Background
In the present era of globalisation, cross border movement of goods, services, capital and people has gone up significantly over the years. With the increased quantum of international trade, commerce and services, issues relating to double taxation of income in two different countries/ jurisdictions assume a lot of significance. Issues and considerations relating to cross border taxation of income have become a very important part of the structuring of businesses, entities and transactions, in the case of Multinational Enterprises/corporations [MNCs].
In order to encourage cross border movement of goods, services, capital and people and avoidance of double taxation, various bilateral Double Taxation Avoidance Agreements [DTAAs] have been entered into, between various countries. India has so far entered into DTAAs with 84 countries.
To minimise the tax cost of undertaking the cross border business/commerce, various measures are evaluated in depth and adopted in structuring various cross border business entities/transactions. This has led to growth/ identifications of various low tax jurisdictions/ tax havens, through which business entities/ transactions are structured/entered into, to save/ lower overall tax cost of the MNCs and/or to shift profits to low tax jurisdictions.
One of the most common measures used is to Mayur Nayak Tarunkumar G. Singhal, Anil D. Doshi Chartered Accountants International taxation create intermediate holding companies in the low tax/nil tax jurisdictions which would hold shares in the operating subsidiary companies in the source countries where the operations of the MNCs are carried out through the wholly owned subsidiaries and/or joint ventures. At the intended time of exit/transfer of business of the subsidiary, instead of transfer of the shares in the subsidiary company in the source country, the shares of the intermediate company are transferred by the MNCs to the prospective nonresident buyers, whereby no tax is payable in the source country, but at the same time, business is effectively transferred to the prospective nonresident buyers. This kind of practice has led to erosion of tax base of various countries and significantly impacted the tax revenues of those countries. Accordingly, the governments/ revenue department of various counties have, in order to protect their tax base, taxed such transactions based on various prevalent/innovative legal principles.
In this regard, in the Indian context, the case of Vodafone International Holdings BV (Vodafone) generated a lot of discussions and has been intensely debated in the country and outside.
Vodafone’s case
Vodafone International Holdings BV (Vodafone), a company resident for tax purposes in Netherlands, acquired the entire share capital of CGP Investments (Holdings) Ltd. (CGP), a company resident for tax purposes in Cayman Islands qua a transaction dated 11-2-2007. On 31-05-2010, the Revenue passed an order u/s. 201(1) and 201(1A) of the Income-tax Act, 1961 [the Act] declaring the transaction to be taxable under the Act. Revenue raised a demand for tax on capital gains arising out of the sale of CGP share capital contending that CGP, while not a tax resident in India, held the underlying Indian assets of Hutchison Essar Ltd. [HEL] and the aim of the transaction was the acquisition of a 67% controlling interest in HEL, an Indian company. On a writ petition by Vodafone against the order u/s. 201(1)/201(1A), the Bombay High Court held against the assessee. Vodafone challenged this decision successfully before the Supreme Court [SC] where SC held in favour of Vodafone. [Vodafone International Holdings B.V. vs. Union of India [2012] 341 ITR 0001 (SC)].
Hutch group (Hong Kong) through participation in a joint venture vehicle invested in telecommunications business in India in 1992. The JV later came to be known as Hutchison Essar Ltd. (HEL). In 1998, CGP was incorporated in Cayman Islands, with limited liability and as an “exempted company”. CGP later became a wholly owned subsidiary of a company which in turn became a wholly owned subsidiary of a Hong Kong company – HTL, which was later listed on the Hong Kong and New York Stock Exchanges in September, 2004.
Vodafone, though not directly a case involving Tax-Treaty implications on domestic tax laws (there being no tax Treaty between India and Cayman Islands), nevertheless considered the application and interpretation of Indian Tax Legislation (the ‘Act’) in the context of an applicable and operative tax treaty, since the correctness of Union of India vs. Azadi Bachao Andolan [2003] 263 ITR 703 [SC] [Azadi Bachao] was raised by Revenue. Revenue contended that Azadi Bachao requires to be over-ruled to the extent it departs from McDowell and Co. Ltd. vs. CTO [1985] 154 ITR 148 [SC] [McDowell] and on the ground that Azadi Bachao misconstrued the essential ratio of McDowell and had erroneously concluded that Chinnappa Reddy, J’s observations were not wholly approved by the McDowell majority qua the leading opinion of Ranganath Misra, J.
Relevant observations/conclusions in Vodafone
Tracing the history and evolution of relevant principles by the English Courts commencing with IRC vs. Duke of Westminster 1936 AC 1[Duke of Westminster] through W.T. Ramsay vs. IRC 982 AC 300 [ Ramsay]; Furniss (Inspector of Taxes) vs. Dawson [1984] 1 All E. R. 530 [Furniss] and Craven vs. White (1988) 3 All E. R. 495 [Craven], the Supreme Court in Vodafone explained that the Westminster principle was neither dead nor abandoned; Westminster did not compel the court to look at a document or transaction isolated from the context to which it properly belonged and it is the task of the court to ascertain the legal nature of the transaction and while so doing, to look at the entire transaction as a whole and not adopt a dissecting approach;
The Court ruled that Westminster, read in the proper context, permitted a “device” which was colourable in nature to be ignored as a fiscal nullity; Ramsay enunciated the principle of statutory interpretation rather than an over-arching anti-avoidance doctrine imposed upon tax laws; Furniss re-structured the relevant transaction, not on any fancied principle that anything done to defer the tax must be ignored, but on the premise that the inserted transaction did not constitute “disposal” under the relevant Finance Act; from Craven the principle is clear that Revenue cannot start with the question as to whether the transaction was a tax deferment/saving device but must apply the “look at” test to ascertain its true legal nature; and that strategic tax planning has not been abandoned.
McDowell majority held that tax planning may be legitimate, provided it is within the framework of law; colourable devices cannot be a part of tax planning and it would be wrong to encourage the belief that it is honourable to avoid payment of tax by resorting to dubious methods; and agreed with Chinnappa Reddy, J’s observations only in relation to piercing the (corporate) veil in circumstances where tax evasion is resorted to through use of colourable devices, dubious methods and subterfuges.
McDowell does not hold that all tax planning is illegal/illegitimate/impermissible. While artificial schemes and colourable devices which constitute dubious methods and subterfuges for tax avoidance are impermissible, they must be distinguished from legitimate avoidance of tax measures.
The court held that reading McDowell properly and as above, in cases of treaty shopping and/ or tax avoidance, there is no conflict between McDowell and Azadi Bachao or between McDowell and Mathuram Agrawal vs. State of Madhya Pradesh [1999] 8 SCC 667 [Mathuram].
Vodafone on International Tax aspects of holding structures
In matters of corporate taxation, provisions of the Act delineate the principle of independence of companies and other entities subject to income tax. Companies and other entities are viewed as economic entities with legal independence vis-à-vis their shareholders/participants. A subsidiary and its parent are distinct taxpayers. Consequently, entities subject to income tax are taxed on profits derived by them on stand-alone basis, irrespective of their actual degree of economic independence and regardless of whether profits are reserved or distributed to shareholders/participants.
It is fairly well-settled that for tax treaty purposes, a subsidiary and its parent are totally separate and distinct taxpayers.
The fact that a group parent company gives principle guidance to group companies by providing generic policy guidelines to group subsidiaries and the parent company exercises shareholder’s influence on its subsidiaries, does not legitimise the assumption that subsidiaries are to be deemed residents of the State in which the parent company resides. Mere shareholder’s influence (which is the inevitable consequence of any group structure) and absence of wholesale subordination of the subsidiaries’ decision making to the parent company, would not per se legitimise ignoring the separate corporate existence of the subsidiary.
Whether a transaction is used principally as a colourable device for the division of earnings, profits and gains, must be determined by a review of all the facts and circumstances surrounding the transaction. It is in the aforementioned circumstances that the principle of lifting the corporate veil or the doctrine of substance over form or the concept of beneficial ownership or of the concept of alter ego arises.
It is a common practice in international law and is the basis of international taxation, for foreign investors to invest in Indian companies through an interposed foreign holding company or operating company (such as Cayman Islands or Mauritius based) for both tax and business purposes. In doing so, foreign investors are able to avoid the lengthy approval and registration processes required for a direct transfer, (i.e., without a foreign holding or operating company) of an equity interest in a foreign invested Indian company.
Holding structures are recognised in corporate as well as tax law. Special purpose vehicles (SPV) and holding companies are legitimate structures in India, be it in Company law or Takeover Code under the SEBI and provisions of the Act.
When it comes to taxation of a holding structure, at the threshold, the burden is on Revenue to allege and establish abuse in the sense of tax avoidance in the creation and/or use of such structure(s). To invite application of the judicial anti-avoidance rule, Revenue may invoke the “substance over form” principle or “piercing the corporate veil” test only after Revenue establishes, on the basis of the facts and circumstances surrounding the transaction, that the impugned transaction is a sham or tax- avoidant. If a structure is used for circular trading or round tripping or to pay bribes (for instance), then such transactions, though having a legal form, could be discarded by applying the test of fiscal nullity. Again, where Revenue finds that in a holding structure an entity with no commercial/ business substance was interposed only to avoid tax, the test of fiscal nullity could be applied and Revenue may discard such inter-positioning. This has however to be done at the threshold. In any event, Revenue/Courts must ascertain the legal nature of the transaction and while doing so, look at the entire transaction holistically and not adopt a dissecting approach.
Every strategic FDI coming to India as an investment destination should be seen in a holistic manner; and in doing so, must keep in mind several factors: the concept of participation in investment; the duration of time during which the holding structure exists; the period of business operations in India; generation of taxable Revenues in India; the timing of the exit; and the continuity of business on such exit. The onus is on the Revenue to identify the scheme and its dominant purpose.
There is a conceptual difference between a pre-ordained transaction which is created for tax avoidance purposes, on the one hand, and a transaction which evidences investment to participate in India. In order to find out whether a given transaction evidences a preordained transaction in the sense indicated above or constitutes investment to participate, one has to take into account the factors enumerated hereinabove, namely, duration of the time during which the holding structure existed, the period of business operations in India, generation of taxable revenue in India during the period of business operations in India, the timing of the exit, the continuity of business on such exit, etc. Where the court is satisfied that the transaction satisfies all the parameters of “participation in investment”, then in such a case, the court need not go into the questions such as de-facto control vs. legal control, legal rights vs. practical rights, etc.
A company is a separate legal persona and the fact that all its shares are owned by one person or by its parent company has nothing to do with its separate legal existence. If the owned company is wound up, the liquidator, and not the parent company, would get hold of the assets of the subsidiary and the assets of the subsidiary would in no circumstance be held to be those of the parent, unless the subsidiary is acting as an agent. Even though a subsidiary may normally comply with the request of the parent company, it is not a mere puppet of the parent. The dis-tinction is between having power and having a persuasive position.
Unlike in the case of a one man company (where one individual has a 99% shareholdings and his control over the company may be so complete as to be his alter ego), in the case of a multinational entity, its subsidiaries have a great measure of autonomy in the country concerned, except where subsidiaries are created or used as sham. The fact that the parent company exercises shareholders’ influence on its subsidiary cannot obliterate the decision making power or authority of its (subsidiary’s) Directors. The decisive criterion is whether the parent company’s management has such steering interference with the subsidiary’s core activities that the subsidiary could no longer be regarded to perform those activities on the authority of its own managerial discretion.
Exit is an important right of an investor in every strategic investment and exit coupled with continuity of business is an important telltale circumstance, which indicates the commercial/ business substance of the transaction.
Court’s Analysis of the transaction and persona of CGP
Two options were available for Vodafone acquiring a controlling participation in HTIL, the CGP route and the Mauritius route. The parties could have opted for anyone of the options and opted for the CGP route, for a smooth transition of business on divestment by HTIL. From the surrounding circumstances and economic consequences of the transaction, the sole purpose of CGP was not merely to hold shares in subsidiary companies but also to enable a smooth transition of business, which is the basis of the SPA. Therefore, it cannot be said that the intervened entity (CGP) had no business or commercial purpose.
The above conclusions, of the business and commercial purpose of CGP, were arrived at despite noticing that under the Company laws of Cayman Islands an exempted company was not entitled to conduct business in the Cayman Islands; that CGP was an exempted company; and its sole purpose is to hold shares in a subsidiary company situated outside Cayman Islands.
Revenue’s contention that the situs of CGP shares exist where the underlying assets are situated (i.e., in India), was rejected on the ground that under the Companies Act, 1956, the situs of the shares would be where the company is incorporated and where its shares can be transferred. On the material on record and the pleadings, the court held that the situs of the CGP shares was situated not in India where the underlying assets (of HEL) are situated but in Cayman Islands where CGP is incorporated, transfer of its shares was recorded and the register of CGP shareholders was maintained.
The Supreme Court in Vodafone concluded that the High Court erred in assuming that Vodafone acquired 67% of the equity capital of HEL. The transaction is one of sale of CGP shares and not sale of CGP or HEL assets. The transaction does not involve sale of assets on itemised basis. As a general rule, where a transaction involves transfer of the entire shareholding, it cannot be broken up into separate individual component assets or rights such as right to vote, right to participate in company meetings, management right, controlling right, controlled premium, brand licenses and so on, since shares constitute a bundle of rights – Charanjit Lal Chowdhury vs. UoI AI 1951 SC 41; Venkatesh (Minor) vs. CIT [1999] 243 ITR 367 (Mad) and Smt. Maharani Ushadevi vs. CIT [ 1981] 131 ITR 445 [MP] were referred to with approval and followed.
Merely since at the time of exit capital gains tax does not become payable or the transaction is not assessable to tax, would not make the entire sale of shares a sham or tax avoidant.
Parties to the transaction have not agreed upon a separate price for the CGP share and a separate price for what is called “other rights and entitlements” [including options, right to non-compete, control premium, customer base, etc]. It is therefore impermissible for Revenue to split the payment and consider a part of such payment for each of the above items. The essential character of the transaction as an alienation is not altered by the form of consideration, the payment of the consideration in installments or on the basis that the payment is related to a contingency (“options”, in this case), particularly when the transaction does not contemplate such a split up.
Retrospective amendments in sections 2(14), 2(47) and 9(1)(i) of the Act by the Finance Act, 2012
Provisions of sections 2(14), 2(47) and 9(1) (i) of the Act were amended by the Finance Act, 2012, to operate with retrospective effect from 1-4-1962, effectively to nullify the impact of the judgement of the Supreme Court in the case of Vodafone and to protect the tax base as well as to safeguard revenue’s interest in many such similar cases.
In this connection, it is important to note the relevant portion of the Finance Minister’s speech on 7-5-2012, while introducing the Finance Bill, 2012, which reads as under:
“7. Hon’ble Members are aware that a provision in the Finance Bill which seeks to retrospectively clarify the provisions of the Income Tax Act relating to capital gains on sale of assets located in India through indirect transfers abroad, has been intensely debated in the country and outside. I would like to confirm that clarificatory amendments do not override the provisions of Double Taxation Avoidance Agreement (DTAA) which India has with 82 countries. It would impact those cases where the transaction has been routed through low tax or no tax countries with whom India does not have a DTAA.” (emphasis added)
Taxability of capital gains in India in respect of transfer of shares of a non-resident entity holding shares of an Indian Company, between two non-residents in a tax treaty situation
As mentioned above, in the Vodafone’s case, there was no Tax treaty involved as shares of a Cayman Islands company were transferred by the Hongkong based holding company to the Netherlands based Buyer company Vodafone and India does not have any DTAA with Cayman Islands or Hong Kong.
In the context of taxability of capital gains in India in respect of transfer of shares of a non-resident entity holding shares of an Indian Company, between two non-residents, in a similar case but in a tax treaty situation, some very important questions arise for consideration, which are, inter alia, as follows:
(1) Whether an intermediate entity [IE] is not with commercial substance; is a sham or illusory contrivance, a mere nominee of its holding company and/or holding company being the real, legal and beneficial owner(s) of Indian Company’s [Indco] shares; and a device incorporated and pursued only for the purpose of avoiding capital gains liability under the Act?
(2) Whether it can be said that an investment, initially made by the holding company through IE in Indco, a colourable device designed for tax avoidance? If so, whether the corporate veil of IE must be lifted and the transaction (of the sale of the entirety of IE shares by Holdco to non -resident buyer) treated as a sale of Indco’s shares?
(3) Is such a transaction (on a holistic and proper interpretation of relevant provisions of the Act and the applicable DTAA), liable to tax in India?
(4) Whether retrospective amendments to provisions of the Act (by the Finance Act, 2012) alter the trajectory or impact provisions of the DTAA and/or otherwise render the trans-action liable to tax under the provisions of the Act?
Andhra Pradesh High Court’s [High Court] land-mark decision in the case of Sanofi Pasteur Holding SA [2013] 30 taxmann.com 222 (AP) dated 15-2-2013
On similar issues which arose for consideration of the Andhra Pradesh High Court in the Writ petitions filed by Sanofi Pasteur Holding SA and others, the AP High Court, in a very detailed, very well considered and articulated judgement, has affirmed certain long established principles. Primarily, it has reiterated the view that the retrospective amendment does not alter the provisions of tax treaty. It has also reaffirmed the various factors brought out in the Vodafone decision while considering whether an entity is a sham entity or conceived only for tax-avoidance purposes.
The court also refused to lift the corporate veil in the absence of sound justification and more so where a case of tax avoidance is not established. This decision also reiterated that an Indian Tribunal or Court is bound by the ruling of jurisdictional superior judicial authority.
The brief facts of the case, issues before court, the tax department’s contention, the petitioner’s contention and the conclusions of the High Court are summarised below.
Brief facts:
Shantha Biotechnics Limited (SBL) is a company incorporated under the Companies Act, 1956 having its registered office in Hyderabad, India. Sanofi Pasteur Holding (Sanofi) is a company incorporated under the laws of France. During the year 2009, Sanofi had purchased 80.37 % of the share capital of another French company (i.e. ShanH) from Merieux Alliance (MA), a French company, and balance 19.63 % share capital of ShanH from Groupe Industriel Marcel Dassault (GIMD), another French company. ShanH held 82.5 % of the share capital of SBL.
The tax department passed an order on Sanofi dated 25th May 2010, u/s. 201(1)/(1A) of the Act, holding Sanofi as an `assessee-in-default’ for not withholding taxes on payments made to MA and GIMD on acquisition of shares of ShanH. MA and GIMD made an application to the Authority for Advance Ruling (the AAR) on the taxability of the transaction. The AAR in November 2011 ruled that the capital gain arising from the sale of shares of ShanH by MA and GIMD was taxable in India in terms of Article 14(5) of the India-France tax treaty.
Later, both the parties i.e. the Buyer (Sanofi) and Sellers (MA and GIMD) filed writ petitions before the High Court.
Department’s contentions
The Share Purchase Agreement (SPA) dated 10th July, 2009 between MA, GIMD and Sanofi was only for the acquisition of the control, management and business interests in SBL and was not mere divestment of shares of ShanH. As a result, capital assets in India were transferred and capital gains had accrued to MA and GIMD in India. ShanH is not a company with an independent status and is only an alter ego of MA and GIMD, the latter are the legal and beneficial owners of shares of SBL. ShanH had no control over SBL management nor enjoyed any rights and privileges in SBL as a shareholder. ShanH is at best a nominee of MA in relation to SBL’s shares.
There was no conflict between the provisions of the Act pursuant to the retrospective amendments carried out by the Finance Act, 2012 and the tax treaty. The transaction was taxable in India since the right was allocated to India under Article 14(5) of the tax treaty. For a proper and purposeful construction of the tax treaty provisions, the expression ‘alienation of shares’ in Article 14(5) of the tax treaty must be understood as direct as well as indirect alienation.
The retrospective amendments to section 2(47) of the Act, by the Finance Act, 2012, clarifies that ‘transfer’ would mean and would deem to have always meant the disposal of an asset whether directly or indirectly or voluntarily or involuntarily. The retrospective clarificatory amendments do not seek to override the tax treaty. In case of a conflict between the domestic law and the tax treaty, the tax treaty will prevail in terms of Section 90 of the Act. In the present case, there is however, no conflict between the tax treaty and the provisions of the Act. Therefore, once the right to tax the gains stand allocated to the source country, domestic law provisions of the source country will have to be read into the tax treaty in terms of Article 3(2) of the tax treaty, where any expression has not been defined in a tax treaty. Since ‘alienation’ is not defined in the tax treaty, its meaning has to be imported from the domestic law, as amended by the FA 2012. This exercise does not amount to overriding the tax treaty and in fact amounts to giving effect to Article 3(2) of the tax treaty.
Since MA and GIMD are owners of SBL shares, both legal and beneficial, it is MA and GIMD which have the participating interest in SBL. The disposal of participating interest, whether directly or through a nominee entity like ShanH would not take the capital gains out of the ambit of Article 14(5) of the tax treaty. If the right to tax vests in India, the mode of disposal was immaterial, whether direct, indirect or deemed disposal.
Petitioner’s contentions
On a reading of section 90 of the Act with relevant provisions of the tax treaty, the capital gain in the Sanofi’s transaction was taxable only in France. Only Article 14(4) of the tax treaty permits a limited ‘see through’, not Article 14(5) of the tax treaty. Neither in law nor qua Article 14 of the tax treaty could an asset held by a company be treated as an asset held by a shareholder.
Controlling interest is not a separate asset independent of shares. Even if controlling interest over SBL by ShanH is viewed as a separate right or asset, the situs of the controlling Interest was located and taxable only in France under Article 14(6) of the tax treaty.
Since the cost of acquisition was not determinable for controlling rights and underlying assets; there being no date of acquisition nor there being any part of the consideration apportionable to these rights, the computation provision of capital gains would fail and taxing the transaction on the underlying assets theory would be inoperative.
ShanH is a company incorporated in France. It is a joint venture between MA and GIMD to act as an investment vehicle. It had a separate Board of Directors and was filing tax returns in France. Setting up of SPVs (France) is considered necessary to protect the interest of investors. Without incorporation of ShanH as a distinct investment entity, it would not have been possible to interest GIMD (with no expertise in the field of vaccines to come on board ShanH, as an investment partner.)
Further, ShanH obtained FIPB approval for investment in the shares of SBL. The AAR ruling is contrary to settled legal principles and erroneous. Since the transaction was not taxable in India, Sanofi was not required to withhold tax.
Relevant issues before High Court
Is ShanH not an entity with commercial substance? Is it a mere nominee of MA and/or MA/ GIMD who are the real, legal and beneficial owners of SBL’s shares? Is ShanH a device incorporated and pursued only for the purpose of avoiding capital gains liability under the Act?
Was the investment, initially by MA and thereafter by MA and GIMD through ShanH in SBL, a colourable device designed for tax avoidance? If so, whether the corporate veil of ShanH must be lifted and the transaction (of the sale of the entirety of ShanH shares by MA/GIMD to Sanofi) treated as a sale of SBL shares?
Is the transaction (on a holistic and proper interpretation of relevant provisions of the Act and the tax treaty), liable to tax in India?
Whether retrospective amendments to provisions of the Act (by the Finance Act, 2012) alter the trajectory or impact provisions of the tax treaty and/or otherwise render the transaction liable to tax under the provisions of the Act?
Decision of the High Court
In respect of commercial substance of ShanH
The High Court observed that ShanH as a French resident corporate entity is a distinct entity of commercial substance, distinct from MA and GIMD. It was incorporated to serve as an investment vehicle, this being the commercial substance and business purpose i.e. of foreign direct investment in India by way of participation in SBL.
ShanH received and continues to receive dividends on its SBL shareholding which have been and are assessable to tax under provisions of the Act; and even post the transaction in issue, the commercial and business purpose of ShanH as an investment vehicle is intact. These indicators/ factors are, in the light of Vodafone International Holdings B.V., adequate base to legitimise the conclusion that ShanH is not a sham or conceived only for Indian tax-avoidance structure.
In respect of lifting of corporate veil of ShanH
The High Court observed that, on an analysis of the transactional documents and surrounding circumstances, ShanH was not conceived for avoiding capital gains liability under the provi-sions of the Act. The same has also not been contested by the tax department. Further, the High Court observed that in the light of the ratio laid down by the SC in Azadi Bachao Andolan and Vodafone International Holdings B.V., ShanH is not a corporate entity brought into existence and pursued only or substantially for avoiding capital gains tax liability under the provisions of the Act.
As observed in the Vodafone International Holdings B.V. factual context (equally applicable in this case), ShanH was conceived and incorporated in conformity with MA’s established business prac-tices and organisational structure.
The fact that a higher rate of capital gains tax is payable and has been remitted to Revenue in France, lends further support to the Sanofi’s contention that ShanH was not conceived, pursued and persisted with, to serve as an India tax-avoidance device. Since the tax department failed to establish that the genesis and continuance of ShanH establishes as an entity of no commercial substance and/or that ShanH was interposed only as a tax avoidant device, no case was made out for piercing or lifting the corporate veil of ShanH. Even subsequent to the transaction in issue and currently as well, ShanH continues in existence as a registered French resident corporate entity and as the legal and beneficial owner of shares of SBL.
Independent of the conclusion that there was no case piercing the corporate veil of ShanH, the transaction in issue was clearly one of transfer by MA and GIMD of their shareholding in ShanH to Sanofi and it was not a case of transfer of shareholding in SBL, which continues with ShanH.
In respect of impact of retrospective amendments
The meaning and trajectory of the retrospective amendments to the Act must be identified by ascertaining the legal meaning of the amendments, considered in the light of the provisions of the Act and the mischief that the amendments are intended to address. The retrospective amendments do not alter the provisions of the tax treaty and given the text of section 90(2) of the Act, these amendments do not alter the taxability of the present transaction.
Further, the retrospective amendments in section 2(14), 2(47) and section 9 of the Act are not fortified by a non -obstante clause to override the provisions of the tax treaties.
No liability to tax in India
The present transaction was for alienation of 100 % of shares of ShanH held by MA and GIMD in favour of Sanofi and such transaction falls within Article 14(5) of the tax treaty. The transaction neither constitutes the transfer nor deemed transfer of shares or of the control/management or underlying assets of SBL.
The controlling interest of ShanH over the affairs, assets and management of SBL being identical to its shareholding and not a separate asset, it cannot be considered or computed as a distinctive value. The assets of SBL cannot be considered as belonging to a shareholder (even if a majority shareholder). The value of the controlling rights over SBL attributable to ShanH shareholding is also incapable of determination and computation. There was also the issue of value of Shantha West, a subsidiary of SBL. For these reasons, the computation component which is inextricably integrated to the charging provision (section 45 of the Act) fails, and consequently the charging provision would not apply. The transaction was not liable to tax in India under the provisions of the Act read with the provisions of the tax treaty.
Conclusions
It appears that in the case of Sanofi, the fact that the intermediate company ShanH was located in France and tax was paid in France on the capital gains at a rate of tax higher than in India, may have had significant influence in deciding the case in favour of the petitioners.
In this connection, attention of the readers is invited to the Report of the Expert Committee on Retrospective Amendments relating to Indirect Transfer headed by Shri Parthasarathi Shome.
Considering the decision of Vodafone, subsequent retrospective amendments by the Finance Act, 2012 and the landmark decision of the AP high Court in Sanofi’s case, it may be plausible to take a view that in similar transactions, in a tax treaty situation, the same may not be liable to tax in India. Media reports indicate that many such cases are pending before various high courts. However, keeping in mind the past trend and the approach of the tax department, surely the final word on the subject would be probably said only after the decision of the SC is rendered on the issue.
