In the year 2012 Vodafone challenged a demand of USD 2.4 billion as withholding tax pursuant to its acquisition of Hutchison’s operations. In this case, the Supreme Court of India gave us a landmark jurisprudence related to taxation on indirect transfers. The Supreme Court held that Vodafone had no liability to withhold taxes as the transaction was an ‘outright sale’ of capital assets outside the country between two non-residents having no taxable presence in India.
The relevant existing law in relation to location of assets is provided in Explanation 5:
“For the removal of doubts, it is hereby clarified that an asset or a capital asset being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be and shall always be deemed to have been situated in India, if the share or interest derives, directly or indirectly, its value substantially from the assets located in India”
Certain conditions now have been brought in the above Explanation 5:
“Provided that nothing contained in this Explanation shall apply to an asset or a capital asset, which is held by a non-resident by way of investment, directly or indirectly, its value substantially from the assets located in India:
Explanation 6.—For the purposes of this clause, it is hereby declared that—
(a) the share or interest, referred to in Explanation 5, shall be deemed to derive its value substantially from the assets (whether tangible or intangible) located in India, if, on the specified date, the value of such assets—
(i) exceeds the amount of ten crore rupees; and
(ii) represents at least fifty per cent of the value of all the assets owned by the company or entity, as the case may be;
Thus, in order to attract the indirect tax provision, the above two criterions have to be met with that is either the value exceeds Rs. 10 crore (Approx. USD 13 million) and the 50% of the value of the assets including intangible like number of subscribers etc, owned by the company is located in India.
Following the announcement by the Trump-led government to ban-TikTok in the USA, there has been news of Microsoft planning to acquire TikTok’s global operations. With TikTok being also banned in India recently due to its ownership being vested with Chinese entities, the acquisition by the USA tech giant might provide the company a new face to win back its subscribers. We are now analysing that if Microsoft were to acquire TikTok in USA, what tax implication, if any, it will attract in India especially in view of the recent above amendment in Indian Tax Law.
Although TikTok has around 500 million subscriber base in India and is valued at 5-10 billion USD. Whereas, TikTok has been recently valued between 30-50 billion USD. Thus the value of its assets in India does not equate substantially to the value of its entire assets owned by the company.
Further, Explanation 5 (above), mandates that a company “will be deemed to have been situated in India, if the share or interest derives, directly or indirectly, its value substantially from the assets located in India. This provision thus also cannot be applied in this case”
For further clarity the recently introduced Proviso above also include and defines what is ‘fair market value’:
“(c)the value of an asset shall be the fair market value as on the specified date, of such asset without reduction of liabilities, if any, in respect of the asset, determined in such manner as may be prescribed;”
Thus, unless the qualifying requisites as introduced recently are met with, the deal will be unlikely to incur, attract or trigger withholding tax in India. This is a reformist amendment in Indian Tax Act and is a qualifier of the earlier controversial amendment which Vodafone had to deal with, wherein the amendment was introduced retrospectively, and companies were taken off guard and burdened with heavy tax. At that time, Vodafone decided not challenge the amendment per se. Thus, the 2012 Amendment still remains ‘retrospectively’, however with certain much needed qualifier in place now.