India: Sanofi Wins The Indirect Way - !!!!!!

Introduction

Taxation Environment in a Country has also been and always remains a matter of concern for foreign investors. A foreign investor always looks for certainty and favorable taxation environment. There has been a lot of ambiguity in taxation atmosphere in India. Last year has seen a lot of developments in taxation scenario in India, starting from the Vodafone judgment, amendments in Income Tax Act, 1961 following the Vodafone judgment, revision and deferment of GAAR [General Antiavoidance rules ] till 2016. Recent judgment of Andhra Pradesh High Court in the case of Sanofi Pasteur Holding SA comes as a breather for foreign investors1.

Brief facts of case

In the present case, Sanofi Pastuer Holding (Sanofi), a company incorporated under the laws of France had purchased 80.37% of the share capital of another French company (i.e. ShanH) from Merieux Alliance (MA), a French company, and a balance 19.63 % share capital of ShanH from Groupe Industrial Marcel Dassault (GMID), another French company. ShanH held 82.5% of the share capital of Shantha Biotechnics Limited (SBL), a company incorporated under the Companies Act, 1956.

The tax Department passed an order on Sanofi dated 25 May 2010 under Section 201(1)/(1A) of the Act, holding Sanofi as an 'Üassessee-in default'" for not withholding taxes n payments made to MA and GMID on acquisition of shares of Shanh. MA and GMID made an application to the Authority for Advance Ruling (the AAR) on the taxability of the transaction. The AAR in November 2011 ruled that the capital gain arising from sale of shares of ShanH by MA and GMID was taxable in India in terms of Article 14(5) of the tax treaty.

Sunsequently, both the parties i.e. the Buyer (Sanofi) and Sellers (MA and GMID) filed writ petitions before Andhara Pradesh High Court (High Court).

1) Is ShanH not an entity with commercial substance; is a sham or illusory contrivance, a mere nominee of MA and/or MA/GIMD being the real, legal and beneficial owner(s) of SBL shares; and a device incorporated and pursued only for the purpose of avoiding capital gains liability under the Act ?

2) Was the investment, initially by MA and thereafter by MA and GIMD through ShanH in SBL, a colourable device designed for tax avoidance? If so, whether the corporate veil of ShanH must be lifted and the transaction (of the sale of the entirety of ShanH shares by MA/GIMD to Sanofi) treated as a sale of SBL shares?

3) Is the transaction (on a holistic and proper interpretation of relevant provisions of the Act and the DTAA), liable to tax in India?

4) Whether retrospective amendments to provisions of the Act (by the Finance Act, 2012) alter the trajectory or impact provisions of the DTAA and/or otherwise render the transaction liable to tax under the provisions of the Act?

5) Whether the AAR ruling dated 28-11-2011 is sustainable? If not, what is the appropriate relief that could be granted to the petitioners (in W.P. Nos. 3339 and 3358 of 2012); and whether the orders by the Revenue dated 25-05-2010 and 15-11- 2011 are valid and sustainable? and 6) Whether the order dated 25-05-2010 (challenged in W.P. No. 14212 of 2010) determining the petitioner- Sanofi to be an 'assessee in default' in respect of payments made by it to MA and GIMD for acquisition of ShanH shares, u/S. 201(1) of the Act; the consequent notice of demand dated 25-05-2010; and a rectification order dated 15-11-2011 (u/S. 154 of the Act) re-computing the long-term capital gain, the tax thereon and the consequent interest, are valid ?

Observations and decision of High Court2

1) The Court observed that ShanH has a commercial existence, which is distinct from that of MA and GMID. Main object of incorporation of ShanH was to serve as a an investment vehicle in other words for pumping foreign direct investment in India and this was done by way of participation in SBL. Also, the receipt of dividends by ShanH as a shareholder in SBL is indicative of the fact that ShanH is a distinct entity as the dividends distributed by SBL are chargeable tax under the Indian law.

2. On going through all the transactional documents, it was observed that ShanH was not established for the purpose of avoiding capital gains liability under the Indian Income tax Act of 1961. ShanH was incorporated in conformity with MA'"s established business practices and organizational structure.

The fact that ShanH was not incorporated for the purpose of avoidance of tax was reaffirmed by the fact that a higher rate of capital gain tax is payable and has been remitted to revenue in France. Tax Department failed to establish that ShanH was interposed only as a tax avoidant device and hence no case of piercing or lifting of corporate veil of ShanH was made out. The court observed that is in existence as a rtegistered French resident corporate entity and as the legal and beneficial owner of shares of SBL and hence the principlae of piercing of corporate veil of ShanH could be made our.

3. According Article 14(5) of the India- France Double Taxation Avoidance of 'Gains from the alienation of shares representing a participation of at least 10 per cent in a company which is a resident of a Contracting State may be taxed in that Contracting State.'

Therefore the present case falls within the taxation territory of Spain and not India. Controlling stake of ShanH over the assets and management of SBL cannot be distinguished from its shareholding and hence cannot be treated as a separate asset Therefore the given transaction cannot be taxed in India keeping in view thw provisions of the DTAA between India and France.

4. The amendment of provisions of the Indian Income Tax Act, 1961are intended to curb certain mischief targeted to prevent tax avoidance and nowhere are in conflict or alter the provisions of India Spain DTAA and therefore are not applicable to present case.

5. The finding of AAR that capital gains arising out of the present transaction were taxable in India was unsustainable as the transaction did not involve any tax avoidance. There was no liability on part of Sanofi to deduct tax at source while making payments to MA nad GMID for acquisition of shares of ShamH as the same is contingent upon capital gains arising and being chargeable under the Income Tax Act, 1961 and since it is not approved that the present transaction is chargeable to tax, therefore no liability on Sanofi to deduct is established.

Conclusion

The decision of Andhara Pradesh High Court has been welcomed by many present and prospective foreign investors and has been seen as a positive sign of stability for foreign investments. Court restrained itself from applying the principle of lifting of corporate veil because according to its observations the present transaction was not for the purpose of avoiding tax and circumventing Indian Taxation laws. The court rightly upheld the principles of India- France DTAA. Tax treaty between two countries is signed to provide relief from double taxation of same international transaction and the capital gains arising in the present transaction have already been taxed in France and the same cannot be taxed again in India, providing for such double taxation of the same transaction will in no way serve the principles of equity and justice. This case also provided an example of harmonious interpretation of amendments introduced in the Income Tax Act, 1961, (in light of Vodafone judgment) and that of tax treaty signed between two countries.

Footnotes

1. Sanofi Pastuer Holding SA v. Dept of Revenue [2013] 30 taxman.com 222 (AP)

2. KPMG issue dated 19.02.2013 on Capital gains arising from transfer of shares of a France Company which in turn held controlling stake in an Indian operating company is taxable in France and not in India

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
JSA Advocates & Solicitors
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
JSA Advocates & Solicitors
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions