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


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.


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.


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

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