Vodafone Controversy: The Vodafone tax controversy shall have a significant impact cross-border M&A transactions involving business

in India. The background of the controversy is that the shares of CGP Investments, a company incorporated in the Cayman Islands were transferred by HTIL, another Cayman Islands company to Vodafone International Holdings BV, a Netherlands company (Vodafone) for a consideration of about USD 11.1 billion. CGP Investments held stake in a series of Mauritian and Indian Companies which cumulatively held about 67% stake in Vodafone Essar Limited (VEL). The Indian Revenue Authorities (Revenue) issued show cause notice (Notice) to both Vodafone and VEL as to why they should not be treated as assesses in default, the former on the ground of failure to withhold taxes at source and the latter as a representative assessee. Both VEL and Vodafone filed respective writ petitions before the Bombay High Court challenging the validity of the Notice. A diagrammatic representation of the transaction is reproduced below The Bombay High Court dismissed Vodafones writ petition on the following substantial grounds: 35

Indian company and hence an indirect transfer of capital asset situated in India.

Cayman Islands entity. As per the terms of the FIPB approval, Vodafone was required to comply with the applicable provisions of the Indian law which shall include the Income Tax Act. Therefore it was within the jurisdiction of the Revenue to proceed against Vodafone and the Notice served was valid. en India and Vodafone, so as to bring the consideration to tax in line with the Effects Doctrine which is a principle of international law which postulates that a State can impose liabilities on a non resident if the nonresident conducts its operation in such a manner which affects the State. In response to the dismissal of the writ petition by the Bombay High Court, Vodafone filed a special leave petition before the Supreme Court in India. The Supreme Court has also dismissed the special leave petition filed by Vodafone and remanded the matter back to the tax authorities who, on the basis of the relevant agreements and facts, would inter alia decide the most fundamental issue of whether there even existed a jurisdiction to issue a notice for subjecting the transaction to tax.

The reasons for mergers and acquisitions One of the most common arguments for mergers and acquisitions is the belief that "synergies" exist, allowing the two companies to work more efficiently together than either would separately. Such synergies may result from the firms' combined ability to exploit economies of scale, eliminate duplicated functions, share managerial expertise, and raise larger amounts of capital (Ravenscraft and Scherer 1987). Carlton and Granada hope to save 55 million annually by combining their operations. Unfortunately, research shows that the predicted efficiency gains often fail to materialise following a merger (Hughes 1989). 'Horizontal' mergers (between companies operating at the same level of production in the same industry) may also be motivated by a desire for greater market power. In theory, authorities such as Britain's Competition Commission should obstruct any tie-up that could create a monopoly capable of abusing its power - as it did recently in preventing the largest supermarket chains from buying the retailer Safeway - but such decisions are often controversial and highly politicised. (In the case of Carlton and Granada, the government imposed strict safeguards to prevent the combined firms from unfairly raising the price of TV advertising. ) However, some authors have argued that mergers are unlikely to create monopolies even in the absence of such regulation, since there is no evidence that mergers in the past have generally led to an increase in the concentration of market power (George 1989), although there may be exceptions within specific industries (Ravenscraft and Scherer 1987). In some cases, firms may derive tax advantages from a merger or acquisition. However, Auerbauch and Reishus (1988) concluded that tax considerations probably do not play a significant role in prompting companies to merge. Corporations may pursue mergers and acquisitions as part of a deliberate strategy of diversification, allowing the company to exploit new markets and spread its risks. AOL's merger with media giant Time Warner, for example, saved it from being affected quite so disastrously as many of AOL's Internet competitors by the 'dot com crash' (Henry 2002). A company may seek an acquisition because it believes its target to be undervalued, and thus a "bargain" - a good investment capable of generating a high return for the parent company's shareholders. Often, such acquisitions are also motivated by the "empire-building desire" of the parent company's managers (Ravenscraft and Scherer 1987).