The Directorate General of Goods and Services Tax Intelligence (DGGI) has asked Sun Pharmaceutical Industries to pay approximately Rs 279 crore in service tax dues to the government, sources told CNBC-TV18. The move is part of the government’s efforts to boost revenue collections.
The Directorate General of GST intelligence claims that Sun Pharma is liable to pay service tax on payments it had made to affiliates of Ranbaxy outside India regarding arbitration.
Considering the 2014 deal where Sun Pharma had acquired Ranbaxy, Sun Pharma was also supposed to clear the arbitration payments which were due by Ranbaxy to Daiichi. Thus, with these arbitration proceeds paid by Sun Pharma, the revenue authorities have claimed that these proceeds come under the service tax purview and that’s how Sun Pharma is likely to clear the tax dues. Since this is a tax due for the payments Sun Pharma had made before the roll-out of GST, this becomes a service tax due.
While confirming the development, a senior official at DGGI said the "directorate is currently in talks with Sun Pharma about the service tax dues. After detailed investigation, the Kochi zone office of DGGI booked the case in February-2019. Since then the company is contesting the claims and a show cause notice will soon be served to the company."
When CNBC-TV18 contacted Sun Pharma, the spokesperson said: "As per our understanding, no case has been booked against Sun Pharma. We had received an enquiry on this subject from DG GST Intelligence and have provided the requisite information.”
Why is Sun Pharma liable to make these payments?
Ranbaxy Laboratories Ltd were ordered by a Singapore arbitration tribunal to pay $385 million to Daiichi Sankyo Co. Ltd, which had bought the firm in 2008. Daiichi had accused Ranbaxy of misrepresenting the problems on account of which they were liable to make payments to Daiichi.
In 2008, Daiichi had bought the Singh brothers’ 34.82 percent stake for $2.4 billion. The total deal value was $4.6 billion. Problems emerged soon after the acquisition, when Ranbaxy’s plants came under scrutiny by the US Food and Drug Administration.
In 2014, Sun Pharma acquired Ranbaxy. With this deal, Sun Pharma was supposed to clear arbitration payments to Daiichi. In order to give effect to this, an agreement was drawn up between Sun Pharma and Daiichi, in which certain clauses had given protection to Sun Pharma. In this agreement arbitration proceeds were also included.
Considering these arbitration proceeds, the revenue authorities has invoked Section 66 (E) of Finance Act 1994, which deals with payments made in connection with tolerating an act or situation or both. According to the government, the non-compete payments cleared by Sun Pharma, including arbitration payment, attract 15 percent service tax.