Taxman at Cadbury door, seeks Kraft deal details

The income tax department has written to Cadbury India seeking information on its global acquisition by the US-based Kraft Foods Inc.

A highly placed source, with direct knowledge of the contents of the letter, said the department has sought a copy of the sale and purchase agreement or share purchase agreement between Kraft, the largest US-based confectionery, food, and beverage company, and Cadbury, the UK-based maker of Dairy Milk and Bournville brand of chocolates.

Kraft bought Cadbury in a $19 billion transaction announced on January 19 last year.

The department is also learnt to have sought other details pertaining to the transaction, including whether any tax return was filed in India by Cadbury, which reflected capital gains arising from the deal.

The letter follows directions given by the Delhi High Court on a public interest litigation, which sought levy of tax on the deal.

The court had directed government to examine the allegations levelled by the petitioner, Ved Prakash.
While parallels will be drawn with the Rs11,000 crore Vodafone tax litigation, experts said there
is one big difference between the two deals.

“The Kraft-Cadbury deal is a global transaction involving the entire spectrum of Cadbury companies across the world, of which India is a relatively small part. So, in any case attacking such transactions can become a significant dampener to global mergers and acquisitions activity, wherever there is an India company involved,” said Ketan Dalal, joint tax head, PwC India.

KPMG India tax head Uday Ved said such deals were never supposed to be covered even under the proposed Direct Taxes Code, which has a provision that indirect transfers may be subject to capital gains tax in India, provided the Indian assets are 50% or more than global assets.

The government probed Kraft last week after a social activist named Ved Prakash alleged the company of tax evasion and flouting of buyout norms.

He said while acquiring Cadbury, Kraft was supposed to pay tax on the acquisition of the India business.

According to reports, the government initiated the questioning under the Income Tax Act on an order from the Delhi high court.

Prakash had filed a complaint against Kraft seeking action against the entities involved for flouting takeover laws. He said that the Indian exchequer had suffered a huge loss on account of tax evasion in Kraft’s takeover of Cadbury.

With the acquisition of Cadbury, Kraft is looking to be the largest chocolate maker in India. The company intends to leverage Cadbury’s distribution strength to bring in products across confectionery, dairy and snacks in the Indian market. Kraft will then have an upper hand over players like Nestle.

— With inputs from Shailaja Sharma