Land Mark Ruling in Vodaphone - N C Hegde

the bombay high court's ruling in the vodafone case will have a significant impact on the structure of future cross-borders mergers and acquisitions (m&as), especially when a transfer of shares of a foreign company leads to an effective transfer of an indian business. the ruling by itself may have a limited impact due to the likelihood of an appeal to the apex court, given the stake involved, in which case the supreme court would have the final say. however, there is no getting away from the fact that the ruling will act as a boost for the tax department in its quest to tax other cross-border mergers where the facts are similar to those in the vodafone case. going forward, this may not have a very significant impact on a majority of cross-border mergers given that most investors would choose to use intermediary jurisdictions such as mauritius, cyprus and singapore, which offer treaty protection for capital gains in an indian tax context. further, the high court seems to have accepted that a transfer of a share of a foreign company would not be taxable but has gone ahead to hold the transfer as taxable by looking into the entire substance of the transaction. the decision could therefore bolster claims on the part of foreign investors in regard to the non-taxability of other global m&as where the transfer of shares of a foreign company involve transfer of assets other than indian assets or where there is a transfer of assets spanning many jurisdictions. in any case, the direct taxes code bill 2010 has a specific proposal wherein a transfer of foreign company shares will be liable to pay capital gains tax on the proportionate value of indian assets if the underlying assets include more than 50% of indian assets. thus, effective april 1, 2012, the intention is to bring overseas m&as under the tax net. as articulated by the mumbai high court, the position in many countries, including australia and china, currently leads to such overseas deals being taxed in those countries and therefore, going forward, foreign investors will have to factor the taxability while undertaking an acquisition that meets the metrics as stipulated in the direct taxes code bill. the ruling will act as a dampener for foreign investors. but as foreign investors have often stated, their main objection to the vodafone case was more because the stand of the tax department in this case was a departure from a widely understood legal position. once they are put on guard in terms of the impending legislation under the dtc, they will be smart enough to factor the liability and discharge it as well where a legitimate alternative is not available. of course, till such time the direct taxes code comes into play, there is bound to be some degree of turbulence as there are aspects like apportionment of consideration and jurisdiction in the ruling, which have been remitted back to the tax department. the writer is partner, deloitte haskins and sells. views are personal.