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2013 (2) TMI 589 - HC - Income TaxTaxability of indirect transfer of shares in an Indian company - India France DTAA - The shares of the Indian company were held by a French holding company (ShanH) with no other assets other than the shares in the Indian company. The Taxpayers (Merieux Alliance, France (MA) and Groupe Industriel Marcel Dassault (GIMD)) transferred the shares of ShanH to Sanofi Pasteur Holding (Sanofi), a French resident third-party buyer. The Taxpayers were companies resident in France. MA incorporated a wholly-owned subsidiary (ShanH) in France with a view to invest in India, MA entered into a share purchase agreement (SPA) in 2006 with shareholders of Shantha Biotechnics Ltd. (Shantha), an Indian company at Hyderabad. Nearly 80% of the shares of Shantha were purchased by ShanH, a subsidiary wholly owned by MA. As in 2009, MA and GIMD transferred their shareholding in ShanH to Sanofi, another French company. The Taxpayers claimed that the subject matter of the transfer were the shares of ShanH (French Company) and not the shares of the Indian company. AAR held that the transfer of shares of ShanH was a scheme for avoidance of Indian tax and that the capital gains arising from the Transaction was liable for tax in India, going by a purposive interpretation of the France DTAA contention of the taxpayer that while transfer of shares in an Indian company is taxable in India under the ITL, an indirect transfer was generally not taxable in Indian in view of the law declared by the SC in the case of Vodafone International Holdings BV (2012 (1) TMI 52 - SUPREME COURT OF INDIA) - prior to the retrospective amendment to the Indian Tax Laws (ITL) on taxation of indirect transfers of Indian assets by Finance Act (FA), 2012 , the Authority for Advance Rulings (AAR) had held the sale to be taxable in India under the ITL as well as under the India-France Double Taxation Avoidance Agreement (France DTAA) - writ petition filed by Tax payers in the jurisdictional HC against the advance ruling Whether ShanH has commercial substance as an entity? Held that - ShanH as a French resident corporate entity (initially a subsidiary of MA, thereafter a JV of MA/GIMD and eventually a JV comprising MA/GIMD/Georges Hibon) is a distinct entity of commercial substance, distinct from MA and/or GIMD and/or Georges Hibon, incorporated to serve as an investment vehicle, this being the commercial substance and business purpose, i.e., of foreign direct investment in India, by way of participation in SBL. It is not necessary that a corporate entity must involve itself, either in manufacture or marketing or trading of goods or services, to qualify for the ascription of being in business or commerce. Creation of a wholly-owned subsidiary or joint venture for domestic or overseas investment is a well-established business/commercial organizational protocol and investment is of itself a legitimate, established and globally well recognized business/commercial avocation. Whether shares of Shantha were transferred to Sanofi under the SPA in 2009 Held that - There was no transfer of right, title and interest in or transfer of Shantha s shares in the Transaction between the Taxpayers and Sanofi as per the SPA in 2009, as it was clearly only for transfer of ShanH shares as ShanH continues to hold the shares in Shantha even after the Transaction. Furthermore, ShanH received and continues to receive dividend on its shareholding in Shantha which is assessable to tax under the ITL. Transfer of Shantha s shares in favour of Sanofi was neither the intent nor the effect of the Transaction. Whether retrospective amendments could be read into the France DTAA Held that - Retrospective amendments under consideration do not impact interpretation in the context of a DTAA also the Finance Minister s speech on 7 May 2012 wherein it was clarified that the amendments do not override the provisions of a DTAA which India has signed. It would impact cases where the transaction was routed through low or no tax countries with which India has no DTAA. Inviting lifting of the corporate veil - Held that - The Transaction in the present case come under Article 14(5) of the France DTAA. The said article is clear, unambiguous and, in explicit terms, allocates the resultant capital gains to France. It is not legitimate to consider Article 14(5) permitting see through provision on a true, fair and good faith interpretation. Therefore, it cannot be said that the Transaction is taxable in India under the France DTAA on the basis that there was a deemed alienation of Shantha s shares on an artificial and strained construction of the provision. Such a construction would provide taxation rights for India on deemed alienation basis and taxation rights to France on actual alienation basis. Neither the text not context of Article 14(5) legitimizes such a strained construction, especially when the DTAA provisions are unambiguous and their legal meaning clearly discernible. Also, the expression alienation , used and not defined in the DTAA, cannot draw its meaning from a synonymous expression transfer used in the ITA. For this purpose, the expression in the ITA should be identical. Furthermore, if the Transaction involved a deemed alienation of control and underlying assets of Shantha covered under the ITL, taxation rights would be allocated to France under Article 14(6), as the Taxpayers are resident in France. In light of the above conclusions, the HC held that the order passed by the AAR cannot be sustained and allowed the writ petitions filed by the Taxpayers. Thus as per this rulling the principle confirmed is that allocation of taxing rights under a DTAA are unaffected by the ITL amendment on indirect transfers. Where a French company indirectly transferrs its interest in Indian concern to another French company, the transferor was not liable to any tax in India as per India-France DTAA.
Issues Involved:
1. Whether ShanH is an entity with commercial substance or a mere nominee of MA/GIMD. 2. Whether the investment by MA and GIMD in SBL through ShanH was a tax avoidance scheme. 3. Whether the transaction is liable to tax in India under the DTAA and the Income Tax Act. 4. Impact of retrospective amendments to the Income Tax Act on the DTAA. 5. Validity of the AAR ruling and the Revenue orders. 6. Whether Sanofi is an "assessee in default" under Section 201 of the Income Tax Act. Issue-wise Analysis: 1. Substance and Ownership of ShanH: The court analyzed the origins, structure, and operations of ShanH, concluding that ShanH is a legitimate corporate entity with commercial substance, established initially as a wholly-owned subsidiary of MA and later evolved into a joint venture with GIMD. The court found that ShanH, not MA or GIMD, acquired and held shares in SBL since inception, and ShanH was not a sham or a mere nominee of MA/GIMD. 2. Tax Avoidance Scheme: The court examined whether the investment by MA and GIMD through ShanH in SBL was a colorable device for tax avoidance. It concluded that ShanH was not conceived for avoiding Indian tax liability and had a clear business purpose as an investment vehicle. The court noted that ShanH was not a pre-ordained scheme for tax avoidance, and its operations and transactions were commercially real and valid. 3. Tax Liability under DTAA and Income Tax Act: The court analyzed the transaction under the DTAA and the Income Tax Act, concluding that the transaction involved the alienation of ShanH shares, not SBL shares. The court held that the capital gains tax on the transaction is allocated to France under Article 14(5) of the DTAA, not India. The court rejected Revenue's interpretation that the transaction involved deemed disposal of SBL shares and that the tax should be allocated to India. 4. Impact of Retrospective Amendments: The court examined the impact of the retrospective amendments to the Income Tax Act on the DTAA. It concluded that the amendments do not affect the interpretation of the DTAA, as the DTAA provisions prevail over the domestic law in case of conflict. The court held that the terms "alienation" and "participation" in Article 14(5) of the DTAA do not accommodate a "see through" and should not be interpreted by reference to the retrospective amendments. 5. Validity of AAR Ruling and Revenue Orders: The court found that the AAR had no jurisdiction to review its earlier decision admitting the applications for advance ruling. The AAR's ruling that the transaction was taxable in India was based on a flawed interpretation of the facts, the DTAA, and the Income Tax Act. The court quashed the AAR ruling and the Revenue orders, including the order assessing Sanofi as an "assessee in default." 6. Sanofi as "Assessee in Default": The court held that Sanofi was not liable to deduct tax at source under Section 195 of the Income Tax Act, as the capital gains tax on the transaction was not chargeable in India. Consequently, the order assessing Sanofi as an "assessee in default," the notice of demand, and the rectification order were invalid and unsustainable. Summary of Conclusions: a) ShanH is an independent entity with commercial substance and not a nominee of MA/GIMD. b) ShanH acquired and holds SBL shares since inception. c) No warrant for lifting the corporate veil of ShanH. d) Capital gains tax on the transaction is allocated to France under the DTAA. e) Retrospective amendments to the Income Tax Act do not impact the DTAA. f) AAR ruling is unsustainable. g) Order assessing Sanofi as an "assessee in default" is unsustainable.
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