Case of Authority for Advance Rulings, February 04, 2009 (case Compagnie Financiere Hamon Vs Director of Income Tax (International Taxation-1))

PresidentP.V. Reddi, J. (Chairman), A. Sinha and Rao Ranvijay Singh, Members
Resolution DateFebruary 04, 2009


Rao Ranvijay Singh, Member, (At New Delhi)

1. The applicant, M/s. Compagnie Financiere Hamon S.A., is a non-resident company incorporated in France and is engaged in the business of Project Engineering, construction and management. The applicant wanted to expand its air, fin coolers and heat recovery activities in India. For this purpose, Memorandum of Understanding (MOU) dated 25.2.1997 was entered into between the applicant and GEI Engineering/Industry Ltd., a listed public company, having registered office at Bhopal, India (hereinafter referred to as Indian Company). Subsequently, the applicant reportedly entered into a Joint Venture Agreement dated 29.9.1997 with the Indian company and their promoters. Pursuant to the agreement, the applicant decided to invest in the equity shares of the Indian company by way of preferential allotment. In the share holders agreement it was stated that the applicant would hold 30% of the equity share capital of the Indian company and would subscribe 29,95,000 equity shares at a price of Rs. 21 per share (face value of Rs. 10 plus premium of Rs. 11) giving way to total investment of Rs. 6.29 crores approximately. The approval of the RBI was also sought by the Indian company to issue requisite shares to the applicant. As per letter bearing No. 597/208(G-B)/97-98 dated 28.11.97, RBI granted approval under Section 19(1)(d) of the Foreign Exchange Regulation Act, 1973 and accordingly 29,95,000 equity shares were acquired by the applicant by way of making payments in foreign exchange.

2. The applicant further avers that in course of operations of the Indian company there arose various disputes relating to joint venture agreements among all the parties including the Indian company and the applicant. As a result, company petitions No. 90/2007 and 133 of 2007 were filed by the applicant before the Company Law Board (CLB) and they (CLB) desired the aforesaid litigation differences to be resolved amicably. Pursuant to the instruction of CLB, the applicant submits that the parties settled the disputes in terms of the Minutes of the Meeting (MOM) dated 13.2.2008 and executed the Memorandum of Settlement dated 6.5.2008. As per MOM and MOS, promoters of the Indian company i.e. Promoter No. 1, Mr. C.E.Fernandes and Promoter No. 4 Mrs. Everlyn Fernandes agreed to purchase 25 lakh shares owned by the applicant @ Rs. 65/- each resulting in total consideration of Rs. 16,25,00,000(Sixteen Crores and twenty five lakhs). All the parties to MOS agreed to applicant's retention of shares aggregating to 4,95,000. On 8.5.2008, the parties filed copies of MOM & MOS before CLB who passed an order dated 8th May 2008 wherein it was stated that MOM & MOS should be treated as part of the order. CLB further directed the parties concerned to withdraw the various complaints filed by them before implementing the terms of settlement. As stated, out of the total shares of 29,95,000 in the Indian company of the face value of Rs. 10 each, the applicant agreed to sell 25 lakh shares to the Indian resident promoter No. 1, namely Mr. C.E. Fernandes and the Indian resident promoter No. 4 namely Mrs. Everlin Fernandes @ Rs. 65 per share, fetching total consideration of Rs. 16,25,00,000. Further, promoters Nos. 2,3,5,6 and 7 have given their 'no objection' to the purchase of shares by promoter No. 1 and 4 from the applicant @ Rs. 65 per share. According to the applicant, till date legal expenses to the tune of Euros 1,49,445.00 equivalent to Rs. 89, 02,063 were incurred in course of pursuing the disputes before CLB and these legal expenses merit to be allowed as deduction under Section 48(1) of the Act..

3. Placed in the above backdrop, the applicant has sought advance ruling from the Authority on the following questions framed:

1. Whether on the stated facts and in law the tax payable on the long-term capital gains arising on the sale of originally purchased...

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