NATIONAL LAW UNIVERSITY, JODHPUR

2017

Principle of Taxation

“ASSIGNMENT (CASE STUDY-1)”

Submitted to:

Dr. Manoj Kumar Singh

Assistant Professor

National Law University, Jodhpur

Submitted by:

Akshita Choubey

I Semester,

LL.M (Corporate Law)

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Index
A. Statement of facts
B. Issues raised
C. Arguments on Behalf of Appellant
1) Is ShanH not an entity with commercial substance;
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
3) Is the transaction (on a holistic and proper interpretation of relevant provisions of the
Act and the DTAA), liable to tax in India?
D. Authorities cited

IRC v. His Grace The Duke of Westminster (1936) AC 1, 19 TC 490

Union of India v. Azadi Bachao Andolan (‘Azadi Bachao') (2003) 263 ITR 706 (SC)

Vodafone International Holdings BV v. Union of India

Chiranjit lal Choudhary vs. union of india and others (AIR 1951 SC 41)

Bacha F Guzda V. CIT AIR 1955 SC 74

Maharani Ushadev V. CIT (131 ITR 445 (MP) (1981))

Western Coalfields Ltd.V. Special Area Development (AIR 1982 SC 697)

LIC of India v. escorts ltd.(AIR 1986 SC 1370)

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Statement of facts
 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 Biotech Ltd”
(“Shantha”) which is a research based enterprise registered at Hyderabad. The shares
in Shantha were transferred to ShanH. MA and GIMD subsequently sold the shares in
ShanH to another French company named “Sanofi Aventis. Sanofi Aventis is a large
pharmaceutical conglomerate based in france.

 Sanofi Aventis having deducted tax at source for the payment made to Shantha Biotech
submitted the same to the French taxation authorities. Since it was advised by its local
counsel, it did not comply with Section 195 of the Indian Income Tax Act, 1961, as
there were no tax consequences in India. In January, 2012, the Income Tax Department
(Hyderabad division) issued a notice to Sanofi Aventis for deduction of tax and
submission of the same amounting to Rs. 650 crores.

 Sanofi contended before the CIT that since the transaction attracted French income tax
under the provisions of the India-France DTAA, there was liability to pay tax only in
France and the same has been complied with. On the other hand, the department
contended that as per the verdict of some case, and as per Income tax Act, the liability
to pay tax arises in India. The contentions of the assessee were rejected by the lower
authorities and the matter is now before the High Court of Andhra Pradesh.

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Issues raised: -

E. 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?

F. 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?

G. Is the transaction (on a holistic and proper interpretation of relevant provisions of the
Act and the DTAA), liable to tax in India?And Whether retrospective amendments to
provisions of the Act (by the Finance Act, 2012) alter the trajectory or impact
provisions of the DTAA and/or otherwise render the transaction liable to tax under the
provisions of the Act?

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Arguments advanced: -

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 ?

ShanH was incorporated as part of the policy that all off-shore investments must be
made through a subsidiary incorporated in France. It is not the case of the Revenue
that ShanH was conceived as a preordained scheme to avoid tax in India. The
Revenue’s case about when ShanH became a tax avoidance scheme is ambivalent and
incoherent. ShanH is an entity of commercial substance and business purpose.
Though a subsidiary of MA/GIMD, it is not a mere nominee or alter ego of
MA/GIMD and there is nothing to show that they exercised overriding control over it.
The creation of subsidiaries for investment is a legitimate practice. ShanH is
accordingly the true and beneficial owner of the Indian company’s shares. When the
shares of ShanH were sold, it was the sale of shares of a French company and it
cannot be said that the control, management or underlying assets of the Indian
company were sold so as to attract tax on capital gains in India (Azadi Bachao
Andolan 1& Vodafone International2).

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?

Article 14(5) of the India-France DTAA3 which exempts capital gains from shares
representing more than 10% holding from tax in India does not permit a see through

1
263 ITR 706 (SC)
2
341 ITR 1 (SC)

3
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.2. 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 of performing independent personal services, including such gains from the alienation of such a
permanent establishment (alone or together with the whole enterprise) or of such fixed base, may be taxed in that
other Contracting State.3. Gains from the alienation of ships or aircraft operated in international traffic or movable
property pertaining to the operation of such ships or aircraft shall be taxable only in the Contracting State of which

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 on whether the alienation of shares by ShanH is an alienation of the control,
management or assets of the Indian company. It cannot be said that an actual
alienation of the ShanH shares amounts to a deemed alienation of the Indian
company’s shares. The fact that the value of the shares of ShanH was because of the
value of the Indian company’s assets is irrelevant;

ShanH is a Joint Venture (JV) and genuineness of JV's has never been disputed in any
jurisdiction, either in India or France. No jurisdiction ignores joint ventures because
of the ultimate control exercised by the parent(s). Lifting the corporate veil is
impermissible under Article 14(5) of the DTAA as it does not accommodate a "see
through". Only Article 14(4) accommodates a limited "see through". It is also
contended that even on lifting the corporate veil of ShanH, the legal and beneficial
owner of SBL shares is ShanH and ShanH alone; the transaction falls within the
provisions of the DTAA; is chargeable to capital gains tax in France; and even if
Revenue's far-fetched and creative "underlying assets" theory is considered, the
chargeability to tax is allocated to France under Article 14(6) of the DTAA.

The generic principles flowing from the decisions in Charanjit Lal Chowdhury4;
Bacha F Guzda5; Maharani Ushadev6 ;Western Coalfields Ltd.7and LIC of India8
could be summarized as under:-

i) A shareholder's interest in a company is represented by his shareholding,

which is immovable property with all the attributes thereof.
ii) A company as a juristic persona is distinct from its shareholders. It is the
company which owns the property, not the shareholder(s).

the alienator is a resident.4. Gains from the alienation of shares of the capital stock of a company the property of
which consists directly or indirectly principally of immovable property situated in a Contracting State may be
taxed in that Contracting State. For the purposes of this provision, immovable property pertaining to the industrial
or commercial operation of such company shall not be taken into account.5. Gains from the alienation of shares
other than those mentioned in paragraph 4 representing a participation of at least 10 per cent in a company which
is a resident of a Contracting State may be taxed in that Contracting State. 6. Gains from the alienation of any
property other than that mentioned in paragraphs 1, 2, 4 and 5 shall be taxable only in the Contracting State of
which the alienator is a resident.

4
(AIR 1951 SC 41)
5
(AIR 1955 SC 74)
6
(131 ITR 445 (MP) (1981))
7
(AIR 1982 SC 697)
8
(AIR 1986 SC 1370)

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 iii) The rights of shareholders are such as are delineated in provisions 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 also find resonance in several other decisions including RC
Cooper v. Union of India9 (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.

3) Is the transaction (on a holistic and proper interpretation of relevant provisions of the
Act and the DTAA), liable to tax in India?And Whether retrospective amendments to
provisions of the Act (by the Finance Act, 2012) alter the trajectory or impact
provisions of the DTAA and/or otherwise render the transaction liable to tax under
the provisions of the Act?

The retrospective amendment to s. 9(1) so as to supersede the verdict in Vodafone

International and to tax off-shore transfers does not impact the provisions of the
India-France DTAA because the DTAA overrides the Act.

As per Article 31 of the Vienna Convention, a treaty has to be interpreted as per good
faith and in accordance with the ordinary meaning. Though Article 3(2) provides that
a term not defined in the treaty may be given the meaning in the Act, this is not
applicable because the term “alienation” is not defined in the Act. In some DTAA’s,

9
(1970) 2 SCC 298)

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 the term “alienation” is defined to include the term “transfer” but not in the India-
France DTAA.

Even assuming that the controlling rights or assets in India held by the Indian
company were transferred on the alienation of the French company’s shares, the cost
of acquiring those rights and assets in the Indian company and their date of
acquisition cannot be determined. It is also not possible to determine the exact or
rationally approximate consideration (out of the total consideration for the transaction
in issue), apportionable to these assets/rights. As the computation provisions fail, the
charging provisions also fail (B C Shrinivas Shetty10 , PNB Finance11 & Dana
Corporation12).
Thus, the WESTMINSTER PRINCIPLE still holds a good law and after citing all
these authorities the appellant has established that revenue authority in india cannot
compel the company to pay tax.

10
(128 ITR 294 (SC))
11
(307 ITR 175 (SC))
12
(32 DTR 1 (AAR))

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