Retrospective amendment to Income-tax Act has no impact on DTAA and Corporate veil can’t be lifted in case transactions are genuine – HC
HIGH COURT OF JUDICATURE, ANDHRA PRADESH AT HYDERABAD
Date- 15.02.2013
W.P.Nos. 14212 of 2010, 3339 and 3358 of 2012
M/s. Sanofi Pasteur Holding SA
Versus
The Department of Revenue ,
Ministry of Finance,
Government of India, New Delhi and others
ORDER
Goda Raghuram, J.
Competing narratives presented for consideration in these cases arise essentially out of the perception of Indian tax authorities – executors of the Indian – Income Tax Act, 1961 (the Act) that petitioners’ claim for immunity (to tax under provisions of the Act; on a transaction involving sale of shares of a company registered and resident in France to another and similarly circumstanced corporate entity), is an Indian tax avoidance stratagem. Petitioners contend to the contrary.
1.1 An agreement between India and France inter alia for avoidance of double taxation, duly notified for effectuation in India (hereinafter more fully described and referred to as the Double Taxation Avoidance Agreement – the DTAA), also enters into the equation. Synergies between DTAA provisions and those of the Act; and how these inform the core issue – as to the liability to tax; and direct the allocation of the tax chargeable on the transaction in issue, to one or the other contracting State (India or France), is the quintessential problematic that falls for our consideration. In the context, we are of the considered view that a prefatory overview, of the origins and evolution of tax treaties and how these conflate, co-operate with domestic tax legislation and converge to signal a unified raft of applicable norms, is appropriate.
Tax treaties and domestic tax legislation : norms of co-existence :
1.2 International juridical double-taxation could generically be defined as imposition of comparable taxes in two or more States on the same tax-bearer in respect of the same subject matter and for identical periods. In recognition of the pejorative effect on exchange of goods and services and movement of capital, technology and persons, agreements/treaties/conventions/protocols evolved for removing obstacles that double-taxation presents to development of economic relations between nations. Current international law permits taxation of foreign 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.
1.3 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 coalescing economic order.
1.4 The process gathered momentum after the 1st World War in Central Europe and spread to other areas in the western hemisphere. Efforts of the League of Nations also contributed substantially to assimilation of existing bilateral treaties and to the development of uniform model treaties. Efforts of the Organization for European Economic Co-operation (OEEC) and of its successor, the Organization for Economic Co-operation and Development (OECD) to develop a system for the avoidance of double-taxation picked up from where the efforts of the League of Nations tapered-off. Between 1956 and 1961, the OECD’s Committee on fiscal affairs submitted a series of model treaty articles in four interim reports followed by a summary report in 1963. The OECD Council inter alia recommended that member States should continue efforts to enter bilateral double-tax agreements while adopting as a basis for their negotiations the model submitted by the fiscal committee and as interpreted by the commentaries in the report, while making allowances for the limitations and reservations in the commentary. The OECD complete model treaty and the commentaries thereon were revised from time to time. This process continues.
1.5 Double tax treaties are international agreements, their creation and consequences determined according to the rules contained in the Vienna Convention on the Law of Treaties, 1969 (VCLT). The conclusion of a treaty/convention is preceded by negotiations. States intending to conclude a treaty are represented by the appropriate level of executive, political or diplomatic expertise according to individual practices and judgment of the participant States. There are several steps in the negotiations phase eventually leading to conclusion of the treaty.
1.6 Treaties or conventions are thus instruments signaling sovereign political choices negotiated between States. The efficacy of a treaty over domestic law turns upon either State – specific conventions operating to govern the sovereign practices, or where there is a written Constitution provisions of that Charter. See Introduction Klaus Vogel on Double Taxation Conventions (2005 – Kluwer Law International) – Introduction
1.7 Double-taxation treaty rules do not “authorize” or “allocate” jurisdiction to tax to the contracting State nor attribute the “right to tax”. As is recognized by public international 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.
1.8 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 taxation avoidance treaty rules merely alter the legal consequences derived from the tax laws of the contracting States, either by excluding application of provisions of the domestic tax law where these apply or by obliging one or both of the concerned States to allow a credit against their domestic tax for taxes paid in the other State. Klaus Vogel (supra) explains that rules of double taxation are thus not conflict rules, similar to that in private international law but are rules of limitation of law, comparable to those of international administrative law.
1.9 In India, Article 253 of the Constitution (fortified by a non-obstante clause qua the normal distribution of legislative powers in the Indian federal context set out in Part XI) authorizes Parliament power to make any law for the whole or any part or territory of India for implementing any treaty, agreement or convention with any other country or countries or any decision at any international conference, association or other body.
1.10 Article 253 read with Entries 13 and 14 of the Seventh Schedule would imply that in implementing a treaty, or a convention with another country or countries, or any decision made in an international conference, association or other body, the limitations imposed by Articles 245 and 246(3) are eclipsed and the total field of legislation is open to the Parliament, enabling Parliament to invade fields of legislation enumerated in List II as well, insofar as may be necessary for the purpose of implementing the treaty, etc., obligations of India – Magan Bhai Ishwarbhai Patel v. Union of India [1970] 3 SCC 400; HM Seervai [Constitution Law of India – IV Edn. Vol.1, Pgs.305-306].
1.11 Our Courts have held that regard must be had to international conventions and norms while interpreting domestic law provisions, when there is no inconsistency between them and there is a void in the domestic law; that Courts are under an obligation, within legitimate limits to so interpret municipal law as to avoid confrontation with the comity of Nations or well-established principles of international law and where municipal law is not in variance with the international treaty – Vishaka v. State of Rajasthan [1997] 6 SCC 241; Gramophone Co. of India Ltd. v. Birendra Bahadur Pandey [1984] 2 SCC 534; and R.D. Upadhyay v. State of Andhra Pradesh [2007] 15 SCC 337.
1.12 However, this is not to say that a treaty must be given effect to without a law or in the absence of municipal law. Thus a treaty entered, to which India is a signatory cannot become a 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.
1.13 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.
1.14 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 overlapping and competing magisteria. This would imply that full faith and credit (Article 261) and fidelity/respect [Article 51(c)] must be accorded to provisions of the DTAA, in as full a measure as to provisions of the Act. How that critical and delicate balance is achieved in the facts of the case before us, is the generic and substrating issue that is presented for consideration in these Writ Petitions.
1.15 The three writ petitions pertain to a tax dispute between the petitioners and the Indian Tax authorities (for short, ‘the Revenue’) in relation to the acquisition in August, 2009 by M/s. Sanofi Pasteur Holding SA, France (for short, ‘Sanofi’) of the entire share capital of M/s. ShanH SAS, France (for short, ‘ShanH’), a Joint venture company, from its constituents M/s. Merieux Alliance, France (for short, ‘MA’) and M/s. Groupe Industrial Marcel Dassault (for short, ‘GIMD’). As on the date of acquisition by Sanofi (of the entire share capital of ShanH), ShanH held about 80% of the shares in Shanta Biotechnics Ltd, Hyderabad (for short, ‘SBL’).
The challenge in the writ petitions :
2. W.P.No.14212 of 2010 :
Sanofi assails the order dated 25-05-2010 of the 3rd respondent. The 3rd respondent (comprehended within the generic expression “the Revenue”) determined the petitioner to be an “assessee in default” in respect of payments made by it to MA and GIMD for acquisition of the majority control/stake in SBL through transfer of ShanH shares, under Section 201(1) of the Act; determined the long-term capital gain at Rs.2625,73,98,171/-; and the consequent tax liability at Rs.594,99,26,425/-. The order also determined liability to interest, on the default of tax deduction at source at Rs.53,54,93,378/-, under Section 201(1A). A consequent notice of demand (also dated 25-05-2010), under Section 156 was served on the petitioner.
After issuing notice to the petitioner and receipt of its responses, a rectification order under Section 154 of the Act was passed on 15-11-2011 re-computing the long-term capital gain, tax thereon and the consequent interest. The total demand is now asserted at Rs. 1058,06,83,952/-.
The substantive order dated 25-05-2010; the notice of demand of even date and the rectification order dated 15-11-2011, are challenged herein.
3. W.P.Nos.3339 and 3358 of 2012 :
GIMD and MA are the respective petitioners. 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 Co. v. DIT [2012] 210 Taxman 42 the challenge to the order dated 28-11-2007 of the AAR could be presented before this Court u/A. 226 of the Constitution. In Columbia Sportswear Co. (supra) the Court ruled that the AAR being an authority and a body exercising judicial power conferred on it vide the provisions in Chapter XIX – B of the Act, is an authority (and a Tribunal) whose decision could be challenged under Articles 226 and/or 227 of the Constitution; and that such challenge should be heard directly by a Division Bench of the High Court.
Maintainability of these Writ Petitions, challenging the ruling dated 28-11-2011 of the AAR, is therefore neither contested nor is contestable.
Counsel for the respective parties specifically urged that in the facts and circumstances of the case and the legislative objective and purposes substrating the provision for an advance ruling mechanism (i.e., expeditious determination), this Court should also adjudicate and record findings on the merits of the questions presented by the petitioners and on which the impugned ruling is issued; and not merely set aside the AAR ruling (if found erroneous and unsustainable) and order a remit for de novo consideration by the AAR.
In the light of the authority of Columbia Sportswear Co. (supra) (holding that the decision of AAR could be challenged under Articles 226 and/or 227), observations in the Constitution Bench decision in H.V. Kamath v. Ahmad Ishaque AIR 1955 SC 223 (to the effect that while in certiorari the High Court could only annul the erroneous decision of an inferior Tribunal, it could while exercising (supervisory) jurisdiction under Article 227 also issue further directions in the matter; and in the light of the conjoint plea by the respective parties (adverted to supra), in the event we hold that the impugned ruling of the AAR is erroneous to a degree susceptible to judicial and/or supervisory review under Articles 226/227 and is on such review unsustainable, we would quash the impugned ruling exercising certiorari and, if need be, issue appropriate declarations/directions, particularly since expeditious disposition is the uncontested legislative purpose underlying the provision of an Advance Ruling Authority, in Chapter XIX – B of the Act.
4. A brief account of SBL, MA, GIMD and Sanofi :
SBL : a company incorporated under the Companies Act, 1956 on 10-03-1993, having its registered office at Hyderabad, India. SBL is inter alia engaged 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 hereinafter). As on the date of the SPA the shareholding pattern in SBL was :
