Name: Prateek Tripathi Department: Department Of Business Administration Teacher: Dr. Mohd.

Anees Subject: Corporate Taxation Year: 2012-14 Course: MBA III (Finance)

We are thankful to our learned teacher Dr. Mohd. Anees (Department of Business Administration). This Corporate Taxation project entitled Double Tax Avoidance by Sanofi Aventis has been possible through the efforts of our respected teacher. We are thankful to sir for giving essential and useful guidance from time to time in understanding the concepts.

Prateek Tripathi MBA III (Finance)

CASE
Andhra Pradesh High Court rules the double tax avoidance agreement between India and France exempts the French drug maker from capital gains tax relating to 90% stake in Shantha Biotech. In a landmark judgment, the Andhra Pradesh High Court (APHC) on 15 February ruled that the French drug maker Sanofi Aventis, which (by buying another French firm ShanH) had acquired a 90% stake in the Hyderabad-based vaccine-maker Shantha Biotech in 2009, need not pay tax in India. The controversy dates back to 2006 when ShanH, a holding company, was incorporated in France as a joint venture (JV) between Merieux Alliance (MA) and Groupe Industriel Marcel Dassault (GIMD). The income tax authorities claimed that ShanH was formed as a shell company only with the intention of avoiding tax. They sought to lift the corporate veil to understand the structure of ShanH. Soon after its incorporation, ShanH acquired the Shantha stake in 2006. In 2009, it decided to sell that stake. So, MA and GIMD, founders of ShanH, sold their ShanH holding to Sanofi Pasteur Holding for an estimated Rs 3,700 crore. This MA-GIMD-Sanofi deal for ShanH had come under the income tax radar. The income tax authorities had raised a claim for about Rs 700 crore to be payable on account of capital gains. But Sanofi rubbished the claim in its petition. It said that ShanH was formed to make it from the very first day the owner of the shares of Shantha. MA (Sanofi) had contested the income tax department's claim and the issue has since been going through rounds of adjudication. MA's contention is that the tax by the Indian authorities would tantamount to double taxation which is sought to be avoided by an IndiaFrance Double Taxation Avoidance Agreement (DTAA). Even Sanofi referred the tax issue to the Authority for Advance Rulings (AAR). However, the AAR ruled against Sanofi.and favoured the tax authorities. In response, Sanofi approached the Andhra Pradesh High Court. Citing the provisions of the India-France DTAA, Sanofi said in its petition that where shares of a resident company of France are transferred, representing the participation of anything more than 10%, the capital gains are taxable only in France. Further, it contended, all other so-called rights, properties and assets held by a French resident, when transferred and even if located in India, are taxable in France. Citing an earlier order of the Supreme Court in the case of Vodafone International Holdings, Sanofi said, The situs of the shares would be where the company is incorporated and where its shares can be transferred. The situs cannot be determined on the basis of the location of the underlying as sets. After prolonged hearing, the APHC bench quashed the rulings of the AAR and the notices of the tax authorities. The bench has made seven key observations in the summary of its judgment. According to the bench:

1) ShanH is an independent corporate entity, registered and resident in France. It has commercial substance and a purpose and is neither a mere nominee of MA and / or MA/GIMD nor is a contrivance / device for tax avoidance. 2) Since inception (in 2006), ShanH (not MA or MA/GIMD) had acquired, and continues to hold, the Shantha shares. 3) There is no warrant for lifting the corporate veil of ShanH and even on looking through the ShanH corporate persona, there is no material to conclude that there is a design or stratagem to avoid tax. 4) The capital gains arising as a consequence of the transaction in issue is chargeable to tax: and the resultant tax is allocated to France (and not to India) under the DTAA. 5) The retrospective amendments to the Income Tax Act, 1961 (vide the Finance Act, 2012) have no impact on interpretation of the DTAA; the transaction in issue falls within Article 14(5) of the DTAA and the tax resulting there from is allocated exclusively to France. 6) The ruling dated November 28, 2011 of the AAR is unsustainable. 7) The order of assessment dated May 25, 2010 (determining Sanofi to be an assessee in default, under Section 201 of the Act) is unsustainable. The consequent demand notice dated May 25, 2010 and the rectification order dated November 15, 2011, being orders/ proceedings consequent to the order dated May 25, 2010 are unsustainable. The outcome of the case was a matter of interest for various other firms, particularly those contemplating mergers and acquisitions in India but protected by the DTAA concerned. "The (AP) High Court has clearly settled the law that the retrospective amendments have no impact on interpretation of the treaty provisions," said Rohit Jain, partner with law firm Economic Laws Practice that represented MA in the case. Analysts, too, expect the APHC order to encourage foreign investments, particularly from countries having DTAA with India. For, the APHC has provided clarity on how to interpret the provisions of the DTAA. "This order definitely gives boost to foreign investors in the country. It is a very positive development because there is clarity that such transactions are not liable for tax in cases of treaty agreements," said Vikram Doshi, partner with consultancy firm KPMG. However, income tax authorities may exercise the option of appealing against the APHC order in the Supreme Court. I cannot comment anything on this order. The decision on whether or not to appeal has to be taken by the income tax department, said S R Ashok, the counsel for the department.

SUMMARY
Indian Income Tax Department (IT) filed a special leave petition (SPL) before the Supreme Court against the ruling by Andhra Pradesh High Court in Sanofi-Aventis double tax case. According to the report, in February 2013, the AP high court issued a ruling in favour of Sanofi-Aventis, a French pharmaceutical company, in a case filed by the IT Department seeking taxation of Sanofi's offshore transaction in India. The AP high court had ruled that transaction was only taxable in France under the India-France double taxation avoidance pact (DTAA). In its plea before the Apex Court, the IT Department had sought reconsideration of its ruling claiming that the high court's interpretation of DTAA was erroneous. Previously, the IT Department had demanded Sanofi to pay Rs 700 crores in capital tax gains in the offshore transaction by Sanofi. Both the Authority for Advance Rulings order and the IT Departments demand notice for Rs 985 crores for tax and interest, and Rs 985 crores for penalty were also rejected by AP High Court. Sanofi's subsidiaries Institut Merieux (IM), Groupe Industriel Marcel Dassault (GIMD) and ShanH were also involved in the case. ShanH SAS, a French subsidiary of Merieux Alliance, acquired by Sanofi Pasteur, bought a majority stake in Shantha Biotechnics in November 2008. IM and GIMD held 80% and 20% shares in ShanH, which were sold to Sanofi Aventis in August 2009. Sanofi acquired 80% stake of Shantha Biotechnics in July 2009 at INR38 billion. The IT Department claimed that Shantha Biotech has formed a shell company, ShanH, prior to signing a tax avoidance deal. This claim was challenged by Sanofi in 2010. The IT Department sought to bring tax from these transactions to India, citing retrospective amendments to income-tax law in Budget 2012-13. Although the Division Bench ruled that the transaction was not designed for tax avoidance, it was rejected in the High Court.

QUESTIONS
Question-1: What did Sanofi Aventis appealed in its petition? Question-2: What was the reason behind the controversy? Question-3: Why were many firms interested in the outcome of the case? Question-4: What is the outcome of the filed case? Question-5: How could the judgement turn out to be beneficial to the economy? Solution-1: Quoting the provisions of the India-France DTAA, Sanofi said that where shares of a resident company of France are transferred, representing the participation of anything more than 10%, the capital gains are taxable only in France. Further, it contended that all other so-called rights, properties and assets held by a French resident, when transferred and even if located in India, are taxable in France. Solution-2: The controversy started when the income tax authorities claimed that ShanH was formed as a shell company only with the intention of avoiding tax because soon after its incorporation, ShanH acquired the Shantha stake in 2006 and IN some time, founders of ShanH sold their holding to Sanofi Pasteur Holding. This made the deal to come under Indian IT Department radar which filed a petition for a payment of capital tax gains in the offshore transaction by Sanofi. Solution-3: The firms which were interested in the outcome were those firms which were expecting mergers and acquisitions in India but were threatened by the Double Taxation Avoidance Agreement (DTAA) with India. There was not much of clarity in the interpretation of the provisions of DTAA. Solution-4: The Andhra Pradesh High Court, in February 2013, ruled that the offshore transaction was only taxable in France under the India-France DTAA and exempted the French drug maker from capital gains tax relating to 90% stake in Shantha Biotech. In the judgment, the APHC issued a ruling that the French firm Sanofi Aventis, which (by buying another French firm ShanH) had acquired stake in Shantha Biotech, need not pay tax in India. Solution-5: Many analysts, after the judgement, have said that AP High Court has clearly settled the law that the ex post facto amendments have no impact on interpretation of the treaty provisions. They also expect that the order will also encourage foreign investments in the country, particularly from countries having DTAA with India. For, the APHC has provided clarity on how to interpret the provisions of the DTAA.

REFERENCES
http://articles.economictimes.indiatimes.com/2013-02-16/news/37133146_1_shanhshares-of-sanofi-india-india-and-france http://www.thehindubusinessline.com/companies/sanofi-tax-case-centre-files-petitionin-apex-court-against-ap-court-ruling/article4746880.ece http://www.pharmabiz.com/NewsDetails.aspx?aid=73849&sid=2 http://www.researchviews.com/healthcare/pharma/womenshealth/NewsReport.aspx?T ype=1&ArticleID=614754&sector=Womens%20Health http://www.business-standard.com/article/companies/sanofi-aventis-gets-tax-reprievefrom-high-court-113021500504_1.html http://www.dnaindia.com/money/1800412/report-sanofi-gets-rs700-crore-relief-indouble-tax-case