Hutch to Vodafone Detailed Case Study

ANUP SSubmitted by

Vodafone Detailed Case Study

Hutch is now

Vodafone

MERGERS AND ACQUISTIONS

AMALGAMATION: When two companies merge together to continue the same business such business combination is referred to AMALGAMATION.

ABSORPTION: When one existing company purchase or take over the business of another company as going concern then such an arrangement is termed as ABSORPTION.

EXTERNAL RECONSTRUCTION: When one company liquidates itself to form another company to take over business of liquidating company, then such an arrangement is referred to as EXTERNAL RECONSTRUCTION

Today all the above concepts are popularly known as MERGERS and ACQUISTIONS.

Hutchison Essar Ltd. (HEL)

◦ Indian company◦ Providing Telecom Services

Hutchison Telecom International Ltd.◦ Foreign Company (Situated at Hong Kong)◦ Holding 100% shares in CGP Investments

Holdings Ltd.CGP Investments Holdings Ltd. (CGP)

◦Foreign Company (Situated at Cayman Island, Mauritius) Holding 67 % share in HEL

CORPORATE STRUCTURE

DIAGRAMMATIC VIEW

Hutchison Telecom International Ltd (Hong Kong)

Holding 100% shares in CGP

CGP Investments Holdings Ltd. (Mauritius)Holding 67% share in HEL

Hutchison Essar Ltd. (Indian Company)

FACTS OF THE CASEHutchison Telecom International Ltd. (HTIL) had transferred 100% shares of CGP Investments for Rs.560 billion to Vodafone International Holdings BV

Indirect transfer of rights in HEL, by HTIL to Vodafone International Holdings BV

Vodafone International Holdings BVForeign Company (Situated at Netherlands)Subsidiary of Vodafone Group (Situated at

London)

Understanding of Facts of The Case Diagrammatically

Vodafone Group plc(London)

Vodafone International Holding BV

(Netherlands)

HTIL (Hong Kong) 100% Holding in CGP

(Mauritius)

CGP Investments (Mauritius)67%

Holding in Hutchison Essar Ltd.(India)

Hutchison Essar Ltd.

(India )

Vodafone Essar Ltd.

(India)

Transfer 100% Shares of

CGP For Consideration of

Rs.560 bn.

INCOME TAX ACT OF INDIA, 1961 Section 9(1)(i)

INCOME DEEMED TO BE ACCRUED IN INDIA

Property situated in BangaloreForeign

Resident

Another Foreign Resident

Sells it outside India

Consideration in Foreign Currency

Assessing Officers Appeal• Transfer of rights in HEL(India) via CGP

Investment Holding Ltd• CGP Investment Holdings Ltd. Is merely

created to take benefits of Tax Heavens in Cayman Island, Mauritius

• As capital gains arise on transfer of shares are exempt in Mauritius

• But if we consider a concept of substance over Form, which clearly depicts that substance of a transaction is to transfer the right in HEL(India)

Bombay High Court DecisionIt was held that appeal done by CIT is u to the

mark because of the following reasons:

As the purpose of entering into agreement Is to acquire the controlling interest, which HTIL (Foreign Co.) had in HEL (Indian CO.)

and as acquired (controlling interest by Vodafone International)

Income Tax Reference: Income shall be deemed to be accrued or arise in India u/s (9)(i)

If today you buy 10% of the shares of a particular company, let us say Jet Airways, does this mean that you automatically own 10% of all the Jet Airways’ assets?

Does this mean that 10% of the entire fleet of aircraft now belongs to you? By buying out a company that holds 67% of HEL, it doesn’t mean that Vodafone now owns 67% of the assets of HEL.

Those assets continue to belong to HEL, which is a separate legal entity based in India, Read the company law, Dam nit!.

Assessee’s Explanation

Assessee’s Defend Diagrammatically Explained

Vodafone International

Holdings BV(Netherlands)100

% Holding in CGP

CGP Investments(Mauriti

us)67%Holding in Hutchison Essar Ltd.

(India)

Hutchison Essar Ltd.(Indian Co)

Vodafone’s DefendBy becoming holding co. of CGP, it doesn’t

means that (Vodafone) holds

67%of all assets in HEL(Indian Co.)

Supreme Court Decision Vodafone filed a review petition in Supreme Court in

January, 2012. Supreme Court reversed the decision of Bombay High Court

because: Assessing officer had no jurisdiction to tax the foreign transaction

as sale of shares in Cayman Island Transfer of shares in CGP doesn’t amount to transfer of Capital

asset situated in India, as per section 9(1)(I) under the 4th Limb Bombay High Court Judgement held that transfer of controlling

interest, which is not an identifiable or distinct capital asset independent of holding of shares and also not covers in Definition of Capital Assets U/s 2(14).

As Capital Asset is not taxable in India, so there is no question of Deducting Tax at Source U/s 195(1).

Supreme court’s decision

section;9(1)(i) transfer of

shares not amount to

transfer of capital asset

situated in India

section;9(1)(i)• transfer of

shares• not amount to

transfer of• capital asset

situated in India

section;9(1)(i)• transfer of

shares• not amount

to transfer of

• capital asset situated in India

these are the important three key points on the basis of which Supreme court has given the decision in Favor of the Vodafone

Transaction and its consequencesprevious scenariotransaction and consequencescurrent scenario

transfer of shares of CGP, from HTIL to vodafone.for consideration of Rs 560 billionwhich leads to capital gain tax on HTIL for Rs 125 billion

the shares of this company(CGP)are sold in Mauritius, which is tax heaven.

after the change of the holding company name changed to vodafonethis depicts that shares transferred to gain the rights in HEL(indian co)

HTIL(Hong Kong) 100% holding in CGP (Mauritius)

CGF investment (Mauritius)67% holding in Hutchison Essar ltd (India)

Hutchison Essar ltd (indian Co)

Vodafone International Holdings BV (Netherlands)100%

CGP investments (Mauritius) 67% holdings in Hutchison Essar

Vodafone Essar ltd(Indian co)

RETROSPECTIVE AMENDMENTS(Done by Finance

Act 2012) Sections of Amendments

Amendment Done

Co relate with case

•Section 9(1)(i):Income deemed to Accrued or Arise in India.

•All income Accrued or Arise, whether directly or indirectly:1. Through transfer of a

“Capital Asset” situated in India.

Capital Asset:Any entity( whether registered outside India) deemed to be situated in India.2. IF the share of that

entity derived from the value of asset located in India.

• Explanation on “Capital Asset” provides that,1. Shares of CGP

Investments (Registered outside India),

2. but value of shares are derived from the value of asset located in India.

•Section 2(14):Definition of capital Assets.

Explanation added regarded meaning of the property:Property includes,1. Any rights in an

Indian company2. Any rights in

relation to an Indian co;

Hutchison Hong Kong having rights in Indian co; • Example : Right to appoint directors. Right to use hutch brand etc.

SUPREME COURT V/S AMENDMENTSSupreme court judgments

Nullified by the Amendments (by FA 2012)

Section 9(1)(i):• transfer of shares • Not amounts to transfer of • capital asset situated in India

Explanation for capital asset U/s 9(1)(i):1. Any entity( whether registered

outside India) deemed to be situated in India

2. If the share of that entity derived from the value of asset( HEL) located in India.

Section 2(14):• As per Bom. H.C. controlling interest of HTIL in HEL, which is not covered under definition of Capital asset U/s 2(14).

Explanation added regarding meaning of property Property includes1. Any rights in an Indian Co;2. Any rights in relation to an Indian

co;3. Right includes right in

management Controlling interests etc.

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