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IT Man to focus on asset sales now
August, 15th 2008

It's not just mergers & acquisitions that have come under the tax scanner. All kinds of asset sales are now being looked at. Even if they take place offshore.

If the Income Tax Department has its way Corporate India will soon have no place left to hide.

Last year the Income Tax department slapped a notice on UK-based mobile firm Vodafone for non-payment of about USD2 billion in tax after it acquired a majority stake in Hutchison-Essar.

Though the deal was all done offshore, the Tax Department claimed taxability as the asset was Indian. But cross border mergers and acquisitions aren't the only asset transfers under the tax department's radar.

The IT Department has asked TIFC Cyprus owned by Network 18 to deduct tax on payments made to UTV Mauritius, a subsidiary of UTV India, for purchase of Distribution Rights of "Welcome."

Even though TIFC Cyprus is based in Cyprus and UTV Mauritius operates out of Mauritius and India has tax-treaties with both these countries, under the law that doesn't appear to matter.

BA Desai, Former Additional Solicitor General of India, "It lends itself to assessment. According to the law, it is the buyer who is sent notice."

But the courts aren't just deciding tax on the offshore sale of film rights - they're also being made to look at the offshore transfer of intangible assets.

Fosters - Australian for Beer. Or is it? Not if the Tax Department, has anything to say about it. The global beer giant has had to face the taxman's ire for its recent sale of the Foster's India brand and trademark to UK based SABMiller. The reason? Well, it appears as though the transfer of intellectual property, an intangible assetis also subject to tax.

According to leading corporate lawyer Satish Maneshinde, this widening of the tax net is untenable and sends out the wrong signals.

Satish Maneshinde, Senior Advocate, Bombay High Court, says, " To invite foreign capital to India and foreign companies to invest in India and then apply all these curbs which are contrary to law is like telling society and the world all over that despite whatever policies exist abroad, we Indians still rule with an iron fist and babuism will prevail."

But the taxmen hold a contrary viewpoint. An official from the IT Dept who spoke to CNBC-TV18 explained that it was these changing frontiers of Indian business that had shifted the Tax department's focus.

"The IT Act is subject to various interpretations - the nature of economic activity is such that it does not lend itself to standard behaviour. The Act tries to take into account the economic activities of each person and it is a huge and controversial thing. Under the same Act we have so many varied interpretations and each asset transfer is a separate case. Wherever there is profit there is tax," he said.

With opinions widely divided on both sides of the debate and the Income Tax Department hungry to set legal precedents, future transactions can only become even more confusing for corporate India.

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