New Delhi: The Supreme Court is set to hear a petition challenging a Andhra Pradesh high court ruling that French drug maker Sanofi SA was not liable to pay tax in India for its acquisition of Shantha Biotechnics Ltd. Its decision will likely have a bearing on the taxability of cross border transactions.

The apex court on Wednesday issued notice to the parties in the matter.

The Union government, which approached the Supreme Court through a special leave petition, is also seeking a review of the principles used in judgements in the Vodafone and the Azadi Bachao Andolan cases.

The Azadi Bachao Andolan case relates to a Supreme Court judgement in 2003 which made it easier for companies to use the Mauritius route to avoid paying tax in India.

The high court had in February 2013 ruled against the income tax department and held that Sanofi was not liable to pay tax in India.

Sanofi bought a majority stake in Hyderabad-based Shantha Biotechnics in 2009 by purchasing ShanH, which owned 80% of Shantha, from French bioindustrial group Merieux Alliance.

Though the deal took place in France, the Indian tax department asked Sanofi to pay 985 crore in 2010 on the grounds that the underlying assets being transferred were in India.

While the high court verdict had mainly relied on the India-France double taxation avoidance agreement, it also used some of the precedents established by the Vodafone judgement.

The court held that it was common legal practice for multinational companies to have a holding company or subsidiary structure, and that the tax department cannot ignore these structures.

The Supreme Court had ruled last year that the income tax department had no jurisdiction over a $11.08 billion deal between Vodafone Group Plc. and Hutchison Telecoms that saw the UK-based company entering India.

In response, the government introduced retrospective amendments to tax laws allowing the income tax department to tax indirect transfers of shares if the underlying assets were in India.

It also introduced a validation clause that could override any court judgement.

Some of the apex court’s observations are working against the government in the lower courts where it is fighting similar cases against multinational and domestic companies involved in cross border acquisitions.

Analysts say the government is trying to fortify its position in case its retrospective amendments are declared void by the courts.

Two writ petitions have already been filed by companies in high courts challenging the constitutional validity of Section 9 of the Income Tax Act.

While McLeod Russel (India) Ltd has filed a petition in the Calcutta high court, SABMiller has filed a writ petition in the Bombay high court.

Sunil Jain, tax partner at law firm J. Sagar Associates, said the Supreme Court’s judgement in the present case will have repercussions for the government with respect to a number of appeals that it is contesting in various courts.

“The general principles laid down in its Vodafone judgement by the apex court will be used by taxpayers to argue their cases. There is this whole question about legitimate tax planning, tax avoidance and treaty shopping which needs to be addressed in a comprehensive manner," he said.

A query addressed to Sanofi’s legal team in Paris did not elicit any reply.

A Sanofi India spokesperson said there is no information yet from the legal team whether they have received the notice from the court.

monalisa@livemint.com

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