By Gaurav Choudhury From Money Control

Tax authorities could draw parallels between the Vodafone’s acquisition of Hutchison Whampoa’s telecom assets in India in 2007.

Question marks loom over potential tax disputes over Walmart’s majority buyout of online Flipkart, likely to be announced today, in what could be a throwback to the row that British telecom giant Vodafone is facing over its acquisition of Hutchison’s telecom assets in India more than 11 years ago.

The Walmart-Flipkart deal will rank as the biggest inbound transaction, greater in value than the USD 12.9 billion Essar Oil-Rosneft deal.

The transaction is likely to take place in Singapore where Flipkart is registered. That, however, may still attract taxes in India, given that Flipkart is primarily an ‘Indian’ asset.

Tax authorities could draw parallels between the Vodafone’s acquisition of Hutchison Whampoa’s telecom assets in India in 2007. It paid USD 11 billion for 67 percent of Hutchison Essar.

A Cayman Islands-registered arm of Hutchison received the payment from Vodafone.

India’s Income Tax (I-T) department, in September 2007, issued notices to Vodafone saying it was liable to pay taxes on the transaction. The I-T department’s argument was that the Cayman Islands transaction was essentially a transfer of an Indian asset and, therefore, Vodafone should have deducted tax (often called withholding tax) when it paid Hutchison for the deal.

Vodafone had contested it in courts on the basis that no tax was due in any event as the deal was concluded in the Cayman Islands.

In January 2012, the Supreme Court ruled in Vodafone’s favour, holding that tax authorities do not have jurisdiction on an overseas transaction, thus setting aside a Bombay High Court judgement asking the company to pay income tax of Rs 11,200 crore.

Shortly thereafter, in the budget for 2012-13, the then finance minister Pranab Mukherjee introduced amendments in the Income Tax Act empowered authorities to tax companies for acquiring assets in India even if the deal was concluded overseas, retroactively from April 1, 1962.

According to these rules, which have come to be known as the “Retrospective Tax,” any asset which is registered or incorporated outside India shall be deemed to be situated in India if the assets “substantially” located in India.”

Vodafone has since initiated arbitration proceedings under the India-United Kingdom and India-Netherlands Bilateral Investment Protection Agreement in connection with the tax demand.

There is a possibility that taxmen may apply the same rules for the Walmart-Flipkart deal.

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