Hyderabad/Mumbai: The Andhra Pradesh high court on Friday quashed an income-tax (I-T) order against French drug maker Sanofi SA demanding around Rs.985 crore on a cross-border merger involving Indian assets, in a case resonant of the Vodafone Group Plc tax dispute.
Sanofi in 2009 bought a majority stake in Hyderabad-based Shantha Biotechnics Ltd in an acquisition valuing the vaccine maker at €550 million (around Rs.3,965 crore today). Sanofi acquired Shantha by purchasing ShanH, which owned 80% of Shantha Biotechnics, from the Merieux Alliance.
Although the deal was transacted in France, the I-T department in 2010 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. Sanofi challenged the I-T order in the Andhra Pradesh high court.
On Friday, a division bench comprising justices Goda Raghuram and M.A. Ramachandra Rao ruled that “there is no material to conclude that there is a design or stratagem to avoid tax” in the transaction.
“The capital gain arising as a consequence of the transaction in issue is chargeable to tax; and the resultant tax is allocated to France (not to India) under DTAA,” ruled the judges. DTAA is short for double-taxation avoidance agreement.
The ruling comes amid concerns over several tax demands raised by the I-T department, which last year lost a case against Vodafone when the Supreme Court ruled in favour of the UK-based telecom firm in a $2 billion (Rs.10,800 crore today) tax dispute stemming from Vodafone’s purchase of Hutchison Whampoa’s local mobile business in 2007.
The government later amended the tax law, enabling it to make retrospective tax claims on corporate deals, sparking concerns among investors.
“It’s an important judgement in terms of protecting the rights of foreign investors. It’s important that the courts have once again stepped in...to protect the interest of investors,” said Rohan Shah, a managing partner at Economic Laws Practice, who represented Sanofi in the case.
The ruling meant that the provisions of DTAA will prevail in such disputes and the amendment to the tax law wouldn’t affect that, Shah said.
“It is a critical order on the issues of the primacy of India’s tax treaty obligations,” he said.
S.R. Ashok, a senior counsel who represented the I-T department in the case, refused to comment on the judgement.
“It is up to the tax authority to take a decision on whether to challenge the order in the Supreme Court or not,” Ashok said.
The I-T department argued that the tax law amendment was also applicable for interpreting the provisions of DTAA in the case of Sanofi.
“The retrospective amendments to the Income-Tax Act, 1961 (vide the Finance Act, 2012) have no impact on interpretation of the DTAA; and the tax resulting therefrom is allocated exclusively to France,” the high court order said.
A spokesperson for Sanofi said the company was reviewing the contents of the ruling and that it “is too early for us to make any further comment at this stage”.
The Andhra Pradesh high court judgement, according to tax experts, will have an impact on similar cases that are being fought between the tax department and foreign firms.
Other ongoing disputes include Tata Industries’ purchase of AT&T Corp.’s stake in Idea Cellular Ltd for $150 million, Vedanta Resources Plc’s purchase of a 51% stake in Sesa Goa Ltd for $981 million through its wholly owned foreign subsidiaries, and DBZ Mauritius’s sale of its 3.28% stake in Quippo Telecom to Mauritius-based fund Geraldton Finance Ltd in 2010, among others.