TMI Blog2013 (2) TMI 589X X X X Extracts X X X X X X X X Extracts X X X X ..... any. AAR held that the transfer of shares of ShanH was a scheme for avoidance of Indian tax and that the capital gains arising from the Transaction was liable for tax in India, going by a purposive interpretation of the France DTAA contention of the taxpayer that while transfer of shares in an Indian company is taxable in India under the ITL, an indirect transfer was generally not taxable in Indian in view of the law declared by the SC in the case of Vodafone International Holdings BV (2012 (1) TMI 52 - SUPREME COURT OF INDIA) - prior to the retrospective amendment to the Indian Tax Laws (ITL) on taxation of indirect transfers of Indian assets by Finance Act (FA), 2012 , the Authority for Advance Rulings (AAR) had held the sale to be taxable in India under the ITL as well as under the India-France Double Taxation Avoidance Agreement (France DTAA) - writ petition filed by Tax payers in the jurisdictional HC against the advance ruling Whether ShanH has commercial substance as an entity? Held that:- ShanH as a French resident corporate entity (initially a subsidiary of MA, thereafter a JV of MA/GIMD and eventually a JV comprising MA/GIMD/Georges Hibon) is a distinct entity of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovision. Such a construction would provide taxation rights for India on deemed alienation basis and taxation rights to France on actual alienation basis. Neither the text not context of Article 14(5) legitimizes such a strained construction, especially when the DTAA provisions are unambiguous and their legal meaning clearly discernible. Also, the expression alienation , used and not defined in the DTAA, cannot draw its meaning from a synonymous expression transfer used in the ITA. For this purpose, the expression in the ITA should be identical. Furthermore, if the Transaction involved a deemed alienation of control and underlying assets of Shantha covered under the ITL, taxation rights would be allocated to France under Article 14(6), as the Taxpayers are resident in France. In light of the above conclusions, the HC held that the order passed by the AAR cannot be sustained and allowed the writ petitions filed by the Taxpayers. Thus as per this rulling the principle confirmed is that allocation of taxing rights under a DTAA are unaffected by the ITL amendment on indirect transfers. Where a French company indirectly transferrs its interest in Indian concern to another French ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n economic transactions when a sufficient nexus exists between the tax-payer and the taxing State, such as through residence, citizenship, habitual abode, situs of capital and the like. Normatively, customary international law does not forbid double-taxation, resulting from the interaction of the domestic laws of two or more States, as long as legislation of each of the concerned States is consistent with international law. International law has yet to develop an adequate raft of norms to regulate the incidence of double-taxation by introduction of rules establishing which of the two or more States having a nexus with the transaction in question is entitled to the levy of tax, to what extent and other allied norms. A major component of this irritant phenomenon is therefore regulated by bilateral (or multi-lateral) double-taxation treaties. The concept of bilateral agreements between individual States for avoidance of double-taxation emerged towards the end of the 19th century. Only federally related or closely allied States were involved in the initial phase, of State-centric taxation regimes evolving organically to adapt to the accelerating pace of the globalizing and coalescin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ional law and constitutional law, States have the original jurisdiction to tax, as an attribute of sovereignty. What double taxation treaties do is to establish an independent mechanism to avoid double taxation through restriction of tax claims in areas where overlapping tax claims are expected, or at least theoretically possible. Essentially therefore, through the mechanism of a treaty, the contracting States mutually bind themselves not to levy taxes, or to tax only to a limited extent, in cases where the treaty reserves taxation for the other contracting States, either wholly or in part. Contracting States thus and quatreaty provisions, waive tax claims or divide tax sources and/or the taxable object. Unlike rules of private international law tax treaty norms assume that both contracting States tax according to their own law. Treaty rules do not lead to the application of foreign law. What treaty rules do is, to limit the content of the tax law of both the contracting States to avoid double- taxation. In effect, double tax at ion a void a ncetreaty rules merely alter the legal consequences derived from the tax laws of the contracting States, either by excluding application of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... law of the land or be implemented unless Parliament passes a law referable to Article 253. Obligations arising under international agreements or treaties are not automatically binding. Thus, the trajectory of a municipal law would not be impeded or deflected, though at variance with provisions of a treaty unless Parliament enacts a law to provide dominant efficacy to treaty provisions. Section 90 of the Act, in particular sub-section 2 thereof is a law made by Parliament referable to Article 253 read with Entries 13, 14 and 82 of List 1 of the Seventh Schedule. The provision (subsection 2) enacts that where the Central Government has entered into an agreement with the Government of any other country under Sub-section (1) for grant of relief of tax or avoidance of double-taxation, then, in relation to the assessee to whom such grant applies, the provisions of the Act shall apply to the extent they are more beneficial to that assessee. From the above very brief and broad-strokes analyses of the origins, evolution and trajectory of tax treaties and the modus vivendi of treaty provisions and domestic laws, we infer that the DTAA and the applicable domestic law - the Act are over ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Pursuant to applications by the petitioners under Section 245Q-1 of the Act, the Authority for Advance Ruling (for short, AAR passed an order dated 28-11-2011. The AAR ruled (on a question presented by both petitioners) that the capital gain arising from the sale of ShanH shares (a French incorporated entity) by the petitioners (also French incorporated entities), to Sanofi (a French incorporated entity as well) is taxable in India in terms of Article 14(5) of the DTAA; that in view of this ruling, question No.2 (presented by MA) does not arise. Question No.2 presented by MA (without prejudice to Question No.1), was: whether the controlling interest (assuming while denying that it is a separate asset) is liable to be taxed in France under Article 14- 6 of the DTAA. The ruling dated 28-11-2011 by the AAR is challenged in these writ petitions. Maintainability and scope of adjudication : Counsel for the petitioners contended and the learned Additional Solicitor General for India (ASG) agreed that on principle and binding authority (vide Columbia Sportswear Company v. DIT, Bangalore [ Dated : 30-07-2012 in SLP (C) No.31543 of 2011 ] ), the challenge to the order dated 28-11-2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ged in the business of research and development of technologies for pharmaceutical products, including bio- pharmaceuticals, life-saving drugs, employing genetic engineering and polymer-chain reaction technology; and carrying on the activity of research and development of laboratories and designing DNA probes; and commercialization of products developed with in-house research or otherwise. SBL was initially set up by, Mr. K.I. Varaprasada Reddy (VR). United Overseas Investment Limited (UOIL) became a shareholder of SBL pursuant to a financial collaboration agreement dated 17-02-1994 executed between VR, SBL and UOIL. H.E. Yousuf Alawi Abdullah along with his associates (hereinafter, H.E. ) held approximately 92% and Mr. Khalil Ahmed approximately 8% of the issued and paid up share capital of UOIL. UOIL was set up in Mauritius as a special purpose investment vehicle and held a major shareholding in the issued and paid up share capital of SBL (see the shareholders agreement dated 07-11-2006 between MA, SBL, Mr. K.Ahmed and UOIL. On 06-11-2006 a share purchase agreement (SPA) was entered into for purchase of 89,96,750 SBL shares - (analyses of this SPA will be considered he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 31.10.2006 - meeting of ShanH shareholders (with MA as the unique shareholder ), presided over by Mr.Michel Dubois CEO, decided : (i) to appoint Mr.Philippe Sans (who previously served as the President and CEO of Bio Merieux NorthAmerica) as the Chairman of the Board of ShanH; (ii) to acquire the shares of SBL; (iii) to confer on him powers to represent ShanH, either individually or along with Mr.Michel Dubois or Ms. Dominique Takizawa for negotiations, conclusion and drawing up of necessary agreements for theacquisition; and (iv) to sign a housing agreement in Lyon with MA. On 02-11-2006 and 03-11-2006, Escrow agreements were entered into with Calyon Bank, Lyon and with Blom Bank, Geneva, by ShanH and UOIL to facilitate sale of UOIL shares to ShanH. The agreements reveal that consideration for purchase of the UOIL shares flowed from ShanH. 06.11.2006 - UOIL, MA, SBL, H.E. VR and family, Mr.Khalil Ahmed and H.E. Shaik Ghassan I Shaker, entered into a Share Purchase Agreement (SPA) envisaging sale by UOIL to MA of 89,96,750 SBL equity shares held by UOIL so that MA may cause ShanH or any other wholly owned subsidiary to purchase the said shares. 07.11.2006 - s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2007-08 and 2008-09, SBL remitted dividends to ShanH account in Calyon Bank, Lyon, (vide copies of statements issued by IOB, Hyderabad Branch, dated 11-10- 2007, 25-11-2008 and 21-07-2009). By July, 2009, ShanH held about 78.75% of the SBL share capital and voting rights. MA, GIMD and Mr. Georges Hibon owned the 7,00,000 shares of ShanH representing 100% of the authorized and issued share capital of ShanH. FIPB approved ShanH purchase of SBL shares : Vide SBL application to FIPB dated 22-09-2006; FIPB proceedings dated 13-06-2007; ShanH application to FIPB dated 12-04-2007; SBL application to FIPB dated 18-04-2007; and FIPB letter to SBL dated 13-06-2007. 08-07-2009 - SBL intimates FIPB that ShanH holds 78.75% of its shares. Custody agreement with HSBC Ltd. : 16-04-2008 - Custody agreement between ShanH and HSBC Ltd. for designating HSBC as agent of ShanH for holding and dealing with seller's documents in Escrow, in relation to ShanH intending to purchase approximately 15% of SBL shares from SBL shareholders. SPA - between GIMD, MA and Sanofi : 10-07-2009 - SPA entered into between MA/GIMD as the sellers and Sanofi as the buyer, in respect of ShanH shares. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Shantha West (an SBL subsidiary). It is however represented (at the hearing before this Court) that the sale of Shantha West has not occurred. Article IX sets out a confidentiality agreement whereunder Sanofi acknowledges that the confidential proprietary information or documents provided to it or any of its affiliates pursuant to this SPA shall be Confidential Information subject to the confidentiality agreement dated 12-02-2009 (entered into between Sanofi and MA); and that the SPA and the confidentiality agreement shall constitute the entire agreement between Sanofi and its affiliates on the one hand; and MA, GIMD and when relevant their affiliates on the other, with respect to the subject matter of the SPA. The SPA was signed by representatives of MA, GIMD and Sanofi. 6. Revenue assessed ShanH u/S.201(1 ) of the Act :- 04.08.2009 : Survey u/S.133A of the Act in SBL office premises (on Revenue s assumptions based on newspaper reports that Sanofi is to acquire more than 80% stake in SBL from ShanH, referred to as a subsidiary of MA); that the acquisition attracts provisions of TDS u/S.195 of the Act; and that ShanH had originally acquired stake in SBL in Novemb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 challenge to the order dated 17-12-2009 of AAR : Assailing the order of the AAR dated 17-12-2009 (admitting the applications of MA and GIMD, for a ruling on merits), Revenue filed W.P.Nos.18132 and 18133 of 2010. By the Order dated 25-03-2011 two learned Judges of this Court (comprising the Division Bench) differed on whether the issue of admissibility must be determined as a preliminary issue [i.e., with regard to the threshold bar under the 1st proviso to Section 245R(2)], by recording reasons in writing; and whether Revenue is entitled to a hearing before an application seeking advance ruling is admitted. One learned Judge concluded that the AAR was not required to decide as a preliminary issue the threshold bar nor is required to record reasons while admitting an application for a further examination leading to an advance ruling or for refusing to do so on the ground of the bar. The other learned Judge concluded to the contrary and on the further ground that as Revenue was not intimated by the AAR as required u/5.245R(1) and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd 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 chargeable to tax in India as under Section 9 (1) (i) of the Act, income accruing indirectly through or from any business connection in India is deemed to accrue or arise in India; (e) under Section 195 of the Act, Sanofi should have deducted tax at source on the payment made to MA; (f) Sanofi should show cause under Section 201 (1) of the Act, why it be not treated as an assessee in default, of the tax liability of MA in India in respect of the gains made by MA from disposal of its investment in India; and (g) Sanofi should submit various agreements and details of the transactions with MA. 20-10-2009: Sanofi responded, contending that :(i) provisions of the Act do not apply to the transaction of purchase of shares of ShanH, a French Company in France by Sanofi, another French Company from MA and GIMD, both French companies; (ii) provisions of the Act have no extra territorial operation; (iii) Indian tax authorities have no jurisdiction to require it, a non-resident, to deduct tax in respect of payments made outsid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ected 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 circumstances in which Sanofi was disabled from concluding its arguments in respect of legal submissions and seeking further opportunity. 25.05.2010: Assistant Director of Income-Tax (Intl.Txn.) - II, Hyderabad, passed an order u/S.201(1)/(1)A of the Act. Sanofi was held liable to tax and interest on long-term capital gain at ₹ 5,94,99,26,425/- and interest (from 01.09.2009 to 25.05.2010 at ₹ 53,54,83,378/- in all ₹ 6,48,54,09,803/-). A notice of demand u/S.156 of the Act of even date was also issued. 15.11.2011: After a due process, a rectification order was issued re-determining the long-term capital gains tax at ₹ 8,33,12,47,206/- and interest for twenty-seven months (September, 2009 to November, 2011) at ₹ 2,24,94,36,746/- The total amount set out being ₹ 10,58,06,83,952/-. W.P.No.14212 of 2010 by Sanofi challenges the order of assessment dated 25.05.2010, the consequent demand notice of even date and the rectification order dated 15.11.2011 (vide am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 of curial opinion in England; and referring to IRC v. Burmah Oil Company Ltd [ 1982 STC 30 (HL) ] and HMRC v. Tower MCashBack LLC [ 2011UK SC 19 ] concluded that notwithstanding the legal validity of a transaction or set of transactions, if the purpose was to create a legal smokescreen to avoid payment of tax that would legitimately be due and having arisen on the basis of a transaction or an event, the legal effect of the transaction in the context of the taxing statute, has to be considered,notwithstanding its reality or validity. (g) The AAR concluded that the relevant sequence of events (MA investing in acquisition of SBL shares through a subsidiary ShanH; eventually acquiring a controlling interest, the shares having been acquired in the name of ShanH; subsequently GIMD coming on to acquire a 20% equity in ShanH; shares in SBL being the only asset of ShanH with no other business; and eventually MA and GIMD offloading shares in ShanH to S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (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 interest over SBL by ShanH could be viewed as a separate right or asset, [independent of the shares not falling under Article 14(5)], even so the situs of the controlling interest is also located and taxable only in France under Article 14(6) of the DTAA; (vi) AAR ruling is flawed on account of incorrect reference to the (foreign) decision - Tower MCashBack; (vii) The AAR ruling is contrary to settled legal principles and erroneous; (viii) There being no cost of acquisition determinable for controlling rights and underlying assets, no date of acquisition nor there being any part of the consideration apportionable to these rights, the computation provision of capital gains would fail and taxing the transaction on the underlying assets theory would be inoperative; (ix) The principles propounded/affirmed in Vodafone International Holdings BV vs. Union of India[341ITR 1] and in Union of India v. Azadi Bachao Ando ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 light of the transactionaldocuments? 2. Is the corporate status of ShanH immune to enquiry as to its commercial substance merely on account of ShanH being a joint venture? 3. What is the subject matter of the transaction involved in the SPA dated 10-07-2009 between MA/GIMD and Sanofi? and 4. Who transferred the right, title and interest in SBL shares and realized the capital gains on the transfer of the SBL shares? 14. According to Revenue : The case of Revenue as predicated on its interpretation of the transactional documents, leading to and including the SPA dated 10-07-2009 (between MA/GIMD and Sanofi), may be noticed : In substance the transaction involved in the SPA dated 10-07-2009 was only for acquisition of the control, management and business interests in SBL, the Indian company and was not a mere divestment of ShanH shares, a French company. As a result, capital assets i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Therefore in terms of Article 3(2), the expression would derive its meaning from domestic law. Domestic law comprehends disposal of capital assets within the meaning of the word transfer [u/S.2(47) of the Act]. Since transfer is widely defined in Section 2(47) of the Act to cover direct as well as indirect transfers, the transaction covered by the 10-07-2009 SPA, which constitutes indirect transfer of SBL shares under the guise of transfer of ShanH shares is chargeable to tax in India. The retrospective amendment to Section 2(47) of the Act (by the Finance Act, 2012) clarifies that transfer would mean and would deem to have always meant, the disposal of an asset whether directly or indirectly or voluntarily or involuntarily. Since, MA/GIMD are owners of SBL shares (both legal and beneficial), it is MA/GIMD which have the participating interes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 granted to the petitioners (in W.P.Nos.3339 and 3358 of 2012); and whether the orders by the Revenue dated 25-05-2010 and 15-11-2011 are valid and sustainable? and (6) Whether the order dated 25-05-2010 (challenged in W.P.No.14212 of 2010) determining the petitioner-Sanofi to be an assessee in default in respect of payments made by it to MA and GIMD for acquisition of ShanH shares, u/S.201(1) of the Act; the consequent notice of demand dated 25-05-2010; and a rectification order dated 15-11-2011 (u/S.154 of the Act) re- computing the long-term capital gain, the tax thereon and the consequent interest, are valid ? ANALYSIS : 16. Issues 1 and 2 : Issues 1 and 2 require integrated analyses of the material on record, applicable precedents, authorities and competing contentions with regard to liability of the transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 precedents instruct ? Revenue relied on National Cement Mines Industries Ltd.; Juggilal Kamlapat; Sri Meenakshi Mills Ltd.; McDowell; Associated Rubber Industry Ltd; Renusagar Power Co.; New Horizons Ltd.; Ebrahimi; and DHN Food Distributors Ltd., in support of its claim for lifting the corporate veil of ShanH and thereafter proceed to treat the transaction as one for transfer of the management, control and underlying assets of SBL to Sanofi, thus liable to capital gains tax under the Act. National Cement Mines Industries Ltd. interpreted a deed dated 07-05-1935 to confirm the view taken all through, that the transaction in question was substantially a commercial transaction for sharing profits of the commercial activities of Associated Ceme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rable 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 and tax evasion , commencing from the observations of Lord Sumner in IRC v. Fisher s Executors [ 1926AC 395 ] and reiterated by Lord Tomlin in IRC v. Duke of Westminster [ 1936AC 1 ] ; referred to developments and shift in judicial attitudes since World War-2; the observations of Lord Wilberforce in W.T. Ramsay v. IRC [ 1982AC 300 ] ; explanation of the paradigm shift in judicial opinion offered by Lord Diplock and Lord Scarman in Burmah Oil Company Ltd., and by Lord Brightman, Lord Fraser and Lord Roskill in Furniss (Inspector of Taxes) v. Dawson [ (1984)1 All.E.R. 530 ] and concluded : 17. We think that time has come for us to depart from the Westminster principle as emphatically as the British Courts have done and to diss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd 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 respondent-Company) was to reduce its income so as to avoid or reduce the bonus payable to its workmen (the appellants), the Supreme Court observed that wherever ingenuity is expended to avoid taxing or welfare legislations, it is the duty of the Court to go beyond the smokescreen and discover the true state of affairs. The corporate veil was again lifted in Renusagar Power Co. and others. The Court treated power generation by Renusagar as power generated by Hindalco, to determine the appropriate rates of duty under provisions of the UP Electricity (Duty) Act, 1952. The Court spelt out several factors to justify the assumption that both the entities (the subsidiary-Renusagar and the holding company-Hindalco) were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 Transport . Compensation for disturbance under the 1961 Act to the appellant - DHN and Transport was denied, though the Local Authority admitted that DHN and Transport had suffered substantial business dislocation. In these circumstances and in the context of considering whether the appellant - DHN was entitled to compensation for disturbance of its business, the Court of Appeal lifted the corporate veil of Bronze and Transport and ruled that the three companies (DHN, Bronze and Transport) should not be treated separately so as to be defeated on a technical point and should not be denied compensation which should justly be paid for disturbance. The Court held that the three companies sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sitive 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 dividend by Mauritius company and/or by way of repayment of loans received by the Mauritius company from the foreign principal/shareholder for the purpose of making the investment. Mr. Chinoy is right in his contention that apart from the DTAA, which provides for tax exemption in the case of capital gains received by a Mauritius company/shareholder at the time of disinvestment/exit and the fact that Mauritius does not levy tax on dividends declared and paid by a Mauritius company/subsidiary to its foreign shareholders/principal, there is no other reason for this quantum of funds to be invested from/through Mauritius. We are, therefore, of the view that in the absence of LOB cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 . Only Article 14(4) accommodates a limited see through . Petitioners alternatively contend that even on lifting the corporate veil of ShanH, the legal and beneficial owner of SBL shares is ShanH and ShanH alone; the transaction falls within the provisions of the DTAA; is chargeable to capital gains tax in France; and even if Revenue s far-fetched and creative underlying assets theory is considered, the chargeability to tax is allocated to France under Article 14(6) of the DTAA. Petitioners rely on the following in support of their several contentions : Charanjit Lal Chowdhury v. UOI [ AIR 1951 SC 41 ] ; Bacha F Guzdar v. CIT [ AIR 1955 SC 74 ] ; Smt. Mahara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alue 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 for acquisition of such shares remains the price of those shares though the price paid be higher than the market price. Controlling interest is only an incidence of shareholding and has no independent existence, held the Court and went on to add that controlling interest cannot be transferred without transferring the shares. Revenue has referred to Clariant International Ltd. and another v. Securities and Exchange Board of India [ (2004)8 SCC 524 ] to buttress its contention that MA (and not ShanH) is the legal and beneficent owner of SBL shares. According to Revenue (noticed earlier) since the amended ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 must be satisfied to enable him to exercise rights of a member. The Court also quoted with approval the statement in Buckley [ Buckleyon the Companies Act (12th Ed.) ] which states that as between the shareholder and the company, the person entitled to exercise the right of voting is a person legally entitled to the shares, the member whose name is on the register; and the company cannot enquire into beneficial ownership. Para - 53 of Clariant (on which Revenue placed reliance) observes that rights of a shareholder are purely contractual and would be such as are granted to him by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... auritius 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 notices was that the recipients were mostly shell companies incorporated in Mauritius operating through Mauritius with the main purpose of investment of funds in India but allegedly controlled and managed from countries other than India or Mauritius. On this assumption and alleging that they were not residents of Mauritius so as to derive benefits from the tax treaty, they were put on notice for levy of tax under the Act. The show cause notices apparently created a panic in the FIIs resulting in hasty withdrawal of funds. Thereafter to clarify the situation, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /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. Since the general principle of chargeability of tax u/S.4 and the general principle of ascertainment of total income u/S.5 of the Act are subject to the provisions of the Act, provisions of the Treaty would automatically over-ride provisions of the Act in the matter of ascertainment of chargeability to income tax and ascertainment of the total income, to the extent of inconsistency with Treaty terms. Liability to taxation is a legal situation while payment of tax is a fiscal fact. For application of Article 4 of the IMA, what is re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erest 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 principle in Duke of Westminster has been departed from subsequently by the House of Lords, is fallacious. Decisions of the House of Lords in Craven v. White [ (1988)3 All.E.R. 495 ] and MacNiven (H.M. Inspector of Taxes) v. Westmoreland Investments Ltd. [ (2001)1 All.E.R. 865 ] considered. M.V. Valliappan v. ITO [ (1988)170ITR 238 (Mad) ] ; Banyan and Berry v. CIT[(1996)222ITR 831 (Guj)]; CWT v. Arvind Narottam [ (1988)173ITR 479 (SC); ] and Mathuram Agrawal v. State of Madhya Pradesh [ (1999)8 SCC 667 ] distinguishing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as 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 tax on capital gains arising out the sale of CGP share capital contending that CGP, while not a tax resident in India, held the underlying Indian assets [of (Hutchisson Essar Ltd.)HEL] and the aim of the transaction was acquisition of a 67% controlling interest in HEL, an Indian company. On a writ petition by Vodafone, the Bombay High Court ordered a remit on the question whether Indian Tax Authorities hadjurisdiction to tax the transaction. Vodafone challenged this decision un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 piercing the (corporate) veil in circumstances where tax evasion is resorted to through use of colourable devices, dubious methods and subterfuges. McDowell does not hold that all tax planning is illegal/illegitimate/impermissible. While artificial schemes and colourable devices which constitute dubious methods and subterfuges for tax avoidance are impermissible, they must be distinguished from legitimate avoidance of tax measures. Reading McDowell properly and as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 establishes, on the basis of the facts and circumstances surrounding the transaction, that the impugned transaction is a sham or tax-avoidant. If a structure is used for circular trading or round tripping or to pay bribes (for instance), then such transactions, though having a legal form, could be discarded by applying the test of fiscal nullity. Again, where Revenue finds that in a holding structure an entity with no commercial/business substance was inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd 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 activities on the authority of its own managerial discretion. Exit is an important right of an investor in every strategic investment and exit coupled with continuity of business is an important telltale circumstance, which indicates the commercial/business substance of the transaction. Analyses of the transaction and persona of CGP : Two options were available for Vodafone acquiring a controlling participation in HTIL, the CGP route and the M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Azadi Bachao Andolan and in Vodafone. Factual matrix of the Lamesa lis : The issue was whether Lamesa is liable to pay income tax in Australia in respect of profits made by it from the sale of shares in an Australian public listed company - ARL. In 1992 US business became interested in acquiring Australian listed mining companies. For that purpose US investment vehicle was established, which acquired an Australian subsidiary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 assets of the subsidiary which was in the nature of a link in a practical and commercial sense. The transaction is thus liable to be taxed in Australiau/Art.13(2)(a). The third contention based on Art.13(2)(b)(iii) requires to treat as there having been a sale of a comparable interest , contending that the assets of the subsidiary are a comparable interest to the case as what is exploited is the shares in a company, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 found to be the beneficial owner, the rate of withholding tax under the Canadian Income Tax Act r/w Art.10 of the Tax Treaty would be 5%; if Volvo and Henlys were to be found the beneficial owners of the dividend, under provisions of the Canadian domestic Tax law r/w relevant provisions of the Canadian-Swedish Tax Treaty and the Canadian - UK Tax Treaty, the withholding tax would be 15% and 10%, in respect of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ication 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 anyone for how he deals with the dividend income. RIP ACJ (for the Tax Court of Canada) observed that when corporate entities are concerned, one does not pierce the corporate veil unless the corporation is a conduit for another person and has absolutely no discretion as to the use or application of funds put through it as a conduit, or has agreed to act on someone else s behalf pursuant to that pers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... older - 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 knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract. (2) The background was famously referred to by Lord Wilberforce as the 'matrix of fact', but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l 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. Surely the parties are reasonably entitled to expect that the courts will strive to ascertain their true intention or, certainly, not to arrive at a meaning of their contract which is at variance with their actual intention. They cannot expect that the judicial exercise of construing their contract will be buried under a stockpile of excessive formalism. Lewiso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orporate 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 shares? Revenue interpretation of the ShanH persona : The case of the Revenue is premised around the following inferences from the transactional documents : SBL was a vibrant and sound commercial and economic proposition having developed and commercializedIndia's first R-DNA Hepatitis B vaccine which was pre- qualified by WHO an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 and issued equity share capital of SBL; and stipulate that purchase of SBL shares by MA or any other subsidiary wholly owned by it shall be deemed purchase by MA. MA paid US $200,000 to SBL for purchase of stamp duty and Clause 4(7) of the SPA obligates SBL to handover duly stamped share transfer forms to MA (not t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ociation 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 shareholder of SBL in its independent, corporate status or as the assignee of MA. Distillate of conclusions by Revenue on the transactional documents : (a) ShanH is a company of no commercial substance : ShanH is a holding company which has never operated, owned nor currently ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cture 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 adopted in previous transactions, ShanH was incorporated. Without ShanH incorporation as a distinct investment entity, it would not have been possible to interest GIMD (with no expertise in the field of vaccines) to come on board ShanH, as an investor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... structions 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 ledger of ShanH reveals that remittances into the Escrow accounts, in Calyon Bank and Blom Bank (the Escrow agents) were by ShanH. Payments to SBL on account of the direct subscription of its shares were also by ShanH. Acquisition of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 premised on the amended SBL-AOA provisions areerroneous and proceed on a misconception and a strained construction of the relevant documents and surrounding circumstances. Petitioners state that the amended m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 to be a party to the SPA while clearly stipulating that ShanH would be authorized by MA to purchase SBL shares. The evolution of ShanH as a distinct entity (though a wholly owned subsidiary of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 12 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 like would have committed such huge investment to pickup a 20% stake in ShanH, if MA and not ShanH were the legal and beneficial owner of SBL shares. The only commercial s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 ₹ 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, in addition to ShanH s current holding of about 61.40% of SBL shares. 13-06-2007 : FIPB (in response to SBL s letters dated 18-04-200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt 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 correspondence, of ShanH being a subsidiary of MA would not alter the non-derogable fact that post 08-03-2007 (the partnership ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 failure to withhold taxes while making payments to sellers. The orders passed by the Revenue esta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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. If ShanH, was not a pre-ordained scheme or arrang ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is) 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 providing generic policy guidelines to group ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; 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 (that the transacti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions, 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 is to ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s evidencing negotiations 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsformed as a JV comprising MA/GIMD and eventually evolved as a JV comprising 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 receiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under which MA (not ShanH) acquired the SBL shares and that consequently the legal and 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 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icted in Craven, Ramsay was resurrected and applied in Commissioners for Her Majesty's Revenue and 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 tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion in Barclays Mercantile Business Finance Ltd. v. Mawson [ (2005)1 AC 684 ] , Supreme Court observed that one of the lessons of 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) that no affidavit need befiled as the contention is one of law, requiring an interpretative process. The above contention by Revenue was neither 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge; (viii) The transaction in issue clearly involves deemed disposal of SBL shares if not actual disposal; and since the transaction involves deemed disposal of 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 08-1994, (on a notification by both the contracting States to each other on the completion of the procedures under their respective laws for bringing into force the Convention), in accordance 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 ent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcraft 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. Double taxation shall be avoided in the following manner : .. . .. . .. . 1. In the case of France : (a) Pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ible. 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. After Parliament has said what it intends to say, only the Court may say what the Parliament meant to say. None else. Once a statute leaves Parliament House, the Court s is the only authentic voice which may echo (interpret) the Parliament. Thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 amended provision, we do not see why we should refuse to take it into consideration as an aid to a correct interpretation. It harmonises with and clarifies the real intent of the words used. Must we, in such circumstances, ignore it ? ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 sought to be remedied by the enactment of sub-section (2) and why the enactment of sub-section (2) was found necessary. Lok Sikshana Trust and K.P. Varghese authorize reference to a speech by the mover of a Bill, particularly of the Finance Minister regarding a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmany 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 or commercial profits of the German enterprise which did not carry on a trade or business in Canada or have permanent establishment and was therefore exempt from subjection to tax in Canada. How is dominance of Convention provisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 whatever reason which results in a change or expansion of a definition of a term such as interest does not prevail over the terms of the 1956 statute because of the necessary meaning of s.3 thereof; and concluded. (iv) In th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 (including override of a tax treaty), lies on the party (Revenue, in this case) asserting the same. The U.S. Supreme Court in United States v. United Continental Tuna [ (1976)425U.S. 164 ] expou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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; so that when such an approach produces injustice, absurdity, contradiction or stultification of statutory objective the language may be modified sufficiently to avoid such disadvantage, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 while petitioners contend that the tax on the capital gain is allocated to France, Revenue claims that it stands allocated to India. Petitioners additionally contend that if Revenue s underlying assets ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dent 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 (ShanH), of the affairs, management and assets of its subsidiary (SBL), as alienation of shares by or of the control over the affairs, management and assets of the subsidiary ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 India under Article 14(5) itself. To support this contention reliance is placed on the observations set out in Paragraphs 19 to 26 of Tradehold Ltd. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ved 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 and is consequently immune to levy and collection in SA, under provisions of the 1962 Act. In our considered view, Tradehold Ltd. affords no as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l 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 totalling to ₹ 359.87 crores, ₹ 20.6 crores and ₹ 82.12 crores respectively during FY 2006-07, 2007-08 and 2008-09 to various NRIs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 of the other contracting State (India), this fact is irrelevant under DTAA provisions; except where the alienation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, both in India and France, by an artificial and strained construction of the provisions of Article 14( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 usurpation (by an unauthorized body - the interpreting Agency/Tribunal), intrusion and unlaw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lani (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 the DTAA (extracted supra) provides that any term not defined therein shall, unless the context otherwise require, have the meaning which it has under the law of tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 incidental transfer of rights in or control over assets of SBL, when the transaction in issue is one of alienation of ShanH shares. As pointed out in Vod ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 transaction conceived by business persons without any tax motivation and carried out with the assistance of tax professionals in a manner design ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia. 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) (i) applies only where the income is taxable in India in accordance with the provisions of the DTAA. As earlier noticed, Revenue predicates its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 provisions of Article 3(2) of the DTAA; and thereby provisions of the Act to the transaction in issue; and in transgression of provisions of the DTAA; and (d) the transaction in issue is not liable to tax in India, under t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... termination 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 applications), found no reason to revoke its earlier order dated 17-12-2009 and posted the applications for hearing on merits, u/S.245R(4) of the Act. On 15-07-2011 writ petitions by Revenue were dismissed by this Court. AAR (at paragraphs 30 and 31 of the impugned ruling) declined to rule on the questions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thorities 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 substantive validity of the AAR ruling is the second facet of this issue, which we now proceed to consider. (b) Is the AAR ruling misconceived, contrary to settled legal principles and hence unsustainable ? In para-9 (supra), we have summarized the relevant conclusions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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). This ruling is without prejudice to the rights, if any, of MA and GIMD to the benefits, if any, available under Article 25(2) of the DTAA; and (ix) In view of above ruling, the second question posed by MA does not arise, since Article 14(6) would apply only if Article 14(5) has no application. The question whether controlling interest is an asset that would be taxable in France under Article 14(6), is therefore not considered. Conclusions on Issue No.5 :- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctions 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 the Act requires prioritizing levy and collection of Indian income tax, subordinating the dominant signals of DTAA provisions, by resort, if need be, to artificial and strained construction; of the transaction and DTAA provisions as well. In our considered view, provisions of the DTAA (truly and fairly construed) applied to the transaction in issue (neutrally identified with forensic integrity) leads to the singular conclusion - that the consequent tax is allocated to France; and there is no question of avoidance of tax under the provisions of the Act. In the facts and circumstances of the case, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 on record our appreciation and gratitude, for the valuable assistance rendered by the learned counsel for the respective parties, whose commitment, fair and professional advocacy and forensic integrity, greatly assisted us in the discharge of our functions. 1. Summary of conclusions : Our conclusions on Issues (1) to (6) are: a) ShanH is an independent corporate entity, registered and resident in France. It has a commercial substance and a purpose (FDI in SBL); and is neither a mere nominee of MA and/or MA/GIMD, nor is a contrivance/device for tax avoidance; b) since inception (in 2006) till date, ShanH (not MA or MA/GIMD) had acquired and contin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aw 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 furniture) held for personal use by the assessee or any member of his family dependent on him, but excludes - (a) jewellery; (b) archaeological collections; (c) drawings; (d) paintings; (e) sculptures; or (f) any work of art. (a) jewellery; (b) archaeological collections; (c) drawings; (d) paintings; (e) sculptures; or (f) any work of art. Explanation For the purposes of this sub-clause, jewellery includes (a) ornaments made of gold, silver, platinum or any other precious metal or any alloy containing one or more of such precious metals, whether or not containing any precious or semi- precious stone, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and scope for, urbanization of that area and other relevant considerations, specify in this behalf by notification in the Official Gazette; (iv) 6 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 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 the Gold Deposit Scheme, 1999 notified by the Central Government; Explanation For the removal of doubts, it is hereby clarified that property includes and shall be deemed to have always included any rights in or in relation to an Indian company, including rights of manage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecoming 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 April, 1962) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... merchandise for the nonresident; or b. has no such authority, but habitually maintains in India a stock of goods or merchandise from which he regularly delivers goods 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 : Provided further that 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or earning any income from any source in India : Provided that nothing contained in this clause shall apply in relation to so much of the income by way of royalty as consists of lump sum consideration for the transfer outside India of, or the imparting of information outside India in respect of, any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process or trade mark or similar property, if such income is payable in pursuance of an agreement made before the 1st day of April, 1976, and the agreement is approved by the Central Government : Provided further that nothing contained in this shall apply in relation to so much of the income by way of royalty as consists of lump sum payment made by a person, who is a resident, 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 an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... including the amounts referred to in section 44BB; (v) the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films; or (vi) the rendering of any services in connection with the activities referred to in sub-clauses (i) to (iv), (iva) and (v). Explanation 3. For the purposes of this clause, computer software means any computer programme recorded on any disc, tape, perforated media or other information storage device and includes any such programme or any customized electronic data; (vii) income by way of fees for technical services payable by -- (a) the Government; or (b) a person who is a resident except where the fees are payable in respect of services utilized in a business or profession car ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ise in India under clause 9v) or clause (vi) or clause (viii) of sub-section (1) and shall be included in the total income of the nonresident, whether or not, -- (i) the non-resident has a residence or place of business or business connection in India; or (ii) the non-resident has rendered services in India. Provided further that 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the royalty is payable in respect of any right, property or information used or services utilized for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or (c) a person who is a non-resident, where the royalty is payable in respect of any right, property or information used or services utilized for the purposes of a business or profession carried on by such person in Indiaor 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 so much of the income by way of royalty as consists of lump sum consideration for the transfer outside India of, or the imparting of information outside India in respect of, any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process or trade mark or similar property, if such income is payable in pursuance of an agreement made before the 1st day of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y; (ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property; (iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property; (iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill; (va) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB; (v) the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films; or (vi) the rendering of any services in connection with the activities referred to in sub-clauses (i) to (iv), (iva) and (v) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 14 of the Constitution or to a person who, having been appointed before the 15th day of August, 1947, to be a Judge of the Federal Court or of a High Court within the meaning of the Government of India Act, 1935, continues to serve on or after the commencement of the Constitution as a Judge in India. Explanation -- For the removal of doubts, it is hereby declared that for the purposes of this section, income of a non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of sub-section (1) andshall be included in the total income of the nonresident, whether or not, -- (i) the non-resident has a residence or place of business or business connection in India; or (ii) the non-resident has rendered services in India. Section 195 Other sums 195. (1) Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest or any other sum chargeable under the provisions of this Act (not being income c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st 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. (5) The Board may, having regard to the convenience of assesses and the interests of revenue, by notification in the Official Gazette, make rules specifying the cases in which, and the circumstances under which, an application may be made for the grant of a certificate under sub-section (3) and the conditions subject to which such certificate may be granted and providing for all other matters connected therewith. (6) The person referred to in sub-section (1) shall furnish the information relating to payment of any sum in such form and manner as may be prescribed by the Board. 195. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ette 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 defined under the said agreement or the Act, but is assigned a meaning to it in the notification issued under sub-section (3) and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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