Other cross-border deals like Vodafone under tax lens: Finance ministry

New Delhi: Tax officials are scrutinising other cross-border mergers like the Vodafone-Hutchison deal for possible tax evasion after the Bombay High Court rejected a petition against imposition of tax on the deal, reports PTI quoting a key finance ministry official.

"We are in the process of investigating other cases. They are also in various stages of processing," Central Board of Direct Taxes chairman S S N Moorthy told reporters on the sidelines of an Associated Chambers of Commerce and Industry (Assocham) seminar here.

Mr Moorthy, who was abroad when the court delivered its verdict on Thursday, said the tax department will abide by the order and not proceed with any tax notice on Vodafone before the expiry of eight weeks.

Earlier, tax authorities had slapped a show-cause notice on Vodafone, asking the company why tax should not be imposed on its acquisition of Hong Kong's Hutchison Telecommunications stake in Indian telecom JV Hutch Essar for over $11 billion in 2007. Sources said that tax on the transaction could amount to as much as Rs12,000 crore, including interest.

The tax authorities said that in this case, the buyer, Vodafone, was liable to pay capital gains tax even if it failed to deduct it at source while making payment to Hutch for the deal that happened overseas. Vodafone challenged the notice.

However, the Bombay High Court ruled on Thursday that the Income Tax Department has the jurisdiction to levy tax on Vodafone, even though the multi-billion dollar deal was signed outside the country.

The court has, however, asked the tax department not to act on its tax order for eight weeks.

"We will abide by the high court order. So, we will not take any action till the time given by the high court," Mr Moorthy said.

He said after the expiry of eight weeks, the next step will be taken, which is "of course, the issue of notice."

Mr Moorthy refused to specify which deals are being investigated by the tax department to check duty evasion.

Sources, however, said the court order may have a bearing on deals like the SABMiller-Foster and Sanofi Aventis-Shanta Biotech transactions.

The second largest brewer in the world, SABMiller, had acquired a 100% share in the Indian arm of Australia- based Foster.

Similarly, French drug-maker Sanofi Aventis had picked up a majority stake in Indian vaccine company Shantha Biotech in 2009 for around $770 million.

Recently, the London-listed Vedanta Group signed a deal to acquire up to a 51% stake in UK-based Cairn Energy's Indian arm for as much as $8.43 billion.


The great Indian pharmaceutical rip-off—I

Taking advantage of poor knowledge of consumers, malpractices by doctors and weak regulation, drug companies are selling medicines at hugely inflated prices. Helpless patients, rich and poor, are ripped off day in and day out. This is the first part of an exclusive Moneylife investigative series

Did you know that when the compound clopidogrel is used by Zydus Cadila in Noklot, the price is Rs78 for 10 tablets? When Sanofi uses it for Plavix, the price is Rs1,020 - a difference of nearly 1,300%. The cost of risperidone is Rs17 for Rispidon made by Torrent but Rs270 for Risperdal (J&J) - a difference of 1,600%. Did you know that the price of even a simple compound like erythromycin made by two companies can differ by 300%? The more expensive one is made by an unknown manufacturer.

Or that the cost of producing a strip of 10 tablets of progesterone is Rs18 but it sells for Rs180? Or that an enterprising Indian Administrative Service (IAS) officer in Rajasthan managed to bring down medicine costs by 90%, exposing the fat margins that drug companies enjoy with impunity? Did you know that competition, which is supposed to be the best antidote to anomalies in market price, does not work in the drug market? A few weeks ago, insurance companies were compelled to band together and initiate action because galloping healthcare and hospitalisation costs were forcing them into losses.

As industry doyen, Fali Poncha, said at a Moneylife Foundation workshop, medical insurance can work only if the insurer as well the service-provider make some money. But the soaring costs of medicines and hospitalisation (caused mainly by the acute shortage of quality healthcare facilities in India) had turned medical insurance into a loss-making proposition for insurance companies.

The public sector insurers have put in place an alternative - in the form of a preferred provider network (PPN) - which alone will be entitled to the cashless insurance facility. PPN is a network of medical service-providers who agree to standardisation of procedure costs and charges based on hospital location, hospital grade, etc. But the other major expense that needs examination is the cost of medicines.

The issues regarding drug prices are horrific. In a report tabled in Parliament on 4 August 2010, the parliamentary standing committee on health and family welfare has suggested drastic measures like increasing the number of drugs under price control, a blanket cap on profit margins of all medicines and promoting the use of generic drugs to make medicines more affordable.

We know that healthcare in India is in a mess. But while the public is somewhat aware of the problems of health insurance (insurers are losing money, thanks to over-billing and exorbitant charges by some hospitals), hardly anything is known about drug price abuse.

According to the parliamentary standing committee on health and family welfare report of 4 August 2010, medicines constitute 40%-80% of insurance claims. On detailed investigation, Moneylife found that there is an enormous difference in the price of the same drug, branded differently by each pharmaceutical company and consumers are completely unaware of it. Doctors and hospitals end up dictating what you pay - they can prescribe an expensive or cheaper drug with the same efficacy. So clearly, there is a good case for insurers demanding price control or parity to reduce claim costs. This is not easy; but it is not impossible either - the urgent need is for customer awareness and the political will to make the healthcare industry healthier.

The exorbitant price you pay!

Moneylife's detailed probe into medicine prices throws up shocking revelations. The same drug is sold at widely varying prices under different brand names. Why does this happen? The National Pharmaceutical Pricing Authority (NPPA), which is a decade old, agrees that overpricing of medicines is a major problem, but it hasn't succeeded in doing much about it. Until June 2010, the NPPA has issued 762 demand notices for a penalty of Rs2,190.48 crore but has realised only Rs199.84 crore - an abysmal 9.1% of the total penalty. The rest of it, almost entirely, is under litigation.

Meanwhile, consumers continue to pay exorbitant prices and pharma companies are getting away with impunity. The violation of the price ceiling is rampant even in the 74 drugs under price control. Of these, 24 drugs are barely used. And, on 50% of the drugs on the list, NPPA has imposed a penalty on one or more manufacturers for overcharging. NPPA's statement of 'Overcharging and Recovery Thereof' on its website lists many of the big pharma companies led by Cipla (Rs1,384 crore) and Ranbaxy (Rs136 crore) which account for 69% of the total overcharge. Cipla itself is the top penalised company with 63% of total overcharge, but has not paid a single rupee to NPPA till now. Cipla's net profit for FY10-11 Q1 rose 6.5% (Rs257.4 crore). The 600-odd firms listed for overcharging include Lyka Labs, Modi Mundi, Okasa, Lupin, Dr Reddy's and Cadila Healthcare.

Let us look at four examples of how price ceilings were violated leading to the penalty.

Shockingly, the same companies overcharge even today.

According to NPPA chairman, SM Jharwal, "We know it takes time to recover dues as the legal battle is a long process. We are now looking at out-of-court settlement with pharma companies as it would save time on recovering dues. We will not reduce the fine at any cost but may look at making the payment process easier. The objective of this exercise is to recover the dues as fast as possible." We are not sure how this helps consumers.

Since ordinary customers do not understand drugs and their composition and combinations, it is a breeding ground for unethical practices and mis-selling by pharma manufacturers. There are many ways in which this happens. Companies evade the price ceiling by the simple trick of adding or changing one or more ingredients in a price-controlled drug. Among the examples given to us by Dr Chandra M Gulhati, editor, Monthly Index of Medical Specialities were: Aciloc-RD of J Chemicals (where the price-controlled ranitidine was replaced with omeprazole); Cetrizet-D of Sun Pharmaceutical (price-controlled pseudoephedrine replaced with phenylepherine), Normet of Emcure (price-controlled norfloxacin replaced with ofloxacin) and Brakke Suspension of Franco-Indian Pharmaceuticals (price-controlled ciprofloxacin replaced with ofloxacin). The brand name was never changed in the above-mentioned cases.

In some cases, companies added another ingredient as an excuse to hike prices exorbitantly without any clinical rationale. Examples include Norflox of Okasa (lactobacillus added to price-controlled norfloxacin) and Doxy-1 of Astalife (lactic acid bacillus added to price-controlled doxycycline). The ceiling price for controlled drug norfloxacin 400mg and doxycycline 100mg is approximately Rs10 for 10 tablets, but the price of branded Norflox and Doxy-1 is approximately Rs48 for 10 tablets. One can get plain norfloxacin 400mg (brand-Norbid; company-Alembic) for Rs10.38, while plain doxycycline 100mg (brand-Microdox; company-Micro Labs Ltd) is available for Rs7.72.

This is an illustrative list of drugs that are sold at hugely inflated prices with no relation to their costs. 

Importantly, nimesulide is banned by the US and many countries, but continues to be openly sold in India. It is especially harmful for children. The retailer's purchasing price of NICIP (branded-generic) manufactured by Cipla is only Rs1.88 for 10 tablets. Cipla is clearly making some profit even at this price, which means that the cost of production cannot be more than Rs1.40. The huge price mark-up is shared by the drug companies and traders - a nexus that ensures there is no action; there are many more examples of this nature.

One chemist at Prabhadevi (Mumbai) explained the racket to us, revealing that not everybody approves of unethical selling. Moneylife invites readers to write in with their experiences, and send us names of ethical pharmacies. It would make sense for buyers to purchase medicine from such ethical pharmacists.

Aggressively advertised, multi-ingredient vitamin and mineral formulations such as Revital, A to Z and Supractiv, etc, are being produced and sold without a mandatory manufacturing licence from drug control authorities. Their producers claim that the products are 'food' and not drugs and, hence, subject only to Prevention of Food Adulteration (PFA) rules!

For producers, there are many benefits to selling medicine as food. Prices of medicines that contain vitamins A, B-1, B-2, C and E are controlled by the NPPA, to prevent profiteering, which they avoid. The obligatory standards for manufacturing infrastructure are also not applicable. This is a bad practice because ordinary people do not realise that excessive intake of vitamins can have serious side-effects which are never disclosed; they get away with extravagant pricing as well. Will the Drug Controller General of India (DCGI) and NPPA protect interests of patients by enforcing laws?

(In the next article in this series, we look at what the government has been doing to regulate drug prices)




5 years ago

price list 2011

Shadi Katyal

6 years ago

The idea of walk out from WTO will not solve any problems and the nation will suffer more. we have very wrong ideas about WTO.IMF,WB etc. We have not liberlised our economy yet and thus one should look into rate of duties paid for different chemicals used in durgs.
I am not trying to defend the drug companies but look at the same drugs cost in say USA. Some of tablets cost upto $25 each and please donot try to compare poverty and wealth as there are lot of unemployed .The medicaid doesnot cove3r everyone.
The cost of chemicals for past few years has been going up and no one has any control.
What is the cost of Royality being paid for patents of such medicine.
India is exp[orting Billions of Dollars worth drugs and maybe some subsidy could be applied from these exports to few medicines.
There is no free lunch and our blaming the drug companies without proper research of time consumed to bring a new drug on the market and cost of research has to be considered.

VC Nanda

6 years ago

1.The State is guilty
2. Pharmaceuticals should be kept out of TRIPS. We walk out of WTO if this is not possible. The fact that the rich poor divide (Ginni factor has gone up from 0.32 to 0.37- today's report), thanks to our joining WTO is reason enough.

Parmod Sachdeva

6 years ago

Dare to create a regulator for them


6 years ago

There is another instance of something similar. The dia-strips, for measuring the blood glucose level using those glucometers of practically all brands (One touch et al) cost about Rs. 800 for 30 strips -- nearly Rs. 27.50 per strip. How can the common man, in a country of the world's highest diabetic population, afford it? There is no way the price here could have any relationship with the cost.

Shadi Katyal

6 years ago

I think in this article one misses the cost of Research and development of any new drug and years it takes to develop. we are dealing with end results and thus the cost to public. There is also the cost of Patent like the mention of Plavix price.
The cost of distribution and advertisement is another factor.Yes Doctors are given free sample to promote but it is a cost to manufacturer and has to be recovered.
Is this the reason of fake medicine ?


Roopsingh Solanki

In Reply to Shadi Katyal 6 years ago

The article is based on cost differences for same formulation of drugs-which have been invented many years back-it is not for newly invented drugs-which require huge R& D expanses-i can share one experience of recent past-when i went to one of chemist shop for a anti-biotic having ammoxyllin and some other mix formula-the chemist tried to give me 6 tablet sachet for Rs 100 which had printed MRP of Rs 250-he told me he can give me discount of 150 Rs for this tablet-but because it was not a well known brand i went to other chemist shop and he gave me same formulation drug of a little known brand at just Rs 60-i have already shared this experience in Moneylife few months back in one of article-so you can imagine how much prfofit margin chemists are making on most of medicicnes-and how much a poor fellow is looted by doctors (white collor butcher lobby) who cheat him with lab tests and operatinal charges and Bonus he gets is mental and physical pain incurred due to wrong treatment and some times this Bonus is "PRE MATURE DEATH"-so its always better to visit doctors at minimum level if you want to be healthy-and pray God that we dont fall pray to these Butchers-


6 years ago

Some drugs prescribed for cancer cost about Rs.17,000--earning the doctor Rs.4,000- as commission. This is 'robbery' by the specialist doctor , in collusion with drug company.


6 years ago

Great, thanks, and all this is made even worse by the amount of fake drugs sold in India.

On organised corporate rip-off of this scale, one can only hope that some of the truly independent retail chains get together and spot the opportunity this sort of mark-up provides, and use it to do something for themselves as well as the consumer. Place low-branded shop/chain-specific products next to the higher cost ones, and let people vote with their money. Vaidyanathan, are you reading this, please - Citi, ICICI and now place in the sun for future, group?


6 years ago

One of the key component of price of drugs is the marketing cost. It is a know fact that many of the medical practitioners receive "gifts" from pharma companies as they want the person to recommend certain brand of drugs. And these certain brand of drugs may be costlier. I have been at receiving end several times when you find out that there cheaper drugs out there in pharmacy stores.
The other problem is that with generic manufacturers that many of the manufactures not follow good manufacturing practices which is mandatory compliance in US. India needs something more than NPPA to not only check prices but also quality of drugs in Indian market. Not to mention check on so called branded hospitals as they continue charging exorbitant prices

Deepak Khemani

6 years ago

I wholly agree with Mr. Roopsingh that Mr. Bhave after his stint at SEBI should get an appointment at NPPA and then we will see the prices of medicines come down and also he will get the intermediaries(dispensing chemists) to work without commissions,there will be no problem as people will never stop falling sick and as such will never stop buying medicines whatever they may cost! Nobody will be the loser neither the pharma companies nor the doctors who prescribe the medicines nor the chemists who will keep on selling as we will keep on buying

Roopsingh solanki

6 years ago

Mr Bhave should be promoted as health and medicine minister-to look after costs and expanses incurred on medicinal and hospitalisation expanses-i am sure he is needed more in health care rather then SEBI


6 years ago

Take the example of Ferrochelate drops, which are iron suppliment for infants. The original composition was for Rs 37, had 20 mg of elemental iron per ml. They came up with new label, Ferrochelate XT, costs Rs 42, and now has 10mg of elemental iron per ml. Our doctor asked us to double the dosage, so we now would use up more bottles, that too expensive ones...

Cairn applies for govt nod for stake sale to Vedanta

New Delhi: More than three weeks after it announced the sale of a majority stake in its Indian arm to Vedanta Resources, UK-based Cairn Energy Plc has formally applied to the government for approvals, saying it will meet all contractual requirements needed to fructify the deal, reports PTI.

The company, on 9th September, wrote separate letters to the oil ministry for specific approvals in respect of seven exploration blocks Cairn India had won under the New Exploration Licensing Policy (NELP) rounds and concurrence in case of three producing properties that were awarded to it prior to NELP, including the giant Rajasthan oilfield.

"We have received letters from Cairn and we are examining them. We will decide (on it) in due course," a senior ministry official said.

Attaching a summary of the deal where Cairn Energy is selling a 40% to 51% stake in its Indian arm to Vedanta Resources Group for up to $8.48 billion, the company’s chief executive officer Bill Gammell, in the covering letter, stated that the proposed transaction was a sale of shares in Cairn India and "there will be no change in the parties holding the participating interests under the Production Sharing Contracts (PSCs)."

Cairn maintained that only NELP blocks required prior government consent for transfer of control, while pre-NELP areas like the Rajasthan oilfield do not have such provisions.

In respect of the seven NELP areas, including gas discovery block, KG-DWN-98/2, which sits next to Reliance Industries' (RIL) prolific KG-D6 field in the Krishna-Godavari Basin (KG), Cairn subsidiaries made applications for approval under Article 28.1 of the PSCs signed with the government.

It said the PSCs for pre-NELP Rajasthan block RJ-ON-90/1, the Ravva oil and gas field in the eastern offshore and the Cambay Basin CB/OS-2 gas fields off Gujarat coast "do not require prior consent" of the government.

"Even if there were to be a contractual requirement for seeking prior permission of the government for the transaction, we submit that the present transaction is one that would merit such consent," Cairn said in letters seeking concurrence of the government on the three pre-NELP blocks.

"PSCs that expressly provide for obtaining prior consent also stipulate that the consent would not be unreasonably withheld," it said. "We have no doubt that in the present case the government should have no hesitation in granting such consent were such consent to be required."

Mr Gammell, in the covering letter, stated that both Cairn Energy Plc and its Indian arm, Cairn India, and its subsidiaries are fully committed to complying in full with all contractual requirements needed to proceed with the deal.

"We believe that the Vedanta Group is of good standing, has the capacity and ability to meet its obligations under the PSCs and is willing to provide an unconditional undertaking as required in Article 28.1(a)," Cairn India's subsidiaries wrote in letters seeking approval in respect of the NELP blocks.

Cairn had previously written to the oil ministry on 26th August introducing Vedanta Group and its financial capabilities.

In a 9th September letter, it said as the proposed sale "is at the shareholder level of Cairn India, there will be no change to the participating interest in any of the PSCs."

"We can also confirm that there are no planned changes in the Cairn India organisation, standards, policies and systems and that the transaction will have no effect upon Cairn India's knowledge and experience as a PSC contractor, operating to accepted international petroleum industry practice," it said.

"We believe that the proposed transaction will not adversely affect the performance or obligations under the PSCs, nor be contrary to the interests of India," the letters stated. "Should it require, we are also happy to satisfy you on the appropriateness of the guarantees contemplated under the PSCs."

The oil ministry had on 31st August written to Cairn Energy asking it to apply for approval in respect of all the properties.


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