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Kraft's Cadbury Purchase Under Scrutiny In India

by Mary Swire,, Hong Kong

07 January 2011

The Indian Finance Ministry is looking into whether Kraft Foods might have avoided paying Indian taxes when it acquired Cadbury last year for USD19bn. This is after a public interest lawsuit filed in the Delhi High Court last year in which Kanth & Associates, a Delhi-based law firm, argued that Kraft had avoided tax liabilities related to the sale of shares and capital assets in India.

The investigation comes hot on the heels of a demand to Vodafone for INR110bn (USD2.4bn) capital gains tax by the Indian income tax authorities. This was in respect of the USD11.2bn acquisition of Hutchison Telecom International Ltd’s stake in a Cayman Islands company, by virtue of which Vodafone acquired the Indian Hutchison Essar mobile phone network. An upcoming court hearing will consider the jurisdiction of the Indian tax authorities to demand capital gains tax, since Vodafone has maintained that there is no jurisdiction, the main agreements having been signed abroad between non-Indian entities. It has come to light, however, that a small number of acquisition documents involving Indian interests were signed in India. It has been acknowledged by the supreme court that an apportionment of liability to reflect the Indian content of the contract might be a possibility.

Access to India’s fast-growing economy, as well as other emerging markets, was believed to be one of the main reasons for Kraft Foods to strike a deal for Cadbury, which has a distribution network of 1.2 million outlets in India.

The general consensus among tax experts is that Kraft has strong grounds to defend itself in this matter. They say that Kraft’s buyout of Cadbury is a global acquisition, where only some value is attributable to India, and that this is completely different to the Vodafone case.

A Kraft spokesman told Reuters that the company has been made aware of the writ, but added that the firm "is fully committed to complying with Indian law."

TAGS: court | tax | business | India | law | mergers and acquisitions (M&A)

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