The finance ministry has launched a probe to find out whether the $40-billion US foods giant Kraft Foods is liable to pay taxes for its $19.6-billion acquisition of British confectioner Cadbury Plc, The New York Times' DealBook blog reported yesterday.

Illinois-based Kraft had acquired London-based Cadbury in February 2010 in one of the most acrimonious takeovers in the UK's corporate history to create the world's largest chocolatier with $50 billion in annual sales. (See: Shareholders approve Kraft's acquisition of Cadbury)

The acquisition included Cadbury's Indian subsidiary, Cadbury India,  among the UK company's top revenue earners in emerging markets.

The Indian probe comes after a public interest litigation (PIL) filed late last year by social activist Ved Prakash in the Delhi High Court, seeking action against Kraft for avoiding taxes on the acquisition involving the sale of Cadbury shares and assets in India.

According to Prakash's lawyer Gaurang Kanth, the amount of tax owed to the Indian government by Kraft could not be estimated, but it would be substantial, and he has listed out Cadbury brands, goodwill, franchise, market share, customer lists, and market value, among its assets.

In response to the PIL, the Delhi High Court has directed the finance ministry to probe whether Kraft has evaded paying taxes in India for its acquisition of Cadbury.

The probe will be widely watched as it will set a precedent for other overseas takeovers, where a company's Indian assets are involved.

The move comes after the Indian government slapped a Rs11,218 crore ($2.5 billion) tax bill on UK's telecom giant Vodafone for its 2007 acquisition of Hong Kong-based Hutchison Whampoa's 67-per cent stake in Hutch-Essar in India.

In September 2007, the tax department initiated proceedings against Vodafone in an attempt to recover the taxes which, in its view, should have been withheld from payments made to Hutch. It justified its position by piercing the corporate veil of numerous intermediary entities to hold that the transaction led to the indirect transfer of controlling interest in the Indian operating company.

Vodafone, then, filed a writ petition before the Bombay High Court challenging the Department's jurisdiction to pursue an offshore transaction of this nature, having absolutely no nexus with the territory of India.

Vodafone later moved the Supreme Court challenging a lower court order on the I-T department's demand of Rs11,000 crore by way of capital gains tax on Vodafone's acquisition of Hutchison Wampoa's majority stake in Hutch Essar in India. (See: Supreme Court asks Vodafone to deposit Rs2,500 crore in tax case)