Sanofi gets Rs700 crore relief in double tax case

In a landmark judgment, the Andhra Pradesh High Court (APHC) on Friday ruled that the French drugmaker Sanofi Aventis, which (by buying another French firm ShanH) had acquired a 90% stake in the Hyderabad-based vaccine-maker Shantha Biotech in 2009, need not pay tax in India.

The controversy dates back to 2006 when ShanH, a holding company, was incorporated in France as a joint venture (JV) between Merieux Alliance (MA) and Groupe Industriel Marcel Dassault (GIMD).

The income tax authorities claimed that ShanH was formed as a shell company only with the intention of avoiding tax. They sought to lift the corporate veil to understand the structure of ShanH.

Soon after its incorporation, ShanH acquired the Shantha stake in 2006. In 2009, it decided to sell that stake. So, MA and GIMD, founders of ShanH, sold their ShanH holding to Sanofi Pasteur Holding for an estimated Rs 3,700 crore.

This MA-GIMD-Sanofi deal for ShanH had come under the income tax radar. The income tax authorities had raised a claim for about Rs 700 crore to be payable on account of capital gains.

But MA (read Sanofi) rubbished the claim in its petition. ShanH, it said, was formed to make it “from the very first day the owner of the shares of Shantha”.

MA had contested the income tax department's claim and the issue has since been going through rounds of adjudication.

MA's contention is that the tax by the Indian authorities would tantamount to double taxation which is sought to be avoided by an India-France Double Taxation Avoidance Agreement (DTAA).

Even Sanofi referred the tax issue to the Authority for Advance Rulings (AAR). However, the AAR ruled against Sanofi.and favoured the tax authorities. In response, Sanofi approached the Andhra Pradesh High Court.

Citing the provisions of the India-France DTAA, Sanofi said in its petition that where shares of a resident company of France are transferred, representing the participation of anything more than 10%, the capital gains are taxable only in France.

Further, it contended, all other so-called rights, properties and assets held by a French resident, when transferred and even if located in India, are taxable in France.

Citing an earlier order of the Supreme Court in the case of Vodafone International Holdings, Sanofi said, “The situs of the shares would be where the company is incorporated and where its shares can be transferred. The situs cannot be determined on the basis of the location of the underlying assets.”

After prolonged hearing, the APHC bench of Justices Goda Raghuram and M S Ramachandra Rao quashed the rulings of the AAR and the notices of the tax authorities.

The bench has made seven key observations in the summary of its judgment running into 200-odd pages. According to the bench:

1) ShanH is an independent corporate entity, registered and resident in France. It has commercial substance and a purpose and is neither a mere nominee of MA and / or MA/GIMD nor is a contrivance / device for tax avoidance.

2) Since inception (in 2006), ShanH (not MA or MA/GIMD) had acquired, and continues to hold, the Shantha shares.

3) There is no warrant for lifting the corporate veil of ShanH and even on looking through the ShanH corporate persona, there is no material to conclude that there is a design or stratagem to avoid tax.

4) The capital gains arising as a consequence of the transaction in issue is chargeable to tax: and the resultant tax is allocated to France (and not to India) under the DTAA.

5) The retrospective amendments to the Income Tax Act, 1961 (vide the Finance Act, 2012) have no impact on interpretation of the DTAA; the transaction in issue falls within Article 14(5) of the DTAA and the tax resulting there from is allocated exclusively to France.

6) The ruling dated November 28, 2011 of the AAR is unsustainable.

7) The order of assessment dated May 25, 2010 (determining Sanofi to be an assessee in default, under Section 201 of the Act) is unsustainable. The consequent demand notice dated May 25, 2010 and the rectification order dated November 15, 2011, being orders/ proceedings consequent to the order dated May 25, 2010 are unsustainable.

The outcome of the case has been a matter of interest for various other firms, particularly those contemplating mergers and acquisitions in India but protected by the DTAA concerned.

"The (AP) High Court has clearly settled the law that the retrospective amendments have no impact on interpretation of the treaty provisions," said Rohit Jain, partner with law firm Economic Laws Practice that represented MA in the case.

Analysts, too, expect the APHC order to encourage foreign investments, particularly from countries having DTAA with India. For, the APHC has provided clarity on how to interpret the provisions of the DTAA.

"This order definitely gives boost to foreign investors in the country. It is a very positive development because there is clarity that such transactions are not liable for tax in cases of treaty agreements," said Vikram Doshi, partner with consultancy firm KPMG.

However, income tax authorities may exercise the option of appealing against the APHC order in the Supreme Court. “I cannot comment anything on this order. The decision on whether or not to appeal has to be taken by the income tax department,” said S R Ashok, the counsel for the department.