India’s tax raj finds a way to lose Japanese friends
When I characterised India’s refusal to let the Tata group pay damages to NTT Docomo Inc. as the “depth of dumb,” I had no idea that the pit of bureaucratic absurdity could be bottomless. Now I know.
And so should the Japanese prime minister. Shinzo Abe was in India this week to sell a 316-mile Shinkansen bullet-train line from Mumbai to Ahmedabad, the main city of his Indian counterpart Narendra Modi’s home state of Gujarat, lovingly gift-wrapped in the $17 billion needed to finance it.
The private sector is latching on to the Abe-Modi bromance. Suzuki Motor Corp., by far the biggest success story of Japanese investment in the country, is considering a fourth production line in the western Indian state to take total capacity there to 1 million cars a year, according to media reports. Together with Toshiba Corp. and Denso Corp., Suzuki will also make lithium-ion batteries, again in Gujarat.
With this wave of good news comes a most unexpected spoiler: Docomo. As Dev Chatterjee reports in the Business Standard, the Indian authorities want the Japanese company to pay $390 million in taxes on the $1.25 billion it won as damages for a breach of contract by its partner.
This is Vodafone 2.0. By slapping a retrospective tax demand on Vodafone Group Plc in 2012, India spooked global investors. At least in that case, which lingers, the tax authorities were going after a windfall for Li Ka-shing’s CK Hutchison Holdings Ltd. (The British carrier bought control of an Indian telco from CK’s Hutchison Telecommunications International Ltd, but didn’t withhold capital-gains tax because the deal was a transfer of shares outside India.)
With Docomo, though, India wants to tax a foreign investor’s compensation for the pain it suffered over breach of contract by its Indian partner. Here’s the start of another messy courtroom battle, generating the sort of headlines Modi wouldn’t want Abe to read.
Docomo is very clearly the aggrieved party. In 2009, Tata group chairman Ratan Tata promised his partner in a wireless joint venture that if things didn’t work out in five years, the Indian conglomerate would either find a buyer for the 26.5% stake, or take over the shares by paying Docomo half the value of its original $2.2 billion investment. When Docomo did exercise its put option, Cyrus Mistry, Tata’s successor, said that the Reserve Bank of India (RBI) was refusing the request to buy out Docomo because fixed-price put options are illegal under Indian law.
When arbitrators in London asked Tata group to pay the same amount in damages instead, the Indian group appealed in Delhi high court. Soon after, Ratan Tata made a surprise return by sacking Mistry in a boardroom coup. By the end of February, the warring partners had patched up. In April, the court threw out the central bank’s lame objection to the consent agreement and allowed Tata to make the payment—after Docomo obtained a withholding tax certificate.
That last requirement sounded like a formality. After all, Docomo isn’t an options trader; nor is it in the business of suing partners for profit. It would take a leap of imagination to argue that Docomo had earned an income. But according to the Business Standard report, that’s exactly what the authorities are claiming.
When Docomo’s lawyers assure CEO Hiroyasu Asami that they’ll eventually triumph because the Supreme Court ruled in 2010 that liquidated damages aren’t income, he should ask them just one question: When did that dispute first arise? The answer is 1973.
The British-built Indian Railways may be getting a Japanese makeover. For the British-built Indian legal system, though, there’s no bullet train. Bloomberg Gadfly
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