An instruction by foreign tax division of central board of direct taxes (CBDT) will put an end to litigation relating to TDS by indian taxpayer in overseas transaction including mergers and acquistions. When any payment is made to foreign company or a non resident for purchase of goods and services, tds is required to be deducted if not deducted the assessee is treated as assessee in default and liable to pay interest and stuff penalties, further the payment on which tax has not been deducted is not allowed as business expenditure
So according to this provision assessee is treated as assessee in default only in respect of that portion which is chargeable to tax in India in the hands of overseas receipient, in case of overseas M&A transactions, when remittance are being made by indian company for purchase of shares from a non resident tds should be deducted on capital gains only if it is chargeable to tax in India and not on the gross purchase consideration. This information will bring clarity to M&A transactions, and solve many pending cases like Vodafone case,it also reduce litigation with the tax department when indian taxpayer is treated as assessee in default .
Let us discuss the Vodafone case also,in this case Vodafone International of Netherlands bought shares of a Cayman Island-located company from another Cayman Island-based firm. The Cayman company that was sold, held controlling stake in Hutchinson Essar (later called Vodafone Essar) in India. By buying the Cayman company, Vodafone International indirectly purchased the Indian company. Effectively, the Indian company was not party to the transaction. The buyer, the seller and the company being sold were multiple layers away from the Indian telecom company in the tree of holding.
Interestingly though, Vodafone had applied to the Foreign Investment Promotion Board (FIPB) in India for acquisition of 52 per cent stake in Hutchinson Essar. This change in controlling stake led to the tax authorities contend that there was transfer of assets of the Indian company and that the buyer Vodafone should have withheld tax on the capital gains.
Besides, one of the provisions in The Income Tax Act (Section 9) deems that ‘‘all income arising directly/indirectly… through transfer of a capital asset situated in India, to accrue or arise in India'' . This provision too was quoted by the tax department to demand the tax.
Thus, the multi-layered holding structure, regulatory aspects such as FIPB approval, the intricacy in controlling interest and whether the sale consideration was for transfer of Indian assets were aspects which dragged this case to court. Not to mention, the lucrative income (Rs 11,200 crore of tax and Rs 7,900 crore of penalty) for the revenue department. The Court's verdict clarified that a complex structure need not automatically warrant a ‘pierce the corporate veil' approach, unless the tax authorities can prove that such a structure was a sham or meant to avoid taxes. Hence the onus was on the tax authorities to prove this. In this case, the upstream company formed by the Hutchison group was in place since the 1990s and clearly was not formed for the purpose of this sale. Through such an arrangement, the group has been bringing in investments into India. It had business interest in India and, therefore, cannot be viewed as a means to tax avoidance.
The Court also ruled that the case involved share sale and not asset sale. Section 9 quoted by the Income-Tax authorities talks of ‘income arising directly/indirectly from transfer of capital asset'. The court stated that the term ‘indirectly' needs to be read as income arising from the asset and not the transfer of the asset itself.
The provision cannot, therefore, be extended to cover indirect transfers of capital assets or property situated in India.There is also no provision in this clause for sale of any underlying asset. Besides, that the Direct Tax Code, 2010 proposes to add a specific clause to tax indirect transfers, is proof that the current law does not provide for the same, asserted the Court. Simply put, international investors can structure their investments in India through holding companies in locations such as Mauritius or Singapore for both tax and commercial reasons. They cannot be denied tax benefits simply because the structure enabled tax planning or helped avoid any lengthy registration or approval process in India. The tax authorities, to ascertain whether the structure was built to avoid tax, can look at the duration for which such a structure has been in existence; the period of operations in India; the timing of the exit and continuity of business in India after such exit. As of today, a number of international deals, including Idea Cellular-AT&T, GE-Genpact, Mitsui-Vedanta, Sabmiller-Fosters and the Sanofi Aventis-Shantha Biotech have tax cases pending in various high courts in the country. Most of these cases involve transfer of assets between two foreign companies by way of shares, where the underlying asset is in India. Unless the Direct Tax Code plugs the loopholes in cross-border transactions and tax avoidance issues suitably, the Vodafone verdict may set a precedent for at least some of the pending cases.
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Esha Agrawal
CAclubindia
