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DOUBLE TAXATION AVOIDANCE AGREEMENT (DTAA) IN

INDIA

I. INTRODUCTION

1.1. INTRODUCTION:

Double taxation may arise when the jurisdictional connections, used by different countries, overlap

or it may arise when the taxpayer has connections with more than one country. A person earning

any income has to pay tax in the country in which the income is earned (as source Country) as well

as in the country in which the person is resident. As such, the said income is liable to tax in both

the countries. To avoid this hardship of double taxation, Government of India has entered into

Double Taxation Avoidance Agreements (DTAAs) with various countries. DTAAs provide for the

following reduced rates of tax on dividend, interest, royalties, technical service fees, etc., received

by residents of one country from those in the other. The Double Tax Avoidance Agreement

(DTAA) is essentially a bilateral agreement entered into between two countries. The basic

objective is to promote and foster economic trade and investment between two Countries by

avoiding double taxation.

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1.2. MEANING:

DTAA stands for Double Taxation Avoidance Agreement. It is an agreement between two

countries with an objective to avoid taxation of the same income in both countries. India has

comprehensive Double Taxation Avoidance Agreements (DTAA) with 84 countries as of now.

Double Taxation Avoidance Agreement (DTAA) also referred as Tax Treaty is a bilateral

economic agreement between two nations that aims to avoid or eliminate double taxation of the

same income in two countries.

1.3. DEFINITION

Double taxation is the enforced duty of two or more taxes on the same, property or monetary

transactions. Double taxation may occur when the legal authority associations, used by different

nations, overlap or it may occur when the taxpayer has links with more than one country.

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1.4. OBJECTIVES:

Protection against double taxation: These Tax Treaties serve the purpose of providing

protection to tax-payers against double taxation and thus preventing any discouragement

which the double taxation may otherwise promote in the free flow of international trade,

international investment and international transfer of technology;

Prevention of discrimination at international context: These treaties aim at preventing

discrimination between the taxpayers in the international field and providing a reasonable

element of legal and fiscal certainty within a legal framework;

Mutual exchange of information: In addition, such treaties contain provisions for mutual

exchange of information and for reducing litigation by providing for mutual assistance

procedure; and

Legal and fiscal certainty: They provide a reasonable element of legal and fiscal certainty

within a legal framework.

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II. DTAA EXPLAINED

2.1. WHAT IS DOUBLE TAXATION AVOIDANCE AGREEMENT?

A person earning any income has to pay tax in the country in which the income is earned (as Source

Country) as well as in the country in which the person is resident. As such, the said income is liable

to tax in both the countries. To avoid this hardship of double taxation, Government of India has

entered into Double Taxation Avoidance Agreements (DTAAs) with various countries. DTAAs

provide for the following reduced rates of tax on dividend, interest, royalties, technical service

fees, etc., received by residents of one country from those in the other. Where total exemption is

not granted in the DTAAs and the income is taxed in both countries, the country in which the

person is resident and is paying taxed, the credit for the tax paid by that person in the other country

is allowed.

Where tax relief has been given by one country, the country of residence generally allows credit

for the tax so spared, to avoid nullifying the relief. If the rate prescribed in the Indian Income-tax

Act, 1961 is higher than the rate prescribed in the Tax Treaty then the rate prescribed in the Tax

Treaty has to be applied. In other words, provisions of DTAA or Indian Income-tax Act, whichever

are more favourable to an individual would apply. Thus In order to avail the benefits of DTAA, an

NRI should be resident of one country and be paying taxes in that country of residence. India has

entered into

DTAA with around 65 countries. These treaties are based on the general principles laid down in

the model draft of the Organisation for Economic Cooperation and Development (OECD) with

suitable modifications as agreed to by the other contracting countries.

Thus in case there is a DTAA between India and United States of America, an NRI should be a

resident of USA and paying taxes there. In case of income earned in India by NRI, tax paid in India

is allowed as credit against tax paid in USA.

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2.2. WHO ARE THE SUBJECTS OF SUCH AGREEMENT?

A typical DTA Agreement between India and another country usually covers persons, who are

residents of India or the other contracting country, which has entered into the agreement with India.

A person, who is not resident either of India or of the other contracting country, would not be

entitled to benefits under DTA Agreements.

International double taxation has adverse effects on the trade and services and on movement of

capital and people.

Taxation of the same income by two or more countries would constitute a prohibitive burden on

the tax-payer. The domestic laws of most countries, including India, mitigate this difficulty by

affording unilateral relief in respect of such doubly taxed income (Section 91 of the Income Tax

Act). But as this is not a satisfactory solution in view of the divergence in the rules for determining

sources of income in various countries, the tax treaties try to remove tax obstacles that inhibit trade

and services and movement of capital and persons between the countries concerned. It helps in

improving the general investment climate.

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2.3. NEED FOR DTAA

The need for Agreement for Double Tax Avoidance arises because of conflicting rules in two

different countries regarding chargeability of income based on receipt and accrual, residential

status etc. As there is no clear definition of income and taxability thereof, which is accepted

internationally, an income may become liable to tax in two countries. Double taxation occurs when

an individual is required to pay two or more taxes for the same income, asset, or financial

transaction in different countries. Double taxation occurs mainly due to overlapping tax laws and

regulations of the countries where an individual operates his business.

In such a case, the two countries have an Agreement for Double Tax Avoidance, in which case the

possibilities are:

The income is taxed only in one country.

The income is exempt in both countries.

The income is taxed in both countries, but credit for tax paid in one country is given against

tax payable in the other country.

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III. TYPES OF DTAA UNDER THE INCOME TAX ACT,

1961

In India, Under Section 90 and 91 of the Income Tax Act, relief against double taxation is provided

in two ways:

3.1. UNILATERAL RELIEF

Under Section 91, an individual can be relieved from double taxation by Indian Government

irrespective of whether there is a DTAA between India and the other country concerned. Unilateral

relief to a tax payer may be offered if:

The person or company has been a resident of India in the previous year.

In India and in another country with which there is no tax treaty, the income should have

been taxed.

The tax have been paid by the person or company under the laws of the foreign country in

question.

3.2. BILATERAL RELIEF

Under Section 90, the Indian government offers protection against double taxation by entering into

a DTAA with another country, based on mutually acceptable terms.

SUCH RELIEF MAY BE OFFERED UNDER TWO METHODS:

EXEMPTION METHOD: This ensures complete avoidance of tax overlapping.

TAX CREDIT METHOD This provides relief by giving the tax payer a deduction from

the tax payable in India.

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3.3. DTAA CAN BE OF TWO TYPES:

A. COMPREHENSIVE DTAA: Comprehensive DTAAs are those which cover almost all types

of incomes covered by any model convention. Many a time a treaty covers wealth tax, gift tax,

surtax etc. too. DTAA Comprehensive Agreements with respect to taxes on income with following

countries :

1 Armenia

2 Australia

3 Austria

4 Bangladesh

5 Belarus

6 Belgium

7 Brazil

8 Bulgaria

9 Canada

10 China

11 Cyprus

12 Czech Republic

13 Denmark

14 Egypt

15 Finland

16 France

17 Germany

18 Greece

19Hashemite Kingdom

20 Hungary

21 Indonesia

22 Ireland

23 Israel

24 Italy

25 Japan

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26 Kazakstan

27 Kenya

28 Korea

29 Kyrgyz Republic

30 Libya

31 Malaysia

32 Malta

33 Mauritius

34 Mongolia

35 Morocco

B. LIMITED DTAA: Limited DTAAs are those which are limited to certain types of incomes

only, e.g. DTAA between India and Pakistan is limited to shipping and aircraft profits only. DTAA

Limited agreements – With respect to income of airlines/merchant shipping with following

countries:

1. Afghanistan

2. Bulgaria

3. Czechoslovakia

4. Ethiopia

5. Iran

6. Kuwait

7. Lebanon

8. Oman

9. Pakistan

10. People's Democratic Republic of Yemen

11. Russian Federation

12. Saudi Arabia

13. Switzerland

14. UAE

15. Uganda

16. Yemen Arab Republic

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When an Indian person makes a profit or some other type of taxable gain or receives any income

in another country, he may be in a situation where he will be required to pay a tax on that income

in India, as well as in the country in which the income was made. To protect Indian tax payers

from this unfair practice, DTAA ensures that India's trade and services with other countries, as

well the movement of capital are not adversely affected. Acting under the authority of law,

3.4. CHOICE OF BENEFICIAL PROVISIONS UNDER DTAA/TAX LAWS

The Provisions of DTAA override the general provisions of taxing statute of a particular country.

It is now well settled that in India the provisions of the DTAA override the provisions of the

domestic statute. Moreover, with the insertion of Sec.90 (2) in the Indian Income Tax Act, it is

clear that assessee have an option of choosing to be governed either by the provisions of particular

DTAA or the provisions of the Income Tax Act, whichever are more beneficial.

For example under DTAA between Indian and Germany, tax on interest is specified @ 10%

whereas under Income Tax Act it is 20%. Hence, one can follow DTAA and pay tax @ 10%.

Further if Income tax Act itself does not levy any tax on some income then Tax Treaty has no

power to levy any tax on such income. Section 90(2) of the Income Tax Act recognizes this

principle.

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IV. MODELS OF DTAA

There are different models developed over a period of time based on which treaties are drafted and

negotiated between two nations. These models assist in maintaining uniformity in the format of

tax treaties. They also serve as checklist for ensuring exhaustiveness or provisions to the two

negotiating countries.

OECD Model, UN Model, the US Model and the Andean Model are few of such models. Of these

the first three are the most prominent and often used models. However, a final agreement could be

combination of different models.

4.1. OECD MODEL

Organization of Economic Co-operation and Development (OECD) Model Double Taxation

Convention on Income and on Capital, issued in 1977, 1992 and 1995. OECD Model is essentially

a model treaty between two developed nations. This model advocates residence principle, that is

to say, it lays emphasis on the right of state of residence to tax.

4.2. UN MODEL

United Nations Model Double Taxation Convention between Developed and Developing

Countries, 1980. The UN Model gives more weight to the source principle as against the residence

principle of the OECD model. As a correlative to the principle of taxation at source the articles of

the Model Convention are predicated on the premise of the recognition by the source country that

(a) taxation of income from foreign capital would take into account expenses allocable to the

earnings of the income so that such income would be taxed on a net basis, that (b) taxation would

not be so high as to discourage investment and that (c) it would take into account the

appropriateness of the sharing of revenue with the country providing the capital. In addition, the

United Nations Model Convention embodies the idea that it would be appropriate for the residence

country to extend a measure of relief from double taxation through either foreign tax credit or

exemption as in the OECD Model Convention. Most of India’s treaties are based on the UN Model.

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4.3. UNITED STATES MODEL INCOME TAX CONVENTION OF

SEPTEMBER, 1996

The US Model is different from OECD and UN Models in many respects. US Model has

established its individuality through radical departure from usual treaty clauses under OECD

Model and UN Model.

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V. GENERAL FEATURES OF DTAA

5.1. LANGUAGE USED BY TREATIES

Tax Treaties employ standard International language and standard terms. This is done in order to

understand and interpret the same term in the same manner by both assessee as well as revenue.

Language employed is technical and stereotyped. Some of the terms are explained below:

a) Contracting State - country which enters into Treaty

b) State of Residence- Country where a person resides

c) State of Source- Country where income arises - Enterprise of a Contracting State- Any taxable

unit (including individuals of a Contracting State)

d) Permanent Establishment - A fixed base of an enterprise in the state of

e) Source (usually a branch of a foreign company and in some cases wholly – owned subsidiaries

as well)

f) Income arising in Contracting state - Income arising in a State of a source

One has to read the treaty carefully in order to understand its provisions in their proper perspective.

The best way to understand the DTAA is to compare it with an agreement of partnership between

two persons. In partnership, the words used are “the party of the first part” and in the DTAA, the

words used are “the other contracting state” .One can also replace the words” Contracting States”

by names of the respective countries and read the DTAA again , for better understanding.

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5.2. COMPOSITION OF A COMPREHENSIVE DTAA

Double Tax Avoidance agreements are divided under following heads

Article No. Heading Content

1 Scope of the Convention To whom applicable?

2 Taxes covered Specific taxes covered

3 General definition Persons, company enterprises,

international traffic, competent authority

4 Resident ‘Residence’ of a contracting state who

can access treaty

5 Permanent Establishment What constitutes P.E.?What does not

constitute P.E?

6 Income from Immovable Property Immovable property and income there

from

7 Business Profits Determination and taxation of profits

arising from business carried on through

P.E.

8 Shipping, Inland waterways & Air

Transport

Place of deemed accrual of profits arising

from activities and mode of taxation

thereon

9 Associated Enterprises Enterprises under common management

and taxation of profits owing to close

connection (other than transactions of

arm’s length nature )

10 Dividend Definition and taxation of

dividends;Concessional rate of tax in

certain situations;

11 Interest Definition and taxation of

interest;Concessional rate of tax in

certain situations;Taxation of interest

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paid in excess of reasonable rate, on

account of special relationship;

12 Royalties Definition of Royalties- what it includes

and covers, and its taxation;Treatment of

excessive payment of royalties due to

special relationship;Country where

taxable.

13 Capital Gains Definition- Taxation aspect;Concessional

rates/exemption from tax if any;Country

where taxable.

14 Independent Personal Services Types of services covered;Country where

taxable.

15 Dependent Personal Services DefinitionCountry where taxable.

16 Directors Fees and Remuneration

for Top Level Managerial official

DefinitionMode of Country where

taxable.

17 Income earned by entertainer and

athletes

Types of activities covered;Mode of

Country where taxable.

18 Pension and social security

payments

Country where taxable.

19 Remuneration and pensions in

respect of government services

Types of remuneration and Country

where taxable.

20 Payment received by students and

apprentices

Taxation / Exemption of payments

received by student and apprentices.

21 Other Income Residual Article to cover income not

covered under other ‘Articles’, mode of

taxation and country where taxable

22 Capital (Tax on wealth) Definition – made – and country where

taxable

23 Method of elimination Exemption Method / Credit Method

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24 Non Discrimination (Equitable) Basis of taxing Nationals and

citizens of foreign state

25 Mutual Agreement Procedure Where taxation is not as per provisions of

the convention, a ‘person’ may present

his case to Competent Authorities of

respective states.Procedure in such cases

26 Exchange of Information Competent Authorities to exchange

information for carrying out provisions of

the convention.Methodology.

27 Assistance in collection of taxes

28 Diplomatic agents and Consular

corps (Officers)

Privileges of this category to remain

unaffected

29 Territorial Extension

30 Entry into force Effective date from which convention

comes into force;Assessment year from

which it comes into force.

31 Termination Time – Notice period – Mode.

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5.3. OVERALL PREVIEW OF THE MODEL CONVENTION

In general terms, the Articles of a convention can be divided into six groups for the purpose of

analyses:

a) Scope Provisions: these include Article 1 (Personal scope), 2 (Taxes covered), 30 (Entry into force)

and 31 (Termination). These provisions determine the persons, taxes and time period covered by

a treaty.

b) Definition provisions: these include Article 3 (General Definitions), 4(Residence) and 5

(Permanent Establishment) as well as the definitions of terms in some of the substantive provisions

(e.g. the definition of “immovable property” in Article 6(2)).

c) Substantive Provisions: these are the Articles between article 6 and 22 which apply to particular

categories of income, capital gains or capital and allocate taxing jurisdiction between the two

Contracting States.

d) Provisions for elimination of double taxation: this is primarily Article 23. Article 25(Mutual

Agreement) could also be placed in this category.

e) Anti-avoidance provisions: these include Article 9 (Associated Enterprises) and 26 (Exchange of

information).

f) Miscellaneous Provisions: this final category includes Articles such as 24(Non-Discrimination),

28 (Diplomats) and 29 (Territorial Extension).

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VI. HOW TO APPLY DTAA

The process of operation of a double taxation convention can be divided into a series of steps,

involving the different types of provisions.

1. Determine if the issue is within the scope of the convention: This involves determining firstly

whether the taxpayer is within the personal scope in Article 1- that is, “persons who are residents

of one or both Contracting States”. This may involve confirming that the taxpayer is a “person”

within in the definition of Article 3(1) (a); it will involve confirming that the taxpayer is resident

of a Contracting State according to Article 4(1).

2. Check that the treaty applies to the tax in issue- is it a tax listed in Article 2 (or a tax substantially

similar to such a tax).

3. Thirdly, check that the treaty is in operation for the taxable period in issue – that the treaty is in

force (Article 29) and has not been terminated (Article 30).

4. Apply the relevant definitions: At this stage the relevant definition provisions (if any) can be

applied. Thus, for example, if the taxpayer is a resident of both Contracting States, the tiebreakers

in Article 4(2) and (3) have to be applied to determine a single residence for treaty purposes,

similarly, if it is necessary to decide whether the taxpayer has a permanent establishment in a state,

then Article 5 is relevant.

5. Determine which of the substantive provisions apply: The substantive provisions apply to different

categories of income, capital gains or capital; it is necessary to determine which applies. This is a

process of characterization. In many cases this may be straightforward; in others the task may not

be easy. For example, payments, which are referred to as “royalties”, may in fact fall under Article

7 (Business Profits), 12 (Royalties), 13 (Capital Gains) or 14 (Independent Personal Services).

Assistance in characterizing the items can be gained from the Commentaries, case law and reports

of the Committee on Fiscal Affairs

6. Apply the substantive article:

Substantive articles generally take one of three forms

a) The state of source may tax without limitation. Examples are: income from house property

situated in that state, and business profits derived from a permanent establishment there.

b) The state source may tax up to a maximum: here the treaty sets a ceiling to the level of taxation

at source.

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Examples in the OECD Models are: dividends from companies resident in that state and interest

derived from there.

c) The state of source may not tax: here, the state of residence of the tax payer alone has jurisdiction

to tax. Examples in the OECD Model are: business profit where there is no permanent

establishment in the state of source.

7.Apply the provisions for the elimination of double taxation Every one of the substantive articles

must be considered along with article 23 which sets out the methods for the elimination of double

taxation.

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VII. ROLE OF TAX TREATIES IN INTERNATIONAL TAX

PLANNING

Facilitates investment and trade flow, preventing discrimination between tax payers; Adds fiscal

certainty to cross border operations; Prevents international evasion and avoidance of tax;

Facilitates collection of international tax; Contributes attainment of international development

goal, and Avoids double taxation of income by allocating

taxing rights between the source country where income arises and the country of residence of the

recipient; thereby promoting cooperation between or amongst States in carrying out their

obligations and guaranteeing the stability of tax burden.

Tax incidence, therefore, becomes an important factor influencing the non-residents in deciding

about the location of their investment, services, technology etc. Tax treaties serve the purpose of

providing protection to tax payers against double taxation and thus preventing the discouragement

which taxation may provide in the free flow of international trade, international investment and

international transfer of technology. In addition, such treaties contain provisions for mutual

exchange of information and for reducing litigation by providing for mutual assistance procedure.

The agreements allocate jurisdiction between the source and residence country. Wherever such

jurisdiction is given to both the countries, the agreements prescribe maximum rate of taxation in

the source country which is generally lower than the rate of tax under the domestic laws of that

country. The double taxation in such cases are avoided by the residence country agreeing to give

credit for tax paid in the source country thereby reducing tax payable in the residence country by

the amount of tax paid in the source country.

These agreements give the right of taxation in respect of the income of the nature of interest,

dividend, royalty and fees for technical services to the country of residence. However, the source

country is also given the right but such taxation in the source country has to be limited to the rates

prescribed in the agreement.

So far as income from capital gains is concerned, gains arising from transfer of immovable

properties are taxed in the country where such properties are situated. Gains arising from the

transfer of movable properties forming part of the business property of a ‘permanent establishment

‘or the ‘fixed base‘ is taxed in the country where such permanent establishment or the fixed base

is located.

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So far as the business income is concerned, the source country gets the right only if there is a

‘permanent establishment‘ or a ‘fixed place of business’ there.

Income derived by rendering of professional services or other activities of independent character

are taxable in the country of residence except when the person deriving income from such services

has a fixed base in the other country from where such services are performed.

The agreements also provides for jurisdiction to tax Director’s fees, remuneration of persons in

Government service, payments received by students and apprentices, income of entertainers and

athletes, pensions and social security payments and other incomes.

It may sometimes happen that owing to reduction in tax rates under the domestic law taking place

after coming into existence of the treaty, the domestic rates become more favourable to the non-

residents. Since the objects of the tax treaties is to benefit the non-residents, they have, under such

circumstances, the option to be assessed either as

per the provisions of the treaty or the domestic law of the land.

In order to avoid any demand or refund consequent to assessment and to facilitate the process of

assessment, it has been provided that tax shall be deducted at source out of payments to non-

residents at the same rate at which the particular income is made taxable under the tax treaties.

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VIII. RECENT DEVELOPMENTS

MAURITIUS PROMISES INDIA FULL-COOPERATION ON TAX

TREATY ISSUES

Mauritius has promised full cooperation with India to address outstanding issues relating to their

bilateral tax treaty, days after Prime Minister Narendra Modi's visit to the island nation.

The much-talked about changes in India-Mauritius Double Taxation Avoidance Agreement

(DTAA) have been hanging fire for a long time, despite several rounds of official level talks

between the two sides.

Apprehensions persist that Mauritius is being used for round-tripping of funds into India even

though the island nation has always maintained that there have been no concrete evidence of any

such misuse.

Mauritius has been one of the largest sources for foreign direct investment in India and inflows

touched USD 7.66 billion in the April 2014-January 2015 period.

Reflecting the importance that Mauritius attaches to India, the reference about the bilateral tax

agreement was made by its Finance Minister Seetanah Lutchmeenaraidoo in his Budget speech,

"The clear statement made by Prime Minister Modi during his last visit in Mauritius has reassured

all stakeholders in the global business sector that India will do nothing to harm this sector,"

Lutchmeenaraidoo, who is also the Economic Development Minister, said, "We will cooperate

fully with Indian authorities to bring to a fruitful conclusion our discussions on outstanding issues

relating to the Double Taxation Avoidance Agreement (DTAA)," he said while presenting the

Budget for 2015-16.

Regarding Agalega island, the Finance Minister said that with the assistance of Indian

government "Rs 750 million will be invested in the construction of a new airstrip and new jetty

facilities"

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During his visit, earlier this month, Modi and his Mauritian counterpart Anerood

Jugnauth discussed the issues related to the tax treaty, "We appreciate that already India postponed

the consideration of the GAAR until 2017. However, we have stressed on the initiatives taken by

Mauritius to build substance within our offshore jurisdiction, "I have requested PM Modi to give

his full support on the DTAA as it is of prime importance for our global business sector," Jugnauth

had said during a joint press conference with Modi in Mauritisus on March 11.

In his response, Modi had said the two sides agreed to continue negotiations on the revised treaty

based on shared objectives to prevent the "abuse" of the convention.

He had also assured Mauritius that India would do nothing to harm its interests.

"I also conveyed our deep appreciation for the support and cooperation offered by Mauritius on

information exchange on taxation," Modi had said.

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IX. CASE STUDY

9.1. FACTS OF THE CASE

Andhra Pradesh High Court rules the double tax avoidance agreement between India and France

exempts the French drug maker from capital gains tax relating to 90% stake in Shantha Biotech.

In a landmark judgment, the Andhra Pradesh High Court (APHC) on 15 February ruled that the

French drug maker Sanofi Aventis, which (by buying another French firm ShanH) had acquired a

90% stake in the Hyderabad-based vaccine-maker Shantha Biotech in 2009, need not pay tax in

India.

The controversy dates back to 2006 when ShanH, a holding company, was incorporated in France

as a joint venture (JV) between Merieux Alliance (MA) and Groupe Industriel Marcel Dassault

(GIMD). The income tax authorities claimed that ShanH was formed as a shell company only with

the intention of avoiding tax. They sought to lift the corporate veil to understand the structure of

ShanH. Soon after its incorporation, ShanH acquired the Shantha stake in 2006. In 2009, it decided

to sell that stake. So, MA and GIMD, founders of ShanH, sold their ShanH holding to Sanofi

Pasteur Holding for an estimated Rs 3,700 crore. This MA-GIMD-Sanofi deal for ShanH had come

under the income tax radar. The income tax authorities had raised a claim for about Rs 700 crore

to be payable on account of capital gains. But Sanofi rubbished the claim in its petition. It said that

ShanH was formed to make it “from the very first day the owner of the shares of Shantha”.

MA (Sanofi) had contested the income tax department's claim and the issue has since been going

through rounds of adjudication. MA's contention is that the tax by the Indian authorities would

tantamount to double taxation which is sought to be avoided by an India-France Double Taxation

Avoidance Agreement (DTAA). Even Sanofi referred the tax issue to the Authority for Advance

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Rulings (AAR). However, the AAR ruled against Sanofi.and favoured the tax authorities. In

response, Sanofi approached the Andhra Pradesh High Court.

Citing the provisions of the India-France DTAA, Sanofi said in its petition that where shares of a

resident company of France are transferred, representing the participation of anything more than

10%, the capital gains are taxable only in France. Further, it contended, all other so-called rights,

properties and assets held by a French resident, when transferred and even if located in India, are

taxable in France. Citing an earlier order of the Supreme Court in the case of Vodafone

International Holdings, Sanofi said, “The situs of the shares would be where the company is

incorporated and where its shares can be transferred. The situs cannot be determined on the basis

of the location of the underlying assets.” After prolonged hearing, the APHC bench quashed the

rulings of the AAR and the notices of the tax authorities. The bench has made seven key

observations in the summary of its judgment. According to the bench:

1) ShanH is an independent corporate entity, registered and resident in France. It has commercial

substance and a purpose and is neither a mere nominee of MA and / or MA/GIMD nor is a

contrivance / device for tax avoidance.

2) Since inception (in 2006), ShanH (not MA or MA/GIMD) had acquired, and continues to hold,

the Shantha shares.

3) There is no warrant for lifting the corporate veil of ShanH and even on looking through the

ShanH corporate persona, there is no material to conclude that there is a design or stratagem to

avoid tax.

4) The capital gains arising as a consequence of the transaction in issue is chargeable to tax: and

the resultant tax is allocated to France (and not to India) under the DTAA.

5) The retrospective amendments to the Income Tax Act, 1961 (vide the Finance Act, 2012) have

no impact on interpretation of the DTAA; the transaction in issue falls within Article 14(5) of the

DTAA and the tax resulting there from is allocated exclusively to France.

6) The ruling dated November 28, 2011 of the AAR is unsustainable.

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7) The order of assessment dated May 25, 2010 (determining Sanofi to be an assessee in default,

under Section 201 of the Act) is unsustainable. The consequent demand notice dated May 25, 2010

and the rectification order dated November 15, 2011, being orders/ proceedings consequent to the

order dated May 25, 2010 are unsustainable.

The outcome of the case was a matter of interest for various other firms, particularly those

contemplating mergers and acquisitions in India but protected by the DTAA concerned. "The (AP)

High Court has clearly settled the law that the retrospective amendments have no impact on

interpretation of the treaty provisions," said Rohit Jain, partner with law firm Economic Laws

Practice that represented MA in the case. Analysts, too, expect the APHC order to encourage

foreign investments, particularly from countries having DTAA with India. For, the APHC has

provided clarity on how to interpret the provisions of the DTAA. "This order definitely gives boost

to foreign investors in the country. It is a very positive development because there is clarity that

such transactions are not liable for tax in cases of treaty agreements," said Vikram Doshi, partner

with consultancy firm KPMG. However, income tax authorities may exercise the option of

appealing against the APHC order in the Supreme Court. “I cannot comment anything on this

order. The decision on whether or not to appeal has to be taken by the income tax department,”

said S R Ashok, the counsel for the department.

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9.2. SUMMARY

Indian Income Tax Department (IT) filed a special leave petition (SPL) before the Supreme Court

against the ruling by Andhra Pradesh High Court in Sanofi-Aventis double tax case.

According to the report, in February 2013, the AP high court issued a ruling in favour of Sanofi-

Aventis, a French pharmaceutical company, in a case filed by the IT Department seeking taxation

of Sanofi's offshore transaction in India. The AP high court had ruled that transaction was only

taxable in France under the India-France double taxation avoidance pact (DTAA). In its plea before

the Apex Court, the IT Department had sought reconsideration of its ruling claiming that the high

court's interpretation of DTAA was erroneous.

Previously, the IT Department had demanded Sanofi to pay Rs 700 crores in capital tax gains in

the offshore transaction by Sanofi. Both the Authority for Advance Ruling’s order and the IT

Department’s demand notice for Rs 985 crores for tax and interest, and Rs 985 crores for penalty

were also rejected by AP High Court.

Sanofi's subsidiaries — Institut Merieux (IM), Groupe Industriel Marcel Dassault (GIMD) and

ShanH were also involved in the case. ShanH SAS, a French subsidiary of Merieux Alliance,

acquired by Sanofi Pasteur, bought a majority stake in Shantha Biotechnics in November 2008.

IM and GIMD held 80% and 20% shares in ShanH, which were sold to Sanofi Aventis in August

2009. Sanofi acquired 80% stake of Shantha Biotechnics in July 2009 at INR38 billion. The IT

Department claimed that Shantha Biotech has formed a shell company, ShanH, prior to signing a

tax avoidance deal. This claim was challenged by Sanofi in 2010.

The IT Department sought to bring tax from these transactions to India, citing retrospective

amendments to income-tax law in Budget 2012-13. Although the Division Bench ruled that the

transaction was not designed for tax avoidance, it was rejected in the High Court.

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9.3. QUESTIONS

Question-1: What did Sanofi Aventis appealed in its petition?

Question-2: What was the reason behind the controversy?

Question-3: Why were many firms interested in the outcome of the case?

Question-4: What is the outcome of the filed case?

Question-5: How could the judgement turn out to be beneficial to the economy?

Solution-1: Quoting the provisions of the India-France DTAA, Sanofi said that where shares of a

resident company of France are transferred, representing the participation of anything more than

10%, the capital gains are taxable only in France. Further, it contended that all other so-called

rights, properties and assets held by a French resident, when transferred and even if located in

India, are taxable in France.

Solution-2: The controversy started when the income tax authorities claimed that ShanH was

formed as a shell company only with the intention of avoiding tax because soon after its

incorporation, ShanH acquired the Shantha stake in 2006 and IN some time, founders of ShanH

sold their holding to Sanofi Pasteur Holding. This made the deal to come under Indian IT

Department radar which filed a petition for a payment of capital tax gains in the offshore

transaction by Sanofi.

Solution-3: The firms which were interested in the outcome were those firms which were

expecting mergers and acquisitions in India but were threatened by the Double Taxation

Avoidance Agreement (DTAA) with India. There was not much of clarity in the interpretation of

the provisions of DTAA.

Solution-4: The Andhra Pradesh High Court, in February 2013, ruled that the offshore transaction

was only taxable in France under the India-France DTAA and exempted the French drug maker

from capital gains tax relating to 90% stake in Shantha Biotech. In the judgment, the APHC issued

29

a ruling that the French firm Sanofi Aventis, which (by buying another French firm ShanH) had

acquired stake in Shantha Biotech, need not pay tax in India.

Solution-5: Many analysts, after the judgement, have said that AP High Court has clearly settled

the law that the ex post facto amendments have no impact on interpretation of the treaty provisions.

They also expect that the order will also encourage foreign investments in the country, particularly

from countries having DTAA with India. For, the APHC has provided clarity on how to interpret

the provisions of the DTAA.

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X. CONCLUSION

From the above study it can be said that Double Taxation Avoidance Agreement is very much

helpful for avoiding double taxation not only that double taxation avoidance agreement can

override the Income Tax Act, it is beneficial for the assessee too. But it should not be used in

wrong manners to promote double non taxation or to unnecessarily or illegally reduce the tax

liability or treaty shopping. It is essential that the Double Taxation Avoidance Agreement should

have a clear provision which prevents DTAA from misuse (example: provision for anti treaty

shopping etc).

So to conclude it can be said the Double Taxation Avoidance Agreement should be used for good

purposes like for the benefits of the assessee or to prevent a person from being taxed twice for the

same income it should not be misused.

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XI. BIBLOGRAPHY

http://taxguru.in/income-tax/double-tax-avoidance-agreements-taxation.html

http://articles.economictimes.indiatimes.com/2013-02-16/news/37133146_1_shanh-

shares-of-sanofi-india-india-and-france

http://www.thehindubusinessline.com/companies/sanofi-tax-case-centre-files-petition-in-

apex-court-against-ap-court-ruling/article4746880.ece

http://www.business-standard.com/article/companies/sanofi-aventis-gets-tax-reprieve-

from-high-court-113021500504_1.html

http://www.dnaindia.com/money/1800412/report-sanofi-gets-rs700-crore-relief-in-

double-tax-case

http://www.incometaxindia.gov.in/Pages/international-taxation/dtaa.aspx

http://articles.economictimes.indiatimes.com/2015-03-24/news/60439185_1_mauritius-

tax-treaty-double-taxation-avoidance-agreement

http://www.ibnlive.com/news/world/mauritius-promises-india-full-cooperation-on-tax-

treaty-issues-977172.html

https://en.wikipedia.org/wiki/Double_taxation