TMI Blog2011 (11) TMI 804X X X X Extracts X X X X X X X X Extracts X X X X ..... g the shares of an Indian company, called Shantha Biotechnics Ltd, ( Shantha ). ShanH was shown as a permitted assign. 599630 shares were acquired. On 12.3.2007 GIMD came into the picture by acquiring 120000 shares amounting to 20% of the shares from MA in ShanH. Further capital increase of shares on 25.3.2009 were also taken by MA and GIMD in the same proportion. In May, 2009 Mr. Georges Hiborn acquired 10400 shares from MA and 2600 shares from GIMD. Due diligence of Shantha was got done by MA. MA claims that ShanH, through its representative, also actively participated in managerial and technical issues relating to the growth of Shantha. The shares in Shantha were acquired by ShanH or in the name of ShanH. Admittedly, the original capital flowed from MA and even the stamp duty was paid by MA though it is submitted that the amount spent in that behalf by MA was subsequently made good by ShanH. MA also appointed a director on the Board of ShanH. With a view to ensuring the achievement of better progress in business by Shantha, MA and GIMD felt that Shantha needed the backing and support of a leading global vaccine company. MA and GIMD started looking for a strategic alliance in re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scertain their liability to tax consequent on the share transfer. It is in the face of these proceedings that MA and GIMD approached this Authority for a ruling essentially on the question whether the sale of shares by them in ShanH to Sanofi is liable to be taxed in India. The questions formulated by MA in its application are: (1) In terms of the provisions of the double taxation avoidance treaty dated 6th September, 1994 as amended from time to time, entered between the Republic of India with the Government of French Republic ( Indo-French Tax Treaty ) read with section 90 of the Income-tax Act, 1961, whether the Capital gains arising from the sale of shares of ShanH (French incorporated Entity) by the Applicant (French Incorporated Entity) to Sanofi (French Incorporated Entity) is liable to tax in France or in India? (2) Without prejudice to the above, whether controlling interest (assuming while denying that it is a separate asset) is liable to be taxed in France under Article 14(6) of the Indo-French Tax Treaty? GIMD has raised only the first question indicated above, in its application. 3. To recapitulate the facts, MA a French company, possibly after arrivin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the tax residency certificate issued to it by the French Authorities. It is pointed out that there was no treaty shopping or evasion of tax involved since the capital gain, if any, was taxable in France under the French law and all that was being sought for, was a ruling on the interpretation of the relevant article in the DTAA between India and France. 4. Facts in detail and the incidents relating to the transaction have been presented before us. The attempt of the Revenue was to persuade us to invoke the proviso to Section 245R(2) of the Act to find that what was involved was the devising of a scheme to avoid tax payable in India and in such a context, no ruling ought to be given by this Authority under section 245R(4) of the Act. The pendency of the proceedings under section 201 as against Sanofi was also put forward as a bar to the entertaining of this application. Originally, this Authority had admitted the applications on 17.12.2009 for giving a ruling under section 245R(4) of the Act on the basis that no valid objection in terms of Section 245R(2) of the act had been put forward. The Revenue came forward with an application to have the question re-examined and this Auth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on under section 245R(2) of the Act, since the final ruling was yet to be rendered and this Authority had itself clarified that the question sought to be raised by the Revenue would again be considered while giving the final ruling. But the other learned Judge took the view that it was a question of jurisdiction of this Authority to entertain an application under section 245Q of the Act. Since according to him, there was violation of natural justice in that the Revenue was not given a proper opportunity of being heard, the orders of this Authority were liable to be quashed. A post decision hearing would not suffice and was not authorised since it was a question of jurisdiction. The Writ Petitions were then placed before a third Judge who found that there was no reason to interfere with the orders under section 245R(2) of the Act passed by this Authority. The learned Judge concluded that the Revenue had failed to substantiate an infringement of any legal right conferred on it under the Statute while allowing the application under section 245R(2) of the Act. Since the request not to render a ruling continued all this while, this Authority could not give a ruling under section 245R(4) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... jecting the application made by the Revenue for reconsideration of the question this Authority had agreed to re-consider the question while giving the ruling under section 245R(4) of the Act. Counsel for the applicant submitted that the High Court of Andhra Pradesh having dismissed the writ petition challenging the order of this Authority allowing the application under section 245R(2) of the Act, there remained nothing for the Revenue to contend on this objection. There may be some force in the submission of learned Senior counsel for the applicant. But, in view of this Authority leaving open that question for consideration afresh in its second order and an objection based on clause (iii) of the proviso is not necessarily confined to the stage of a hearing under section 245R(2) of the Act, we think it appropriate to deal with the question. 7. What is contended on behalf of the Revenue is that the issue regarding taxability of the transaction is being examined by the DDI(IT), Hyderabad, during the course of the proceedings against Sanofi under section 201 of the Act. He submitted that an order dated 25.5.2010 was passed overruling the contentions of Sanofi and treating it as an a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax avoidance. The representative for the Revenue submitted that adequate facts were not disclosed by the applicants and could not be gathered by the Revenue at the time of initiation of proceedings against Sanofi and ShanH and now that the facts are clear, this Authority has to consider the nature of the transaction and the effect of the transaction in the context of the ruling sought for. The proceeding against ShanH is also under section 201 of the Act. We do not think that it would be proper for us to decline to consider the rival claims in the context of these applications based on the effect of the proceedings initiated against Sanofi and/or ShanH canvassed for by Counsel for the applicant. As we have noticed, the nature of the proceedings based on section 195 of the Act, is not conclusive and is only preliminary in nature. It cannot stand in the way of our considering this objection also even while we consider the main application for a ruling. 11. We may here notice the ruling of this Authority in Canaro Reources Ltd . (313 ITR 2) relied on. Therein an objection based on clause (iii) of the proviso to Section 245R(2) of the Act was not taken when the application was bein ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Shantha. It was MA that got the due diligence done. Though it is claimed that ShanH was formed as a 100% subsidiary of MA on 31.10.2006, it was not ShanH that entered into the share purchase agreement on 6.11.2006. ShanH had no office, no staff and the director of MA was also its director. Only in March, 2007, GIMD came into the picture by acquiring 20% shares in ShanH. Subsequently one Mr. Hebon also acquired some shares in Shan H. ShanH had no other business and it held no assets other than the shares in Shantha. The Revenue, therefore, submits that ShanH was merely a front created for avoiding the liability to tax that may arise on dealing with the shares of Shantha by MA which still held the controlling interest in Shantha through ShanH. What was now being done was to sell the shares of ShanH to Sanofi virtually handing over the assets and control of Shantha. It is also pointed out that MA assumed the right to nominate the Members of the Board of Shantha and the entire transaction now put forward was a clear attempt to avoid tax by way of capital gains. Even on a prima facie scrutiny, this was clear and hence the objection that the giving of a ruling under section 245R(4) w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere, the applicants were claiming the benefit of DTAA between India and France to be taxed in France. He also submitted that Tax Residency Certificates have been produced and it was not open to the Revenue or this Authority to go behind them in the light of the position settled in Azadi Bachao Andolan. It was also not open to ignore the existence of properly incorporated companies under relevant laws of the country to which the parties belonged. There is no substance in the contention raised by the Revenue in the light of the decision in Azadi Bachao Andolan. 16. We may straightaway notice, that the decision in Azadi Bachao Andolan, obviously binding on this Authority, may not be the final word in a given situation, when this Authority is approached for an advance ruling. The proviso to Section 245R(2) of the Act mandates that this Authority shall not allow the application for pronouncing a ruling where the question raised in the application relates to a transaction or issue which is designed, prime facie, for the avoidance of incometax. This obviously means that this Authority has to decline jurisdiction when it finds that the ruling sought for relates to a transaction which is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s (whether or not they include the achievement of a legitimate commercial end) into which there are inserted steps that have no commercial purpose apart from the avoidance of a liability to tax; which in the absence of those particular steps would have been payable. The learned Law Lord continued, The difference is in approach. It does not necessitate the overruling of any earlier decisions of this House; but it does involve recognizing that Lord Tomlin s oft quoted dictum in IRC v. Duke of Westminister, Everyman is entitled, if he can, to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be, tells us little or nothing as to what methods of ordering one s affairs will be recognized by the courts as effective to lessen the tax that would attach to them if business transactions were conducted in a straight forward way. Furniss v. Dawson [(1984) AC 474] took the concept forward followed by Ensign Tankers [(1992) 2 WLR 469 HL] and Moodi (1993) 1 WLR 266 HL. An attempt was made to confine the operation of the doctrine in Cravan V. White [(1988) 3 WLR 423 HL] by the majority therein, and some decisions that followed it. But, recent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is argued on behalf of the applicant that what is taxed by the taxing statute is the gain arising out of the sale of the shares of an Indian company and that taxing event has not taken place. He also submitted that the concept of underlying assets and controlling interest are not concepts that can come into reckoning while interpreting the taxing statute. A taxing statute is to be construed strictly and nothing is to be added or subtracted. Nor can it be interpreted in such a manner that transactions not directly hit by it, are also roped in based on presumed intention or purpose. Counsel for the Revenue submitted that what we are concerned with, is to see whether there is an attempt to avoid payment of tax in India for declining a ruling and in arriving at that conclusion, nothing is being added to or subtracted from the section. Section 9 of the Income-tax Act and the DTAA permit a see through of the transaction to ascertain its true purpose and that is all that is needed to be done in this case. 22. The whole endeavour on the side of the applicants was to show that the coming into being and existence of ShanH as a commercial and corporate entity cannot be ignored. It is empha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies of transactions from the commencement of the formation of ShanH, it appears to us to be a pre-ordained scheme to produce a given result, viz., to deal with the assets and control of Shantha without actually dealing with the shares of Shantha or its assets and business. This scheme adopted, has to be seen as one for avoiding payment of capital gains which would otherwise arise if the shares of the Indian company had been transferred, leading to the same result as now achieved. We are satisfied that a scheme of the nature cannot be accepted simply for the reason that upon the true construction of the Statute, the transaction which was designed to avoid the charge to tax, actually comes within it. [See Norglen Ltd. v. Reeds Rains Prudential Ltd. [1999 2 AC 1 at 14). 25. It is pointed out that ShanH would continue to exist inspite of the sale of shares in it by the applicants to Sanofi. The question may also arise as to what would happen if Sanofi were to sell the shares of ShanH, it has acquired, to another. We do not consider it proper to go into that question since our ruling is invited only on the transaction involved herein, namely, transfer of the shares of ShanH by MA a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is pointed out that neither the applicants nor Sanofi are tax residents of India. 29. On behalf of the Revenue, it is reiterated that what is really sold is the property and the controlling interest in Shantha and so considered, the capital gains arising out of the sale of shares is liable to be taxed in India. The whole case of the Revenue depends upon the plea that what is really being dealt with by virtue of the transaction in question is the underlying assets, business and controlling interest of an Indian company and consequently, any transfer for a consideration giving rising to a gain could be taxed in India. The further argument is that the payments made by Sanofi for the purchase to the shares of the applicants is for acquisition of control and management and other bundle of rights in Shantha and consequently, the transaction would give rise to capital gains in India, as Shantha is a company incorporated in India and located in India. The transfer of shares of ShanH would amount to the transfer of the assets of Shantha, if not of its shares formally. 30. In view of our conclusion that the transaction must not be taken at face value since it amounts to a scheme for av ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he shares being sold are of a company incorporated in France, which is a tax resident of France, to another tax resident of France, the gain therefrom is taxable in France. Article 14.5 reads: 5. Gains from the alienation of shares other than those mentioned in paragraph 4 representing a participation of atleast 10 per cent in a company which is a resident of a contracting state may be taxed in that contracting state. It is the contention that ShanH, the shares of which are being sold is a company incorporated in France in which the applicants have a participation above 10 per cent and since the gains is that of a resident of France, it is liable to be taxed only in France. It is contended that unlike paragraph 1 of Article 14 relating to immoveable property, paragraph 5 does not permit a see through and the transaction has to be accepted as it is. The fact that the asset is located in another country is irrelevant. The option to provide for a see through has not been exercised while entering into the Treaty with France. 34. Alternatively, it is submitted that even if paragraph 5 is held to be not applicable to bring about the above result, in terms of paragraph 6 of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company, on a literal interpretation of paragraph 5 of Article 14 of the treaty. But a purposive construction of the said paragraph of the treaty leads us to the conclusion that the capital gains arising out of the transaction is taxable in India. The essence of the transaction takes within its sweep various rights including a change in the controlling interest of an Indian company having assets, business and income in India. 37. We, therefore, rule on question no. 1 in the application by MA and on the question in the application by GIMD, that the transactions of sale of shares by them in ShanH to Sanofi are taxable in India in terms of paragraph 5 of Article 14 of the Double Taxation Avoidance Convention between India and France. 38. This ruling is obviously without prejudice to the right, if any, of the applicants to the benefits, if any, available to them under Article 25.2 of the DTAA. 39. Since we have ruled on question no.1 that the transaction is liable to be taxed in India in terms of Article 14.5 of the DTAA, the second question posed in application No. 847 of 2009 filed by MA does not arise. Article 14.6 has application only if Article 14.5 has no application. He ..... X X X X Extracts X X X X X X X X Extracts X X X X
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