2013 (2) TMI 589 - ANDHRA PRADESH HIGH COURT

Taxability 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.