Facts
Marieux Alliance („Applicant‟) is incorporated in France and is part of an International Health Care Group dedicated to prevention, diagnostics and treatment of infectious disease.
The Applicant formed a wholly owned subsidiary company in France named as “ShanH”.
Immediately after its incorporation, ShanH acquired shares of an Indian company called “Shantha Biotechnics Ltd.” („Shantha‟).
Due diligence of Shantha was done by the applicant. Both the applicant as well as ShanH actively participated in managerial and technical issues relating to the growth Shantha. The original capital as well as stamp duty flowed from the applicant, which was subsequently made good by ShanH.
Later the applicant sold certain shares held in ShanH to Groupe Industrial Marcel Dassault („GIMD‟), a company incorporated in France.
In August 2009, the applicant and GIMD sold the shares of ShanH to Sanofi Pasteur Holding („Sanofi‟) another company incorporated in France.
of the transaction was alienation of the assets and controlling interest of Shantha and hence in terms of paragraph 5 of Article 14 of the India-France tax treaty, the same was taxable in India.
Issue before the AAR
Whether the capital gains arising to the applicant as well as GIMD from sale of shares of ShanH to Sanofi is taxable in India?
Observations and Ruling of the AAR
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.
By accepting it in the context of the taxing statute, the door would be opened for passing of the assets and control of an Indian company repeatedly without the shares of the Indian company being touched, though in reality the shares of the Indian company are being acquired, that control over it and its assets can otherwise be acquired. Hence, the aspects of underlying assets and control over the affairs of the company, passing from one hand to another cannot be ignored.
A permissible commercial scheme has been adopted to acquire the shares, the underlying assets and control of Shantha. However, in the guise of dealing with the shares of ShanH, the underlying assets, business and control of Shantha has passed from one hand to another.
The series of transactions from the commencement of the formation of ShanH appears to be a pre-ordained scheme to produce a given result, viz., to deal with the assets and control of Shantha without actually dealing with the shares of Shantha or its assets and business. The adopted scheme, has to be seen as one for avoiding payment of capital gains which would otherwise arise if the shares of the Shantha had been transferred.
The payment of tax on capital gains on the shares of Shantha can be perpetually avoided by dealing with the shares of ShanH transferred to Sanofi, but passing effective control over the assets and the business of Shantha. It is the adoption of such devices that is not accepted at face value by courts and treated as ineffectual for the purpose of averting payment of tax due under the statute.
Although the transactions are commercially real and taken step by step valid, that by itself does not preclude the aspect of considering the scheme or the scope of the transaction as a whole from the point of view of taxation and so looked at, it is a scheme for avoidance of tax in India.
The transaction involves an alienation of the assets and controlling interest of Shantha. The transactions gone through are part of a scheme for avoidance of tax and the scheme has to be ignored, that the gain from the transaction is taxable in India.
A purposive construction of paragraph 5 of Article 14 of the India-France tax treaty leads to the conclusion that the capital gains arising out of the transaction is taxable in India. The essence of the transaction takes within its sweep various rights including a change in the controlling interest of Shantha having assets, business and income in India.
Conclusion
The AAR held that the transaction of sale of shares of ShanH by the applicant to Sanofi is not one to be taken at face value since it is one intended to avoid payment of tax on capital gains in India. The AAR further held that the essence of the transaction was alienation of the assets and controlling interest of Shantha and hence in terms of paragraph 5 of Article 14 of the India-France tax treaty, the same was taxable in India.
Marieux Alliance („Applicant‟) is incorporated in France and is part of an International Health Care Group dedicated to prevention, diagnostics and treatment of infectious disease.
The Applicant formed a wholly owned subsidiary company in France named as “ShanH”.
Immediately after its incorporation, ShanH acquired shares of an Indian company called “Shantha Biotechnics Ltd.” („Shantha‟).
Due diligence of Shantha was done by the applicant. Both the applicant as well as ShanH actively participated in managerial and technical issues relating to the growth Shantha. The original capital as well as stamp duty flowed from the applicant, which was subsequently made good by ShanH.
Later the applicant sold certain shares held in ShanH to Groupe Industrial Marcel Dassault („GIMD‟), a company incorporated in France.
In August 2009, the applicant and GIMD sold the shares of ShanH to Sanofi Pasteur Holding („Sanofi‟) another company incorporated in France.
of the transaction was alienation of the assets and controlling interest of Shantha and hence in terms of paragraph 5 of Article 14 of the India-France tax treaty, the same was taxable in India.
Issue before the AAR
Whether the capital gains arising to the applicant as well as GIMD from sale of shares of ShanH to Sanofi is taxable in India?
Observations and Ruling of the AAR
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.
By accepting it in the context of the taxing statute, the door would be opened for passing of the assets and control of an Indian company repeatedly without the shares of the Indian company being touched, though in reality the shares of the Indian company are being acquired, that control over it and its assets can otherwise be acquired. Hence, the aspects of underlying assets and control over the affairs of the company, passing from one hand to another cannot be ignored.
A permissible commercial scheme has been adopted to acquire the shares, the underlying assets and control of Shantha. However, in the guise of dealing with the shares of ShanH, the underlying assets, business and control of Shantha has passed from one hand to another.
The series of transactions from the commencement of the formation of ShanH appears to be a pre-ordained scheme to produce a given result, viz., to deal with the assets and control of Shantha without actually dealing with the shares of Shantha or its assets and business. The adopted scheme, has to be seen as one for avoiding payment of capital gains which would otherwise arise if the shares of the Shantha had been transferred.
The payment of tax on capital gains on the shares of Shantha can be perpetually avoided by dealing with the shares of ShanH transferred to Sanofi, but passing effective control over the assets and the business of Shantha. It is the adoption of such devices that is not accepted at face value by courts and treated as ineffectual for the purpose of averting payment of tax due under the statute.
Although the transactions are commercially real and taken step by step valid, that by itself does not preclude the aspect of considering the scheme or the scope of the transaction as a whole from the point of view of taxation and so looked at, it is a scheme for avoidance of tax in India.
The transaction involves an alienation of the assets and controlling interest of Shantha. The transactions gone through are part of a scheme for avoidance of tax and the scheme has to be ignored, that the gain from the transaction is taxable in India.
A purposive construction of paragraph 5 of Article 14 of the India-France tax treaty leads to the conclusion that the capital gains arising out of the transaction is taxable in India. The essence of the transaction takes within its sweep various rights including a change in the controlling interest of Shantha having assets, business and income in India.
Conclusion
The AAR held that the transaction of sale of shares of ShanH by the applicant to Sanofi is not one to be taken at face value since it is one intended to avoid payment of tax on capital gains in India. The AAR further held that the essence of the transaction was alienation of the assets and controlling interest of Shantha and hence in terms of paragraph 5 of Article 14 of the India-France tax treaty, the same was taxable in India.
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