Hutch-Vodafone may have deep tax implications

By Jasman Boparai, Titus & Co

Mergers and acquisitions are well accepted strategies for corporate growth by companies seeking to achieve economies of scale, increase market share, and diversify product range.

Jasman Boparai, Associate, Titus & Co
Jasman Boparai
Titus & Co

Many high profile mergers and acquisitions have caught our attention in the last few months.

One of them is the Hutch-Vodafone deal.

However, like all significant corporate transactions, acquisitions bring with them a large number of regulatory requirements and tax implications. Tax laws can do much to encourage or constrict these transactions.

Hutch-Vodafone deal

Hutchison Telecom International Limited (HTIL) had sold its stake of 67% in Hutchison Essar to Vodafone Group PLC (Vodafone) for US$11.2 billion.

With this transaction Vodafone acquired a controlling stake in Hutchison Essar, which was renamed Vodafone Essar.

This is one of the largest cross-border inbound deals (inbound deals have a foreign buyer and an Indian target), involving an overseas firm acquiring a company in India.

The tax authorities are attempting to tax this deal between two foreign companies involving transfer of a beneficial interest in an Indian asset.

If the tax liability is established, it could amount to around US$1.7 billion. Tax authoritites have given a number of reasons for this bill.

Capital gains

The Income Tax Department sent a notice to Vodafone, seeking around US$1.7 billion in capital gains tax related to the sale of HTIL’s stake in Hutchison Essar to Vodafone. Tax authorities are claiming capital gains as they are of the view that the transaction involves the transfer of an Indian asset for which the approval of the Foreign Investment Promotion Board (FIPB) was sought.

Under Section 45 of the Income Tax Act, 1961, (IT Act) any profit or gain arising from the sale or transfer of a capital asset is chargeable to tax under the head of Capital Gains.

Capital assets include property of any kind, whether fixed or circulating, movable or immovable, tangible or intangible.

According to section 9(1)(i) of the IT Act, all income accruing or arising, whether 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 situate in India shall be deemed to accrue or arise in India.

Agent treatment

A show cause notice is seeking an explanation from Vodafone Essar as to why it should not be treated as an agent of HTIL.

Section 163 of the IT Act states that an agent in relation to a non-resident includes any person in India who:

(a) is employed by or on behalf of the non-resident; or

(b) has any business connection with the non-resident; or

(c) from or through whom the non-resident is in receipt of any income, whether directly or indirectly; or

(d) is the trustee of the non-resident; and includes also any other person who, whether a resident or non-resident, has acquired by means of a transfer, a capital asset in India.

Tax deductions

Further, the Income Tax Department is of the view that Vodafone has the liability of a payer and should have deducted tax at source while paying HTIL the consideration amount.

Vodafone filed a writ petition with the Bombay High Court challenging the right of the Income Tax Department to levy tax.

One of the grounds which Vodafone may use is that as the transaction between HTIL and Vodafone was structured through Mauritius and since India has a double taxation avoidance treaty with Mauritius it would not attract tax in India.

In addition, Vodafone has not had any capital gains in this deal as it is the acquirer and had paid the sale consideration amount to HTIL.

Hence, the capital gains may be taxable in the hands of the purchaser, that is HTIL.

It is far fetched on the part of Indian income tax authorities to treat Vodafone Essar as the “agent” of HTIL as this is a buyer-seller relationship and not principal agent relation.


One of the measures which companies like Vodafone Essar could adopt is to seek an indemnity or escrow of some nature from the seller providing that the seller would be responsible for paying income tax.

This area of the income tax law needs clarification to ensure smooth execution of such deals.

Jasman Boparai is an associate at Titus & Co, Advocates and may be contacted at

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