No CG tax on Sanofi for Shantha deal: HC

Written by feBureau | Hyderabad/New Delhi | Updated: Feb 16 2013, 08:17am hrs
Shantha dealShantha deal
In what showed the limitation of Indias recent retrospective amendments in tax laws concerning indirect transfers abroad of Indian assets, the Andhra Pradesh High Court on Friday ruled that notwithstanding the bolstered law, French drug multinational Sanofi need not pay capital gains tax in India for its acquisition of Hyderabad-based vaccine manufacturer Shantha Biotech in 2009. The court said Sanofi, which is liable to pay tax in France for the R3,800-crore deal, wont have to pay tax in India also thanks to the protection afforded by the Indo-French tax treaty.

The Indian tax authorities had asked Sanofi to pay over R650 crore as capital gains tax.

Sanofi Aventis, as it was then known, had bought out Shantha Biotechnics through acquisition of ShanH, which held a majority stake in Shantha. ShanH, the French subsidiary of Merieux Alliance, had earlier bought out Shantha in November 2008. The court held that ShanH was a company with commercial substance and so the deal was eligible for treaty protection.

The government is likely to challenge the order in the Supreme Court.

The HC ruling have positive implications for at least a couple of similar cross-border deals where the buyers face Indian tax demands, including British brewing giant SAB Miller which bought out Fosters Group for $10.2 billion in September 2011. SAB Miller claims that the transaction enjoyed protection of the India-Australia double taxation avoidance agreement (DTAA).

Rajiv Chug, partner, direct tax, Ernst & Young said: As long as the entity in the treaty-partner country has commercial substance and is not a sham entity or mere nominee, the treaty protection is bound to be there.

However, the high courts ruling on Friday will have little effect on the high-profile Vodafone case, as the relevant deal did not enjoy any duty protection. The government is apparently having a rethink on the retrospective amendments of Section 9 of the Income Tax Act meant to tax deals similar to Vodafone involving offshore transfer of shares, which have derived value substantially from assets located in India.

Separately, informal talks are on with Vodafone on reaching an amicable settlement over the R11,000-crore tax demand raised. As the law stands today, the amendment covers all such offshore transactions.

The Parthasarathi Shome committee has voted against retrospective applicability of the law on indirect transfer of assets brought in through the Finance Act, 2012, but proposed some clarifications that would substantially reduce the irritant nature of the law, regardless of whether past cases remain within its domain. It said the government should apply the provision only to the taxpayer who earned capital gains (the seller) and suggested that no taxpayer in such cases be asked to pay interest and penalty on the tax computed.

The Sanofi case came up for hearing in the high court on Friday and law firm Economic Laws Practice appeared for the petitioners. Talking to FE, Rohit Jain, partner, Economic Laws Practice, said: This is a good judgment and sets out the law as applicable by the Indo-French treaty which continues even after retrospective amendments. The deal is not taxable as per the Indo-French treaty.

ShanH is an independent corporate entity, registered and resident in France. ShanH has commercial substance and a purpose and is not a nominee of Merieux Alliance, the law firms said. Since its inception in 2006, ShanH acquired and continues to hold shares in Shantha Biotechnics and there is no warrant to lift the corporate veil in the present circumstances.

According to the counsel, the transaction of the sale of shares of ShanH by the French company Sanofi is not a design for tax avoidance. The transaction is chargeable to tax in France, in terms of the provisions of the DTAA, and retrospective amendments to the Act have no impact on the DTAA.

Earlier also, giving a blow to the revenue authorities in their pursuit of taxing cross-border deals, the Andhra Pradesh High Court had dismissed the tax mans plea against the Authority for Advanced Rulings (AAR) admission of Sanofis application regarding the Shantha Biotech deal. Sanofi had approached the AAR to determine the taxability of the deal. The AAR had concluded that the transaction was a preordained scheme to avoid tax in India and share transfer was taxable in India. Among other arguments, Sanofi had relied on the Indo-French treaty to defend its position that the gains are not taxable in India. Sanofi had argued that there was no alienation in shares of the Indian company.

Bbooster shot

* French drug multinational Sanofi is liable to pay tax in France for the R3,800-crore Shantha Biotech deal

* The HC ruled Sanofi wont have to pay tax in India thanks to the protection afforded by the Indo-French tax treaty

* Indian tax authorities had asked Sanofi to pay over Rs.650 crore as capital gains tax for the 2009 deal

* Ruling has positive implications for at least a couple of similar cross-border deals, including SAB Miller