In a recent interesting case of Groupe Industrial Marcel Dassault, in AAR no 847 of 2009 the shares of an Indian company, namely, Shantha were owned and controlled by a French company, namely, ShanH. The shares of ShanH were held by two French Companies. The shareholders of ShanH proposed to sell the shares of Shan H to another French company called Sanofi.
In the above background the question raised before the Authority is ‘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 India.’
The French company argued that since the transaction of sale and purchase of shares is between two French companies, there is no question of any tax in India. The Revenue on the other hand contented that what effectively was transferred was controlling interest of the Indian company. Therefore, the transaction is subject to tax in India.
Another issue raised by the Revenue was that the series of transaction shows that it was an attempt to avoid payment of tax in India. Therefore, the Authority should not entertain this application under section 245R(2) of the Income-tax Act.
The Authority observed that “On a look at the series of transactions from the commencement of the formation of ShanH, it appears to us 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. This scheme adopted, has to be seen as one for avoiding payment of capital gains”.
On the question of charge of Capital Gain in India, the Authority held that ‘We have found that what is involved in this transaction, is an alienation of the assets and controlling interest of an Indian company. It would logically follow from our finding that 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.’
Almost similar issue had arisen in the famous case of Vodafone [329 ITR 126]. In that case also the controlling interest of an Indian company was held by a Hongkong based company through a Cayman Island company. Vodafone Netherland entered into an agreement with the Hongkong company to buy the shares of the Cayman Island company. The revenue issued a show cause for withholding tax on the capital gain. However, Vodafone filed a writ before the Bombay High Court wherein it was observed:
- Vodafone’s main contention is that since the transaction took place outside India between the two Non-resident Companies, the Indian tax authorities do not have any jurisdiction in the matter.The High Court held that “the very purpose of entering into agreements between the two foreigners is to acquire the controlling interest which one foreign company held in the Indian company, by other foreign company. This being the dominant purpose of the transaction, the transaction would certainly be subject to municipal law of India, including the Indian Income-tax Act”.
- The Indian law does not permit use of any “colourable” device by any tax payer for perpetuating tax evasion in India. The High Court remarked that “the present is a case of tax evasion and not tax avoidance”. It is apparent that in the present case a chain of foreign companies located in full or part tax haven countries was used to avoid payment of tax in India.
The Authority in the instant case without referring to Vodafone’s case has also decided in line with the High Court decision in case of Vodafone. It is obvious that the jurisdiction of Indian Income-tax can not be avoided by clandestinely using a chain of foreign companies to transfer the shares and controlling interest of Indian company held by one non-resident company to another non-resident company.
The author is a Sr. Partner in S.S. Kothari Mehta & Co. e-mail: firstname.lastname@example.org