CLR Editorial Notes : Murieux Alliance (˜MA™) and Groupe Industrial Marcel Dassault (GIMD) , two French companies were holding shares in ShanH (another French company). MA & GIMD combine acquired shares in Shantha Biotechnics Ltd (Shantha), an Indian company. The shares of Shantha were transferred to ShanH, being held by MA and GIMD, which subsequently sold their shares of ShanH to yet another French company Sanofi Pasteur Holding (Sanofi). The assessees then claimed that due to this transaction (two French companies selling shares of another French Co. to a third French co.), the gains were not taxable in India. They filed an advance ruling application to this effect.
The department had opposed the advance filing application stating that the only purpose with which the French company ShanH was incorporated was to hold the shares of the Shantha. It also maintained that this transaction was actually taxable in India. The Authority for Advance Rulings (AAR) had earlier upheld the department™s plea on the ground that ShanH was actually a façade and a well planned scheme to avoid taxation under Indian Law.
Facts and status:
– It was understood that according to Policy, all off-shore investments in France, need to be made through a subsidiary company in France.
– In which case, ShanH had been also been incorporated as per policy.
– The Revenue is wrong in its claim that it was a pre-planned idea for tax avoidance and is also not clear as to when and how ShanH became a tax avoiding scheme.
– It was known that ShanH was merely an entity incorporated for commercial & business purposes.
– Creation of subsidiaries for the sole purpose of investments is legal.
– ShanH was a subsidiary to MA & GIMD and it could be established whether the MA/GIMD combine had overriding powers over it.
– ShanH is therefore a legitimate owner of the shares of the Indian company and hence the sale of the shares of ShanH, does not signify sale of underlying assets of the Indian Company it held
– The India-France DTAA, exempts capital gains tax from sale of shares for companies holding more than 10% shares.
– Whether the alienation of shares of ShanH led to alienation of control, management and underlying assets of Shantha, was not clear.
– Also it was unclear and irrelevant to deduce that the capital gain on sale of ShanH was attributed to Shantha.
– References were made to the Vodafone verdict, but that did not impact this case, as the Indo French DTAA, overrides the Act, under which the amendment to Section 9(1) was made.
– The term ˜alienation™ or meaning of ˜transfer™ has not been defined either in the Act or in the Indo-French DTAA.
– The ITAT held that the department™s contention and retrospective amendment to DTAA does not hold good in this case.
– The Hon™ble HC quashed the Department™s appeal
The full case order is available for download
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