India Examines Possible Tax Evasion in Kraft Takeover of Cadbury

Indian officials are investigating whether Kraft Foods evaded taxes in its $19 billion takeover of Cadbury last year.

The Ministry of Finance is examining Kraft’s tax liabilities related to the takeover, on the heels of a public interest lawsuit filed last year in the Delhi High Court. In the suit, a lawyer based in New Delhi asserted that Kraft had “completely and illegally avoided” tax liabilities related to the sale of shares and capital assets in India, which had caused “substantial loss to the Indian economy.”

In a letter dated Dec. 22 referring to the public interest suit, which was shown to The New York Times by the law firm that filed the suit, a finance ministry official wrote, “action has been initiated in the matter under the Income Tax laws.”
Under Secretary Salil Mishra, the official who wrote the letter, said on Monday that he could not comment on the issue.
Access to India’s fast-growing economy, as well as other emerging markets, was a crucial reason Kraft Foods struck a deal for Cadbury, analysts and Kraft executives said as the deal was forged.
Cadbury has a 1.2 million-outlet distribution network in India, and was the country’s largest confectionary company before the takeover, with more than double the market share of its closest competitor.
A Kraft spokesman in India said on Monday that the company was not aware of any litigation or investigation related to tax matters and the Cadbury deal, adding that Kraft had not been contacted by the Indian government on the matter.
Gaurang Kanth, the lawyer in New Delhi who filed the public interest suit, said he could not estimate what Kraft’s total tax bill should be in India, but said that it would be sizable. Mr. Kanth said he filed the suit because companies were “building in the Indian market and selling in the Indian market, without any sales proceeds coming back to India.”
“If you are getting something from India,” Mr. Kanth said, “you should be paying back in to India.”
The Indian government has a multitrillion-rupee budget deficit, he said. Public interest lawsuits in India are often used to protect the rights of the poor and working class.
It is the second multibillion-dollar deal between international companies to run into tax issues here.
The telecommunications giant Vodafone is still appealing Indian court rulings last year that it was liable for about $2 billion in capital gains taxes on its $11 billion acquisition in 2007 of a controlling stake in one of India’s largest cellphone companies. Vodafone has argued that there is no legal precedent for asking an acquiring company to pay capital gains taxes.
But tax experts in India say the Vodafone case has little in common with Kraft’s buyout of Cadbury.
Vodafone’s takeover in India and the Kraft-Cadbury deal are “not comparable at all,” said Dinesh Kanabar, a deputy chief executive and tax expert at KPMG in India.
“In Kraft’s case, there was a sale overseas of Cadbury, which was a global transaction, and India was just one small portion of the deal,” Mr. Kanabar said. Indian tax authorities are unlikely to weigh in on an international transaction where only a fraction of the assets changing hands are Indian.
The public interest suit itself relies on India’s long-standing income tax laws to make its case.
According to the suit, “the brands, goodwill, franchise, market share, customer lists, relationship and the value of market, etc., are capital assets,” and any accruals from the transfer of these assets is taxable under Section 4 of the 1961 Income Tax Act.
Kraft is “under an obligation to deduct the income tax while making the said payment towards the acquisition,” the suit argues.