Santa Biotech-Sanofi (Sale of shares of Foreign Company by Non Resident to Non Residents )

Gains arising on sale of shares of foreign company by NR to NR taxable in India if the foreign co only held Indian assets

Two French companies named “Murieux Alliance” (‘MA’) and “Groupe Industrial Marcel Dassault” (“GIMD”) held shares in another French company named “ShanH”. MA & GIMD acquired shares in an Indian company named “Shantha Biotechnics Ltd” (“Shantha”). The shares in Shantha were transferred to ShanH. MA and GIMD subsequently sold the shares in ShanH to another French company named “Sanofi Pasteur Holding”. The assessees filed an application for advance ruling claiming that as the two French companies had sold the shares of another French company to a third French company, the gains were not chargeable to tax in India. The department opposed the application on the ground that ShanH was formed with no purpose other than to hold the shares of the Indian company and that the transaction was taxable in India. HELD upholding the department’s plea:

(i) Azadi Bachao Andolan, though binding on the AAR, may not be the final word because under the proviso to s. 245R(2), the AAR is entitled to disallow an application if the question raised therein relates to an issue which is designed, prime facie, for the avoidance of income-tax. The AAR is entitled to see whether the steps taken were a device to avoid liability to tax. Also it is difficult to accept the arguments based on Azadi Bachao Andolan because that judgement appears to proceed on the basis that the views expressed by Chinnappa Reddy, J. were his own and did not represent the view of the Court as a whole. The view that has emerged 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 a transaction or an event, the legal effect of the transaction in the context of the taxing statute, has to be considered, notwithstanding its reality or validity;

(ii) On facts, the French company’s (ShanH) only asset were the shares in the Indian company & it had no other business. When its shares were sold, what really passes were the underlying assets and the control of the Indian company. A gain was generated by the transaction. If the transaction is accepted at face value, control over Indian assets and business can pass from hand to hand without incurring any liability to tax in India. Such transactions have to be treated as ineffectual. It is not necessary to ignore the existence of ShanH to come to a conclusion that what is put up is a facade in the context of the tax law and would amount to a scheme for avoidance of tax;

(iii) Under Article 14(5) of the India-France DTAA, gains from the alienation of shares representing a participation of at least 10% in an Indian company may be taxed in India. Here, though the shares being transferred are that of a French company, the situs of the underlying assets & controlling interest cannot be ignored. What is involved in the transaction is an alienation of the assets and controlling interest of an Indian company. Consequently, even though such interest is not an alienation of the shares of an Indian company, still, on a purposive construction of Article 14(5), the capital gains is taxable in India.