Income Tax departments across the world have a reputation to live up to. Especially in times where their Government’s coffers are stretched and the outlook is bleak. Cash is King, and Income Tax officials are under that much more pressure to do whatever it takes bring the cash in.
Hence over the past few years a specific target has been “cash rich” foreign investors in India. Those who make their money in India but use so called fancy offshore structures to avoid paying tax. Well to the guy on the street who works damn hard to earn a buck or two and gets his income deducted at source as he does not have the ability to even contemplate fancy tax planning – he’ll be obviously rooting for the IT officials to go catch the fat cats who “plunder our nation” and don’t pay their fair share. Telecom giant Vodafone has of course being the biggest and most notable target.
But it’s not as simple as good cops chasing bad guys, and all ends happily. Tax planning and the legality of “avoiding” (as opposed to “evading”) has always been an accepted facet of economies globally. India being no exception.
Hence when I heard the news that the Andhra Pradesh High Court yesterday had ruled that the French pharmaceutical giant Sanofi will not have to pay £250 million capital gains tax and penalties that were levied by the Income Tax authorities to acquire it’s acquisition of Hyderabad-based Shantha Biotech in 2009, I felt some balance was being brought back into the system – albeit belatedly through the judiciary.
The High Court considered the Indian I-T department’s tax demand was unsustainable. It ruled according to the provisions of the double taxation avoidance agreement (DTAA) between France and India, the transaction is taxable in France and not in India. Though of course the Supreme Court has led the way with the Vodafone, such judgments still take guts. But in my view we now have a sensible precedent. Well, so long at the Indian government don’t persist with enforcing retrospective legislation.
In fact Justice Raghuram said that the retrospective amendments to the Income Tax Act, 1961, through the Finance Act, 2012, have no impact on the interpretation of DTAA and the tax arising out of the deal was to be paid in France.
Apart from Sanofi Aventis, three other companies – Merieux Alliance, ShanH and GIMD – were also involved in the case. Sanofi had acquired Shantha Biotechnics, a Hyderabad based company for around £500 million through a transaction in 2009. Sanofi had acquired ShanH, which held a majority stake in Shantha Biotechnics. ShanH, the French subsidiary of Merieux Alliance, had bought a majority stake in Shantha Biotechnics in November 2008.
The I-T authorities had demanded a capital gains tax of £250 million on the deal on the grounds that Sanofi had created a “puppet company” to evade taxes, with ShanH being incorporated by Sanofi just six days before the Shantha Biotech buyout deal was executed.
However, in its ruling, the Judges said: “ShanH is an independent corporate entity registered and based in France. It has a commercial substance and a purpose (FDI in Shantha Biotech) and is neither a mere nominee of other French companies nor is a device for tax avoidance. Since inception in 2006 till date, ShanH had acquired and continues to hold Shantha Biotech shares.”
The High Court therefore held that the capital gain arising as a result of the transaction was liable to be taxed – but in France and not in India under the double taxation avoidance agreement between the two countries. The fact all along in this case was that Sanofi was saying it agreed that tax had to be paid somewhere, but it’s interpretation, and in my view rightly, was that the tax had to be paid on this occasion in France. And that’s precisely what it had done, as otherwise it would amount to double taxation. This is also precisely why governments the world over seek to help legitimate enterprise by signing such treaties.
Let’s not also forget that in the world where India Inc goes global, the shoe will more frequently now be on the other foot. At that time I am sure the Indian government will seek to bat from the otherside. It’s therefore better to be long term and sensible – clearly as the tide turns towards Indian companies doing more and more deals globally and likewise will wish to seek the benefits of tried and tested double taxation avoidance regimes.
So in my view, this judgement helps to further establish the precedent that the Vodafone judgement set. It gives a signal that the Indian judiciary can be clear and independent, and that despite understandable domestic pressures to get the cash in, the law is the law. That can only be a good sign.
This current government has alas singularly been unable or unwilling to portray the message over the past few years that India is open for business. Thankfully the separation of powers (at least in this instance) is demonstrable and the courts have stepped in where the government has clearly failed.
