Vodafone tax verdict to impact on merger deals

NEW DELHI, INDIA: The Supreme Court verdict Friday on Vodafone's $2.2 billion tax liability will have a bearing on a host of similar overseas mergers and acquisitions deals in which Indian assets are involved, say experts.

"This settles a prolonged litigation that had created a lot of uncertainty for foreign companies having similar structures who had entered into or were proposing to enter into similar transactions," said Sandeep Ladda, executive director with PricewaterhouseCooper (PwC) India.

"This should provide much needed respite to other litigants in other cases - where the Vodafone controversy had been initiated by the revenue authorities - and are currently pending at various stages of litigation across the country," he added.

In a landmark judgment, the apex court said Indian tax authorities had no jurisdiction over transactions abroad and quashed the Income Tax department's demand of capital gains tax from Vodafone pertaining to its majority buy of Hutchison Essar in 2007.

Income tax authorities had claimed Rs.11,218 crore ($2.2 billion) in the form of capital gains tax from the world's largest telecom operator Vodafone.

"This landmark decision will enhance the trust of international investors in the Indian judicial system and the strong institutional fundamentals underlying the economy," said FICCI secretary general Rajiv Kumar.

"Stability of institutional processes is an important requirement for attracting foreign direct investment. This decision will re-inject confidence in cross-border mergers and acquisitions and further augment such investment coming to India," Kumar said.

Among other deals under the IT department's scanner are global telecom firm AT&T's stake sale in Idea Cellular to Tata. The Tatas later exited Idea, but the tax liability issue is still pending before the Bombay High Court.

Echoing a similar opinion, Hemant Joshi, partner at Deloitte Haskins & Sells, said the judgment would send a strong positive signal to foreign investors and help attract overseas investments in telecom and other sectors.

"The telecom sector has been plagued by various uncertainties. For a sector that is expected to contribute to 15 per cent of India's GDP shortly, foreign investment is going to play a key role," Joshi said.

"With this decision, a strong signal goes out to investors regarding the predictability and certainty of tax laws in the country," he said.

"It will have a positive impact on the sentiment for attracting foreign investments. With the sector having attracted more than $10 billion in foreign investments, this should help to give the right signals," Joshi said.

Some similar cases which would be impacted from the Supreme Court's verdict on Vodafone:

- GE's sale of majority stake in one of India's biggest outsourcing firm Genpact. The $500 million transaction for 60 per cent stake bought by US-based private equity companies, General Atlantic and Oak Hill Partners, was completed overseas

- Japanese Mitsui's 51 per cent stake sale in mining company Sesa Goa to UK-based Vedanta Group for $981 million in April 2007. The deal was routed through Fininsider, a company incorporated in the UK and which held the Sesa Goa shares. Vedanta bought 100 per cent of the company. The deal came under the scanner of authorities and the case is pending before the Goa High Court

- SABMiller, leading global brewer acquired 100 per cent stake in Foster's India, a subsidiary of Foster's Australia, in 2006. The matter is pending before a Pune court. In a separate case, Foster's Australia had approached the Authority for Advance Ruling a quasi-judicial body which ruled against the company and said the Australian beer major's sale of brand and trademarks to SABMiller in India is taxable in the country.