GROUPE INDUSTRIAL MARCEL DASSAULT Vs. DIRECTOR OF INCOME TAX

JUDGEMENT

(1.) MURIEUX Alliance, hereinafter referred to as "MA" is said to be a part of an International Health Care Group dedicated to prevention, diagnosis and treatment of infectious diseases. It is incorporated in France. It claims that after negotiations with Groupe Industrial Marcel Dassault, hereinafter referred to as "GIMD", another company incorporated in France, it formed a wholly owned subsidiary in France on 31.10. 2006 named "ShanH". On 6.11.2006, MA entered into a share purchase agreement acquiring the shares of an Indian company, called "Shantha Biotechnics Ltd, ("Shantha"). ShanH was shown as a permitted assign. 599630 shares were acquired. On 12.3.2007 GIMD came into the picture by acquiring 120000 shares amounting to 20% of the shares from MA in ShanH. Further capital increase of shares on 25.3.2009 were also taken by MA and GIMD in the same proportion. In May, 2009 Mr. Georges Hiborn acquired 10400 shares from MA and 2600 shares from GIMD. Due diligence of Shantha was got done by MA. MA claims that ShanH, through its representative, also actively participated in managerial and technical issues relating to the growth of Shantha. The shares in Shantha were acquired by ShanH or in the name of ShanH. Admittedly, the original capital flowed from MA and even the stamp duty was paid by MA though it is submitted that the amount spent in that behalf by MA was subsequently made good by ShanH. MA also appointed a director on the Board of ShanH. With a view to ensuring the achievement of better progress in business by Shantha, MA and GIMD felt that Shantha needed the backing and support of a leading global vaccine company. MA and GIMD started looking for a strategic alliance in relation to their larger interest in the field of immunotherapy in developing countries and also in relation to the activities of Shantha. A commercial transaction was evolved whereby Sanofi Pasteur Holding (hereinafter, "Sanofi "), another company incorporated in France, came forward to participate actively with MA and GIMD, provided the representatives of MA continued to be Members of the Board of Directors of ShanH having a say in the policies and approach to be pursed by ShanH. With a view to further improve the business and performance, MA and GIMD sold their shares in ShanH to Sanofi in August, 2009. On 20.11.2009, MA and GIMD filed applications before this Authority under section 245Q(1) of the Income -tax Act, 1961 (hereinafter referred to as "the Act") seeking an advance ruling on the questions raised in the applications. The application filed by GIMD was numbered as Application No. 846 of 2009 and that filed by MA was numbered as Application No. 847 of 2009.

(2.) THE approach by the two companies to this Authority was preceeded by certain steps taken by the Revenue. On 4.8.2009, a survey under section 133A of the Act was conducted in the office premises of Shantha. This was on the basis of information that became available that Sanofi was proposing to acquire 80% of the stakes in Shantha from MA and GIMD through their subsidiary ShanH for a consideration of Rs. 2,500 crores pursuant to a share purchase agreement executed by the concerned parties on 10.7.2009. The assessing officer on 7.8.2009 informed Sanofi about its likely obligation under section 195 of the Act arising out of the share purchase agreement. The details were called for. Another notice was issued on 24.8.2009. By replies dated 27.8.2009 and 3.9.2009, Sanofi intimated the Income -tax department that the share purchase agreement had a closure with effect from 31.7.2009. This was followed by the notice to show cause under section 195 of the Act issued by the assessing officer to Sanofi. Sanofi was asked to show cause why it should not be treated as an assessee in default under section 201(1) of the Act in respect of payments made by it to MA and GIMD for acquisition of the majority controlling interest in Shantha through the transfer of the shares of ShanH, the subsidiary of MA and GIMD. The department also requested MA and GIMD to provide related documents to enable the department to ascertain their liability to tax consequent on the share transfer. It is in the face of these proceedings that MA and GIMD approached this Authority for a ruling essentially on the question whether the sale of shares by them in ShanH to Sanofi is liable to be taxed in India. The questions formulated by MA in its application are:

(3.) FACTS in detail and the incidents relating to the transaction have been presented before us. The attempt of the Revenue was to persuade us to invoke the proviso to Section 245R(2) of the Act to find that what was involved was the devising of a scheme to avoid tax payable in India and in such a context, no ruling ought to be given by this Authority under section 245R(4) of the Act. The pendency of the proceedings under section 201 as against Sanofi was also put forward as a bar to the entertaining of this application. Originally, this Authority had admitted the applications on 17.12.2009 for giving a ruling under section 245R(4) of the Act on the basis that no valid objection in terms of Section 245R(2) of the act had been put forward. The Revenue came forward with an application to have the question re -examined and this Authority re -examined the question and found no reason to change the position earlier adopted that there was no valid objection to the entertaining of the application for giving a ruling. But considering the persistence with which the Revenue questioned the original allowing of the application under section 245R(2) of the Act without actually hearing it, this Authority specified that the question of avoidance of tax and the bar created by the pendency of other proceedings under the Act, would be considered again while giving the ruling under section 245R(4) of the Act in terms of the order already passed under section 245R(2) of the Act. This Authority recorded in its order dated 3.8.2010, "Having been prima facie satisfied that there was no compelling reason to revoke the earlier order of admission and to refuse hearing on merits and that a comprehensive final order could be passed as regards the grounds made out for revoking the admission as well as on the merits, this case was posted for hearing on merits under section 245R(4) of the Act on the specified date." Not satisfied, the Revenue chose to challenge the order of this Authority in Writ Petition Nos. 18132 and 18133 of 2010 in the High Court of Andhra Pradesh. The original order challenged was the one allowing the application under section 245R(2) of the Act, without hearing the Revenue, since the Revenue had not appeared and later by amendment, the subsequent order on the application of the Revenue to re -consider the question, an order passed after hearing the Revenue. The Division Bench of the High Court considered the Writ Petitions. In the meanwhile, this Authority had listed the matter for final hearing to render the ruling under section 245R(4) of the Act. The hearing was spread over for days and was very elaborate. In view of the request made by the High Court of Andhra Pradesh to this Authority to withhold the ruling since they were entertaining the Writ Petitions against the orders under section 245R(2) of the Act and were to render a decision on the question whether the applications were rightly allowed under section 245R(2) of the Act or not, the ruling was withheld. Subsequently, the Division Bench heard the writ petitions finally. But the learned Judges differed in their conclusions - one of them taking the view that there was no warrant for interference with the order allowing the application under section 245R(2) of the Act, since the final ruling was yet to be rendered and this Authority had itself clarified that the question sought to be raised by the Revenue would again be considered while giving the final ruling. But the other learned Judge took the view that it was a question of jurisdiction of this Authority to entertain an application under section 245Q of the Act. Since according to him, there was violation of natural justice in that the Revenue was not given a proper opportunity of being heard, the orders of this Authority were liable to be quashed. A post decision hearing would not suffice and was not authorised since it was a question of jurisdiction. The Writ Petitions were then placed before a third Judge who found that there was no reason to interfere with the orders under section 245R(2) of the Act passed by this Authority. The learned Judge concluded that the Revenue had failed to substantiate an infringement of any legal right conferred on it under the Statute while allowing the application under section 245R(2) of the Act. Since the request not to render a ruling continued all this while, this Authority could not give a ruling under section 245R(4) of the Act. By the time, the path became clear for this Authority to give its ruling, one of the Members - Member(Law) - had retired and this resulted in the application having to be posted again for a hearing under Section 245R(4) of the Act. The parties took full advantage of that opportunity and re -argued the matter in detail. The ruling is being given after such fresh hearing.