MNCs may not get to challenge I-T dept
Gains arising from M&As of Indian co to be treated as income earned in india under new tax code
By M Padmakshan, ET Bureau |
MUMBAI: If the provisions of the new tax code are anything to go by, foreign companies wouldn���t anymore have the locus standi to take Indian Income tax department to court over tax notices on capital gains arising from cross border acquisition of Indian companies.
This would be a significant development especially against the backdrop of the recent $2-billion tax dispute between Vodafone and the income tax department. It would also have a bearing on equally high profile corporate cases, where companies have dragged the I-T department to court over what they perceived to be an ill-conceived demand notice from the department.
According to section 5(1)( d) of the Direct Tax Code, ���Income shall be deemed to accrue in India, if it accrues, whether directly or indirectly, through or from transfer, directly or indirectly, a capital asset situate in India.��� This provision supports Indian tax department���s stand that says that if profit has been generated in India, tax has also to be paid in India. The proposed tax code, unveiled on Wednesday, is likely to become law in 2011.
Foreign companies that acquired Indian companies have argued that Indian tax authorities have no locus standi over transactions that took place outside India, between two overseas parties. The dispute between Vodafone and the income-tax department is over the issue of tax demanded on the $11-billion acquisition of Indian telecom major Hutch Essar.
In 2007, British cellular giant Vodafone acquired a majority stake in Hutchison Essar for about $11 billion, making it one of the largest cross border acquisitions that year. The Indian income tax department subsequently raised tax questions over the deal. However, Vodafone argued that as the transaction took place outside India, Indian tax authorities have no locus standi over the issue.
The Indian income-tax department has been dragged to courts by other companies also during the last three years. Besides Vodafone, Foster���s Australia , Idea Cellular and Genpact have also moved courts against the tax department . The Supreme Court���s decision in the Vodafone case asking the telecom major to go back to the department and sort out the issue was the last major court decision on the issue.
The Indian tax regime has also reinforced its position on such issues by stipulating that the tax code overrides Double Taxation Avoidance Agreements (DTAA) it has signed with other countries. The tax code states that in a situation wherein domestic law is amended subsequent to the signing of a treaty, the subsequent amendment will prevail over the treaty.
Sanjay Sanghvi, tax partner of law firm Khaitan & Co, told ET: ���This is a significant provision. However, the department shouldn���t seek to tax purely foreign transaction of predominantly offshore assets, unless there is an unequivocal connection with India.���
However, what gives a shot in the arm for the income-tax department is the new provision stipulating that the new tax code would override all DTAAs. This virtually prevents companies from taking shelter under the provisions of DTAAs, which by an international consensus, among the various tax regimes of the world, overrides domestic tax laws.
This would be a significant development especially against the backdrop of the recent $2-billion tax dispute between Vodafone and the income tax department. It would also have a bearing on equally high profile corporate cases, where companies have dragged the I-T department to court over what they perceived to be an ill-conceived demand notice from the department.
According to section 5(1)( d) of the Direct Tax Code, ���Income shall be deemed to accrue in India, if it accrues, whether directly or indirectly, through or from transfer, directly or indirectly, a capital asset situate in India.��� This provision supports Indian tax department���s stand that says that if profit has been generated in India, tax has also to be paid in India. The proposed tax code, unveiled on Wednesday, is likely to become law in 2011.
Foreign companies that acquired Indian companies have argued that Indian tax authorities have no locus standi over transactions that took place outside India, between two overseas parties. The dispute between Vodafone and the income-tax department is over the issue of tax demanded on the $11-billion acquisition of Indian telecom major Hutch Essar.
In 2007, British cellular giant Vodafone acquired a majority stake in Hutchison Essar for about $11 billion, making it one of the largest cross border acquisitions that year. The Indian income tax department subsequently raised tax questions over the deal. However, Vodafone argued that as the transaction took place outside India, Indian tax authorities have no locus standi over the issue.
The Indian income-tax department has been dragged to courts by other companies also during the last three years. Besides Vodafone, Foster���s Australia , Idea Cellular and Genpact have also moved courts against the tax department . The Supreme Court���s decision in the Vodafone case asking the telecom major to go back to the department and sort out the issue was the last major court decision on the issue.
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The Indian tax regime has also reinforced its position on such issues by stipulating that the tax code overrides Double Taxation Avoidance Agreements (DTAA) it has signed with other countries. The tax code states that in a situation wherein domestic law is amended subsequent to the signing of a treaty, the subsequent amendment will prevail over the treaty.
Sanjay Sanghvi, tax partner of law firm Khaitan & Co, told ET: ���This is a significant provision. However, the department shouldn���t seek to tax purely foreign transaction of predominantly offshore assets, unless there is an unequivocal connection with India.���
However, what gives a shot in the arm for the income-tax department is the new provision stipulating that the new tax code would override all DTAAs. This virtually prevents companies from taking shelter under the provisions of DTAAs, which by an international consensus, among the various tax regimes of the world, overrides domestic tax laws.
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