A likely Supreme Court ruling next month will make or break the much-touted conciliation process between the Indian government and British telecom giant Vodafone Group Plc in a high-profile tax case.
On April 1, the apex court will likely give its views on the validity of retrospective changes to the Income Tax Act approved by Parliament in May 2012 in a similar case involving offshore purchase of Indian assets by French drug major Sanofi Pasteur Holdings. The SC ruling, which would tread the fine line between the Constitutional prerogatives of the legislature and the judiciary, will have implications for a clutch of other similar cases as well.
Vodafone Group Plc is battling a Rs 20,000-crore tax demand (including interest and penalty) in India after the government retrospectively changed the law in 2012 to revive the tax claim set aside by the Supreme Court. Although the Cabinet approved a conciliation process, it hasn’t gathered pace yet as both sides could not quite agree on its scope and methodology.
Sources in the income tax department said that the outcome of the Sanofi case could strengthen or weaken the government’s case against Vodafone during the negotiations for a settlement. In case the department loses the case, the very basis of the Vodafone tax demand could fall apart.
Experts FE spoke to said that although the conciliation talk between government and Vodafone is independent of the Sanofi dispute, the apex court ruling in Sanofi case would certainly impact the negotiating strategy of Vodafone and the government. Vodafone has so far not approached Indian courts challenging the retrospective amendment of 2012, but could consider that option in case the Sanofi judgement gives encouraging signals.
“This would be a landmark judgment on offshore sale of Indian assets from the Supreme Court post the retrospective amendment to the Income Tax Act and, therefore, is keenly watched,” said PwC India direct tax head Rahul Garg. Garg declined to comment on the specifics of the case.
The Rs 1,058-crore tax demand on Sanofi for its acquisition of Hyderabad-based Shantha Biotech from France’s ShanH in 2009 will be decided by the apex court in the light of the retrospective changes to the law. The court has posted the case for final disposal on April 1.
The I-T department, which won the case against Sanofi at the Authority for Advance Ruling (AAR) in 2011, subsequently lost at the Andhra Pradesh High Court last February and a few months later appealed to the Supreme Court.
In both the Vodafone and the Sanofi cases, their respective arms with tax domicile outside India purchased Indian assets from holding companies situated outside India and claimed the transactions were not liable to capital gains tax in India. Sanofi acquired 80% of Shantha Biotech from France’s ShanH, which in turn was owned by other French companies, Merieux Alliance and Groupe Industriel Marcel Dassault.
The tax department claims there is a taxable capital gains of Rs 26,000 crore from the Sanofi deal. While the AAR said the deal was a tax avoidance scheme, the high court said the capital gains was taxable in France under a double tax avoidance agreement and not in India.
The HC also rejected the claim that the Sanofi deal was a tax avoidance strategy. In its defence, Sanofi referred to the 2012 January Supreme Court decision setting aside the tax demand raised on Vodafone’s purchase of Hutch Essar through a Dutch arm from CGP Investments of Cayman Islands for $ 11 billion.
After the apex court ruling, the finance ministry retrospectively amended the law to strengthen provisions meant to tax offshore deals with underlying Indian assets and revived its demand to Vodafone.
Netherlands has a bilateral investment protection agreement with India, under which the telecom giant has now sought international arbitration on the dispute.
India, however, claims the treaty does not cover tax matters and has extended another opportunity for conciliation with Vodafone after resolving a related transfer pricing issue by a tax tribunal. The Cabinet will take a call on the conciliation process after the tribunal settles the transfer pricing case.