SC slaps notice on Sanofi over cross-border deal

Written by Indu Bhan | Indu Bhan | New Delhi | Updated: Sep 5 2013, 14:29pm hrs
In a case similar to the Vodafone groups $2-billion tax dispute, the Supreme Court on Wednesday asked French drug major Sanofi SA to explain why it should not pay tax to the tune of around R1,058.07 crore on a cross-border merger involving Indian assets of Hyderabad-based Shantha Biotechnics (SBL).

A bench headed by Justice AR Dave sought reply from the French firm after the income-tax department challenged the Andhra Pradesh high court's February 15 order that ruled in favour of Sanofi Pasteur Holding SA.

It also posted the matter for further hearing on January 14 and asked the parties to file short notes.

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.

Sanofi in 2009 bought a majority stake in SBL in an acquisition valuing the vaccine maker 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 raised a tax demand on Sanofi, holding that the underlying assets (shares of an Indian company) were being transferred and, therefore, the deal was subject to Indian tax laws.

The government in this case has once again questioned the rationale of the Supreme Court's January last years judgment in the Vodafone case. The finance ministry has asked the top court to review the judgments in the Vodafone International Holdings matter and the Azadi Bachao, as both are in conflict with the decision of a Constitution Bench of five judges in the M/s McDowell case.

Solicitor-general Mohan Parasaran, appearing for the finance ministry, requested the apex court 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 purposes 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.

However, senior counsel Porous Kaka, on behalf of the French firm, argued that the case relates to the two French companies selling joint venture firm to another company in the jurisdiction of France, which is not a tax haven but has a tax treaty with India.

There is no dispute on the genuineness of the companies. It's just about interpreting tax treaty between the two countries and is not as complicated as it sounds, he argued.

On a careful consideration of all the documents, conduct and intent, the transaction had resulted in transfer of capital asset in India whereby capital gains has arisen to Merieux Alliance (a company incorporated in France)/Groupe Industriel Marcel Dassault in India, the petition stated.

Therefore, under the Double Taxation Avoidance Agreement between India and France, according to the department, the right to tax the income arising out of the transaction has been allocated to India, which is the source country in which the asset sought to be transferred is situated and, therefore, the capital gains arising out of the transaction is taxable in India under Income Tax Act, 1961.