BEFORE THE AUTHORITY FOR ADVANCE RULINGS
(INCOME TAX), NEW DELHI
28th November, 2011
A.A.R. No.846 & 847 of 2009
Name & address of the applicant :
Groupe Industrial Marcel Dassault
[In application No. AAR/846/2009]
[In application No. AAR/847/2009]
R U L I N G
[By Justice P.K. Balasubramanyan)
Murieux Alliance, hereinafter referred to as ‘MA’ is said to be a part of an International Health Care Group dedicated to prevention, diagnosis and treatment of infectious diseases. It is incorporated in France. It claims that after negotiations with Groupe Industrial Marcel Dassault, hereinafter referred to as ‘GIM D , another company incorporated in France, it formed a wholly owned subsidiary in France on 31.10. 2006 named „ShanH‟. On 6.11.2006, MA entered into a share purchase agreement acquiring the shares of an Indian company, called „Shantha Bio Technics 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 Hi born 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 relation to their larger interest in the field of immuno therapy in developing countries and also in relation to the activities of Shantha. A commercial transaction was evolved whereby Sanofi Pasteur Holding (hereinafter,„Sanof‟), another company incorporated in France, came forward to participate actively with MA and GIMD, provided the representatives of MA continued to be Members of the Board of Directors of ShanH having a say in the policies and approach to be pursed by ShanH. With a view to further improve the business and performance, MA and GIMD sold their shares in ShanH to Sanofi in August, 2009. On 20.11.2009, MA and GIMD filed applications before this Authority under section 245Q(1) of the Income-tax Act, 1961 (hereinafter referred to as the Act‟) seeking an advance ruling on the questions raised in the applications. The application filed by GIMD was numbered as Application No. 846 of 2009 and that filed by MA was numbered as Application No. 847 of 2009.
2. The approach by the two companies to this Authority was preceded by certain steps taken by the Revenue. On 4.8.2009, a survey under section 133A of the Act was conducted in the office premises of Shantha. This was on the basis of information that became available that Sanofi was proposing to acquire 80% of the stakes in Shantha from MA and GIMD through their subsidiary ShanH for a consideration of Rs.2,500 crores pursuant to a share purchase agreement executed by the concerned parties on 10.7.2009. The assessing officer on 7.8.2009 informed Sanofi about its likely obligation under section 195 of the Act arising out of the share purchase agreement. The details were called for. Another notice was issued on 24.8.2009. By replies dated 27.8.2009 and 3.9.2009, Sanofi intimated the Income-tax department that the share purchase agreement had a closure with effect from 31.7.2009. This was followed by the notice to show cause under section 195 of the Act issued by the assessing officer to Sanofi. Sanofi was asked to show cause why it should not be treated as an assessee in default under section 201(1) of the Act in respect of payments made by it to MA and GIMD for acquisition of the majority controlling interest in Shantha through the transfer of the shares of ShanH, the subsidiary of MA and GIMD. The department also requested MA and GIMD to provide related documents to enable the department to ascertain 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 PHSubliO oI I Ria with tDe ZLveKL WKt LI FrYHch PeSQbliLI (“I ) o-French 7D[ 7Uaty”) reLILI Uith GectiLn 90 oI tFe InRQme-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 arriving at an understanding with GIMD, another French company, decided to invest in Shantha by purchasing 80% of the shares of Shantha. With that in view while entering into an agreement with the sharesholders of Shantha for purchase of its shares, it got the due diligence of Shantha done, and also formed a 100% subsidiary, ShanH. The shares in Shantha were acquired in the name of ShanH or by ShanH. The consideration and stamp duty proceeded from MA. Thereafter, GIMD acquired 20% of the shares of ShanH from MA. Mr. Hebon also purchased some of the shares of ShanH. Thereafter, for business reasons, according to the applicants, they decided to sell their shares in ShanH to Sanofi. The case of MA and GIMD in a nutshell is that what was involved in the transaction of the two applicants selling their shares in ShanH to Sanofi, was only the sale of shares held in a French company and that had nothing to do with the shares of Shantha, the Indian company, the sale of which might or might not attract liability under the Indian Income-tax Act. MA and GIMD, therefore, claim that any attempt to tax in India the sale of shares of ShanH by them to Sanofi, was not sanctioned by the Income-tax Act and certainly not by the Double Taxation Avoidance Agreement (DTAA) between India and France. The essential contention of the Revenue, as we understand it, is that ShanH was only a front, a paper company, having no office and no employee. The Director of MA was also its director. What was involved in the alleged sale of shares of ShanH by MA and GIMD to Sanofi was the transfer of the assets of an Indian company and certainly the controlling interest in the Indian company, Shantha. In reality, the sale of shares in ShanH held by MA and GIMD to Sanofi, attracted capital gains tax in India and the transaction was liable to be taxed in India. This stand of the Revenue is met by MA and GIMD by pointing out that the tax authorities in India could not ignore the incorporation of the Company ShanH, the Tax Residency Certificate produced and the recognition of the transaction even by the Government of India and proceed to tax what it calls the underlying transaction. In the light of the principle settled by the decision in Azadi Bachao Andolan (263 ITR 706), there is no question of attempting to pierce the veil and attempting to go behind the existence of ShanH in the eye of law and ignoring 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 Authority re-examined the question and found no reason to change the position earlier adopted that there was no valid objection to the entertaining of the application for giving a ruling. But considering the persistence with which the Revenue questioned the original allowing of the application under section 245R(2) of the Act without actually hearing it, this Authority specified that the question of avoidance of tax and the bar created by the pendency of other proceedings under the Act, would be considered again while giving the ruling under section 245R(4) of the Act in terms of the order already passed under section 245R(2) of the Act. This Authority recorded in its order dated 3.8.2010, “Having been prima facie satisfied that there was no compelling reason to revoke the earlier order of admission and to refuse hearing on merits and that a comprehensive final order could be passed as regards the grounds made out for revoking the admission as well as on the merits, this case was posted for hearing on merits under section 245R(4) of the Act on the specified date.” Not satisfied, the Revenue chose to challenge the order of this Authority in Writ Petition Nos. 18132 and 18133 of 2010 in the High Court of Andhra Pradesh. The original order challenged was the one allowing the application under section 245R(2) of the Act, without hearing the Revenue, since the Revenue had not appeared and later by amendment, the subsequent order on the application of the Revenue to re-consider the question, an order passed after hearing the Revenue. The Division Bench of the High Court considered the Writ Petitions. In the meanwhile, this Authority had listed the matter for final hearing to render the ruling under section 245R(4) of the Act. The hearing was spread over for days and was very elaborate. In view of the request made by the High Court of Andhra Pradesh to this Authority to withhold the ruling since they were entertaining the Writ Petitions against the orders under section 245R(2) of the Act and were to render a decision on the question whether the applications were rightly allowed under section 245R(2) of the Act or not, the ruling was withheld. Subsequently, the Division Bench heard the writ petitions finally. But the learned Judges differed in their conclusions – one of them taking the view that there was no warrant for interference with the order allowing the application 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) of the Act. By the time, the path became clear for this Authority to give its ruling, one of the Members – Member(Law) – had retired and this resulted in the application having to be posted again for a hearing under Section 245R(4) of the Act. The parties took full advantage of that opportunity and re-argued the matter in detail. The ruling is being given after such fresh hearing.
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 being allowed under section 245R(2) of the Act for giving a Ruling. But at the hearing under Section 245R(4) of the Act, the objection was taken. The applicant objected to the question being considered. This Authority overruled that plea on the basis that was an objection “pertai ing to the mai tainability of the application”Subsequently in ABC In re (AAR No.840/2010), this Authority has indicated that the consideration of such an objection at the stage of hearing under Section 245R(4) of the Act was not taboo and had to be dealt with on merits. It is really an objection to the jurisdiction to give a ruling. We cannot keep out a consideration of the objection and clutch at a jurisdiction; we may or may not have. We, therefore, proceed to consider the objection that the transaction is designed to avoid tax in India.
14. On behalf of the applicant it is submitted that the setting up of a subsidiary company for making fresh acquisitions was a legal, permissible and known method of business and there was nothing illegal in MA and GIMD forming a subsidiary ShanH for the purpose of acquiring shares in Shantha. He submitted that ShanH had three shareholders including the two applicants and the shares of ShanH are now acquired by Sanofi. ShanH being a French company and a tax resident of France was entitled to claim the protection of the DTAA between India and France. What was involved was the transfer of shares of Shan H held by the two applicants to another French company Sanofi and the capital gains, if any, arising out of the transaction to the applicants, was taxable in France. This was not a case of an attempt to avoid the payment of tax. This was not a case of treaty shopping. The tax had to be paid in France in terms of the DTAA and as a matter of fact, the tax payable would be more in France since treatment of long term capital gains in France was to the disadvantage of the applicants, where shares had to be held for two years before sale, for qualifying as long term capital gains whereas it was only one year in India. All the companies were within the tax jurisdiction of France and the transaction was taxable in France. By virtue of Article 13 of the India-France treaty, the power to tax rested with France and not with India. The applicants were only claiming the benefit of a Treaty, and were not attempting to avoid tax. The argument that what was really being transferred, were the assets of Shantha, the Indian company, had no substance. The shares of Shantha were not being dealt with, though the consequence of the buying of shares of ShanH by Sanofi might be to give control of the affairs of Shantha to Sanofi. But then, it was a legal and legitimate business route taken by the applicants and the transaction did not attract taxability as capital gains in India.
15. Counsel for the applicant submitted that in the light of the decision of the Supreme Court in Azadi Bachao Andolan 263 ITR 706, there was no question of going behind the transaction to ascertain its so-called real nature especially in cases governed by agreements for avoidance of double taxation. Here, 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 income- tax. This obviously means that this Authority has to decline jurisdiction when it finds that the ruling sought for relates to a transaction which is designed prime facie for the avoidance of income- tax. In considering that question what this Authority is doing is not piercing the veil of the corporate entity, but is only asking itself the question whether there was a step taken or a series of steps taken, that may have business purpose but was clearly a device to avoid the liability to tax and look at the transaction within the confines of the proviso.
17. We also find some difficulty in accepting the arguments based on Azadi Bachao Andolan. Azadi Bachao Andolan was inter alia considering the effect of the ratio of the earlier constitution bench decision of the Supreme Court in McDowell and Co. Ltd. v. Commercial Tax Officer (154 ITR 148). One of the main aspects involved was whether a tax avoidance scheme or attempt at avoidance of tax was liable to be accepted by the Court once it was shown that it was not an objectionable evasion. Four of the learned judges speaking through Ranganath Misra J. are seen to have left it to the other learned judge, Chinnappa Reddy, J. to deal with this aspect. The four learned judges referred to some of the earlier decisions on the subject and did observe:“The panning may be leg timate provided it is within the frame work of law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by resorting to dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges.”
But, they did not stop there. They proceeded to say:
“On this aspectone of us Chinn appa Reddy, J. has proposed a separate and detailed opinion with which we agree”[emphasis supplied].
18. With respect, Azadi Bachao Andolan seems to proceed on the basis that the views expressed by Chinnappa Reddy, J. are his own and do not represent the view of the Court as a whole. This, with respect, does not appear to be correct. An analysis of the Ramasay principle as discussed and adopted in later decisions of the House of Lords show that much water had flowed under the bridge since IRC v. Duke of Westminister was rendered. In IRC v. Burmah Oil Company Ltd [1982 STC 30(HL)] Lord Diplock stated that no one can assume that Ramasay did not mark a significant change in the approach adopted by the House of Lords in its judicial role into preordained transactions (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 approachIt 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 vDuke of WestministerEveryman is entitled, if he can, to order his affairs so that the tax attaching under the appropriate Acts is less than t otherwise would be ‟ tells us little or nothing as to what methods of ordering ones affairs wi l 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 . 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, recently in HMRC v. Tower MCashback LLC [(2011 UK SC 19] the Supreme Court of England has reiterated and applied the Ramasay principle to find a transaction found to be genuine to be part of a tax avoidance scheme to deny the full relief to the assessee therein. As we understand it, the view that has emerged is that notwithstanding the legal validity of a transaction or a set of transactions, if the purpose was to create a legal smoke screen to avoid the payment of tax that would legitimately be due as having arisen on the basis of a transaction or an event, the legal effect of the transaction in the context of the taxing statute, has to be considered, notwithstanding its reality or validity. As observed by Lord Hoffman in Macniven v. Westmoreland Investments [(2001) UKHL 6], “The point to hold on to is that something may be real for one purpose, but not for another.”
“The Government of the Republic of India and Government of the French Republic, desiring to conclude a convention for avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on Income and capital”.(emphasis supplied).
Have agreed to its terms: To test whether a scheme adopted is with the object of avoidance of tax which would have been otherwise payable an enquiry in that behalf is contemplated by the very tax convention relied on by the applicant. This is in addition to the power available to this Tribunal under the proviso to Section 245R(2) of the Act and the law settled by courts in decisions like the one in McDowell. Therefore, when a plea of attempt at tax avoidance is raised by the Revenue in a proceeding before this Authority for a Ruling on the question of liability to tax of an applicant in respect of a transaction, an enquiry in that behalf cannot be avoided. This can be done even while we consider the application under section 245R(4) of the Act, when all the facts relevant, are available before us or ought to be made available to us.
28. It is the case of the applicant that the transaction in question is governed by Article 14 of the DTAA. Under Article 14.5 gains from alienation of shares representing a participation of atleast 10% in a company which is a resident of France, may be taxed in France. It is the contention that the capital gain arising out of the sale of the shares of ShanH in France, can be taxed only in France. It is pointed out that neither the applicants nor Sanofi are tax residents of India.
31. This Authority had allowed the application under Section 245R(2) of the Act but had clarified that the bar created by Section 245R(2) of the Act will be reconsidered while giving a ruling under section 245R(4) of the Act. This behaves us to consider the questions on merits and to give rulings on them. A ruling is also necessary for a completion of this proceeding and to avoid a remit of this matter to this Authority, in case, on the question of tax avoidance, the Supreme Court were to disagree with our conclusion. It will be unjust to leave open the question raised and argued.
“5. 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.”
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 counry is irrelevantThe option to provide for a „s ee 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 the Convention, the transaction is taxable only in France. Article 14.6 reads:
“6 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”
It is submitted that the applicants, the alienators are resident of France and going by paragraph 6 of Article 14, the transaction would be taxable in France. By no stretch of imagination can the alienator be deemed to be a resident of India.