Chennai Tribunal upholds tax neutrality of intra-group share transfer under Section 47(iv); rejects Revenue’s “colorable device” allegation

In the case of Valeo Bayen ^[1] (Taxpayer), the issue before the Chennai Income Tax Appellate Tribunal (Tribunal) was whether transfer of shares of an Indian company by the Taxpayer, a French resident holding company, to its wholly owned Indian subsidiary constitutes a colorable device to avoid tax.

In the facts of the case, the Taxpayer held a substantial stake in Valeo Service India Auto Parts Pvt. Ltd. (VSIAPL) since 2012. In 2018, it acquired the remaining 40% stake from its joint venture partner after the joint venture did not achieve its objective. Subsequently, in December 2019, the Taxpayer transferred its entire shareholding in VSIAPL to its Indian wholly owned subsidiary (WOS), Valeo India Pvt. Ltd. (VIPL) for a consideration of approximately INR 64.78 crore. Post transfer, VSIAPL was merged into VIPL under the fast-track merger route.

The Taxpayer treated the transaction as exempt transfer under section 47(iv) of Income Tax Act, 1961 (ITA 1961) and claimed refund of taxes withheld by VIPL. The Tax Authority, however, disregarded the transaction of transfer of shares to Indian WOS and taxed the entire consideration as “income from other sources”, contending that (i) the transaction lacked commercial necessity, (ii) the taxpayer adopted an inflated Discounted Cash Flow (DCF) valuation, (iii) the share transfer was an unnecessary step before merger, and (iv) the transaction was in nature of trade and was carried out to remit the consideration without paying tax in India. The Dispute Resolution Panel upheld the Tax Authority’s draft order by rejecting Taxpayer’s contentions.

On Taxpayer’s appeal, the Tribunal ruled in favor of the Taxpayer and held that the transaction was a bonafide transfer squarely covered within the ambit of section 47(iv) of ITA 1961. The Tribunal made the following observations:

• The Tax Authority erred in examining only the 2018 acquisition of 40% stake and 2019 transfer without appreciating that the majority shareholding had been held since 2012 as an investment.
• The Tax Authority cannot sit in the armchair of a businessman and dictate the manner in which business decisions are to be taken.
• The choice of adopting a share transfer followed by a fast-track merger could not be disregarded merely because an alternative direct merger route was available without prior share transfer.
• The Tribunal noted that the tax authority had rejected the DCF valuation merely on comparison with Net asset value (NAV) without identifying specific defects in the DCF methodology or assumptions. It held that in absence of any concrete defects, the valuation cannot be disregarded.
• The Tribunal also rejected Tax Authority’s reliance on post-merger accounting treatment in books of VIPL, observing that extinguishment of VSIAPL shares and adjustment to capital reserve were accounting treatment and disclosure as mandated by applicable accounting standards and cannot be the basis for treating the transaction as non-genuine.

^[1] [TS-676-ITAT-2026(CHNY)]