Andhra Pradesh High Court, last week had quashed the Income Tax (IT) department’s claim demanding around Rs.985 crore as tax from Sanofi Aventis on a cross-border merger involving Indian drug maker Shanta Biotech Pvt Ltd in Hyderabad.

According to sources, way back in 2010, the Income Tax department had ordered a payment of outstanding tax from Sanofi Aventis in relation to merger of Shanta Biotech. Contending this Sanofi Aventis petitioned in Andhra Pradesh high court against IT department’s order. After 3 years of legal fight the French Drug maker had finally got a favourable judgment on 15th February 2013.

In this regard, a division bench comprising justices Goda Raghuram and M.A. Ramachandra Rao had delivered their judgment saying, “there is no material to conclude that there is a design or stratagem to avoid tax” in the transaction. The capital gain arising as a consequence of the transaction in issue is chargeable to tax; and the resultant tax is allocated to France (not to India) under Double Taxation Avoidance Agreements (DTAA). ”

Going into details of the case, in the year 2009 the French drug maker Sanofi Aventis had acquired major stake in Shanta Biotechnics Pvt Limited, a Hyderabad based vaccine maker. The acquisition was valued at around Rs.3965 crore (550 million Euros) at present rate. In fact Sanofi’s vaccine division Sanofi Pasteur had acquired Shantha by purchasing ShanH, a subsidiary of Merieux Allliance which owned 80 per cent shares of Shanta Biotech. Prior to November 2008 Shantha Biotechnics was then a privately held company, making vaccines for hepatitis- B, diphtheria, cholera and tetanus vaccines.

In relation to this merger, the IT department had demanded a capital gains tax of Rs.985 crore from Sanofi in 2010, claiming that the French company gained new markets and platforms for its products through the acquisition of Shantha. The tax department had also claimed Shantha floated a shell company, ShanH just a week ahead of signing the deal for tax avoidance.

Even though the merger deal was transacted in France, IT department had demanded a tax from Sanofi saying that the underlying assets (i.e., shares of an Indian company) were being transferred and, therefore, the deal was subject to Indian tax laws. With this, Sanofi Aventis approached the Andhra Pradesh high court challenging IT departments order.

While taking up this case last week the Andhra Pradesh high court had delivered a favourable judgment against Sanofi Aventis and squashed the IT departments claim for tax.

When enquired about the recent AP High Court, a spokes person for Sanofi informed “The AP High Court has just pronounced its judgment on February 15, 2013. We are reviewing the content of this judgment. It is too early for us to make any further comment at this stage. The case relates to the transaction that took place between the sellers and Sanofi Pasteur in 2009 for the acquisition of the French company ShanH. This acquisition was subject to taxation in France, under the French law. Shantha, a vaccine company part of Sanofi Group based in Hyderabad, is not subject to the ongoing procedure initiated between the Sellers, Sanofi and the Indian authorities.”

“The judgement has come as a major boost to the foreign investors, after a long legal fight the Andhra Pradesh High court had finally delivered a favourable judgement in favour of Sanofi Aventis. With this the Income Tax department’s claim demanding outstanding tax in relation to merger of Shanta Biotech is kept aside,” said sources at Shanta Biotech in Hyderabad.

According to Tax experts, the Andhra Pradesh high court judgment will have an impact on similar cases that are being fought between the tax department and foreign firms.