Grant Thornton India LLP. All rights reserved.

Dealtracker
Providing M&A and PE deal insights
Grant Thornton India LLP. All rights reserved.
Dealtracker
Half Yearly 2012
2
Contents
Foreword 3
Introduction 5
Half yearly deal snapshot 6
M&A deal round up 7
PE deal round up 11
IPO snapshot 13
Sector insight 15
Regulatory insight 18
Grant Thornton India LLP. All rights reserved.
Dealtracker
Half Yearly 2012
3
Foreword
We have come to the middle of a turbulent year in Indias
Corporate World. We called this the Year of the M&A at the
beginning of 2012 and predicted that volumes of M&A will grow
though values will remain subdued. The first half has shown a
significant growth in M&A with the number of deals increasing from
508 to 544 while values have dropped from $ 35.4 to 28.3 Billion
as expected.
We foresee continued growth in M&As in the remaining half of
2012 with robust activity across sectors and we expect continued
level of dealmaking in the active sectors of IT/ITES, Pharma and
Healthcare, Auto components, Media, Telecom and Financial
Services.
We saw a clear reversal of trend in 2007 where outbound deals
overtook inbound deals and saw a reversal in 2011. The trend
continues in the first half with Inbound Deals dominating the cross
border activity both in value and volume. We expect this trend to
continue in the second half but forecast the gap to narrow with
increased outbound activity by India Inc given the economic
uncertainties and policy/procedural hassles of doing business in
India.
Harish HV
Partner- India Leadership Team
Private Equity (PE) continues to increase deal making efforts
inspite of the overall economic environment and the difficult exit
situation. We have seen a robust increase in volumes of PE deals
from 195 to 218 transactions but a fall in values indicating that
average deal sizes have dropped. We see continued activity in PE
space driven by the long term potential of the Indian economy
since investors are looking at the medium term and PEs to focus
on the consumption story more than infrastructure story given the
policy related issues that plague the infrastructure industries.

Grant Thornton India LLP. All rights reserved.
Dealtracker
Half Yearly 2012
4
Grant Thornton India LLP. All rights reserved.
Dealtracker
Half Yearly 2012
5
Introduction
We are pleased to present the Half-yearly Deal Tracker which
captures the deal activity in India in the 1
st
6 months of 2012
(January to June), our analysis and trends as well insights around
deal activity. This edition includes a special feature around deal
trends and outlook in the healthcare and e-commerce sector as
well as implications of GAAR (General Anti-Avoidance
Regulations) on the M&A and PE deals.
As we take stock of the half-way mark, we clearly see deal
momentum continuing in 2012 with 544 deals as compared to 508
deals in 2011. However, the economic headwinds in Europe,
overall tightening of liquidity in the market and the impact of the
recent Tax Regulations have impacted the value of deals.
Deal value in H1/12 was US$ 28.3 Billion, which declined by 20%
compared to H1/11. H1/12 witnessed US$ 14.4 Billion of domestic
internal mergers and restructuring driven by Sesa Sterlite and
TechMahindra Satyam mergers. If we exclude the domestic
internal mergers and restructuring, deal value in H1/12 declined by
60% over H1/11.
Larger M&A deals in 2012 included HSBCs acquisition of RBS,
Sesa Sterlite merger, TechMahindra-Satyam merger, Piramals
acquisition of Decision Resources Group.
In the Private Equity space, investor interest appears to be
focused on the domestic consumption story and companies in
Raja Lahiri
Partner, Transaction Advisory Services
healthcare, e-commerce and non-banking financial services sector
attracted PE and VC investments. Some of the large deal included
Advents investment in Care Hospital, Olympus Capitals
investment in DM Healthcare, Accel Partners investment in Flipkart
and Warburg Pincus investment into Future Capital.
Governments intervention on policy issues, especially, Tax
Regulations and FDI in sectors like retail, aviation etc will play a
role in driving large transactions, especially, inbound deals. Indias
growth story remains intact and we hope to see deal momentum
rebounding in 2nd half of 2012.
Happy reading !

Grant Thornton India LLP. All rights reserved.
Dealtracker
Half Yearly 2012
6
Half yearly deal snapshot
Deal Snapshot
Deal Value Half Yearly Trend H1 12
Highlights
The 1
st
half of 2012 witnessed M&A of US$ 24.6 billion
which has been the lowest in the last 3 years and about
19% down compared to 1
st
half of 2011
Internal mergers and restructuring deals have gained
momentum over the years. The first 6 months of 2012
have seen a number of large and historic restructuring
deals like Sesa Goa - Vedanta , Tech Mahindra
Satyam and UB Scottish & New Castle India
A long awaited acquisition of RBS's retail and
commercial banking business in India by HSBC was
also seen during this period. Other key deals in the first
half have been Piramal Group's acquisition of Decision
Resources Group, US and Mitsui Sumitomo Insurances
investment into Max New York Life Insurance
Private Equity deal value was US$ 3.8 Billion) in 1
st
half
of 2012 which was about 45% down in value terms
compared to 1
st
half of 2011.
The key PE deals in 1
st
half of 2012 included Morgan
Stanleys investment in Continuum Energy, Accel and
Tiger Globals investment in Flipkart and Temaseks
investment into Godrej Consumer
Sectors like healthcare and internet space appears to
be sectors liked by some of the players and these
sectors continues to attract good investor interest

Note: Above represented M&A deals (excluding internal mergers and restructuring)
Domestic
39%
Inbound
70%
Outbound
30%
Crossborder
61%
Deal summary
First half H1 2010 H1 2011 H1 2012 H1 2010 H1 2011 H1 2012
Inbound 44 58 77 5.4 20.5 4.9
Outbound 108 87 48 17.9 6.0 2.1
Cross border 152 145 125 23.3 26.5 7.0
Domestic 137 83 158 5.6 3.4 3.1
M&A 289 228 283 28.9 29.9 10.1
Internal mergers & restructuring 96 85 43 0.0 - 14.4
Total M&A 385 313 326 28.9 29.9 24.6
Private equity 125 195 218 3.0 5.5 3.8
Grand Total 510 508 544 31.8 35.4 28.3
Volume Value in billion
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Half Yearly 2012
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M&A deal round up
Continent Inbound Continent Outbound
Europe
55.2%
Asia
23.5%
North
America
20.4%
South
America
0.4%
Australia
0.4%
Africa
0.12%
Europe
48.6%
North
America
38.5%
Asia
6.9%
Australia
3.9%
Africa
1.2%
South
America
0.93%
M&A Sector Break Up
M&A trends (excluding Internal merger & restructuring)
H1 10
US$ 28.8 bn
H2 10
US$ 9.9bn
H1 11
US$ 29.8 bn
H2 11
US$ 14.3 bn
H1 12
US$ 10.1 bn
Note: Above represented M&A
deals (excluding internal mergers
and restructuring)
Banking &
Financial
Services
24%
IT & ITeS
19%
Pharma,
Healthcare &
Biotech
12%
Telecom
8%
Media,
Entertainment
& Publishing
7%
Others
30%
17.4
11.4
2.5
7.4
17.9
11.9
6.9
7.4
3.9
6.2
139
150
96
118
99
128
121
146
150
133
0
20
40
60
80
100
120
140
160
-
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
20.0
Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11 Q4 11 Q1 12 Q2 12
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$

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Value Volume
Grant Thornton India LLP. All rights reserved.
Dealtracker
Half Yearly 2012
8
M&A deal round up
Top internal merger & restructuring deals Top M&A deals( excluding internal merger & restructuring)
Top M&A deals (excluding internal merger &
restructuring) accounted for 48% of the Total M&A
(excluding Internal merger & restructuring) deal values.
Top 4 internal merger & restructuring deals accounted
for 99% of the total Internal merger & restructuring deal
values.
* Sesa Goa and Vedanta internal merger & restructuring deal has been
considered as a single deal
Acquirer Target US$ mn
Sesa Goa Ltd (Sesa Sterlite)
Sterlite Industries
Vedanta Aluminium
The Madras Aluminium Company
Cairn India
12,769*
Tech Mahindra Satyam Computer Services Ltd. 1,400
United Breweries Scottish & Newcastle India 77
Empee Sugars & Chemicals Empee Distilleries 26
Acquirer Target US$ mn
Hongkong and Shanghai
Banking Corporation - UK
The Royal Bank of Scotland - retail
& commercial banking businesses
in india
1,895
Piramal Healthcare Decision Resources Group - USA 680
Piramal Healthcare Vodafone Essar 618
Mitsui Sumitomo Insurance
Company - Japan
Max New York Life Insurance
Company
530
TV18 Broadcast Eenadu Television Network 395
Watson Pharmaceuticals Inc -
USA
Ascent Pharmahealth Ltd - (division
of Strides Acrolab)
393
Binani Industries 3B - fibreglass - Belgium 360
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Dealtracker
Half Yearly 2012
9
Top M&A deals by sector
Banking & Financial Services
Top M&A deals in top sectors
Acquirer :
HSBC

Target :
RBS - retail & commercial banking
businesses in India
Deal Value
US$ 1,895 mn
Acquirer :
Mitsui Sumitomo Insurance

Target :
Max New York Life Insurance

Deal Value
US$ 530 mn
Acquirer :
Nippon Life Insurance

Target :
Reliance Capital Asset Management

Deal Value
US$ 290 mn
Metals & Mining
Acquirer :
Sesa Goa
Target :
Sterlite Industries , Vedanta Aluminium
The Madras Aluminium Company
Cairn India
Deal Value
US$ 12,769 mn
Acquirer :
Vedanta Aluminium
Target :
Raykal Aluminium

Deal Value
US$ 40 mn
Acquirer :
Jindal Steel & Power
Target :
Gujarat NRE Coking Coal Ltd -
Australian arm
Deal Value
US$ 25 mn
Although the Eurozone is less
optimistic about the growth
prospects of their own economies a
large proportion of businesses within
Europe are actively seeking
opportunities abroad and expanding
into higher growth markets such as
the BRIC economies. Following the
financial crisis of 2008, the flow of
economic power from west to east
has undoubtedly sped up. It is
therefore encouraging that
enterprising corporates in mature
markets appreciate that M&A remains
a vital strategic tool to enable them
to benefit from these trends.
Munesh Khanna,
Senior Partner, M&A
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Dealtracker
Half Yearly 2012
10
Top M&A deals by sector
Top M&A deals in top sectors
IT & ITeS Pharma, Healthcare & Biotech
Acquirer :
Tech Mahindra

Target :
Satyam Computer Services
Deal Value
US$ 1,400 mn
Acquirer :
Ybrant Digital
Target :
PriceGrabber, LowerMyBills
ClassesUSA.com

Deal Value
US$ 175 mn
Acquirer :
NTT Communications
Target :
Netmagic Solutions

Deal Value
US$ 128mn
Acquirer :
Piramal Healthcare
Target :
Decision Resources Group
Deal Value
US$ 680 mn
Acquirer :
Watson Pharmaceuticals Inc

Target :
Ascent Pharmahealth

Deal Value
US$ 393 mn
Acquirer :
Radiant Life Care

Target :
Guru Harkishan Hospital

Deal Value
US$ 77 mn
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Dealtracker
Half Yearly 2012
11
59
66
58
70
75
120
90
88
120
98
1.6 1.4
1.7
1.6
2.6 2.9
1.9
1.4
2.1
1.7
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
0
20
40
60
80
100
120
140
Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11 Q4 11 Q1 12 Q2 12
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Volume Value
PE deal round up
PE Quarterly & Half yearly Trends
Pharma,
Healthcare &
Biotech
16%
IT & ITeS
14%
Banking &
Financial
Services
13%
Real
Estate
10%
Power &
Energy
9%
Others
38%
PE Sector Break Up
Top PE Deals
H1 10
US$ 3.0 bn
H2 10
US$ 3.3 bn
H1 11
US$ 5.5 bn
H2 11
US$ 3.2 bn
H1 12
US$ 3.8 bn
Investor Investee US$ mn
Morgan Stanley PE Continuum Wind Energy 210
Accel Partners and Tiger Global Flipkart Online Services 150
Temasek Holdings Godrej Consumer Products 137
APG - Pension Fund Lemon Tree Hotels 130
General Atlantic Fourcee Infrastructure Equipments 125
Advent PE CARE Hospital 105
Olympus Capital DM Healthcare Pvt Ltd 100
GIC Vasan Healthcare 100
Morgan Stanley PE Sheth Developer's Mumbai Project 90
Warburg Pincus Future Capital Holdings 84
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Top PE deals by sector
Banking & Financial Services
Top PE deals in top sectors
IT & ITeS Pharma, Healthcare & Biotech
Investor:
Advent International

Investee :
CARE Hospital

Deal Value
US$ 105 mn
Investor:
Olympus Capital

Investee :
DM Healthcare

Deal Value
US$ 100 mn
Investor:
GIC

Investee :
Vasan Healthcare

Deal Value
US$ 100 mn
Investor:
Accel Partners and Tiger Global

Investee :
Flipkart Online Services
Deal Value
US$ 150 mn
Investor:
Sequoia Capital

Investee :
Just Dial
Deal Value
US$ 61 mn
Investor:
eBay Inc., Norwest Venture Partners,
Matrix India Fund, Warburg Pincus
Investee :
Quikr India
Deal Value
US$ 32 mn
Investor:
Warburg Pincus

Investee :
Future Capital Holdings
Deal Value
US$ 84 mn
Investor:
Warburg Pincus

Investee :
AU Financiers

Deal Value
US$ 50 mn
Investor:
NYLIM Jacob Ballas

Investee :
Religare Finvest

Deal Value
US$ 40 mn
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Dealtracker
Half Yearly 2012
13
IPO snapshot
IPO half yearly Trend Volume & Value
IPO's
10
3,325
2,317
5,649
672
531
268
2
15
27
35
14
16
8
0
5
10
15
20
25
30
35
40
45
50
0.0
1,000.0
2,000.0
3,000.0
4,000.0
5,000.0
6,000.0
H1 2009 H2 2009 H1 2010 H2 2010 H1 2011 H2 2011 H1 2012
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Value Volume
Investor US$ mn
MCX India 132.7
Tribhovandas Bhimji Zaveri 40.0
Speciality Restaurants 35.2
National Building Construction 25.4
MT Educare 19.8
BCB Finance 5.8
Monarch Health Services 4.8
Olympic Cards 4.7
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over 800 due diligences,1000 valuations and 50 completed
transactions.
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Sector Insight
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Sector Insight
Pharma, Healthcare & Biotech
Private Equity focus back on multi-specialty healthcare?
The first half of 2012 has seen some of the largest private equity
investments in the healthcare delivery sector. Three $100 million deals
(GIC's investment in Vasan Healthcare, Advent Private Equity's
investment in Care Hospitals and Olympus Capital's investment in DM
Healthcare), a Rs 100 crore + investment by Orbimed and Ascent Capital
in KIMS Trivandrum and a Rs 100 crore investment by Sequoia Capital in
Moolchand Healthcare has really raised the question
"Are Multi-Speciality Hospitals back in business as far as PE
investments are concerned?".
Vasan Healthcare of course is the largest chain of eye-care surgical
centres in the country, whereas Care Hospitals, KIMS Trivandrum, DM
Healthcare and Moolchand Healthcare are all multi-specialty healthcare
operators.
Vasan Healthcare, as already highlighted, focuses on single specialty
care (ophthalmic surgeries). Single specialty healthcare (eye care,
dental, day-surgeries, birthing etc) has been of huge interest for PE funds
in the last few years due to better return on capital parameters and
greater scalability.

The only reported PE investments in multi-specialty hospitals in all of
2011 were in Apollo Hospitals and Vaatsalya Healthcare, both of which
cannot be taken as representative Apollo being the largest Indian
healthcare operator in terms of market capitalization and Vaatsalya
Healthcare being differentiated because of its focus on primary and
secondary care in the rural and semi-urban areas.

So what has changed in 2012?

We take a closer look at these transactions to understand what is likely to
have been the driving factor behind these deals.

Care Hospitals is among the largest chain of multi-specialty hospitals in
the country with a strong presence in several non-Metro cities such as
Bhubaneshwar, Raipur, Nagpur, Surat and Vishakapatnam. DM
Healthcare and KIMS Trivandrum have significant presence in Kerala
and GCC, with the added attraction of being able to capitalize on medical
tourism from the GCC region into Kerala.

Moolchand Healthcare is located in the heart of Delhi, which is
considered to be the most lucrative healthcare delivery market in the
country, and has demonstrated an ability to add beds and operate more
efficiently than several operators in the region.

It is however important to note that there is a
shortage of healthcare franchises that are
operating to scale and profitably and can absorb
the amount of capital that PE funds typically look
to deploy in this space. Given that, we believe the
level of activity in the multi-specialty hospitals
space is likely to shift towards strategic deals, with
some PE-led buyouts continuing to happen.


Mahad Narayanamoni,
Partner, Corporate Finance
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Dealtracker
Half Yearly 2012
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Fund and Investee company services
Technical excellence and distinctive client services
Target profiling
Industry/Market scans
Assistance with potential
target identification
Investee Company health
check
Promoter and Company
background checks
Financial and Operational
Diligences
Technology reviews
Social & Environmental
diligence
Other Strategic Services
Investing in a
Company
Structuring
Fund Formation
Audit & tax services
Deal structuring
Estate/wealth planning
Investor structuring
Compensation & benefits
Managing the Fund
Assurance
Tax Advisory
Operations and Process
efficiency advisory/ reviews
Corporate Governance
Compliance with
regulations SOX, Clause
49 etc
Compensation planning
HR audits
Social and Environmental
/CSR reviews
Developing MIS/ Reporting
Assistance with monitoring
accounting
Board reconstitution
advisory
Managing the
Portfolio Company
Preparation of Information
Memorandum sale
document
Exit options advisory
Reverse Due Diligences
Sell Side Advisory
IPO readiness reviews and
assistance
Reporting Accountant
services
Financial Statement
Conversions IFRS/ US
GAAP
Tax Structuring
Exiting the
Investment
Investment structuring
Assistance with price
negotiations
Commercial assessments
Deal and Tax structuring
Valuation Services
Merger Integration
M&A Advisory and Support
Opening Balance Sheet
Audits
HR/ Personnel Strategy
Advisory
Change Management
ESOP Services
Closing the
Investment
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Regulatory insight
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Regulatory insight
GAAR: A dynamic move in the right direction?
Internationally, tax avoidance has been recognized as an area of concern
and several countries have expressed concern over tax evasion and
avoidance. This is also evident from the fact that most of the nations
have legislated or are legislating doctrine of General Anti-Avoidance
Regulations (GAAR) in their tax code or strengthening their existing
code.

Tax payers across the world arrange their business/ affairs in a way that
gives them maximum tax advantage. On one hand, tax authorities look
through these transactions carrying reduction in tax liability with
jaundiced eye while taxpayers label those as genuine tax planning. This
difference in approach and outlook becomes the subject matter of debate
and turns into protracted litigation.


Introduction of GAAR in India
GAAR is now contained in the current Income Tax Act. The Direct Taxes
Code Bill 2010 (DTC )proposed to implement the GAAR for the first time
in domestic legislation. Given the postponement of DTC, GAAR as part of
tax reforms was introduced through this year's budget.

The Finance Minister has deferred its applicability by a year to 1st April,
2013. GAAR is introduced to counter aggressive tax avoidance schemes,
while ensuring that it is used only in appropriate cases, by enabling a
review by a GAAR panel (known as Approving Panel).

Scope of provisions
GAAR to tax an impermissible avoidance arrangement which may be a
step, a part or whole of an arrangement herein referred to as
transaction.






The main premise of invoking GAAR is that any transaction or step in a
transaction which has one of its main purposes i.e. the obtaining of a tax
benefit, should be disregarded, or dealt with in such a manner so as to
protect the right of the revenue to taxes. In addition to obtaining the tax
benefit, the transaction:
creates rights and obligations which are not ordinarily created between
persons dealing at arms length; or
results directly or indirectly in the misuse of the provisions of the Act;
or
lacks commercial substance or is deemed to lack commercial
substance, in whole or in part; or
is entered into in such a manner which are not ordinarily be employed
for bonafide purposes.

In other words, once the tax benefit test is satisfied, the arrangement
needs to satisfy at least one of the above four additional tests.

Some of important terms used are as explained below.

Tax benefit means
a reduction, avoidance or deferral of, or an increase in a refund of tax
under the Income Tax Act (ITA or the Act)
a reduction, avoidance or deferral of, or an increase in a refund of tax
for a Tax Treaty
a reduction in tax bases including increase in loss




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Regulatory insight
GAAR: A dynamic move in the right direction?
Lack of commercial substance:

An arrangement will be deemed to lack commercial substance if

1. the substance or effect of the arrangement as a whole, is inconsistent
with, or differs significantly from, the form of its individual steps or a
part; or
2. it involves or includes
round trip financing; (the ordinary meaning of the word 'round-
tripping' is 'a journey to place and back again)
an accommodating party ;
elements that have effect of offsetting or cancelling each other; or
a transaction which is conducted through one or more persons
and disguises the value, location, source, ownership or control of
fund which is subject matter of such transaction; or
3. it involves the location of an asset or of a transaction or of the place
of residence of any party which is without any substantial commercial
purpose other than obtaining tax benefit for a party.

Consequences if GAAR triggered:

Once treated as an impermissible avoidance arrangement, look through
is permitted by:
disregarding or combining any step of the arrangement





ignoring the arrangement for the purpose of taxation law
disregarding or combining any party to the arrangement
reallocating expenses and income between the parties to the
arrangement
relocating place of residence of a party, or location of a transaction or
situs of an asset to a place other than provided in the arrangement
considering or looking through the arrangement by disregarding any
corporate structure
re-characterizing equity into debt, capital into revenue etc.

If a transaction is regarded as an impermissible avoidance transaction, it
could be disregarded, combined with any other step in the transaction or
re-characterized, or the parties to the transaction could be disregarded as
separate persons and treated as one. The provisions are drafted in a
manner to permit the application of principles relating to lifting corporate
veil, substance over form test, economic substance test, and thin
capitalization rules such as re-characterisation of debt into equity or vice
versa.
It is provided that GAAR shall be applied in accordance with such
guidelines and subject to such conditions and the manner as may be
prescribed. The Finance Minister had announced that a Committee was
constituted under the Chairmanship of the Director General of Income
Tax (International Taxation) to give recommendations for formulating the
rules and guidelines for implementation of GAAR and to suggest
safeguards so that these provisions are not applied indiscriminately.
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Regulatory insight
GAAR: A dynamic move in the right direction?
The Committee has recently, made certain recommendations for
incorporating in the guidelines to be prescribed. These recommendations
are open for consultation and feedback from the stakeholders.

Summarily, these recommendations include setting a monetary
threshold, prescribing statutory forms for reference for invoking GAAR,
approving panel be provided the secretariat staff along with appropriate
budgetary and infrastructure support by the Central Board of Direct
Taxes, including a detailed note explaining provisions of GAAR and
illustrations for scope of GAAR.

Till the time we see a final version of guidelines, the applicability of
GAAR will continue to be a surprise.

Impact of GAAR on Mergers and Acquisitions (M&A):

Taxpayers, domestic and foreign, will witness a paradigm shift in
empowerment and approach of tax authorities in India towards taxation of
transactions, structures and arrangements. GAAR may impact cross
border deals, investments into India by foreign institutional investors and
private equity funds, domestic transactions, even within two units of one
conglomerate. ,

These provisions are substantially overriding in nature and would impact
all restructuring and acquisitions. GAAR provisions expressly clarify that
the holding period of a structure or arrangement and the fact that it
provides a legitimate exit route for investors is not relevant for the
purpose of determining commercial substance.

Some of the emerging concerns are mentioned below which are
becoming boost dampener for M&A market.

1. Wide scope: Under the present provisions, while a transaction as a
whole may be a bonafide one, however the tax authorities can invoke
GAAR if any of the steps on a standalone basis are undertaken to
obtain a tax benefit. Consequently, even genuine business
transactions might fall on the wrong side of GAAR. In fact, it seems
that while taking all commercial decisions and determining the manner
of their implementation, the tax implications of these provisions would
play a pivotal role.

2. GAAR vs. Treaty provisions: GAAR would apply to a taxpayer
irrespective of the fact that the treaty provisions are more beneficial. It
may be noted that a unilateral enactment of a new domestic tax law
which is contrary to an existing treaty, without an amendment in treaty
could possibly be regarded as violation of international law and is
generally known as treaty override.

It may be relevant to note that according to rules of legislative
interpretation, specific legislation overrides general legislation.
Therefore, an argument may be taken that change of a domestic law
generally, which could be the case with GAAR, may not affect the
treaty. However, in the absence of an anti-avoidance provision under
the treaty, the reaction of Indias treaty partner countries needs to be
observed.

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22
Regulatory insight
GAAR: A dynamic move in the right direction?
It may be noted while the limited treaty override provisions are
theoretically in line with substance over form rule or economic
substance rule (as envisaged under the OECD commentary and
global practice for anti-avoidance measures), it is unclear as to how
such interplay between the tax treaty provisions and the domestic
override provisions would be balanced by the tax administration. For
instance, if a particular transaction is eligible for tax treaty relief
(especially in where the tax treaty already has a limitation of benefit
clause), could the domestic anti-avoidance rules still be invoked by the
revenue to pierce the corporate veil and deny tax treaty relief?

3. Wide powers of tax authorities: The language of GAAR as it stands
today, provide tax authorities powers to invoke GAAR by using any
one of the criterion which are vast as well as ambiguous.

Thus there is need to lay down more objective criteria and specific
administrative guidelines for invoking GAAR and determining the tax
consequences in cases where GAAR is invoked and to establish a
reasonable level of accountability for the tax authorities.

4. GAAR vs. SAAR: There are varied international precedents when it
comes to the interaction between general and special anti-abuse
provisions, with some jurisdictions ruling out applicability of general
anti avoidance measures in cases where more specific anti-abuse
provisions have been applied such as Germany. The approach of
OECD countries is different, with common law countries espousing a
view that the existence of special anti-avoidance measures cannot
preclude overarching general anti-avoidance rules.

On interplay between SAAR and GAAR, the Committee's
recommendation is that under normal circumstances, where SAAR is
applicable, GAAR should not be invoked. However, in an exceptional
case where SAAR is defeated, applicability of GAAR provisions can
be checked.

5. Approach to AAR: All taxpayers, resident as well as non-resident,
can approach the Authority for Advance Ruling to know whether an
arrangement to be undertaken was permissible under GAAR. This
move should take care of some of the emerging concerns relating to
uncertainty as it provides opportunity for a more comprehensive
consideration of proposed transaction well in advance.

Conclusion

For a foreign investor a countrys tax regime is very significant factor if
not a decisive factor. Today businesses are looking at inorganic growth
to achieve better economies of scale, synergy and competency in form of
business reorganizations. Therefore the tax policies of the government
need to be critically framed as to achieve the purpose of tax reform and
also being positive to business environment of the country.

Worldwide, GAAR has been criticized and supported equally by
international tax experts. The rule of law requires law to be certain and
predictable, such that law abiding citizens are aware of what is permitted
and what is prohibited. While the concept of GAAR may as such be
against this principle, to some extent, GAAR is important, since it is not
humanly possible to make laws for each and every tax avoidance tool
used by a creative taxpayer.






Grant Thornton India LLP. All rights reserved.
Dealtracker
Half Yearly 2012
23
Regulatory insight
GAAR: A dynamic move in the right direction?
The success of GAAR lies in its judicious, selective and sensible
implementation. In the Indian context, considering the aggression of tax
administration in some cases, the introduction of GAAR may be
worrisome to a tax payer unless implemented in the balanced manner
with adequate safeguards for protecting the taxpayer.

Tax payers would keenly await draft subordinate legislation, which law
makers expect would be open for public debate.

The intent of the Indian lawmakers to legislate GAAR is progressive in so
far as tax policy decisions are directed. However, an important question
is whether, in the current context, the introduction of GAAR is well timed,
or still a premature effort towards alignment with internationally accepted
principles of anti-avoidance.










Anshu Khanna,
Partner, Walker, Chandiok & Co.
Grant Thornton India LLP. All rights reserved.
Dealtracker
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