Offshore deal of 2009 held liable under Article 14(5) of tax treaty with France; all eyes now on apex court ruling in the Vodafone tax case.
In a significant ruling, pronounced Monday evening, the Authority for Advance Ruling (AAR) has held that the offshore share sale transaction between two French companies, Mérieux Alliance and Sanofi-Aventis, was taxable in India under Article 14(5) of India-France tax treaty.
The deal took place in 2009, wherein Sanofi-Aventis had acquired Mérieux Alliance’s French subsidiary ShanH, which, in turn, owned a majority stake in Hyderabad based vaccine company, Shantha Biotechnics.
Sanofi Aventis had in 2009 acquired Mérieux Alliance’s majority stake in Hyderabad-based vaccine firm Shantha Biotechnics in a deal that valued the company at €550 million (about `3,783 crore). Mérieux Alliance owned 80% in Shantha through its subsidiary ShanH — it is this stake Sanofi’s vaccine division, Sanofi Pasteur, acquired.
The tax department has calculated the tax liability on this deal at around Rs650 crore.
AAR, while ruling in favour of Revenue, is learnt to have held that the underlying assets of the Indian company were actually transferred through the offshore sale transaction.
AAR is also believed to have ruled that the transaction was a scheme to avoid tax.
While any ruling by AAR is binding only on the facts of the case, the Revenue is likely to use the ruling to further buttress its stand that offshore share deals whereby underlying assets are primarily in India, ought to be taxed.
All eyes will now shift to the impending Supreme Court judgment in the $2billion Vodafone tax case, where Hutch sold the shares of a Cayman Island company to Vodafone and claimed that it transferred a majority stake in Indian telecom Hutchison Essar through the share sale.
The taxman is vigorously contesting this case and won the case in Bombay High Court last year. Girish Dave, former chief commissioner of income tax, argued the matter on behalf of the IT Department.
When the acquisition was announced, Shantha’s fiscal sales were seen nudging $90 million (`433 crore) and industry experts had hailed the valuation as extremely good. It was the fourth major offshore deal in the pharma space since 2006 and Sanofi was expected to gain from Shantha’s state-of-the-art manufacturing facilities. In turn, the French firm would provide the Varaprasad Reddy-led firm new technologies and allow it to work on injectable polio and hepatitis-A vaccine products. Sanofi Pasteur would also support Shantha’s ongoing research and development programmes as a platform to address the need for high-quality affordable vaccination in international markets.
The writers are with taxsutra.com
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