of shares under the Indo-French Tax Treaty.
2. Potential tax avoidance scheme and applicability of Section 245R(2) of the Income-tax Act.
3. Jurisdiction and procedural objections raised by the Revenue.

Detailed Analysis:

1. Taxability of Capital Gains from the Sale of Shares under the Indo-French Tax Treaty:

Issue: Whether the capital gains arising from the sale of shares of ShanH (a French incorporated entity) by the applicants (French incorporated entities) to Sanofi (another French incorporated entity) are liable to tax in France or in India under the Indo-French Tax Treaty.

Ruling: The applicants argued that the transaction should be taxable in France under 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 France may be taxed in France. The Revenue contended that the transaction involved the transfer of underlying assets and controlling interest of an Indian company (Shantha), and thus should be taxed in India.

The Authority concluded that the transaction should not be taken at face value as it amounted to a scheme for avoidance of tax in India. By invoking the principles laid down in McDowell and Co. Ltd. v. Commercial Tax Officer and considering the purposive construction of Article 14.5 of the Treaty, the Authority ruled that the capital gains arising from the sale of shares by the applicants in ShanH to Sanofi are taxable in India.

2. Potential Tax Avoidance Scheme and Applicability of Section 245R(2) of the Income-tax Act:

Issue: Whether the transaction was designed as a scheme for avoidance of tax in India, and if so, whether the application for advance ruling should be barred under the proviso to Section 245R(2) of the Income-tax Act.

Ruling: The Revenue argued that ShanH was merely a front created to avoid tax liability in India, as it had no office, no staff, and the director of MA was also its director. The Authority agreed with the Revenue's contention that the transaction was part of a pre-ordained scheme to avoid tax on capital gains in India. The Authority emphasized that the object of the Double Taxation Avoidance Convention is not only to avoid double taxation but also to prevent fiscal evasion. Consequently, the Authority invoked the proviso to Section 245R(2) of the Act and declined to rule on the questions posed, citing the transaction as a scheme for avoidance of tax in India.

3. Jurisdiction and Procedural Objections Raised by the Revenue:

Issue: Whether the pendency of proceedings under Section 201 of the Act against Sanofi and ShanH barred the application for advance ruling, and whether the Revenue's objections regarding jurisdiction and procedural fairness were valid.

Ruling: The Authority held that the initiation of proceedings under Section 195 or 197 of the Act and even a final order passed therein would not create a bar to entertaining an application for advance ruling. The Authority overruled the Revenue's objection that the giving of a ruling under Section 245R(4) of the Act was barred by clause (i) in the proviso to Section 245R(2) of the Act, stating that the proceedings under Section 201 were preliminary in nature and could not stand in the way of considering the application for a ruling.

The Authority also addressed the procedural fairness issue, noting that the Andhra Pradesh High Court had dismissed the writ petitions challenging the order allowing the application under Section 245R(2) of the Act. The Authority concluded that all relevant facts were now before it, enabling a satisfactory decision on the bar claimed by the Revenue.

Conclusion:

The Authority ruled that the capital gains arising from the sale of shares by the applicants in ShanH to Sanofi are taxable in India under Article 14.5 of the Indo-French Tax Treaty. The transaction was found to be part of a scheme for avoidance of tax in India, and the application for advance ruling was declined under the proviso to Section 245R(2) of the Income-tax Act. The procedural objections raised by the Revenue were overruled, allowing the Authority to proceed with the ruling.

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