US-based Abbott Laboratories will get an excise duty exemption on medicines manufactured at its Baddi, Himachal Pradesh, factory, just the way the previous owner Piramal Healthcare did.
An excise exemption is given to factories in hill areas for the economic spin-offs they generate. The case of Abott getting an excise exemption sets precedence for future buyouts.
A regional office of the Central Board of Excise and Customs had questioned Abbott’s excise duty exemption as the duty relief was given to Piramal Healthcare and not Abbott Healthcare Pvt Ltd — the company in whose name the factory’s ownership got transferred after the Abbott-Piramal deal. Abbott Laboratories bought Piramal Healthcare’s domestic formulation business, including the Baddi factory, for over Rs 17,000 crore in March 2010, in one of the biggest acquisitions in India’s pharmaceuticals industry.
The excise board’s position was that the transfer of registration (ownership) happened after March 31, 2010, the cut-off date laid down by the government for any unit that wants to avail duty exemption, and hence its new owner had to pay the central excise duty with arrears. The department issued a show cause notice to Abbott with a demand of Rs 16 crore as excise duty dues with interest and penalties.
Abbott Healthcare, in an e-mail, said it got “a notice from the office of the Commissioner of Central Excise and Service Tax, Chandigarh concerning continuation of exemption of excise duty for the products manufactured at the Baddi plant.”
Spin-offs continue
Abbott responded to the notice saying that the economic spin-offs of the factory continued. “We believe that our pharmaceutical manufacturing plant in Baddi allows for important economic and social contributions to the community”, said a spokesperson of Abbott India.
The excise department’s notice to Abbott was flagged to the finance ministry by Piramal Healthcare, the former owner of the Baddi factory.
“The finance ministry has clarified that excise exemption is given to a manufacturing unit and not to the company that owns it. This clarification is significant as it will avoid such confusion with regard to future mergers and acquisitions across industries that are housed in tax exempt areas”, an industry official said.
The Piramal-Abbott deal made Abbott the biggest pharmaceutical company by domestic sales in India. In addition to the Baddi factory, it included transfer of rights over 350 brands and trademarks. The sale also included transfer of employees of the domestic formulation business of Piramal. Piramal got Rs 10,271 crore upfront and the rest in four installments of $400 million (over Rs 2,100 crore) every following year. The last installment will reach Piramal in 2014.
Regulatory heat
The excise payment would have been a small one for Abbott. Other foreign buyers of Indian drug companies have faced the heat not on tax but on regulatory fronts. Japanese drug major Daiichi was caught off-guard by the magnitude of the regulatory crisis that plagued two of the manufacturing plants of Ranbaxy, the Indian company which it acquired in 2008. Recently, Ranbaxy announced provisioning $ 500 million (about Rs 2700 crore) towards settling the charges raised against the company by United States drug regulator – US Food and Drugs Administration and the US department of justice.
Vaccine-maker Shanta Biotech of Hyderabad, acquired by French multinational Sanofi Aventis in 2009, faced regulatory trouble when the World Health Organisation withdrew approval to one of its vaccines citing manufacturing defects.
