Vodafone verdict to impact other M&A deals

06 December 2008

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.