Treaty-protected share sale: court rejects indirect transfer theory and holds capital gains taxable only in France.

ShanH was found to be a genuine corporate entity with commercial substance and the legal and beneficial owner of the SBL shares, so corporate veil lifting was unwarranted. The 10-07-2009 SPA was treated as a sale of ShanH shares only, not an indirect transfer of SBL shares, control or underlying assets. Article 14(5) of the DTAA was held to govern the capital gains, with no look-through reading and no override by the Finance Act, 2012 amendments, so the gain was not chargeable to tax in India and was taxable only in France. The AAR ruling, the Section 201 default order, the demand notice and the rectification order were all set aside.

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Issues: (i) whether ShanH was a genuine corporate entity with commercial substance and the legal and beneficial owner of the SBL shares, or a sham/nominee device liable to have its corporate veil lifted; (ii) whether the transaction under the 10-07-2009 SPA was a transfer of ShanH shares or, in substance, a transfer of SBL shares, control and underlying assets; (iii) whether the capital gains from the transaction were chargeable to tax in India under the DTAA and the Income-tax Act, including after the retrospective amendments by the Finance Act, 2012; (iv) whether the AAR ruling dated 28-11-2011 was sustainable; and (v) whether the order treating Sanofi as an assessee in default, the demand notice, and the rectification order were valid.

Issue (i): whether ShanH was a genuine corporate entity with commercial substance and the legal and beneficial owner of the SBL shares, or a sham/nominee device liable to have its corporate veil lifted.

Analysis: The transactional documents, share registers, escrow arrangements, board records, dividend payments, approvals and surrounding circumstances showed that ShanH was incorporated as a French investment vehicle, later became a joint venture, paid for the SBL shares, and remained the registered holder throughout. The materials did not establish that ShanH was a mere alter ego of MA or GIMD, or that it lacked commercial purpose.

Conclusion: ShanH was held to be an independent entity with commercial substance and the legal and beneficial owner of the SBL shares.

Issue (ii): whether the transaction under the 10-07-2009 SPA was a transfer of ShanH shares or, in substance, a transfer of SBL shares, control and underlying assets.

Analysis: Reading the SPA and connected documents as a whole, the transaction was found to be the sale of ShanH shares to Sanofi. The Court rejected the attempt to treat the transaction as an indirect transfer of SBL shares or of SBL's underlying assets merely because ShanH held a controlling stake in SBL. Controlling interest was treated as an incidence of shareholding and not a separate transferable asset.

Conclusion: The transaction was held to be an alienation of ShanH shares only, not a transfer or deemed transfer of SBL shares or assets.

Issue (iii): whether the capital gains from the transaction were chargeable to tax in India under the DTAA and the Income-tax Act, including after the retrospective amendments by the Finance Act, 2012.

Analysis: Article 14(5) of the DTAA was held to apply to the alienation of a participation of at least 10% in a company resident in France, and no look-through could be read into that provision. The retrospective amendments to the Income-tax Act did not override the DTAA, and Article 3(2) could not be used to import a different domestic-law meaning to rewrite the treaty. On the facts, the taxing was allocated to France.

Conclusion: The capital gains were held not chargeable to tax in India and were allocated exclusively to France under the DTAA.

Issue (iv): whether the AAR ruling dated 28-11-2011 was sustainable.

Analysis: The AAR's conclusion proceeded on an erroneous view of the facts, treaty text and governing legal principles, including an impermissible reading of Article 14(5) and an unwarranted application of anti-avoidance notions to a transaction that the Court found to be commercially real and treaty-protected.

Conclusion: The AAR ruling was quashed as unsustainable.

Issue (v): whether the order treating Sanofi as an assessee in default, the demand notice, and the rectification order were valid.

Analysis: The duty to deduct tax at source under Section 195 arises only where the sum paid is chargeable to tax in India. Since the underlying capital gain was held not taxable in India, the foundation for treating Sanofi as an assessee in default failed, and the consequential demand and rectification also could not stand.

Conclusion: The order under Section 201, the demand notice and the rectification order were held invalid.

Final Conclusion: The writ petitions succeeded. The Court affirmed that the transaction was a treaty-covered transfer of ShanH shares taxable only in France, rejected the Revenue's indirect-transfer theory, and set aside the adverse rulings and demands.

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