Thursday, February 21, 2013

Even retro amendment can't tax indirect transfer as it doesn't override tax treaties; HC follows Vodafone

Retro amendments made to overcome Vodafone's decision are fruitless exercises as the same do not contain a non-obstante clause to override treaty. Therefore, where a French company acting as an Investment vehicle transferred its interest in Indian concern to another French company, the transferor was not liable to any tax in India as per India-France DTAA

The facts of the case were as under:

a) L, Hyderabad was an Indian company and 80 per cent of its shares were held by French company S;

b) Company S was a JV between two French companies G and M. G and M sold their shares in S to another French company Sanofi;

c) G and M had applied for Advance Rulings to AAR regarding the taxability of capital gains in India arising out of sale of shares in S to Sanofi in terms of Article 14(5) of Indo-France DTAA;

d) AAR held that such deal was chargeable to tax in India. Hence, G and M filed separate writ petitions before the High Court challenging the ruling of AAR;

e) Sanofi was held as 'assessee in default' for non-deduction of TDS under section 195 from payment made to G and M. Hence, present writ petition was filed by Sanofi before the High Court.

The High court held in favour of assessee as under:

1) S is an independent corporate entity registered and resident in France and FDI in SBL is its commercial substance and purpose;

2) S was established as a Special Purpose Vehicle to facilitate FDI and to cushion potential investment risks of M and G on direct investment in L;

3) Uncontested assertion by petitioners that a higher rate of tax on capital gains (in comparison to what would have been chargeable in India) is payable in France and has been remitted to Revenue in France lends further support to the inference that S was not conceived, pursued and persisted with to serve as an Indian tax avoidant device;

4) Since Revenue failed to establish its case that genesis or continuance of S establishes it to be an entity of no commercial substance and/or that S was interposed only as a tax avoidant device, no case made out for piercing or lifting of the corporate veil;

5) Subsequent to the transaction in issue and currently as well, S continues in existence as a registered French resident corporate entity and as the legal and beneficial owner of L shares;

6) The transaction in issue clearly and exclusively is one of transfer of the entire shareholding in S by M/G in favour of Sanofi. Transfer of L shares in favour of S is neither the intent nor the effect of the transaction;

7) The Revenue's contentions that retrospective amendments by Finance Act,2012 would over-ride DTAA provisions deserves to be rejected for the following reasons:

a. The Finance Act, 2012 introduced GAAR provisions (sections 95 to 102) which override treaties in case of abuse of treaty provisions was proposed to be operationalized w.e.f 1-4-2014. Section 90(2A) inserted by Finance Act,2012 enables application of GAAR even if same is not beneficial to assessee;

b. In contra-distinction, retrospective amendments relied upon by Revenue-Explanation 2 to section 2(47) and Explanations 4 and 5 to section 9 are not fortified by a non-obstante clause to override tax treaties - Sanofi Pasteur Holding SA v. Department of Revenue, Ministry of Finance [2013] 30 222 (Andhra Pradesh)