SANOFI’S SHANTHA BUYOUT TO ATTRACT CAP GAINS TAX

SANOFI'S SHANTHA BUYOUT TO ATTRACT CAP GAINS TAXCompanies and tax professionals tracking Vodafones $2-billion dispute with the Indian tax authorities may make a mental note of a similar case relating to Shantha Biotech, a Hyderabad-based pharma company. On Monday, the Authority for Advance Rulings (AAR) a quasi-judicial authority ruled the French company that sold its controlling interest in Shantha Biotech to another French company will have to pay capital gains tax to the Indian government, even though the deal was cut outside India. The AAR bench took a view that since the assets and businesses of Shantha are based in India, tax cannot be avoided, though the shares and money changed hands abroad. French company Merieux Alliance (MA) held majority stake in Shantha through a subsidiary, ShanH, incorporated outside India. Groupe Industrial Massel Dass Ault (GIMD), another French company, also had a stake in ShanH. In 2009, both MA and GIMD sold their stakes in ShanH to Sanofi, another French company, for.Rs.2, 500 crore. With this, Sanofi took control of Shantha from MA and GIMD, as the offshore entity (ShanH) holding Shantha shares was bought over by Sanofi. The transaction closely resembles British company Vodafones acquisition of a controlling interest in Indian telecom major Hutch-Essar from Hong Kong-based Hutchison International. Here, as in the Shantha deal, the buyer and seller were both nonresidents. But the Income-Tax Department insisted that tax was payable in India because the ownership of an Indian company passed from one hand to another. The matter is pending before the Supreme Court. The AAR has ruled that the Shantha transaction was simply aimed at avoiding tax in India. The AAR decision will have a bearing on similar crossborder transactions, said Sanjay Sanghvi, partner at Khaitan & Co, a law firm. The question that crops up is: do the French companies MA and GIMD pay the tax in India or France Both MA and GIMD approached the AAR, asking it to decide whether capital gains tax was payable in France or India. According to the French companies, tax should ideally be paid in France as both companies are incorporated in France. Under the provisions of the Indian Income-Tax Act and Double Tax Avoidance Agreement (DTAA) between India and France, the companies were not required to pay tax in India, the French companies had claimed. They had also argued that the Indian Income-Tax Act cannot be invoked in this case, as the transaction was outside its territorial jurisdiction. But, the Income-Tax Department held that the whole transaction was part of a scheme to avoid tax in India. Since the capital gains arose in India, such gains were taxable in India under the India-France DTAA, it said. The French companies had argued that all parties involved in the transaction held valid Tax Residency Certificates issued by the French Tax Office, and thus the transaction was not a mechanism for avoiding tax in India. The AAR on Monday said, On a look at the series of transactions from the commencement of the ShanH, it appears to be a preordained scheme to produce a given result, viz. to deal with assets to control ShanH without actually dealing with the shares of Shantha or its assets and business. The scheme adopted has to be seen as one for avoiding payment of capital gains which would otherwise arise if the shares of the Indian company had been transferred, leading to the same result as now achieved. - www.economictimes.indiatimes.com