(2013) 354 ITR 316 (AP)
Income deemed to accrue or arise in India; double taxation relief
Not taxable in India. Under the treaty, gains from the alienation of shares are taxable only in the state of residence of the transferor. A genuine holding company with real investment purpose is not a device, and retrospective domestic amendments cannot override a treaty.
Where a French company acquires another French company whose principal asset is shares in an Indian company, is the gain taxable in India, and do retrospective amendments override the treaty?
Two French shareholders held the entire capital of a French company which had been incorporated as a vehicle to hold and develop an investment in an Indian vaccine manufacturer. They sold their shares in the French holding company to another French pharmaceutical group. The Revenue treated the sale as an indirect transfer of the underlying Indian company, asserting that the French holding vehicle was interposed without substance and that the real subject matter of the sale was the Indian business. It relied additionally on retrospective amendments enacted after the Vodafone decision, which extended the deeming provision to shares deriving their value substantially from Indian assets.
The transaction was challenged by writ petition before the High Court, which examined both the treaty position and the effect of the retrospective amendments, and decided in the taxpayer's favour.
For the assessee
What was sold was shares in a French company by French residents to a French buyer. The treaty allocates the right to tax gains from the alienation of shares to the state of residence of the transferor, so the gains were taxable in France alone. The holding company had been established years earlier for genuine investment reasons, had made and managed the investment, and was not a shell inserted for the transaction.
For the Revenue
The value of the French holding company lay wholly in the Indian business, and the commercial reality of the transaction was the acquisition of that business. The retrospective amendments placed such indirect transfers expressly within the deeming provision, and the treaty does not prevent India from taxing what its own law deems to arise here.
The Court examined the genesis and conduct of the French holding company and found it to be a genuine investment vehicle rather than a device: it had been incorporated well before the sale, for the purpose of making and holding the investment, and had functioned as an investment holding company with real decision-making. There being no artificiality, there was no basis to disregard its separate existence and treat the transaction as a transfer of the Indian shares. On the treaty, the Court held that the capital gains article allocated the right to tax gains from the alienation of shares to the state of residence of the alienator, which was France, and that India therefore had no taxing right over the gain. On the retrospective amendments, it held that a unilateral change to domestic law cannot alter the allocation of taxing rights agreed in a bilateral treaty; the treaty prevails where it is more favourable, and an amendment to the deeming provision does not amend the treaty. The Court also observed that the arrangement predated the transaction by years and could not be characterised as a scheme to avoid Indian tax.
Part of the post-Vodafone indirect transfer story. The retrospective amendments it declined to apply through the treaty were themselves withdrawn for pre-2021 transactions by later legislation, following adverse investment treaty arbitration awards. Under the IT Act 2025 the indirect transfer charge sits in Section 9 and treaty relief in Section 159, so the treaty-prevails reasoning continues to govern where a favourable treaty applies. Read with Vodafone, Copal Research and Tiger Global.