Sanofi Should Be Made Liable To Pay Tax for Acquisition of Shantha Biotech

Sanofi's acquisition of Shantha Biotech

Pharmaceutical  sector is attracting many acquisitions in India
Pharmaceutical sector is attracting many acquisitions in India | Source

Your Vote Please

Do you think Sanofi is liable to pay tax for its acquisition of Shantha Biotech in India?

See results without voting

Tax Liability for Acquiring Shantha Biotech


Tax Issues Out Of Acquisition of Shantha Biotech

Sanofi is examining legal issues on the tax that have arisen out of is decision to acquire Shantha Biotech. Authority for Advance Rulings (AAR) has given its ruling that offshore sale agreements of firms with Indian assets are taxable. Now the French pharma major Sanofi Aventis is gearing itself to face a court battle with Income Tax authorities. Sanofi spent Rs.3700 crore for acquiring Shantha Biotech from another French company. In case of Vodafone, the Supreme Court had ruled that the company need not pay any tax. Though there are differences between the acquisitions of Vodafone and Sanofi, nevertheless Sanofi is hoping for a favourable judgement from the Indian courts as similarities between the two cases outnumber the differences. In both the cases, the buyer and the seller are non-residents and foreigners.

Offshore Sale Transaction

The offshore share sale transaction between Sanofi and Merieux Alliance enabled the former to acquire Shantha Biotech. AAR quoted Article 14(5) of India-France tax treaty to rule that the deal is taxable in India. AAR functions under the Finance Minister of the Central Government. Merieux Alliance held more than 90% of shares in Shantha Biotech, which manufactures vaccines in India. It was a very big deal in the Indian biotech sector involving a whopping Rs.3700 crore. The Income Tax Department has demanded Sanofi to pay Rs.650 crore to Indian government by way of capital gain tax. AAR feels that the offshore deal between the two French companies was a ploy to avoid paying tax in India. This is a correct stand on the part of the AAR and the IT department as the underlying assets that have been acquired are lying in India. Therefore IT Department is justified in taxing the sales under Section 195 o the Income Tax Act.

But The Underlying Assets Are Registered In India

The transfer of any Indian asset involves capital gains tax payable to the Indian tax authorities. Shantha Biotech is an Indian company having its assets in India. The profit made by Merieux through sales of shares of Shantha Biotech was generated in India even though the agreement itself could have been penned in a foreign country. Tax specialists are of the unanimous opinion that the tax has to be paid for this transaction in India. Sanofi had an obligation to pay withholding tax to the Indian tax authorities before paying to Merieux. But Sanofi did not do this. Therefore Indian Income Tax authorities served a tax notice on Sanofi in September 2010 demanding tax payment which was due. But Sanofi communicated to the IT department that it was not liable to pay any tax to the Indian authorities as the entire transaction took place in a foreign country.

Sanofi Should Be Made Liable To Pay Tax for Acquisition of Shantha Biotech

Pharma sector is attracting foreign attention

Pharma sector is attracting foreign attention
Pharma sector is attracting foreign attention | Source

Sanofi Should Be Made Liable To Pay Tax for Acquisition of Shantha Biotech


Similarities with Vodafone Case

We are going to witness another long drawn out legal battle in this case as Sanofi is fighting to the finish to avoid paying tax. Sanofi has been encouraged by the Vodafone case. Are there any parallels between the Vodafone case and the Sanofi case now? Let us analyse. Two years back, Vodafone bought 67% stake in Hutchison Essar. After the acquisition, Hutchison has been renamed as Vodafone Essar. Hutchison Whampoa, the Hong Kong based company controlled Hutchison Essar as its Indian subsidiary. The control was exercised through a company registered in Cayman Islands. Vodafone bought this company registered in Cayman Islands to take over Hutchison Essar. The tax authorities in India slapped a whopping $2 billion as tax for this transaction. Vodafone fought the case tooth and nail and got reprieve from the Supreme Court. But the government of India has appealed against this judgement, quoting more than hundred points in favour of reversing this judgement.

Sanofi Can Escape Tax Liability

If we accept Supreme Court judgement as final and binding, then probably Sanofi can also escape from any tax liability as there are quite a number of similarities between the two cases though they are not exactly equal. In case of Vodafone, Vodafone took control of the foreign company registered in Cayman Islands. In case of Sanofi, Sanofi acquired ShanH, the subsidiary which controlled Shantha Biotech. This subsidiary ShanH was also incorporated outside India. Another French company Groupe Industrial Massel Dass Ault (GIMD) also had a stake in ShanH. Sanofi acquired in 2009 the stakes of both the companies GIMD and Merieux in ShanH. Therefore there is every parallel between the Vodafone case and Sanofi case.

Income Tax Amendment

Income Tax Department has quietly made an amendment in its rules which says that the buyer of Indian assets will have to pay the tax if the seller does not pay it. The payment includes penalty for not withholding the tax. This is understandable. Merieux did not pay any tax to the Indian government after selling the shares of Shantha Biotech it held to Sanofi. The government of India and the IT department do not have any hold on Merieux. But the government can enforce its rules and collect the tax with penalty from Sanofi as its acquired the assets of Shantha Biotech, which is in India.

Confusion about Tax Liability Persists

But inspite of all these amendments, many offshore treaties are waiting in the wings with confusion about the tax liability that may arise out of it. The methodology for computing tax for offshore dealings should be clearly and unambiguously finalised by the Income Tax department so that there is no confusion over such deals. I feel that even the Supreme Court judgement is wrong and the Income Tax Department is right. When Indian assets are involved, definitely any deal is taxable in India. I hope that the Supreme Court will correct its earlier judgement after the appeal is heard.

More by this Author

  • Symphony Dominates Air Cooler Market
    0

    Air coolers are best suited to people living in the interior away from the sea. For those who live within fifty kilometres of sea coast, air coolers are difficult to maintain and they should opt for air conditioners....


Comments

No comments yet.

    Sign in or sign up and post using a HubPages Network account.

    0 of 8192 characters used
    Post Comment

    No HTML is allowed in comments, but URLs will be hyperlinked. Comments are not for promoting your articles or other sites.


    Click to Rate This Article
    working