9911796707
TMI Blog2013 (2) TMI 589X X X X Extracts X X X X X X X X Extracts X X X X ..... ibed and referred to as the Double Taxation Avoidance Agreement - the DTAA), also enters into the equation. Synergies between DTAA provisions and those of the Act; and how these inform the core issue - as to the liability to tax; and direct the allocation of the tax chargeable on the transaction in issue, to one or the other contracting State (India or France), is the quintessential problematic that falls for our consideration. In the context, we are of the considered view that a prefatory overview, of the origins and evolution of tax treaties and how these conflate, co-operate with domestic tax legislation and converge to signal a unified raft of applicable norms, is appropriate. Tax treaties and domestic tax legislation : norms of co-existence : International juridical double-taxation could generically be defined as imposition of comparable taxes in two or more States on the same tax-bearer in respect of the same subject matter and for identical periods. In recognition of the pejorative effect on exchange of goods and services and movement of capital, technology and persons, agreements/treaties/conventions/ protocols evolved for removing obstacles that double-taxation presents ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the commentary. The OECD complete model treaty and the commentaries thereon were revised from time to time. This process continues. Double tax treaties are international agreements, their creation and consequences determined according to the rules contained in the Vienna Convention on the Law of Treaties, 1969 (VCLT). The conclusion of a treaty/convention is preceded by negotiations. States intending to conclude a treaty are represented by the appropriate level of executive, political or diplomatic expertise according to individual practices and judgment of the participant States. There are several steps in the negotiations phase eventually leading to conclusion of the treaty. Treaties or conventions are thus instruments signaling sovereign political choices negotiated between States. The efficacy of a treaty over domestic law turns upon either State - specific conventions operating to govern the sovereign practices, or where there is a written Constitution provisions of that Charter. See Introduction[[1] Klaus Vogel on Double Taxation Conventions (2005 - Kluwer Law International)Introduction] Double-taxation treaty rules do not "authorize" or "allocate" jurisdiction to tax to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by Articles 245 and 246(3) are eclipsed and the total field of legislation is open to the Parliament, enabling Parliament to invade fields of legislation enumerated in List II as well, insofar as may be necessary for the purpose of implementing the treaty, etc., obligations of India - Maganbhai Ishwarbhai Patel v. Union of India[(1970) 3 SCC 400]; HM Seerva[Constitution Law of India - IV Edn. Vol.1, Pgs.305-306]. Our Courts have held that regard must be had to international conventions and norms while interpreting domestic law provisions, when there is no inconsistency between them and there is a void in the domestic law; that Courts are under an obligation, within legitimate limits to so interpret municipal law as to avoid confrontation with the comity of Nations or well-established principles of international law and where municipal law is not in variance with the international treaty - Visakha v. State of Rajasthan[1997 6 SCC 241]; Gramophone India Co. v. Birendra Bahadur Panday[1984 2 SCC 534]; andRD Upadhyay v. State of Andhra Pradesh[(2007) 15 SCC 337]. However, this is not to say that a treaty must be given effect to without a law or in the absence of municipal law. Thus a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the order dated 25-05-2010 of the 3rd respondent. The 3rd respondent (comprehended within the generic expression "the Revenue") determined the petitioner to be an "assessee in default" in respect of payments made by it to MA and GIMD for acquisition of the majority control/stake in SBL through transfer of ShanH shares, under Section 201(1) of the Act; determined the long-term capital gain at Rs. 2625,73,98,171/-; and the consequent tax liability at Rs. 594,99,26,425/-. The order also determined liability to interest, on the default of tax deduction at source at Rs. 53,54,93,378/-, under Section 201(1A). A consequent notice of demand (also dated 25-05-2010), under Section 156 was served on the petitioner. After issuing notice to the petitioner and receipt of its responses, a rectification order under Section 154 of the Act was passed on 15-11-2011 re-computing the long-term capital gain, tax thereon and the consequent interest. The total demand is now asserted at Rs. 1058,06,83,952/-. The substantive order dated 25-05-2010; the notice of demand of even date and the rectification order dated 15-11-2011, are challenged herein. 3. W.P.Nos.3339 and 3358 of 2012 :- GIMD and MA are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia Sportswear (holding that the decision of AAR could be challenged under Articles 226 and/or 227), observations in the Constitution Bench decision in H.V. Kamath v. Ahmad Ishaque and others[AIR 1955 SC 223](to the effect that while in certiorari the High Court could only annul the erroneous decision of an inferior Tribunal, it could while exercising (supervisory) jurisdiction under Article 227 also issue further directions in the matter; and in the light of the conjoint plea by the respective parties (adverted to supra), in the event we hold that the impugned ruling of the AAR is erroneous to a degree susceptible to judicial and/or supervisory review under Articles 226/227 and is on such review unsustainable, we would quash the impugned ruling exercising certiorari and, if need be, issue appropriate declarations/directions, particularly since expeditious disposition is the uncontested legislative purpose underlying the provision of an Advance Ruling Authority, in Chapter XIX - B of the Act. 4. A brief account of SBL, MA, GIMD and Sanofi :- SBL : a company incorporated under the Companies Act, 1956 on 10-03-1993, having its registered office at Hyderabad,India. SBL is inter alia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g; and (d) Prophylactic vaccines in emerging countries operated through ShanH (a French resident entity), now a joint venture wherein MA has 80% shareholding. GIMD:a separate business conglomerate registered in France engaged in various businesses such as Defense Systems,Avionics and the like. Even earlier to association with MA in ShanH, GIMD was an investor along with MA in ABL,USA and Transgene, France. GIMD invested in 20% shareholding of ShanH while MA held the other 80%. 5. Preview of evolution of ShanH : : During August/September, 2006, MA was negotiating with GIMD, inviting the latter for a strategic association for investment in SBL through a holding structure (emails dated 10-08-2006, 18-08-2006, 08-09-2006 and 23-11-2006 - between MA and GIMD representatives and law advisor of GIMD). Pursuant to the 26-10-2006 meeting of the MA Board, resolving to allow ShanH (a contemplated MA subsidiary) to acquire 54% share of SBL, ShanH was incorporated on 31- 10-2006 and registered in the home jurisdiction (theFrench Republic), with MA as the sole and unique shareholder holding a nominal share capital of 370 shares, of a value of EUR37,000/-. 31.10.2006 - meeting of ShanH share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by 1,00,000 shares (to 7,00,000) contributed by MA and GIMD in the 80:20 ratio. ShanH (now a joint-venture (JV) of MA and GIMD) acquired 20,000 shares of UOIL; 17,500 shares from Indian resident shareholders and 4,23,600 shares from non- resident shareholders of SBL in 2007; and a further 1,90,640 shares from UOIL, 10,78,920 shares from Indian resident shareholders and 14,57,150 shares from non- resident shareholders of SBL, in 2008. During March, 2008, a capital increase in SBL by 4,49,830 shares were subscribed directly by ShanH, which remitted US $5,000,000 to SBL towards advance and share application money (vide certificate of foreign inward remittance, dated 08-03-2008 issued by IOB, Chennai). 05.05.2009 - shareholders agreement executed pursuant to which Mr. Georges Hibon purchased 10,400 shares from MA and 2,600 shares from GIMD. After this transaction, of the 700,000 shares of ShanH, 78.5% held by MA; 19.6% by GIMD and 1.9% by Mr. Georges Hibon. July and August, 2009 - ShanH purchased a further 5,57,500 shares from UOIL and 2,00,000 shares from Indian Resident shareholders of SBL. For 2006-07, 2007-08 and 2008-09, SBL remitted dividends to ShanH account in Calyon Bank ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ining to the transfer of the MA and GIMD shares to Sanofi; (b) originals of the share transfer register and shareholder accounts of ShanH and the SBL share certificates held by ShanH, at the closing date; and (c) other specified documents in original or certified copies to effectuate transfer of the entire ShanH shareholding to Sanofi qua existing entitlements, rights or interests of MA, GIMD or Mr.Georges Hibon under the Articles of Association of ShanH or the SHA's, dated 08-03-2007 (between MA and GIMD) and dated 05-05-2009 between GIMD and Mr.Georges Hibon. Article II of the SPA sets out joint warranties by MA/GIMD to Sanofi - that MA, GIMD and ShanH are corporations duly organized and validly existing under the laws of France and inhere the requisite corporate power and authority to own respectively the shares of ShanH; and that ShanH is duly qualified to conduct business under laws of the jurisdiction of incorporation (France). Article VIII (S.8.1) incorporates the assurance that the sellers and the buyer shall use their best efforts towards completion of sale of Shantha West (an SBL subsidiary). It is however represented (at the hearing before this Court) that the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 09 : MA and GIMD filed separate applications before the Authority for Advance Rulings (AAR), u/S.245Q(1) of the Act for an advance ruling on two questions, viz.:- Question (1): In terms of the provisions of the double taxation avoidance treaty dated 6th September, 1994, as amended from time to time, entered between the Republic of India with the Government of French Republic ("Indo-French Tax Treaty") read with Section 9o of the income Tax Act, 1961, 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. Question (2): Without prejudice to above, 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? GIMD raised only the first question and sought a ruling thereon. 17.12.2009 : AAR admitted applications by MA and GIMD seeking advance ruling , ruling that the applications are not hit by proviso to Section 245(R)(2) of the Act; and directed issue of notice to the parties, for hearing. Revenue's challe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tter to MA addressed by the Deputy Director of Income Tax (International Taxation)-I, Hyderabadin respect of proposed sale of its shares to Sanofi, details sought. 26-8-2009: MA responded stating that : (a) the proposed transaction - the transfer of shares to Sanofi would not involve any transfer of shares of SBL, which will remain under the control of its current majority shareholder i.e., ShanH; (b) the deal with Sanofi is not concluded and is under discussion; (c) details of acquisition of SBL shares by ShanH are not relevant; (d) provisions of the Act are inapplicable; (e) MA holds no shares in SBL nor had received any dividends from SBL; and (f) MA is not directly involved in the control and management of SBL. 17-09-2009: the Deputy Director of Income Tax (International Taxation) - II, Hyderabad issued notice to Sanofi contending that: (a) Sanofi had paid consideration to MA for purchase of shares in Shan H, which owned a majority stake in SBL; (b) MA made a substantial gain on disposal of their investment and controlling rights in SBL, an Indian Company; (c) such gain is a direct result of realization of "investment" of MA in India by its sale to Sanofi; (d) the same is cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... time to Sanofi to secure other statements recorded u/S.131. By letter dated 08.04.2010 Sanofi (after collecting statements of other persons recorded u/S.131, i.e., N. Rajasekhar and VR), sought time to make submissions and to furnish written submission by 15.04.2010 and for a personal hearing from the Revenue. 05.05.2010: Revenue intimated Sanofi of scheduling the hearing to 10.05.2010. On 10.05.2010 Sanofi sought time and requested re-scheduling the hearing to 21.05.2010 or later. 21.05.2010: Hearing of Sanofi's liability to tax. There is a dispute between Sanofi and Revenue with regard to whether adequate and reasonable opportunity was provided to Sanofi. During hearing of Sanofi's writ petition (W.P.No.14212 of 2010) counsel referred to averments in the writ petition to assert that on 21.05.2010 Sanofi's counsel sought leave to make further submissions on 22.05.2010 and 23.05.2010 (Saturday and Sunday); that this request was not considered by the Revenue; that Sanofi's counsel was directed to conclude arguments within an hour on 21.05.2010; and having no alternative Sanofi filed a letter dated 25.05.2010 in the Office of the Presiding Officer on26.05.2010 setting out circums ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er it is acceptable in the context of the taxing statute; (d) The transaction of transfer of shares of Shan H would amount to transfer of assets of SBL, an Indian Company, if not of its shares formally; and this is a scheme for avoidance of tax in India; (e) While the decision in Azadi Bachao Andalan is binding on this authority it may not be the final word when the authority is approached for an advance ruling. Azadi Bachao Andalan incorrectly proceeds on the basis that the views expressed by Chinappa Reddy, J (in McDowell and Co. Ltd.) are his own and do not represent the view of the Court as a whole. The view that has emerged in England is that notwithstanding the legal validity of a transaction or a set of transactions, if the purpose was to create a legal smoke-screen to avoid the payment of tax that would legitimately be due as having arisen on the basis of a transaction or an event, the legal efficacy of the transaction in the context of the taxing statute, has to be considered, notwithstanding its reality or validity. (emphasis is added) (f) After observing that Azadi Bachao Andolan incorrectly appreciated the ratio of McDowell, AAR concluded that there was a reversal o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned Additional Solicitor General for India (ASG) for the Revenue /respondents. We have considered the legal and factual submissions presented and the pleadings and documents filed in the respective writ petitions. 11. Learned counsel for the respective parties advanced extensive arguments; referred to several instruments andprecedents to support the respective contentions. We will deal with the several propositions, contentions and citations during our analyses to follow. 12. Sri Porus Kaka summarized the legal submissions on behalf of MA (W.P.No.3358 of 2012) into the following propositions (summary of oral argument and written submissions) : Propositions on behalf of MA : (i) Qua Section 90 of the Act read with relevant provisions of the DTAA, the capital gains in the transaction in question is taxable only in France; (ii) Only Article 14(4) of the DTAA accommodates/permits a limited "see through", not Article 14(5); (iii) Neither in law nor qua Article 14 of the DTAA could an asset held by a company be treated as an asset held by a shareholder; (iv) Controlling interest is not a separate asset, independent of the shares; (v) Assuming while denying that the controlling ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt and business interests in SBL, the Indian company. The transaction was not merely a divestment of ShanH shares (a French company) butresulted in transfer of capital assets in India wherefor capital gains had arisen to MA/GIMD in India. (b) In the facts and circumstances of the transaction, provisions of the Act apply to the transaction in terms of DTAA provisions and the right to tax the transaction stands allocated to India, under Article 14(5) thereof. On this view of the matter there is no conflict between provisions of the Act [pursuant to the retrospective amendments vide the Finance Act, 2012 (Act No.23 of 2012)] and provisions of the DTAA. Determinations necessitated in the light of the above contentions by Revenue : 1. Who is the real owner of SBL shares? (a) Had ShanH a distinct corporate status, so as to be the legal/beneficial owner of SBL shares? (b) What was the extent and degree of control of MA/GIMD over ShanH, in the context of the SPA, SHA's and other transactional documents? (c) Did SBL shares vest with ShanH as the legal owner thereof from the inception of the transfer of shares (in2006); and was there ever an assignment by MA/GIMD (of SBL shares) in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... management and such participation was more than 10%. On conclusion of the transaction contemplated by the 10-07-2009 SPA, MA/GIMD realized the gain on alienation of shares representing participation of more than 10% in the capital, control and management of SBL (an Indian company). The gains are thus chargeable to tax in India, in terms of Article 14(5) of DTAA. Double Taxation Avoidance Agreements allocate taxing rights to the country of residence or of source; or to both. Once the source country gets the right of taxation, domestic law provisions operate to bring to tax, reference income in the source country. Since the source country derives the right to tax the gains arising from alienation of shares of a company located within its territory, it is immaterial whether such gains are realized by "disposal of asset" or "deemed disposal of asset". DTAA provisions would apply in both cases and the source country inheres the right to tax such gains. For a proper and purposeful construction of DTAA provisions, the expression "alienation of shares" in Article 14(5) must be understood as direct as well as indirect alienation. The expression "alienation" is not defined in the DTAA. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... venue) challenged in the writ petitions, the following issues arise for consideration: ISSUES : (1) Is ShanH not an entity with commercial substance; is a sham or illusory contrivance, a mere nominee of MA and/or MA/GIMD being the real, legal and beneficial owner(s) of SBL shares; and a device incorporated and pursued only for the purpose of avoiding capital gains liability under the Act ? (2) Was the investment, initially by MA and thereafter by MA and GIMD through ShanH in SBL, a colourable device designed for tax avoidance? If so, whether the corporate veil of ShanH must be lifted and the transaction (of the sale of the entirety of ShanH shares by MA/GIMD to Sanofi) treated as a sale of SBL shares? (3) Is the transaction (on a holistic and proper interpretation of relevant provisions of the Act and the DTAA), liable to tax in India? (4) Whether retrospective amendments to provisions of the Act (by the Finance Act, 2012) alter the trajectory or impact provisions of the DTAA and/or otherwise render the transaction liable to tax under the provisions of the Act? (5) Whether the AAR ruling dated 28-11-2011 is sustainable? If not, what is the appropriate relief that could be gra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmercial Tax Officer[(1985)3 SCC 230]; Workmen Employed in Associated Rubber Industry Ltd, Bhavnagar vs Associated Rubber Industry Ltd., Bhavnagar and Another[(1985)4 SCC 114]; State of U.P. and Others vs Renusagar Power Co. and Others[(1998)4 SCC 59]; New Horizons Limited and Another vs Union of India and Others[(1995)1 SCC 478]; Ebrahimi vs Westbourne Galleries Ltd and Others[(1972)2 All.E.R 492]; DHN Food Distributors Ltd and Others vs London Borough of Tower Hamlets[(1976)3 All.E.R 462]; Radha Sundar Dutta vs Mohd. Jahadur Rahim[AIR 1959 SC 24]; Puzhakkal Kuttappu vs C. Bhargavi and Others[(1977)1 SCC 17]; Ford against Beech[(1848)11 Q.B 852]; Inntrepreneur Pub Co Ltd vs East Crown Ltd[(2000)2 Lloyd's Rep. 611]; Investors Compensation Scheme Ltd vs West Bromwich Building Society[(1998)1 All E.R 98]; Hideo Yoshimoto v Canterbury Golf International Limited[2000NZCA350]; Aditya Birla Nuvo Limited [Formerly known as Indian Rayon & Industries Limited] vs The Deputy Director of Income Tax, [International Taxation], Mumbai and Ors.[ (2011)113(4)Bom.L.R.2706] and Provident Investment Co. Ltd. v. CIT, Bombay City[(1953)24 ITR 33 (Bom)] When is it legitimate to lift the veil? What prece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essment under the State Sales Tax Act. Notwithstanding the definition of "excise duty" in the State Excise Act, a practice was contrived whereby wholesale buyers used to remit the excise duty (payable by the manufacturer-McDowell) at the time of lifting of stocks of liquor from the manufacturer. This component was not reflected in McDowell's books of account. Rejecting McDowell's appeal and upholding the determination by Sales Tax Authorities that the excise duty component should be included in the appellant's turnover, Misra, J observed : 45. Tax planning may be legitimate provided it is within the framework 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. and at para - 46 stated :- 46. On this aspect one of us, Chinnappa Reddy, J., has proposed a separate and detailed opinion with which we agree. Chinnappa Reddy, J., in the concurring opinion traced the history and evolution of the judicially crafted distinction between "tax avoidance" a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... islation and it is a pretence to say that avoidance of taxation is not unethical and that it stands on no less moral plane than honest payment of taxation. In our view, the proper way to construe a taxing statute, while considering a device to avoid tax, is not to ask whether the provisions should be construed literally or liberally, nor whether the transaction is not unreal and not prohibited by the statute, but whether the transaction is a device to avoid tax, and whether the transaction is such that the judicial process may accord its approval to it. A hint of this approach is to be found in the judgment of Desai, J. in Wood Polymer Ltd. and Bengal Hotels Limited, In re where the learned Judge refused to accord sanction to the amalgamation of companies as it would lead to avoidance of tax. (emphasis added) Whether the opinion of Chinnappa Reddy constituted the operative principle by the Constitution Bench was considered in later decisions, analyzed infra. In Associated Rubber Industry Ltd., the Court lifted the corporate veil of the respondent-Company. In the context of its observations and conclusions, that the obvious purpose of creating a subsidiary company (by the responde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 (f) of the (U.K.) Companies Act, 1948, on just and equitable grounds. On analyses of the relevant facts, House of Lords found that removal of the appellant as a Director of the respondent-company, on the strength of an ordinary resolution passed by the other two shareholders who held a majority of the stock, constituted inequitable conduct on the part of these shareholders (father and son), employing their legal rights to the prejudice of the appellant. In DHN Food Distributors Ltd. the Court (of Appeal) allowed the appeal and held that the appellant was entitled to compensation for disturbance under Section 5 of the (UK) Land Compensation Act, 1961. Under the Act, compensation is to be made for the value of the land and for disturbance of the business as well. Factually however, the firm (DHN) and its property were not under single ownership. It was owned by three companies. The business was owned by the appellant and parent company - DHN; the land at the time of acquisition was owned by a subsidiary - Bronze Investors Ltd.,(Bronze) and the vehicles by another subsidiary - DHN Food Transport Ltd., (Transport). DHN held all the shares, in both subsidiary companies - "Bronze" and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s are kept open, to be determined in the assessment proceedings; and (vii) The prima facie observations (in Aditya Birla) were made in the context of a writ in the nature of prohibition presented to challenge initiation of proceedings u/S.148 of the Act. It also requires to be noticed that several contentions urged on behalf of Aditya Birla (though not on the specific facts that were before the Bombay High Court) were noticed and observations made thereon, in Vodafone. The following observations in Vodafone are significant: Mr. Aspi Chinoy, learned senior counsel contended that in the absence of LOB clause in the India Mauritius Treaty, the scope of the treaty would be positive from Mauritius special purpose vehicles (SPVs) created specifically to route investments into India, meets with our approval. We acknowledge that on a subsequent sale/transfer/disinvestment of shares by the Mauritian company, after a reasonable time, the sale proceeds would be received by the Mauritius company as the registered holder/owner of such shares, such benefits could be sent back to the foreign principal/100 per cent shareholder of Mauritius company either by way of a declaration of special divid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inst the suggestion that in revenue cases the substance of the matter may be regarded as distinguished from the strict legal position. Privy Council ruled that if the strict legal position were clear, the Court is not permitted to look at the substance of the matter and ignore the true legal position. For this principle, reliance was placed by the Privy Council on Duke of Westminster. Bombay High Court answered the reference in favour of the assessee and ruled that the transaction in question was not liable to the charge on capital gains u/S.12(B) of the Indian Income Tax Act, 1922. Petitioners' version : Petitioners contended that precedents cited by the Revenue are inapplicable and inappropriate to the facts and circumstances of the case. ShanH is a Joint Venture (JV) and genuineness of JV's has never been disputed in any jurisdiction, either in India or France. No jurisdiction ignores joint ventures because of the ultimate control exercised by the parent(s). None of the decisions cited by the Revenue deal with transactions involving implication of a tax treaty. Lifting the corporate veil is impermissible under Article 14(5) of the DTAA as it does not accommodate a "see through ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndividual members; its property is not the property of the shareholders who have merely an interest in the company arising under the Articles of Association, measured by a sum of money for the purpose of liability and by sharing the profit; and that where companies are incorporated for a lawful purpose their properties are owned by them and there is no reason for even taxation purposes that their property should be treated as belonging to the shareholders. The Madras High Court built on these underlying principles in Venkatesh (Minor) for rejecting the assessees' creative contention that a part of the value received on sale of shares, constituting a controlling interest in a company was for transfer of the controlling interest, and that component of the value received did not amount to a capital gain. The Court held that on a sale of shares the fact that the vendor has a controlling interest and is in a position to place the vendee in control of the company (by transfer of his shares or such part as would enable the vendee to exercise control over the company with the aid of transferred shares) would only enhance the value of the shares transferred. The price paid by the vendee fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the following observations of Chitty, J in Wala Wynaad Indian Gold Mining Co., In re[(1882)21 Ch D 849] : 'I use now myself the term which is common in the courts, "a shareholder", that means the holder of the shares. It is the common term used, and only means the person who holds the shares by having his name on the register.' Clariant also referred to the decision in Balkrishan Gupta vs. Swadeshi Polytex Ltd.[ (1985)2 SCC 167]. In Balkrishan Gupta, the Court on analyses of relevant provisions of the Companies Act, 1956 ruled that subscribers of the Memorandum of Association of a company shall be deemed to have agreed to become members of the company and on its registration shall be entered as members in its register of members; a subscriber of the memorandum is liable as the holder of the shares which he has undertaken to subscribe for; any other person who agrees to become a member of a company and whose name is entered in its register of members shall be a member of the company; that in his case the two conditions, viz., (that there is an agreement to become a member and that his name is entered in the register of members of a company) are cumulative; and both conditions mus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ading to the decision Azadi Bachao Andolan require to be noticed. Governments of India and of Mauritius entered into an agreement on 01.04.1983 for avoidance of double taxation and prevention of fiscal evasion with respect to taxes on income and capital gains and for encouragement of mutual trade and investment (the Indo-Mauritius agreement - IMA). IMA was brought into force by a notification dated 06/12/1983 issued under Sec. 90 of the Act. CBDT by a circular dated 30/03/1994 (exercising powers u/Sec. 90 of the Act) clarified that capital gains of any resident of Mauritius by alienation of shares of Indian companies shall be taxable only in Mauritius according to Mauritius Taxation laws and will not be liable to tax in India. On the basis of this clarification a large number of Foreign Institutional Investors (FIIs) invested large amounts of capital in the shares of Indian companies, expecting immunity to capital gains tax under the Act on the profits made in the sale of shares of Indian companies. Around the year 2000 Income Tax Authorities issued notices to some FIIs proposing imposition of tax on profits and on dividends accrued to them in India. The basis for the show cause ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es to which the convention applies. Art.14 of the DTAA broadly corresponds to Art.13 of the IMA. Paras 1 and 2 of Art.14 of DTAA correspond to Paras 1 and 2 of Art.13 of the IMA; Para 3 of Arts.14 and of 13 (of DTAA and IMA, respectively) are substantially similar; and Art.14(6) of DTAA corresponds to Art.13(4) of the IMA. Rationes and conclusions in Azadi Bachao Andolan : When a double-taxation avoidance treaty, convention or agreement (for short, "Treaty") becomes operational and is notified by the Central Government for implementation of its terms u/S.90 of the Act, provisions of the Treaty, with respect to cases to which they would apply, would operate even if inconsistent with provisions of the Act. As a consequence, if a tax liability is imposed by the Act, the Treaty may be referred to for negativing or reducing it. In case of conflict between provisions of the Act and of the Treaty, provisions of the Treaty would prevail and are liable to be enforced - CIT v. Visakhapatnam Port Trust[(1983)144ITR 146]; CIT v. Davy Ashmore India Ltd.[ (1991)190ITR 626]; CIT v. R.M. Muthaiah[(1993)202ITR 508]; andArabian Express Lanes Ltd. of UK v. Union of India[(1995)212ITR 31], approved. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h each side seeking concessions from the other, the final agreement will often represent a number of compromises, and it may be uncertain as to whether a full and sufficient quid pro quo is obtained by both sides - observations in Francis Bennion : Statutory Interpretation and David R. Davis : Principles of International Double Taxation Relief, referred to. There are many principles in fiscal economy, including Treaty shopping, which at first blush might appear to be evil, or tolerated in developing economies in the interest of long-term development. Terms of a Treaty are essentially policy trade-offs negotiated at the diplomatic level between sovereign Nations. When the Treaty becomes operative however, it is not the function or domain of tax administrators or courts to consider the fairness or equity of the policy; and the terms of a Treaty must be given full faith and credit. The majority judgment in McDowell has not endorsed the concurring view of Chinnappa Reddy, J. The "extreme view" of Chinnappa Reddy, J militates against the observations in the majority represented by the leading judgment of Ranganath Misra, J. Chinnappa Reddy, J's observation in McDowell that the princip ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on sale was not genuine. Supreme Court rejected Revenue's contention observing that the assessee had made use of the provisions of the Act and such use cannot be termed "abuse of law". Even assuming that the transaction was pre-planned there was nothing to impeach the genuineness of the transaction. Responding to Revenue's reliance on the McDowell ruling, the Court observed : It may be stated that in the later decision of this court in Union of India v. Azadi Bachao Andolan it has been held that a citizen is free to carry on its business within the four corners of the law. That, mere tax planning, without any motive to evade taxes throughcolourable devices is not frowned upon even by the judgment of this court in McDowell and Co. Ltd.'s case (supra). Vodafone : Vodafone International Holdings BV (Vodafone), a company resident for tax purposes in Netherlands acquired the entire share capital of CGP Investments (Holdings) Ltd. (CGP), a company resident for tax purposes in Cayman Islands qua a transaction dated 11-02-2007. On 31-05-2010 Revenue passed an order u/S.201(1) and 201(1A) of the Act declaring the transaction to be taxable under the Act. Revenue raised a demand for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ok at the entire transaction as a whole and not adopt a dissecting approach; Westminster, read in the proper context permitted a "device" which was colourable in nature to be ignored as a fiscal nullity; Ramsay enunciated the principle of statutory interpretation rather than an over-arching anti-avoidance doctrine imposed upon tax laws; Furniss re-structured the relevant transaction, not on any fancied principle that anything done to defer the tax must be ignored but on the premise that the inserted transaction did not constitute "disposal" under the relevant Finance Act; from Craven the principle is clear that Revenue cannot start with the question as to whether the transaction was a tax deferment/saving device but must apply the "look at" test to ascertain its true legal nature; and that strategic tax planning has not been abandoned. McDowell majority held that tax planning may be legitimate provided it is within the framework of law; colourable devices cannot be a part of tax planning and it would be wrong to encourage the belief that it is honourable to avoid payment of tax by resorting to dubious methods; and agreed with Chinnappa Reddy,J's observations only in relation to p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ficial ownership or of the concept of alter ego arises. It is a common practice in international law and is the basis of international taxation, for foreign investors to invest in Indian companies through an interposed foreign holding company or operating company (such as Cayman Islands or Mauritius based) for both tax and business purposes. In doing so, foreign investors are able to avoid the lengthy approval and registration processes required for a direct transfer, (i.e., without a foreign holding or operating company) of an equity interest in a foreign invested Indian company. Holding structures are recognized in corporate as well as tax law. Special purpose vehicles (SPV) and holding companies are legitimate structures in India, be it in Company law or takeover code under the SEBI and provisions of the Act. When it comes to taxation of a holding structure, at the threshold the burden is on Revenue to allege and establish abuse in the sense of tax avoidance in the creation and/or use of such structure(s). To invite application of the judicial anti-avoidance rule, Revenue may invoke the "substance over form" principle or "piercing the corporate veil" test only after Revenue e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... separate legal existence. If the owned company is wound up, the liquidator, and not the parent company, would get hold of the assets of the subsidiary and the assets of the subsidiary would in no circumstance be held to be those of the parent, unless the subsidiary is acting as an agent. Even though a subsidiary may normally comply with the request of the parent company, it is not a mere puppet of the parent. The distinction is between having power and having a persuasive position. Unlike in the case of a one man company (where one individual has a 99% shareholdings and his control over the company may be so complete as to be his alter ego), in the case of a multi-national entity its subsidiaries have a great measure of autonomy in the country concerned, except where subsidiaries are created or used as sham. The fact that the parent company exercises shareholders' influence on its subsidiary cannot obliterate the decision making power or authority of its (subsidiary's) Directors. The decisive criterion is whether the parent company's management has such steering interference with the subsidiary's core activities that the subsidiary could no longer be regarded to perform those acti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , controlled premium, brand licenses and so on, since shares constitute a bundle of rights - Charanjit Lal Chowdhury; Venkatesh (Minor) andSmt. Maharani Ushadevi referred to with approval and followed. Merely since at the time of exit capital gains tax does not become payable or the transaction is not assessable to tax, would not make the entire sale of shares a sham or tax avoidant. Parties to the transaction have not agreed upon a separate price for the CGP share and a separate price for what is called "other rights and entitlements" [including options, right to non-compete, control premium, customer base, etc]. It is therefore impermissible for Revenue to split the payment and consider a part of such payment for each of the above items. The essential character of the transaction as an alienation is not altered by the form of consideration, the payment of the consideration in installments or on the basis that the payment is related to a contingency ("options", in this case), particularly when the transaction does not contemplate such a split up. Lamesa Holdings B.V. : The judgment of the Federal Court of Australia in Lamesa was referred to and quoted with approval both in Aza ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e only in that State unless the enterprise carries on business in the other State through a permanent establishment situated therein. Clause (5) of Art.7 statesthat for the purpose of this Article, except as provided in the Articles referred to in this Paragraph, the profits of an enterprise do not include items of income dealt in Articles 6, 8, 10 to 14, 16 and 17. While Art.13 provides that income from the alienation of real property may be taxed in the State in which that property is situated; Art. 13(2)(b)(iii) provides that real property would include, where it consists of shares or a comparable interest in a company, the assets of which consist whole or principally of direct interest in or over land in one of the States, or all rights to exploit, or to explore for, natural resources in one of the States - in the State in which the assets or the principal assets of the company are situated. In appeal Australian Revenue put forth four principal contentions to support the impugned assessment. The first two contentions proceed on the basis that since Lamesa had a control over the subsidiaries (ARL - ARM -Arimco - Arimco Mining), in a lineal sense ARL had a direct interest in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bserving that the agreement was intended to assimilate as reality only one tier of the company rather than numerous tiers. Separate legal personality is a doctrine running not only through common law but the civil law as well and that is consistent with the plain and quite unambiguous language which the Agreement has employed. When the Legislation speaks of the assets of one company it invariably does not intend to include within the meaning of that expression assets belonging to another company, whether or not held in the same ownership group. Revenue's appeal was dismissed. Prevost Car Inc. : Revenue's appeal against the judgment of the Tax Court of Canada, Ottawa was rejected by the Federal Court of Appeal. A Canadian resident corporation - Prevost Car Inc, (Prevost Car) paid dividends to its shareholders - Prevost Holding B. V. (Prevost Holding), a corporation resident in Netherlands. Prevost Holding in turn paid dividends in substantially the same amount to its corporate shareholders - Volvo (a Swedish resident company) and to Henlys(a U.K. resident company), in terms of a shareholders' agreement between Volvo and Henlys dated 03-05-1995. IfPrevost Holding were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... explained that the term "beneficial owner" in Art.10(2) of the Model Convention is not used in a narrow technical sense but should be understood in its context and in the light and the object of the purposes of the Convention, including avoiding double-taxation and the prevention of fiscal evasion and avoidance. Art.3(2) of the 1986 Treaty (similar to Art.3(2) of the DTAA) provided that in the application of the convention by a State any term not defined therein shall, unless the context otherwise requires, have the meaning which it has under the law of that State concerning the taxes to which the Convention applies. The Tax Court after due consideration including of expert opinion, dictionary meanings of the expressions "beneficial" and "owner" and the meaning given to the expression "beneficial owner" in decisions of the Canadian Supreme Court, concluded that the beneficial owner of dividends is a person who receives the dividends for his/her own use and enjoyment and assumes the risk and control of the dividend received; is the person who enjoys and assumes all the attributes of ownership; the dividend is for the owner(s) own benefit and this person is not accountable to anyon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o avoid tax schemes from UK or Sweden and other international tax issues, for effective management and control of the holding company. Further, minutes of the appellant, of Prevost Car Inc. shareholders' meeting dated 23-03-1996 had recorded that the meeting was attended by proxies for the parent companies (Volvo and Henlys) of the subsidiary, at a time when the appellant had only one shareholder - Prevost Holding B. V. Precedents on the interpretation/construction of documents : The decisions of the Supreme Court in Radha Sunder Dutta and Puzakklal Kuttapu; in Ford v. Beech; Inntrepreneur;West Bromwich Building Society; and in Hideo Yoshimoto, all spell out principles pertaining to construction of documents. Lord Hoffmann in the leading opinion of the House of Lords (with which the other learned law Lords concurred) in West Bromwich Building Society, while observing that almost all the old intellectual baggage of "legal" interpretation was discarded, summarized the principles by which contractual documents are presently considered, as under : (1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background k ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rierna AB, The Antaios (1984) 3 All ER 229 at 233, (1985) AC 191 at 201. '... if detailed semantic and syntactical analyses of words in a commercial contract is going to lead to a conclusion that flouts business common sense, it must be made to yield to business common sense.' In Hideo Yoshimoto, Thomas, J for the New Zealand Court of Appeal after quoting with approval the restatement of law by Lord Hoffmann in West Bromwich Building Society and noting that the five principles Lord Hoffmann articulated were reiterated and applied by the New Zealand Court of Appeal in Boat Park Ltd. v. Hutchison[(1999)2 NZLR 74], referred to a paradigm shift in the interpretative principles noticed by Wigmore[Wigmoreon Evidence - 1981 - Vol.9, Para.2461] and agreed with the observation : The history of the law of interpretation is the history of a progress from a stiff and superstitious formalism to a flexible rationalism; and proceeded to state : The cardinal rule of contractual interpretation must be to ascertain the intention of the parties. To the extent this rule is not implemented, the courts must incur the criticism of failing to give effect to the reasonable expectations of the parties ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the relevant matrix of facts, transactional documents and surrounding circumstances : Revenue points out (in its written submissions) that ascertainment of the real persona of ShanH and the chargeability of the transaction in issue, to tax in India is dependent on determination of the following core criteria : (i) Whether ShanH had a distinct corporate status so as to be the legal/ beneficial owner of SBL shares? (ii) What was the extent and degree of control of MA/GIMD over ShanH in the light of the SPA's, SHA's and other transactional documents? (iii) Was there an assignment by MA/GIMD in favour of ShanH; or in the light of the transactional documents, whether it could be legitimately inferred that from inception, SBL shares vested in ShanH as a legal owner? (iv) Merely since a joint venture (ShanH) was holding SBL shares, whether the corporate status of ShanH is immune to enquiry as to its commercial substance? (v) What is the subject matter of the transaction involved in the SPA dated 10-07-2009 between MA/GIMD and Sanofi? and (vi) Who is the transferor of the right, title and interest in SBL shares; and who realized the capital gains on the transfer of SBL sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd for ensuring resignation of existing Directors and appointment of new Directors; requirement of the sellers delivering a copy of the long-term supply agreement between SBL and UNICEF relating to supply of vaccines to Sanofi; provisions relating to adjustment of the closing price with reference to SBL's past accounting practice; payment of the price complement in Section 1.5(b) being dependent on phases of clinical study of vaccines developed by SBL, submission of product to WHO, progress in relation to new drugs, etc., reveal that the underlying transaction was the commercial substance of SBL. The above and other provisions of the SPA disclose that the real intent of the parties to the transaction is acquisition of SBL (the Indian company) and its business, driven primarily by the development of vaccines by SBL and the market potential consequently generated. This is so since ShanH is an entity with no commercial substance and the SPA could not have intended acquisition of shares of a "nondescript" company (ShanH). SPA dated 06.11.2006 : Terms of the SPA dated 06-11-2006 indicate MA's intent to participate in SBL by obtaining ownership/control over 60% of the paid-up capital a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Various clauses of the SHA's [2, 2.2, 3, 4.2, 4.6, 4.7, 5.1, 7.1 and 8.3] indicate (in the absence of any assignment of SBL shares by MA in favour of ShanH) that it is MA which owned the SBL shares; ShanH being a mere nominee or alter ego of MA. Amended AOA of SBL : SBL Articles of Association were amended to give effect to the SPA dated 06-11- 2006 and SHA's dated 07-11-2006. In the amended AOA, MA is defined to mean itself; not including its successor or assignee. There is no mention of ShanH; and MA is depicted as the legal and beneficial owner of the SBL shares. Clause 45A of the amended AOA stipulates : 45A. The Transfer of shares held by MA or VR (including his family members) or KA shall be subject to the restrictions/terms of any agreement entered into between the MA, VR and/or KA dated on or prior to the Completion Date, which restrictions shall also be setout by way of restrictive legend on the share certificate so held or, in the case of dematerialized shares, shall also be communicated in writing to the concerned depository of the Company and the concerned depository participant(s). Provisions of the amended AOA belie the petitioners' claims that ShanH was the shar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facilitates MA to maintain distinct lines of business such as in-vitro vaccines; food quality and nutrition; prophylactic vaccines, immuno therapy in developed countries; and immuno therapy in developing countries, etc. Further, such organizational structure enables MA to identify and group various activities by business units and to possibly have other investors/partners (shareholders) in each business unit; besides ensuring risk containment. (ii) MA group also explores external investors into specific entities engaged in specific businesses. Until 2007, GIMDwas an investor in TSGH, a special purpose vehicle (SPV) set up in France, which in turn held shares in ABL (USA) and Transgene (France). Setting up of SPVs in the home jurisdiction (France) is considered necessary to ensureinterests of the investors (who/which though not sectoral experts are looking to maximize their return on investments) by granting investors, participative and protective rights (preemptive rights, liquidity undertaking, joint transfer applications, joint assignment rights, etc.) through the SPV route. (iii) Consistent with the aforesaid policy and practice and in conformity with the investment pattern a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Though the authorized signatory to the Escrow Agreement (and in fact almost all agreements) on behalf of UOIL was Mr. Khalil Ahmed, Revenue was not heard to contend that UOIL is the alter ego of Mr. Khalil Ahmad. On 06-11-2006 "joint instructions" from authorized representatives of the purchaser and seller were addressedto the Calyon Bank (the Escrow Agent) intimating that the transaction contemplated under the share purchaseagreement (dated 06-11-2006) executed amongst the parties has been completed and Calyon is authorized to operate the Escrow account in terms of the said agreement. The "joint instructions" was signed by Mr. Philippe Sans (President, ShanH) apart from Mrs.Dominique Takizawa; the seller being represented by its signatory, again Mr. Khalil Ahmed. Another Escrow agreement was entered into on 03-11-2006 between ShanH (the purchaser); UOIL (the seller); and Blom Bank, Switzerland (the Escrow Agent). Schedule II to this agreement specified the authorized representative of the purchaser to be Mrs.Dominique Takizawa and Mr. Michel Dubois, the Secretary General and Director General, respectively of MA and Mr. Philippe Sans, President of ShanH. Copy of the general ledge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to purchase SBL shares, clearly stipulating that such purchase shall be deemed a purchase by MA and any such purchaser would be entitled to all the benefits accruing to MA including the representations, warranties and indemnities contained in the SPA, it is clear and the inference is compelling that participation in SBL (by acquisition of shares) is by ShanH and no assignment by MA to ShanH of the SBL shares was necessary to constitute ShanH the legal and beneficial owner of SBL shares. Post the negotiations and due diligence of SBL by MA in August/September, 2006, events appeared to have gathered a momentum culminating in MA's Board decision dated 26-10-2006. By this date the preparatory work for incorporation of ShanH was in full steam and ShanH was therefore determined to be the entity which would acquire a majority stake in SBL. Within five days thereafter ShanH was incorporated and registered as a French resident company. The SPA dated 06-11-2006 followed, clearly indicating (Clause 2.1) the unqualified liberty of MA to cause ShanH to purchase SBL shares. Response to Revenue interpretation of amended SBL AOA : Petitioner's assert that Revenue interpretation and inferences ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on it is MA and not ShanH which is the legal and beneficial owner of SBL shares. The above contention does not commend acceptance. As earlier noticed Clause 2.1 of the 06-11-2006 SPA specifically stipulates that MA may cause inter alia ShanH to purchase SBL shares; for the purpose of the SPA such purchase shall be deemed to be purchase by MA; and such purchaser entitled to all the benefits accruing to MA including the representations, warranties and indemnities, contained therein. On behalf of MA it is specifically contended that there is no deed of assignment nor is one necessitated, since ShanH had purchased and owns SBLshares since inception. Our analysis shows that ShanH (and not MA) acquired SBL shares. In view of this circumstance and other reasons to be recorded by us infra, on analyses of the relevant transactional documents and the surrounding circumstances, we hold that absence of a deed of assignment (of SBL shares by MA in favour of ShanH) does not establish that MA and not ShanH is the legal and beneficial owner of the SBL shares. Since as on this date MA was the unique shareholder of ShanH, we do not consider it incongruent that the 06-11-2006 SPA should record MA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isted with the Lyon Commercial and Companies Registry(France); (ii) As on date MA holds all of the registered capital of ShanH; (iii) On 07-11-2006 ShanH (not MA) acquired and to date holds 8.9 million shares representing (as on the date of acquisition), 61.4% of SBL registered capital and voting rights; according to the terms of the acquisition,ShanH has the control of SBL and its subsidiary Shantha West Inc, as defined in the relevant Article of the(French) Commercial Code; and copies of the SPA and SHA's (dated 06-11- 2006 and 07-11-2006) areappended to the agreement. Other clauses of the agreement (clauses 4 to 6 and 10, in particular) clearly indicate GIMD's entitlement (in proportion to its investment) to participation and decision-making in the management, affairs and control of ShanH. The terms of this agreement legitimize and compel the inference that ShanH is (post the agreement) a JV entity of MA and GIMD. GIMD made a cash contribution of EUR12 million to pick up the 20% share in ShanH (Article 2 of the agreement). It is inconceivable that a major business conglomerate with vast international experience and business savvy in defence systems, avionics and the lik ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the transferor, distinctive numbers of the certified share certificates and the consideration for which the shares were transferred, including the stamp duty thereon. ShanH is recorded as the transferee. This meeting also recorded approval of the SBL board for allotment of 4,49,830 SBL shares in favour of ShanH, on preferential allotment basis for a total consideration of Rs. 20,24,23,500/-. (vi) As on 31-03-2007 (post GIMD acquisition of 20% stake in ShanH, vide the partnership agreement dated 08-03-2007) ShanH holding in SBL was around 61.4%. MA, the 80% shareholder in ShanH by itself had thus no controlling interest. Only ShanH, the JV of MA/GIMD had the controlling interest, i.e., 61.4%, in SBL. Correspondence with Indian authorities : 18-04-2007: SBL addressed FIPB intimating that UOIL had sold 89,96,750 shares to ShanH and that ShanH holds a majority of shares in SBL, i.e., 61.40% of the SBL equity; that approval is sought for allotment of 15,00,000 new equity shares by way of fresh issue of capital from SBL to ShanH; and for transfer of 17,00,000 shares from existing NRI's, OCB's and Indian shareholders to ShanH; i.e., about 12.60% of the current equity capital of SBL, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ShanH addressed FIPB seeking permission to buy about 34,00,000 shares of SBL from existing NRI's, OCB's and Indian resident shareholders and sought necessary sanction to SBL to enable the acquisition by ShanH. 05-08-2009 : FIPB intimated SBL that transfer of SBL shares from resident, NRI and erstwhile OCB to ShanH is permissible under the automatic route subject to compliance with provisions of Press Note No.1 of 2005 read with Press Note No.3 of 2005, issued by the Department of Industrial Policy and Promotion. The above noted and other correspondence between SBL and ShanH on the one hand and the Government of India /FIPB on the other clearly establish that SBL, ShanH and the Government of India were clearly on the same page, viz., that the existing holder and intending purchaser of further SBL shares (either as fresh issue of capital, purchases from Indian residents, NRI's, OCB's) is ShanH. Though in some of the correspondence SBL or FIPB had described ShanH as a subsidiary of MA (even after 08-03-2007 when ShanH became a JV of MA/GIMD) such description would not alter the fact that the legal and beneficial holder of SBL shares was ShanH. The ascription in the correspo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quisition would attract provisions of TDS under the Act; that ShanH had initially acquired a stake in SBL in November, 2006 by purchase of shares from different non-residents, the payments relating to which also attract provisions of Section 195 of the Act. Eventually, on 14-12-2009 Revenue passed two orders u/S.201(1) of the Act, in respect of FY 2007-08 and FY 2008-09. Para 1.1 of the order notes that during survey operation it was revealed that Sanofi entered into an agreement with MA on 26-07-2009 for acquisition of majority stake in SBL from ShanH by acquiring the shares of ShanH, approximately 80% of SBL shares. Para 1.2 of the order notes that on a verification of the "memorandum of share transfer" obtained from SBL during the survey, it is revealed that ShanH made (specified) payments during the FYs 2006-07, 2007-08 and 2008-09 to various NRI's for purchase of SBL shares; and ShanH received dividends from SBL in respect of its SBL shareholding. By the orders dated 14-12-2009 (pertaining to the FYs 2007-08 and 2008-09), Revenue, having initiated proceedings u/S.201(1) and 201(1)(A) read with Section 195 of the Act, determined ShanH to be an "assessee in default" for fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of SBL shares. Such determination is a conscious, reasoned determination on analyses of the material gathered during survey operations including the memorandum of share transfer of SBL and the SPA dated 06-11-2006. Is ShanH an entity having commercial substance ? Consistent with the organizational structure of the MA group, ShanH was incorporated (on 31-10-2006) as a French company with MA as the unique shareholder. Since 08-03-2007, ShanH evolved into a JV with MA and GIMD having 80:20 participation, GIMD joining as a strategic investor. In May, 2009 Mr. Georges Hibon acquired 1.9% participation in ShanH having purchased 13,000 shares from MA and GIMD (10,400 shares and 2,600 shares, respectively). The learned ASG (responding to a specific query from the Court, on 30-08- 2012) fairly conceded that it is not the case of Revenue that in 2006 itself ShanH was conceived as a preordained scheme to avoid tax in India. Revenue asserts that since MA and GIMD claim that the capital gains liability arises only in France, it must be inferred that "it" is a pre-ordained scheme to avoid Indian tax liability. This argument on behalf of the Revenue does not commend acceptance by this Court. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SBL. The SBL Board meeting (held at Paris) 07-11-2006 records : that Mr. Georges Hibon was associated with Merck and Connaught Vaccines; that Mr. Philippe Sans had been with the MA group for over twenty years and had served as the President and CEO of bioMerieux North America, for five years; that Mr. Johannes Burlin had earlier been with the MA group and is currently working as president and CEO of Advanced Bio Science Laboratories, Inc., USA; and that Mr. Georges Hibon (a person totally unconnected with MA) is elected to serve as Chairman of the SBL Board. Minutes of this meeting also record the re-constitution of various committees of SBL directors such as the audit committee, the remuneration committee and the share transfer committee involving participation of Mr. Philippe Sans, Mr. Burlin and others. Minutes of the SBL Board meeting dated 29-11-2006 and 04-06-2009 (at Hyderabad and Chicagorespectively) evidence active participation of Mr. Philippe Sans. No choking, chilling or extra-ordinary control, invasion or interference by MA or MA/GIMD in SBL affairs is apparent. Vodafone pointed out that a group parent company giving principle guidance to group companies by providin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al organizational protocol; and investment is of itself a legitimate, established and globally well recognized business/commercial avocation. ShanH is a special purpose joint venture investment vehicle, established initially by MA and coadopted in due course by GIMD and eventually by Mr.Georges Hibon, to facilitate investment by way of participation in the shareholding of SBL. That is the ShanH business and its commercial purpose. Was there a transfer of SBL shares to Sanofi under the 10-07-2009 SPA ? Revenue in its written submissions while asserting that certain enumerated questions have to be decided by this Court [for deciding the core issue : whether the substance of the transaction involved in the SPA dated 10-07-2009between MA/GIMD and Sanofi was for acquisition of control, management and business interests in SBL and liable to capital gains liability under the Act?], framed one of the integral questions requiring to be decided as : (d) Who is the transferor of the right, title and interest in the shares of Shantha (SBL) and who realized the capital gains on the transfer of the shares of Shantha? (written submissions by ASG - para 2(d), pg.4) This Revenue assumption (th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erpretations, forecasts, transactions of the respective businesses of the parties, their employees, officers, directors, customers, and/or ventures, or concerning the existence, status, contemplation, structure, concepts and details of the transaction as well as financial information, customer lists and other customer information, pricing information, know-how, designs, technical specifications, manufacturing processes or improvements, market definitions and information, inventions and ideas), to keep the confidential information and the fact that the recipient has received the confidential information, confidential; and not to disclose, use or exploit any of the confidential information in any manner whatsoever. The information in respect of which confidentiality is agreed to be maintained pertains to SBL. Since the transaction in issue relates to sale of ShanH shares by MA/GIMD to Sanofi and not SBL shares; qua the transaction Sanofi would acquire control of ShanH, which in turn has a majority shareholding in SBL (this being the essential business purpose and commercial substance of ShanH as a SPV), it is natural that Sanofi desires to learn of the vitality of SBL. The agreement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TAA provisions (a detailed analysis on this to follow), cannot be considered as a transfer of either SBL shares of its underlying assets. Relevance of statements recorded u/Sec.131 of the Act : Revenue referred to statements by Mr. Khalil Ahmad (former executive Director of SBL), recorded on 11-11-2009 to support its contention, that SBL shares were acquired by MA; that ShanH is a mere alter ego of MA and had no independent role over affairs of SBL; and MA had a deep and pervasive control over SBL affairs. It requires to be noticed that apart from the statement of Mr. Khalil Ahmad, statements of Mr. N. Rajasekhar (CFO of SBL) and of Mr. K.I. Varaprasada Reddy (MD of SBL) were also recorded, earlier on 09.11.2009 and 10.11.2009, respectively. Statements by the CFO and MD of SBL regarding the role of ShanH in the active management/control of SBL; ShanH having acquired the SBL shares, as a subsidiary of MA; ShanH participating in SBL management through its nominee Directors; and SBL dealing only with ShanH on business decisions at the Board level, contradict Mr. Khalil Ahmad's statement. The contradictory assumptions, in the statement of Mr. Khalil Ahmad on the one hand and of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons between MA and GIMD during August/September, 2006; (b) minutes of the meeting of the MA Board dated 26-10-2006; (c) incorporation and registration of ShanH on 31-10-2006 as a French corporate entity; (d) resolutions of the ShanH shareholders meeting dated 31-10-2006; (e) Escrow agreements dated 02-11-2006 and 03-11-2006 between ShanH, and Calyon Bank, Lyon and Blom Bank, Geneva, respectively and UOIL; (f) The SPA dated 06-11-2006; (g) The two SHA's dated 07-11-2006; (h) The ShanH partnership agreement dated 08-03-2007 between MA and GIMD, in the presence of ShanH; (i) The acquisition/subscription by ShanH in March, 2008 of SBL shares and remittances by ShanH to SBL, (evidenced by the certificate of foreign inward remittance dated 08-03-2008, issued by IOB, Chennai); (j) The shareholders' agreement dated 05-05-2009 qua which Mr. Georges Hibon acquired a minority participation (13,000 shares) in ShanH from MA and GIMD; (k) Further purchases by ShanH of SBL shares from UOIL and others during July and August, 2009; (l) SBL dividend remittances to ShanH account for 2006-07, 2007-08 and 2008-09 evidenced by IOB bank statements of SBL; (m) Amended (on 14-02-2007) Articles ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ising MA/GIMD/Mr.Georges Hibon. ShanH was established and functioned as a special purpose investment vehicle, to facilitate foreign direct investment and to cushion potential investment risks of MA/GIMD, on direct investment in SBL; (viii) the uncontested assertion by petitioners, that a higher rate of capital gains tax is payable and has been remitted to Revenue in France (than would have been the case, if liable under provisions of the Act), lends further support to the inference that ShanH was not conceived, pursued and persisted with to serve as an Indian tax-avoidant device; (ix) ShanH since its inception was the legal and beneficial owner of SBL shares and this constitutes its participation in SBL investment. ShanH since its incorporation (on 31-10-2006) has been in existence till the transaction in issue (qua the SPA dated 10-07-2009); and what is significant and uncontested, continues to exist even thereafter and currently. The commercial and business purpose of ShanH as a special purpose investment vehicle (for investment in SBL) constitutes its business operations in India; ShanH hitherto received and continues to receive dividends on its SBL shareholding which have bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... beneficial owner of SBL shares is MA and not ShanH; then and on this interpretation/construction, the following transactional documents would irretrievably fail : the 07-11-2006 SHA's; the Escrow agreements dated 02-11-2006 and 03-11-2006; the ShanH partnership agreement dated 08-03-2007 between MA and GIMD; the May, 2007 purchase of ShanH shares by Mr. Georges Hibon from MA/GIMD; and even the 10-07-2009 SPA between MA/GIMD and Sanofi. As a consequence of Revenue's interpretation qua the 08-03-2007 SPA, GIMD would have acquired a 20% shareholding of ShanH which had neither a commercial substance, a business purpose or any value whatsoever; the Escrow agreements dated 02-11-2006 and 03-11-2006 with the French and Swiss Banks would be of no consequence; and under the 10-07-2009 SPA, Sanofi would have acquired 100% shareholding of ShanH, a wholly vacuous corporate entity, since this SPA was not for acquisition of MA/GIMD shareholding of SBL but for the ShanH shareholding of these JV partners. Further, the findings and conclusions of Revenue in the 14-12-2009 assessment of ShanH, for AY 2008-09 and 2009-10 u/S.201(1) of the Act, would become illegal and the tax of Rs. 1.33 crores remi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Customs v. Tower MCashback LLP 1 and another[(2011)UKSC19]. Apart from the axiomatic and non-derogable principle that the learned AAR as a quasijudicial Tribunal was bound by the law declared in Azadi; and it would be inconsistent with hierarchical discipline to question the correctness of the Azadi conclusion [that Chinnappa Reddy, J's views do not constitute the operative McDowell ratioand McDowell did not outlaw legitimate tax planning by a transaction or a step or steps in a transaction which are notdevious, circuitous or vacuous (having no business or commercial purpose)], since the AAR referred to the 2011 decision of the UK Supreme Court in Tower MCashback to fortify its conclusion, we will briefly advert to the factualcontext of and the principles delineated in this decision. Tower MCashback : The appeal before the UK Supreme Court concerned claims by the respondents - Tower MCashback LLP's (1 and 2) for first year allowances (FYA's under the Capital Allowances Act, 2001). Revenue disallowed the whole of LLP 1's claim on the ground that it had not been trading during the 2003-04 tax year and 75% of LLP 2's claim on analyses of the expenditure issue. Respondents' app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Barclays decision is that it is not enough for Revenue, in attacking a scheme of this sort (the case on hand) to point to the money going round in a circle; and a closer analyses is required. The Court observed: ... "in the present case, by contrast, the borrowed money did not go to MCashback, even temporarily; it passed, in accordance with a solicitor's undertaking, straight to R&D where itproduced no economic activity (except a minimal spread for the two Guernsey banks) until clearing fees began to flow from MCashback to the LLPs (in an arrangement comparable, though not closely similar, to the arrangements between LPI and VP in Ensign)." The Court concluded that there was a loan but there was not in any meaningful sense, an incurring of expenditure of the borrowed money in the acquisition of software rights. It went into a loop in order to enable the LLP's to indulge in a tax avoidance scheme. Revenue's appeal was allowed. Tower MCashback is not a tax treaty case. The claim for FYA's under the (U-K) Capital Allowances Act, 2001 was disallowed on the basis of detailed analyses in the primary order, of the Special Commissioner (Revenue). This was approved ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her asserted before the AAR, in earlier proceedings nor in the counters filed to the present writ petitions. The contention was advanced only qua oral argument in these proceedings and reiterated in written submissions by the ASG. Contours of the contention may be noticed : (i) In the facts and circumstances, ShanH is not a company with an independent and distinct status; is a merealter ego of MA/GIMD, who are the legal and beneficial owners of SBL shares; (ii) Consequently, the transaction in issue is for acquisition of SBL shares. MA/GIMD participated directly in the capital, control and management of SBL; and such participation was more than 10% of SBL; (iii) On conclusion of the transaction in issue, MA/GIMD realized the gain on alienation of shares, representing participation of more than 10% in the capital, control and management of SBL. Therefore, the gain is chargeable to tax in India in terms of Article 14(5) of the DTAA; (iv) Tax treaties inter alia allocate taxing rights to the country of residence or of source or to both. Since the source country (India) gets the rights of taxation [qua contentions (i) to (iii) supra], provisions of the Act operate to bring to tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SBL shares and the expression alienation is not defined in DTAA, this expression would derive its meaning from provisions of the Act [in terms of Article 3(2)]. Since the Act comprehends disposal of capital assets within the meaning of the word transfer in Section 2(47) [in terms of Article 3(2) and read with Section 2(47) of the Act], the undefined expression alienation in Article 14(5) would cover direct as well as indirect transfers; (ix) Black's law dictionary defines transfer to embrace every method - direct or indirect, absolute or conditional, voluntary or involuntary - of disposing of or parting with property or with an interest in property. The retrospective clarificatory amendment to Section 2(47) of the Act (vide the Finance Act, 2012) defines transferto mean and to always have meant the disposal of an asset whether directly or indirectly voluntarily or involuntarily; (x) Contrary to petitioners contention, see through is permitted not only in Article 14(4) but in Article 14(5) as well. Since Article 14(4) seeks to tax the underlying assets of the company in the source State in the form of immovable property, the expression directly or indirectly is employed therei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccordance with paragraph 1 of Article 30 of the DTAA. The Government of India in exercise of powers conferred interaliaby Section 90 of the Act issued Notification No.9602 [F.No.501/16/80 - FTD], dated 06-09-1994, as amended by Notification No.SO. 650(E), dated 10-07-2000. Provisions of the DIM relevant for the purposes of this lisare: Relevant DTAA provisions : ARTICLE 1 - Personal scope - This Convention shall apply to persons who are residents of one or both of the Contracting States. ARTICLE 2 - Taxes covered - 1. The taxes to which this Convention shall apply are : (a) in India : (i) the income-tax including any surcharge thereon; ... ... ... ARTIICLE 3 - General definitions - 1. In this Convention, unless the context otherwise requires : ... ... ... ... ... ... (c) the terms "a Contracting State" and "the other Contracting State" mean India or France as the context requires; (d) the term "person" includes an individual, a company and any other entity which is treated as a taxable unit under the taxation laws in force in the respective Contracting States; (e) the term "company" means any body corporate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tracting State. 1. Gains from the alienation of ships or aircraft operated in international traffic or movable property pertaining to the operation of such ships or aircraft shall be taxable only in the Contracting State of which the alienator is a resident. 1. Gains from the alienation of shares of the capital stock of a company the property of which consists directly or indirectly principally of immovable property situated in a Contracting State may be taxed in that Contracting State. For the purposes of this provision, immovable property pertaining to the industrial or commercial operation of such company shall not be taken into account. 2. Gains from the alienation of shares other than those mentioned in paragraph 4 representing a participation of at least 10 per cent in a company which is a resident of a Contracting State may be taxed in that Contracting State. 1. Gains from the alienation of any property other than that mentioned in paragraphs 1, 2, 4 and 5 shall be taxable only in the Contracting State of which the alienator is a resident. ARTICLE 25 - Elimination of double taxation - 1. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e construed on the basis of the legislative text and permissible context and resort to the speech of the Finance Minister while introducing the Finance Bill (leading to the retrospective amendments) is impermissible. The learned ASG referred to the following passage from the Constitution Bench judgment in Sanjeev Coke Manufacturing Company v. Bharat Coking Coal Limited and Anr.[ (1983)1 SCC 147] : 26. Shri Ashok Sen drew pointed attention to the earlier affidavit filed on behalf of Bharat Coking Coal Company and commented severally on the alleged contradictory reasons given therein for the exclusion of certain coke oven plants from the Coking Coal Mines (Nationalisation) Act. But, in the ultimate analysis, we are not really to concern ourselves with the hollowness or the self-condemnatory nature of the statements made in the affidavits filed by the respondents to justify and sustain the legislation. The deponents of the affidavits filed into Court may speak for the parties on whose behalf they swear to the statement. They do not speak for the Parliament. No one may speak for the Parliament and Parliament is never before the Court. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e on the speech of the Finance Minister in the Parliament (explaining introduction of Section 2(15) in the Act), is permissible was considered. The following passages in Lok Shikshana Trust are relevant: 32.It is true that it is dangerous and may be misleading to gather the meaning of the words used in an enactment merely from what was said by any speaker in the course of a debate in Parliament on the subject. Such a speech cannot be used to defeat or detract from a meaning which clearly emerges from a consideration of the enacting words actually used. But, in the case before us, the real meaning and purpose of the words used cannot be understood at all satisfactorily without referring to the past history of legislation on the subject and the speech of the mover of the amendment who was, undoubtedly, in the best position to explain what defect in the law the amendment had sought to remove. It was not just the speech of any member in Parliament. It was the considered statement of the Finance Minister who was proposing the amendment for a particular reason which he clearly indicated. If the reason given by him only elucidates what is also deducible from the words used in the amende ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the mischief sought to be remedied by the legislation and the object and purpose for which the legislation is enacted. This is in accord with the recent trend in juristic thought not only in western countries but also in India that interpretation of a statute being an exercise in the ascertainment of meaning, everything which is logically relevant should be admissible. In fact there are at least three decisions of this Court, one in Lok Shikshana Trust v.CIT(1981)4 SCC 173, the other in Indian Chamber of Commerce v. Commissioner of Income Tax[(1976)1 SCC 324] and the third in Additional Commissioner of Income Taxv. Surat Art Silk Cloth Manufacturers' Association[(1980)2 SCC 31]where the speech made by the Finance Minister while introducing the exclusionary clause in Section 2, clause (15) of the Act was relied upon by the Court for the purpose of ascertaining what was the reason for introducing that clause. The speech made by the Finance Minister while moving the amendment introducing sub-section (2) clearly states what were the circumstances in which sub-section (2) came to be passed, what was the mischief for which Section 52 as it then stood did not provide and which was sou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment prevail to the extent of the inconsistency. (broadly corresponding to Section 90(2) of the Act) Article III of the Convention provided that the contracting states have agreed that industrial or commercial profits of an enterprise in Germany would not be subject to tax in Canada unless it carried on business in Canada through a permanent establishment here. Article II (2) of the Convention provided that undefined terms in the Convention shall take the meaning which they take in the laws in force in the contracting countries. (corresponding to Article 3(2) of DTAA) In 1974, Parliament introduced Section 214(15) to the Income Tax Act with a view to extend withholding tax to interest, to payments by way of guaranty fees or standby charges. The issue in Melford : Whether the 1974 amendment to the Income Tax Act amends the Convention so as to expose Melford to the burden of withholding tax at the prescribed rate when making payment of the guaranty fees to the non-resident guarantor-the German Bank was the core issue involved. The Supreme Court of Canada concurred with the Federal Court of Appeal to rule that payment by the respondent to the German Bank constituted industrial o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tax Act. For this practical reason one finds it difficult to conclude that Parliament has left its own handiwork of 1956 in such inadvertent jeopardy. That is not to say that before the 1956 Act can be amended in substance it must be done by Parliament in an Act entitled "An act to Amend the Act of 1956". But neither is the converse true that is that every tax enactment adopted for whatever purpose, might have the effect of amending one or more bilateral or multilateral tax conventions without any avowed purpose or intention so to do. There is no doubt, in my view, that the effect of s. 3 is to make the operation of any other law of Parliament, including the Income Tax Act, subject to the terms of the 1956 Act and the incorporated Agreement. The only exception to this result would be where Parliament has expressly set out to amend the 1956 statue. Then, of course, there is no conflict between the 1956 Act and "any other law". This interpretation has the necessary result of embodying in the Agreement, by reason of Article II(2), as definitions of the words not therein defined, the meaning of those words at the time the Agreement was adopted. Thus any legislative action taken for w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contra-distinction, the retrospective amendments, sought to be relied upon by Revenue in the present case [Explanation 2 to Section 2(47)]; and Explanations 4 and 5 to Section 9) are not fortified by a non-obstante clause expressed to over-ride tax treaties. There is a presumption against a repeal by implication and the reason underlying this principle is premised on the theory that Legislature while enacting a law has a complete knowledge of the existing laws on the same subject matter, and therefore, when it does not provide a repealing provision it signals an intention not to repeal existing legislation - Municipal Council, Palai v. T.J. Joseph[AIR 1963 SC 1561];Tansukhrai v. Nilratan Prasad[86];Northern India Caterers (P) Ltd. v. State of Punjab[87];Delhi Municipality v. Shivshanker[88];RatanlalAdukia v. Union of India[89];R.S. Raghunath v. State of Karnataka[90];Union of India v. Venkatesan[AIR 2002 SC 1890];Stateof M.P. v. Kedia Leather and Liquor Ltd.,[ AIR 2003 SC 3236]; Also, continuance including efficacy of existing legislation, in the absence of an express provision of a repeal, being presumed, the burden to show that there has been a repeal by implication (includin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the legislature enacting it; (ii) The grammatical meaning of an enactment is its linguistic meaning taken in isolation from legal considerations, i.e., the meaning it bears when, as a piece of English prose, it is construed according to the rules and usages of grammar, syntax and punctuation (the verbal formulae) and the accepted linguistic canons of construction. An enactment is grammatically ambiguous where grammatically capable of more than one meaning. A modern statement of the nuanced principle on this aspect is clear from the following passage in the speech of Lord Simon of Glaisdale:Suthendran v. Immigration Appeal Tribunal[(1976)3 All.E.R. 611 (HL)]: Parliamentis prima facie to be credited with meaning what is said in an Act of Parliament. The drafting of statues, so important to a people who hope to live under the rule of law, will never be satisfactory unless courts seek whenever possible to apply 'the golden rule' of construction, that is to read the statutory language, grammatically and terminologically, in the ordinary and primary sense which it bears in its context, without omission or addition. Of course, Parliament is to be credited with good sense; s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... titutional text and authority and duly notified under provisions of the Act; and the amendment ought be confined to its legitimate locus and orbit. As earlier observed, provisions of the Act and of the DTAA are overlapping and competing legal magisteria and the proper interpretive role requires, on a harmonious construction and in accordance with the relative weight and priority, giving effect to both competing provisions, as per the inter seweightage mandated by the overarching legal norms, set out in Section 90(2) of the Act. Revenue interpretation of DTAA, to justify application of provisions of the Act : Analysis : Petitioners and Revenue are agreed that provisions of paragraphs (1) to (4) of Article 14 of the DTAA have no bearing or application to chargeability to tax or the Contracting State to which tax on the capital gain involved, is allocated, in respect of the transaction in issue. Though Article 14(4) is not relevant and admittedly so, reference to this provision would assist elucidation of the true meaning, purpose and trajectory of the provisions of Article 14(5). Petitioners and Revenue agree that Article 14(5) is the relevant and applicable provision; though whil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y, is situate. Article 14(5) deals with alienation of shares (excluding those comprehended within paragraph 4) representing a participation of at least 10% in a company which is a resident of a Contracting State and the right to tax is allocated to that contracting State in which the company is a resident. On an interactive analyses of paragraphs (4) and (5), in our considered view, the scope and reach of Article 14(5) is : (a) the transaction must involve gains from alienation of shares [not being shares of the capital stock of a company, the property of which principally comprises, directly or indirectly of immovable property - Art.14(4)], representing participation of at least 10% in the company; and (b) on indicators in (a)being satisfied, the gains derived from alienation of shares of such company may be taxed in the contracting State whereat the company is resident. On no rational interpretive principle is it legitimate to consider provisions of Article 14(5) as permitting a "see through". The provision, on a true, fair and non-manipulative interpretation, does not accommodate reckoning of the inherence of control by an intermediary/inter positioned joint venture company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inty is called for. Revenue's strained construction of the provisions of Article 14(5) is wholly premised upon its seminal contention and contrived substrate, that MA/GIMD are the owners of SBL shares (legal and beneficial) and have the participating interest in SBL; that ShanH is a sham and nominal entity with no business or commercial purpose and is a device contrived to avoid liability to Indian tax. As already noticed, Revenue while conceding that ShanH was not at inception (in October, 2006) a tax avoidant device, failed to explain when ShanH, conceived and born as a legitimate corporate entity transmuted into a tax avoidant device. Be that as it may. The substrate of Revenue's case on this aspect is also that the transaction in issue involves a disposal (or deemed disposal) of the participating interest of MA/GIMD in SBL through the alterego ShanH. The ratio in Tradehold Ltd : Revenue placed reliance on the dictum of the South African Supreme Court of Appeal in Commissioner for the South African Revenue Services v. Tradehold Ltd.[ (2010)ZASAC.61] to contend that since the transaction in issue involved deemed disposal of SBL shares, the resultant tax stands allocated to I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... [corresponding to Art.3(2) of the DTAA] applies and the undefined expression must bear a meaning ascribed to it under the 1962 Act. The Court observed that an international treaty must be interpreted so as to give effect to its provisions; that the first step is to determine into which Article of the treaty the particular tax falls; that Art. 13 includes within its ambit capital gains derived from the alienation of all properties; it must be assumed that the parties to the treaty were aware of provisions of the 1962 Act and have intended Art. 13 to apply to capital gains of the kind provided therein (the 1962 Act). The Court reasoned that Art. 13(4) incorporates no distinction between capital gains that arise from actual or deemed alienation of property; and there is no reason in principle why the parties to the treaty would have intended that Art.13 should apply only to taxes of actual capital gains resulting from actual alienation of property. The Court concluded that alienation being a neutral term having a broader meaning as well (comprehending both actual and deemed disposal of assets), Art.13(4) would apply to the transaction in question; the tax is allocated to Luxembourg a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat purposive construction ought not to result in extravagant and absurd consequences, in particular when the interpretation subverts the essential purposes for which the DTAA was entered into i.e., for avoidance of double taxation. It requires to be noticed in passing and while on analysis of Tradehold Ltd. that Art. 13(4) of the South Africa -Luxembourg treaty substantially corresponds to Art. 14(6) of the DTAA. On the basis of the Trade hold dictum, if the transaction in issue involves a deemed alienation (meaning transferas defined u/Sec.2(47) of the Act), of the control and underlying assets of SBL (as integral to alienation of ShanH shares to Sanofi), the resultant tax is allocated to France under Art. 14(6) of the DTAA, since MA/GIMD - the alienators, are resident in France. We have earlier adverted to the fact that Revenue has itself (vide orders dated 14-12-2009), assessed ShanH on the foundational premise that it was the purchaser of SBL shares. In paragraphs 1.2 of the assessment order Revenue concluded : On verification of the 'Memorandum of Share Transfer' obtained from SBL during the course of survey, it was found that SHS (ShanH) had made payments totallin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y participation in SBL. There is neither an actual nor a deemed transfer of the underlying assets of SBL in favour of Sanofi quathe transaction in issue; and ShanH continues to exist with its participatory controlling interest in SBL operative and extant; participation understood as shareholding, as considered in Vodafone. Clearly, the transaction in issue involves a gain from alienation of ShanH shares (not SBL shares) by MA/GIMD and Mr. Georges Hibon to Sanofi, representing a participation of more than 10% (in fact 100%) in ShanH (not SBL), a company registered and resident in France. The alienation is admittedly outside the scope of Article 14(4) and falls to be considered under Article 14(5). The later provision in clear, unambiguous and explicit terms allocates the resultant capital gains tax to France (the contracting State, whereat ShanH is indisputably a resident). QuaArt.14(5), where shares of a company which is a resident of France are transferred, representing a participation (shareholding - see Vodafone) of more than 10% in such entity, the resultant capital gain is taxable only in France. Even where the underlying value of such shares is located in the jurisdiction o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the UN Model Convention provides that countries negotiating a treaty have an option in Article 14(5) to permit the clause to operate only in instances where a substantial portion of the company's assets are situate in that contracting State, mere residence of a company would not suffice and its underlying assets should also be situate in that State. The relevant commentary on the UN Model Convention, at paragraph-11, mentions that such a clause must be incorporated as part of a treaty. The relevant part of the commentary reads :- Some countries might consider that the Contracting State in which a company is resident should be allowed to tax the alienation of its shares, only if a substantial portion of the company's assets are situated in that State, and in bilateral negotiations might urge such a limitation. Other countries might prefer that paragraph to be omitted completely. The DTAA does not incorporate such a clause and accommodating a "see through" in Article 14(5) would transgress the negotiated terms of the DTAA since the capital gains tax arising from the transaction, which stands allocated to France in terms of the DTAA would be susceptible to double-taxation, bot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to a treaty would also transgress the inherent and vital constitutional scheme, of separation of powers. Treaty-making power is integral to the exercise of sovereign legislative or executive will according to the relevant constitutional scheme, in all jurisdictions. Once the power is exercised by the authorized agency (the legislature or the executive, as the case may be) and a treaty entered into, provisions of such treaty must receive a good faith interpretation by every authorized interpreter, whether an executive agency, a quasi-judicial authority or the judicial branch. The supremacy of tax treaty provisions duly operationalised within a contracting State [which may (theoretically) be disempowered only by explicit and appropriately authorized legislative exertions], cannot be eclipsed by employment of an interpretive stratagem, on misconceived and ambiguous assumption of revenue interests of one of the contracting States. Where the operative treaty's provisions are unambiguous and their legal meaning clearly discernible and lend to an uncontestable comprehension on good faith interpretation, no further interpretive exertion is authorized; for that would tantamount to usurpati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its objects and purpose. Ram Jethmalani (as already noticed) recognizes the applicability of the above VCLT principle of treaty interpretation in the Indian context as well. RamJethmalanialso refers with approval observations in AzadiBachaoAndolanand the dictum of Lord Widgery, CJ (quoted in Azadi)that the word sofa treaty are to be given their general meaning, general to lawyer and laymen and alike ... the meaning of the diplomat rather than the lawyer. Ram Jethmalani further observes that according to this principle of interpretation, with respect to treaties and the provisions therein, the ordinary meanings of words be given effect to, unless the context requires otherwise; and the fact that such treaties are drafted by diplomats, and not lawyers, leading to sloppiness in drafting also implies that care has been taken to not render any word, phrase, or sentence redundant, especially where rendering of such word, phrase or sentence redundant would lead to a manifestly absurd situation, particularly from a constitutional perspective. Article 3(2) of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay be taxed in both Contracting States. Amendments to provisions of the main treaty were agreed by way of a protocol, at the signing of a treaty. Clause (4) of this protocol (agreed to be an integral part of the treaty) provides: that the term "alienation" includes a "transfer" within the meaning of the Indian taxation laws. In the Indo-Mauritius agreement (a tax treaty) (earlier adverted to in another context), Article 13(5) defines the term "alienation" for the purposes of the said Article, to mean the sale, exchange, transfer or relinquishment of the property or the extinguishment of any rights therein or the compulsory acquisition thereof under any law in force in the respective Contracting States. No similar explication of the term alienation, to include extinguishment of any rights to the property or relinquishment thereof is present in DTAA provisions. This circumstance signifies a conscious choice by the contracting States, while negotiating the DTAA and entering into it. Good faith interpretation does not permit incorporation of a see through or look through provision in Article 14(5) by the interpretive route or ascription of an intent (in the DTAA), to cover indirect or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company had become a Luxembourg company. Since by that date, the value of the shares has decreased to an extent, no Luxembourg capital gains tax was payable. Canadian Revenue relied upon the domestic general anti-avoidance rule (GAAR) to ignore the transfer to Luxembourg as being a tax avoidant transaction. Revenue argued that the deliberate selection of a low tax jurisdiction was itself abusive and/or there was an anti- avoidance rule inherent in the Convention. Bell, J allowed the appeal by the taxpayer, holding: (a) The tax benefit had arisen from the sale of the shares. To find that the sale was one of a series of transactions it had to be shown that the series was preordained and that there was a strong nexus between them. On the facts it could not be shown that the sale was intended at the time at which the previous transactions had been entered into; (b) Therewasnothinginherentlyproperorimproperinselectingoneforeignregimeoveranother. The selection of a low tax jurisdiction might be evidence that a transaction had a tax purpose but treaty shopping, or selection of a jurisdiction to minimize tax could not on its own be viewed as abusive; (c) A purely commercial transactio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax jurisdiction; and in fact the liability of the transaction in issue (to capital gains tax) is said to be higher in the French jurisdiction than in India. The ratio of MIL (Investments)therefore (though persuasive), commends acceptance, a fortiori. Is Article 25 of DTAA relevant? Revenue alternatively contended that in any event petitioners would not suffer any prejudice by way of double-taxation, in view of provisions of Article 25(1) r/w (2)(a)(i) thereof. The above contention, in the facts and circumstances of the present lis, is stated to be rejected. Provisions of the DTAA including Article 25 have been extracted supra. On a true and fair construction, absent a grammatical ambiguity and the literal meaning of the text corresponding to its legal meaning, it is clear that only income arising and taxable in India, in accordance with the provisions of this Convention (DTAA) i.e., Article [14(5)], would be taken into account for computation of the French tax, to the extent of the amount of tax paid in India, in accordance with the provisions of the said Article [14(5)], so however that it shall not exceed the amount of French tax attributable to such income. Article 25(2) (a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the transaction in issue (pursuant to the SPA dated 10-07-2009 between MA/GIMD and Sanofi) is for alienation of 100% ShanH shares held by MA, GIMD and Mr. Georges Hibon in favor of Sanofi (falling within Article 14(5) of the DTAA); and constitutes neither the transfer nor deemed transfer of shares or of the control, management, or underlying assets of SBL (i.e., not a transfer, within the meaning of the expression as defined in Section 2(47) of the Act); (b) the consequent tax on the capital gain accrued to MA/GIMD, is clearly and exclusively allocated to France under the provisions of Article 14(5) of the DTAA; (c) retrospective amendments to provisions of the Act (by the Finance Act, 2012) persedo not operate to deflect, modify; or subject DTAA provisions to provisions of the Act (interpreted on good faith principle and construed in the light of applicable principles of statutory construction). There is no ambiguity in the Article 14(5) expressions - alienation or participation; and since these terms (identical, not synonymous) are neither employed nor defined in the Act, there is no warrant for invoking provisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es. The assets of SBL in the light of binding precedential authority cannot be considered as belonging to a shareholder (even if a majority shareholder) - ShanH. The value of the controlling rights over SBL attributable to the ShanH shareholding is also incapable of determination and computation. There is also the issue of the value of Shanta West, a subsidiary of SBL. For these reasons, the computation component which is inextricably integrated to the charging provision (in Sec. 45 of the Act) fails, and consequently the charging provision would not apply. 1. Issue No.5 : There are two facets to this issue, viz., : (a) Whether the AAR may review its order, admitting the applications for advance ruling, for consideration on merits ? To restate the relevant facts : On 17-12-2009 applications for advance ruling (by MA and GIMD) were allowed by the AAR u/S.245R(2), recording a clear finding that the applications are not hit by Clause(iii) of the proviso to the provision. Revenue challenged this order before this Court. On 08-07-2010, AAR by another order considered representations/objections (of Revenue to admissibility of the applic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of India[Judgmentof the High Court of Bombay in W.P.,No. 1505 of 2007 dt 06/08/2007];J.K. Synthetics Ltd. vs. Collector of Central Excise[(1996).86.E.L.T. 472 (S.C.)]. From the catena of referred authority, persuasive and binding, it is clear that judicial and quasi-judicial authorities exercising jurisdiction under a legislative grant have no inherent power to review their decision. Since the several precedents cited reiterate an established norm, we avoid an idle parade and detailed analyses of familiar authority. In view of the settled position, the decision of the learned AAR (in the impugned ruling - set out in paragraphs 30 and 31 thereof), reviewing its earlier decision (admitting the applications) dated 17-12-2009, reiterated on 08-07-2010, is unsustainable and so declared. We hasten to add that the above declaration is formally recorded on petitioners' invitation for a determination on this aspect. However, nothing substantial turns on this issue or quaour declaration thereon. The AAR has also ruled on the merits of the applications. Counsel for respective parties are agreed and have urged this Court to adjudicate on the validity of the AAR decision, as well. The subs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Indian company passing from one hand to another cannot be ignored; (vii) The series of transactions from commencement of ShanH formation suggests a pre- ordained scheme to produce a given result, viz., to deal with the assets and control of SBL without actually dealing with its shares, assets and business. The scheme adopted must be seen as one for avoiding payment of capital gains, which would otherwise arise if the shares of an Indian company had been transferred, leading to the same result as now achieved. So considered, it is a scheme for avoidance of tax in India; (viii) Though the transaction does not involve alienation of shares of an Indian company on a literal interpretation of Article 14(5), on a purposive construction of the said provision however, it must be concluded that the capital gains arising out of the transaction is taxable in India; and the essence of the transaction takes within its sweep various rights including a change in the controlling interests of the Indian company - SBL, having assets, business and income in India. Therefore, the transaction is taxable in India in terms of Article 14(5). T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o acquire SBL shares; (d) the transaction in issue is taxable in France; no avoidance of tax per-se is thus involved and the series of transactions are commercially real and taken step by step, valid; (e) the capital gain consequent on the transaction in issue is taxable in France (not in India) on a literal interpretation of Article 14(5) of the DTAA; but (f) since the transaction results in no tax liability (to India) under provisions of the Act, it must be considered an Indian tax-avoidant devise; and the several legitimate stages/steps/transactions leading to the transaction in issue must nevertheless be ignored. In the light of our prefatory observations, analyses on issues 1 to 4, and the conclusions recorded by AAR (adverted to supra), processed in the light of the catena of textual and precedential authority, the AAR ruling that the capital gain arising out of the transaction in issue is liable to tax in India is, in our respectful view, unsustainable. As we perceive, the fallacy in Revenue assumptions which resonates through the impugned ruling as well, is a sub-liminal perception that administering provisions of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ateria those proffered by and on behalf of Revenue. Since the tax on the capital gain on the transaction in issue is not allocated to India and is exclusively allocated to France, under provisions of the Act read with DTAA provisions (as concluded earlier video uranalyses on Issues (1) to (5) supra), Sanofi has transgressed no provision of the Act (Sec.195 included) in not deducting tax on payments made to MA/GIMD on the transaction in issue. It was alternatively contended that since there is no allegation of tax avoidance by Sanofi, even if ShanH were considered a tax avoidant device Sanofi cannot be treated an assessee in default, for proceeding u/Sec. 201 of the Act. This contention is misconceived. If the capital gain accruing from the transaction in issue is chargeable to tax under the Act, Sanofi is obligated to deduct the income tax thereon in accordance with the provisions of Sec. 195. As a consequence of the preceding analysis, the impugned order, assessing Sanofi as an assessee in default; the notice of demand, also dated 25-05-2010 and the Rectification order dated 15-11-2011 are invalid and unsustainable. 1. We place o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p; The Writ Petitions are allowed as above. No costs however.JUSTICE GODA RAGHURAM JUSTICE M.S. RAMACHANDRA RAO Dated : 15-02-2013 NDR/VA/PVSN LR copy to be marked : YES A N N E X U R E Relevant provisions of the Income Tax Act, 1961 : Pre and Post - amendments qua The Finance Act, 2012 :- Pre-Finance Act, 2012 Pre-Finance Act, 2012 "capital asset" means property of any kind held by an assessee, whether or not connected with his business or profession, but does not include - "capital asset" means property of any kind held by an assessee, whether or not connected with his business or profession, but does not include - (i) any stock-in-trade, consumable stores or raw materials held for the purposes of his business or profession; (i) any stock-in-trade, consumable stores or raw materials held for the purposes of his business or profession; (ii) Personal effects, that is to say, movable property (including wearing apparel and furniture) held for personal use by the assessee or any member of his family dependent on him, but excludes - (ii) Personal effects, that is to say, movable property (including wearing apparel and furnit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or cantonment board referred to in item (a), as the Central Government may, having regard to the extent of, and scope for, urbanization of that area and other relevant considerations, specify in this behalf by notification in the Official Gazette; (b) in any area within such distance, not being more than eight kilometers, from the local limits of any municipality or cantonment board referred to in item (a), as the Central Government may, having regard to the extent of, and scope for, urbanization of that area and other relevant considerations, specify in this behalf by notification in the Official Gazette; (iv) 6 ½ per cent Gold Bonds, 1977, or 7 per cent Gold Bonds, 1980, or National Defence Gold Bonds, 1980, issued by the Central Government; (iv) 6 ½ per cent Gold Bonds, 1977, or 7 per cent Gold Bonds, 1980, or National Defence Gold Bonds, 1980, issued by the Central Government; (v) Special Bearer Bonds, 1991, issued by the Central Government; (v) Special Bearer Bonds, 1991, issued by the Central Government; (vi) Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 notified by the Central Government; (vi) Gold Deposit Bonds issued under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1882); or (vi) any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property. Explanation - For the purposes of sub-clauses (v) and (vi), "immovable property" shall have the same meaning as in clause (d) of section 269 UA; Explanation 2. - For the removal of doubts, it is hereby clarified that "transfer" includes and shall be deemed to have always included disposing of or parting with an asset or any interest therein, or creating any interest in any asset in any manner whatsoever, directly or directly, absolutely or conditionally, voluntarily or involuntarily, by way of an agreement (whether entered into in India or outside India) or otherwise, notwithstanding that such transfer of rights has been characterized as being effected or dependent upon or flowing from the transfer of a share or shares of a company registered or incorporated outside India; (Inserted by the Finance Act 2012 w.e.f. 1st Ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds or merchandise on behalf of the non-resident; or c. habitually secures orders in India, mainly or wholly for the non-resident or for that non-resident and other non-residents controlling, controlled by, or subject to the same common control, as that nonresident : Provided that such business connection shall not include any business activity carried out through a broker, general commission agent or any other agent having an independent status, if such broker, general commission agent or any other agent having an independent status is acting in the ordinary course of his business : 9. (1) The following incomes shall be deemed to accrue or arise in India :-- (i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India. Explanation 1 - For the purposes of this clause - (a) in the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat where such broker, general commission agent or any other agent works mainly or wholly on behalf of a non-resident (hereafter in this proviso referred to as the principal nonresident) or on behalf of such non-resident and other non-residents which are controlled by the principal non-resident or have a controlling interest in the principal non-resident or are subject to the same common control as the principal non-resident, he shall not be deemed to be a broker, general commission agent or an agent of an independent status. Explanation 3. - Where a business is carried on in India through a person referred to in clause (a) or clause (b) or clause (c) of Explanation 2, only so much of income as is attributable to the operations carried out in India shall be deemed to accrue or arise in India; (ii) income which falls under the head "Salaries", if it is earned in India. Explanation. - For the removal of doubts, it is hereby declared that the income of the nature referred to in this clause payable for - (a) service rendered in India; and (b) the rest period or leave period which is preceded and succeeded by services rendered in India a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, for the transfer of all or any rights (including the granting of a licence) in respect of computer software supplied by a nonresident manufacturer along with a computer or computer-based equipment under any scheme approved under the Policy on Computer SoftwareExport, Software Development and Training, 1986 of the Government of India. Explanation 1.-For the purposes of the first proviso, an agreement made on or after the 1st day of April, 1976, shall be deemed to have been made before that date if the agreement is made in accordance with proposals approved by the Central Government before that date; so, however, that, where the recipient of the income by way of royalty is a foreign company, the agreement shall not be deemed to have been made before that date unless, before the expiry of the time allowed under subsection (1) or sub-section (2) of section 139 (whether fixed originally or on extension) for furnishing the return of income for the assessment year commencing on the 1st day of April, 1977, or the assessment year in respect of which such income first becomes chargeable to tax under this Act, whichever assessment year is later, the company ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the purposes of making or earning any income from any source outside India; or (c) a person who is a non-resident, where the fees are payable in respect of services utilized in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India : Provided that nothing contained in this clause shall apply in relation to any income by way of fees for technical services payable in pursuance of an agreement made before the 1st day of April, 1976, and approved by the Central Government. Explanation 1. -- For the purposes of the foregoing proviso, an agreement made on or after the 1st day of April, 1976, shall be deemed to have been made before that date if the agreement is made inaccordance with proposals approved by the Central Government before that date. Explanation 2.-For the purposes of this clause, "fees for technical services" means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, it is hereby clarified that an asset or a capital asset being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be and shall always be deemed to have been situated in India, if the share or interest derives, directly or indirectly, its value substantially from the assets located in India. (inserted by the Finance Act 2012 w.e.f. 1st April, 1962) (ii) income which falls under the head "Salaries", if it is earned in India. Explanation - For the removal of doubts, it is hereby declared that the income of the nature referred to in this clause payable for - (a) service rendered in India; and (b) the rest period or leave period which is preceded and succeeded by services rendered in India and forms part of the service contract of employment, shall be regarded as income earned inIndia; (iii) income chargeable under the head "Salaries" payable by the Government to a citizen of India for service outside India; (iv) a dividend paid by an Indian company outside India; (v) income by way of interest payable by -- (a) the Government; or (b) a person who is a resid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade on or after the 1st day of April, 1976, shall be deemed to have been made before that date if the agreement is made in accordance with proposals approved by the Central Government before that date; so, however, that, where the recipient of the income by way of royalty is a foreign company, the agreement shall not be deemed to have been made before that date unless, before the expiry of the time allowed under sub-section (1) or sub-section 92) of section 139 (whether fixed originally or on extension) for furnishing the return of income for the assessment year commencing on the 1st day of April, 1977, or the assessment year in respect of which such income first becomes chargeable to tax under this Act, whichever assessment year is later, the company exercises an option by furnishing a declaration in writing to the (Assessing) Officer (such option being final for that assessment year and for every subsequent assessment year) that the agreement may be regarded as an agreement made before the 1st day of April, 1976. Explanation 2.-For the purpose of this clause, "royalty" means consideration (including any lump sum consideration but excluding any consideratio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... April, 1976, and approved by the Central Government. Explanation 1. - For the purposes of the foregoing proviso, an agreement made on or after the 1st day of April, 1976, shall be deemed to have been made before that date if the agreement is made in accordance with proposals approved by the Central Government before that date. Explanation 2. - For the purposes of this clause, "fees for technical services" means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head "Salaries". (2) Notwithstanding anything contained in subsection (1), any pension payable outside India to a person residing permanently outside India shall not be deemed to accrue or arise in India, if the pension is payable to a person referred to in article 314 of the Constitution or to a person who, having been appointed before the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... application to the Assessing Officer to determine, by general or special order, the appropriate proportion of suchsum so chargeable, and upon such determination, tax shall be deducted under sub-section (1) only on that proportion of the sum which is so chargeable. (3) Subject to rules made under sub-section (5), any person entitled to receive any interest or other sum on which income-tax has to be deducted under sub-section (1) may make an application in the prescribed form to the Assessing Officer for the grant of a certificate authorizing him to receive such interest or other sum without deduction of tax under that sub-section, and where any such certificate is granted, every person responsible for paying such interest or other sum to the person to whom such certificate is granted shall, so long as the certificate is in force, make payment of such interest or other sum without deducting tax thereon under sub-section (1). (4) A certificate granted under sub-section (3) shall remain in force till the expiry of the period specified therein or, if it is cancelled by the Assessing Officer before the expiry of such period, till such cancellation. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her or not the non-resident personhas - (i) a residence or place of business or business connection in India; or (ii) any other presence in any manner whatsoever in India: (inserted by the Finance Act 2012 w.e.f. 1stApril, 1962) (2) Where the person responsible for paying any such sum chargeable under this Act (other than salary) to a non-resident considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application to the Assessing Officer to determine, by general or special order, the appropriate proportion of such sum so chargeable, and upon such determination, tax shall be deducted under sub-section (1) only on that proportion of the sum which is so chargeable. (3) Subject to rules made under sub-section (5), any person entitled to receive any interest or other sum on which income-tax has to be deducted under sub-section (1) may make an application in the prescribed form to the Assessing Officer for the grant of a certificate authorizing him to receive such interest or other sum without deduction of tax under that sub-section, and where any such certificate is grante ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... but not collected or recovered before such commencement, may be collected or recovered an appropriated in accordance with the provisions of the Income-tax Act, 1961 as amended by this Act, and the rules made thereunder and there shall be no liability or obligation to make any refund whatsoever. Note : Highlighted portions of the text are relevant amendments to provisions of the Act quathe Finance Act, 2012. Other provisions of the Act : Chapter IX of the Act sets out provisions pertaining to double-taxation relief. Prior to its substitution by Finance Act, 2009, (with effect from 01-10-2009), Section 90 bore the marginal heading "agreement with foreign countries" and after the substitution quathe Finance Act, 2009 the marginal heading reads "agreement with foreign countries or specified territories". For purposes of this lisnothing substantial turns upon amendment of the marginal heading of Section 90, by the Finance Act, 2009 or of its text. We set out the relevant provisions of Section 90 of the Act, as substituted by the Finance Act, 2009. 90. (1) The Central Government may enter into an agreement with the Government of any country outside India or specifi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ame meaning as assigned to it in the notification issued by the Central Government in the Official Gazette in this behalf. (4) An assessee, not being a resident, to whom an agreement referred to in sub-section (1) applies, shall not be entitled to claim any relief under such agreement unless a certificate, containing such particulars as may be prescribed, of his being a resident in any country outside India or specified territory outside India, as the case may be, is obtained by him from the Government of that country or specified territory. Explanation1.-For the removal of doubts, it is hereby declared that the charge of tax in respect of a foreign company at a rate higher than the rate at which a domestic company is chargeable, shall not be regarded as less favourable charge or levy of tax in respect of such foreign company. Explanation2.---- For the purposes of this section, "specified territory" means any area outside India which may be notified as such by the Central Government. Explanation3.---- For the removal of doubts, it is hereby declared that where any term is used in any agreement entered into under sub-section (1) and not define ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or ... ... ... does not deduct, or does not pay, or after so deducting fails to pay, the whole or any part of the tax, as required by or under this Act, then, such person, shall, without prejudice to any other consequences which he may incur, be deemed to be an assessee in default in respect of such tax: ... ... ... ... ... ... (1A) Without prejudice to the provisions of sub-section (1), if any such person, principal officer or company as is referred to in that sub-section does not deduct the whole or any part of the tax or after deducting fails to pay the tax as required by or under this Act, he or it shall be liable to pay simple interest, -- (i) at one per cent for every month or part of a month on the amount of such tax from the date on which such tax was deductible to the date on which such tax is deducted; and (ii) at one and one-half per cent for every month or part of a month on the amount of such tax from the date on which such tax was deducted to the date on which such tax is actually paid, and such interest shall be paid before furnishing the statement in accordance with the provisions of sub-sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
