The Chennai Bench of the Income Tax Appellate Tribunal has ruled in favour of a French parent company in a significant intra-group reorganisation dispute.
The case, M/s. Valeo Bayen v. DCIT, centred on whether a share sale between group entities qualified for exemption under Section 47(iv) of the Income-tax Act, 1961.
Valeo Bayen, a French tax resident within the Valeo group, held two Indian subsidiaries: Valeo India Pvt. Ltd. and Valeo Service India Auto Parts Pvt. Ltd.
The dispute arose from a three-phase reorganisation in which the parent first consolidated full ownership of its subsidiary, then sold those shares to a fellow group company, and finally merged the two Indian entities.
The tax authorities rejected the taxpayer’s exemption claim, treating the entire consideration of INR 64,78,01,960 as taxable income from other sources.
The Revenue argued that the same consolidation could have been achieved through a direct merger, making the intermediate share sale unnecessary and designed to repatriate funds without tax.
The Tribunal rejected that framing, firmly restating that the Revenue cannot sit in the armchair of a businessman and dictate the manner in which business decisions are to be taken.
Central to the ruling was the Tribunal’s finding that ultimate beneficial ownership remained unchanged throughout, the underlying assets continued to exist in India, and nothing on record suggested the transaction was circular or devoid of real economic effect.
On the question of asset characterisation, the Revenue attempted to isolate a 40% stake acquired in 2018 and sold within eighteen months, arguing the shares were stock-in-trade rather than capital assets.
The Tribunal declined that narrow, temporal approach, instead applying a holistic assessment that gave primacy to the foundational 60% holding maintained since 2012.
This approach aligns with CBDT Circular No. 4/2007 and the ruling in Fidelity Northstar Fund, both of which direct tribunals to assess a taxpayer’s actual intent and conduct at the point of acquisition, not merely the holding period of a single tranche.
The Tribunal also found fault with how the Assessing Officer handled the valuation question, ruling that a DCF valuation cannot be discarded simply by comparing it to a Net Asset Value figure without identifying specific methodological defects.
Commentators have noted that the Revenue’s approach amounted to applying General Anti-Avoidance Rules scrutiny without engaging any of the statutory procedural safeguards those rules are designed to provide.
A further inconsistency identified in the judgment involved the Assessing Officer characterising the transaction as trade-like but then taxing the proceeds under the residuary head of income from other sources, rather than as business profits.
For a French tax resident with no permanent establishment in India, business profits would have attracted treaty protection under Article 7 of the India-France tax treaty, potentially rendering the gains untaxable in India altogether.
The ruling confirms that Section 47(iv) relief is not forfeited simply because a transfer forms one step in a broader restructuring, provided the statutory conditions are met and beneficial ownership remains undisturbed.
Advisers have cautioned against over-reading the decision, noting the Tribunal did not endorse the speed rationale on its merits but rather held the Revenue had no standing to demand a justification in the first place.
Groups undertaking similar reorganisations would be well advised to document the commercial rationale for each step contemporaneously, including any regulatory constraints that make an intermediate step a precondition rather than a mere embellishment.