Treaty anti-avoidance and indirect transfer principles applied to tax offshore share sale gains on Indian assets

A composite shareholding arrangement through a wholly owned French subsidiary was treated as a pre-ordained scheme to transfer the underlying Indian assets and controlling interest, rather than a mere offshore share sale. On that purposive construction, Article 14(5) of the Indo-French tax treaty was held applicable and the gain was taxable in India. The objection that the arrangement was a prima facie tax-avoidance arrangement under the proviso to section 245R(2) was rejected, and the ruling favoured the Revenue.

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Issues: Whether the gain arising from the applicants' sale of shares in the French holding company to another French company was taxable in India under Article 14(5) of the Indo-French tax treaty, and whether the transaction was a prima facie tax-avoidance arrangement within the proviso to section 245R(2) of the Income-tax Act, 1961.

Analysis: The arrangement was examined as a composite series of steps under which a French company acquired and held the shares of an Indian company through a wholly owned French subsidiary, and the subsidiary had no independent business apart from holding those shares. The later transfer of the subsidiary's shares to another French company effectively passed the underlying Indian assets and controlling interest without a direct transfer of the Indian company's shares. On that view, the transaction was treated as a pre-ordained scheme designed to avoid capital gains tax in India and not as a transaction to be accepted merely at face value. The treaty was construed purposively in light of its object of preventing fiscal evasion, and Article 14(5) was held applicable to the gain arising from the transfer.

Conclusion: The transaction was held taxable in India, the objection based on the proviso to section 245R(2) was rejected, and the ruling was in favour of the Revenue.

Ratio Decidendi: A transaction that is part of a pre-ordained scheme to transfer the underlying assets and control of an Indian company cannot be accepted at face value for tax purposes, and the treaty must be construed purposively to prevent avoidance of Indian capital gains tax.

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