TMI Blog2011 (11) TMI 74X X X X Extracts X X X X X X X X Extracts X X X X ..... ing 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. - A.A.R. NO. 846 & 847 OF 2009 - - - Dated:- 28-11-2011 - SHRI P.K. BALASUBRAMANYAN, AND SHRI V.K. SHRIDHAR, JJ. Present for the applicant : Mr. Porus Kaka, Sr. Advocate Mr. Manish Kanth, Advocate Mr. B.M. Singh, Advocate Mr. Dominique Tazikawa Co.Rep. Mr. Rohan Shah, Advocate Mr. Rohit Jain, Advocate Mr. Parth Contractor, C.A. Mr. Kumar Visalaksh, Advocate Present for the Department : Mr. Girish Dave, Advocate Mr. Gangadhar Panda, Addl. DIT (Int. Taxation), Hyderabad RULING Justice P.K. Balasubramanyan, Chairman Murieux Alliance, hereinafter referred to as 'MA' is said to be a part of an International Health Care Group dedicated to prevention, diagnosis and treatment of infectious diseases. It is incorporated in France. It claims that after negotiati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mbered as Application No. 847 of 2009. 2. The approach by the two companies to this Authority was preceded by certain steps taken by the Revenue. On 4.8.2009, a survey under section 133A of the Act was conducted in the office premises of Shantha. This was on the basis of information that became available that Sanofi was proposing to acquire 80% of the stakes in Shantha from MA and GIMD through their subsidiary ShanH for a consideration of Rs. 2,500 crores pursuant to a share purchase agreement executed by the concerned parties on 10.7.2009. The assessing officer on 7.8.2009 informed Sanofi about its likely obligation under section 195 of the Act arising out of the share purchase agreement. The details were called for. Another notice was issued on 24.8.2009. By replies dated 27.8.2009 and 3.9.2009, Sanofi intimated the Income-tax department that the share purchase agreement had a closure with effect from 31.7.2009. This was followed by the notice to show cause under section 195 of the Act issued by the assessing officer to Sanofi. Sanofi was asked to show cause why it should not be treated as an assessee in default under section 201(1) of the Act in respect of payments made by it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the sale of which might or might not attract liability under the Indian Income-tax Act. MA and GIMD, therefore, claim that any attempt to tax in India the sale of shares of ShanH by them to Sanofi, was not sanctioned by the Income-tax Act and certainly not by the Double Taxation Avoidance Agreement (DTAA) between India and France. The essential contention of the Revenue, as we understand it, is that ShanH was only a front, a paper company, having no office and no employee. The Director of MA was also its director. What was involved in the alleged sale of shares of ShanH by MA and GIMD to Sanofi was the transfer of the assets of an Indian company and certainly the controlling interest in the Indian company, Shantha. In reality, the sale of shares in ShanH held by MA and GIMD to Sanofi, attracted capital gains tax in India and the transaction was liable to be taxed in India. This stand of the Revenue is met by MA and GIMD by pointing out that the tax authorities in India could not ignore the incorporation of the Company ShanH, the Tax Residency Certificate produced and the recognition of the transaction even by the Government of India and proceed to tax what it calls the underlying ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s on the merits, this case was posted for hearing on merits under section 245R(4) of the Act on the specified date." Not satisfied, the Revenue chose to challenge the order of this Authority in Writ Petition Nos. 18132 and 18133 of 2010 in the High Court of Andhra Pradesh. The original order challenged was the one allowing the application under section 245R(2) of the Act, without hearing the Revenue, since the Revenue had not appeared and later by amendment, the subsequent order on the application of the Revenue to re-consider the question, an order passed after hearing the Revenue. The Division Bench of the High Court considered the Writ Petitions. In the meanwhile, this Authority had listed the matter for final hearing to render the ruling under section 245R(4) of the Act. The hearing was spread over for days and was very elaborate. In view of the request made by the High Court of Andhra Pradesh to this Authority to withhold the ruling since they were entertaining the Writ Petitions against the orders under section 245R(2) of the Act and were to render a decision on the question whether the applications were rightly allowed under section 245R(2) of the Act or not, the ruling was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pending in High Courts for years and in the case of some High Courts, even in Letters Patent Appeals and then again in the Supreme Court. It appears to be appropriate to point out that considering the object of giving an advance ruling expeditiously, it would be consistent with the object sought to be achieved, if the Supreme Court were to entertain an application for Special Leave to appeal directly from a ruling of this Authority, preliminary or final, and render a decision thereon rather than leaving the parties to approach the High Courts for such a challenge. It is for the legislature to consider whether an appeal directly to the Supreme Court should not be provided against a ruling rendered by this Authority to ensure that the delay in procedure is minimised and the object of creating this Authority is achieved. 6. Persisting in its objection based on the proviso to section 245R(2) of the Act, in spite of the dismissal of the Writ Petitions by the High Court of Andhra Pradesh, but taking advantage of the observation of the Authority that the objection will be considered while giving a Ruling under section 245R(4) of the Act, the representative for the Revenue again reitera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comply with the requirement of Section 195 of the Act. Even earlier, this Authority had noticed that such a proceeding cannot stand in the way of an application being considered for a ruling under section 245R(4) of the Act. We do not find any reason to depart from that position adopted by this Authority earlier. If so, the pendency of the proceedings or the order passed under section 201 of the Act against Sanofi cannot stand in way of our proceeding to give a ruling. The main thrust of the argument in the earlier round on alleged violation of natural justice, stands concluded by the decision of the Andhra Pradesh High Court. Even otherwise it has lost its steam since all the facts are now before this Authority at the instance of the Revenue and we are in a position to render a satisfactory decision on the bar claimed to have been created by of the proviso to Section 245R(2) of the Act. Suffice it to say, we overrule the objection of the Revenue that 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. 10. Counsel for the applicants contended that having initiated proceedings against Sanofi on the purchase of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n was taxable in France and not in India in terms of the DTAA and that no avoidance of tax was involved. What this Authority is entrusted with, is a jurisdiction to rule in advance, whether a transaction is taxable in India, going by the Act or the overriding DTAA. Therefore, the question of avoidance of tax that has to be considered is the avoidance, if any, of the tax in India. Therefore, the argument on behalf of the applicants that tax on this transaction has to be paid in France where the companies involved were incorporated and of which they were tax residents and hence no avoidance of tax was involved, even if acceptable to the extent it goes, cannot stand in the way of this Authority considering whether designing of a scheme for avoidance of payment of tax in India has been resorted to. Hence, this aspect raised by the Revenue has to be considered. 13. On behalf of the Revenue, it was submitted that the prior transactions leading to the present transaction relied upon by the applicants were only transactions on paper and it was part of an elaborate scheme to avoid tax in India. The Revenue submits that ShanH was created merely for the purpose of dealing with the assets of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... treaty shopping. The tax had to be paid in France in terms of the DTAA and as a matter of fact, the tax payable would be more in France since treatment of long term capital gains in France was to the disadvantage of the applicants, where shares had to be held for two years before sale, for qualifying as long term capital gains whereas it was only one year in India. All the companies were within the tax jurisdiction of France and the transaction was taxable in France. By virtue of Article 13 of the India-France treaty, the power to tax rested with France and not with India. The applicants were only claiming the benefit of a Treaty, and were not attempting to avoid tax. The argument that what was really being transferred, were the assets of Shantha, the Indian company, had no substance. The shares of Shantha were not being dealt with, though the consequence of the buying of shares of ShanH by Sanofi might be to give control of the affairs of Shantha to Sanofi. But then, it was a legal and legitimate business route taken by the applicants and the transaction did not attract taxability as capital gains in India. 15. Counsel for the applicant submitted that in the light of the decisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re seen to have left it to the other learned judge, Chinnappa Reddy, J. to deal with this aspect. The four learned judges referred to some of the earlier decisions on the subject and did observe: "The planning may be legitimate provided it is within the frame work of law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by resorting to dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges." But, they did not stop there. They proceeded to say: "On this aspect, one of us, Chinnappa Reddy, J. has proposed a separate and detailed opinion with which we agree" [Emphasis Supplied]. 18. With respect, Azadi Bachao Andolan seems to proceed on the basis that the views expressed by Chinnappa Reddy, J. are his own and do not represent the view of the Court as a whole. This, with respect, does not appear to be correct. An analysis of the Ramasay principle as discussed and adopted in later decisions of the House of Lords show that much water had flowed under the bridge since IRC v. Duke of Westminister was rendered. In IRC v. B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an Indian company. Ultimately it acquires a controlling interest. For this purpose, it creates a fully owned subsidiary. The shares are taken in the name of the subsidiary. Subsequently, another company also comes in and acquires a part of the shares (20%) in the subsidiary. The only asset of the subsidiary is the shares in the Indian company. It has no other business. Now the two shareholders of the subsidiary are selling the shares of the subsidiary to another company. By that process, what really passes is the underlying assets and the control of the Indian company. A gain is generated by this transaction. By repeating the process, the control over the Indian assets and business can pass from hand to hand without incurring any liability to tax in India, if the transaction is accepted at face value. 20. This type of attempt is what is frowned upon by the McDowell decision. This is the line of reasoning adopted by the English Courts in Ramasay and the subsequent decisions. The payment of tax on capital gains over the shares of Shantha can be perpetually avoided by dealing with the shares of ShanH earlier with MA and GIMD, but now with Sanofi, but passing effective control over ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eptable in the context of the taxing statute. When we ask ourselves that question in this case, we get the answer that by accepting it in the context of the taxing statute we would be opening the door for the passing of the assets and control of an Indian company repeatedly without the shares of the Indian company being touched, though in reality it is only by acquiring shares of the Indian company, that control over it and its assets can otherwise be acquired. When dealing with such a question we cannot ignore the aspects of underlying assets and control over the affairs of the company, passing from one hand to another. 24. When can an usually adopted business scheme be treated as an attempt at avoidance of tax liable to be not accepted by the tax regime? It appears to us that it will depend on the effect of the scheme as a whole on the liability of the entity to be taxed. In this case, a permissible commercial scheme has been adopted to acquire the shares, the underlying assets and control of an Indian company. But thereafter, in the guise of dealing with the shares of a subsidiary formed for such acquisition, the underlying assets, business and control of an Indian company is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... conclude a convention for avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on Income and capital". [Emphasis supplied]. Have agreed to its terms: To test whether a scheme adopted is with the object of avoidance of tax which would have been otherwise payable an enquiry in that behalf is contemplated by the very tax convention relied on by the applicant. This is in addition to the power available to this Tribunal under the proviso to Section 245R(2) of the Act and the law settled by courts in decisions like the one in McDowell. Therefore, when a plea of attempt at tax avoidance is raised by the Revenue in a proceeding before this Authority for a Ruling on the question of liability to tax of an applicant in respect of a transaction, an enquiry in that behalf cannot be avoided. This can be done even while we consider the application under section 245R(4) of the Act, when all the facts relevant, are available before us or ought to be made available to us. 28. It is the case of the applicant that the transaction in question is governed by Article 14 of the DTAA. Under Article 14.5 gains from alienation of shares representing a participation of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ised in these applications is whether the capital gains arising to the applicants from the sale of their shares in ShanH to Sanofi, another company incorporated in France is taxable in France alone or in India. Looked at blandly, the transaction in the manner put through, is taxable in France. We have earlier concluded that the fact that the transactions are commercially real and taken step by step valid, does not preclude us from considering the scheme or the scope of the transaction as a whole from the point of view of taxation and so looked at, it is a scheme for avoidance of tax in India. We have held that what is involved is a preordained scheme for avoidance of tax and it cannot be given effect to in the context of the taxing statute. In substance, what is dealt with are the underlying assets and the controlling interest in Shantha, a consequence that would naturally spring out of the sale of shares of Shantha itself. The transfer of shares of ShanH may have commercial and business efficacy or validity. But that does not prevent us from looking at the transaction in the context of the Income-tax Act and/or the DTAA between the countries and assessing its efficacy from the poi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n an Indian company would be taxable in India as per paragraph 5 of Article 14 of the Convention. Participation in a company, according to the Revenue would mean, the right to vote, the right to nominate Directors, control and management, day to day decision making and right to get distribution of profits. It is submitted that all these rights in respect of the Indian company, Shantha are with MA or with MA and GIMD, the applicants and hence the transfer now being effected is taxable in India in terms of paragraph 5 of Article 14. 36. It is true that a Double Taxation Avoidance Convention has to be construed on its terms. On a literal construction paragraph 5 would lead to the position that the transfer of shares of ShanH in this case, can be taxed only in France. But the contention of the Revenue is that the situs of the underlying assets cannot be ignored and the underlying assets and controlling interest are that of a company incorporated in India and a resident of India. We have found that what is involved in this transaction, is an alienation of the assets and controlling interest of an Indian company. It will logically follow from our finding that the transactions gone thro ..... X X X X Extracts X X X X X X X X Extracts X X X X
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