A triumph of substance over form


Will we witness a sea change in Indian tax jurisprudence after the Vodafone case?

Is it the beginning of an era in which tax lawyers focus on the substance of a transaction and not merely its form? Certainly, this may have been on Nishith Desai’s mind after tax authorities won the first round of their closely watched duel with Vodafone, an international telecoms company. “We have to look at the big picture, we have to take an integrated approach,” he said. Commenting in last month’s issue of India Business Law Journal, Desai, the managing partner of Nishith Desai Associates, said that when an aggressive tax authority comes knocking on your door, every document, statement and grandiose claim on your website may be fair game. Form is clearly unimportant.

Leader 1010Tales of tax feuds such as this one capture the public imagination, a remarkable feat for a field of law that is best known for its propensity to baffle and befuddle. But while the pundits and the politicians debate the underlying issues, the big money generally sits it out.

If that is to happen, many observers will rightly ask whether India can afford a regulatory regime that focuses on substance rather than form. India Business Law Journal considers this to be a valid question, worthy of further debate. But at the same time the country must find a way of balancing investors’ needs for certainty with tax authorities’ needs to investigate deals that fall within India’s territorial nexus.

In this month’s What’s the deal? (Caught in the net, page 41), Pranay Bhatia and Aditi Sharma of Economic Laws Practice assess the uncertainties surrounding the taxation of international M&A deals and offer guidance on how best to proceed in the current climate. Their analysis reveals that India is not alone in looking beyond its borders for tax revenue. Other countries too have begun to demand tax on offshore deals that have a nexus to their jurisdictions.

Given this stark new reality, one may be forgiven for predicting a slowdown in M&A activity. Yet as is so often the case, India is proving the sceptics wrong. Our Cover story reveals that India-related M&A activity is not only flourishing, but has reached fever pitch (The art of the deal, page 17). In the first quarter of 2010, the value of deals completed was a staggering 75 times greater than that in the same quarter last year.

Our coverage scrutinizes the boom in dealmaking, while the accompanying Practitioner’s perspectives, written by lawyers from Dua Associates, Majmudar & Co and Phoenix Legal, provide expert guidance to in-house counsel who find themselves at the cutting edge of international transactions.

As M&A continues to thrive, India Inc is steadily making its mark around the world. One of its latest frontiers is Latin America, where acquisitive Indian companies are forging deals in sectors as diverse as natural resources and pharmaceuticals (A new American dream?, page 31). Where clients lead, their legal advisers inevitably follow. It’s no surprise, therefore, that Indian law firms are also seeking opportunities in the region. Chennai-based Surana & Surana, for example, has established tie-ups with law firms in South America and currently has an Argentinian law student interning with it.

While India searches for opportunities overseas, it must not lose sight of challenges at home. In a no-holds-barred interview with India Business Law Journal, prominent civil liberties lawyer Prashant Bhushan speaks candidly about the quality of justice in the country (Cleaning up India’s courts, page 27).

“You can’t do honest business in India,” laments Bhushan, adding that “in major corporate cases involving huge financial stakes, you need to fix the judges and you need to find the lawyers who can do that”. Bhushan’s outspoken opinions have landed him with contempt of court charges, but nevertheless provide food for thought for consumers of justice.

For yet more controversy, look no further than this month’s Vantage point (page 40). In it, Sanjay Kamlani, the co-CEO of Pangea3, a legal process outsourcing company, furthers the heated debate on outsourcing – a timely topic as the US president, Barack Obama, will be in India next month (News, page 11). Kamlani is fiercely critical of Obama’s new tax rules and employment restrictions, which he believes will not only harm India’s outsourcing sector, but also the US economy. “The best way to protect American jobs is to eliminate trade and immigration hurdles … and for US companies to operate outside their country,” he says.

India’s legal profession, which remains firmly closed to foreign participants, may not be the best example of the kind of openness that Kamlani espouses. The “closed” nature of the legal market extends well beyond the prohibition of international law firms. Indeed, in a profession that is still dominated by family run firms, even Indian lawyers may struggle to achieve prominence without a lineage of lawyers behind them. From a client’s perspective, the closed mentality may be apparent in different ways, perhaps none more striking than the lack of transparency in law firm billing.

Since the publication of its first billing rates survey in 2007, India Business Law Journal has sought to lift the shroud of secrecy that often surrounds legal fees. Such efforts have been welcomed by in-house counsel. “Increased levels of transparency will help in evaluating the appropriate firm for the matter,” says Sree Patel, the head of legal and corporate affairs at GlaxoSmithKline in Mumbai.

Our fourth annual survey of law firm billing rates is presented in this month’s Intelligence report (page 45). A total of 40 law firms participated this year, the largest number to date. The results reveal sharp rises in hourly fees and highlight growing client demands for alternative billing arrangements.

Average fees have increased by almost 7% since last year, and clients looking for an hour of a senior associate’s time should expect to pay an average of US$159. Managing partners enjoyed a more modest increment than their junior colleagues. Their average hourly fees rose by 3.1% to US$297.