Introduction of Sm

7/23/2019 Introduction of Sm

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MERGER OF VODAFONE & HUTCHISON

INTRODUCTION

In an increasingly open global economy, where old prejudices against foreign

predators and old fears of economic colonization have been replaced by a hunger

for capital, Mergers and Acquisitions M!A" are welcome everywhere# In human

aspects of M!As we used a not$too$original distinction between mergers,

acquisitions and joint ventures# M!As represented a marriage, while joint

ventures meant cohabiting# Although mergers and acquisitions are generally

treated as if they are one and the same thing, they are legally different transactions#

In an acquisition, one company buys sufficient numbers of shares as to gain control

of the other%the acquired company# Acquisitions may be welcomed by the

acquired company or they may be vigorously contested# &here are several

alternative methods of consolidation with each method having its own strengths

and wea'nesses, depending on the given situation# (owever, the most commonly

adopted method of consolidation by firms has been through M!As# &hough both

mergers and acquisitions lead to two formerly independent firms becoming a

commonly controlled entity, there are subtle differences between the two# )hileacquisition refers to acquiring control of one corporation by another, merger is a

particular type of acquisition that results in a combination of both the assets and

liabilities of acquired and acquiring firms# In a merger, only one organization

survives and the other goes out of e*istence# &here are also ways to acquire a firm

other than a merger such as stoc' acquisition or asset acquisition &he +odafone$

(utch deal is one of the largest M!A deal e*ecuted by overseas firm in Indian

subcontinent# &oday +odafone business in India has been successfully integrated

into the group and now has over million customers, with over -. per cent pro

forma revenue growth# /evenues increased by -. per cent during the year driven

by rapid e*pansion of the customer base with an average of 0#- million net

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additions per month since acquisition In todays volatile mar'et, where major

M!A deals are showing negative growth or companies are loo'ing for

1overnment 2ailout money, +odafone acquisition of hutch is a major contributor

to its revenue #)hile Indias revenues grew by 34#5 percent other A6A7 countries

posted far lower growths at 0. percent in 8gypt, 9 percent in Australia and :

percent in ;ew


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HISTORY

(utchison$8ssar =ear and 8vents

044 (utchison Ma* &elecom >imited (M&>", a joint venture between(utchison and Ma*, wins the licence to provide cellular services in Mumbai# 7#

?ivasan'aran sells -0@ sta'e in elhis ?terlings 7ellular to 8ssar group# 044-

(M&> launches mobile services in India under the Ma* &ouch brand name# 0445

?wisscom sells 4@ sta'e in 8ssar 7ellphone to (utchison# 044B Ma*s Analjit

?ingh sells 0@ sta'e in (utchison Ma* to (utchison (ong Cong# 3... Dan"

(utchison acquires a 4 per cent sta'e in ?terling 7ellular in the elhi circle from

?wisscom, an 8ssar 1roup company# A few wee's later, the Erange brand name

replaces Ma* &ouch in Mumbai# 3... Duly" (utchison and Cota' together acquire

a 0.. per cent sta'e in Fsha Martin &ele'om in Col'ata circle# 3... ?ep"

(utchison acquires a 4 per cent sta'e in Gascel, which operates in 1ujarat, from

?hinawatra# 3..0 (utchison puts in the bid to provide cellular licences in 7hennai,

Andhra 6radesh, Carnata'a and Maharashtra# It wins all e*cept Maharashtra# 3..:

8ssar &eleholdings sells its operations in /ajasthan, Fttar 6radesh 8ast" and

(aryana to (utchison 8ssar# 8ssar was running these operations through group

company, Aircel iglin' India >td# (utchison acquires licence to provide cellular

services in 6unjab# &his is bought from 8scotel# 3.. 8ssar pic's Grance

&elecoms 4#4@ sta'e in 26> 7ommunications# (utchison &elecommunications

International >td (&I>" gets listed on the (ong Cong and ;ew =or' stoc'

e*changes# >aunches services in 6unjab, )est 2engal and Fttar 6radesh )est"#Also receives approval from the regulators to consolidate its operations in India#

3..- (utchison 8ssar consolidates its various mobile companies in India to create

a single entity# A little later, (utchison 8ssar signs agreements with the 8ssar

1roup to acquire 26> 7ommunications and 8ssar ?pacetel# uring the same year,

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(utch becomes a national brand# 8ssar &eleholdings buys Ma* &elecom +entures

:#05@ sta'e in (utchison 8ssar for /s# 5-9 crore# 8gyptian cellular service

provider, Erascom, acquires a 04#: per cent sta'e in (&I># 3..5 Cota' sells B#::@

sta'e to Analjit ?ingh for /s 0.04 crore# (&I> acquires a -#00 sta'e from the

(indujas to increase its direct and indirect sta'e in (utchison$8ssar to 59 per cent#

8ssar holds the balance :: per cent# (utchison$8ssar receives the letter of intent

>oI" from the government to provide cellular services in si* more circles#

(utchison wants to e*it# In Gebruary 3..9 +odafone announced officially its

acquisition of 59@ of (utch$8ssar for H00#.B billion defeating the rival bidder

/eliance 7ommunications#

FACTS OF THE CASE

In 3..9, +odafone 1roup bought the Indian telecom assets of (ong Congs

(utchison &elecommunications International >td# It paid F?H00 billion for a 59@

sta'e in (utchison 8ssar# &he latter was the operating company in India for what is

now the third$largest operator with 000 million users# +odafone was the buyer#

(utchison, the seller, made huge capital gains# =et since then, +odafone has been

battling it out in the courts against the Indian Income &a* I&" department, which

has saddled it with a F?H3#0 billion ta* claim# (utchison, which poc'eted the

capital gains, is nowhere in the picture# &he transaction was e*ecuted through a

(utchinson company located in the 7ayman Islands

Round 1:

began in ?eptember 3..9, when the &a* epartment issued a show cause notice to

+odafone that said +odafone was liable to pay withholding ta* on the purchase

amount#

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Round 2:

+odafone filed a writ at the 2ombay (igh 7ourt disputing the ta* departments

jurisdiction in an overseas transaction# 2ut the petition was dismissed and

+odafone then appealed to the ?upreme 7ourt mar'ing the third round of

hostilities# In Danuary 3..4, the ?upreme 7ourt sent the case bac' to the &a*

epartment to decide on the jurisdiction issue# (utchison held call options over

companies controlled by Asim 1hosh and Analjit ?ingh as also over ?MM?

Investments 6vt# >td# aggregating to appro*imately 0-@ of the shareholding of

(8># &he benefit of these options enured in favour of a corporate entity called :

1lobal ?ervices 6rivate >td#, a company registered under the 7ompanies Act,

04-5# Many important documents relevant to the deal have never been made

public, so it is unclear if the ta* claim is a result of +odafones overloo'ing a 'ey

issue or overconfidence# In such transactions, the buyer is supposed to deduct ta*

at source or withholding ta*" and pay that to the government# &his is a transaction

involving foreign companies and the seller can easily disappear once the money is

in the ban'# &he buyer, on the other hand, has the Indian assets and, in a worst casescenario, those can be attached if there is any default#

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VODAFONE

+odafone is a mobile networ' operator with its headquarters in ;ewbury,

2er'shire, 8ngland, FC# It is the largest mobile telecommunications networ'

company in the world by turnover and has a mar'et value of about J9- billion

August 3..B"# +odafone currently has operations in 3- countries and partner

networ's in a further 3 countries# &he name +odafone comes from +oice data

fone, chosen by the company to Kreflect the provision of voice and data services

over mobile phones# +odafone 8ssar is owned by +odafone -3@, 8ssar 1roup

::@, and other Indian nationals, 0-@# En Gebruary 00, 3..9, +odafone agreed to

acquire the controlling interest of 59@ held by >i Ca ?hing (oldings in (utch$

8ssar for F?H00#0 billion, pipping /eliance 7ommunications, (induja 1roup, and

8ssar 1roup, which is the owner of the remaining ::@# &he whole company was

valued at F? 0B#B billion# &he transaction closed on May B, 3..9# As of ;ov

3..B +odafone 8ssar has -B9505 or 3:#-9@ of total 34:4:5 1?M mobile

connections in India# +odafone Indias share in the mobile phone operator mar'etrose to 0B percent#

HUTCH-ESSAR

(utch 8ssar was a leading Indian telecommunications mobile operator with 3:#:

million customers at :0 ecember 3..5, representing a 05#@ national mar'et

share# (utch 8ssar operates in 05 circles and has licenses in an additional si*

circles# In the year to :0 ecember 3..-, (utch 8ssar reported revenue of

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F?H0,3B3 million, 82I&A of F?H0- million, and operating profit of F?H:0:

million# In the si* months to :. Dune 3..5, (utch 8ssar reported revenue of

F?H4.B million, 82I&A of F?H349 million, and operating profit of F?H335

million# Fp until Danuary 3..5, (utch 8ssar had licenses in 0: circles, of which

nine have 4.. M(z spectrum# In Danuary 3..5, (utch 8ssar acquired 26>, thereby

adding three circles, each operating with 4.. M(z spectrum# In Ectober 3..5,

(utch 8ssar acquired ?pacetel, adding si* further licenses, with operations planned

to be launched during 3..9#

Reasons fo Hu!"# Sa$e

&here are two main reasons which are responsible for >i Ca$shing to leave India#

&hey are L(utch$8ssar Mutual istrust# LA right time to quit Indian operations to

finance other operations >i Ca$?hing was the 0.th richest man globally in 3..5, is

'nown as a businessman who spots an opportunity early, invests in it and e*its at a

neat premium# It is only after he e*its that the rush begins# In the early 044.s, he

sold his sta'e in ?tar &+ to /upert Murdoch for HB3- million# &he (utch 8ssar

deal has netted him a neat HB#B billion# )hat could he do with that moneyN >i is a

major player in the ports and retail businesses# 1etting access to the ports business

in India is difficult, than's to being from 7hina# (owever, with retail being thenew mantra in India, >i could be loo'ing at a third entry# (is retail outfits include

)atsons and 6A/Cn?(E6# )hile )atsons operates 9,9.. stores in :9 countries,

6A/Cn?(E6 is a supermar'et chain# Industry sources say that several incidents

revealed the deepening rift between (utch and 8ssar# &hey say that as telecom

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valuations in India started rising, 8ssar tried to increase its sta'e in the joint

venture# (owever, in ecember 3..-, Erascom of 8gypt bought a 04#: per cent

sta'e in (utchison )hampoa# &his indirectly gave it control of 03#4: per cent

sta'e in (utchison 8ssar# &he sta'e sale decision was reportedly ta'en without

8ssars 'nowledge and strained its relations with (utchison# Gollowing this 8ssar

approached the epartment of &elecommunications on this sale saying that

(utchison )hampoas equity sale to Erascom may have an impact on national

security as Erascom has a sta'e in 6a'istans Mobilin'# ?ubsequently, say sources,

8ssar sounded out some private equity investors about buying out (utchisons

equity holding in (utchison 8ssar# )hat followed was the tussle between 8ssar

and (utch over 26>s Mumbai circle# ?ources say that the decision to split the

merger of 26> 7ommunication into (utchison 8ssar may also have been prompted

by the potential of the Mumbai circle# 26>s mobile operations included 26>

7ellular, which had licences for Maharashtra, &amil ;adu and Cerala, and 26>

Mobile, which had the licence for Mumbai# 26> 7ellular was merged with

(utchison 8ssar earlier this year#"

FINANCING THE DEA%

+EAGE;8? successful bid for (utchisons 59 per cent sta'e in (utch 8ssar

may have been driven by its compulsions to enter the high$growth Indian mar'et,

but what clinched the deal for the FC$based company was the enormous booty of

cash at its disposal# Analysts estimate that +odafone was probably the least

leveraged of all the bidders and this helped them bid aggressively# It already has H-

billion from the sale of its Dapanese unit for H0- billion last year the remaining

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H0. billion is e*pected to go bac' to shareholders"# It will also get H0#53 billion

cash from its -#5 per cent sta'e sale in 2harti# &his H5#53 billion may go towards

funding the H00#0$billion price tag for the 59 per cent sta'e# In addition, +odafone

has free cash reserves for the first si* months of 3..5" in e*cess of H: billion# It

has also sold its 3- per cent sta'e in ?wisscom Mobile and e*ited 2elgium#

&herefore, the debt component in the deal is li'ely to be low, according to an

analyst# Fnconfirmed sources say that /eliance 7ommunications was wary of

raising too much debt, which may have acted as a deterrent# )hether the FC$based

telco overpaid is another question# Investment ban'ers in India, too, have

underlined +odafones advantage, than's to its access to cash and its capability to

stri'e the least leveraged deal#

SYNERGIES C%AIMED

+odafone gets access to the fastest growing mobile phone mar'et in the world that

is e*pected to touch -.. million subscribers by 3.0.# L 7ellular penetration in rural

India is below 3@, but 59@ of Indias population lives in rural India# L (utchison$

8ssar is not just the O player, but also one of the better$run companies with higher

average revenue per subscribers# L :1 is set to ta'e off in India, allowing data and

video to ride on cellular networ's# +odafone already offers :1 elsewhere in the

world# L India is 'ey to +odafone strengthening its presence in Asia, a region seen

as the big telecom story#

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IMMEDIATE CHA%%ENGES

(utch is going to be a tough battle ahead as the worlds largest mobile operator by

revenues" tries to woo the price$conscious Indian consumer# +odafone is targeting

0.. million Indian subscribers in three years (utch has 3#0 million at present"#

&hats half its current subscriber base across 39 countries# 2ut getting there means

adding between 0#- million and 3 million subscribers every month# )hile (utch

has been adding around 0 million subscribers a month, mar'et leader 2harti has

been adding 0#9- million# +odafone needs to e*ceed 2hartis net subscriber

additions to be the leader in three years# ?econd, it needs to tap rural India in a big

way# +odafone has earmar'ed an investment of H3 billion over the ne*t couple of

years to strengthen its presence here# &he agreement with 2harti fits in perfectly to

tap the hinterland #/ealising the importance of familiarity with the terrain, ?arin

has opted to retain Asim 1hosh as the man to head the venture# Ence the board

approves it, 1hosh will formally ta'e charge# After all, thats what he has been

doing as (utchisons 'ey lieutenant over the past few years# (owever, even before

it gets to that, +odafone has to ensure that the 8ssar 1roup, the :: per cent partnerin the venture, does not go to court on its entry# &o insure against such a possibility,

+odafone has reserved the right to abandon the acquisition of the sta'e if litigation

is launched# ?umming these challenges we have $ L &he cellular telephony is

e*tremely competitive, and India has one of the lowest A/6Fs in the world#

2esides, A/6F growth is slowing# L It has an uneasy equation with 8ssar, which is

one$third partner in (utch$8ssar# &hat could be a source of problem# L &he

+odafone brand is relatively un'nown in the Indian mar'et# 2esides the brand will

cost money and ta'e time# L &elecom valuations are at a high and this could mean it

is years +odafone recovers its multibillion dollar investment# L Its big competitors

are home$grown majors, who can manage the environment better#

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SEVERA% %EGA% ISSUES ARISE FROM THE CASE

i" )hether a non$resident seller +odafone International" is liable to ta* inIndia on sale of shares of the foreign ?6+N ii" Is a non$resident

purchaser (&I>" liable for deduction of ta* on purchase of shares of the

foreign ?6+ while ma'ing payment to the non$resident sellerN iii"

)hether an Indian company can be treated as agent of the non$resident

purchaser and held liable for deduction of ta*N iv" 7an the law impose

ta* retrospectivelyN

SCOE OF TA'A(%E INCOME OF A NON-RESIDENT

6ursuant to ?ection -3" of the Act, the ta*able income of a non$resident

includes income Kreceived or deemed to be received in IndiaP and

income that Kaccrues or arises or deemed to accrue or arise in IndiaP#

(owever, it does not include income that accrues or arises or is deemed

to accrue or arise outside India# 6ursuant to ?ection 4 0" of the Act,

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# 6ursuant to ?ection 04- of the Act every person

paying any sum, which is chargeable to ta* in India to a non$resident

must deduct income$ta* at source at the time of payment or credit# &heliability to deduct ta* applies to non$residents as well as residents# &he I&

epartment has argued that this transfer represents a transfer of

beneficial interest in the shares of the Indian company and hence, any

gain arising from it would attract ta* in India# In the case of transfer of

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shares in an Indian company by companies established in certain

countries such as Mauritius, 7yprus and ?ingapore withholding ta* on

capital gains is not liable to be levied in India pursuant to the relevant

&AA# 716 the company that was sold to +odafone" was a 7ayman

company and there is no India7ayman &AA# It is an interesting

question as to whether the sale of Mauritius ?6+ would attract a similar

ta* notice or whether a Mauritius intermediate ?6+ interposed between

the 7ayman ?6+ and the Indian subsidiary would act as a successful

bloc'er entity#

)#o *s an A+en!,

According to ?ection 05.0" of the Act, agent of the non$resident is

representative assessee, and ?ection 050 discusses the liability of

representative assessee# ?ection 05: defines agent to include a person

who has a business connection with the non$resident#

ass*n+ of %as Re!os.e"!*/e$0

In the 049- (industan Machine &ools case, the ?upreme 7ourt held that

the legislature could pass laws retrospectively, with the e*ception that

this power could be challenged if the law was discriminatory# &his same

principle was reaffirmed in 0449 in Arooran ?ugars >td case, where the

?upreme 7ourt that if the law does not discriminate, it may be

retrospective# &his is perhaps the first time ta* authorities are attempting

to ta* a transaction between two foreign companies involving transfer ofan Indian asset# If the ta* liability is established, it could result in a ta*

liability of appro*imately H0#9 billion# Investors will be 'eeping a close

eye on the upcoming Mumbai (igh 7ourt verdict# 8ither way, the ne*t

battle may be fought in the ?upreme 7ourt#

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Hu!"# Vodafone Me+e An Issue of Ta $ann*n+ Unde In"o3e

Ta

Act, 0450 It is a landmar' case that will severely impact the Mergers !

Acquisitions M!A" landscape in India# ;o matter which way it goes,

the +odafone versus I& department ta* case will have an indelible impact

on the M!A landscape of India# >ast year 2ritish &elecom giant

+odafone paid (ong Cong based (utchison International over F? 00

billion to buy (utchisons 59@ sta'e in Indian telecom company

(utchison 8ssar# &he transaction was done through the sale and purchase

of shares of 716, a Mauritius based company that owned that 59@ sta'e

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in (utch 8ssar# ?ince the deal was offshore, neither party thought it was

ta*able in India# 2ut the ta* department disagreed# It claimed that capital

gains ta* most people paid on the transaction and that ta* should have

been deducted by +odafone whilst paying (utch# &he matter went to

court and was heard over by the court# +odafone argued that the deal was

not ta*able in India as the funds were paid outside India for the purchase

of shares in an offshore company that the ta* liability should be borne by

(utchQ that +odafone was not liable to withhold ta* as the withholding

rule in India applied only to Indian residence that the recent amendment

to the I& act of imposing a retrospective interest penalty for withholding

lapses was unconstitutional# ;ow the ta*mans argument was focused on

proving that even though the +odafone$(utch deal was offshore, it was

ta*able as the underlying asset was in India and so it pointed out that the

capital assetQ that is the (utch$8ssar or now +odafone$8ssar joint venture

is situated here and was central to the valuation of the offshore sharesQ

that through the sale of offshore shares, (utch had sold +odafone

valuable rights $ in that the Indian asset including tag along rights,

management rights and the right to do business in India and that the

offshore transaction had resulted in +odafone having operational control

over that Indian asset# &he epartment also argued that the withholding

ta* liability always e*isted and the amendment was just a clarification#

&he ta* officers are saying that (utch is ta*able on the profit they made

from the sale $ that is one aspect# &he second aspect is that +odafone as a

payer was liable to deduct ta* at source because they paid income to

(utch# &hose are the two different issues# &he case was mainly about the

second issue where the +odafone was liable or not and in principleQ it is

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possible that the department is right on the first and yet not right on the

second#

4UDGEMENTS&he facts clearly establish that it would be simplistic to assume that the

entire transaction between (&I> and +I( 2+ was fulfilled merely upon

the transfer of a single share of 716 in the 7ayman Islands# &he

commercial and business understanding between the parties postulated

that what was being transferred from (&I> to +I( 2+ was the

controlling interest in (8># (&I> had through its investments in (8>

carried on operations in India which (&I> in its annual report of 3..9

represented to be the Indian mobile telecommunication operations# &he

transaction between (&I> and +I( 2+ was structured so as to achieve

the object of discontinuing the operations of (&I> in relation to the

Indian mobile telecommunication operations by transferring the rights

and entitlements of (&I> to +I( 2+# (8> was at all times intended to be

the target company and a transfer of the controlling interest in (8> was

the purpose which was achieved by the transaction# 8rnst and =oung who

carried out a due diligence of the telecommunications business carried on

by (8> and its subsidiaries have made the following disclosure in its

report $ R&he target structure now also includes a 7ayman company,

716 Investments (oldings" >imited# 716 Investments (oldings"

>imited was not originally within the target group# After our duediligence had commenced the seller proposed that 716 Investments

(oldings" >imited should be added to the target group and made

available certain limited information about the company# Although we

have reviewed this information, it is not sufficient for us to be able to

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comment on any ta* ris's associated with the company#R 8mphasis

supplied"# &he due diligence report emphasizes that the object and intent

of the parties was to achieve the transfer of control over (8> and the

transfer of the solitary share of 716, a 7ayman Islands company was put

into place at the behest of (&I>, subsequently as a mode of effectuating

the goal# &he true nature of the transaction as it emerges from the

transactional documents is that the transfer of the solitary share of the

7ayman Islands company reflected only a part of the arrangement put

into place by the parties in achieving the object of transferring control of

(8> to +I( 2+# (&I> had put into place, during the period when it was

in control of (8>, a comple* structure including the financing of Indian

companies which in turn had holdings directly or indirectly in (8># 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 (8># (ence, it is from that perspective that the

framewor' agreements pertaining to the Analjit ?ingh and Asim 1hosh

group of companies and IG7 have to be perceived# &hese were

agreements with Indian companies and the transaction between (&I> and

+I( 2+ ta'es due account of the benefit of those agreements# &he price

paid by +I( 2+ to (&I> of F? H 00#.0 2illion factored in, as part of the

consideration, diverse rights and entitlements that were being transferred

to +I( 2+# Many of these entitlements were not relatable to the transfer

of the 716 share# Indeed, if the transfer of the solitary share of 716

could have effectuated the purpose it was not necessary for the parties to

enter into a comple* structure of business documentation# &he

transactional documents are not merely incidental or consequential to the

transfer of the 716 share, but recognized independently the rights and

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entitlements of (&I> in relation to the Indian business which were being

transferred to +I( 2+# )e began the record of submissions by adverting

to the contention of the 6etitioner that if any of the shares held by the

Mauritian companies were sold in India, there would be no liability to

capital gains ta* because of the 7onvention on the Avoidance of ouble

&a*ation between India and Mauritius# &he cru* 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 e*ercised control over Mauritian

companies# As we have noted earlier, it is simplistic to assume that all

that the transaction involved was the transfer of one share of an upstream

overseas company which was in a position to e*ercise control over a

Mauritian company# &he transaction between +I( 2+ and (&I> was a

composite transaction which covered a comple* web of structures and

arrangements, not referable to the transfer of one share of an upstream

overseas company alone# &he transfer of that one share alone would not

have been sufficient to consummate the transaction# &he transaction

documents are adequate in themselves to establish the untenability of the

6etitioners submissions# &he submission of +I( 2+ that the transaction

involves merely a sale of a share of a foreign company from one non$

resident company to another cannot be accepted# &he edifice of the

submission has been built around the theory that the share of 716, a

company situated in the 7ayman 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# 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# &he purpose

of the discussion earlier has been to establish the fallacy in the

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submission# &he transfer of the 716 share was not adequate in itself to

achieve the object of consummating the transaction between (&I> and

+I( 2+# Intrinsic to the transaction was a transfer of other rights and

entitlements# &hese rights and entitlements constitute in themselves

capital assets within the meaning of ?ection 30" which e*pression is

defined to mean property of any 'ind held by an assessee# Fnder ?ection

-3" 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#

6arliament has designedly used the words Rall income from whatever

source derivedR# &hese are words of width and amplitude# 7lause i" of

?ection 4 e*plains the ambit of incomes which shall be deemed to accrue

or arise in India# 6arliament has designedly postulated that all income

accruing or arising whether directly or indirectly, a" through or from any

business connection in India or b" through or from any property in IndiaQ

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# )here an asset or source of income is situated in

India or where the capital asset is situated in India, 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# +I( 2+s

disclosure to the GI62 is indicative of the fact that the consideration that

was paid to (&I> in the amount of F? H 00#.0 2illion was for the

acquisition of a panoply of entitlements including a control premium, use

and rights to the (utch brand in India, a non$compete agreement with the

(utch group, the value of non$voting non convertible preference shares,

various loan obligations and the entitlement to acquire subject to Indian

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foreign investment rules, a further 0-@ indirect interest in (8># &he

manner in which the consideration should be apportioned is not

something which can be determined at this stage# Apportionment lies

within the jurisdiction of the Assessing Efficer during the course of the

assessment proceedings# Fndoubtedly it would be for the Assessing

Efficer to apportion the income which has resulted to (&I> between that

which has accrued or arisen or what is deemed to have accrued or arisen

as a result of a ne*us within the Indian ta*ing jurisdiction and that which

lies outside# ?uch an enquiry would lie outside the realm of the present

proceedings# 2ut once this 7ourt comes to the conclusion that the

transaction between (&I> and +I( 2+ had a sufficient ne*us with

Indian fiscal jurisdiction, the issue of jurisdiction would have to be

answered by holding that the Indian ta* authorities acted within their

jurisdiction in issuing a notice to show cause to the 6etitioner for not

deducting ta* at source# In assessing the true nature and character of a

transaction, the label which parties may ascribe to the transaction is not

determinative of its character# &he nature of the transaction has to be

ascertained from the covenants of the contract and from the surrounding

circumstances# In ;ational 7ement Mines Industries >td# vs# 7# I# ,

0450" 3 I&/ 54 0450 Indlaw ?7 4- Mr# Dustice D#7# ?hah spea'ing for

the ?upreme 7ourt emphasized the principles of interpretation to be

adopted by the 7ourt in construing a commercial transaction R2ut in

assessing the true character of the receipt for the purpose of the Income$

ta* Act, inability to ascribe to the transaction a definite category is of

little consequence# It is not the nature of the receipt under the general law

but in commerce that is material# It is often difficult to distinguish

whether an agreement is for payment of a debt by installments or for

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ma'ing annual payments in the nature of income# &he court has, on an

appraisal of all the facts, 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# ;o single test of

universal application can be discovered for solution of the problem# &he

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

moment, 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#R

T#e (o35a0 #*+# "ou!

has affirmed the ta* departments jurisdiction to proceed against

+odafone 1roup 6lc# (owever, it has not determined whether any part of

the payment made by +odafone is actually chargeable to ta* in India# &he

court had granted a stay on the department from raising a ta* demand to

allow time for an appeal to be filed by +odafone before the ?upreme

7ourt, which has now been made# &he decision accepts the principle that

income earned by a non$resident from an offshore transaction cannot be

ta*ed in India unless the assets transferred have sufficient ne*us with the

territory of India# )ith respect to transfer of capital assets by a non$

resident, it is necessary that the legal situs a legal term meaning site" of

the assets is in India# 7onsidering that the transaction between +odafone

and (utchison only involved the transfer of specific non$India based

assets such as shares of a foreign company and certain loan entitlements,

it should ordinarily not give rise to any income that is ta*able in India# &o

briefly summarize the facts, in Gebruary 3..9, a sale and purchase

agreement was entered into between +odafone International (oldings

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2+, ;etherlands, and (utchison &elecommunications International >td

(&I>", 7ayman Islands, for acquisition of the entire share capital of

716 Investments (oldings" >td, another company based in the 7ayman

Islands# 716 Investments directly and indirectly held offshore companies

that owned a 59@ interest in the Indian operating company, (utch 8ssar

>td (8>"# &he agreement between +odafone and (&I> also involved

assignment of certain inter$company loans which were owed by 716

Investments and its Mauritian subsidiary to various (utchison group

companies# 2ased on various transaction documents, Goreign Investment

6romotion 2oard GI62" disclosures and due diligence reports, the ta*

department has tried to argue that the subject matter of the transaction

was a transfer of 59@ interest in the Indian operating company, (8>, and

a number of other rights such as its Indian telecom licence, the right to

use the (utch brand, management rights in the Indian company, joint

venture interests and inter$company loan obligations# According to the

department, this creates sufficient ne*us for it to e*ercise jurisdiction to

proceed against +odafone# )hile accepting the ta* departments

jurisdiction to initiate proceedings, the 2ombay high court noted that the

acquisition of the offshore 7ayman entity by +odafone was a composite

transaction and the numerous agreements between the various parties

captured certain rights and entitlements in relation to the Indian operating

company# En this basis, the court held that the department would have to

apportion that part of the payment made by +odafone which related to

assets that were situated in India# &he high court has also emphasized

that, for ta* purposes, one should only loo' at the form of the transaction

and not its substance as long as it is not a sham or a colorable device#

&his principle was laid down by the ?upreme 7ourt in the Azadi 2achao

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Andolan case# &he high court clarified that ta*payers can legitimately

plan their economic affairs within the four corners of law even if the

object was to lawfully mitigate the incidence of ta*# &he high court also

reiterated the common law principle that a share is a distinct capital asset

in its own right# &he 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# &he 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 e*istence distinct from the

shareholding# En applying these principles to +odafones facts, it is

difficult to understand how the high court accepted the ta* departments

jurisdiction to initiate proceedings in relation to an offshore transaction of

this nature# 8ven if such jurisdiction does e*ist, it is li'ely that little or no

part of the consideration paid by +odafone may be considered ta*able in

India# &he form of the transaction only contemplated transfer of certain

offshore loan entitlements and shareholding in the 7ayman entity which

is legally distinct from the underlying controlling interest in the Indian

operating company# &he other rights and interests vested with various

downstream subsidiary companies and it may not be possible to suggest

that these were transferred in law# Another issue is that it would be very

difficult to quantify the cost of acquisition of the various rights identified

by the ta* department# Gurther, under principles of private international

law, the legal situs of many of these rights cannot be said to lie in India

and, hence, there may not be sufficient ne*us for the transaction to be

ta*ed in India# &hese legal aspects are li'ely to have a crucial bearing on

the final outcome of the case# &his time, the Income &a* department has

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launched a : pronged attac' against +odafone# &he first offensive is one

that har's bac' to the first show cause notice of 3..9# &hen and now $ the

ta* department holds +odafone as an assessee in default for not ma'ing

its withholding ta* payments on time# &he department insists that

whether an income is chargeable or not, withholding ta* must be paid#

;ow this argument has been tested in court quite frequently this past

year# ?pea'ing of ta* liability, that brings me to the most important aspect

of this case $ the one regarding jurisdiction# &he ta* department claims it

is the actions of +odafone itself that gives it grounds to claim jurisdiction

over the +odafone$(utch transaction# &his change in brand, filings with

the GI62, due diligence of (utch, a sale purchase agreement centered

around (utch, and disclosures to the stoc' e*changes# &he &a*

epartment claims all these actions by +odafone prove that the subject

matter of the transaction with (utch was an Indian asset, even if the

transaction was done offshore# &he 2ombay (igh 7ourt has attempted a

difficult distinction# En the one hand are the actual shares in the

+odafone case, just one share of 7ayman Island registered 716

Investments (oldings was transferred"# &his is not ta*able# 2alanced

against this are the assets, brand value, goodwill and other intangibles

owned by the company in India# &his is ta*able# &he problem is to figure

out how much it is worth# &he court has passed the buc' on this and left

the valuation e*ercise to the I& assessing officer# &he court has also

bounced the ball bac' to the ?upreme 7ourt# It has barred action by the

ta*ation authorities for eight wee's, while +odafone files an appeal# &he

company didnt ta'e that longQ it went to the ?upreme 7ourt on

?eptember 0# R&he appeal challenges the recent (igh 7ourt judgment on

the issue of jurisdiction# +odafone remains convinced that there is no ta*

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to pay on the (utchison transaction and we will continue to defend this

position vigorously,

Case S!ud0 on Vodafone6s Re-(and*n+ S!a!e+*es *n Ind*a: Hu!"# !o

Vodafone

%aun"# of Vodafone Essa

+odafone is the worlds leading international mobile communications

company# It presently has operations in 3- countries across - continents and

. partner networ's with over 3.. million customers worldwide# +odafone

has partnered with the 8ssar 1roup as its principal joint venture partner for

the Indian mar'et# &he 8ssar 1roup is a diversified business corporation

with interests spanning the manufacturing and service sectors li'e ?teel,

8nergy, 6ower, 7ommunications, ?hipping ! >ogistics and 7onstruction#

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25/33


&he 1roup has an asset base of over /s#.. billion and employs over 3.,...

people#

+odafone 8ssar was launched in India on 30st ?eptember 3..9# +odafone

was welcomed in India with the K(utch is now +odafoneP campaign# &he

popular and endearing brand (utch was transitioned to +odafone across

India# &his mar'ed a significant chapter in the evolution of +odafone as a

dynamic and ever$growing brand# &his brand unveiled nationally through a

high profile campaign covering all important media#

+odafone, the worlds leading mobile telecommunication company,completed the acquisition of (utchison 8ssar in May 3..9 and the company

was formally renamed +odafone 8ssar in Duly 3..9# &he transition from

(utch to +odafone is probably the largest brand change ever underta'en in

this country and arguably as big as any in the world# It is even larger than

(utchs own previous brand transitions# &he migration from (utch to

+odafone was one of the fastest and most comprehensive brand transitions in

the history of the +odafone 1roup, with ..,... multi brand outlets, over

:-. +odafone stores, over 0,... mini stores, over :- mobile stores and over

:,... touch$points rebranded in two months, with 5.@ completed within B

hours of the launch#

&he +odafone mission is to be the communications leader in an increasingly

connected world S enriching customers lives, helping individuals,businesses and communities be more connected by delivering their total

communication needs#

Vodafone6s Ma7e!*n+ S!a!e+*es: Hu!"# !o Vodafone

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+odafones new advertising campaign in India carried on with the same

popular pug that has become a brand ambassador for (utch# )here ever

you go, our networ' follows, was the previous slogan with the pug

following the child wherever he goes# ;ow, with (utchison 8ssar becoming

part of the +odafone 1roup, the new campaign had started with +odafone

8ssar earmar'ing /s# 3#- billion on the transition from (utch to +odafone#

&he main message of the brand transition e*ercise &he new +odafone is the

same old (utch# In the advertisement, the pug sees a new home when it

returns after an outing and feels the change is better# &he new catch phrase

will be Ma'e the most of now#

+odafone had tied up with ?tar India to run a complete roadbloc' of its fresh

campaign on the entire networ' by unveiling the 3$hour nationwide

rebranding campaign# +odafone used all of the commercial airtime across all

0: channels in five languages (indi, &amil, 2engali, Marathi and 8nglish"

from 4 pm on 3. ?eptember to 4 pm on ?eptember 30# &his e*ercise

included &+ commercials, transition bumpers and contest spots to promote

the +odafone 8ssar brand# 7ommercial spots had also been purchased on

?ony#

7onventionally awareness for a new brand ta'es some time to build#

(owever, +odafone wanted to achieve this tas' at the shortest possible time#

(ence, Ma*us and ?tar ;etwor' wor'ed closely to address this challenge

and came up with the idea wherein during the day of the launch a complete

roadbloc' on the ?tar ;etwor' channels was conceptualized# 7onsidering

that the ?tar ;etwor' is the lead networ' in India, this was the most apt

platform for +odafone launch# &his strategy helped not only in achieving

build rapid brand awareness but also brea's the clutter during such an

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important launch in the most happening category S telecom# &his is a first of

its 'ind mega media initiative in India by any brand# )hile the campaign

was heavy on television, it also included all other media vehicles# &he print

campaign 'ic'ed off on 30 ?eptember, a day after the television splash#

)hile the brand campaign had been addressing the transformation, the

7ompany, on the other hand was swiftly preparing for a price war in the

Indian telecom space# Indeed, it was preparing to provide mobile handsets to

new subscribers at ultra$cheap prices, ranging from about H04 to H3-#

+odafone 8ssar launched low priced cell phones in India under the +odafonebrand, and also co$branded handsets sourced from major global vendors# 2y

bringing in millions of low$cost handsets from across the globe into India,

+odafone 8ssar distributed bundled handsets through its e*isting ..,...

distribution outlets# 2y flooding the mar'et with its low$cost handsets,

+odafone also became a mass mobile phone brand li'e ;o'ia, ?amsung,

Motorola, and ?ony 8ricsson in addition to continuing as telecom services

provider#

6reviously, similar handset$driven e*pansion strategies to grow subscriber

bases were adopted by 7MA players, li'e /7EM and &ata &eleservices#

+odafone is the first 1?M operator to follow suit#

&he +odafone mission is to be the communications leader in an increasingly

connected world S enriching customers lives, helping individuals,

businesses and communities be more connected by delivering their total

communication needs# +odafones logo is a representation of that belief S

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&he start of a new conversation, a trigger, a catalyst, a mar' of true

pioneering#

Vodafone6s Ad/e!*s*n+ S!a!e+*es: Hu!"# !o Vodafone

Advertising is probably one of the most frequently used vehicles for

/ebranding, as it is fairly easy, fle*ible and quic' to change# It is a powerful

way of reaching a broad or targeted audience quic'ly and is effective at

signaling a change in positioning, however real or broad that may be# &here

are many e*amples of where advertising has either repositioned or

strengthened brands, other good e*amples of where advertising has built anew position for a brand or built a strong emotional lin' with the public are

where companies have created a sort of soap opera out of their advertising#

&he Advertising agency of (utch and now +odafone, Egilvy ! Mather

E!M", had a two$fold tas' to achieve announce the entry of +odafone into

India and highlight the metamorphosis of (utch into +odafone# E!M

realized that they had a fantastic property in the (utch pug, which they had

been using for about five years# &herefore, to show the transition from (utch

to +odafone, E!M launched a rather direct, thematic ad showing the

trademar' pug in a garden, moving out of a pin' colored 'ennel which

symbolized (utch ma'ing his way into a red one that is the +odafone color#

A more energetic, chirpier version of the =ou and I tune associated with

(utch was played towards the end, and it concludes with 7hange is good#(utch is now +odafone#

E!M has also rolled out four 7ommercials featuring (utchs animated boy

and girl, introducing the new brands logo to consumers# &he four

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creatives which were of five seconds each included the duo peeping over a

wall to see the logoQ parasailing with the logo flying high behind themQ

releasing a roc'et bomb wherein the e*plosion reveals the logoQ and lastly,

drawing curtains aside to show the logo#

Gour other ads with the pug did the rounds of telly screens# &hese five and

0. second spots cast the dog in situations where he, literally, saw red, using

the color as a visual mnemonic to remember the brand by# &he pug was

shown in a red bas'et, popping up from a red cart, drying himself on a red

mat, and hiding in a red blan'et# 8ach of these made use of the (utch is

now +odafone tagline#

&he print ads, in all major languages in several leading dailies, were 'ept

unbelievably simple a still shot of the pug inside a red 'ennel# &he same

creative was used in outdoor hoardings as well, in all the 05 circles in which

+odafone now operates#

It wasnt easy integrating +odafone with (utchQ the latter, as is 'nown, is a

subtle, understated brand, while globally, +odafone represents high energy,

dynamism and young vitality S all represented by its bright red speech mar'

logo# And so they put in elements such as a more energetic tune and feel to

the ads#

A few advertisements include

(utch is now +odafone If you watch any of the star channels or tuned

into 3.$3. world cup, you would have seen this ad En 00 Gebruary 3..9,

+odafone agreed to acquire the controlling interest of 59@ held by 7heung

Cong (oldings in (utch$8ssar for F?H00#0 billion and now had to rebrand

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itself so it has decided to run a new ad series which piggy ban'ed on (utchs

dog mascot and the theme K7hange is 1oodP# &his required nearly 3-.

crores of spending by +odafone but they have successfully painted the town

red# An interesting part of this campaign was on the opening day roadbloc'

where they made a deal with ?tar India so that besides them no other

commercials were aired apart from in$channel promos" on the ?tar Indias

channels for 3 hours#

+odafone +alentine ay ?pecial Ads +odafone had released a simple and

sweet ad for musical greetings targeted at couples during the valentine wee'

the feature of this campaign is its simplicity and believability and is quite

well received# It uses the positioning KMa'e the most of nowP enjoy the

video

+odafone 7hota 7redit In' Ad &his new ad had come as refreshing

change and more so that this ad ta'es a very refreshing loo' at school and at

fountain pens# &his ad creates a wonderfully subtle message which reallyputs the point of chota small" credit across#

2G ETITIONER RA8ES U HUTCH-VODAFONE DEA% AT SC

In a fresh attempt to e*pand the ambit of the ongoing ?7$supervised probe

into telecom licensing, the 7entre for 6ublic Interest >itigation 76I>", the

petitioner in the 31 ?pectrum case, has filed a fresh affidavit that see's the

72I investigation on the acquisition of (utch 8ssar by +odafone in 3..9# In

a fresh attempt to e*pand the ambit of the ongoing ?7$supervised probe into

telecom licensing, the 7entre for 6ublic Interest >itigation 76I>", the

petitioner in the 31 ?pectrum case, has filed a fresh affidavit that see's the

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72I investigation on the acquisition of (utch 8ssar by +odafone in 3..9

and recently also on the finance ministry officials and home minister 6

7hidambaram in clearing the F? 00 billion deal, reports 7;27$&+0Bs

?iddharth Affidavit claims that Idea 7ellular remained

silent on benami holding# &he Idea 7ellular notings are under the /&I Act#

+odafone has acquired 59@ of (utch 8ssar in violation of Goreign

Investment 6romotion 2oard GI62", while GI62 had allowed only -3@ of

transfer of (utch 8ssar to +odafone, rejecting the remaining 0-@ sta'e

transfer, which is held by Analjit ?ingh, Asim 1hosh ! IG7# /eacting

strongly on the issue, +odafone said that they have always complied fully

with GI guidelines and have received all necessary GI62 approvals# &he

telecom major has blamed 7I6> for the allegation#

CONC%USION

In an increasingly open global economy, where old prejudices against

foreign predators and old fears of economic colonization have been

replaced by a hunger for capital, Mergers and Acquisitions M!A" arewelcome everywhere# In human aspects of M!As we used a not$too$original

distinction between mergers, acquisitions and joint ventures# +odafone is a

mobile networ' operator with its headquarters in ;ewbury, 2er'shire,

8ngland, FC# It is the largest mobile telecommunications networ' company

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in the world by turnover and has a mar'et value of about J9- billion August

3..B"# (utch 8ssar was a leading Indian telecommunications mobile

operator with 3:#: million customers at :0 ecember 3..5, representing a

05#@ national mar'et share#

#

(I(%OGRAHY

9+oo$e9"o3

9s"*5d9"o3

3one0"on!o$9"o3

)*7*.ed*a9

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Documents

Introduction of Sm