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India: Indian high court rules on taxation of indirect transfer under India-France treaty


Rajendra Nayak

Aastha Jain

The Andhra Pradesh High Court (HC) recently ruled on the issue of taxability of indirect transfers of shares of an Indian company in the case of Merieux Alliance, France (MA) and Groupe Industriel Marcel Dassault (GIMD) (collectively referred to as taxpayers) [TS-57-HC-2013(AP)]. Taxpayers, tax residents of France, held shares in ShanH, a French company which in turn held shares of an Indian company. ShanH held no assets other than shares in the Indian company. The taxpayers transferred shares of ShanH to Sanofi Pasteur Holding (Sanofi), another French company. As per Article 14(5) of the India-France treaty, capital gains arising to a French tax resident from alienation of shares representing a participation of at least 10% in a company resident in India may be taxed in India. The taxpayers had earlier approached the authority for advance ruling (AAR) which held that the transfer of shares of ShanH was a scheme for avoidance of Indian tax and that the capital gains arising from the indirect transfer of shares of an Indian company was liable for tax in India, going by a purposive interpretation of the India-France treaty. This ruling was rendered before the decision of the Supreme Court of India in the case of Vodafone International Holdings BV (341 ITR 1) and the retrospective amendment to the Indian Tax Laws (ITL) on taxation of indirect transfers of Indian assets by Finance Act 2012. Aggrieved by the ruling of the AAR, the taxpayers filed a writ petition before the HC.

The HC held that ShanH had commercial substance as it was incorporated to serve as an investment vehicle, that is foreign direct investment in India which is a well-established business/commercial organisational protocol. Hence, the corporate veil of ShanH cannot be pierced as it was an independent corporate entity with commercial substance, business purpose and it was not a device for avoiding Indian tax. In terms of the instant transaction, the taxpayers had transferred shares of ShanH to Sanofi and there was no transfer of right, title and interest in or transfer of Indian company's shares. Article 14(5) of the treaty is clear, unambiguous and, in explicit terms, allocates the resultant capital gains to France. It was not legitimate to consider Article 14(5) permitting "see through" provision on a true, fair and good faith interpretation. Therefore, it cannot be said that the indirect transfer is taxable in India under the India-France treaty on the basis that there was a deemed alienation of shares of the Indian company on an artificial and strained construction of the provision. The HC also held that the retrospective amendments to the ITL would not impact the allocation of taxing rights under a treaty. The order passed by the AAR cannot be sustained and allowed the writ petitions filed by the taxpayers.

Rajendra Nayak ( and Aastha Jain (

Ernst & Young

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