Holcim's $6.4 billion deal with Gautam Adani to be a tax-free transaction?

Switzerland-based Holcim Group said no capital gains tax would be paid in India for its $6.4 billion transaction to sell stakes in Ambuja Cements and ACC to the Adani Group.
Addressing an investor call, chief executive Jan Jenisch also said the company would not provide indemnity against fines that have been imposed on the two Indian cement companies by the competition watchdog, and which are currently being litigated in the Supreme Court.

"According to our analysis, it is a tax-free transaction," Jenisch told analysts. "Never know if any complication arises, but we assume we will get the 6.4 billion Swiss francs (about $6.4 billion) as net proceeds."

Tax department officials told ET that the deal was unlikely to face capital gains tax if Holcim had acquired the stakes before 2017, when India and Mauritius renegotiated their bilateral tax treaty and withdrew the capital gains tax exemption available to investments from the island nation. A Mauritius-based investment company of the Holcim Group had acquired Ambuja Cements (then Gujarat Ambuja Cement) in January 2006 for ₹4,500 crore.

'Assessing Officer to Take Final Call'
All transactions routed via Mauritius prior to the 2017 amendments were grandfathered, allowing them to enjoy exemption on capital gains tax. "A final decision will be taken by the assessing officer based on the merits of the case," a tax official said. The Adani Group is buying the two companies for $10.5 billion, and Holcim's stake in the deal is worth $6.4 billion.



The new buyer will be liable for the fines levied on them by the competition watchdog, Holcim said.

"It's a straightforward sale of the shares. There is no further indemnification from our side," Jenisch said.

The two companies, along with multiple other cement manufacturers, were found guilty of cartelisation during a 2016 investigation by the Competition Commission of India. The antitrust body had imposed a fine of Rs 1,164 crore on Ambuja Cements and Rs 1,148 crore on ACC. The companies challenged the order in two appellate authorities, which ruled against them. They moved the Supreme Court in 2018 and a judgement is awaited.

The Swiss company's management said choosing the Adani Group as the buyer of its India assets would ensure a smooth transaction, given the latter has negligible prior interests in the cement industry and so was unlikely to run afoul of competition laws.

Tax Treaties to Help

Minhaz Lokhandwala, a partner at law firm IndusLaw, said Holcim would also have protection under the India-Netherlands Double Taxation Avoidance Agreement (DTAA).

The seller in the deal is Holderfin B.V., a Netherlands entity Holcim that held the stakes through Mauritius-based Holderind Investments Ltd, Lokhandwala said. "As per the India-Netherlands Double Taxation Avoidance Agreement, gains from the sale of property, other than some specified property, is taxable only in the state of which the seller is a resident, i.e., the Netherlands in this case," the lawyer added.

"Accordingly, under the DTAA, India may not have the right to tax the transaction, though substantial value of the Mauritius company may arise from assets located in India. This being the case, there may be no withholding tax obligation here, as the indirect tax provision under Indian tax laws would also be overridden by the India-Netherlands treaty," said Lokhandwala.

Contingent Liabilities

According to Sonam Chandwani, managing partner of law firm KS Legal & Associates, because the obligations assumed by the Adani Group from the antitrust cases were still contingent liabilities, the final valuation might vary depending on the outcome of the Supreme Court verdict.

"It would be interesting to study how valuation changes over time, as this is the core issue that must be solved," said Chandwani. "The companies are fighting at the apex court. This makes the Adani Group accountable for any tax and antitrust liabilities stemming from the deal. The selling of shares does not require indemnification, benefiting the Holcim Group and the transaction. Adani Group's presence in India may help it overcome the two firms' liabilities," she added.

Proceeds to Fund Buyouts

The proceeds from the sale will be used by the Swiss cement maker for acquiring assets in other geographies. The company said it has a pipeline of around 10 merger and acquisition deals.

"We have just spent over 5 billion Swiss francs in the last 15 months and we hope we can keep a similar pace so we will put this money to work very fast," the Holcim chief executive said. "We have quite a good pipeline in M&A. So, our job is to check all the transactions and come up with a good one."