INCOME TAX ACT, 1961

--Capital gains--ChargeabilityAlienation of shares by which controlling interest transferred--MA, a French company, possibly after arriving at an understanding with GIMD, another French company, decided to invest in Shantha by purchasing 80% of the shares of Shantha. With that in view while entering into an agreement with the sharesholders of Shantha for purchase of its shares, it got the due diligence of Shantha done, and also formed a 100% subsidiary, ShanH. The shares in Shantha were acquired in the name of ShanH or by Shanse. The consideration and stamp duty was paid by MA. Thereafter, GIMD acquired 20% of the shares of ShanH from MA. Mr. Hebon also purchased some of the shares of ShanH. Thereafter, for business reasons, according to the applicants, they decided to sell their shares in ShanH to Sanofi. The case of MA and GIMD in a nutshell is that what was involved in the transaction of the two applicants selling their shares in ShanH to Sanofi, was only the sale of shares held in a French company and that had nothing to do with the shares of Shantha, the Indian company, the sale of which might or might not attract liability under the Indian Income Tax Act. MA and GIMD, therefore, claim that any attempt to tax in India the sale of shares of ShanH by them to Sanofi, was not sanctioned by the Income Tax Act and certainly not by the Double Taxation Avoidance Agreement (DTAA) between India and France. On 20-11-2009, MA and GIMD filed applications before this Authority under section 245Q(1) seeking an advance ruling on the questions raised in the applications. 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 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 AO on 7-8-2009 informed Sanofi about its likely obligation under section 195 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 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) 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. Held: The transactions of sale of shares by them in ShanH to Sanofi are taxable in India in terms of paragraph 5 of Article 14 of the Double Taxation Avoidance Convention between India and France.