TaxTMI 
TaxTMI 
2013 (2) TMI 589
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....ion in India (hereinafter more fully described and referred to as the Double Taxation Avoidance Agreement - the DTAA), also enters into the equation. Synergies between DTAA provisions and those of the Act; and how these inform the core issue - as to the liability to tax; and direct the allocation of the tax chargeable on the transaction in issue, to one or the other contracting State (India or France), is the quintessential problematic that falls for our consideration. In the context, we are of the considered view that a prefatory overview, of the origins and evolution of tax treaties and how these conflate, co-operate with domestic tax legislation and converge to signal a unified raft of applicable norms, is appropriate. Tax treaties and domestic tax legislation : norms of co-existence : International juridical double-taxation could generically be defined as imposition of comparable taxes in two or more States on the same tax-bearer in respect of the same subject matter and for identical periods. In recognition of the pejorative effect on exchange of goods and services and movement of capital, technology and persons, agreements/treaties/conventions/ protocols evolved for rem....
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.... allowances for the limitations and reservations in the commentary. The OECD complete model treaty and the commentaries thereon were revised from time to time. This process continues. Double tax treaties are international agreements, their creation and consequences determined according to the rules contained in the Vienna Convention on the Law of Treaties, 1969 (VCLT). The conclusion of a treaty/convention is preceded by negotiations. States intending to conclude a treaty are represented by the appropriate level of executive, political or diplomatic expertise according to individual practices and judgment of the participant States. There are several steps in the negotiations phase eventually leading to conclusion of the treaty. Treaties or conventions are thus instruments signaling sovereign political choices negotiated between States. The efficacy of a treaty over domestic law turns upon either State - specific conventions operating to govern the sovereign practices, or where there is a written Constitution provisions of that Charter. See Introduction^[[1] Klaus Vogel on Double Taxation Conventions (2005 - Kluwer Law International)Introduction^] Double-taxation treaty rul....
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.... conference, association or other body, the limitations imposed by Articles 245 and 246(3) are eclipsed and the total field of legislation is open to the Parliament, enabling Parliament to invade fields of legislation enumerated in List II as well, insofar as may be necessary for the purpose of implementing the treaty, etc., obligations of India - Maganbhai Ishwarbhai Patel v. Union of India^[(1970) 3 SCC 400^]; HM Seerva^[Constitution Law of India - IV Edn. Vol.1, Pgs.305-306^]. Our Courts have held that regard must be had to international conventions and norms while interpreting domestic law provisions, when there is no inconsistency between them and there is a void in the domestic law; that Courts are under an obligation, within legitimate limits to so interpret municipal law as to avoid confrontation with the comity of Nations or well-established principles of international law and where municipal law is not in variance with the international treaty - Visakha v. State of Rajasthan^[1997 6 SCC 241^]; Gramophone India Co. v. Birendra Bahadur Panday^[1984 2 SCC 534^]; andRD Upadhyay v. State of Andhra Pradesh^[(2007) 15 SCC 337^]. However, this is not to say that a treaty mu....
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..... The challenge in the writ petitions :- 2. W.P.No.14212 of 2010 :- Sanofi assails the order dated 25-05-2010 of the 3rd respondent. The 3rd respondent (comprehended within the generic expression "the Revenue") determined the petitioner to be an "assessee in default" in respect of payments made by it to MA and GIMD for acquisition of the majority control/stake in SBL through transfer of ShanH shares, under Section 201(1) of the Act; determined the long-term capital gain at Rs. 2625,73,98,171/-; and the consequent tax liability at Rs. 594,99,26,425/-. The order also determined liability to interest, on the default of tax deduction at source at Rs. 53,54,93,378/-, under Section 201(1A). A consequent notice of demand (also dated 25-05-2010), under Section 156 was served on the petitioner. After issuing notice to the petitioner and receipt of its responses, a rectification order under Section 154 of the Act was passed on 15-11-2011 re-computing the long-term capital gain, tax thereon and the consequent interest. The total demand is now asserted at Rs. 1058,06,83,952/-. The substantive order dated 25-05-2010; the notice of demand of even date and the rectification order d....
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....ustainable) and order a remit for de novo consideration by the AAR. In the light of the authority of Columbia Sportswear (holding that the decision of AAR could be challenged under Articles 226 and/or 227), observations in the Constitution Bench decision in H.V. Kamath v. Ahmad Ishaque and others^[AIR 1955 SC 223^](to the effect that while in certiorari the High Court could only annul the erroneous decision of an inferior Tribunal, it could while exercising (supervisory) jurisdiction under Article 227 also issue further directions in the matter; and in the light of the conjoint plea by the respective parties (adverted to supra), in the event we hold that the impugned ruling of the AAR is erroneous to a degree susceptible to judicial and/or supervisory review under Articles 226/227 and is on such review unsustainable, we would quash the impugned ruling exercising certiorari and, if need be, issue appropriate declarations/directions, particularly since expeditious disposition is the uncontested legislative purpose underlying the provision of an Advance Ruling Authority, in Chapter XIX - B of the Act. 4. A brief account of SBL, MA, GIMD and Sanofi :- SBL : a company incorpora....
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....H France) wherein MA has 94.9% shareholding. TSGH France operates through ABL, USA and Transgene, France, wherein TSGH France has 56.68% shareholding; and (d) Prophylactic vaccines in emerging countries operated through ShanH (a French resident entity), now a joint venture wherein MA has 80% shareholding. GIMD:a separate business conglomerate registered in France engaged in various businesses such as Defense Systems,Avionics and the like. Even earlier to association with MA in ShanH, GIMD was an investor along with MA in ABL,USA and Transgene, France. GIMD invested in 20% shareholding of ShanH while MA held the other 80%. 5. Preview of evolution of ShanH : : During August/September, 2006, MA was negotiating with GIMD, inviting the latter for a strategic association for investment in SBL through a holding structure (emails dated 10-08-2006, 18-08-2006, 08-09-2006 and 23-11-2006 - between MA and GIMD representatives and law advisor of GIMD). Pursuant to the 26-10-2006 meeting of the MA Board, resolving to allow ShanH (a contemplated MA subsidiary) to acquire 54% share of SBL, ShanH was incorporated on 31- 10-2006 and registered in the home jurisdiction (theFrench Republic....
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.... ShanH share capital was increased to 5,99,630 shares of which MA subscribed to 4,79,630 shares and GIMD to 1,20,000 shares as on 12-03-2007. On 25-03-2009 ShanH capital was increased by 1,00,000 shares (to 7,00,000) contributed by MA and GIMD in the 80:20 ratio. ShanH (now a joint-venture (JV) of MA and GIMD) acquired 20,000 shares of UOIL; 17,500 shares from Indian resident shareholders and 4,23,600 shares from non- resident shareholders of SBL in 2007; and a further 1,90,640 shares from UOIL, 10,78,920 shares from Indian resident shareholders and 14,57,150 shares from non- resident shareholders of SBL, in 2008. During March, 2008, a capital increase in SBL by 4,49,830 shares were subscribed directly by ShanH, which remitted US $5,000,000 to SBL towards advance and share application money (vide certificate of foreign inward remittance, dated 08-03-2008 issued by IOB, Chennai). 05.05.2009 - shareholders agreement executed pursuant to which Mr. Georges Hibon purchased 10,400 shares from MA and 2,600 shares from GIMD. After this transaction, of the 700,000 shares of ShanH, 78.5% held by MA; 19.6% by GIMD and 1.9% by Mr. Georges Hibon. July and August, 2009 - ShanH p....
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.... the transactions contemplated by the SPA, the sellers (MA and GIMD) shall deliver or cause to be delivered to Sanofi : (a) the original and duly completed (by MA and GIMD), executed and dated share transfer forms pertaining to the transfer of the MA and GIMD shares to Sanofi; (b) originals of the share transfer register and shareholder accounts of ShanH and the SBL share certificates held by ShanH, at the closing date; and (c) other specified documents in original or certified copies to effectuate transfer of the entire ShanH shareholding to Sanofi qua existing entitlements, rights or interests of MA, GIMD or Mr.Georges Hibon under the Articles of Association of ShanH or the SHA's, dated 08-03-2007 (between MA and GIMD) and dated 05-05-2009 between GIMD and Mr.Georges Hibon. Article II of the SPA sets out joint warranties by MA/GIMD to Sanofi - that MA, GIMD and ShanH are corporations duly organized and validly existing under the laws of France and inhere the requisite corporate power and authority to own respectively the shares of ShanH; and that ShanH is duly qualified to conduct business under laws of the jurisdiction of incorporation (France). Article VIII (....
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....ven date were issued to ShanH. ShanH asserts to have paid the tax and claims that there is no tax due against ShanH on this account. There are however appeals, stated to be pending, before the ITAT. 7. MA and GIMD seek Advance ruling : 20.11.2009 : MA and GIMD filed separate applications before the Authority for Advance Rulings (AAR), u/S.245Q(1) of the Act for an advance ruling on two questions, viz.:- Question (1): In terms of the provisions of the double taxation avoidance treaty dated 6th September, 1994, as amended from time to time, entered between the Republic of India with the Government of French Republic ("Indo-French Tax Treaty") read with Section 9o of the income Tax Act, 1961, whether the Capital gains arising from the sale of shares of ShanH (French Incorporated Entity) by the Applicant (French incorporated Entity) to Sanofi (French incorporated Entity) is liable to tax in France or in India. Question (2): Without prejudice to above, whether controlling interest (assuming while denying that it is a separate asset) is liable to be taxed in France under Article 14 (6) of the Indo - French Tax Treaty? GIMD raised only the first question and sought a ....
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....rt of the CIT to defeat or delay the remedy invoked (for advance ruling); and observed that such strategies would have a pejorative impact on the image of tax administration in the country. 8. Sanofi is assessed to tax on purchase of ShanH share holding : 07-08-2009: letter to MA addressed by the Deputy Director of Income Tax (International Taxation)-I, Hyderabadin respect of proposed sale of its shares to Sanofi, details sought. 26-8-2009: MA responded stating that : (a) the proposed transaction - the transfer of shares to Sanofi would not involve any transfer of shares of SBL, which will remain under the control of its current majority shareholder i.e., ShanH; (b) the deal with Sanofi is not concluded and is under discussion; (c) details of acquisition of SBL shares by ShanH are not relevant; (d) provisions of the Act are inapplicable; (e) MA holds no shares in SBL nor had received any dividends from SBL; and (f) MA is not directly involved in the control and management of SBL. 17-09-2009: the Deputy Director of Income Tax (International Taxation) - II, Hyderabad issued notice to Sanofi contending that: (a) Sanofi had paid consideration to MA for purchase of shares in....
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.... 31.03.2010. 26.03.2000: Sanofi submitted a detailed reply to the show-cause notice dated 19.02.2010 and sought opportunity to cross-examine Mr.Khalil Ahmed. 31.03.2010: Revenue responded stating that opportunities to cross-examine Mr. Khalil Ahmed were not earlier availed; and granted time to Sanofi to secure other statements recorded u/S.131. By letter dated 08.04.2010 Sanofi (after collecting statements of other persons recorded u/S.131, i.e., N. Rajasekhar and VR), sought time to make submissions and to furnish written submission by 15.04.2010 and for a personal hearing from the Revenue. 05.05.2010: Revenue intimated Sanofi of scheduling the hearing to 10.05.2010. On 10.05.2010 Sanofi sought time and requested re-scheduling the hearing to 21.05.2010 or later. 21.05.2010: Hearing of Sanofi's liability to tax. There is a dispute between Sanofi and Revenue with regard to whether adequate and reasonable opportunity was provided to Sanofi. During hearing of Sanofi's writ petition (W.P.No.14212 of 2010) counsel referred to averments in the writ petition to assert that on 21.05.2010 Sanofi's counsel sought leave to make further submissions on 22.05.2010 and 23.05.....
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.... Act/DTAA and assessing its efficacy from the point of view of taxation; (c) The legal validity of a transaction or the adoption of a series of transactions commonly used like creating a fully owned subsidiary for making such investments in another country, cannot stand in the way of the question being asked whether it is acceptable in the context of the taxing statute; (d) The transaction of transfer of shares of Shan H would amount to transfer of assets of SBL, an Indian Company, if not of its shares formally; and this is a scheme for avoidance of tax in India; (e) While the decision in Azadi Bachao Andalan is binding on this authority it may not be the final word when the authority is approached for an advance ruling. Azadi Bachao Andalan incorrectly proceeds on the basis that the views expressed by Chinappa Reddy, J (in McDowell and Co. Ltd.) are his own and do not represent the view of the Court as a whole. The view that has emerged in England is that notwithstanding the legal validity of a transaction or a set of transactions, if the purpose was to create a legal smoke-screen to avoid the payment of tax that would legitimately be due as having arisen on the basis of ....
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....rule on the questions raised. 10. Heard Sri S.Ravi, learned Senior Counsel for the petitioner (Sanofi) in W.P.No.14212 of 2010, Sri Arvind Datar, learned Senior Counsel for the petitioner (GIMD) in W.P.No.3339 of 2012, Sri Porus Kaka, learned Senior Counsel for the petitioner (ShanH) in W.P.No.3358 of 2012 and Sri Mohan Parasaran, the learned Additional Solicitor General for India (ASG) for the Revenue /respondents. We have considered the legal and factual submissions presented and the pleadings and documents filed in the respective writ petitions. 11. Learned counsel for the respective parties advanced extensive arguments; referred to several instruments andprecedents to support the respective contentions. We will deal with the several propositions, contentions and citations during our analyses to follow. 12. Sri Porus Kaka summarized the legal submissions on behalf of MA (W.P.No.3358 of 2012) into the following propositions (summary of oral argument and written submissions) : Propositions on behalf of MA : (i) Qua Section 90 of the Act read with relevant provisions of the DTAA, the capital gains in the transaction in question is taxable only in France; (ii) Only Ar....
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.... therefrom formulated by Revenue : The generic contentions : (a) On analyses and a holistic consideration of the several transactional documents, surrounding circumstances,conduct and intent of the parties, in substance, the transaction (involved in the SPA dated 10-07-2009 betweenMA/GIMD and Sanofi) was exclusively for acquisition of the control, management and business interests in SBL, the Indian company. The transaction was not merely a divestment of ShanH shares (a French company) butresulted in transfer of capital assets in India wherefor capital gains had arisen to MA/GIMD in India. (b) In the facts and circumstances of the transaction, provisions of the Act apply to the transaction in terms of DTAA provisions and the right to tax the transaction stands allocated to India, under Article 14(5) thereof. On this view of the matter there is no conflict between provisions of the Act [pursuant to the retrospective amendments vide the Finance Act, 2012 (Act No.23 of 2012)] and provisions of the DTAA. Determinations necessitated in the light of the above contentions by Revenue : 1. Who is the real owner of SBL shares? (a) Had ShanH a distinct corporate status....
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....elation to SBL shares. Re chargeability under Article 14(5) of the DTAA : Since ShanH is not a company with an independent status and is only an alter ego of MA/GIMD, the latter is the legal and beneficial owner of SBL shares. The transaction involved in the SPA dated 10-07-2009 (between MA/GIMD and Sanofi) is acquisition of SBL shares. Only MA /GIMD participated directly in SBL, in its capital, control and management and such participation was more than 10%. On conclusion of the transaction contemplated by the 10-07-2009 SPA, MA/GIMD realized the gain on alienation of shares representing participation of more than 10% in the capital, control and management of SBL (an Indian company). The gains are thus chargeable to tax in India, in terms of Article 14(5) of DTAA. Double Taxation Avoidance Agreements allocate taxing rights to the country of residence or of source; or to both. Once the source country gets the right of taxation, domestic law provisions operate to bring to tax, reference income in the source country. Since the source country derives the right to tax the gains arising from alienation of shares of a company located within its territory, it is immateri....
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.... in terms of Article 3(2), where any expression has not been defined in the DTAA. Since "alienation" is not defined in the DTAA, its meaning has to be imported from the domestic law. This exercise does not amount to overriding the treaty and in fact amounts to giving effect to Article 3(2) of the DTAA. 15. Issues for determination : In view of the competing contentions/submissions and orders (the ruling of the AAR and orders of the Revenue) challenged in the writ petitions, the following issues arise for consideration: ISSUES : (1) Is ShanH not an entity with commercial substance; is a sham or illusory contrivance, a mere nominee of MA and/or MA/GIMD being the real, legal and beneficial owner(s) of SBL shares; and a device incorporated and pursued only for the purpose of avoiding capital gains liability under the Act ? (2) 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? (3) Is the transaction (on a holi....
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....rlying assets of SBL by MA/GIMD [MA being the true, legal and beneficial owner of SBL shares] in favour of Sanofi), Revenue has cited the following precedents : National Cement Mines Industries, Ltd vs Commissioner of Income Tax, West Bengal, Calcutta^[(1961)3 SCR 502^]; Juggilal Kamlapat vs Commissioner of Income Tax, U.P.^[ (1969)73 ITR 702 (SC)^]; Commissioner of Income Tax, Madras vs Sri Meenakshi Mills Ltd^[(1967)63 ITR 609 (SC)^]; M/s McDowell and Company Limited vs Commercial Tax Officer^[(1985)3 SCC 230^]; Workmen Employed in Associated Rubber Industry Ltd, Bhavnagar vs Associated Rubber Industry Ltd., Bhavnagar and Another^[(1985)4 SCC 114^]; State of U.P. and Others vs Renusagar Power Co. and Others^[(1998)4 SCC 59^]; New Horizons Limited and Another vs Union of India and Others^[(1995)1 SCC 478^]; Ebrahimi vs Westbourne Galleries Ltd and Others^[(1972)2 All.E.R 492^]; DHN Food Distributors Ltd and Others vs London Borough of Tower Hamlets^[(1976)3 All.E.R 462^]; Radha Sundar Dutta vs Mohd. Jahadur Rahim^[AIR 1959 SC 24^]; Puzhakkal Kuttappu vs C. Bhargavi and Others^[(1977)1 SCC 17^]; Ford against Beech^[(1848)11 Q.B 852^]; Inntrepreneur Pub Co Ltd vs East Crown Ltd^[....
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....ions. The McDowell plurality : In McDowell there were concurring opinions; Ranganath Misra, J. (for himself and on behalf of Chandrachud, C.J., Desai and Venkataramiah, JJ) and a concurring opinion by Chinnappa Reddy, J. A brief reference to the relevant facts of the case is in order. The question was whether the component of excise duty paid directly to excise authorities of the State by wholesale buyers of liquor (from the manufacturer-McDowell) should be included in McDowell's turnover for the purpose of assessment under the State Sales Tax Act. Notwithstanding the definition of "excise duty" in the State Excise Act, a practice was contrived whereby wholesale buyers used to remit the excise duty (payable by the manufacturer-McDowell) at the time of lifting of stocks of liquor from the manufacturer. This component was not reflected in McDowell's books of account. Rejecting McDowell's appeal and upholding the determination by Sales Tax Authorities that the excise duty component should be included in the appellant's turnover, Misra, J observed : 45. Tax planning may be legitimate provided it is within the framework of law. Colourable devices cannot be part of tax planning ....
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....r lesser mortals to attain the state of mind of Mr. Justice Holmes, who said: "Taxes are what we pay for civilized society. I like to pay taxes. With them I buy civilization". But, surely, it is high time for the judiciary in India too to part its ways from the principle ofWestminster and the alluring logic of tax avoidance. We now live in a Welfare State whose financial needs, if backed by the law, have to be respected and met. We must recognize that there is behind taxation laws as much moral sanction as behind any other welfare legislation and it is a pretence to say that avoidance of taxation is not unethical and that it stands on no less moral plane than honest payment of taxation. In our view, the proper way to construe a taxing statute, while considering a device to avoid tax, is not to ask whether the provisions should be construed literally or liberally, nor whether the transaction is not unreal and not prohibited by the statute, but whether the transaction is a device to avoid tax, and whether the transaction is such that the judicial process may accord its approval to it. A hint of this approach is to be found in the judgment of Desai, J. in Wood Polymer Ltd. and Bengal ....
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...."looked through" the NHL corporate veil to conclude that since the appellant is a joint venture, expertise of its various constituents must be considered by the Tender Evaluation Committee (TEC), as a prudent business consideration. Rejection of the appellant's tender (which offered nearly five time the amount offered by the successful tenderer - the 4th respondent), by the TEC was held to be arbitrary and irrational. In Ebrahimi, the issue was whether the respondent - company - Westbourne Galleries Ltd. ought to be wound-up under Section 222 (f) of the (U.K.) Companies Act, 1948, on just and equitable grounds. On analyses of the relevant facts, House of Lords found that removal of the appellant as a Director of the respondent-company, on the strength of an ordinary resolution passed by the other two shareholders who held a majority of the stock, constituted inequitable conduct on the part of these shareholders (father and son), employing their legal rights to the prejudice of the appellant. In DHN Food Distributors Ltd. the Court (of Appeal) allowed the appeal and held that the appellant was entitled to compensation for disturbance under Section 5 of the (UK) Land Compensati....
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....n Vodafone; (iv) The High Court held that Azadi Bachao Andolan is not applicable to the facts of the case (just as the Hon'ble AAR had discarded, not distinguished, Azadi Bachao Andolan); (v) During the hearing of Vodafone the Supreme Court permitted Aditya Birla to intervene and its counsel made several submissions on legal principles regarding treaty interpretation, and separate existence of parent and subsidiary companies; (vi) The Bombay High Court in clear terms recorded that the opinion expressed by it is prima facie and all contentions of both parties are kept open, to be determined in the assessment proceedings; and (vii) The prima facie observations (in Aditya Birla) were made in the context of a writ in the nature of prohibition presented to challenge initiation of proceedings u/S.148 of the Act. It also requires to be noticed that several contentions urged on behalf of Aditya Birla (though not on the specific facts that were before the Bombay High Court) were noticed and observations made thereon, in Vodafone. The following observations in Vodafone are significant: Mr. Aspi Chinoy, learned senior counsel contended that in the absence of LOB clause in th....
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....sidiary/SPV by principals/genuine substantial long-term FDI in India from/through Mauritius, pursuant to the DTAA and Circular No.789 can never be considered to be set up for tax evasion. (Pages - 101, 102 of ITR) In any event, the prima facie analyses by the Bombay High Court in Aditya Birla must yield to the binding precedents inter alia, Azadi Bachao Andolan and Vodafone. In a 1953 decision in Provident Investment Co. Ltd., Chagla, CJ, relied on Bank of Chettinad v. CIT, Madras[(1940)8 ITR 522]where the Privy Council considered it necessary to reiterate its protest against the suggestion that in revenue cases the substance of the matter may be regarded as distinguished from the strict legal position. Privy Council ruled that if the strict legal position were clear, the Court is not permitted to look at the substance of the matter and ignore the true legal position. For this principle, reliance was placed by the Privy Council on Duke of Westminster. Bombay High Court answered the reference in favour of the assessee and ruled that the transaction in question was not liable to the charge on capital gains u/S.12(B) of the Indian Income Tax Act, 1922. Petitioners' version : ....
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....rovisions of the Companies Act. A shareholder while having no rights of ownership in the assets of the company has a voice in administering the affairs of the company and would be entitled, as provided by the Articles of Association to a declaration of dividends, distributed out of profits of the company to the shareholders. The above principles find resonance in several other decisions including RC Cooper v. Union of India^[(1970)2 SCC 298^] (the Bank nationalization case) where the Court reiterated the principle that a company registered under the Companies Act is a legal person, separate and distinct from its individual members; its property is not the property of the shareholders who have merely an interest in the company arising under the Articles of Association, measured by a sum of money for the purpose of liability and by sharing the profit; and that where companies are incorporated for a lawful purpose their properties are owned by them and there is no reason for even taxation purposes that their property should be treated as belonging to the shareholders. The Madras High Court built on these underlying principles in Venkatesh (Minor) for rejecting the assessees' cre....
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....sion to contend that it is ShanH and not MA which is the legal and beneficial owner of SBL shares. The Clariant Court (paragraphs 50 - 52) pointed out that members holding equity share capital of a company and whose names are entered as beneficial owner in the records of the depository shall be members of the company concerned; that in Howrah Trading Co. Ltd. v. CIT^[AIR 1959 SC 775^], the Court had pointed out that the expression "shareholder" used in Section 18(5) of the Companies Act, 1956 means a person denoted by the same expression in the Indian Companies Act 1913; and that the Court in Howrah had quoted with approval the following observations of Chitty, J in Wala Wynaad Indian Gold Mining Co., In re^[(1882)21 Ch D 849^] : 'I use now myself the term which is common in the courts, "a shareholder", that means the holder of the shares. It is the common term used, and only means the person who holds the shares by having his name on the register.' Clariant also referred to the decision in Balkrishan Gupta vs. Swadeshi Polytex Ltd^.[ (1985)2 SCC 167^]. In Balkrishan Gupta, the Court on analyses of relevant provisions of the Companies Act, 1956 ruled that subscribers of th....
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....sed by Chinnappa Reddy,J (in the concurring opinion in McDowell) are his own and do not represent the view of the Court. The McDowell facts did not require consideration of implications of an operative tax treaty, while considering several issues such as when the corporate veil could be lifted; how a step or series of steps leading to a transaction should be interpreted; and how provisions of the Act should be construed and the like. Azadi Bachao Andolan is a clear and explicit tax treaty case and was required to identify the normative synergies between treaty and domestic law provisions. A brief account of the facts and circumstances leading to the decision Azadi Bachao Andolan require to be noticed. Governments of India and of Mauritius entered into an agreement on 01.04.1983 for avoidance of double taxation and prevention of fiscal evasion with respect to taxes on income and capital gains and for encouragement of mutual trade and investment (the Indo-Mauritius agreement - IMA). IMA was brought into force by a notification dated 06/12/1983 issued under Sec. 90 of the Act. CBDT by a circular dated 30/03/1994 (exercising powers u/Sec. 90 of the Act) clarified that ca....
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....The circular was held ultra vires on the ground that it interfered with the quasi judicial functions of the Assessing Officer. Aggrieved, Union of India appealed to the Supreme Court. Supreme Court allowed the appeal. McDowell analyzed the salient features of the IMA. Suffice to note and for the purposes of this case, that provisions of IMA and of DTAA are substantially similar. Art.3(2) of both agreements provides, that in the application of provisions of the agreement by a contracting State, any term not defined therein, shall, unless the context otherwise require, have the meaning which it has under the law of that contracting State concerning the taxes to which the convention applies. Art.14 of the DTAA broadly corresponds to Art.13 of the IMA. Paras 1 and 2 of Art.14 of DTAA correspond to Paras 1 and 2 of Art.13 of the IMA; Para 3 of Arts.14 and of 13 (of DTAA and IMA, respectively) are substantially similar; and Art.14(6) of DTAA corresponds to Art.13(4) of the IMA. Rationes and conclusions in Azadi Bachao Andolan : When a double-taxation avoidance treaty, convention or agreement (for short, "Treaty") becomes operational and is notified by the Central Government f....
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....of lifting the veil of incorporation cannot be applied. The whole purpose of a Treaty is to ensure that benefits thereunder are available even if they are inconsistent with the provisions of the Act. Treaties (including for double-taxation relief) are negotiated and entered into at a political level and have several considerations as their bases. Treaty provisions must be seen in the context of aiding commercial relations between treaty partners and as being essentially the bargain between two treaty countries as to the division of tax revenues between them in respect of income falling to be taxed in both jurisdictions. Since Treaty negotiations are largely a bargaining process, with each side seeking concessions from the other, the final agreement will often represent a number of compromises, and it may be uncertain as to whether a full and sufficient quid pro quo is obtained by both sides - observations in Francis Bennion : Statutory Interpretation and David R. Davis : Principles of International Double Taxation Relief, referred to. There are many principles in fiscal economy, including Treaty shopping, which at first blush might appear to be evil, or tolerated in developin....
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....f units could be considered as expenditure in relation to earning of dividend income exempt under section 10(33), disallowable under section 14A of the Act? In a clear dividend stripping transaction, the assessee claimed the dividend received as exempt u/S.10(33) and claimed set-off for the loss occasioned on the sale of the shares against its taxable income, thereby seeking to reduce its tax liability and gain tax advantage. Revenue relied on McDowell to contend that the assessee had designedlyentered into a pre-meditated transaction, of buying and selling units yielding exempted dividends with full knowledge of the fall in NAV after the record date and the payment of tax-free dividend; and therefore the loss on sale was not genuine. Supreme Court rejected Revenue's contention observing that the assessee had made use of the provisions of the Act and such use cannot be termed "abuse of law". Even assuming that the transaction was pre-planned there was nothing to impeach the genuineness of the transaction. Responding to Revenue's reliance on the McDowell ruling, the Court observed : It may be stated that in the later decision of this court in Union of India v. Azadi Bachao ....
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....l ratio of McDowelland had erroneously concluded that Chinnappa Reddy, J's observations were not wholly approved by the McDowellmajority 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 Duke of Westminsterthrough W. T. Ramsay Ltd.; Furniss (Inspector of Taxes) and Craven, Vodafone explained that the Westminsterprinciple 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; 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 ....
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....mize the assumption that subsidiaries are to be deemed residents of the State in which the parent company resides. M e r e shareholder's influence (which is the inevitable consequence of any group structure) and absent a wholesale subordination of the subsidiaries' decision- making to the parent company, would not per se legitimize 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 processe....
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....ment 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-factocontrol 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 distinction i....
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....he pleadings, held that the situs of the CGP shares was situate not in India where the underlying assets (of HEL) are situate but in Cayman Islands where CGP is incorporated, transfer of its shares was recorded and the register of CGP shareholders maintained. 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 itemized 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; Venkatesh (Minor) andSmt. Maharani Ushadevi 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 transact....
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....rofits made by Lamesa on the sale of shares in its Australian subsidiary (ARL) since Lamesa did not acquire direct interest in land or in exploration rights in Arimco or Arimco Mining. Relevant provisions of the Agreement : Commencing with Art.6, the Agreement allocates the jurisdiction to tax in respect of income. Art.6 deals with income from real property and the power to tax income from real property is allocated to the State in which the real property (including mines, quarries, or natural resources) is situate. Qua Art.6(2), income from a lease of land and income from any other direct interest in or over land is to be regarded as income from real property. Art. 7 deals with business profits and Art.7(1) provides that the profits to an enterprise in one of the States shall be taxable only in that State unless the enterprise carries on business in the other State through a permanent establishment situated therein. Clause (5) of Art.7 statesthat for the purpose of this Article, except as provided in the Articles referred to in this Paragraph, the profits of an enterprise do not include items of income dealt in Articles 6, 8, 10 to 14, 16 and 17. While Art.13 provides that inco....
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....similation would only arise by the specific provisions of the Agreement and its specific provisions set the extent to which the assimilation of shares to reality may operate. When the Agreement uses the word "comparable interest in a company" in Art.13(2), it speaks to avoid technicality inherent in the word "shares"; the Article will operate whether the property alienated was stock or warrant, provided that it is possible to say of the interest alienated that it is comparable to a share. In any event it is not possible to contend that rights to underlying assets of a subsidiary are interest in the nature of shares. That is not what the words "comparable interest in a company" are concerned with. The fourth contention of the Revenue (inviting lifting of the corporate veil) was also rejected observing that the agreement was intended to assimilate as reality only one tier of the company rather than numerous tiers. Separate legal personality is a doctrine running not only through common law but the civil law as well and that is consistent with the plain and quite unambiguous language which the Agreement has employed. When the Legislation speaks of the assets of one company it invar....
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.... of the company paying the dividends The expression "beneficial owner" or the equivalent expressions in the French or the Dutch versions of the Treaty are not defined either in the 1986 Treaty or the Model Convention. The relevant commentary of Art.10 of the Model Convention stated that the limitation of tax in the State of source [under para - 10(2)] is not available when an intermediary, such as an agent or nominee is interposed between the beneficiary and the payer, unless the beneficial owner is a resident of the other Contracting State; States which wish to make this more explicit are free to do so during bilateral negotiations. The Tax Court noticed that there were no negotiations between Canada - Netherlands which explicated the expressions in Art.10(2). The revised 2003 OECD commentaries on Art.10 explained that the term "beneficial owner" in Art.10(2) of the Model Convention is not used in a narrow technical sense but should be understood in its context and in the light and the object of the purposes of the Convention, including avoiding double-taxation and the prevention of fiscal evasion and avoidance. Art.3(2) of the 1986 Treaty (similar to Art.3(2) of the DTAA) p....
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....ficial owner" must mean that person who can, in fact, ultimately benefit from the dividend) appears nowhere in the OECD documents and such interpretation would jeopardize the relative degree of certainty and stability that the Tax Treaty seeks to achieve. The Appellate Court added that the Crown was inviting the Court to adopt a pejorative view of holding companies which neither the Canadian domestic taw, the international community nor the Canadian Government through the process of objection, have adopted. It is significant to note that in Prevost Car Inc. there was a tax treaty shopping. Mr. Backstrom of Volvo had stated that tax implication was a consideration, though not an over- riding consideration; and that a Dutch holding company - (Prevost Holding B.V.) was chosen on professional recommendation inter alia to avoid tax schemes from UK or Sweden and other international tax issues, for effective management and control of the holding company. Further, minutes of the appellant, of Prevost Car Inc. shareholders' meeting dated 23-03-1996 had recorded that the meeting was attended by proxies for the parent companies (Volvo and Henlys) of the subsidiary, at a time when the appel....
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....s which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax (Mannai Investment Co Ltd v. Eagle Star Life Assurance Co Ltd (1997) All ER 352, (1997) 2 WLR 945. (5) The 'rule' that words should be given their 'natural and ordinary meaning' reflects the commonsense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. Lord Diplock made this point more vigorously when he said in Antaios Cia Naviera SA v. Salen Rederierna AB, The Antaios (1984) 3 All ER 229 at 233, (1985) AC 191 at 201. '... if detailed semantic and syntactical analyses of words in a commercial contract is going to lead to a conclusion that flouts business common sense, it must be made to yield to business common sense.' In Hideo Yoshimoto, Thomas, J for the New Zealand Court of Appeal af....
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....ract at all, or (if of apparent central importance) treated as demonstrating that the parties never made an agreement at all, that is to say, had never truly agreed upon the vital terms of their bargain. It is thus reasonable to infer, on the guidance received from the matrix of precedents and authority referred to, that curial role in the construction of documents/instruments is to identify the intention of the parties. The role is in a sense facilitative, i.e., to ascertain what the mutual intentions of the parties were as to the legal obligations each assumed by the words in which they sought to express them, to iron out the creases where there is a contextual, grammatical or syntactical deficit; but not normally to manipulate the construction, with a purported intent of achieving an elusive fair outcome in the case before it. 18. Analyses of the relevant matrix of facts, transactional documents and surrounding circumstances : Revenue points out (in its written submissions) that ascertainment of the real persona of ShanH and the chargeability of the transaction in issue, to tax in India is dependent on determination of the following core criteria : (i) Whether ShanH ....
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....eferences to SBL, revealing that the control, management of commercial enterprise and of the assets of SBL was the basis for the transaction, viz., (i) the definition clause in the SPA mentions SBL; "Applicable law" in relation to SBL is defined to mean Indian Law; "Fully diluted basis", "Key employees", "Lien", "Material Adverse Effect", are all expressions defined with reference to SBL; (ii) Section 1.3(b)(v) of the SPA stipulates that the sellers (MA/GIMD) should inter alia deliver to the buyer (Sanofi) the share certificates of SBL held by ShanH. This leads to the inference that ShanH was a mere nominee of MA/GIMD and mere transfer of ShanH shares would not have consummated the real transaction which was the transfer of SBL to Sanofi, as the underlying transaction; (iii) Other provisions of the SPA such as requirement of resignation of SBL Directors; Meeting of SBL Board for ensuring resignation of existing Directors and appointment of new Directors; requirement of the sellers delivering a copy of the long-term supply agreement between SBL and UNICEF relating to supply of vaccines to Sanofi; provisions relating to adjustment of the closing price with reference to SBL's....
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....there was no need for an assignment since the ownership of SBL shares vested in ShanH since inception and without any assignment from MA. Though Schedule 1, Part B of the SPA enumerates ShanH to be the holder of SBL shares, in the totality of the circumstances ShanH must be considered a nominee of MA and the ownership of the SBL shares continues with MA. Shareholder's agreements (SHA's) dated 07-11-2006 : There were two SHA's (substantially similar), both dated 07-11-2006 : (a) between MA, SBL and Varaprasad Reddy; and (b) between MA, SBL, Khalil Ahmed and UOIL. ShanH is not a party to the SHA's despite the claim that it is a registered shareholder of SBL shares. In the SHA's though MA is again defined to include its successors and permitted assignees, there being noassignment by MA in favour of ShanH, MA must be inferred to be itself and not its successor or permitted assignee. Various clauses of the SHA's [2, 2.2, 3, 4.2, 4.6, 4.7, 5.1, 7.1 and 8.3] indicate (in the absence of any assignment of SBL shares by MA in favour of ShanH) that it is MA which owned the SBL shares; ShanH being a mere nominee or alter ego of MA. Amended AOA of SBL : SBL....
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.... not make payments for acquisition of SBL shares. Subsequent accounting of the purchase consideration (by MA) as a loan from MA in its accounts prepared later, would not alter the reality. (e) The expression "MA" does not include ShanH in the SPA or SHA's, as no assignment was made by MA in favour of ShanH. (f) ShanH had no control over the management of SBL nor enjoyed any rights or privileges of a shareholder of SBL. (g) ShanH was thus a mere nominee of MA in relation to SBL shares. Our analyses of the ShanH persona qua the transactional documents and surrounding circumstances : It is pleaded and contended by MA (and not contradicted by Revenue) that : (i) It is and has been the inveterate policy and practice of the MA group that all investments out of France are routed through a subsidiary incorporated in MA's natural home jurisdiction (France). This business policy and practice is adopted as an organizational norm since it facilitates MA to maintain distinct lines of business such as in-vitro vaccines; food quality and nutrition; prophylactic vaccines, immuno therapy in developed countries; and immuno therapy in developing countries, etc. Further, such org....
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....cified amount in "Euros" to the Escrow account. Other clauses of the agreement establish ShanH to be the prospective purchaser of SBL shares from UOIL (the seller) and others. Initially (during oral argument) it was pointed out by Revenue that Mrs.Dominique Takizawa (a representative of MA) was the signatory to the Escrow agreement on behalf of ShanH (and not a ShanH official), thereby suggesting that the entire transaction of purchase of the SBL shares was for the legal and beneficial ownership by MA, with ShanH being a mere "smoke-screen" or a nominee of MA. On behalf of the petitioner (MA) it was explained that on account of certain travel glitches, a ShanH representative could not be present to sign the Escrow agreement and in the circumstances a representative of MA (the unique and singular shareholder ofShanH, as on that date) signed the agreement on behalf of ShanH. In its written submissions however, Revenue did not pursue this line of interpretation. Though the authorized signatory to the Escrow Agreement (and in fact almost all agreements) on behalf of UOIL was Mr. Khalil Ahmed, Revenue was not heard to contend that UOIL is the alter ego of Mr. Khalil Ahmad. On 06-1....
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....6 SPA qua which the transaction came about specifically designated ShanH as the purchaser of the shares and the permitted assign of MA. MA is defined in the SPA to include its successors and permitted assignees. Clause 2.1 of the 06-11-2006 SPA specifically states that MA may cause ShanH or any other wholly owned subsidiary to purchase the Sale Shares and for the purposes of this Agreement such purchase shall be deemed as a purchase made by MA and any such purchaser will be entitled to all the benefits accruing to MA including the representations, warranties and indemnities contained herein. Schedule I - Parts B and C clearly establish that the SBL shareholding is by ShanH. In view of the MA Board's decision dated 26-10-2006; MA being defined in the 06-11- 2006 SPA (subject to a contrary context) to mean and include its successors and permitted assignees; provisions of Clause 2.1 of this SPA clearly facilitating MA to cause ShanH (by now a French registered and resident company) to purchase SBL shares, clearly stipulating that such purchase shall be deemed a purchase by MA and any such purchaser would be entitled to all the benefits accruing to MA including the representat....
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....ads : Merieux Alliance (MA), a French Company, has purchased major shareholding from the existing shareholders and currently holds 60% equity of the Company through its investment company, ShanH. As per the agreement entered with the majority shareholders, the Company has to insert new articles and delete some existing articles and also substitute some new terminology by replacing some of the existing articles. (emphasis added) Petitioners, assert that reference to only MA in the amended AOA of SBL does not therefore legitimize the Revenue inference that ShanH is not the holder and beneficial owner of SBL shares. Did MA assign SBL shares to ShanH ? As earlier adverted to in brief, one of Revenue's key contentions is that though the 06-11-2006 SPA defines MA to mean and include its successors and permitted assignees, there was no deed of assignment by MA in favour of ShanH (assigning SBL shares) brought on record. Revenue suggests that it is therefore legitimate to infer that since inception it is MA and not ShanH which is the legal and beneficial owner of SBL shares. The above contention does not commend acceptance. As earlier noticed Clause 2.1 of the 06-11-2006 ....
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....s of SBL representing (as on the date of their acquisition) 61.4% of the registered capital and voting rights of SBL. GIMD agreed to subscribe for a minority interest in the registered capital of ShanH purely as a strategic investor. This is clear from the recitals in Clause - C of the agreement, which stipulates that GIMD agreed (to the proposals by MA) to subscribe for the registered capital of ShanH in recognition of the prospect of ensuring liquidity of its investment by, in particular, the introduction of the company (ShanH) on a stock exchange, the transfer of shares or the takeover - merger by a listed company,within four to six years as from the date of the agreement, which MA agreed to. Consequent on the agreement, the capital of ShanH stood increased from 370 shares to 6,00,000 shares with MA and GIMD holding 80% and 20% of the ShanH shareholding, respectively. Clause 3.1 of the agreement (setting out representations and warranties of MA) stipulates that : (i) ShanH has been duly incorporated and validly listed with the Lyon Commercial and Companies Registry(France); (ii) As on date MA holds all of the registered capital of ShanH; (iii) On 07-11-2006 ShanH ....
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....2007 a further 20,000 shares from UOIL; 17,500 shares from Indian resident shareholders; and 4,23,600 shares from non-resident shareholders of SBL. (ii) In 2008 acquired a further 1,90,460 shares from UOIL; 10,78,920 shares from Indian resident shareholders; and 14,57,150 shares from non-resident shareholders of SBL. (iii) In March, 1998, there was a capital increase of SBL, viz., 4,49,830 shares, subscribed directly by ShanH. (iv) In July/August, 2009 ShanH purchased a further 5,57,500 shares from UOIL and 2,00,000 shares fromIndian resident shareholders of SBL. (v) The SBL Board meeting dated 19-03-2008 (copy of the minutes on record and not contested) took note of the minutes of the share transfer committee meeting held on conclusion of the previous board meeting held on 18-12-2007 along with the statement of share transfers disclosing transfer of SBL shares held by VR, members of his family and UOIL, in favour of ShanH. The statement appended to Item.8 (of the minutes of this meeting) sets out the number of shares transferred, particulars of the transferor, distinctive numbers of the certified share certificates and the consideration for which the shares were transf....
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....ent shareholders of the SBL to ShanH is permissible under the automatic route; and that SBL's request for transfer of its 2,00,000 shares from OCB to ShanH, if included in the permission conveyed by the FIPB approval dated 13-06-2007 (supra), no further approval is required. 08-07-2009 : SBL intimated FIPB that it has equity participation by NRI's, foreign institutional investors and foreign investors, for which it obtained approvals from the Secretariat for Industrial Approval (SIA), FIPB and RBI; that the current shareholding pattern of SBL includes 78.75% shareholding by ShanH; and that MA intends to purchase through its existing subsidiary ShanH or through any other of its subsidiaries the balance 21.25% of SBL shareholding from existing shareholders, NRI's, Indian residents and OCB's and approval for the same is sought. 13-07-2009 : FIPB addressed SBL (in response to SBL's letter dated 08-07-2009) intimating that transfer of shares is permissible under the automatic route and SBL should approach RBI and avail the general permission route. 21-07-2009: ShanH addressed FIPB seeking permission to buy about 34,00,000 shares of SBL from existing NRI's, OCB's and....
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....sued by the Indian Overseas Bank, Chennai Branch attest to receipt of US $5,000,000 from ShanH to the credit of SBL towards application money for acquisition of SBL shares. Who received SBL Dividends - ShanH or MA ? Bank statements of SBL disclose remittances of dividends for FYs 2006-07, 2007-08 and 2008- 09, to the credit of ShanH, vide statement of Indian Overseas Bank, Chennai branch, (copy on record not contested or disputed). US $ 68.705,32; 75.729,53; and 2.614.154,76, were remitted to the credit of ShanH account in Calyon Bank, Lyon, for the respective years. Revenue neither contests this assertion, disputes the material furnished by MA in support thereof, nor explains the effect of SBL dividend payments to ShanH on its contention that the legal and beneficial owner of SBL shares is MA and not ShanH. How did Revenue treat ShanH in relation to SBL shares ? In August, 2009 Revenue conducted a survey under Section 133A of the Act in the office premises of SBL (on anassumption based on news reports that Sanofi is going to acquire more than 80% stake in SBL from ShanH) and this acquisition would attract provisions of TDS under the Act; that ShanH had initially acquir....
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....gannath Hanumanbux v. ITO^[(1957)31 ITR 603 (Cal.)^]; CIT v. Cochin Co. (P) Ltd.^[ (1976)104ITR 655 (Ker.)^]; and Cotton Agents Ltd. v. CIT^[(1960)40 ITR 135 (SC)^]. Clearly while protective assessment is permissible (though not textually provided in the Act but evolved as a departmental practice that has gained judicial recognition), recovery of tax even if styled as protective recovery is not- Jagannath Bawri v. CIT^[(1998)234ITR 464 (Gau.)^]; and CWT v. Begum Brigees Zahoor Quasim^[(2001)248ITR 482 (Del.)^]. This Court in CIT v. Khalid Mehdi^[(1987)165ITR 685 (AP)^] observed that where an assessment is intended to be protective it should be so expressed. The orders dated 14-12-2009 passed u/S.201(1) and 201(1)(A) are not and cannot be construed as orders of protective assessment and do not assert to be so either. Further, the undisputed fact that recovery notices were issued and the balance tax liability pursuant to these orders has also been collected from ShanH, puts paid to such contention by Revenue. The 14-12-2009 orders constitute determination by Revenue that ShanH (not MA) is the legal and beneficial owner of SBL shares. Such determination is a conscious, reasoned ....
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....eafter a JV of MA/GIMD and eventually a JV comprising MA/GIMD/Georges Hibon) is a distinct entity of commercial substance, distinct from MA and/or GIMD and/or Georges Hibon, 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. Extent of MA control over SBL : After purchase of SBL shares by ShanH (both consequent on the 06-11-2006 SPA and later de hors this SPA as well) SBL at all points in time was controlled and managed by its qualified board of directors comprising Mr. Georges Hibon as the Chairman, Mr. Johannes Burlin, Dr. K.I. Varaprasad Reddy, Mr. Philippe Sans, Mr. Abhey Yograj, Mr. Alain Merieux and Ms. Takizawa, serving as directors, at different points in time. Mr. Georges Hibon, who had twenty years of experience with Merck and had worked with Connaught Vaccines was appointed as the Chairman of the SBL Board. Mr. Philippe Sans and Ms. Takizawa, who were earlier associated with bioMerieux, were directors of ShanH. These persons actively participated and contributed to the business development of SBL. The SBL Board meeting (held at Paris....
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....vaccine business in developing countries, incorporated ShanH on 31-10-2006 as a French resident company with itself as the sole and unique shareholder. Even prior to ShanH incorporation, MA was negotiating with GIMD to come on board an investment vehicle, inter alia as a strategic investor to constitute a JV. The intention was clearly that ShanH (an investment vehicle operating as a JV) would acquire a controlling stake in SBL. In reality, since the very inception ShanH had acquired SBL shares, both qua the 06-11-2006 SPA and even thereafter and independent of this SPA. Having a footprint in India in the prophylactic vaccine business through controlling participation (shareholding) in SBL is the clear commercial substance and business purpose of ShanH. No curial or academic authority is placed before us to hazard a conclusion that a corporate entity must necessarily involve itself either in manufacture or marketing/trading in/of goods or services to qualify for the ascription of being in business or commerce. Creation of wholly owned subsidiaries or joint ventures either for domestic or overseas investment is a well established business/commercial organizational protocol; ....
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....view to maintaining confidentiality in relation to the potential transaction. This agreement has no relevance to determination of the tax liability of the transaction qua the DTAA; since SBL was an indirect subsidiary of MA (through ShanH), MA signing the confidentiality agreement in relation to SBL is not an unnatural event, and has no legal significance on the status of ShanH (either in respect of its status as separate and legal entity or in respect of its being the holder and beneficial owner of SBL shares). Further, the confidentiality agreement is to ensure an obligation of non-disclosure in relation to the assets of SBL and is not concerned with the shares of SBL. Alternatively, in the event it is to be construed (though impermissible) that the 12-02-2009 confidentiality agreement must lead to the inference that SBL assets were sold (to Sanofi) quathe transaction in issue, then u/A.14(4) and/or u/A.14(6) of the DTAA the transaction would be taxable only in France; and in no event would the tax be allocable to India, under the treaty provisions. The agreement obligates Sanofi - the recipient of the "confidential information" (defined to include data, reports, interpretatio....
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....lion (only) towards the incremental enterprise value of SBL but conditioned upon certain contingencies defined in Schedule - "A" of the offer letter. Schedule - "A" lists ongoing vaccine development processes by SBL which comprise Rota Virus in the South, Cholera for the South, Cholera for the U.S. market and typhoid conjugate. There is no dispute about the fact that the value of ShanH shareholding substantially comprises its majority participation (shareholding) in SBL. After all, ShanH (as already analyzed supra) is a special purpose foreign direct investment vehicle, that being its commercial substance and business purpose. In the circumstances, mention in Sanofi's offer letter that the price offered for acquisition of 100% ShanH shareholding is predicated upon the enterprise value of ShanH, both current and prospective, does not by itself tantamount to the subsequent transaction in issue, constituting sale of SBL shares (and not shares of ShanH), to Sanofi. In view of the principles gleaned from Venkatesh (Minor); Walfort Share and Stockbrokers Pvt. Ltd.; Azadi Bachao Andolan; Vodafone; Lamesa; and Prevost Car Inc., the transaction in issue, considered in the light of the....
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....d to, categorized and analyzed precedents and other textual authority, relevant to issues 1 and 2, cited at the Bar by the parties herein. Analyses of the transactional documents and surrounding circumstances synthesized with guidance derived from precedents and other authority referred to, leads us to the conclusion that :- (i) Under the 06-11-2006 SPA; thereafter and independent of this SPA as well, ShanH (not MA or MA/GIMD) had purchased SBL shares and remitted the value therefor. The shares were registered in the name of ShanH, which is the recorded shareholder in the SBL shareholders' register. In view of the rulings and rationes in Charanjit Lal Chowdhury;Bacha F Guzdar; Maharani Ushadevi, RC Cooper; Western Coal Fields Ltd., Balkrishnan Gupta; LIC of India and Clariant, ShanH is the legal and beneficial owner of SBL shares, being the registered shareholder, having been recorded as such in the shareholders register of SBL;. (ii) On a true and fair construction and a holistic analyses of the uncontested facts, the relevant transactional documents, surrounding circumstances and orders and correspondence by Indian authorities and Revenue, enumerated hereunder : (a) E-ma....
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....n the light of the discussion, analyses and rationes in Azadi Bachao Andolan and Vodafone, ShanH is not a corporate entity brought into existence and pursued only or substantially for avoiding capital gains liability under provisions of the Act; (v) ShanH is an investment vehicle; foreign direct investment in SBL being its commercial purpose and substance; (vi) observations of Chinnappa Reddy, J (in his concurring opinion) do not constitute the operative McDowellratio, as discernible from the analyses in M.V. Valliappan; Banyan and Berry; Arvind Narottam; Mathuram Agrawal; Azadi Bachao Andolan; Walfort Share and Stockbrokers Pvt. Ltd.; and Vodafone; (vii) apropos the concession by Revenue and even otherwise, on an independent and holistic analyses of the transactional documents and surrounding circumstances, ShanH was not conceived for avoiding capital gains liability under the provisions of the Act. As observed in the Vodafone factual context (equally applicable herein), ShanH was conceived and incorporated in consonance with MA's established business practices and organizational structure, as a wholly owned subsidiary to serve as an investment vehicle. ShanH thereafter t....
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....sion (x) supra, even on piercing the corporate veil of ShanH, the transaction in issue is clearly one of the transfer by MA/GIMD of their ShanH shareholding (and of the marginal shareholding of Mr. Georges Hibon in ShanH as well) to Sanofi; and is not expressly or by any legitimate inference of the transactional documents and surrounding circumstances, a transfer of SBL shareholding, which continues with ShanH; (xii) 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 SBL shares; and (xiii) the transaction in issue clearly and exclusively is one of transfer of the entire shareholding in ShanH, by MA/GIMD in favour of Sanofi. Transfer of SBL shares in favour of Sanofi is neither the intent nor the effect of the transaction. (xiv) Revenue's perception of the ShanH persona and interpretation of the transactional documents (including the amended SBL AOA) and surrounding circumstances is fundamentally misconceived for another reason. If MA is considered as only MA qua the amended SBL AOA; that the 06-11-2006 SPA and the 07-11-2006 SHAs were instrument....
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....itates against observations in the majority judgment; and Reddy J's observations have also been distinguished in M.V. Valliappan; Banyan and Berry; Arvind Narottam; and Mathuram Agrawal. Azadi interpretation of McDowell was reiterated and followed in Walfort and in Vodafone, as well. Though Vodafone is subsequent to the AAR ruling and Walfort does not appear to have been brought to the notice of the AAR, the manner in which Azadi was discarded (not distinguished) is interesting, given the non-derogable obligation of an Indian Tribunal/Court (the AAR), of fidelity to the binding ruling/ratio of the jurisdictional superior judicial authority. In para - 16 (of the order) the Authority observes that while Azadi is binding on it, it may not be the final word in a given circumstance; that it finds "some difficulty" in accepting arguments based on Azadi; that Azadi "incorrectly" proceeded to assume that the views expressed by Chinnappa Reddy, J do not represent the McDowell majority; and developments in English decisions reveal that the Ramsay principle was pursued in Ensign Tankers (Leasing) Ltd. v. Stokes^[(1992)1 AC 655^] and though the Ramsay principle was attempted to be restricte....
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....d, disclosed that much less than the full claimed expenditure was incurred on acquisition of software rights. Lord Walker (the leading opinion with concurrences by Lord Hope, Lord Rodger, Lord Collins, Lord Kerr, Lord Clarke and Lord Dyson) analysed the wider transaction as indisputably showing that the sequence of events amounted to a pre- arranged composite transaction of the type to which Lord Wilberforce referred to in Ramsay. Tracing the historical context of the Ensign decision and developments since Ramsay following through the opinion of Lord Diplock in Burmah Oil Co. Ltd.; Lord Brightman's opinion in Furniss and that of Lord Hoffman inMacNiven v. Westmoreland Investments Ltd.^[ (2003)1 AC. 311^], the Supreme Court observed that the need to recognize Ramsay as a principle of statutory construction, the application of which must always depend on the text of the taxing statue in question was clearly recognized in Craven. The Court also referred to the judgments in the Court ofFinal Appeal of Hong Kong in Collector of Stamp Revenue v. Arrow Town Assets^[(2003)HKCFA 46^]. Having considered the House of Lords decision in Ensign Tankers (1992) and the later decision in Bar....
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....ssues 3 and 4 : Revenue : The transaction (vide the 10-07-2009 SPA) is chargeable to capital gains tax under the provisions of the Act as amended by the Finance Act 2012 : The learned ASG advanced a contention (on 30-08-2012), that since neither of the expressions "alienation" or "participation" in Article 14(5) is defined; in view of Article 3(2) of the DTAA, these terms would bear the meaning ascribed to them under provisions of the Act [as the law of (India) one of the Contracting States], as regards application of the DTAA. Learned senior counsel for the Petitioner-MA (Mr. Porus Kaka, on 31-08-2012) raised seriousobjection to this contention (orally urged on behalf of Revenue) and asserted that since it is an issue pertaining to fundamental policy i.e., as regards applicability, of the retrospective amendments to provisions of the Act (by the Finance Act, 2012), to interpretation of provisions of the DTAA, this contention must be pleaded in an affidavit, to place on record this specific stand by the Union of India. Sri S.R. Ashok, learned senior learned counsel for the Income Tax department deputing on behalf of the learned ASG however responded (on 31-08-2012) that no af....
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.... Article 14(5). This provision authorizes the source State to tax a gain on the alienation of shares of a company resident of that State whether the alienation occurs within or outside the State, where the alienation represents a participation of at least 10% of the company resident in that State. Once the source country inheres a right to tax gains arising from alienation of shares of a company located in the source country, it is immaterial whether such gains are realized by "disposal" or "deemed disposal" of assets. Treaty provisions apply in either case and the source country would have the right to tax such gains; (vii) The expression alienation of shares in Article 14(5) must be read and understood, as direct as well as indirect alienation, for a proper and purposeful construction of DTAA provisions. The expression alienation of property is used to cover particular gains resulting from the sale or exchange of property and also from partial alienation, expropriation, transfer to a company in exchange for stock, the sale of a right, gift and even the passing of property on death; and is therefore intended to have a wider scope than the expression - sale or exchange; (viii....
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....ested by the petitioners. On analyses, we are in general agreement with Petitioners' submissions and consider Revenue's contention as premised on a fundamentally erroneous factual substratum, fallacious and misconceived. We therefore consider it appropriate and to facilitate brevity, incorporate the relevant arguments and submissions of Petitioners as part of our analyses on this aspect. We set out provisions of the Act and of the DTAA, insofar as relevant and material for analyses, hereinafter. Relevant provisions of the Act and the DTAA : Certain provisions of the Act were amended by the Finance Act, 2012, to operate with retrospective effect from 01-04-1962. Provisions of the Act relevant to adjudication of this lis, (pre and post the Finance Act, 2012) are set out in a tabular form in the Annexure to this judgment (for convenience and to avoid visual clutter). Relevant provisions of the DTAA are reproduced infra. DTAA : Governments of India and of the French Republic concluded a Convention (DTAA) for avoidance of double-taxation and prevention of fiscal evasion with respect to taxes on income and capital. The Convention has come into force on 01-08-1994, (on....
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....ed place of business through which the business of an enterprise is wholly or partly carried on. 2. The fact that a company which is a resident of one of the Contracting States controls or is controlled by a company, which is a resident of the other Contracting State, or which carries on business in that other Contracting State (whether through a permanent establishment or otherwise), shall not of itself constitute either company a permanent establishment of the other. ARTICLE 14 - Capital gains - 1. Gains derived by a resident of a Contracting State from the alienation of immovable property, referred to in article 6, and situated in the other Contracting State may be taxed in that other Contracting State. 1. Gains from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State or of movable property pertaining to a fixed base available to a resident of a Contracting State in the other Contracting State for the purpose o....
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....rdance with the provisions of those articles. However, it shall not exceed the amount of French tax attributable to such income; Issue 3 and 4 analyses : Responding to the contention on behalf of Revenue (regarding applicability of retrospective amendments to provisions of the Act by the Finance Act, 2012), petitioners contended that in view of the legislative intent underlying the amendatory exercise and on a proper interpretation as well, retrospective amendments are inapplicable where tax treaties operate alongside domestic tax legislation. Support for this contention is placed on the speech dated 07-05-2012 of the Hon'ble Finance Minister, while introducing the Finance Bill, 2012. The relevant portion reads : 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 ....
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....ind Parliament. Validity of legislation is not to be judged merely by affidavits filed on behalf of the State, but by all the relevant circumstances which the court may ultimately find and more especially by what may be gathered from what the legislature has itself said. We have mentioned the facts as found by us and we do not think that there has been any infringement of the right guaranteed by Article 14. It however requires to be noticed that the passage in Sanjeev Coke, while reiterating the established position (that no one may speak for the legislature and legislation must be interpreted on its textual basis; and reference to other permissible aids to construction is legitimate only where the legislative text inheres an ambiguity and thus invites external aids to the appropriate construction of its text), ruled that statements made in affidavits filed by parties to a lis (respondents, in the case) do not constitute legitimate aids to interpretation/construction of legislation. Whether the speech by the Finance Minister while introducing a Bill for enactment of fiscal legislation, is a legitimate aid to construction of a fiscal statute (and if there be an ambiguity) is a....
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....aid in interpretation if we think, as I do in the instant case, that it helps us considerably in understanding the meaning of the amended law. We find no bar against such a use of the speech." Proper interpretation of the provisions of Section 52(2) of the Act fell for consideration in K.P. Varghese v. ITO, Ernakulam and another^[81].The primary objection against a literal construction of Section 52(2) (urged on behalf of the appellant - assessee) was that it leads to manifestly unreasonable and absurd consequences. The Court proceeded to construe the provision not on a strictly literal interpretation of the text but in due regard to the object and purpose which the legislature had in view in enacting the provision and in the context and the collocation of other relevant provisions in which the particular provision occurs. The Finance Minister's speech while moving the amendment introducing sub-Section (2) was considered relevant for ascertaining the legislative object and purpose of the provision. What is relevant for the present lis is the following passage: Now it is true that the speeches made by the Members of the Legislature on the floor of the House when a Bill for ena....
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....ons are said to compete. The Factual context : There was in force and operation, relevant to the transactions in question, the Canada-Germany Tax convention (the Convention) brought into effect in Canada by the Canada-Germany Income Tax Agreement Act, 1956 (for short 'the 1956 Act'); a distinct legislation, by the Canadian Parliament. The respondent-Melford Developments Inc.,made payments to a German Bank, which admittedly had no permanent establishment in Canada; the payment being towards fee payable to the German Bank for guaranteeing the Melford loan advanced by a Canadian Bank (the Bank of Nova Scotia). Canadian Revenue sought to recover withholding tax on payments by Melford. Revenue contended that the payment by Melford is subject to withholding tax under Section 212(1)(b) and 214(15)(a) in Part XIII of the (Canadian) Income Tax Act where a provision is made for the taxation of non-residents. Revenue contended that the payment in question is, for the purpose of (the Canadian) Income Tax Act "interest". In defense, Melford asserted that whatever provisions of the Income Tax Act may provide, these cannot override provisions of the Convention and in particular pro....
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.... not earned through a permanent establishment in Canada; that the guarantee fee paid by Melford to the German bank falls into this category; and the revenue received by the German bank by reason of its guarantee of a Canadian lender (the Bank of Nova Scotia) represents industrial and commercial profits received from within Canada but not earned in an enterprise carried on through a Canadian permanent establishment; (ii) laws enacted by Canada to re-define taxation procedures and mechanisms with a reference to income not subjected to taxation by the Convention are not incorporated in the expression laws in force in Canada, as employed by the Convention; a contrary assumption would mean that Article - II(2) of the Convention authorizes Canada or Germany to unilaterally amend Convention provisions from time to time as their respective domestic needs dictate; (iii) As Parliament is supreme within its constitutionally assigned jurisdiction it follows that Section 3 or any other part of the 1956 Act could be repealed or amended. However, collateral legislative action in connection with the Income Tax Act (and not the 1956 Act) would not amend the 1956 Act, ruled the Supreme Court, ....
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....Section 90(2) of the Act, to effectuate a treaty entered into between India and another or other Contracting State(s). The principle of non-derogability of treaty provisions so effectuated (whether qua a separate legislation in Canada or operationalised by a notification under provisions of the Act in India), has resonances in pari materia in both jurisdictions - India and Canada, though by distinct processes. Other clear indicators (apart from the speech of the Finance Minister, adverted to supra) to negate Revenue's contention that retrospective amendments to the Act would over-ride provisions of the DTAA (or other tax treaties) may be noticed : The Finance Act, 2012, apart from introducing several retrospective amendments to tax indirect transfers, has also introduced provisions (Sections 95 to 102) in relation to GAAR, vide Chapter X - A of the Act. The purpose of these provisions is to invoke provisions of the Act in instances of abuse of treaty provisions. GAAR provisions specifically seek to over-ride tax treaties (proposed to be operationalised w.e.f. 01-04- 2014). Section 90 of the Act has been amended, inserting sub-Section 2(A) (w.e.f. 01-04- 2013), to enable ap....
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.... that he began from recognized legal principles and reasoned in an intellectually coherent and politically neutral way to his result; and that the desire to do justice, whose nature seems to him obvious, is compelling while the concept of the legal process is abstract, the signals occasionally ambivalent and the abstinence it counsels (from encroaching into the realm of other organs of Government) unsatisfying. We are also conscious of Cardozo's[The judge, even when he is free, is still not wholly free. He is not to innovate at pleasure. He is not a knight-errant roaming at will in pursuit of his own ideal of beauty or of goodness. He is to draw his inspiration from consecrated principles. He is not to yield to spasmodic sentiment, to vague and unregulated benevolence. He is to exercise a discretion informed by tradition, methodized by analogy, disciplined by system, and subordinated to "the primordial necessity of order in the social life". Wide enough in all conscience is the field of discretion that remains - The Nature of the Judicial Process.]stately admonition, more appropriate to pursuing the interpretive role in adjudication; and that choice of appropriate interpretive p....
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.... patently discernible on the face of those provisions from the words used; (iv) Where, in relation to the facts of a given case, the enactment is grammatically ambiguous, the legal meaning is the one to which on balance of factors arising from the relevant interpretative criteria accord the greater weight; (v) Ambiguity could be semantic, syntactical or contextual. The latter is where there is a conflict between the enactment and its internal or external context. Thus, where there are two possible grammatical meanings of the enactment in relation to its internal or external context, it is ambiguous; (vi) Grammatical ambiguity in the above sense could be general or relative, the latter when it is ambiguous only in relation to certain facts; (vii) In a case of relative ambiguity the facts must be brought into the equation; (viii) The unit of interpretation is not merely the subset of the relevant provision falling to be construed, the provision itself or the generic enactment in which it occurs but the whole universe of applicable and relevant legal rules of which the enactment is a part; In the case on hand therefore, the m....
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....s, whose assets are comprised principally of immovable property, subject however to exclusion of immovable property pertaining to the industrial or commercial operations of such company from computation of the tax able capital gain. Provisions of Article 14(4) have been set out. On a true, fair and grammatical construction of the provision, it is clear that the expression "directly or indirectly " is incorporated, to accommodate a "see through". Thus, while considering whether the gain from alienation of shares of the capital stock of a company is chargeable to tax, assessment of the transaction must necessarily involve the enquiry whether the property of the company principally (whether directly or indirectly), consists of immovable property. The expression "directly or indirectly" is intended to clarify the treaty intent that gain from alienation of shares of a company, whose property consists principally of immovable property, whether directly or indirectly is chargeable to tax and the right to tax is allocated to the Contracting State whereat the immovable property of the company so liable, is situate. The requisites for application of Article 14(4) are, in our considered....
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....n between contracting States as to the division of tax revenues between them in respect of income falling to be taxed in both jurisdictions. As Azadi Bachao Andolanhas noticed, treaty negotiations are essentially a bargaining process, with each side seeking concessions from the other. The final agreement would often represent several compromises and it may be uncertain as to whether a full and sufficient quidproquois obtained by both sides. Many developed countries tolerate or encourage even treaty shopping, even if it were unintended, improper or unjustified, for other and non-tax reasons, unless it leads to significant loss of tax revenue; and allow the use of treaty network to attract foreign enterprises and off- shore activities. Some States favour treaty shopping for outbound investment to reduce foreign taxes of their tax residents but dislike their own loss of tax revenue on inbound investment or trade of non- residents. All these are sovereign policy choices. Developing countries need foreign investments and treaty shopping opportunities could be an additional factor to attract them. There are many principles in a fiscal economy which, though may facially appear inequita....
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....2 Act asserted that the company is deemed to have disposed of its only relevant assets i.e., 100% shareholding in another company (Tradegrow Ltd) resulting in capital gain being realized; and levied tax accordingly. The assessee, in the appeal before the Tax Court contended that if there was a deemed disposal of investments during the relevant year, the resultant capital gain was taxable in Luxembourg, not in SA. This contention was predicated on the basis that at the relevant time Tradehold Ltd, was deemed to be a resident of Luxembourg in terms of Art. 4(3) of the Double Tax Agreement between South Africa and Luxembourg, the terms of which applied to the transaction. Under Article 4(3), the deemed place of residence of a company is where its effective management is situated. Art. 13(4) of the treaty provides that: Gains from the alienation of any property referred to in Paras 1, 2 and 3, shall be taxable only in the Contracting State of which the alienator is a resident (a provision corresponding to Art.14(6) of the DTAA). The Tax Court rejected the contention (by SA Revenue) that the expression a lie nation does not include deemed disposal of the property, as deemed disposal ....
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....therefore cannot be, that the transaction in issue is permitted (under the DTAA regime) to be taxed in India on the basis that there is a deemed alienation of SBL shares; and in France on the basis that there actual a lie nation of ShanH shares. Neither the text nor the context of Art. 14(5) legitimize such interpretation. Strained construction which subverts the policy underlying India entering into a double taxation avoidance treaty with another State, by enabling dual taxation through artificial interpretation of treaty provisions, is in our view, an impermissible exercise of judicial discretion (of choosing among alternative interpretations). There is a further problematic in accepting this contention. If there be a deemed alienation of SBL shares to Sanofi chargeable to capital gains under the Act, henceforth Sanofi would be the legal and beneficial owner of SBL shares (qua provisions of the Act), entitled to its dividends and liable to tax accordingly. ShanH would (also and independent of Sanofi) continue as the registered shareholder of SBL shares, under provisions of the Indian Companies Act and consistent with the rulings in Charanjit Lal Chowdhury; Bacha F Guzdar; Maha....
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....y of MA, transformed thereafter into a JV comprising MA and GIMD and thereafter of MA, GIMD and Mr. Georges Hibon); that the chronology of events leading to the incorporation of ShanH as a subsidiary of MA and its subsequent transformation into a JV does not legitimize the inference that ShanH is a device, subterfuge or a gossamer entity, contrived for avoidance of tax liability in India. We also advert to in passing that it is the specific plea and contention of the petitioners that capital gains at a higher rate (than in India, if liable) is chargeable and has been paid in France, on the transaction. This assertion has not been contested by Revenue and we presume that this contention has lead to Revenue's strategic concession that ShanH was not an Indian tax avoidant device at its inception. The uniform precedential authority (adverted to in our analyses on issues 1 and 2) is also to the effect that corporate shareholding does not amount to ownership of the corporate assets; that a company is a juristic person adistinct from its shareholders; and while controlling interest would be an incidence of shareholding, it has no independent existence. Even ShanH is not therefore th....
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....e legal and beneficial owners of SBL shares" assumption); and in the context of SBL assets comprising immovable property pertaining to its industrial and commercial operations as well; would render provisions of Art.14(4) otiose. In CIT v. P.V.A.L.Kulandagan Chettiar^[(2004)267ITR 654^] the respondent assessee carried on the business of rubber plantation in Malaysia and had no permanent establishment in India. Whether the business income of the assessee from the rubber plantation could be taxed in India and in the context of a tax treaty between India and Malaysia though the property was located in Malaysia where the assessee had set up a permanent establishment, was in issue. Except the primary assessing authority, the CIT (Appeals), the the Tribunal and the High Court held in favour of the assessee.Dismissing the appeal by Revenue, the Supreme Court observed that taxation policy is within the power of the Government and Sec. 90 of the Act enables the Government to formulate its policies through treaties entered into by it and such treaties determine the fiscal domicile in one State or the other and this determination in the treaty prevails over other provisions of the Act. ....
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....eting a treaty in the Indian context as well. We have earlier adverted to Revenue's contention, that Article 14(5) be purposively construed and interpreted as incorporating a "see through", though absent a textual basis. In our considered view, Article 14(5) does not admit of a grammatical, syntactical or contextual ambiguity legitimizing a strained construction. The grammatical and literal meaning of the provision wholly corresponds to its legal meaning and therefore authorizes no strained construction. There is yet another problematic in accepting Revenue's invitation to purposive construction. Whose purpose is the question? It is axiomatic that while tax legislation may principally be for revenue augmentation that need not, in all circumstances, be the singular legislative purpose. Sovereign power to tax may be and often is (in contemporaneous governmental objectives, across nations) pursued for effectuating a cornucopia of State objectives; including nurture of societal equilibrium, minimizing economic or other disparities and health or ecological concerns (to mention a few). Normatively, promotion of international trade and commerce, in goods and services is thus a legit....
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.... reliance on Article 3(2) to contend that since the terms alienation and participation in Article 14(5) are not defined in the DTAA, these expressions require to be understood by reference to the meaning of the term transfer, as defined in the retrospectively amended section 2(47) of the Act, and consequently the transaction is liable to tax in India and in terms of Article 14(5) itself. Vogel(cited supra) notes that the earlier literature on international law records active disputes on whether statutory text or statutory purpose should control the interpretation of an international agreement and that there was also a difference of opinion regarding the meaning of protocols of negotiations and other material, with the widely held view being that Treaty provisions are to be interpreted restrictively, since parties to a treaty in doubtful cases should only be presumed to have waived their sovereignty to the extent unequivocally apparent from the text of the treaty. According to VogelVCLT rendered many of the earlier conflicts of opinion with regard to treaty interpretation obsolete and while VCLT contains only relatively general ....
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....tion of ambiguity (to accommodate an expanded meaning to the DTAA provision), would be contrary to good faith interpretation. A further problematic of contriving an ambiguity to unwarrantedly invite application of domestic law of a contracting State would be that while India would interpret an undefined DTAA provision according to the provisions of the Act, France could do so by reference to its tax code. As a consequence, the purpose of entering into a treaty with a view to avoiding double-taxation of cross-border transactions would be frustrated. Revenue contends (already noted) that since alienationis not defined in the DTAA, quaArticle 3(2) provisions of the Act should legitimately be referred to for its definition. The Act does not define alienation and Article 3(2) permits, in the circumstance adoption of the meaning of a term defined in the domestic law, only when the term employed in the domestic law is identical (not synonymous) to the undefined term in the DTAA. Petitioners contend and we agree, that when India and France negotiated the terms of DTAA, the definition of the term transfer [as defined in Section 2(47) of the Act] was known, as was the international mea....
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....hey stand. It also helps the tax administration in enforcing the provisions of the taxing laws. ... ... ... (emphasis added) We are of the considered view, that absent such a provision in the DTAA, it would be impermissible to construe the expression alienation, though undefined in the DTAA by ascribing to it the meaning drawn from the definition of a different term transfer, defined in Section 2(47) of the Act. This invitation by Revenue, in our considered view, transcends the interpretive role and intrudes into the proper domain of the federal Executive/legislative power, viz., treaty making. We politely, but firmly, decline this invitation by the Revenue, to jurisdictional aggression/overreach. InMIL(Investments)SAv.Canada[9 ITR 25]thecoreissueconsideredbytheTaxCourtCanadawaswhetherselectionofa low tax jurisdiction was abusive; and whether double taxation agreement must be interpreted as inherently containing the anti-avoidance rule. There was an operative convention between Canada and The Grand Duchy of Luxembourg for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital (the Convention). The Taxpayer....
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....oidancerulesand had not included one in the carefully negotiated Convention; Canada has negotiated a b road net - work of carefully negotiated Tax Conventions with many different nations; and prior to negotiating the treaty (Convention), Canada undoubtedly had knowledge of Luxembourg's treatment of capital gains; (f) In the light of OEC Dcommentary and the decision by Canada and Luxembourg not to include an explicit reference to anti-avoidance rules in their carefully negotiated treaty (Convention), no ambiguity in the treaty is discernible permitting it to be construed as containing an inherent anti-abuse rule; consequently the ordinary meaning of the treaty allowing the appellant to claim the exemption must be respected. In MIL(Investments)SAv.Canada ^[9 ITLR 1111^] the Federal Court ofAppealdismissedtheappealbytheCanadianRevenue.TheappellateCourtheld:CanadianTaxLegislationexemptednon-residentsfromtaxationonthegainsfromthedispositionoftreaty-exempt property;theTaxpayer'ssharesweretreaty-exemptproperty;hadtheintentionbeentolimittheexemptiontoportfolioinvestments,ortonon-controllinginterests in immoveable property it could e....
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.... of SBL shares is MA/GIMD, not ShanH. In our conclusions recorded on Issues 1 and 2 and in the preceding analyses on Issues 3 and 4, we have rejected the above contentions by Revenue and concluded that: (i) ShanH is an entity of commercial substance and business purpose; is not a mere nominee of MA/GIMD; is the true and beneficial owner of SBL shares; and Article 14(5) neither incorporates nor accommodates a see through; (ii) the transaction in issue is of alienation of ShanH shares and not transfer of the shares or of the control, management or underlying assets of SBL; (iii) retrospective amendments to provisions of the Act are neither relevant nor operate to impact in any manner the good faith interpretation of DTAA provisions; and (iv) that the tax (on capital gain) on the transaction in issue, is allocated exclusively to France under Article 14(5) of the DTAA, not to India. In the light of aforesaid analyses of the provisions of Article 25 of the DTAA and our conclusions on Issues 1 to 4 (summarized supra), the income accruing to MA/GIMD consequent on the transaction in issue neither arises nor is taxable in India in accord....
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....the date of acquisition of each of these 'assets' cannot be determined nor is it possible to determine the exact or rationally approximate consideration (out of the total consideration for the transaction in issue), apportionable to these assets/rights. According to the petitioners, computation provisions being inextricably integrated with the charging provision (Section 45 of the Act), inapplicability/failure of one component would render the other inapplicable as well. Reliance for this contention is placed on the decisions in CIT v. BC Srinivasa Shetty[(1981)128ITR 294 (SC)];PNB Finance Ltd. v CIT[(2008)307ITR 175];and the AAR ruling dated 30-11-2009 in Dana Corporation v. DIT[AAR No.788 of 2008, dated 30-11-2009].This contention by petitioners is integrated with other cognate contentions, viz.,that the assets of SBL cannot be treated as the assets of ShanH or MA/GIMD even under domestic law; and controlling interest over a distinct corporate entity is not a separate asset, independent of the shareholding. The later contentions and the precedential authority marshaled in support thereof have already been considered in the analyses on Issues 1 and 2, supra. Revenue however con....
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....ts), reiterated on 08-07-2010; and reviewed the earlier decision. No other interpretation of the observations by AAR is proffered by Revenue. Petitioners' contention that AAR reviewed its earlier decision to admit the applications appears to be the only possible construction of the relevant AAR observations. Revenue contended that AAR, a quasi-judicial tribunal exercising adjudicatory jurisdiction under Chapter XXI - B of the Act, is neither expressly granted nor has inherently, the power to review its earlier decision (admitting the applications). Revenue does not contest petitioners' submission that AAR has no jurisdiction, of review; a submission for which reliance is placed on the following decisions (rendered in various factual, legal and statutory contexts). CIT & Anr. vs Income Tax Appellate Tribunal & Anr^[(1994) 210 ITR 397 Orissa^]; Patel Narshi Thakershi vs Pradyumansinghji Arjunsinghji^[AIR 1970 SC 1273^];Grinland Bank Ltd. vs Central Garment Industrial Tribunal & Anr.^[ 1980(Supp)SCC 420^]; Appropriate Authority vs Rasiklal M. Dhariwal^[(2005)277ITR 370 (Guj)^]; Jose T. Mooken vs CIT, Kerala^[(1979)117 ITR 921 (Karnataka)^....
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....a transaction is designed prima facie for avoidance of income tax; and the avoidance in issue would thus be avoidance, if any, of tax in India; (ii) SBL shares were acquired in the name of or by, ShanH; (iii) It is not necessary to ignore ShanH existence to come to the conclusion that what is put up is a façade in the context of tax law and would amount to a scheme for avoidance of tax; and in the view, the fact that GIMD and George Hibon held shares in ShanH, makes no difference; transfer of ShanH shares may have a commercial and business efficacy and validity. The transaction as conceived and executed is commercially real and taken step by step, valid. A permissible commercial scheme was adopted to acquire the shares, the underlying assets and control of SBL. Thereafter, under the guise of dealing with shares of a subsidiary firm (ShanH) for such acquisition, the underlying assets, business and control of an Indian company (SBL) is passed from one hand to another; (iv) On a literal construction of Article 14(5) of DTAA, transfer of ShanH shares can be taxed only in France (where th....
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....alyses on issues 1 to 4 (of the relevant facts); the transactional documents and surrounding circumstances; the appropriate principles relevant to interpretation of tax treaties and to convergent application of a duly notified tax treaty and domestic tax legislation; and our conclusions that: (i) ShanH is the true, legal and beneficial owner of SBL shares since inception; (ii) ShanH is not either a sham, an artificially interposed entity with no commercial or business purpose or a tax-avoidant contrivance; (iii) the transaction in issue is of transfer of ShanH shares and not of SBL shares or of its underlying assets and controlling interests; and (iv) the resultant gain is allocated to France (not India) under Article 14(5) of the DTAA, the impugned AAR ruling is declared misconceived and as premised on flawed interpretation of relevant facts, provisions of the Act, the DTAA and applicable legal and interpretive norms relevant to the questions presented for advance ruling by the AAR. The transaction in issue does not involve tax avoidance. The core issue (substrating the q....
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.... is no question of avoidance of tax under the provisions of the Act. In the facts and circumstances of the case, the provision [Clause (iii) of the proviso to Sec. 245R(2)], i.e., the clause: relates to a transaction ... ... which is designed prima facie for the avoidance of income-tax would not apply where the claim of immunity to Indian income-tax is predicated upon the fact of allocation of the tax (chargeable on the transaction in issue) to France under DTAA provisions. As a result of the preceding analyses, the ruling dated 28-11-2011 of the Authority for Advance Ruling, is quashed. 1. Issue No. 6 : The order dated 25-05-2010 (impugned in Writ Petition No. 14212 of 2010) determined Sanofi to be an assessee in default for failure to deduct tax on the payment to MA/GIMD on the transaction in issue, u/Sec. 195 of the Act. A consequent demand notice of even date and the subsequent Rectification order dated 15-11- 2011 by Revenue are also challenged. The petitioner (Sanofi) adopts the contentions advanced on behalf of the other petitioners, without reservation. Conclusions on Issue No. 6 : The liability of Sanofi to ded....
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....France. It has a commercial substance and a purpose (FDI in SBL); and is neither a mere nominee of MA and/or MA/GIMD, nor is a contrivance/device for tax avoidance; b) since inception (in 2006) till date, ShanH (not MA or MA/GIMD) had acquired and continues to hold the SBL shares; c) there is no warrant for lifting the corporate veil of ShanH; and even on looking through the ShanH corporate person at here is no material to conclude that there is a design or stratagem to avoid tax; d) the capital gain arising as a consequence of the transaction in issue is chargeable to tax; and the resultant tax is allocated to France (not to India) under the DTAA; e) the retrospective amendments to the Income Tax Act, 1961 (vide the Finance Act, 2012) have no impact on interpretation of the DTAA; the transaction in issue falls within Article 14(5) of the DTAA; and the tax resulting there from is allocated exclusively to France; f) the ruling dated 28-11-2011 of the Authority for Advance Rulings is unsustai....
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.... Explanation - For the purposes of this sub-clause, "jewellery" includes (a) ornaments made of gold, silver, platinum or any other precious metal or any alloy containing one or more of such precious metals, whether or not containing any precious or semi- precious stone, and whether or not work or sewn into any wearing apparel; (a) ornaments made of gold, silver, platinum or any other precious metal or any alloy containing one or more of such precious metals, whether or not containing any precious or semi- precious stone, and whether or not work or sewn into any wearing apparel; (b) precious or semi-precious stones, whether or not set in any furniture, utensil or other article or worked or sewn into any wearing apparel; (iii) agricultural land in India, not being land situate -- (b) precious or semi-precious stones, whether or not set in any furniture, utensil or other article or worked or sewn into any wearing apparel; (iii) agricultural land in India, not being land situate -- (a) in any area which is comprised within the jurisdiction of a municipality (whether known as a municipality, municipal corporation,....
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....anagement or control or any other rights whatsoever; (inserted by the Finance Act 2012 w.e.f. 1st April, 1962) Section 2(47) (47) "transfer", in relation to a capital asset, includes, -- (i) the sale, exchange or relinquishment of the asset; or (ii) the extinguishment of any rights therein; or (iii) the compulsory acquisition thereof under any law; or (iv) in a case where the asset is converted by the owner thereof into, or is treated by him as, stock-in-trade of a business carried on by him, such conversion or treatment; or (iva) the maturity or redemption of a zero coupon bond; or (v) any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882); or (vi) any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect ....
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....i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India. Explanation 1 - For the purposes of this clause - (a) in the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India; (b) in the case of a non-resident, no income shall be deemed to accrue or arise in India to him through or from operations which are confined to the purchase of goods in Indiafor the purpose of export; (c) in the case of a non-resident, being a personengaged in the business of running a news agency or of publishing newspapers, magazines or journals, no income shall be deemed to accrue or arise in India to him through or from activities which are confined to the collection of news and views in India for transmission out of India; (d) in the case of....
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....ly such part of the income as is reasonably attributable to the operations carried out in India; (b) in the case of a non-resident, no income shall be deemed to accrue or arise in India to him through or from operations which are confined to the purchase of goods in Indiafor the purpose of export; (c) in the case of a non-resident, being a personengaged in the business of running a news agency or of publishing newspapers, magazines or journals, no income shall be deemed to accrue or arise in India to him through or from activities which are confined to the collection of news and views in India for transmission out of India; (d) in the case of a non-resident, being -- (1) an individual who is not a citizen of India; or (2) a firm which does not have any partner who is a citizen of India or who is resident in India; or (3) a company which does not have any shareholder who is a citizen of India or who is resident in India, no income shall be deemed to accrue or arise in India to such individual, firm or company through or from operations which are confined to the shooting of any cine....
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....sp; (b) the rest period or leave period which is preceded and succeeded by services rendered in India and forms part of the service contract of employment, shall be regarded as income earned in India; (iii) income chargeable under the head "Salaries" payable by the Government to a citizen of India for service outside India; (iv) a dividend paid by an Indian company outside India; (v) income by way of interest payable by - (a) the Government; or (b) a person who is a resident, except where the interest is payable in respect of any debt incurred, or moneys borrowed and used, for thepurposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or (c) a person who is a non-resident, where the interest is payable in respect of any debt incurred, or moneys borrowed and used, for the purposes of a business or profession carried on by such person in India; (vi) income by way of royalty payable by - (a) the Government; or (b) a person who ....
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....n) for furnishing the return of income for the assessment year commencing on the 1st day of April, 1977, or the assessment year in respect of which such income first becomes chargeable to tax under this Act, whichever assessment year is later, the company exercises an option by furnishing a declaration in writing to the Assessing Officer (such option being final for that assessment year and for every subsequent assessment year) that the agreement may be regarded as an agreement made before the 1st day of April, 1976. Explanation 2. - For the purposes of this clause, "royalty" means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head "Capital gains") for - (i) the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property; (ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trad....
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....f the agreement is made inaccordance with proposals approved by the Central Government before that date. Explanation 2.-For the purposes of this clause, "fees for technical services" means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head "Salaries". (2) Notwithstanding anything contained in subsection (1), any pension payable outside India to a person residing permanently outside India shall not be deemed to accrue or arise in India, if the pension is payable to a person referred to in article 314 of the Constitution or to a person who, having been appointed before the 15th day of August, 1947, to be a Judge of the Federal Court or of a High Court within the meaning of the Government of India Act, 1935, continues to serve on or after the comm....
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.... payable for - (a) service rendered in India; and (b) the rest period or leave period which is preceded and succeeded by services rendered in India and forms part of the service contract of employment, shall be regarded as income earned inIndia; (iii) income chargeable under the head "Salaries" payable by the Government to a citizen of India for service outside India; (iv) a dividend paid by an Indian company outside India; (v) income by way of interest payable by -- (a) the Government; or (b) a person who is a resident, except where the interest is payable in respect of any debt incurred, or moneys borrowed and used, for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or (c) a person who is a non-resident, where the interest is payable in respect of any debt incurred, or moneys borrowed and used, for the purposes of a business or profession carried on by such person in India; (vi) income by way of royalty payable by --  ....
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....n 92) of section 139 (whether fixed originally or on extension) for furnishing the return of income for the assessment year commencing on the 1st day of April, 1977, or the assessment year in respect of which such income first becomes chargeable to tax under this Act, whichever assessment year is later, the company exercises an option by furnishing a declaration in writing to the (Assessing) Officer (such option being final for that assessment year and for every subsequent assessment year) that the agreement may be regarded as an agreement made before the 1st day of April, 1976. Explanation 2.-For the purpose of this clause, "royalty" means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head "Capital gains") for - (i) the transfer of all or any rights (including the granting of a licnece) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property; (ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, ....
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.... the Central Government before that date. Explanation 2. - For the purposes of this clause, "fees for technical services" means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head "Salaries". (2) Notwithstanding anything contained in subsection (1), any pension payable outside India to a person residing permanently outside India shall not be deemed to accrue or arise in India, if the pension is payable to a person referred to in article 314 of the Constitution or to a person who, having been appointed before the 15th day of August, 1947, to be a Judge of the Federal Court or of a High Court within the meaning of the Government of India Act, 1935, continues to serve on or after the commencement of the Constitution as a Judge in India. Expla....
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....on such determination, tax shall be deducted under sub-section (1) only on that proportion of the sum which is so chargeable. (3) Subject to rules made under sub-section (5), any person entitled to receive any interest or other sum on which income-tax has to be deducted under sub-section (1) may make an application in the prescribed form to the Assessing Officer for the grant of a certificate authorizing him to receive such interest or other sum without deduction of tax under that sub-section, and where any such certificate is granted, every person responsible for paying such interest or other sum to the person to whom such certificate is granted shall, so long as the certificate is in force, make payment of such interest or other sum without deducting tax thereon under sub-section (1). (4) A certificate granted under sub-section (3) shall remain in force till the expiry of the period specified therein or, if it is cancelled by the Assessing Officer before the expiry of such period, till such cancellation. (5) The Board may, having regard to the convenience of assesses and the interes....
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....ent, whether or not the non-resident personhas - (i) a residence or place of business or business connection in India; or (ii) any other presence in any manner whatsoever in India: (inserted by the Finance Act 2012 w.e.f. 1stApril, 1962) (2) Where the person responsible for paying any such sum chargeable under this Act (other than salary) to a non-resident considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application to the Assessing Officer to determine, by general or special order, the appropriate proportion of such sum so chargeable, and upon such determination, tax shall be deducted under sub-section (1) only on that proportion of the sum which is so chargeable. (3) Subject to rules made under sub-section (5), any person entitled to receive any interest or other sum on which income-tax has to be deducted under sub-section (1) may make an application in the prescribed form to the Assessing Officer for the grant of a certificate authorizing him to receive such interest or other sum without deduction of ta....
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....and accordingly, any tax levied, demanded, assessed, imposed or deposited before the commencement of this Act and chargeable for a period prior to such commencement but not collected or recovered before such commencement, may be collected or recovered an appropriated in accordance with the provisions of the Income-tax Act, 1961 as amended by this Act, and the rules made thereunder and there shall be no liability or obligation to make any refund whatsoever. Note : Highlighted portions of the text are relevant amendments to provisions of the Act quathe Finance Act, 2012. Other provisions of the Act : Chapter IX of the Act sets out provisions pertaining to double-taxation relief. Prior to its substitution by Finance Act, 2009, (with effect from 01-10-2009), Section 90 bore the marginal heading "agreement with foreign countries" and after the substitution quathe Finance Act, 2009 the marginal heading reads "agreement with foreign countries or specified territories". For purposes of this lisnothing substantial turns upon amendment of the marginal heading of Section 90, by the Finance Act, 2009 or of its text. We set out the relevant provisi....
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....used but not defined in this Act or in the agreement referred to in sub-section (1) shall, unless the context otherwise requires, and is not inconsistent with the provisions of this Act or the agreement, have the same meaning as assigned to it in the notification issued by the Central Government in the Official Gazette in this behalf. (4) An assessee, not being a resident, to whom an agreement referred to in sub-section (1) applies, shall not be entitled to claim any relief under such agreement unless a certificate, containing such particulars as may be prescribed, of his being a resident in any country outside India or specified territory outside India, as the case may be, is obtained by him from the Government of that country or specified territory. Explanation1.-For the removal of doubts, it is hereby declared that the charge of tax in respect of a foreign company at a rate higher than the rate at which a domestic company is chargeable, shall not be regarded as less favourable charge or levy of tax in respect of such foreign company. Explanation2.---- For the purposes of this section, "specified territory" means any area outside India....