A Project Report On CASE STUDY OF MERGER OF VODAFONE AND HUTCHINSON Submitted towards the partial fulfillment of 3rd Semesterof M.B.A. (Insurance) Degree course, for the subject MERGERS AND ACQUISITIONS Submitted by: Samudra Singh & Bhana Ram Tak M.B.A. (Insurance) 3rd Semester Roll no. 233 & 223 Submitted to: Dr. U.R.Daga Faculty of Management National Law University NATIONAL LAW UNIVERSITY, JODHPUR 2010 Today Vodafone business in India has been successfully integrated into the group and now has over 44 million customers. the most commonly adopted method of consolidation by firms has been through M&As.While India’s revenues grew by 29. In human aspects of M&As we used a not-too-original distinction between mergers. M&As represented a ‘marriage’. Mergers and Acquisitions (M&A) are welcome everywhere.5 million net additions per month since acquisition In today’s volatile market. Vodafone acquisition of hutch is a major contributor to its revenue . Acquisitions may be welcomed by the acquired company or they may be vigorously contested. However.INTRODUCTION In an increasingly open global economy. There are several alternative methods of consolidation with each method having its own strengths and weaknesses. where old prejudices against foreign ‘predators’ and old fears of economic colonization have been replaced by a hunger for capital. While acquisition refers to acquiring control of one corporation by another. they are legally different transactions. merger is a particular type of acquisition that results in a combination of both the assets and liabilities of acquired and acquiring firms. there are subtle differences between the two. Though both mergers and acquisitions lead to two formerly independent firms becoming a commonly controlled entity. Although mergers and acquisitions are generally treated as if they are one and the same thing. In a merger. depending on the given situation. 7 percent in Australia and 3 percent in New Zealand at . In an acquisition. Revenues increased by 50 per cent during the year driven by rapid expansion of the customer base with an average of 1. one company buys sufficient numbers of shares as to gain control of the other—the acquired company. while joint ventures meant ‘cohabiting’. with over 50 per cent pro forma revenue growth. where major M&A deals are showing negative growth or companies are looking for Government Bailout money. acquisitions and joint ventures.6 percent other APAC countries posted far lower growths at 10 percent in Egypt. only one organization survives and the other goes out of existence. There are also ways to acquire a firm other than a merger such as stock acquisition or asset acquisition The Vodafone-Hutch deal is one of the largest M&A deal executed by overseas firm in Indian subcontinent. the Orange brand name replaces Max Touch in Mumbai. Aircel Diglink India Ltd. This Report covers the various aspects of M&A along with insights on Vodafone Merger. 1995 HMTL launches mobile services in India under the Max Touch brand name. 2000 (Jan) Hutchison acquires a 49 per cent stake in Sterling Cellular in the Delhi circle from Swisscom. which operates in Gujarat. Hutchison acquires licence to provide cellular services in Punjab. 1998 Max’s Analjit Singh sells 41% stake in Hutchison Max to Hutchison Hong Kong. Karnataka and Maharashtra. a joint venture between Hutchison and Max. . an Essar Group company.constant exchange rates. 2000 (Sep) Hutchison acquires a 49 per cent stake in Fascel. Uttar Pradesh (East) and Haryana to Hutchison Essar. A few weeks later. from Shinawatra. It wins all except Maharashtra. C. 2000 (July) Hutchison and Kotak together acquire a 100 per cent stake in Usha Martin Telekom in Kolkata circle. wins the licence to provide cellular services in Mumbai. Andhra Pradesh. Essar was running these operations through group company. This is bought from Escotel. Sivasankaran sells 51% stake in Delhi’s Sterlings Cellular to Essar group. 2003 Essar Teleholdings sells its operations in Rajasthan. 2001 Hutchison puts in the bid to provide cellular licences in Chennai. HISTORY: Hutchison-Essar Year and Events 1994 Hutchison Max Telecom Limited (HMTL). 1996 Swisscom sells 49% stake in Essar Cellphone to Hutchison. acquires a 19. the seller. made huge capital gains. In February 2007 Vodafone announced officially its acquisition of 67% of Hutch-Essar for $11. Hutchison. Egyptian cellular service provider. 2006 Kotak sells 8. Launches services in Punjab.16% stake in Hutchison Essar for Rs. Vodafone was the buyer.33% stake to Analjit Singh for Rs 1019 crore. A little later. Orascom. Hutch becomes a national brand. Hutchison wants to exit. The transaction was executed through a Hutchinson company located in the Cayman Islands Round 1: began in September 2007. During the same year. which has saddled it with a US$2. FACTS OF THE CASE In 2007. Hutchison-Essar receives the letter of intent (LoI) from the government to provide cellular services in six more circles.2004 Essar picks France Telecom’s 9. Hutchison. Vodafone has been battling it out in the courts against the Indian Income Tax (IT) department.08 billion defeating the rival bidder Reliance Communications. 657 crore.11 stake from the Hindujas to increase its direct and indirect stake in Hutchison-Essar to 67 per cent. Vodafone Group bought the Indian telecom assets of Hong Kong's Hutchison Telecommunications International Ltd.1 billion tax claim. . Essar Teleholdings buys Max Telecom Ventures 3. when the Tax Department issued a show cause notice to Vodafone that said Vodafone was liable to pay withholding tax on the purchase amount. Yet since then. Hutchison Essar signs agreements with the Essar Group to acquire BPL Communications and Essar Spacetel. It paid US$11 billion for a 67% stake in Hutchison Essar. Also receives approval from the regulators to consolidate its operations in India. The latter was the operating company in India for what is now the third-largest operator with 111 million users. Hutchison Telecommunications International Ltd (HTIL) gets listed on the Hong Kong and New York stock exchanges.9% stake in BPL Communications. HTIL acquires a 5. Essar holds the balance 33 per cent. West Bengal and Uttar Pradesh (West). is nowhere in the picture. which pocketed the capital gains.3 per cent stake in HTIL. 2005 Hutchison Essar consolidates its various mobile companies in India to create a single entity. Many important documents relevant to the deal have never been made public. which is the owner of the remaining 33%. Vodafone Essar is owned by Vodafone 52%. VODAFONE Vodafone is a mobile network operator with its headquarters in Newbury.. Vodafone agreed to acquire the controlling interest of 67% held by Li Ka Shing Holdings in Hutch-Essar for US$11. Vodafone currently has operations in 25 countries and partner networks in a further 42 countries. It is the largest mobile telecommunications network company in the world by turnover and has a market value of about £75 billion (August 2008). In such transactions. UK. 15%. Hutchison held call options over companies controlled by Asim Ghosh and Analjit Singh as also over SMMS Investments Pvt. 2007. The whole company was valued at USD 18. has the Indian assets and. Essar Group 33%. and Essar Group. the Supreme Court sent the case back to the Tax Department to decide on the jurisdiction issue. . chosen by the company to “reflect the provision of voice and data services over mobile phones.8 billion. Ltd. those can be attached if there is any default. The benefit of these options enured in favour of a corporate entity called 3 Global Services Private Ltd. on the other hand. pipping Reliance Communications. The buyer. 2007. In January 2009. England. the buyer is supposed to deduct tax at source (or withholding tax) and pay that to the government.Round 2: Vodafone filed a writ at the Bombay High Court disputing the tax department's jurisdiction in an overseas transaction. and other Indian nationals. Berkshire. The transaction closed on May 8. in a worst case scenario. Hinduja Group. The name Vodafone comes from Voice data fone.1 billion. so it is unclear if the tax claim is a result of Vodafone's overlooking a key issue or overconfidence. 1956. aggregating to approximately 15% of the shareholding of HEL. But the petition was dismissed and Vodafone then appealed to the Supreme Court marking the third round of hostilities. On February 11. a company registered under the Companies' Act. This is a transaction involving foreign companies and the seller can easily disappear once the money is in the bank. As of Nov 2008 Vodafone Essar has 58764164 or 23.3 million customers at 31 December 2006. with operations planned to be launched during 2007. Up until January 2006. invests in it and exits at a neat premium. While Watsons operates 7. PARKnSHOP is a supermarket chain. is known as a businessman who spots an opportunity early. of which nine have 900 MHz spectrum. In October 2006. Li could be looking at a third entry. It is only after he exits that the rush begins. Hutch Essar reported revenue of US$1. he sold his stake in Star TV to Rupert Murdoch for $825 million. Getting access to the ports business in India is difficult. •A right time to quit Indian operations to finance other operations Li Ka-Shing was the 10th richest man globally in 2006. thereby adding three circles.48 billion. Hutch Essar acquired Spacetel. and operating profit of US$313 million. In the six months to 30 June 2006. with retail being the new mantra in India. In the year to 31 December 2005. HUTCH-ESSAR Hutch Essar was a leading Indian telecommunications mobile operator with 23. Hutch Essar reported revenue of US$908 million. .4% national market share. each operating with 900 MHz spectrum. Reasons for Hutch Sale There are two main reasons which are responsible for Li Ka-shing to leave India.700 stores in 37 countries. adding six further licenses. EBITDA of US$297 million. In the early 1990s. and operating profit of US$226 million. However.282 million. EBITDA of US$415 million. Hutch Essar had licenses in 13 circles. They are •Hutch-Essar: Mutual Distrust. In January 2006. thanks to being from China.57% of total 249349436 GSM mobile connections in India. His retail outfits include Watson’s and PARKnSHOP. representing a 16. Vodafone India’s share in the mobile phone operator market rose to 18 percent. Hutch Essar operates in 16 circles and has licenses in an additional six circles. The Hutch Essar deal has netted him a neat $8. Hutch Essar acquired BPL. What could he do with that money? Li is a major player in the ports and retail businesses. ) FINANCING THE DEAL VODAFONE’S successful bid for Hutchison’s 67 per cent stake in Hutch Essar may have been driven by its compulsions to enter the high-growth Indian market. It has also sold its 25 per cent stake in Swisscom Mobile and exited Belgium.62 billion may go towards funding the $11. However.1-billion price tag for the 67 per cent stake. Vodafone has free cash reserves (for the first six months of 2006) in excess of $3 billion. which had licences for Maharashtra. In addition.3 per cent stake in Hutchison Whampoa. but what clinched the deal for the UK-based company was the enormous booty of cash at its disposal. This $6. What followed was the tussle between Essar and Hutch over BPL’s Mumbai circle. say sources. The stake sale decision was reportedly taken without Essar’s knowledge and strained its relations with Hutchison. Sources say that the decision to split the merger of BPL Communication into Hutchison Essar may also have been prompted by the potential of the Mumbai circle. Essar tried to increase its stake in the joint venture. (BPL’s mobile operations included BPL Cellular. Unconfirmed sources say that Reliance Communications was wary of raising too much debt.Industry sources say that several incidents revealed the deepening rift between Hutch and Essar. the debt component in the deal is likely to be low. in December 2005.62 billion cash from its 5. Following this Essar approached the Department of Telecommunications on this sale saying that Hutchison Whampoa’s equity sale to Orascom may have an impact on national security as Orascom has a stake in Pakistan’s Mobilink. It already has $5 billion from the sale of its Japanese unit for $15 billion last year (the remaining $10 billion is expected to go back to shareholders). . BPL Cellular was merged with Hutchison Essar earlier this year. This indirectly gave it control of 12. Therefore. Essar sounded out some private equity investors about buying out Hutchison’s equity holding in Hutchison Essar. Tamil Nadu and Kerala. which had the licence for Mumbai. which may have acted as a deterrent. Subsequently. Whether the UK-based telco overpaid is another question. They say that as telecom valuations in India started rising. according to an analyst.93 per cent stake in Hutchison Essar.6 per cent stake sale in Bharti. Orascom of Egypt bought a 19. Analysts estimate that Vodafone was probably the least leveraged of all the bidders and this helped them bid aggressively. and BPL Mobile. It will also get $1. • Cellular penetration in rural India is below 2%. market leader Bharti has been adding 1. • India is key to Vodafone strengthening its presence in Asia. • Hutchison-Essar is not just the #4 player. • 3G is set to take off in India.Realising the importance of familiarity with the terrain. allowing data and video to ride on cellular networks. but also one of the better-run companies with higher average revenue per subscribers. While Hutch has been adding around 1 million subscribers a month.41 million at present). Vodafone needs to exceed Bharti’s net subscriber additions to be the leader in three years. SYNERGIES CLAIMED • Vodafone gets access to the fastest growing mobile phone market in the world that is expected to touch 500 million subscribers by 2010.5 million and 2 million subscribers every month. But getting there means adding between 1. have underlined Vodafone’s advantage. After . IMMEDIATE CHALLENGES Hutch is going to be a tough battle ahead as the world’s largest mobile operator (by revenues) tries to woo the price-conscious Indian consumer. That’s half its current subscriber base across 27 countries.Investment bankers in India. a region seen as the big telecom story. Vodafone is targeting 100 million Indian subscribers in three years (Hutch has 24. Once the board approves it. thanks to its access to cash and its capability to strike the least leveraged deal. The agreement with Bharti fits in perfectly to tap the hinterland . Ghosh will formally take charge. Second. Vodafone has earmarked an investment of $2 billion over the next couple of years to strengthen its presence here. it needs to tap rural India in a big way. Sarin has opted to retain Asim Ghosh as the man to head the venture. but 67% of India’s population lives in rural India. Vodafone already offers 3G elsewhere in the world.75 million. too. However. that’s what he has been doing as Hutchison’s key lieutenant over the past few years. ARPU growth is slowing. who can manage the ‘environment’ better. Besides the brand will cost money and take time.all. even before it gets to that. • Telecom valuations are at a high and this could mean it is years Vodafone recovers its multibillion dollar investment. That could be a source of problem. and India has one of the lowest ARPUs in the world. which is one-third partner in Hutch-Essar. Besides. Vodafone has reserved the right to abandon the acquisition of the stake if litigation is launched. • The Vodafone brand is relatively unknown in the Indian market. • It has an uneasy equation with Essar. does not go to court on its entry. • Its big competitors are home-grown majors. Vodafone has to ensure that the Essar Group. Several legal issues arise from the case: (i) Whether a non-resident seller (Vodafone International) is liable to tax in India on sale of shares of the foreign SPV? (ii) Is a non-resident purchaser (HTIL) liable for deduction of tax on purchase of shares of the foreign SPV while making payment to the non-resident seller? (iii) Whether an Indian company can be treated as ‘agent’ of the non-resident purchaser and held liable for deduction of tax? (iv) Can the law impose tax retrospectively? . To insure against such a possibility. the 33 per cent partner in the venture. Summing these challenges we have: • The cellular telephony is extremely competitive. it does not include income that accrues or arises or is deemed to accrue or arise outside India. Section 163 defines agent to include a person who has a business connection with the non-resident. Cyprus and Singapore withholding tax on capital gains is not liable to be levied in India pursuant to the relevant DTAA.Scope of Taxable Income of a Non-resident: Pursuant to Section 5(2) of the Act. Passing of Laws Retrospectively: In the 1975 Hindustan Machine Tools case. income is deemed to accrue or arise in India if such income is due to transfer of an asset situated in India or through or from business connection in India. In the case of transfer of shares in an Indian company by companies established in certain countries such as Mauritius. Pursuant to Section 9 (1) of the Act. Pursuant to Section 195 of the Act every person paying any sum. which is chargeable to tax in India to a non-resident must deduct income-tax at source at the time of payment or credit. with the exception that this power could be challenged if the law was . The IT Department has argued that this transfer represents a transfer of beneficial interest in the shares of the Indian company and hence. Who is an Agent? According to Section 160(1) of the Act. It is an interesting question as to whether the sale of Mauritius SPV would attract a similar tax notice or whether a Mauritius intermediate SPV interposed between the Cayman SPV and the Indian subsidiary would act as a successful blocker entity. the Supreme Court held that the legislature could pass laws retrospectively. and Section 161 discusses the liability of representative assessee. ‘agent’ of the non-resident is ‘representative assessee’. The liability to deduct tax applies to non-residents as well as residents. any gain arising from it would attract tax in India. the taxable income of a non-resident includes income “received or deemed to be received in India” and income that “accrues or arises or deemed to accrue or arise in India”. CGP (the company that was sold to Vodafone) was a Cayman company and there is no IndiaCayman DTAA. However. the next battle may be fought in the Supreme Court. No matter which way it goes. a Mauritius based company that owned that 67% stake in Hutch Essar. This same principle was reaffirmed in 1997 in Arooran Sugars Ltd case. Hutch Vodafone Merger – An Issue of Tax Planning Under Income Tax Act. it could result in a tax liability of approximately $1. It claimed that capital gains tax most people paid on the transaction and that tax should have been deducted by Vodafone whilst paying Hutch. it may be retrospective. The matter went to court and was heard over by the court. . neither party thought it was taxable in India. Hutch had sold Vodafone valuable rights .in that the Indian asset including tag along rights. Now the taxman’s argument was focused on proving that even though the Vodafone-Hutch deal was offshore. Since the deal was offshore. that through the sale of offshore shares. where the Supreme Court that if the law does not discriminate. Investors will be keeping a close eye on the upcoming Mumbai High Court verdict.discriminatory. Last year British Telecom giant Vodafone paid Hong Kong based Hutchison International over USD 11 billion to buy Hutchison’s 67% stake in Indian telecom company Hutchison Essar. that is the Hutch-Essar or now Vodafone-Essar joint venture is situated here and was central to the valuation of the offshore shares. The transaction was done through the sale and purchase of shares of CGP. Vodafone argued that the deal was not taxable in India as the funds were paid outside India for the purchase of shares in an offshore company that the tax liability should be borne by Hutch. Either way. But the tax department disagreed.7 billion. it was taxable as the underlying asset was in India and so it pointed out that the capital asset. the Vodafone versus IT department tax case will have an indelible impact on the M&A landscape of India. If the tax liability is established. This is perhaps the first time tax authorities are attempting to tax a transaction between two foreign companies involving transfer of an Indian asset. that Vodafone was not liable to withhold tax as the withholding rule in India applied only to Indian residence that the recent amendment to the IT act of imposing a retrospective interest penalty for withholding lapses was unconstitutional. 1961 It is a landmark case that will severely impact the Mergers & Acquisitions (M&A) landscape in India. JUDGEMENTS The facts clearly establish that it would be simplistic to assume that the entire transaction between HTIL and VIH BV was fulfilled merely upon the transfer of a single share of CGP in the Cayman Islands.management rights and the right to do business in India and that the offshore transaction had resulted in Vodafone having operational control over that Indian asset. Ernst and Young who carried out a due diligence of the telecommunications business carried on by HEL and its subsidiaries have made the following disclosure in its report: "The target structure now also includes a Cayman company. The transaction between HTIL and VIH BV was structured so as to achieve the object of discontinuing the operations of HTIL in relation to the Indian mobile telecommunication operations by transferring the rights and entitlements of HTIL to VIH BV.that is one aspect. HEL was at all times intended to be the target company and a transfer of the controlling interest in HEL was the purpose which was achieved by the transaction. CGP Investments (Holdings) Limited was not originally within the target group. The commercial and business understanding between the parties postulated that what was being transferred from HTIL to VIH BV was the controlling interest in HEL. The case was mainly about the second issue where the Vodafone was liable or not and in principle. The second aspect is that Vodafone as a payer was liable to deduct tax at source because they paid income to Hutch. After our due diligence had commenced the seller proposed that CGP Investments (Holdings) Limited should be added to the target group and made available certain limited information about the . The Department also argued that the withholding tax liability always existed and the amendment was just a clarification. it is possible that the department is right on the first and yet not right on the second. HTIL had through its investments in HEL carried on operations in India which HTIL in its annual report of 2007 represented to be the Indian mobile telecommunication operations. Those are the two different issues. CGP Investments (Holdings) Limited. The tax officers are saying that Hutch is taxable on the profit they made from the sale . In consideration call and put options were created and the benefit of those options had to be transferred to the purchaser as an integral part of the transfer of control over HEL. The true nature of the transaction as it emerges from the transactional documents is that the transfer of the solitary share of the Cayman Islands company reflected only a part of the arrangement put into place by the parties in achieving the object of transferring control of HEL to VIH BV. subsequently as a mode of effectuating the goal." (Emphasis supplied). a Cayman Islands company was put into place at the behest of HTIL. Indeed. a complex structure including the financing of Indian companies which in turn had holdings directly or indirectly in HEL. The price paid by VIH BV to HTIL of US $ 11.company. The due diligence report emphasizes that the object and intent of the parties was to achieve the transfer of control over HEL and the transfer of the solitary share of CGP. Hence. during the period when it was in control of HEL. if the transfer of the solitary share of CGP could have effectuated the purpose it was not necessary for the parties to enter into a complex structure of business documentation. it is from that perspective that the framework agreements pertaining to the Analjit Singh and Asim Ghosh group of companies and IDFC have to be perceived. but recognized independently the rights and entitlements of HTIL in relation to the Indian business which were being transferred to VIH BV. as part of the consideration.01 Billion factored in. there would be no liability to capital gains tax because of the Convention on the Avoidance of Double Taxation between India and Mauritius. As we have noted earlier. These were agreements with Indian companies and the transaction between HTIL and VIH BV takes due account of the benefit of those agreements. We began the record of submissions by adverting to the contention of the Petitioner that if any of the shares held by the Mauritian companies were sold in India. Many of these entitlements were not relatable to the transfer of the CGP share. The crux of the submission is that the entire transaction in the case is subsumed in the transfer of a share of an upstream overseas company which exercised control over Mauritian companies. it is simplistic to assume that all that the transaction . HTIL had put into place. diverse rights and entitlements that were being transferred to VIH BV. it is not sufficient for us to be able to comment on any tax risks associated with the company. Although we have reviewed this information. The transactional documents are not merely incidental or consequential to the transfer of the CGP share. a company situated in the Cayman Islands was a capital asset situated outside India and all that was transferred was that which was attached to and emanated from the solitary share. The transaction documents are adequate in themselves to establish the untenability of the Petitioner's submissions. . The transaction between VIH BV and HTIL was a composite transaction which covered a complex web of structures and arrangements. The transfer of that one share alone would not have been sufficient to consummate the transaction. The purpose of the discussion earlier has been to establish the fallacy in the submission.involved was the transfer of one share of an upstream overseas company which was in a position to exercise control over a Mauritian company. Clause (i) of Section 9 explains the ambit of incomes which shall be deemed to accrue or arise in India. Under Section 5(2) the total income of a non-resident includes all income from whatever source derived which (a) is received or is deemed to be received in India or (b) accrues or arises or is deemed to accrue or arise to him in India. not referable to the transfer of one share of an upstream overseas company alone. The edifice of the submission has been built around the theory that the share of CGP. The transfer of the CGP share was not adequate in itself to achieve the object of consummating the transaction between HTIL and VIH BV. Parliament has designedly used the words "all income from whatever source derived". Where an asset or source of income is situated in India or where the capital asset is situated in India. Parliament has designedly postulated that all income accruing or arising whether directly or indirectly. Intrinsic to the transaction was a transfer of other rights and entitlements. all income which accrues or arises directly or indirectly through or from it shall be treated as income which is deemed to accrue or arise in India. The submission of VIH BV that the transaction involves merely a sale of a share of a foreign company from one non.resident company to another cannot be accepted. (a) through or from any business connection in India or (b) through or from any property in India. These rights and entitlements constitute in themselves capital assets within the meaning of Section 2(14) which expression is defined to mean property of any kind held by an assessee. It was on this hypothesis that it was urged that the rights and entitlements which flow out of the holding of a share cannot be dissected from the ownership of the share. or (c) through or from any asset or source of income in India or (d) through the transfer of a capital asset situate in India would be deemed to accrue or arise in India. These are words of width and amplitude. I. vs. It is not the nature of the receipt under the general law but in commerce that is material. a further 15% indirect interest in HEL.C. No single test of universal application can be discovered for solution of the problem. the issue of jurisdiction would have to be answered by holding that the Indian tax authorities acted within their jurisdiction in issuing a notice to show cause to the Petitioner for not deducting tax at source. Shah speaking for the Supreme Court emphasized the principles of interpretation to be adopted by the Court in construing a commercial transaction : "But in assessing the true character of the receipt for the purpose of the Income-tax Act. The court has. Apportionment lies within the jurisdiction of the Assessing Officer during the course of the assessment proceedings. the value of non-voting non convertible preference shares.VIH BVs disclosure to the FIPB is indicative of the fact that the consideration that was paid to HTIL in the amount of US $ 11. The name which the parties may give to the transaction which is the source of the receipt and the characterization of the receipt by them are of little . Such an enquiry would lie outside the realm of the present proceedings. various loan obligations and the entitlement to acquire subject to Indian foreign investment rules. Justice J. to assess whether a transaction is commercial in character yielding income or is one in consideration of parting with property for repayment of capital in installments. the label which parties may ascribe to the transaction is not determinative of its character. (1961) 42 ITR 69 1961 Indlaw SC 95 Mr. In National Cement Mines Industries Ltd. C. inability to ascribe to the transaction a definite category is of little consequence. The manner in which the consideration should be apportioned is not something which can be determined at this stage. on an appraisal of all the facts. The nature of the transaction has to be ascertained from the covenants of the contract and from the surrounding circumstances. a non-compete agreement with the Hutch group. T. In assessing the true nature and character of a transaction. use and rights to the Hutch brand in India.. It is often difficult to distinguish whether an agreement is for payment of a debt by installments or for making annual payments in the nature of income. Undoubtedly it would be for the Assessing Officer to apportion the income which has resulted to HTIL between that which has accrued or arisen or what is deemed to have accrued or arisen as a result of a nexus within the Indian taxing jurisdiction and that which lies outside.01 Billion was for the acquisition of a panoply of entitlements including a control premium. But once this Court comes to the conclusion that the transaction between HTIL and VIH BV had a sufficient nexus with Indian fiscal jurisdiction. With respect to transfer of capital assets by a non-resident. CGP Investments directly and indirectly held offshore companies that owned a 67% interest in the Indian operating company. joint venture interests and inter-company loan obligations. and Hutchison Telecommunications International Ltd (HTIL). it should ordinarily not give rise to any income that is taxable in India. and the true nature and character of the transaction have to be ascertained from the covenants of the contract in the light of the surrounding circumstances. Based on various transaction documents. Considering that the transaction between Vodafone and Hutchison only involved the transfer of specific non-India based assets such as shares of a foreign company and certain loan entitlements. The agreement between Vodafone and HTIL also involved assignment of certain inter-company loans which were owed by CGP Investments and its Mauritian subsidiary to various Hutchison group companies. However. Netherlands. The court had granted a stay on the department from raising a tax demand to allow time for an appeal to be filed by Vodafone before the Supreme Court. and a number of other rights such as its Indian telecom licence. To briefly summarize the facts. the tax department has tried to argue that the subject matter of the transaction was a transfer of 67% interest in the Indian operating company.moment. According to the department. Hutch Essar Ltd (HEL). for acquisition of the entire share capital of CGP Investments (Holdings) Ltd. Cayman Islands. management rights in the Indian company. it has not determined whether any part of the payment made by Vodafone is actually chargeable to tax in India. Foreign Investment Promotion Board (FIPB) disclosures and due diligence reports." The Bombay high court has affirmed the tax department’s jurisdiction to proceed against Vodafone Group Plc. the right to use the Hutch brand. it is necessary that the legal situs (a legal term meaning site) of the assets is in India. HEL. in February 2007. The decision accepts the principle that income earned by a non-resident from an offshore transaction cannot be taxed in India unless the assets transferred have sufficient nexus with the territory of India. . a sale and purchase agreement was entered into between Vodafone International Holdings BV. another company based in the Cayman Islands. this creates sufficient nexus for it to exercise jurisdiction to proceed against Vodafone. which has now been made. the legal situs of many of these rights cannot be said to lie in India and.While accepting the tax department’s jurisdiction to initiate proceedings. Further. it is likely that little or no part of the consideration paid by Vodafone may be considered taxable in India. Even if such jurisdiction does exist. it is difficult to understand how the high court accepted the tax department’s jurisdiction to initiate proceedings in relation to an offshore transaction of this nature. one should only look at the form of the transaction and not its substance as long as it is not a sham or a colorable device. the court held that the department would have to apportion that part of the payment made by Vodafone which related to assets that were situated in India. On this basis. The high court also reiterated the common law principle that a share is a distinct capital asset in its own right. Another issue is that it would be very difficult to quantify the cost of acquisition of the various rights identified by the tax department. On applying these principles to Vodafone’s facts. The high court has also emphasized that. The other rights and interests vested with various downstream subsidiary companies and it may not be possible to suggest that these were transferred in law. The court observed in very clear terms that a controlling interest which a shareholder acquires is incidental to the holding of shares and does not have a separate existence distinct from the shareholding. The high court clarified that taxpayers can legitimately plan their economic affairs within the four corners of law even if the object was to lawfully mitigate the incidence of tax. This principle was laid down by the Supreme Court in the Azadi Bachao Andolan case. there may not be sufficient nexus for the transaction to . under principles of private international law. for tax purposes. The form of the transaction only contemplated transfer of certain offshore loan entitlements and shareholding in the Cayman entity which is legally distinct from the underlying controlling interest in the Indian operating company. hence. The business and assets of a corporation are not the business and assets of its shareholders and the acquisition of shares of a parent company would not lead to any transfer of interests in its underlying subsidiary companies. the Bombay high court noted that the acquisition of the offshore Cayman entity by Vodafone was a composite transaction and the numerous agreements between the various parties captured certain rights and entitlements in relation to the Indian operating company. The court has passed the buck on this and left the valuation exercise to the IT assessing officer. withholding tax must be paid. The court has also bounced the ball back to the Supreme Court. The problem is to figure out how much it is worth. These legal aspects are likely to have a crucial bearing on the final outcome of the case. The department insists that whether an income is chargeable or not. The company didn't take that long. The tax department claims it is the actions of Vodafone itself that gives it grounds to claim jurisdiction over the Vodafone-Hutch transaction. Then and now . just one share of Cayman Island registered CGP Investments Holdings was transferred). Balanced against this are the assets." . This is not taxable. This is taxable.the tax department holds Vodafone as an assessee in default for not making its withholding tax payments on time. "The appeal challenges the recent High Court judgment on the issue of jurisdiction. The Bombay High Court has attempted a difficult distinction. due diligence of Hutch. even if the transaction was done offshore. On the one hand are the actual shares (in the Vodafone case. Now this argument has been tested in court quite frequently this past year. It has barred action by the taxation authorities for eight weeks.the one regarding jurisdiction. This change in brand. while Vodafone files an appeal. The Tax Department claims all these actions by Vodafone prove that the subject matter of the transaction with Hutch was an Indian asset. filings with the FIPB. This time. it went to the Supreme Court on September 14. a sale purchase agreement centered around Hutch. goodwill and other intangibles owned by the company in India. that brings me to the most important aspect of this case . the Income Tax department has launched a 3 pronged attack against Vodafone. The first offensive is one that harks back to the first show cause notice of 2007.be taxed in India. brand value. and disclosures to the stock exchanges. Vodafone remains convinced that there is no tax to pay on the Hutchison transaction and we will continue to defend this position vigorously. Speaking of tax liability. aspx?ID=457987 365businessdays.totaltele./vodafone-tax-case-verdict-victory-for.edu/india/article.com/.wharton.in/news/display/103/Tax%20officials%20scrutinising%20cross-border%20merger/ www.com/...REFERENCES: http://taxguru..html bombayhighcourt.in/data/judgements/2010/OSWP130810 http://www..blogspot.com/view./l363-Hutch-Vodafone-Merger-–-An-Issue-Of-Tax-Planning.com/nda-news/Vodafone VS Tax Department Round 4 knowledge.cfm?articleid=4529 .upenn.nic.nishithdesai.html www.legalserviceindia.