More cross-border deals under CBDT scrutiny after Vodafone issue

The Central Board of Direct Taxes (CBDT) is inspecting several trans-border mergers akin to the Vodafone-Hutchison deal for assessing possible tax evasion.

The Central Board of Direct Taxes (CBDT) is inspecting several trans-border mergers akin to the Vodafone-Hutchison deal for assessing possible tax evasion. The move comes after the Bombay High Court’s ruling last week that upheld the income tax department’s jurisdiction over taxing the cross-border deal.

We are in the process of investigating other cases. They are also in various stages of processing, CBDT Chairman S S N Moorthy told reporters on the sidelines of an Assocham seminar here. He said the department will not initiate any action till the expiry of eight weeks given by the court to the company to appeal against the order in the Supreme Court.

We will abide by the High Court order. So,we will not take any action till the time given by the High Court….the next step will be taken,(which is) of course,the issue of notice, Moorthy said.

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He,however,refused to name the deals being investigated by the department.

Tax authorities have been maintaining that the deal is taxable in India even though it took place outside the country,and Vodafone should pay capital gains tax on the transaction. The tax authorities had issued a show-cause notice to Vodafone,asking the company to explain why tax should not be imposed on its acquisition of Hong Kong’s Hutchison Telecommunications stake in Indian telecom JV Hutch Essar for over $11 billion in 2007. According to sources,the tax could be around Rs 12,000 crore. Many such deals like SABMiller-Foster and Sanofi Aventis-Shanta Biotech may feel the heat of the high court order,the sources added.

As regard the transfer pricing issue,Moorthy said the safe harbour rules,which would enable the tax department to accept the tax without inspecting the returns by the Indian units of foreign companies,would be soon put in place.

Safe harbour rules are at an advanced stage of consideration. I can’t share how the guidelines are going to be it will be a very favourable programme … we are working on it and it will be in place as early as possible, he said.

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A committee was formed last year to formulate rules for safe harbour regarding transfer pricing returns. Transfer pricing refers to the price at which one arm of a company,usually a multinational corporation,transfer goods or services to another division of the same organisation in order to calculate each arms profit and loss separately.

Moorthy also said that Taxes Code (DTC) bill proposes to bring PSUs under the ambit of Advance Rulings and Dispute Resolution (Authority) to resolve tax disputes.