The Andhra Pradesh High Court has ruled that France, not India, is entitled to Rs 650 crore in capital gains tax arising from the sale of Hyderabad-based Shantha Biotech to Sanofi Aventis. The judgement is likely to have a calming effect on foreign investors wary about India's stance on taxing offshore transactions.
The court's ruling, which came on a day when French President Francois Hollande was in India, clarifies that tax treaties override the controversial retrospective amendments that India made to the incometax law, experts said. In an order on Friday, Justices Goda Raghuram and MS Ramachandra Rao wrote that the transaction involving Shantha falls within the double-taxation avoidance pact between India and France and that the "tax resulting therefrom is allocated exclusively to France". Shares of Sanofi India closed 3.7% higher at Rs 2,323 on the National Stock Exchange.
The Rs 3,700-crore transaction involving vaccine maker Shantha, which has assets in India, took place in 2009 between French companies Merieux Alliance (the seller) and Sanofi Aventis. It was routed through a special purpose entity, ShanH, incorporated in France by Merieux in 2006.
The case was being closely monitored for signals about India's position on offshore transactions involving domestic assets as well as for other similar deals. Tax authorities have maintained that if an asset is located in India, any offshore deal involving it attracts capital gains tax. This contention was rejected last year by the Supreme Court in the case involving British telco Vodafone, which bought Hutchison Essar in 2007 through offshore entities and was asked to pay more than Rs 11,000 crore in tax.
Last year, when Pranab Mukherjee was the finance minister, the Income-Tax Act was amended to retrospectively tax Vodafone-like deals although the government said the case did not influence the change in law. This has led to worry among investors that India's tax regime is not stable, but prone to being manipulated from time to time. Since then, the government has said it will postpone the implementation of the General Anti-Avoidance Rules to 2016 and modify them based on the recommendations of a committee headed by taxation expert Parthasarathi Shome.
Although the Vodafone and Shantha deals involved assets based in India, the difference is that India and France have a treaty to avoid double taxation. The Vodafone deal too was an indirect purchase, but in the Cayman Islands — a British territory.
"I think it is a very welcome judgement in relation to all investors, because once again the courts have stepped in to protect investors," said Rohan Shah, managing partner at Economic Laws Practice, which represented Sanofi.
SR Ashok, the standing counsel for the income-tax department, said a decision on an appeal will be taken "soon".
Sanofi contested the tax demand before the Authority for Advance Rulings, an arm of the finance ministry. In 2011, the authority upheld the income-tax authorities' claim and observed the transaction appeared to be a scheme to avoid tax.
However, on Friday, the high court found that "there is no material to conclude that there is a design or stratagem to avoid tax".
Source:- http://economictimes.indiatimes.com/
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