Sanofi Pasteur Holding SA vs. Dept of Revenue (Andhra Pradesh High Court)

Gains arising on sale of shares of foreign company by NR to NR not taxable in India under India-France DTAA even if the foreign co only held Indian assets

Two French companies named “Murieux Alliance” (‘MA’) and “Groupe Industrial Marcel Dassault” (“GIMD”) held shares in another French company named “ShanH”. MA & GIMD acquired shares in an Indian company named “Shantha Biotechnics Ltd” (“Shantha”). The shares in Shantha were transferred to ShanH. MA and GIMD subsequently sold the shares in ShanH to another French company named “Sanofi Pasteur Holding”. The assessees filed an application for advance ruling claiming that as the two French companies had sold the shares of another French company to a third French company, the gains were not chargeable to tax in India. The department opposed the application on the ground that ShanH was formed with no purpose other than to hold the shares of the Indian company and that the transaction was taxable in India. The AAR upheld the department’s plea on the ground that the French company’s (ShanH) only asset were the shares in the Indian company & so when its shares were sold, what really passes were the underlying assets and the control of the Indian company and so the French company was a facade and a scheme for avoidance of tax. On appeal by the assessee to the High Court, HELD reversing the AAR:

(i) ShanH was incorporated as part of the policy that all off-shore investments must be made through a subsidiary incorporated in France. It is not the case of the Revenue that in 2006 itself ShanH was conceived as a preordained scheme to avoid tax in India. The Revenue’s case about when ShanH became a tax avoidance scheme is ambivalent and incoherent. ShanH is an entity of commercial substance and business purpose. Though a subsidiary of MA/GIMD, it is not a mere nominee or alter ego of MA/GIMD and there is nothing to show that they exercised overriding control over it. The creation of subsidiaries for investment is a legitimate practice. ShanH is accordingly the true and beneficial owner of the Indian company’s shares. When the shares of ShanH were sold, it was the sale of shares of a French company and it cannot be said that the control, management or underlying assets of the Indian company were sold so as to attract tax on capital gains in India (Azadi Bachao Andolan 263 ITR 706 (SC) & Vodafone International 341 ITR 1 (SC) followed);

(ii) Article 14(5) of the India-France DTAA which exempts capital gains from shares representing more than 10% holding from tax in India does not permit a see through on whether the alienation of shares by ShanH is an alienation of the control, management or assets of the Indian company. It cannot be said that an actual alienation of the ShanH shares amounts to a deemed alienation of the Indian company’s shares. The fact that the value of the shares of ShanH was because of the value of the Indian company’s assets is irrelevant;

(iii) The retrospective amendment to s. 9(1) so as to supersede the verdict in Vodafone International and to tax off-shore transfers does not impact the provisions of the India-France DTAA because the DTAA overrides the Act;

(iv) The Revenue’s argument that as the term “alienation” is not defined in the DTAA, it should have the meaning of the term “transfer” in s. 2(47) as retrospectively amended is not acceptable because as per Article 31 of the Vienna Convention, a treaty has to be interpreted as per good faith and in accordance with the ordinary meaning. Though Article 3(2) provides that a term not defined in the treaty may be given the meaning in the Act, this is not applicable because the term “alienation” is not defined in the Act. In some DTAA’s, the term “alienation” is defined to include the term “transfer” but not in the India-France DTAA;

(v) Even assuming that the controlling rights or assets in India held by the Indian company were transferred on the alienation of the French company’s shares, the cost of acquiring those rights and assets in the Indian company and their date of acquisition cannot be determined. It is also not possible to determine the exact or rationally approximate consideration (out of the total consideration for the transaction in issue), apportionable to these assets/rights. As the computation provisions fail, the charging provisions also fail (BC Srinivasa Shetty 128 ITR 294 (SC), PNB Finance 307 ITR 175 (SC) & Dana Corporation 32 DTR 1 (AAR) followed);

(v) The AAR has no power to review its own order. Having admitted the application, the AAR cannot at a later stage invoke clause (iii) of the Proviso to s. 245R(2)(iii) & decline to rule on the application;