Mumbai: The dismissal of Vodafone's writ by the Bombay High Court against the income tax demand could have implications on other merger and acquisition deals.

However, some accountancy firms opine that the judgement of the high court cannot be indiscriminately applied as a general rule to all merger and acquisitions (M&A).
They point out that if shares are transferred through a country with which India has a tax treaty, such as Mauritius, the laws governing the tax treaty would apply. However, if transfer is done through a country with whom India does not have a tax treaty, such as the Cayman Islands, local Indian laws would apply.

Therefore, the implications would be mainly for deals where both parties are incorporated overseas, as the situation would not arise if even one of the parties is a resident of India.

Reports cited tax experts as saying that a non-resident is taxable in India under Section 9 of the Income Tax Act, only if income accrues or arises through or from a business connection or transfer of capital asset situated in India.

However, in the case of Vodafone, there was no business connection in India, nor was there transfer of capital asset situated in India, as the transfer of shares of the Cayman Island company took place outside India.

Therefore, by acquiring the shares of the Cayman Island company, Vodafone did not acquire any right or controlling interest in the assets of the Indian company.

For its part, the income tax department was reported to be planning to place under scrutiny over a dozen cases of offshore M&As, where the deal culminates in an ultimate change of ownership of Indian firms. This follows the favourable ruling from the Bombay High Court in the case filed by Vodafone International Holding BV.

Central Board of Direct Taxes (CBDT) chairman N B Singh told the media that the high court's decision has strengthened the hands of the income tax department in its attempt to bring to tax in India transactions involving transfer of assets situated in India between entities located outside the country. Director general of International Tax, CBDT, Prakash Chandra said that the income tax department would now issue notices in over a dozen similar cases, as the department saw the Vodafone case as a test case, and there may be other cases which previously escaped scrutiny.

The income tax department would stand to gain substantial payment of taxes, including penalties and penal interest, if it succeeds in efforts to tax similar overseas transactions that involve Indian assets.

Vodafone had acquired the controlling stake in Hutchison Essar Ltd, by acquiring a company in registered in the Cayman Islands in 2007. The Cayman Islands are known to be a tax haven. In its contention, Vodafone said that the transactions relate to two overseas entities, and therefore it was not liable to tax in India.

However, the tax department rejected the company's contention and sent a show-cause notice, since the overseas transaction involved assets in India. Vodafone then moved the Bombay High Court, asking it to reject the department's notice.

The income tax department has its eyes fixed squarely on an amount exceeding $2 billion (around Rs10,000 crore) from Vodafone by way of tax deducted at source (TDS), on the $11.2 billion it paid to Hong Kong's Hutchison International to buy the latter's stake.

The Bombay High Court has given Vodafone eight weeks to file an appeal in Supreme Court. The income tax department too would move a caveat in Supreme Court, seeking a hearing before allowing any further stay in the case, which is important if the department wants to move forward with the case, and the dozen other cases it plans to scrutinise.

Reports suggested that the move could negatively impact foreign investment in the country, as for a foreign investor, India has a very tax-challenging environment, and this ruling would only add to the complexity.