Merieux Alliance & Groupe Industrial Marcel Dassault, In re (Unreported) AAR Nos. 846 & 847 of 2009 Article 14(5) of India-French DTAA Dated: 28-11-2011 Counsel for assessee/revenue: Porus Kaka, Manish Kanth, B. M. Singh, Dominique Tazikawa, Rohan Shah, Rohit Jain, Parth Contractor, Kumar Visalaksh/Girish Dave, Gangadhar Panda

Facts:
Merieux Alliance (‘MA’) & Groupe Industrial Marcel Dassault (‘GIMD’) (jointly referred to as the applicants) were French companies. MA incorporated wholly-owned subsidiary (‘ShanH’) in France. MA acquired 80% equity shares of an Indian company (‘Shantha’) from shareholders of Shantha in the name of ShanH. Due diligence, funding and payment of stamp duty for the purchase was done by MA. Subsequently, GIMD and a foreign individual acquired 20% of the shares in ShanH from MA. In 2009, MA and GIMD sold their holding in ShanH to Sanofi, another French company.

 On the basis of the information available with it, the tax authority initiated proceedings against Sanofi for failure to withhold tax from payment made to MA and GIMD. In view of the proceedings, the applicant approached AAR for its ruling on the following issues:

(i) Whether capital gains arising from transfer of shares of ShanH, a French company, were changeable to tax in India, either under the Act or under the DTAA?

(ii) Without prejudice to (i), whether transfer of 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 applicant contended as follows :

• The shares transferred were of a French company and therefore, such transfer cannot be taxed either under the Act or under the DTAA.

• Acquiring shares of Shantha through a subsidiary was a legitimate business route.

• As per the Supreme Court in Azadi Bachao Andolan, the Revenue cannot go behind the transaction since it was not permissible to ignore the corporate structure, the tax residency certificate and the fact that the transaction was recognised by the Government of India.

• As the capital gains from transfer of shares of a French company were taxable in France, there was no question of tax evasion or treaty shopping.

• A taxing statute should be construed strictly and nothing is to be added and subtracted. The concepts of ‘underlying assets’ and ‘controlling interest’ cannot be reckoned while interpreting a taxing statute and transactions not directly hit by the taxing statute cannot be roped in based on presumed intention or purpose.

The tax authority contended as follows :

• As the withholding tax proceeding against Sanofi were pending and the transaction was, prima facie, a tax avoidance scheme, in terms of section 245(4) of the Act, no ruling could be given by AAR.

• ShanH had no substance, it was a front, a paper company, having no office, no employees, no business and no asset except the share in Shantha and was created only for dealing with the share of Shantha.

• Alienation is a word of wide import. Alienation of shares coupled with a participation of at least 10% in a company implies that under Article 14(5) of the DTAA, such participation would attract tax in India if the participation interest is in an Indian company. ‘Participation’ would mean right to vote, to nominate directors, control and management, day-to-day decision making and right to get profits distributed. All these rights in Shantha were with MA and GIMD, which were transferred pursuant to the transfer of shares of ShanH.

• The transfer of shares of ShanH involved alienation of assets and controlling interest of an Indian company, gains from which was taxable in India.

Held:
AAR observed and held as follows :

• Initiation of proceedings u/s.195/197 of the Act or even final order passed were preliminary and were not conclusive and it was no bar on considering an application. ? Merely because there was no tax avoidance as the transaction was taxable in France, AAR can yet examine whether the scheme was designed, prima facie, for Indian tax avoidance.

(ii) Tax avoidance:

• While the Supreme Court decision in Azadi Bachao Andolan is binding on AAR, it may not be the final word in a given situation. In considering the question of prima facie tax avoidance, AAR is not piercing the corporate veil, but examining whether the steps taken had any business purpose.

• Usually adopted scheme can be treated as an attempt at avoidance of tax depending on the effect of the scheme in entirety on liability of the entity to be taxed.

• The series of transactions commencing from formation of ShanH appears to be a preordained scheme to produce a given result, viz., to deal with assets and control of Shantha, without actually dealing with the shares of Shantha. A gain is generated by this transaction. If the transaction is accepted at face value, by repeating the process, control over Indian assets and business can pass from hand to hand without incurring any tax liability in India.

(iii) Corporate veil and controlling interest:

• Since ShanH had no business or assets other than shares in Shantha, the transaction resulted in transfer of underlying assets, business and control of Shantha.

• Based on literal construction of Article 14(5) of the DTAA, the transfer of shares in ShanH can be taxed only in France. However, since the transaction involved alienation of assets and controlling interest of an Indian company, on purposive construction of Article 14(5), capital gains arising from the transaction would be taxable in India. The question as to whether controlling interest is an asset taxable in France under Article 14(6) of the DTAA is not required to be answered.