Taxation aspects on Mergers &

Acquisitions (Vodafone Case)

R.Ravichandran IRS
Director of Income Tax (Investigation)
 Numbers
GDP: US$1.84 trillion

Direct Taxes (DT) Collection:

Target Corporate Tax Rs4,19,520 Income Tax Rs.2,47,639
Total Rs.6.67,159Cr (2013-14)
Total Revenue:Rs.12,35,870 (Share of DT:52% )

Number of Tax Payers:3.5Cr (Company:4.96 Lakhs)

Cost of Collection (0.64%) (Global Bench Mark 2-3%)

Direct Taxes to GDP ratio:5.66% (Developed Countries 15-

20%)
 Cross border Transactions
Liberalization of economic policy in India since 1991

Flow of foreign capital and portfolio investments grew from US$100mn in 1990-91 to
US$12 bn in 2012-13

FDI Inflows-
1991-92 to 1999-00 –US$1.72bn
2000-01 to 2004-05- US$2.85bn
2005-06 to 2009-10- US$19.73bn
2010-11 to 2012-13 –US$ 21.02 bn

Cumulative amount of equity inflows, reinvested earnings & other investments from
1991 to 2012 is US$214.81bn

Cumulative FII inflows in securities market US$116bn

Outbound FDI increased from US$ 0.2bn in 1996-97 to US$18bn in 2012-13

 Developments in Cross border Taxation

Huge network of amended DTAA (92) and TIEA with tax havens (13) has been created.

Specific requests in 333cases (220 by Foreign Tax Division of CBDT and 113 by FIU)
have been made by Indian authorities for obtaining information from foreign jurisdictions.

Over 9900 pieces of Information obtained (9743 information by Foreign Tax Division of
CBDT and 177 information by FIU) regarding suspicious transactions by Indian citizens
from several countries have been obtained which are now under different stages of
processing and investigation.

Over 30,700 pieces of domestic information about suspicious transactions has been
obtained by FIU which are under investigation by respective agencies.

Directorate of Transfer Pricing has detected mispricing of Rs. 34,145 crore (US$6.8bn) in
last two financial years thus preventing the outflow of this amount to foreign jurisdictions.
 Developments in Cross border Taxation
Investigation wing of CBDT has detected concealed income of Rs.18,750 Crore
(US$3.7bn) in last two financial years.

During the first five months of the current financial year, concealed income of Rs.
3,014 crores (US$600mn) as been detected due to focused searches on the basis of
information received from foreign jurisdictions.

Directorate of International Taxation has collected taxes of Rs.33,784 crores

(US$6.6bn) from cross broader transactions in last two financial years.

Under the EOI Article of DTAA with France, India has received some information
regarding Indians having bank accounts.

In 69 cases, the taxpayers have admitted to the unaccounted income of Rs.397.17

crores. Taxes of Rs. 30.07 crore have also been paid.

A Protocol to amend the Double Taxation Avoidance Agreement (DTAA) between

India and Switzerland which was signed on 30th August 2010 after completion of all
formalities.
 Taxation of Non Residents
The taxation of various sources of income (viz. dividends,
royalties, technical fees), of foreign companies and non
residents falls under Section 115 A of the Income Tax Act;

while section 44 D of the Act and Rules 10, 11 (Income Tax

Rules), relate to the computation of this income.

Sections 92, 93 deal with cases of tax avoidance in related party

transactions involving non- residents,

Section 173 with the recovery of these taxes

What is the case all about?
Change in ownership of telecom business in India
(HMTL/HEL) from Hutch (HTIL),Hong Kong to
Vodafone (Netherlands)

Transaction of transfer of control of Indian Business

done through holding companies of HTIL in tax
heavens Cayman island and Mauritius

Deal value of business in India US$11.076bn out of

total Enterprise(HEL) valuation US$18.8bn

Date of transfer (11/2/2007)

 History
1994
Hutchinson Max Telecom Ltd (HMTL)
50% held by Indian company Max Telecom venture
49% by HTIL, Mauritius
License issued by DOT in 1994 to HMTL

1998
CGP Investments (Holdings) Ltd incorporated in Cayman Islands by
Hutchinson Group

2004
HTIL, Cayman Islands incorporated and listed on HK stock exchange and
New York stock exchange
FIPB &RBI approved the deal in 2004
 History…
2006
Hutchinson intends to exit business
Vodafone makes offer to acquire Hutchinson

2007
Vodafone made application to FIPB for approval
Income Tax Department issues notice to HEL (15/3/2007)
HEL replies to IT that there are no tax liabilities accruing
out of transaction
FIPB approves the deal on 7th May,2007
 How was it done?

TII/Analjit/Asim
TII/Analjit/Asim
(19.54%)
(19.54%)
Mauritius
Mauritius
CGP
Holdings HTIL
(Cayman
) Hong Kong
(61.9%)
 Holding Pattern
• HTIL (Listed in Hong Kong Stock Exchange)
• HTIL holds Indian business interest through CGP Investments Holdings Ltd,
Cayman Islands
HTIL

• HTIL transfers its holding in CGP (one share) to Vodafone (cross border transfer)-
(42% in HEL)
• Vodafone to hold another 10% through it’s holding in TII & Omega
Vodafone • Control of Indian operations transferred to Vodafone

• Vodafone becomes new owner with 52% interest in Indian business

• Holding by Indian Companies (48%)
HEL(India) • Analjit (4.68%)/Asim (7.57%)/IDFC(2%)/Essar (33%)
SUMMARY OF DECISION
You cannot look through a transaction under section 9 of
the Income Tax Act, 1961

You cannot impute direct or indirect transfer of ownership

of assets

No territorial jurisdiction for the Indian tax authorities to

proceed

Extinguishment of rights argument of revenue turned down

Vodafone’s argument on intermediary location upheld

 SUMMARY OF
DECISION…
Azadi correctness upheld – Form over substance. If it
is a legitimate transaction, one does not need lift the
corporate veil

Hutch is not a fly by night operator

Capital gains not applicable on transactions

Section 195 does not apply; No question of TDS on

the transaction

It is a bonafide FDI transaction

Issue with Income Tax Department
Cross border Taxation

Section 163 of Income Tax Act,1961

Representative assessee for the tax liabilities of HTIL

Notice under Section 201(1) & 201(1A)

Assesse in default for failure to with hold tax

 IT Department’s Stand
Hutchison Telecommunications International Ltd (Hong Kong) held 67% of the
shares of Hutchison Essar Ltd (India) indirectly through CGP Investments
Holdings Ltd (a Cayman Islands SPV) and also held call options in Mauritius
and India

The stake of Hutch Hong Kong in the Cayman Islands SPV was acquired by
Vodafone (UK), through a Netherlands based SPV viz. Vodafone International
Holdings BV (Vodafone)

As a result of this sale, capital gains, estimated at $ 11 billion, accrued to the

Cayman Islands SPV

IT Department
held that the transaction would give rise to capital gains chargeable to tax in India
held that Vodafone was under an obligation to withhold tax at source while
making the aforesaid payment of sale consideration.
Bit of Income Tax Act on Taxation
The two basic principles for imposition of tax which are set out
in Section 5 are
(a) source
(b) residence
Section 5(2) is a source based rule in relation to non-residents. 
The source in relation to income has always been construed to
be where the transaction takes place and not where the item of
value, which was the subject of the transaction, was acquired or
derived from. 
In the case of Vodafone, the entire transaction of sale took place
outside India and hence Source Test will not establish that the
transaction had connection with India.
 Section 9
Under Section 9(1)(i), income is deemed to accrue or arise in India
if it accrues directly or indirectly through or from any business connection in
India or
through or from any property in India, or
through or from any asset or source of income in India or
through the transfer of a capital asset situated in India. 

Section 9(1)(i) gathers in one place various types of income and directs that income
falling under each of the sub-clauses shall be deemed to accrue or arise in India

Broadly there are 4 items of income.  Each item of income is distinct and independent
of the other, with independent requirements to bring them under respective sub-
clauses.

This section deals with categories of income accruing to the assesse outside India,
and through a fiction, the section seeks to shift the situs of accrual of income to India
 DTAA with Mauritius
Most frequently used jurisdictions for inbound investment into India,

Mauritius is a preferred jurisdiction,  inter alia, due to benefits available under the India-
Mauritius Tax Treaty (Tax Treaty)

A Circular issued by the Central Board of Direct Taxes (CBDT) which permits the Tax Treaty
benefits based on the existence of a valid Tax Residency Certificate (TRC) of Mauritius

Supreme Court (SC) ruling [in case of Azadi Bachao Andolan (263 ITR 706)] upholding the
validity of the CBDT Circular have generally provided certainty to taxpayers regarding the use of
the Tax Treaty

This contention has been re-affirmed by the single Judge’s order while pronouncing Vodafone
decision. While the Tax Treaty was not the subject matter in the Vodafone’s case, the SC held that
Tax Treaty benefit cannot be denied in the absence of Limitation Of Benefit (LOB) clause and
presence of CBDT Circular

This will not only help to rest the controversy in transactions which are currently being
investigated by the ITD, but also see more investments coming in through Mauritius
 Section 195 on TDS
Section 195 states that “any person” responsible for
paying to a non-resident any sum chargeable under the
provisions of the Act shall at the time of payment or
credit, whichever is earlier, deduct income-tax thereon
at the rates in force
• Literal interpretation of the term “any person”, it
includes even a non-resident
Provisions of Section 195 extend even to a non-
resident payer
What does this Valuation of US$11bn represent?

HTIL held through 8 downstream Mauritius subsidiaries

Shareholding of HTIL in TII through CGPC & OMEGA

Rights on Call & Put Options of holdings of Asim Ghosh and

Analjit Singh

Finance to SMMS to acquire shares of OMEGA(ITNC)

Controlling rights over ITNC shareholders agreement

Loan to HTV BVI through Array to purchase 8 Mauritius

companies

Preference Share Capital in JKF &TII

 Interpretation of SC
The three elements which are necessary for charging of capital gains are
(a) transfer
(b) existence of a capital asset and
(c) situation of such asset in India. 

The fiction created by Section 9(1)(i) applies to the Assessment of income of non-
resident.

 In the case of a non-resident,  if any income accrues or arises to  it directly or indirectly
outside India, as a sequel to the transfer of a capital asset situated in India, then the same
is fictionally deemed to accrue or arise in India, thereby creating liability to tax by reason
of 5(2)(b) of the Act.

Thus, the main purpose behind enactment of Section 9(1)(i) is to capture through a fiction
such income arising to a non-resident outside India on transfer of capital asset situated in
India, which may otherwise go untaxed

By fictionally deeming such income as accruing or arising in India, it is caught within the
mischief of 5(2)(b) of Income Tax Act for tax purposes.
 Stand of SC
whether the transfer of shares of the foreign company holding shares in an Indian
company can be treated as equivalent to the transfer of shares of the Indian company
on the premise that Section 9(1)(i) covers direct and indirect transfers of capital
assets.

The single judge in his separate but concurring Judgment observed that on transfer of
shares of a foreign company to a non-resident off-shore, there is no transfer of shares
of the Indian company

It cannot be contended that the transfer of shares of the foreign company results in an
extinguishment of the foreign company’s control of the Indian company

Equally, it does not constitute an extinguishment and transfer of an asset situated in

India

Legislature has expressly provided for indirect transfers, wherever indirect transfers
are intended to be covered, like Section 64 of the Income Tax Act
 Stand of SC
Even assuming that there was a transfer of capital asset in India,
such a transfer was not a direct transfer and would, at the most,
amount to an indirect transfer of capital assets/properties situated in
India

A plain reading of Section 9(1)(i) would indicate that the words,

directly or indirectly appearing in Section 9(1)(i) go with the income
and not with the transfer of capital asset

Therefore, the transfer of capital asset as envisaged in the said

section would relate to direct transfer and not indirect transfers

To make the section applicable for indirect transfers also would

amount to change the content and ambit of Section 9(1)(i)
 Stand of SC
The absence of the same in Section 9(1)(i) would
make the intention of the  legislature clear that
indirect transfers were sought to be kept out
If indirect transfer of capital asset is read into
Section 9(1)(i), then the words ‘capital assets
situated in India’ would be rendered nugatory,
since Section 9(1)(i) applies to direct transfer of
capital assets situated in India and not otherwise. 
 S.9 is Legal Fiction
A Legal fiction has a limited scope and it has to be construed strictly in
keeping with the context in which that fiction was created. 

In interpreting a provision creating a legal fiction, the court is to ascertain

for what purpose the fiction is created, but in construing the fiction, it is
not to be extended beyond the purpose for which it is created. 

A legal fiction cannot be expanded by giving purposive interpretation,

particularly if the result of such interpretation were to change the concept
of chargeability occurring in Section 9(1)(i).

According to the Supreme Court, Section 9(1)(i) is not a ‘Look Through’

provision in as much as it operates on a fiction and does not have the
necessary statutory support which alone can provide ‘Look Through’.
SC draws support from DTC,2010
View from DTC Bill 2010, which proposes to tax income from
transfer of shares of a foreign company by a non-resident where at
any time during 12 months preceding the transfer the fair market
value of the assets in India, owned directly or indirectly by the
company, represents at least 50% of the fair market value of all the
assets owned by that company

DTC bill for the first time proposes taxation of off-shore share
transactions, especially when such transactions involve an economic
interest of a particular threshold level in India for the non-resident
company

The proposed measure amply demonstrates that indirect transfers are

not covered by the existing Section 9(1)(i) of the Act
 DTC…
Otherwise there is no need for the DTC Bill to expressly
provide that income accruing even from indirect transfer
of a capital asset situated in India would be deemed to
accrue or arise in India

In the absence of any enabling provisions in the present

scheme of enactment, the question of providing ‘Look
Through’ on the basis of purposive construction is
precluded

Supreme Court held that Section 9(1)(i) would not apply

to indirect transfer of a capital asset situated in India.
Credibility of Transaction in SC’s view

Hutch was not a fly by night operator

Structure was in position since 1994

Monies were invested in the telecom business which

continued even after the acquisition

The government was aware of and therefore accepted

the structure that was put in place for investment by
Hutch
 Test of Genuineness
The Court has said that every strategic foreign direct investment coming to India as an
investment destination should be seen in a holistic manner

While doing so the revenue/court should keep in mind the following factors :
participation in investment
duration of time for which the holding structure exists
period of business operations in India
generation of taxable revenues in India
timing of the exit
continuity of business on such exits

Corporate business purpose of a transaction is evidence against a colorable or artificial device.

  

There is a conceptual difference between preordained transactions which is created for tax
avoidance on the one hand and a transaction which evidences investment to participate in India

The Judgment also said that you have to look at the transaction holistically and not adopt a
dissecting approach.
 SC overturned all assumptions
The situs of the capital asset, being shares, would be situated where the company is incorporated
and where the register of members is maintained

Gain arising to a foreign company from transfer of shares of a foreign holding company, which
indirectly held underlying Indian assets (Indirect Transfer) is not taxable in India

The ITA has no jurisdiction under Indian Tax Laws (ITL) to tax the gains arising to a foreign
company from such Indirect Transfer by applying the ‘look through’ principles in a deeming
fiction created under ITL

The withholding tax provisions under the ITL will not apply when there is an offshore transaction
between two non-residents; accordingly, such provisions would not have an extra territorial
operation

Provisions which treat a person as an agent/representative of a foreign entity for the purpose of
levy and recovery of tax (due from such a foreign entity) are not applicable in the absence of a
nexus

Tax planning within the framework of law is permissible, unless the planning is a sham or a
colorable device; the onus is on the ITA to establish that a transaction is a ’sham’.
 Justice Radhakrishnan on
TDS
Justice Radhakrishnan observed in Para 185 that the term “any
person” under Section 195 only covers resident payers

Majority decision given by Justice Kapadia did not touch upon

this issue of extra-territorial application of Section 195

Can the observation of Justice Radhakrishnan be said to be

obitar dicta of the Supreme Court, which can still act as a
binding precedent for lower courts

For an observation to be regarded as an obitar dicta, it needs to

be an observation of the Supreme “Court” and not just the
Supreme Court “Judge”.
 Extra Territorial Application
Provisions of the Income-tax Act, 1961 expressly provide for
application of extra-territorial rule

Section 1(2) of the Act which states that the Act extends to the
whole of India

These words imply that the Income-tax Act applies to:

persons in India; or
acts done in India;
 China follows India
China which introduced Notice 698 in November 2009 as a direct response to
the Vodafone matter

Notice 698 states that the authorities will impose a 10% withholding tax on
capital gains derived by non-resident enterprises from the transfer of equity
interest in Chinese resident enterprises

Traditional tax planning strategies use an off- shore holding company to

invest into China and exit from the country by transferring the off- shore
holding company without paying any China withholding tax

Circular requires a non-resident seller to disclose an indirect transfer of a

resident company to the tax authorities within 30 days after signing the share
sale agreement if the tax burden in the intermediate holding company’s
jurisdiction is less than 12.5%, or if that jurisdiction exempts foreign-sourced
income from tax
 China Case
In this case, a Singapore company held 100% shares of another Singapore subsidiary,
the apparent target of acquisition This company, in turn, held 31.6% of the equity of
Chongqing Company, which was the real target. The Singapore Company sold its
stake in the apparent target Singapore Company to a Chinese buyer

“Capital gains would not be subject to withholding tax in China for an offshore
transaction such as this. Nevertheless, perhaps having studied the handling of the
Vodafone transaction by the Indian authorities on very similar facts, the Chongqing
tax authorities challenged the transaction as a tax avoidance arrangement and denied
the existence of the Singapore target company based on the following rationale
The Singapore target Company was not engaged in any operating activities except for
holding 31.6% equity interest in the Chongqing Company.
In substance, the equity transferred was in fact the equity interest in the Chongqing
Company.” (Source: Tax Risk Management edited by Sander)

One can perhaps argue that in this case the ultimate investor was Chinese. It doesn’t
matter
 China case…
Carlyle had a subsidiary in Hong Kong, which had invested USD 80 million private equity in
2007 and owned 49% interest in a joint venture in one Yangzhou Chende Steel Tube Co Ltd in
the Jiangsu province

In 2010, Carlyle sold off its stake to one Precision Castparts Corporation for USD 350 million
resulting in substantial gains to Carlyle

Jiangdu Tax Authorities found that the Hong Kong Company had no employees, no assets, no
liabilities, no other investments, and no business operations

In effect, very much like the Cayman Islands Company in the Vodafone case, it had no economic
substance

Jiangdu Tax Authorities therefore held that the transfer of the Hong Kong Company was in
substance a transfer of the Chinese joint venture company and hence should be subject to
Chinese withholding tax. [Source: China: taxing offshore transactions – Julie Zhang]

State Administration of Taxes (STA) rejected the appeal and after several rounds of negotiation,
Carlyle filed a tax return and settled the payment of CNY173 million on 18 May 2010
Post SC - Retro Amendments
 Retro Amendments
Section 2(14): This provision defines a “capital asset”. Both the
Bombay High Court and the Supreme Court held in Vodafone that
“controlling interest” is not a capital asset. The Finance Bill added
the following Explanation

In clause (14), at the end, the following Explanation shall be

inserted and shall be deemed to have been inserted with effect
from the 1st day of April 1962, namely:

“Explanation- For the removal of doubts, it is hereby clarified that

‘property’ includes and shall be deemed to have always included
any rights in or in relation to an Indian company, including rights
of management or control or any other rights whatsoever”
 Retro Amendments…
Section 2(47): This provision defines a “transfer”.

Revenue’s primary case in Vodafone in the Supreme Court was that there was an
“extinguishment” under this provision.

In clause 47, the Explanation shall be numbered as Explanation 1 thereof and after
Explanation 1 as so numbered, the following Explanation shall be inserted and shall
be deemed to have been inserted with effect from the 1st day of April, 1962, namely:

“Explanation 2: For the removal of doubts, it is hereby clarified that “transfer”

includes and shall be deemed always to have included disposing of or parting with an
asset or any interest therein, or creating any interest in any asset in any manner
whatsoever, directly or indirectly, absolutely or conditionally, voluntarily or
involuntarily, by way of an agreement (whether entered into in India or outside
India) or otherwise, notwithstanding that such transfer of rights has been
characterised as being effected or dependent upon or flowing from the transfer of a
share or shares of a company incorporated outside India.”
 Retro amendments…
Section 9: This provision defines when income is deemed to accrue or arise in India, and
the Supreme Court held in Vodafone that the words “directly or indirectly” do not qualify
the transfer of the asset.

In section 9 of the Income Tax Act, in sub-section (1)-

(a) in clause (i), after Explanation 3, the following Explanations shall be inserted and shall
be deemed to have been inserted with effect from the 1st day of April 1962, namely:-

“Explanation 4: For the removal of doubts, it is hereby clarified that the expression
“through” shall mean and include and shall be deemed to have always meant and
included “by means of”, “in consequence of” or “by reason of”.”

“Explanation 5: For the removal of doubts, it is hereby clarified that an asset or a capital
asset being any share or interest in a company or entity registered or incorporated outside
India shall be deemed to be and shall always be deemed to have been situated in India, if
the share of the interest derives, directly or indirectly, its value substantially from the
assets located in India.”
 Post Vodafone…
The dispute over the tax payable for its purchase in 2007 of the
67 per cent stake in Hutch is on an amount of  Rs 11,200 crore

Transfer pricing dispute on Rs 4,200 crore for the assessment

year 2008-09

Transfer pricing matter for Rs 370 crore claim for the

assessment year of 2009-10

Finance Act 2012 enacted on 28 May 2012 includes a

'clarificatory' amendment on taxation of such transfer of shares
if its value is substantially from assets located in India. This
amendment is effective retrospectively from 1 April 1961.
 Transfer Pricing Issue
IT Department had issued an order to Vodafone alleging that Vodafone
India under priced its shares issued to Vodafone Teleservices Mauritius in
2007-08, by around Rs 1,300 crore

The parent company invested Rs 246 crore and bought 2.89 lakh shares,
the I-T Department values each of these shares at Rs 8,509, while the
transfer pricing officer valued it around Rs 80,000. 

The department also challenged the valuation method adopted by

Vodafone India Services Pvt Ltd (VISPL) while issuing shares to the
Mauritius-based company

Transfer pricing is the practice of arm’s length pricing for transactions

between group companies based in different countries to ensure that a fair
price one that would have been charged to an unrelated party is levied.
 Road Ahead
Huge implications on tax collections of Cross border taxation
in India if allowed to continue

Future tax collections in globalized world from Cross border

taxations

Review of treaties/implementation of General Anti Avoidance

Rules (GAAR)

Information Exchange through TIEA(Tax Information

Exchange Agreements) (Lichtenstein/HSBC) &
implementation of BEPS (Base Erosion Profit Shifting)
regulations
Framework of Taxation of
Mergers & Acquisition in
India
 M&A
Acquisition of the business of an Indian
company can be accomplished by the purchase
of shares or the purchase of all or some of the
assets
long term capital gains arising on a sale of shares
through the recognized stock exchanges in India are
exempt from tax
All other gains on sales of assets are taxable
other transfer taxes such as stamp duty are also
leviable
 Purchase of assets
Slump-sale
the sale of a business undertaking is on a slump-sale basis when the
entire business is transferred as a going concern for a lump- sum
consideration
The actual cost of the asset will be regarded as the cost of the asset
for tax purposes
Allocation of the purchase price on a fair value or other reasonable
commercial value and reports obtained from independent valuers

Itemized sale basis

when only specific assets/liabilities are transferred and cherry-
picking of assets by the buyer is an option
the cost paid by the acquirer as agreed upfront,
 Share Acquisition
the purchaser takes over the target company together with all
its related liabilities, including contingent liabilities

Purchaser require more extensive indemnities and warranties

than in the case of an asset acquisition

Alternative approach is for the seller’s business to be

transferred into a newly formed entity with a view to the
purchaser taking a clean business leaving the liabilities
behind

Such a transfer may have tax implications.

 Securities Transaction Tax (STT)
Securities transaction tax (STT) payable if the sale of shares is
through a recognized stock exchange in India

STT is imposed on purchases and sales of equity shares listed on a

recognized stock exchange in India at 0.125 percent per delivery
based purchase or sale and is payable both by the buyer and the seller

In case of non- delivery based transactions, STT is levied at 0.025

percent and is payable only by the seller.

Transfers of shares (other than those in de-materialized form, which

are normally traded outside the stock exchanges), are subject to stamp
duty, at the rate of 0.25 percent of the market value of the shares
transferred.
 FDI
Acquisitions through an Indian holding company are governed by
the downstream investment guidelines issued in 2009 under
Foreign Direct Investment (FDI) policy

Any indirect foreign investments (through Indian companies) will

not be construed as foreign investments if the intermediate Indian
holding company is either owned or controlled by resident Indians

The criteria for deciding the ownership and control of an Indian

company are ownership of more than 50 percent of the shares and
control of the governing board

Downstream investments made by Indian entities will not be

included when judging whether these criteria are met.
 Dividends
Subject to a dividend distribution tax (DDT) of 16.995%

Parent company may be able to obtain credit for the DDT paid
by its subsidiaries against its DDT liability on dividends
declared, but not if the parent is a subsidiary of another
company

In the case of an Indian holding company, it may not be

possible to claim credit for the DDT paid by its subsidiary

Repatriation of tax free dividend is not possible

 Foreign Parent
Foreign investors may invest directly through the foreign parent
company subject to the prescribed Foreign Investment Guidelines

In the case of an asset purchase, it is necessary to establish whether

the foreign entity risks creating a permanent establishment (PE) in
India

An intermediate holding company resident in another territory is

used for investment into India, to minimize the tax incidence in
India such as withholdings at source, capital gains taxes on exit, etc.

Purchaser to take advantage of a more favorable tax treaty with India

and it will require evidence of substance in the intermediate holding
company’s jurisdiction.
 Joint ventures
used when there are specific sectoral caps stipulated
under the Foreign Investment guidelines

Joint venture with an Indian partner is set up, which

will later acquire the Indian target.
 Cost of Acquisition
A purchaser using an Indian acquisition vehicle to carry out an
acquisition for cash will need to decide whether to fund the vehicle
with debt or equity, or even a hybrid instrument that combines the
characteristics of debt and equity.

Tax-deductibility of interest makes debt funding an attractive method

of funding

Debt borrowed in foreign currency is governed by the External

Commercial Borrowing (ECB) guidelines issued by the Reserve Bank
of India (RBI), which impose restrictions on ECB in terms of the
amount, the term, cost, end use and remittance into India, which
prohibit an Eligible Borrower of ECBs to use the proceeds to fund any
acquisition of shares or assets
 Funds
Borrowing funds from an Indian financial institution
as interest on such loans can be deducted from the
operating profits of the business to arrive at the
taxable profit
No regulatory approvals required
Flexibility in repayment of funds
No ceilings on rate of interest
No hedging arrangements are required
No withholding tax (WHT) on interest
 Interest Deduction
interest accounted for in the company’s books of accounts
will be allowed as deduction for tax purposes

Interest on loans from financial institutions or banks is

allowed only when actually paid

Other Interest (to residents and non-residents) is normally

deductible from business profits, subject to the condition that
appropriate taxes have been withheld thereon and paid to the
government treasury.

No thin-capitalization rules are applied

With Holding Tax (WHT)
An interest payment by Indian company to non-
residents is normally subject to WHT of 22.66 percent

All external borrowings (foreign debt) from

associated enterprises should comply with the transfer
pricing rules
 Equity
Most of the sectors have been opened up for foreign
investment

No approvals from the government is necessary for the issue

of fresh shares with respect to these sectors

Certain sectors are subject to restrictions or prohibitions of

foreign investment where the foreign investor would have to
approach the government of India for a specific approval

Pricing of the shares would have to be as per the guidelines

issued by the Reserve Bank of India and any acquisition of
equity through a share swap would require approval from the
Foreign Investment Promotion Board (FIPB).
 Dividends
Paid by domestic companies are not taxable in the hands of
the shareholders

No WHT at the time of the distribution of dividends to the

shareholders

Domestic company needs to pay dividend distribution tax

(DDT) at the rate of 16.995 percent (income-tax 15 percent
plus a surcharge of 10 percent, and education cess of 3
percent) on the amount of dividends actually paid to the
shareholders.
 Amalgamation
Amalgamation is defined to mean a merger of one or more
companies into another company, or the merger of two or
more companies to form a new company so that:
All the properties and liabilities of the merging companies
(amalgamating companies) immediately before the merger
become the properties and liabilities of the company into which
the merger takes place (amalgamated company).
Shareholders holding at least three-quarters of the shares in the
amalgamating companies become shareholders of the
amalgamated company
 M&A Tax Neutral
Amalgamation enjoys tax-neutrality as both the amalgamating
company transferring the assets and the shareholders transferring
their shares in the amalgamating company are exempt from tax

the amalgamated company should be an Indian company

Unabsorbed business losses including depreciation (that is,

amortization for capital assets) of the amalgamating
company(ies) are deemed to be the unabsorbed business losses
and depreciation of the amalgamated company for the year in
which amalgamation takes place

the business losses get a new lease of life for eight years for
carry-forward.
 M&A High Court approval
Corporate reorganizations involving amalgamations of two or more
companies require the approval of the Jurisdictional High Court (or NCLT)

High Court approval

Transfer taxes
Stamp duty
ST/VAT
Exchange Control Regulations
Takeover Code

The process of obtaining High Court approval normally takes four to six
months.
 Cross border M&A
Both slump-sales and itemized sales are subject to capital gains tax in
the hands of the sellers
In the case of a slump-sale, consideration in excess of the net worth of the
business is taxed as capital gains
Net worth needs to be computed as per the provisions of the Income tax
Act, 1961
Where the business of the undertaking of the transferor company is held for
more than 36 months, such an undertaking would be treated as a long-term
capital asset, and the gains from its transfer would be taxed at a rate of
22.66 percent rate for a domestic company and 21.115 percent for a foreign
company (including applicable surcharge2 and education cess of 3 percent)
Otherwise, the gains would be taxed at 33.99 percent for a domestic
company and 42.23 percent for a foreign company (including applicable
surcharge and education cess at 3 percent).
 Tax on Capital Gains
Itemized sale would depend on the nature of assets. These can
be divided into three categories:
Tangible capital assets
Stock-in-trade
Intangibles (goodwill, brand, etc.)
Limited Liability Partnerships (LLPs)

Limited Liability Partnerships Act passed in 2009

Previously, the law only provided for partnerships

with unlimited liability

LLP operates as a separate legal entity

able to enter into binding contracts
taxed as normal partnerships and the profits earned by
an LLP are taxed in the hands of the LLP, and shares of
profit are exempt in the hands of the partners
 M&A
Regulatory Framework in India & Companies Act 2013
 Regulatory framework
Companies Act 1956 (now 2013)
Compromise arrangement and amalgamation (clause
230-240)

SEBI Act,1992 (SAST,2011)

FEMA Act,1999 (FDI(in Bound) &FSR(Out bound)

Competition Act,2002 (ex ante)

Income Tax Act, 1961

 Merger & Amalgamation
CA 2013 defines ‘merger’ as distinguishing between a merger by absorption, where one or
more existing companies merge into an existing company and a merger by formation of a
new company which involves merging of two or more companies to form a new company

Definition of amalgamation in the Income Tax Act does not differentiate between a merger
and an amalgamation and defines amalgamation as merger of one or more companies into
another company or the merger of two or more companies to form one company such that,
pursuant to the amalgamation, the assets and liabilities of the amalgamating company
become the assets and liabilities of the amalgamated company and shareholders holding not
less than three fourths in value of the amalgamating company become shareholders of the
amalgamated company

Benefits of carried forward losses and unabsorbed depreciation of an amalgamating

company are available only for certain types of companies falling within the scope of
shipping, hotel, banking and industrial undertakings and further subject to continuity of the
business for three years before the amalgamation and five years after the amalgamation

Stringent conditions are also applicable for closely held companies.

 Mergers & Restructuring
Restriction on multi layered structures (certain exemptions to foreign acquisitions/
to comply with law)

Mergers without Tribunal approval permitted between two small companies or

between a holding company and its wholly-owned subsidiary

Merger into a foreign companies introduced

Valuation report mandatory along with notice to concerned parties in case of

proposed mergers

Scheme of compromise or arrangement must be in line with accounting standards;

auditors’ certificate attesting same needed

In case of ‘reverse merger’ of listed company into unlisted company, the transferor
may continue to be unlisted

Holding of treasury shares directly or through a Trust, prohibited

 Financial Statements
Consolidated financial statements mandatory for all Groups, including Unlisted/ Private companies, with
more than one entity; includes associates or joint ventures;

Mandatory rotation of audit firm for listed companies post 10 years

Financial year for all companies to be March 31 (exception for subsidiaries of foreign entities)

Re-casting and re-statement of financial statements can be ordered; Voluntary revision of financial
statements for previous periods now permitted

Auditor to also report on adequacy of internal financial controls system and the operating effectiveness of
such controls

Increased restrictions on non-audit services provided by Auditors

Auditor to be a whistleblower to Central Government, if becomes aware of any fraud

The maximum limit of 20 companies per Partner in an Audit firm

Prescribed companies to appoint internal auditor; manner, period and reporting to be prescribed by Central
Government

Significant enhancement of penalties for auditors

 Positive Developments –CA-2013
2% of the average net profit of preceding three financial years to be spent annually on
Corporate Social Responsibility (CSR) or explain why not; for Companies with net
worth of  Rs 500 crore or more, turnover of Rs 1,000 crore or more, or net profit more
than Rs 5 crore

Valuations for any property, stocks, shares, goodwill or any other assets, net worth of a
company etc. must be performed by a registered valuer

Class action suits introduced as a remedy for small investors against wrongful acts

Establishment of a National Financial Reporting Authority (NFRA), with the objective

of monitoring and enforcing compliance of auditing and accounting standards

Establishment of vigil mechanism (whistle blowing) in the prescribed manner by every

listed company

Deposit accepted (including interest due) to be repaid within 1 year from enactment or
from due date of such payments, whichever is earlier
 FEMA,1999
FEMA and the various rules, regulations, circulars,
etc. issued under FEMA consolidate the law relating
to foreign exchange with the objective of facilitating
external trade and payments and promoting the
orderly development and maintenance of the foreign
exchange market

Provisions of FEMA specify the current and capital

account transactions which may be carried on with
general or specific permission of the RBI and/or the
FIPB
 Foreign Exchange Management (Transfer or Issue of Security by a Person
Resident Outside India) Regulations, 2000 (“FDI Regulations”)

The FDI Regulations and the press notes issued thereunder

govern investments by persons resident outside India in shares,
debentures (convertible and non convertible), security receipts
and warrants of companies incorporated in India; in effect
regulating inbound investments/acquisitions.

In most sectors, 100% foreign direct investment is permitted

(with or without conditions) without the prior approval of
FIPB.

In certain sectors it is permitted only to the extent prescribed,

subject to conditions set out in the sectoral policy, without the
prior approval of FIPB. Hostile takeovers on a cross border
basis are effectively precluded.
Foreign Exchange Management (Transfer or Issue of any Foreign Security)
Regulations, 2004 (“Foreign Security Regulations”):

Outbound investments by residents in India are

regulated by the Foreign Security Regulations. Indian
companies are permitted to invest up to 400% of their
net worth in joint ventures or wholly owned
subsidiaries abroad under the automatic route.
 SEBI
The Takeover Code, as the name suggests, regulates
takeovers of (and substantial acquisitions in)
companies

Any change in control of shareholding or

consolidation of shareholding beyond certain
thresholds requires an open offer to be made to the
public

Specifies certain triggers which attract disclosure

requirements including as regards share pledges.
 Securities and Exchange Board of India (Issue of Capital and
Disclosure Requirements) Regulations, 2009 (“ICDR Regulations”)

Deal with the issue of further capital by companies

that are listed or proposed to be listed on a recognized
stock exchange

Regulate acquisitions that may take place by making

preferential allotments

Allotments which result in a change in control are

required to comply with the provisions of the
Takeover Code in addition to the provisions of the
ICDR Regulations.
Securities and Exchange Board of India (Delisting of Securities) Guidelines, 2003,
(“Delisting Guidelines”):

Delisting Guidelines set out the procedure for permanent delisting of

securities of a listed company from a stock exchange resulting in
discontinuance of trading in such securities

Delisting can be
Compulsory: where securities are permanently removed from the stock
exchange at the behest of the stock exchange as a result of violation of
compliance required by the stock exchange or upon the public
shareholding in the company falling below the minimum level prescribed
Voluntary: where the promoters or acquirers desire to delisting shares
from the stock exchange, with the intent of consolidating their
shareholding or otherwise, subsequent to making a public announcement
to that effect and providing an exit option to the existing shareholders.
 SAST,2011
SEBI at their Board Meeting held on 28 July 2011,
had considered the report of Takeover Regulations
Advisory Committee [TRAC] and accepted most of the
recommendations made by TRAC. SEBI has, on 23
September 2011, notified SEBI (Substantial Acquisition
of Shares and Takeovers) Regulations, 2011 [SAST 2011]

Direct acquisition of shares or voting rights

Any acquisition of shares or voting rights in the target
company by the acquirer and PAC which entitle them to
exercise in aggregate 25% or more voting rights.
 SAST,2011…
Any acquisition of shares or voting rights exceeding permissible creeping limit (5%) in a financial year.
This situation arises in cases where the acquirer and PAC have acquired and holds shares or voting
rights in the target company which entitles them

to exercise 25% or more but less than maximum permissible non-public shareholding and further
acquires more than 5% shares or voting rights in a financial year.

• Acquisition of shares by any person such that the individual shareholding of such person acquiring
shares exceeds stipulated thresholds irrespective of whether there is a change in the aggregate
shareholding with the PAC.

• An indirect acquisition of shares or voting rights requiring an open offer would be considered as direct
acquisition, for pricing, timing of open offer and other compliances/ requirements of open offer, where
the proportionate net assets or sales turnover or market capitalization of the target company as

a percentage of the consolidated net asset or sales turnover or the enterprise value for the entity or
business being acquired is in excess of 80% on the basis of the most recent audited annual financial
statements (deemed acquisition)

Any revision in voluntary offer size made by the acquirer within 15 working days from the PA of the
competing offer.
 SAST,2011
Acquisition of control
Any direct or indirect acquisition of control of Target Company
by an acquirer irrespective of acquisition or holding of shares or
voting rights.

Indirect acquisition of shares or control

Acquisition of shares or voting rights in, or control over, any
company or other entity, that would enable any person and PAC
to exercise or direct the exercise of such percentage of voting
rights in, or control over a target company, the acquisition of
which would otherwise trigger open offer obligation, shall be
considered as an indirect acquisition of shares or voting rights in,
or control over the target company necessitating an open offer.
 The Competition Act, 2002 (the “Competition Act”)

The Competition Act as amended by the Competition

(Amendment) Act, 2007 provides for control over
M&A activity and abuse of dominant position in the
market

Prior approval of the CCI is required for mergers and

acquisitions above specified thresholds

The CCI has extra territorial jurisdiction as regards

mergers or combinations taking place outside India.
 Voluntary offer
An acquirer, who together with PAC, holds shares or voting rights in a target company
entitling them to exercise 25% or more but less than the maximum permissible non-
public shareholding, shall be entitled to voluntarily make a PA of an open offer for
acquiring shares. A voluntary offer is subject to certain conditions which includes the
following:
Minimum offer size is 10% of the total shares of the target company;
The aggregate shareholding of the acquirer and PAC after completion of the open offer
cannot exceed the maximum permissible non-public shareholding;
Voluntary offer cannot be made where an acquirer or PAC has acquired shares of the target
company in the preceding 52 weeks without attracting the obligation to make an open offer;
During voluntary offer period such acquirer shall not be entitled to acquire any shares
otherwise than under the open offer;
An acquirer and PAC who have made a voluntary offer shall not be entitled to acquire any
shares of the target company for a period of 6 months after completion of the open offer
except pursuant to another voluntary open offer or making a competing offer upon any other
person making an open offer or bonus issue or stock splits.
 CCI
Competition Act, 2002 deals with ‘combinations’ in the form of
mergers, acquisitions or amalgamations under Sections 5, 6, 20,
29, 31

These provisions of the Act had not come into effect till 1st June,
2011

On 1st June, 2011, the Competition Commission of India issued

‘The Competition Commission of India (Procedure in regard to the
transaction of business relating to combinations) Regulations, 2011

These regulations have now been amended twice, once on 23rd

Feb. 2012 and second on 4th April, 2013,
 CCI…
As per the Competition Act, 2002 (“Act”) the ‘combination’ includes:
any acquisition of control, shares, voting rights or assets of the acquired
enterprise by the acquiring enterprise; or
acquiring of control by a person over an enterprise when such person has already
direct or indirect control over another enterprise engaged in production,
distribution or trading of a similar or identical or substitutable goods or provision
of a similar or identical or substitutable services; or any merger or amalgamation.

Even if there is no acquisition of control but only the acquisition of shares or

voting rights, even then it can be a combination for the purpose of the
Competition Act, 2002

Similarly, when there is acquisition of control but not any acquisition of

shares or voting rights, then also it can be a combination for the purpose of the
Act
 CCI…
Provisions of Section 6(2)
Each and every person or enterprises which want to enter in to any
combination has to give pre-merge notification to the Commission in
the specified form
Combination Regulations, 2011 (as amended upto 2013) provides under
Regulation 4 that, if there is any combination which does not have the
tendency to cause or likely to cause the appreciable adverse effect on
the competition (AAEC) and which is covered under the transactions
given in Schedule I of the Combinations Regulations, 2011 (as amended
upto 2013) in India, then there is an option given to the parties ‘to file or
not to file the pre-merger notification’ before the Commission
It implies that the decision to file notice is in discretion of the parties,
however, the Commission still holds the jurisdiction over such
transactions.
 CCI- Minority Interest
The Category 1 of the Schedule I provides for the
‘acquisition of minority stake’ i.e. only those
transactions have been covered in this category, which
could fulfill the following conditions:
Acquisition must be made ‘solely as an investment or in
the ordinary course of business’;
Acquisition of shares or voting rights must be below
twenty five per cent (25%) of the total shares or voting
rights of the acquired company; and
Acquisition of shares or voting rights, whether directly
or indirectly, does not lead to the acquisition of control.
Income Tax Act, 1961 and Indirect Taxation

Any M&A transaction requires detailed evaluation of the tax consequences

Governs all direct taxation within India and grants or withdraws certain
benefits in the case of change of control/shareholdings subject to certain
conditions

Indirect taxation may be in the form of value added tax, excise, etc. and is
governed by various state and central statutes

An asset transfer by way of slump sale may result in higher income for the
seller and higher value added tax liability for the buyer, whereas M&A
under the court scheme may result in additional benefits under the Income
Tax Act and stamp duty laws when compared to an M&A by private
arrangement
FDI Policy & Data
 The New Industrial Policy,
1991
Accelerated the process of liberalisation, stated:
While Government will continue to follow the policy of self‐
reliance, there would be greater emphasis placed on building up our
ability to pay for imports through our own foreign exchange
earnings. ...
Foreign investment and technology collaboration will be welcomed
to obtain higher technology, to increase exports and to expand the
production base....
Foreign investment would bring attendant advantages of technology
transfer, marketing expertise, introduction of modern managerial
techniques and new possibilities for promotion of exports. ... The
government will therefore welcome foreign investment which is in
the interest of the countryʹs industrial development.
 OECD Definition of FDI
Foreign direct investment reflects the objective of establishing a
lasting interest by a resident enterprise in one economy (direct
investor) in an enterprise (direct investment enterprise) that is resident
in an economy other than that of the direct investor

Lasting interest implies the existence of a long ‐term relationship

between the direct investor and the direct investment enterprise and a
significant degree of influence on the management of the enterprise

Direct or indirect ownership of 10% or more of the voting power of

an enterprise resident in one economy by an investor resident in
another economy is evidence of such a relationship.

...Direct investment is not solely limited to equity investment but also

relates to reinvested earnings and inter‐company debt
 Thanks
(ravichandran.ramasamy@gmail.com)

Disclaimer: Views expressed in the presentation are personal and do not represent the
organization
 References
High Court (8/9/2010) & Supreme Court (20/1/2012) Judgments in
Vodafone International Holdings B.V Vs Union of India & others

Fact Sheet on Foreign Direct Investment (FDI From August,1991 to

March, 2011

K.S. Chalapati Rao & Biswajit Dhar, India’s FDI Inflows (Trends
&Concepts), SSID Working Paper No.2011/1

Analysis of Vodafone Judgement extracted from www.taxsutra.com