NEW DELHI: Tax treatment of overseas M&A deals involving Indian assets may have changed forever with the Bombay High Court ruling in the Vodafone tax issue.
The court on Wednesday accepted Indian tax authorities’ jurisdiction over the $11 billion acquisition of mobile phone operator Huchison Essar by Vodafone, making it difficult to conduct transfer of big assets held in a holding company structure through sale of shares.
Armed with the ruling, the income tax department plans to revisit other such transactions. “This is a test case, we will look at similar cases,” said Sudhir Chandra, acting chairman of the central board of direct taxes (CBDT).
There were already some cases under investigation, he said. The court order may have a bearing on deals such as SABMiller-Foster and Sanofi Aventis-Shanta Biotech transactions.
“The high court has accepted the contention that transfer of shares of the Cayman Company was only a mechanical step for the eventual transfer of various commercial rights of the telecom business situated in India,” says Sudhir Kapadia, tax markets leader at consultancy firm Ernst & Young.
Vodafone argues that it need not pay tax as the transaction was done between two offshore entities. Vodafone International Holdings BV, a Netherlands entity, had acquired 100% shares in CGP (Holdings) Ltd, a Cayman Islands company from Hutchison Telecommunications International Ltd for $11.2 billion.
Information available with the income tax authorities, however, show that only one $1 share was transferred by the Cayman islands-based entity, although the total consideration was much higher.
The income tax department issued a show cause notice to Vodafone to explain why tax was not withheld on payments made to HTIL in relation to the above transaction.
The court, while accepting that shares of a foreign company are located outside India, observed that the transfer of the attendant commercial rights would attract tax in India.
In other words, the court seems to be suggesting a bifurcation of the total consideration into two parts. First part attributable to the shareholding per se, which would include all the relevant shareholder rights and controlling interest, and the second part represented by various commercial interests such as telecom licences and brands situated in India.
“The High Court has mentioned about the proportionality theory. But, the issue of proportionality is tricky one and it is difficult to resolve. I guess it would have to be settled in a mutually acceptable manner,” said Mukesh Butani, partner, BMR Legal.
Tax authorities can also issue a show-cause notice to Vodafone, even as the matter looks all set to go to the Supreme Court, said another tax department official. The tax notice, he said, would be issued after the expiry of the eight-week period stipulated by the High Court.
Several countries have in their legislation something known as “look-through” provisions by which a tax is imposed on gains arising from transfer of shares outside the country if it results in the passing of control over a company, which holds specified assets or property in the country. Indian tax laws, however, do not have such provisions.
The Direct Taxes Code Bill, 2010, introduced in Parliament recently, proposes to tax transfers outside India of shares in a foreign company, in proportion to the fair market value of assets located in India. This rule will apply if the fair market value of assets in India exceeds 50% of the value of all assets owned by the foreign company.
Source : http://economictimes.indiatimes.com/Telecom//articleshow/6527486.cms
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