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Mumbai, New Delhi, Dec. 4 Wednesday’s High Court dismissal of Vodafone’s writ petition against the income tax demand on them could have a potential implication on several other M&A deals, industry watchers feel.

Mr Rajesh Chaturvedi, Managing Partner of CA firm Chaturvedi and Shah, who were representing the income tax department in the case feels that this High Court judgement cannot be applied as a general rule for all M&A activity in the country.

“If the transfer of shares were done through a country such as Mauritius, with which India has a tax treaty, then the laws governing the tax treaty would have applied. Since India does not have any treaty with Cayman Islands, local Indian laws would apply,” he said.

A senior CBDT official said this would have a bearing on only deals in which both the parties are incorporated overseas. “Where even one of the parties is resident in India, such a situation would not apply,” he said.

Mr Uday Ved, Tax Head, KPMG: “A non-resident is taxable in India under Section 9 of the Income-tax Act only if income accrues or arises through or from a business connection or transfer of capital asset situated in India. In the present case, there was no business connection in India. Further, there was no transfer of capital asset situated in India because the situs of shares of the Cayman Island company were situated outside India. By acquiring shares of the Cayman Island company, Vodafone did not acquire any right or controlling interest in the assets of the Indian company.

“Under the Income-tax Act, the tax needs to be withheld only when income is taxable in India. If the income is not taxable in India, there is no question of withholding of any tax in India,” Mr Mukesh Bhutani, partner, BMR Advisors said:

“The written ruling is not out as yet. The case was evenly balanced on an issue of law, which was not clear. The Bombay High Court move would strengthen the revenue department’s resolve to bring to tax in India a number of cases where there was offshore transfer of ownership of shares.”

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