APAC Tax Matters: 13th edition
At a glance
- Rules on taxation of indirect transfer under India-France Double Taxation Avoidance Agreement challenged
- Indian Union Cabinet approves non-binding “conciliation” process with Vodafone
- India publishes rules on the characterization and taxability of subscription fees paid for accessing information on a website
High Court (HC) rules on taxation of indirect transfer under India-France DTAA and Special Leave Petition (SLP) filed before Supreme Court (SC) against the HC’s ruling
The cross-border acquisition of Indian companies has been the focus of the Tax Authority over the last few years. Pursuant to the Vodafone ruling, the ITL was amended retrospectively to tax the transfer of shares of a foreign entity whose value is derived, directly or indirectly, substantially from assets located in India. However, it is generally recognized that a number of India’s DTAAs would protect such gains from Indian tax.
This principle was upheld by the Andhra Pradesh HC in the case of Merieux Alliance, France (MA) and Groupe Industriel Marcel Dassault (GIMD)1. With the Tax Authority filing a SLP before the SC challenging the HC’s ruling, finality on this matter is awaited.
Background and facts
MA and GIMD are companies resident in France. With a view to investing in India, MA entered into a share purchase agreement in 2006 with shareholders of an Indian company, Shantha Biotechnics (Shantha). Nearly 80% of Shantha’s shares were purchased by ShanH, a French wholly-owned subsidiary of MA. Over the years, other investors like GIMD acquired shares in ShanH from MA.
Thereafter, in 2009, MA and GIMD transferred their shareholding in ShanH to a French resident third-party buyer, Sanofi Pasteur Holding (Sanofi). Subsequently, MA and GIMD approached the Authority for Advance Rulings (AAR). The AAR, in a ruling that was rendered, prior to the decision of the SC in the case of Vodafone International Holdings BV (Vodafone), as well as prior to the retrospective amendments to the Indian Tax Laws (ITL) on taxation of indirect transfers of Indian assets introduced by the Finance Act, 2012, had held that the transfer of shares of ShanH was a scheme for avoidance of Indian tax and the capital gains arising from the transaction were liable for tax in India.
In this regard, the AAR adopted a purposive interpretation of the India-France DTAA. Aggrieved by the AAR ruling, MA and GIMD filed a writ petition before the HC. In February 2013, the HC gave its ruling in favor of MA and GIMD.
Aggrieved by the HC’s order, the Tax Authority has now filed an SLP before the SC against the HC’s ruling.
Ruling of the HC and arguments raised in the SLP by the Tax Authority
The HC held that the corporate veil of the French holding company, ShanH, cannot be pierced as it was an independent corporate entity with commercial substance and business purpose and was not a device for avoiding tax in India. As MA and GIMD had transferred shares of a French resident company, taxation of capital gains arising therefrom is allocated exclusively to France under the France DTAA and, therefore, not taxable in India. The HC also held that the retrospective amendments to the ITL would not impact the allocation of taxing rights under a DTAA.
In the SLP filed in the SC, the arguments raised by the Tax Authority are:
- The transfer of shares of ShanH (which in turn held shares in an Indian company, Shantha) was a scheme for avoidance of tax in India because ShanH did not have commercial or economic substance and the real intent was to acquire the shares and entire business interest in the Indian company.
- The Andhra Pradesh HC erred in not appreciating the approach of the Bombay HC in the case of Aditya Birla Nuvo Ltd. and Others wherein the subsidiary was ignored and the parent company was treated as the “real owner” of the shares.
- India has the right to tax the capital gains under the provisions of the India-France DTAA.
- Conflict between the rulings in the cases of Azadi Bachao Andolan1 and Vodafone2 and that in the case of McDowell3 on observations on the issue of tax planning versus tax avoidance. The decisions in Vodafone and Azadi Bachao Andolan must be referred to an appropriate bench for deciding on the correctness of the issue.
- Because various observations from the Vodafone ruling are cited as incorrect, the Vodafone ruling should be referred to a larger bench for reconsideration.
The SC has the discretion to admit or dismiss the SLP. The petition is yet to be heard by the SC.
1 [263 ITR 706]
2 [341 ITR 1]
3 [154 ITR 148]
4 [341 ITR 1]