The income tax department requested the SC to look into whether a foreign company, which has no business activity except holding shares in an Indian company and which was subsequently converted into a joint venture only for the purpose of holding shares in the Indian company, can be considered as a company with economic substance or can it be ignored being a puppet subsidiary for the purposes of imposing tax liability.
Sanofi, in 2009, bought a majority stake in SBL in an acquisition valuing the vaccine maker at around R3,800 crore. Sanofi acquired SBL by purchasing ShanH, which owned 80% of SBL, from the Merieux Alliance.
Although the deal was transacted in France, the income tax department in 2010 had raised a tax demand on Sanofi, holding that the underlying assets (i.e., shares of an Indian company) were being transferred and, therefore, the deal was subject to Indian tax laws.
Challenging the Andhra Pradesh high court's February 15 order that quashed the department's order against the French drug maker Sanofi Pasteur Holding, the revenue authorities in its SLP stated the HC erred in holding that ShanH is an independent corporate entity and that it has a commercial substance and a purpose.
According to the department, the HC erred in holding that the case does not warrant for lifting the corporate veil of ShanH and that there is no material to conclude that there is a design or stratagem to avoid tax.
It may be noted that the department had last year lost a case against Vodafone when the SC ruled in favour of the UK-based telecom firm in a $2- billion tax dispute stemming from Vodafones purchase of Hutchison Whampoas local mobile business in 2007.