Sale of shares in a French entity by two other French Entities to a fourth French entity is not taxable in India

Sanofi Pasteur Holding SA vs Department of Revenue,Ministry of Finance (Andhra Pradesh High Court-W.P. NOS. 14212 of 2010 and 3339 & 3358 of 2012  dated 15th February 2013)


1. Whether ShanH, a French Company and investment vehicle of two other French companies (MA and GIMD), a vehicle of tax avoidance, a sham entity with no commercial substance, and meant to conceal the real, effective and beneficial ownership of SBL?

2. In continuance of Issue 1, whether the corporate veil of ShanH must be lifted and the transaction (of the sale of the shares of ShanH by MA/GIMD to Sanofi, another French Company) be treated as a sale of shares of Indian Company,SBL ?

3. Is the transaction liable to tax in India ?

4. Whether the retrospective amendments to the Income Tax Act by the Finance Act,2012 alter the trajectory of the DTAA and render the transaction liable to tax in India?

5. Whether in light of above the petitioner , Sanofi, was liable to deduct tax from payments made to MA and GIMD as per the provisions of Section 195 of the Act?



INDIA FRANCE DTAA                                                    

A) MA and GIMD are two French Companies. ShanH is another French company which is a JV between MA and GIMD.

B) SBL is an Indian Company in which controlling interest is held by ShanH. Infact ShanH is an investment vehicle through which MA and GIMD has made investment in SBL.

C) Sanofi is another French Company, which has acquired shares of ShanH from MA and GIMD as a result of which it acquires controlling interest in SBL through ShanH.

D) On an application filed with AAR , the AAR held that capital gains on transaction of transfer of shares of ShanH by MA and GIMD to Sanofi is taxable in India because what Sanofi in actual acquires is an Indian Company.

E) Sanofi was also held liable for non deduction of tax under Section 195 of the Income Tax Act 1961.



a) That since transaction in issue involved transfer of shares and the control, management and business interests as well as the value of underlying assets of SBL in favour of Sanofi, it was necessary to lift the corporate veil of ShanH to decide the taxability of capital gains income.

b) That transaction was taxable in India under Article 14(5) of DTAA as the capital assets which had been transferred were in India and capital gains on transaction also had accrued to MA/GIMD in India.

c) That Article 14(5) of India France DTAA deals with the alienation of shares representing a participation of at least 10 percent in a company which is a resident of contracting state and the right to tax is allocated to that contracting state in which the company is resident.

d) In other words gain on alienation of shares representing participation of more than 10% in capital, control and management of SBL (an Indian Company) was chargeable to tax as source country had right to tax capital gains from alienation of shares within its territory whether it was realized from disposal of asset or deemed disposal of asset.

e) That ShanH is a sham and nominal entity with no business or commercial purpose and is a device contrived to avoid liability to Indian Tax.

f) The residuary clause i.e Article 14(6), which gives that sate of residence of the alienator the right to tax capital gains is not applicable since Article 14(5) applies to the transaction.

g) The revenue further contended that consequent to the retrospective amendments in law the capital gains transaction was taxable in India.


a) That ,as per facts of present case, under Article 14(5) of DTAA tax on capital gains is allocated to France as transaction involved alienation of shares representing  a participation of at least 10% in a company which is resident of France.

b) That lifting of corporate veil was not permitted under Article 14(5) of DTAA as it does not accommodate a "see through" situation. The "underlying assets" theory is far fetched and creative and would not apply to present case and even if this was considered the chargeability to tax is allocated to France under Article 14(6) of DTAA.

c) That ShanH had commercial and business substance and was not conceived for avoiding capital gains tax liability under the provisions of the Act. In fact higher rate of capital gains tax is payable and has been remitted to revenue in France.

d)  That retrospective amendments are inapplicable where tax treaties operate alongside domestic legislation. That as per FM speech in Parliament retrospective provision to tax indirect transfer of shares would not apply to the countries with whom India had entered into DTAA but would only apply to low/nil tax jurisdictions. Even otherwise retrospective amendments in the Act does not override DTAA.



Hon'ble Andhra Pradesh High Court discussed the provisions of  Income Tax Act,1961 and Articles 3(2) ,14 of Indo-France DTAA and observed and held as under :-

a) That it is not the case of revenue that in year 2006 itself ShanH was conceived as a pre-ordained scheme to avoid tax in India.

b) That independent and holistic analysis of the transactional documents and surrounding circumstances indicate that ShanH was not conceived for avoiding capital gains tax liability under the provisions of the Act.

c) That commercial and business purpose of ShanH as a special purpose investment vehicle constituted its business operations in India, and even post the transaction in issue, the commercial and business purpose as an investment vehicle continued to exist.

d) That ShanH was not gossamer, sham or conceived only for avoidance of tax in India. The revenue failed to establish lack of commercial substance or business purpose or that ShanH was interposed only as tax avoidance device, there was no case for piercing or lifting the corporate veil.

e) ShanH is an investment vehicle; FDI in SBL being its commercial purpose and substance. That the uncontested assertion by petitioners, that a higher rate of capital gains tax is payable and has been remitted to Revenue in France , lends further support to the inference that ShanH was not conceived, pursued and persisted with to serve as an India tax-avoidant device.

f) That transaction in issue clearly and exclusively was one of transfer of the entire shareholding in ShanH, by MA/GIMD in favour of Sanofi and transfer of SBL shares in favour of Sanofi was neither the intent nor the effect of transaction.

g) That there is no "look through" provisions in Article 14(5) unlike in Article 14(4) which contains the term "directly or indirectly". Article 14(5) is concerned only with a participation of at least 10% in a company which is itself a resident of contracting state.

h) That the transaction in issue is for alienation of 100 percent ShanH shares held by MA,GIMD in favour of Sanofi (falling within Article 14(5) of the DTAA); and constitutes neither the transfer nor deemed transfer of shares or of the control , management , or underlying assets of SBL.

i) That the consequent tax on capital gain accruing to MA and GIMD, is undoubtedly allocated to France under the provisions of Article 14(5) of the DTAA.

j) That retrospective amendments to provisions of the Act per se do not operate to deflect, modify; or subject DTAA provisions to provisions of the Act. Thhat the transaction in issue falls within Article 14(5) of the DTAA; and the tax resulting therefrom is allocated exclusively to France.

k) That hence the transaction in issue is not liable to tax in India, under the provisions of the Act read in conjunction with the provisions of the Act.


Comments  :-

This case is being considered as a case, as big as that of Vodafone's in terms of law being laid by the Hon'ble Court against the Revenue Authorities in respect of indirect transfer of shares. However there is difference between the facts and judgement in case of Vodafone and Sanofi. In Vodafone case ,revenue was on much strong footing as India has no DTAA with Cayman Islands and decision was based on interpretation of Section 9 of the Income Tax Act.Further in that case the government stand was that Cayman Island was Tax Haven and hence tax has been avoided by the assessee by transfer of shares of Cayman Island Company. Whereas in present case there is a well laid out DTAA between India and France and assessee has also paid tax in France which is not less than the tax leviable in India.

It is not a case of tax avoidance as was there in case of Vodafone, as contended by the Revenue. Though the Revenue tried to contend in this case also that ShanH is a colourable device to avoid payment of taxes in India but it was really a far fetched contention which was liable to be rejected.

This is a case wherein two French companies own another French Company as JV and sells of the shares of JV company to fourth French Company. Indian connection comes in picture in shape of Indian Company being owned by the French company whose shares have been sold. Article 14(5) and Article 14(6) of the DTAA are clear and principles therein have been clearly spelt out. There was no need to apply the concept of indirect transfer , "see trough" approach or "lifting of corporate veil"  in the present case. Had it been the case of involvement of some Tax Heaven which would have resulted in non payment of taxes in any tax jurisdiction and with which India has no DTAA , then retrospective amendments would have come into play. But in the present case authority of DTAA has been challenged which has been put to its logical fate by the Hon'ble High Court.

CA.Vipin Verma (Partner S N Verma & Co.,Chartered Accountants)
9811156389, 9811188940


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