Merger and Acquisition Synopsis
This Cayman transaction, along with several related agreements, gave Vodafone control over 67% of HEL and extinguished Hong Kong-based Hutchison’s rights of control in India a deal that cost the world’s largest Telco $11. 2 billion at the time. The crux of the dispute had been whether or not the Indian Income Tax Department has jurisdiction over the transaction. Vodafone had maintained from the outset that it is not liable to pay tax in India; and even if tax were somehow payable, then it should be Hutchison to bear the tax liability.
In January 2012, the Indian Supreme Court passed the judgment in favor of Vodafone, saying that the Indian Income tax department had “no jurisdiction” to levy tax on overseas transaction between companies incorporated outside India. However, Indian government thinks otherwise. It believes that if an Indian company, Hutchison India Ltd. , conducts a financial transaction, government should get its tax out of it.
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Therefore, in 2012, India changed its Income Tax Act retrospectively and made sure that any company, in similar circumstances, is not able to avoid tax by operating out of tax-havens like Cayman Islands or Lichtenstein.
In May 2012, Indian authorities confirmed that they were going to charge Vodafone about Rs. 20000 crore (US $4. 5 billion) in tax and fines. The second phase of the dispute is about to start. Significance of the study The study is significant because there will be implications in the Vodafone and other cases involving tax liability of about Rs 40,000 crore, the government has amended the IT Act with effect from 1962 to bring under net all overseas transactions involving domestic assets. There is large number of similar (Vodafone type) cases which, could be impacted. The rough assessment is that total impact of such cases would have been to the tune of Rs 35,000-Rs 40,000 crore. ” The position of the government is that the intention of the legislature on the initial stage was very clear that the transaction like the Vodafone, are subject to taxation in India. The amendment will apply to all past transactions concerning assets in India.
In the Vodafone case, the Supreme Court had held that the Income Tax department does not have the jurisdiction to levy Rs 11,000 crore as withholding tax on Vodafone for its $11 billion acquisition deal with Hutchison Essar in 2007. The study is also significant as it deals with important issues of M&A in similar cases. They are: 1. Interpretation of Section 9(1)(i) of the Act. 2. Extinguishment of HTIL’s interests. 3. Role of CGP in the transaction. 4. Holding and Subsidiary structures. 5. Rights and entitlements. 6. Anti-avoidance Rules and earlier decisions in McDowell and Azadi Bachao Andolan case. Aims and Objectives