TMI Blog2012 (1) TMI 52X X X X Extracts X X X X X X X X Extracts X X X X ..... a strong governance infrastructure which includes enactment of laws and how well the legal system works. Certainty is integral to rule of law. Certainty and stability form the basic foundation of any fiscal system. Tax policy certainty is crucial for taxpayers (including foreign investors) to make rational economic choices in the most efficient manner. Legal doctrines like Limitation of Benefits and look through are matters of policy. It is for the Government of the day to have them incorporated in the Treaties and in the laws so as to avoid conflicting views. Investors should know where they stand. It also helps the tax administration in enforcing the provisions of the taxing laws. As stated above, the Hutchison structure has existed since 1994. According to the details submitted on behalf of the appellant, we find that from 2002-03 to 2010-11 the Group has contributed an amount of ₹ 20,242 crores towards direct and indirect taxes on its business operations in India. Transfer outside India - held that:- On transfer of shares of a foreign company to a nonresident off-shore, there is no transfer of shares of the Indian Company, though held by the foreign company, in su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Order of Bombay High Court set aside - decided in favor of assessee. - CIVIL APPEAL NO.733 OF 2012 (arising out of S.L.P. (C) No. 26529 of 2010) - - - Dated:- 20-1-2012 - SHRI S.H. KAPADIA, SHRI Swatanter Kumar, SHRI K.S. Radhakrishnan, J.J. For Petitioner(s): Mr. Harish N. Salve, Ms. Anuradha Dutt, Ms. Fereshte D. Sethna,Ad., Ms. Vijayalakshmi Menon,Adv. For Respondent(s): Mr. R.F. Nariman,SG. Mr. Mohan Parasaran,ASG Mr. D.L. Chidananda,Adv. Mr. G.C. Srivastava,Adv. Mr. Girish Dave,Adv. Mr. Gaurav Dhingra,Adv. Mr. Ritin Rai,Adv. Mr. B.V. Balaram Das,Adv. For Intervenor : Ms. Mamta Tiwari,Adv. Ms. Sangeeta Mandal,Adv. Ms. Swati Sinha,Adv. for M/s. Fox Mandal and Co.,Advs. Ms. Sumita Hazarika,Adv. Mr. Mohit Kumar Shah,Adv. Mr. Amit Anand Tiwari,Adv. JUDGMENT S.H. KAPADIA, J. 1. Leave granted. Introduction 2. This matter concerns a tax dispute involving the Vodafone Group with the Indian Tax Authorities [hereinafter referred to for short as the Revenue ], in relation to the acquisition by Vodafone International Holdings BV [for short VIH ], a company resident for tax purposes in the Netherlands, of the entire share capital of CGP In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , other than Hutchison and Essar, in HMTL/HEL. They were Indian tier I companies above HMTL/HEL. The consolidation was first mooted as early as July, 2003. 7. On 28.10.2005, VIH agreed to acquire 5.61% shareholding in Bharti Televentures Ltd. (now Bharti Airtel Ltd.). On the same day, Vodafone Mauritius Limited (subsidiary of VIH) agreed to acquire 4.39% shareholding in Bharti Enterprises Pvt. Ltd. which indirectly held shares in Bharti Televentures Ltd. (now Bharti Airtel Ltd.). 8. On 3.11.2005, Press Note 5 was issued by the Government of India enhancing the FDI ceiling from 49% to 74% in telecom sector. Under this Press Note, proportionate foreign component held in any Indian company was also to be counted towards the ceiling of 74%. 9. On 1.03.2006, TII Framework and Shareholders Agreements stood executed under which the shareholding of HEL was restructured through TII , an Indian company, in which Analjit Singh (AS) and Asim Ghosh (AG), acquired shares through their Group companies, with the credit support provided by HTIL. In consideration of the credit support, parties entered into Framework Agreements under which a Call Option was given to 3 Global Services Privat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or 67% of HTIL s interest at 100% enterprise value of US $17.5 bn by way of acquisition by VIH of one share (which was the entire shareholding) in CGP, an indirect Cayman Islands subsidiary of HTIL. The said approval was subject to: (i) reaching an agreement with Bharti that allowed VIH to make a bid on Hutch; and (ii) entering into an appropriate partnership arrangement to satisfy FDI Rules in India. 15. On 6.02.2007, HTIL calls for a binding offer from Vodafone Group for its aggregate interests in 66.98% of the issued share capital of HEL controlled by companies owned, directly or indirectly, by HTIL together with inter-related loans. 16. On 9.02.2007, Vodafone Group makes a revised offer on behalf of VIH to HTIL. The said revised offer was of US $10.708 bn for 66.98% interest [at the enterprise value of US $18.250 bn] and for US $1.084 bn loans given by the Hutch Group. The offer further confirmed that in consultation with HTIL, the consideration payable may be reduced to take account of the various amounts which would be payable directly to certain existing legal local partners in order to extinguish HTIL s previous obligations to them. The offer further confirmed t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owner of CGP share. 22. On 11.02.2007, a Side Letter was sent by HTIL to VIH inter alia stating that out of the purchase consideration, up to US $80 million could be paid to some of its existing partners. By the said Side Letter, HTIL agreed to procure that Hutchison Telecommunications (India) Ltd. (Ms) [ HTIL Mauritius for short], Omega Telecom Holdings Private Limited [ Omega for short] and GSPL would enter into IDFC Transaction Agreement prior to the completion of the acquisition pursuant to SPA, which completion ultimately took place on 8.05.2007. 23. On 12.02.2007, Vodafone makes public announcement to Securities and Exchange Commission [ SEC for short], Washington and on London Stock Exchange which contained two assertions saying that Vodafone had agreed to acquire a controlling interest in HEL via its subsidiary VIH and, second, that Vodafone had agreed to acquire companies that control a 67% interest in HEL. 24. On the same day, HTIL makes an announcement on HK Stock Exchange stating that it had agreed to sell its entire direct and indirect equity and loan interests held through subsidiaries, in HEL to VIH. 25. On 20.02.2007, VIH applied for approval to FIPB. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wned subsidiaries of HTIL which held an aggregate of 19.54% of HEL, which added up to 61.88%, whereas in the communication to FIPB dated 6.03.2007, the direct and indirect FDI held by HTIL was stated to be 51.96%. 31. By letter of the same date from HEL to FIPB, it was pointed out that HTIL was a company listed on NY SE. Accordingly, it had to file Statements in accordance with US SEC. That, under US GAAP, HTIL had to consolidate the assets and liabilities of companies even though not majority owned or controlled by HTIL, because of a US accounting standard that required HTIL to consolidate an entity whereby HTIL had risk or reward . Therefore, this accounting consolidation required that even though HTIL held no shares nor management rights still they had to be computed in the computation of the holding in terms of the Listing Norms. It is the said accounting consolidation which led to the reporting of additional 19.54% in HEL, which leads to combined holding of 61.88%. On the other hand, under Indian GAAP, the interest as of March, 2006 was 42.34% + 7.28% (rounded up to 49.62%). After the additional purchase of 2.34% from Hindujas in August 2006, the aggregate HTIL direct and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts and dividend rights. In other words, none of the Indian partners exited and, consequently, there was no change of control. (v) The Essar Group would continue to own 33% of HEL. 34. On 15.03.2007, a Settlement Agreement was signed between HTIL and Essar Group. Under the said Agreement, HTIL agreed to pay US $415 mn to Essar for the following: (a) acceptance of the SPA; (b) for waiving rights or claims in respect of management and conduct of affairs of HEL; (c) for giving up Right of First Refusal (RoFR), Tag Along Rights (TARs) and shareholders rights under Agreement dated 2.05.2000; and (d) for giving up its objections before FIPB. 35. Vide Settlement Agreement, HTIL agreed to dispose of its direct and indirect equity, loan and other interests and rights, in and related to HEL, to VIH. These other rights and interests have been enumerated in the Order of the Revenue dated 31.05.2010 as follows : 1. Right to equity interest (direct and indirect) in HEL. 2. Right to do telecom business in India 3. Right to jointly own and avail the telecom licences in India 4. Right to use the Hutch brand in India 5. Right to appoint/remove directors from the Bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . This query presupposes that even according to FIPB the actual acquisition was only 51.96% (52% approx.). 40. On the same day, VIH replied that VIH has agreed to acquire from HTIL, interests in HEL which included 52% equity shareholding for US $11.08 bn. That, the price included a control premium, use and rights to the Hutch Brand in India, a non-compete agreement with the Hutch Group, the value of non-voting non-convertible preference shares, various loans obligations and the entitlement to acquire a further 15% indirect interest in HEL as set out in the letter dated 14.03.2007 addressed to FIPB (see page 6117 of SLP Vol. 26). According to the said letter dated 19.03.2007, all the above elements together equated to 67% of the economic value of HEL. 41. Vide Agreement dated 21.03.2007, VIH diluted its stake in Bharti by 5.61%. 42. In reply to the queries raised by FIPB regarding break up of valuation, VIH confirmed as follows: Various assets and liabilities of CGP included its rights and entitlements, including subscription rights, call options to acquire in future a further 62.75% of TII, call options to acquire in future a further 54.21% of Omega which together would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere taken by HEL and its subsidiaries; (v) sending of a Side Letter by HTIL to VIH relating to completion mechanics; (vi) computation of net amount payable by VIH to HTIL including retention of a certain amount out of US $11.08 bn paid on 8.05.2007 towards expenses to operationalize the Option Agreements and adjustments for breach (if any) of warranties, etc.; (vii) assignment of loans given by HTI (BVI) Finance Ltd. to CGP and Array in favour of VIH; (viii) cancellation of share certificate of HTIHL (BVI) and entering the name of VIH in the Register of Members of CGP; (ix) execution of Tax Deed of Covenant indemnifying VIH in respect of tax or transfer pricing liabilities payable by Wider Group (CGP, GSPL, Mauritius holding companies, Indian operating companies). (x) a Business Transfer Agreement between GSPL and a subsidiary of HWP Investments Holdings (India) Ltd. (Ms) for sale of Call Centre earlier owned by GSPL; (xi) payment of US $10.85 bn by VIH to HTIL (CI). 47. On 5.06.2007, under the Omega Agreement, it was agreed that in view of the SPA there would be a consequent change of control in HTIL Mauritius, which holds 45.79% in Omega, and that India De ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t which was dismissed on 8.09.2010 vide the impugned judgment [reported in 329 ITR 126], hence, this Civil Appeal. B. Ownership Structure 54. In order to understand the above issue, we reproduce below the Ownership Structure Chart as on 11.02.2007. The Chart speaks for itself. 55. To sum up, CGP held 42.34% in HEL through 100% wholly owned subsidiaries [Mauritius companies], 9.62% indirectly through TII and Omega [i.e. pro rata route], and 15.03% through GSPL route. 56. To explain the GSPL route briefly, it may be mentioned that on 11.02.2007 AG Group of companies held 23.97% in TII, AS Group of companies held 38.78% in TII whereas SMMS held 54.21% in Omega. Consequently, holding of AG in HEL through TII stood at 4.68% whereas holding of AS in HEL through TII stood at 7.577% and holding of SMMS in HEL through Omega stood at 2.77%, which adds up to 15.03% in HEL. These holdings of AG, AS and SMMS came under the Option Route. In this connection, it may be mentioned that GSPL is an Indian company indirectly owned by CGP. It held Call Options and Subscription Options to be exercised in future under circumstances spelt out in TII and IDFC Framework Agreements (keeping ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scheme, whose object was to create a neutral situation. The decreasing asset was to be sold so as to create an artificial loss and the increasing asset was to yield a gain which would be exempt from tax. The Crown challenged the whole scheme saying that it was an artificial scheme and, therefore, fiscally ineffective. It was held that Westminster did not compel the court to look at a document or a transaction, isolated from the context to which it properly belonged. It is the task of the Court to ascertain the legal nature of the transaction and while doing so it has to look at the entire transaction as a whole and not to adopt a dissecting approach. In the present case, the Revenue has adopted a dissecting approach at the Department level. 61. Ramsay did not discard Westminster but read it in the proper context by which device which was colourable in nature had to be ignored as fiscal nullity. Thus, Ramsay lays down the principle of statutory interpretation rather than an over-arching anti-avoidance doctrine imposed upon tax laws. 62. Furniss (Inspector of Taxes) v. Dawson (1984) 1 All E.R. 530 dealt with the case of interpositioning of a company to evade tax. On facts, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the context of artificial and colourable devices. Reading McDowell, in the manner indicated hereinabove, in cases of treaty shopping and/or tax avoidance, there is no conflict between McDowell and Azadi Bachao or between McDowell and Mathuram Agrawal. International Tax Aspects of Holding Structures 65. In the thirteenth century, Pope Innocent IV espoused the theory of the legal fiction by saying that corporate bodies could not be ex communicated because they only exist in abstract. This enunciation is the foundation of the separate entity principle. 66. The approach of both the corporate and tax laws, particularly in the matter of corporate taxation, generally is founded on the abovementioned separate entity principle, i.e., treat a company as a separate person. The Indian Income Tax Act, 1961, in the matter of corporate taxation, is founded on the principle of the independence of companies and other entities subject to income-tax. Companies and other entities are viewed as economic entities with legal independence vis-a-vis their shareholders/participants. It is fairly well accepted that a subsidiary and its parent are totally distinct tax payers. Consequently, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e for the distribution of earnings, profits and gains, is determined by a review of all the facts and circumstances surrounding the transaction. It is in the above cases that the principle of lifting the corporate veil or the doctrine of substance over form or the concept of beneficial ownership or the concept of alter ego arises. There are many circumstances, apart from the one given above, where separate existence of different companies, that are part of the same group, will be totally or partly ignored as a device or a conduit (in the pejorative sense). 68. The common law jurisdictions do invariably impose taxation against a corporation based on the legal principle that the corporation is a person that is separate from its members. It is the decision of the House of Lords in Salomon v. Salomon (1897) A.C. 22 that opened the door to the formation of a corporate group. If a one man corporation could be incorporated, then it would follow that one corporation could be a subsidiary of another. This legal principle is the basis of Holding Structures. It is a common practice in international law, which is the basis of international taxation, for foreign investors to invest in In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ciple enunciated in Ramsay (supra) in which it was held that the Revenue or the Court must look at a document or a transaction in a context to which it properly belongs to. It is the task of the Revenue/Court to ascertain the legal nature of the transaction and while doing so it has to look at the entire transaction as a whole and not to adopt a dissecting approach. The Revenue cannot start with the question as to whether the impugned transaction is a tax deferment/saving device but that it should apply the look at test to ascertain its true legal nature [See Craven v. White (supra) which further observed that genuine strategic tax planning has not been abandoned by any decision of the English Courts till date]. Applying the above tests, we are of the view 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/Courts should keep in mind the following factors: the concept of participation in investment, the duration of time during which the Holding Structure exists; the period of business operations in India; the generation of taxable revenues in India; the timing of the exit; t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 four items of income. The income dealt with in each sub-clause is distinct and independent of the other and the requirements to bring income within each sub-clause, are separately noted. Hence, it is not necessary that income falling in one category under any one of the sub-clauses should also satisfy the requirements of the other sub-clauses to bring it within the expression income deemed to accrue or arise in India in Section 9(1)(i). In this case, we are concerned with the last sub-clause of Section 9(1)(i) which refers to income arising from transfer of a capital asset situate in India . Thus, charge on capital gains arises on transfer of a capital asset situate in India during the previous year. The said sub-clause consists of three elements, namely, transfer, existence of a capital asset, and situation of such asset in India. All three elements should exist in order to make the last sub-clause applicable. Therefore, if such a transfer does not exist in the previous year no charge is attracted. Further, Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is contended on behalf of the Revenue is that under Section 9(1)(i) it can look through the transfer of shares of a foreign company holding shares in an Indian company and treat the transfer of shares of the foreign company as equivalent to the transfer of the shares of the Indian company on the premise that Section 9(1)(i) covers direct and indirect transfers of capital assets. For the above reasons, Section 9(1)(i) cannot by a process of interpretation be extended to cover indirect transfers of capital assets/property situate in India. To do so, would amount to changing the content and ambit of Section 9(1)(i). We cannot re-write Section 9(1)(i). The legislature has not used the words indirect transfer in Section 9(1)(i). If the word indirect is read into Section 9(1)(i), it would render the express statutory requirement of the 4th sub-clause in Section 9(1)(i) nugatory. This is because Section 9(1)(i) applies to transfers of a capital asset situate in India. This is one of the elements in the 4th sub-clause of Section 9(1)(i) and if indirect transfer of a capital asset is read into Section 9(1)(i) then the words capital asset situate in India would be rendered nugatory. Simi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. According to the Revenue, this right was a property right and not a contractual right. It vested in HTIL as HTIL was a parent company, i.e., a 100% shareholder of the subsidiary; (ii) According to the Revenue, the 2006 Shareholders/ Framework Agreements had to be continued upon transfer of control of HEL to VIH so that VIH could step into the shoes of HTIL. According to the Revenue, such continuance was ensured by payment of money to AS and AG by VIH failing which AS and AG could have walked out of those agreements which would have jeopardized VIH s control over 15% of the shares of HEL and, consequently, the stake of HTIL in TII would have stood reduced to minority; (iii) Termination of IDFC Framework Agreement of 2006 and its substitution by a fresh Framework Agreement dated 5.06.2007, as warranted by SPA; (iv) Termination of Term Sheet Agreement dated 5.07.2003. According to the Revenue, that Term Sheet Agreement was given effect to by clause 5.2 of the SPA which gave Essar the right to Tag Along with HTIL and exit from HEL. That, by a specific Settlement Agreement dated 15.03.2007 between HTIL and Essar, the said Term Sheet Agreement dated 5.07.2003 stood terminated. This, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ense indicated above or investment to participate, one has to take into account the factors enumerated hereinabove, namely, duration of time during which the holding structure existed, the period of business operations in India, generation of taxable revenue in India during the period of business operations in India, the timing of the exit, the continuity of business on such exit, etc. Applying these tests to the facts of the present case, we find that the Hutchison structure has been in place since 1994. It operated during the period 1994 to 11.02.2007. It has paid income tax ranging from ₹ 3 crore to ₹ 250 crore per annum during the period 2002-03 to 2006- 07. Even after 11.02.2007, taxes are being paid by VIH ranging from ₹ 394 crore to ₹ 962 crore per annum during the period 2007-08 to 2010-11 (these figures are apart from indirect taxes which also run in crores). Moreover, the SPA indicates continuity of the telecom business on the exit of its predecessor, namely, HTIL. Thus, it cannot be said that the structure was created or used as a sham or tax avoidant. It cannot be said that HTIL or VIH was a fly by night operator/ short time investor. If ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany with subsidiaries, is it or is it not the law that the parent company has the power over the subsidiary. It depends on the facts of each case. For instance, take the case of a one-man company, where only one man is the shareholder perhaps holding 99% of the shares, his wife holding 1%. In those circumstances, his control over the company may be so complete that it is his alter ego. But, in case of multinationals it is important to realise that their subsidiaries have a great deal of autonomy in the country concerned except where subsidiaries are created or used as a sham. Of course, in many cases the courts do lift up a corner of the veil but that does not mean that they alter the legal position between the companies. The directors of the subsidiary under their Articles are the managers of the companies. If new directors are appointed even at the request of the parent company and even if such directors were removable by the parent company, such directors of the subsidiary will owe their duty to their companies (subsidiaries). They are not to be dictated by the parent company if it is not in the interests of those companies (subsidiaries). The fact that the parent company ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as carried on by the Indian companies under the control of their Board of Directors, though HTIL, as the Group holding company of a set of companies, which controlled 42% plus 10% (pro rata) shares, did influence or was in a position to persuade the working of such Board of Directors of the Indian companies. In this connection, we need to have a relook at the ownership structure. It is not in dispute that 15% out of 67% stakes in HEL was held by AS, AG and IDFC companies. That was one of the main reasons for entering into separate Shareholders and Framework Agreements in 2006, when Hutchison structure existed, with AS, AG and IDFC. HTIL was not a party to the agreements with AS and AG, though it was a party to the agreement with IDFC. That, the ownership structure of Hutchison clearly shows that AS, AG and SMMS (IDFC) group of companies, being Indian companies, possessed 15% control in HEL. Similarly, the term sheet with Essar dated 5.07.2003 gave Essar the RoFR and Right to Tag Along with HTIL and exit from HEL. Thus, if one keeps in mind the Hutchison structure in its entirety, HTIL as a Group holding company could have only persuaded its downstream companies to vote in a given m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtain instances restrict the powers of the shareholder with majority voting interest to control the operations or assets of the investee. At the same time, even the minority is entitled to exit. This exit right comes under protective rights . On examination of the Hutchison structure in its entirety, we find that both, participative and protective rights, were provided for in the Shareholders/ Framework Agreements of 2006 in favour of Centrino, NDC and SMMS which enabled them to participate, directly or indirectly, in the operations of HEL. Even without the execution of SPA, such rights existed in the above agreements. Therefore, it would not be correct to say that such rights flowed from the SPA. One more aspect needs to be mentioned. The Framework Agreements define change of control with respect to a shareholder inter alia as substitution of limited or unlimited liability company, whether directly or indirectly, to direct the policies/ management of the respective shareholders, viz., Centrino, NDC, Omega. Thus, even without the SPA, upon substitution of VIH in place of HTIL, on acquisition of CGP share, transition could have taken place. It is important to note that transit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Shareholders Agreement to regulate the affairs of Omega. It is important to note that even in the fresh agreement the call option remained with GSPL and that the said Agreement did not confer any rights on VIH. One more aspect needs to be mentioned. The conferment of call options on GSPL under the Framework Agreements of 2006 also had a linkage with intra-group loans. CGP was an Investment vehicle. It is through the acquisition of CGP that VIH had indirectly acquired the rights and obligations of GSPL in the Centrino and NDC Framework Agreements of 2006 [see the report of KPMG dated 18.10.2010] and not through execution of the SPA. Lastly, as stated above, apart from providing for standstill , an SPA has to provide for transition and all possible future eventualities. In the present case, the change in the investors, after completion of acquisition on 8.05.2007, under which SSKI and IDFC exited leaving behind IDF alone was a situation which was required to be addressed by execution of a fresh Framework Agreement under which the call option remained with GSPL. Therefore, the June, 2007 Agreements relied upon by the Revenue merely reiterated the rights of GSPL which rights existed e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id capital gains. That, in December, 2006, HTIL explored the possibility of the sale of shares of the Mauritius entities and found that such transaction would be taxable as HTIL under that proposal had to be the prime mover behind any agreement with VIH prime mover in the sense of being both a seller of shares and the recipient of the sale proceeds therefrom. Consequently, HTIL moved upwards in the Hutchison structure and devised an artificial tax avoidance scheme of selling the CGP share when in fact what HTIL wanted was to sell its property rights in HEL. This, according to the Revenue, was the reason for the CGP share being interposed in the transaction. We find no merit in these arguments. 79. When a business gets big enough, it does two things. First, it reconfigures itself into a corporate group by dividing itself into a multitude of commonly owned subsidiaries. Second, it causes various entities in the said group to guarantee each other s debts. A typical large business corporation consists of sub-incorporates. Such division is legal. It is recognized by company law, laws of taxation, takeover codes etc. On top is a parent or a holding company. The parent is the public ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the transfer of an upstream company rather than the transfer of HEL directly. The transfer of Array had the advantage of transferring control over the entire shareholding held by downstream Mauritius companies (tier I companies), other than GSPL. On the other hand, the advantage of transferring the CGP share enabled VIH to indirectly acquire the rights and obligations of GSPL (Indian company) in the Centrino and NDC Framework agreements. This was the reason for VIH to go by the CGP route. One of the arguments of the Revenue before us was that the Mauritius route was not available to HTIL for the reason indicated above. In this connection, it was urged that the legal owner of HEL (Indian company) was not HTIL. Under the transaction, HTIL alone was the seller of the shares. VIH wanted to enter into an agreement only with HTIL so that if something goes wrong, VIH could look solely to HTIL being the group holding company (parent company). Further, funds were pumped into HEL by HTIL. These funds were to be received back in the shape of a capital gain which could then be used to declare a special dividend to the shareholders of HTIL. We find no merit in this argument. Firstly, the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rotection while preserving upside value in the growth of HEL. The second document is the Annual Report 2007 of HTIL. Under the caption Overview , the Report observes that on 11.02.2007, HTIL entered into an agreement to sell its entire interests in CGP, a company which held through various subsidiaries, the direct and indirect equity and loan interests in HEL (renamed VEL) and its subsidiaries to VIH for a cash consideration of HK $86.6 bn. As a result of the said Transaction, the net debt of the Group which stood at HK $37,369 mn as on 31.12.2006 became a net cash balance of HK $25,591 mn as on 31.12.2007. This supports the fact that the sole purpose of CGP was not only to hold shares in subsidiary companies but also to enable a smooth transition of business, which is the basis of the SPA. Therefore, it cannot be said that the intervened entity (CGP) had no business or commercial purpose. 82. Before concluding, one more aspect needs to be addressed. It concerns situs of the CGP share. According to the Revenue, under the Companies Law of Cayman Islands, an exempted company was not entitled to conduct business in the Cayman Islands. CGP was an exempted company . According to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the Revenue, right from 22.12.2006 onwards when HTIL made its first public announcement, HTIL on innumerable occasions represented its direct and indirect equity interest in HEL to be 67% - the direct interest being 42.34% and indirect interest in the sense of shareholding belonging to Indian partners under its control, as 25%. Further, according to the Revenue, the purchase price paid by VIH was based on an enterprise value of 67% of the share capital of HEL; this would never have been so if VIH was to buy only 42.34% of the share capital of HEL and that nobody would pay US $2.5 bn extra without control over 25% in HEL. We find no merit in the above submissions. At the outset, it may be stated that the expression control is a mixed question of law and fact. The basic argument of the Revenue is based on the equation of equity interest with the word control . On perusal of Hutchison structure, we find that HTIL had, through its 100% wholly owned subsidiaries, invested in 42.34% of HEL (i.e. direct interest). Similarly, HTIL had invested through its non- 100% wholly owned subsidiaries in 9.62% of HEL (through the pro rata route). Thus, in the sense of shareholding, one c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cessary to enter into such an agreement for smooth running of the business post acquisition. Secondly, we find from the letter addressed by HEL to FIPB dated 14.03.2007 that Articles of Association of HEL did not grant any specific person or entity a right to appoint directors. The said directors were appointed by the shareholders of HEL in accordance with the provisions of the Indian Company Law. The letter further states that in practice the directors were appointed pro rata to their respective shareholdings which resulted in 4 directors being appointed from Essar group, 6 directors being appointed by HTIL and 2 directors were appointed by TII. One such director was AS, the other director was AG. This was the practice even before the Term Sheet. The Term Sheet continues this practice by guaranteeing or assuring Essar that 4 directors would be appointed from its Group. The above facts indicate that the object of the SPA was to continue the practice concerning nomination of directors on the Board of Directors of HEL which in law is different from a right or power to control and manage and which practice was given to keep the business going, post acquisition. Under the Company Law ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ti to VIH, but on account of the fact that the competing Indian bidders would have had de facto access to the entire 67%, as they were not subject to the limitation of sectoral cap, and, therefore, would have immediately encashed the call options. The question still remains as to from where did this figure/ expression of 67% of equity interest come? The expression equity interest came from US GAAP. In this connection, we have examined the Notes to the Accounts annexed to the Annual Report 2006 of HTIL. According to Note 1, the ordinary shares of HTIL stood listed on the Hong Kong Stock Exchange as well as on the New York Stock Exchange. In Note No. 36, a list of principal subsidiaries of HTIL as on 31.12.2006 has been attached. This list shows the names of HEL (India) and some of its subsidiaries. In the said Annual Report, there is an annexure to the said Notes to the Accounts under the caption Information for US Investors . It refers to Variable Interest Entities (VIEs). According to the Annual Report, the Vodafone Group consisting of HTIL and its subsidiaries conducted its operations inter alia in India through entities in which HTIL did not have the voting control. Since HTI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p of shares may, in certain situations, result in the assumption of an interest which has the character of a controlling interest in the management of the company. A controlling interest is an incident of ownership of shares in a company, something which flows out of the holding of shares. A controlling interest is, therefore, not an identifiable or distinct capital asset independent of the holding of shares. The control of a company resides in the voting power of its shareholders and shares represent an interest of a shareholder which is made up of various rights contained in the contract embedded in the Articles of Association. The right of a shareholder may assume the character of a controlling interest where the extent of the shareholding enables the shareholder to control the management. Shares, and the rights which emanate from them, flow together and cannot be dissected. In the felicitous phrase of Lord MacMillan in IRC v. Crossman [1936] 1 All ER 762, shares in a company consist of a congeries of rights and liabilities which are a creature of the Companies Acts and the Memorandum and Articles of Association of the company. Thus, control and management is a facet of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stances in which VIH agreed to pay US$ 11.08 bn for acquiring 67% of HEL when actual acquisition was of 51.96%. In its response dated 19.03.2007, VIH stated that it had agreed to acquire from HTIL for US$ 11.08 bn, interest in HEL which included a 52% equity shareholding. According to VIH, the price also included a control premium, use of Hutch brand in India, a non-compete agreement, loan obligations and an entitlement to acquire, subject to the Indian FDI rules, a further 15% indirect interest in HEL. According to the said letter, the above elements together equated to 67% of the economic value of HEL. This sentence has been misconstrued by the High Court to say that the above elements equated to 67% of the equity capital (See para 124). 67% of the economic value of HEL is not 67% of the equity capital. If VIH would have acquired 67% of the equity capital, as held by the High Court, the entire investment would have had breached the FDI norms which had imposed a sectoral cap of 74%. In this connection, it may further be stated that Essar had 33% stakes in HEL out of which 22% was held by Essar Mauritius. Thus, VIH did not acquire 67% of the equity capital of HEL, as held by the Hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the High Court calls as other rights and entitlements (including options, right to noncompete, control premium, customer base etc.). Thus, it was not open to the Revenue to split the payment and consider a part of such payments for each of the above items. The essential character of the transaction as an alienation cannot be altered by the form of the consideration, the payment of the consideration in instalments or on the basis that the payment is related to a contingency ( options , in this case), particularly when the transaction does not contemplate such a split up. Where the parties have agreed for a lump sum consideration without placing separate values for each of the above items which go to make up the entire investment in participation, merely because certain values are indicated in the correspondence with FIPB which had raised the query, would not mean that the parties had agreed for the price payable for each of the above items. The transaction remained a contract of outright sale of the entire investment for a lump sum consideration [see: Commentary on Model Tax Convention on Income and Capital dated 28.01.2003 as also the judgment of this Court in the case of CIT (C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, no liability to deduct TAS arose. Further, in the case of transfer of the Structure in its entirety, one has to look at it holistically as one Single Consolidated Bargain which took place between two foreign companies outside India for which a lump sum price was paid of US$ 11.08 bn. Under the transaction, there was no split up of payment of US$ 11.08 bn. It is the Revenue which has split the consolidated payment and it is the Revenue which wants to assign a value to the rights to control premium, right to non-compete, right to consultancy support etc. For FDI purposes, the FIPB had asked VIH for the basis of fixing the price of US$ 11.08 bn. But here also, there was no split up of lump sum payment, asset-wise as claimed by the Revenue. There was no assignment of price for each right, considered by the Revenue to be a capital asset in the transaction. In the absence of PE, profits were not attributable to Indian operations. Moreover, tax presence has to be viewed in the context of the transaction that is subjected to tax and not with reference to an entirely unrelated matter. The investment made by Vodafone Group companies in Bharti did not make all entities of that Group subj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the reasons given above, there is no necessity of examining the written submissions advanced on behalf of VIH by Dr. Abhishek Manu Singhvi on Sections 191 and 201. Summary of Findings 90. Applying the look at test in order to ascertain the true nature and character of the transaction, we hold, that the Offshore Transaction herein is a bonafide structured FDI investment into India which fell outside India s territorial tax jurisdiction, hence not taxable. The said Offshore Transaction evidences participative investment and not a sham or tax avoidant preordained transaction. The said Offshore Transaction was between HTIL (a Cayman Islands company) and VIH (a company incorporated in Netherlands). The subject matter of the Transaction was the transfer of the CGP (a company incorporated in Cayman Islands). Consequently, the Indian Tax Authority had no territorial tax jurisdiction to tax the said Offshor Transaction. Conclusion 91. FDI flows towards location with a strong governance infrastructure which includes enactment of laws and how well the legal system works. Certainty is integral to rule of law. Certainty and stability form the basic foundation of any fiscal syste ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igh growth rates of crossborder investments and a number of rich global investors have come forward to use high technology and communication infrastructures. Removal of barriers to cross-border trade, the liberalisation of financial markets and new communication technologies have had positive effects on global economic growth and India has also been greatly benefited. 2. Several international organisations like UN, FATF, OECD, Council of Europe and the European Union offer finance, one way or the other, for setting up companies all over the world. Many countries have entered into treaties with several offshore companies for cross-border investments for mutual benefits. India has also entered into treaties with several countries for bilateral trade which has been statutorily recognised in this country. United Nations Conference on Trade and Development (UNCTAD) Report on World Investment prospects survey 2009-11 states that India would continue to remain among the top five attractive destinations for foreign investors during the next two years. 3. Merger, Amalgamation, Acquisition, Joint Venture, Takeovers and Slump-sale of assets are few methods of cross-border re-organisatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 1992, when the group invested in Hutchison Max Telecom Limited (HTML) (later known a Hutchison Essar Limited (HEL), which acquired a cellular license in Mumbai circle in the year 1994 and commenced its operation in the year 1995. Hutchison Group, with the commercial purpose of consolidating its interest in various countries, incorporated CGP Investments Holding Limited (for short CGP ) in Cayman Islands as a WOS on 12.01.1998 as an Exempted Company for offshore investments. CGP held shares in two subsidiary companies, namely Array Holdings Limited (for short Array) and Hutchison Teleservices (India) Holding Ltd. [for short HTIH(M)] both incorporated in Mauritius. CGP(India) Investment (for short CGPM) was incorporated in Mauritius in December 1997 for the purpose of investing in Telecom Investment (India) Pvt. Limited (for short TII), an Indian Company. CGPM acquired interests in four Mauritian Companies and entered into a Shareholders Agreement (SHA) on 02.05.2000 with Essar Teleholdings Limited (ETH), CGPM, Mobilvest, CCII (Mauritius) Inc. and few others, to regulate shareholders right inter se. Agreement highlighted the share holding pattern of each composition of Board of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... subscribe 97.5% and 97% of the equity share capital respectively at a pre-determined rate equal to the face value of the shares of Centrino and NDC respectively exercisable within a period of 10 years from the date of the agreements. Agreements also restricted AG companies and AS companies from transferring any downstream interests leading to the shareholding in TII. 10. HEL shareholding again underwent change with Hinduja Group exiting and its shareholding being acquired by an Indian company called SMMS Investments Private Limited (SMMS). SMMS was also a joint venture company formed by India Development Fund (IDF) acting through IDFC Private Equity Company (IDFCPE), Infrastructure Development Finance Company Limited (IDFC) and SSKI Corporate Finance Pvt. Ltd. (SSKI) all the three companies were incorporated in India. Pursuant thereto, a FWA was entered into on 07.08.2006 between IDF (through IDFCPE), IDFC, SSKI, SMMS, HTIL (M), 3GSPL, Indus Ind Telecom Holding Pvt. Ltd. (ITNL) (later named as Omega Telecom Holding Pvt. Ltd. (Omega) and HTIL. 3GSPL, by thatAgreement, had a call option and a right to purchase the entire equity shares of SMMS at a pre-determined price equal to &# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a 67% effective interest in HEL through the acquisition of 100% interest in CGP and granting an option by Vodafone to Indian Continent Investment Ltd. over a 5.6% stake in Bharati Airtel Limited. Bharati Infotel and Bharati Airtel conveyed their no-objection to the Vodafone purchasing direct or indirect interest in HEL. 14. Vodafone and HTIL then entered into a Share and Purchase Agreement (SPA) on 11.02.2007 whereunder HTIL had agreed to procure the transfer of share capital of CGP by HTIBVI, free from all encumbrances and together with all rights attaching or accruing together with assignments of loan interest. HTIL on 11.02.2007 issued a side letter to Vodafone inter alia stating that, out of the purchase consideration, up to US$80 million could be paid to some of its Indian Partners. HTIL had also undertaken that Hutchison Telecommunication (India) Ltd. (HTM), Omega and 3GSPL, would enter into an agreed form IDFC Transaction Agreement as soon as practicable. On 11.02.2007, HTIL also sent a disclosure letter to Vodafone in terms of Clause 9.4 of SPA Vendor warranties relating to consents and approvals, wider group companies, material contracts, permits, litigation, arbitr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... holding of HTIL Group would then be 61.88%. Reference was also made to the communication dated 06.03.2007 sent to the FIPB wherein it was stated that the direct and indirect FDI by HTIL would be 51.96% and, hence, was asked to clarify that discrepancy. Similar letter dated 14.03.2007 was also received by Vodafone. On 14.03.2007, HEL wrote to FIPB stating that the discrepancy was because of the difference in U.S. GAAP and Indian GAAP declarations and that the combined holding for U.S. GAAP purposes was 61.88% and for Indian GAAP purposes was 51.98%. It was pointed out that Indian GAAP number accurately reflected the true equity ownership and control position. On 14.03.2007 itself, HEL wrote to FIPB confirming that 7.577% stake in HEL was held legally and beneficially by AS and his wife and 4.78% stake in HEL was held legally and beneficially by AG. Further, it was also pointed out that 2.77% stake in HEL through Omega and S.M.M.S. was legally and beneficially owned by IDFC Limited, IDFC Private Equity Limited and SSKI Corporate Finance Limited. Further, it was also pointed out that Articles of Association of HEL did not give any person or entity any right to appoint directors, howev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s shareholders including setting out VIHBVI s right as a shareholder of HEL to nominate eight persons out of twelve to the board of directors, requiring Vodafone to nominate director to constitute a quorum for board meetings and get ROFR over shares owned by Essar in HEL. Term Sheet also stated that Essar had a TAR in respect of Essar s shareholding in HEL, should any Vodafone Group shareholding sell its share or part thereof in HEL to a person not in a Vodafone Group entity. VIHBV and Vodafone Group Plc.(as guarantor of VIHBV) had entered into a Put Option Agreement on 15.03.2007 with ETH, ECL (Mauritius), requiring VIHBV to purchase from Essar Group shareholders all the option shares held by them. 22. The Joint Director of Income Tax (International Taxation), in the meanwhile, issued a notice dated 15.03.2007 under Section 133(6) of the Income Tax Act calling for certain information regarding sale of stake of Hutchison group HK in HEL, to Vodafone Group Plc. 23. HTIL, on 17.3.2007, wrote to AS confirming that HTIL has no beneficial or legal or other rights in AS s TII interest or HEL interest. Vodafone received a letter dated 19.3.2007 from FIPB seeking clarifications on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rights at par value and call options to acquire in future a further 62.75% of TII and call options to acquire a further 54.21% of Omega Telecom Holdings Pvt. Ltd, which together would give Vodafone a further 15.03% proportionate indirect equity ownership of Hutch Essar, various intangible features such as control premium, use and rights of Hutch branch in India, non compete agreement with HTIL. HEL on 5.4.2007 wrote to the Joint director of Income Tax stating that it has no liabilities accruing out of the transaction, also the department has no locus standi to invoke Section 195 in relation to non-resident entities regarding any purported tax obligations. On 09.04.2007 HTIL submitted FWAs, SHAs, Loan Agreement, Share-pledge Agreements, Guarantees, Hypothecations, Press Announcements, Regulatory filing etc., charts of TII and Omega Shareholding, note on terms of agreement relating to acquisition by AS, AG and IDFC, presentation by Goldman Sachs on fair market valuation and confirmation by Vodafone, factors leading to acquisition by AG and AS and rationale for put/call options etc. 28. Vodafone on 09.04.2007 sent a letter to FIPB confirming that valuation of N.D. Callus, Centrino, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transfer pricing liabilities payable or suffered by wider group companies (as defined by SPA i.e., CGP, 3 GSPL, Mauritian holding and Indian Companies) on or before completion, including reasonable costs associated with any tax demand. 30. HTIL also sent a side letter to SPA on 08.05.2007 to Vodafone highlighting the termination of the brand licences and brand support service agreements between HTIL and 3GSPL and the Indian Operating Companies and stated that the net amount to be paid by Vodafone to HTIL would be US$ 10,854,229,859.05 and that Vodafone would retain US$ 351.8 million towards expenses incurred to operationalize the option agreements with AS and AG, out of the total consideration of US$11,076,000,000. On 08.05.2007 loan assignment between HTI BVI Finance Limited, Array and Vodafone of Array debt in a sum of US$ 231,111,427.41 was effected, whereby rights and benefits of HTI BVI Finance Limited to receive repayment was assigned in favour of Vodafone as part of the transaction contemplated vide SPA. On the same day loan assignment between HTI BVI Finance Limited, CGP and Vodafone, of CGP debt in the sum of US$ 28,972,505.70 was effected, whereby rights and benefits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the gains made by the sale of its entire interest in HEL. On 04.07.2007 fresh certificates of incorporation was issued by the Registrar of Companies in relation to Indian operating companies whereby the word Hutchison was substituted with word Vodafone . 33. On 05.07.2007, a FWA was entered into between AG, AG Mercantile Pvt. Limited, Plustech Mercantile Company Pvt.Ltd, 3GSPL, Nadal Trading Company Pvt. Ltd and Vodafone as a confirming party. In consideration for the unconditional 'call option , 3GSPL agreed to pay AG an amount of US$ 6.3 million annually. On the same day a FWA was signed by AS and Neetu AS, Scorpio Beverages Pvt. Ltd.(SBP), M.V. Healthcare Services Pvt. Ltd, 3GSPL, N.D. Callus Info Services Pvt. Ltd and Vodafone, as a confirming party. In consideration for the 'call option 3GSPL agreed to pay AS Mrs. Neetu AS an amount of US$ 10.02 million annually. TII SHA was entered into on 05.07.2007 between Nadal, NDC, CGP (India), TII and VIHBV to regulate the affairs of TII. On 05.07.2007 Vodafone entered into a Consultancy Agreement with AS. Under that Agreement, AS was to be paid an amount of US$ 1,050,000 per annum and a one time payment of US$ 1,30,00, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax Act. Notice was also challenged by Vodafone in the above writ petition by way of an amendment. The Bombay High Court dismissed the Writ Petition on 08.09.2010 against which the present SLP has been filed. 37. The High Court upheld the jurisdiction of the Revenue to impose capital gains tax on Vodafone as a representative assessee after holding that the transaction between the parties attracted capital gains in India. Court came to the following conclusions: (a) Transactions between HTIL and Vodafone were fulfilled not merely by transferring a single share of CGP in Cayman Islands, but the commercial and business understanding between the parties postulated that what was being transferred from HTIL to VIHBV was the controlling interest in HEL in India, which is an identifiable capital asset independent of CGP share. (b) HTIL had put into place during the period when it was in the control of HEL a complex structure including the financing of Indian companies which in turn had holdings directly or indirectly in HEL and hence got controlling interest in HEL. (c) Vodafone on purchase of CGP got indirect interest in HEL, controlling right in certain indirect holding comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eign exchange laws recognize Overseas Corporate Bodies (OCB). Learned senior counsel also submitted that such Transnational Structures also contain exit option to the investors. Senior counsel also pointed out that where regulatory provisions mandate investment into corporate structure such structures cannot be disregarded for tax purposes by lifting the corporate veil especially when there is no motive to avoid tax. Shri Salve also submitted that Hutchison corporate structure was not designed to avoid tax and the transaction was not a colourable device to achieve that purpose. Senior counsel also submitted that source of income lies where the transaction is effected and not where the underlying asset is situated or economic interest lies. Reference was made to judgment in Seth Pushalal Mansinghka (P) Ltd. v. CIT (1967) 66 ITR 159 (SC). Learned counsel also pointed out that without any express legislation, off-shore transaction cannot be taxed in India. Reference was made to two judgments of the Calcutta High Court Assam Consolidated Tea Estates v. Income Tax Officer A Ward (1971) 81 ITR 699 Cal. and C.I.T. West Bengal v. National and Grindlays Bank Ltd. (1969) 72 ITR 121 Cal. Le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is levied on transaction and not its effect. Learned senior counsel pointed out that to lift the corporate veil of a legally recognised corporate structure time and the stage of the transaction are very important and not the motive to save the tax. Reference was also made to several judgments of the English Courts viz, IRC v. Duke of Westminster (1936) AC 1 (HL), W. T. Ramsay v. IRC (1982) AC 300 (HL), Craven v. White (1988) 3 All ER 495, Furniss v. Dawson (1984) 1 All ER 530 etc. Reference was also made to the judgment of this Court in McDowell, Azadi Bachao Andolan cases (supra) and few other judgments. Learned senior counsel point out that Azadi Bachao Andolan broadly reflects Indian jurisprudence and that generally Indian courts used to follow the principles laid down by English Courts on the issue of tax avoidance and tax evasion. Learned Senior counsel also submitted that Tax Residency Certificate (for short TRC) issued by the Mauritian authorities has to be respected and in the absence of any Limitation on Benefit (LOB Clause), the benefit of the Indo- Mauritian Treaty is available to third parties who invest in India through Mauritius route. 39. Mr. Salve also argued on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India as the entire business purpose of holding that share was to assume control in Indian telecom operations, the same was managed through Board of Directors controlled by HTIL. The controlling interest expressed by HTIL would amount to property rights and hence taxable in India. Reference was made to judgments of the Calcutta High Court in CIT v. National Insurance Company (1978) 113 ITR 37(Cal.) and Laxmi Insurance Company Pvt. Ltd. v. CIT (1971) 80 ITR 575 (Delhi). Further, it was also pointed out the call and put options despite being a contingent right are capable of being transferred and they are property rights and not merely contractual rights and hence would be taxable. Referring to the SPA Shri Nariman submitted that the transaction can be viewed as extinguishment of HTILs property rights in India and CGP share was merely a mode to transfer capital assets in India. Further, it was also pointed out that the charging Section should be construed purposively and it contains a look through provision and that the definition of the transfer in Section 9(1)(i) is an inclusive definition meant to explain the scope of that Section and not to limit it. The resignation of HTIL Dir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he company and members have no direct proprietary rights to it but merely to their shares in the undertaking and these shares constitute items of property which are freely transferable in the absence of any express provision to the contrary. 44. Corporate structure created for genuine business purposes are those which are generally created or acquired: at the time when investment is being made; or further investments are being made; or the time when the Group is undergoing financial or other overall restructuring; or when operations, such as consolidation, are carried out, to cleandefused or over-diversified. Sound commercial reasons like hedging business risk, hedging political risk, mobility of investment, ability to raise loans from diverse investments, often underlie creation of such structures. In transnational investments, the use of a tax neutral and investor-friendly countries to establish SPV is motivated by the need to create a tax efficient structure to eliminate double taxation wherever possible and also plan their activities attracting no or lesser tax so as to give maximum benefit to the investors. Certain countries are exempted from capital gain, certain countri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has also accepted the corporate structure consisting of holding companies and several subsidiary companies. A holding company which owns enough voting stock in a subsidiary can control management and operation by influencing or electing its Board of Directors. The holding company can also maintain group accounts which is to give members of the holding company a picture of the financial position of the holding company and its subsidiaries. The form and content of holding company or subsidiary company s own balance sheet and profit and loss account are the same as if they were independent companies except that a holding company s accounts an aggregated value of shares it holds in its subsidiaries and in related companies and aggregated amount of loss made by it to its subsidiaries and to related companies and their other indebtedness to it must be shown separately from other assets etc. 48. Corporate governors can also misuse their office, using fraudulent means for unlawful gain, they may also manipulate their records, enter into dubious transactions for tax evasion. Burden is always on the Revenue to expose and prove such transactions are fraudulent by applying look at principl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... does not necessarily lead to the conclusion that they involve in the activities of tax evasion or other criminal activities. The multi-national companies are attracted to offshore financial centres mainly due to the reason of providing attractive facilities for the investment. Many corporate conglomerates employ a large number of holding companies and often high-risk assets are parked in separate companies so as to avoid legal and technical risks to the main group. Instances are also there when individuals form offshore vehicles to engage in risky investments, through the use of derivatives trading etc. Many of such companies do, of course, involve in manipulation of the market, money laundering and also indulge in corrupt activities like round tripping, parking black money or offering, accepting etc., directly or indirectly bribe or any other undue advantage or prospect thereof. 52. OECD (Organisation for Economic Co-operation and Development) in the year 1998 issued a report called Harmful Tax Competition: An Emerging Global Issue . The report advocated doing away with tax havens and offshore financial canters, like the Cayman Islands, on the basis that\ their low-tax regime ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... untry, but we always lag behind because our priorities are different. Lack of proper regulatory laws, leads to uncertainty and passing inconsistent orders by Courts, Tribunals and other forums, putting Revenue and tax payers at bay. HOLDING COMPANY AND SUBSIDIARY COMPANY 56. Companies Act in India and all over the world have statutorily recognised subsidiary company as a separate legal entity. Section 2(47) of the Indian Companies Act 1956 defines subsidiary company or subsidiary , a subsidiary company within the meaning of Section 4 of the Act. For the purpose of Indian Companies Act, a company shall be subject to the provisions of sub-section 3 of Section 4, be deemed to be subsidiary of another, subject to certain conditions, which includes holding of share capital in excess of 50% controlling the composition of Board of Directors and gaining status of subsidiary with respect to third company by holding company s subsidization of third company. A holding company is one which owns sufficient shares in the subsidiary company to determine who shall be its directors and how its affairs shall be conducted. Position in India and elsewhere is that the holding company control ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing company and subsidiary company are, however, considered as separate legal entities, and subsidiary are allowed decentralized management. Each subsidiary can reform its own management personnel and holding company may also provide expert, efficient and competent services for the benefit of the subsidiaries. 60. U.S. Supreme Court in United States v. Bestfoods 524 US 51 (1998) explained that it is a general principle of corporate law and legal systems that a parent corporation is not liable for the acts of its subsidiary, but the Court went on to explain that corporate veil can be pierced and the parent company can be held liable for the conduct of its subsidiary, if the corporal form is misused to accomplish certain wrongful purposes, when the parent company is directly a participant in the wrong complained of. Mere ownership, parental control, management etc. of a subsidiary is not sufficient to pierce the status of their relationship and, to hold parent company liable. In Adams v. Cape Industries Plc. (1991) 1 All ER 929, the Court of Appeal emphasized that it is appropriate to pierce the corporate veil where special circumstances exist indicating that it is mere fa ade con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reedom of contract can be restricted by law only in cases where it is for some good for the community. Companies Act 1956 or the FERA 1973, RBI Regulation or the I.T. Act do not explicitly or impliedly forbid shareholders of a company to enter into agreements as to how they should exercise voting rights attached to their shares. 64. Shareholders can enter into any agreement in the best interest of the company, but the only thing is that the provisions in the SHA shall not go contrary to the Articles of Association. The essential purpose of the SHA is to make provisions for proper and effective internal management of the company. It can visualize the best interest of the company on diverse issues and can also find different ways not only for the best interest of the shareholders, but also for the company as a whole. In S. P. Jain v. Kalinga Cables Ltd. (1965) 2 SCR 720, this Court held that agreements between non-members and members of the Company will not bind the company, but there is nothing unlawful in entering into agreement for transferring of shares. Of course, the manner in which such agreements are to be enforced in the case of breach is given in the general law between ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to sell at the same price. TAR often finds a place in the SHA which protects the interest of the minority shareholders. (c) Subscription Option : Subscription option gives the beneficiary a right to demand issuance of allotment of shares of the target company. It is for that reason that a subscription right is normally accompanied by ancillary provisions including an Exit clause where, if dilution crosses a particular level, the counter parties are given some kind of Exit option. (d) Call Option : Call option is an arrangement often seen in Merger and Acquisition projects, especially when they aim at foreign investment. A Call option is given to a foreign buyer by agreement so that the foreign buyer is able to enjoy the permitted minimum equity interests of the target company. Call option is always granted as a right not an obligation, which can be exercised upon satisfaction of certain conditions and/or within certain period agreed by the grantor and grantee. The buyer of Call option pays for the right, without the obligation to buy some underlying instrument from the writer of the option contract at a set future date and at the strike price. Call option is where the bene ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other moveable property under the Companies Act and the Transfer of Property Act. Restriction of Transfer of Shares is valid, if contained in the Articles of Association of the company. Shares are, therefore, presumed to be freely transferable and restrictions on their transfer are to be construed strictly. Transfer of shares may result in a host of consequences. Voting Rights: 69. Voting rights vest in persons who names appear in the Register of Members. Right to vote cannot be decoupled from the share and an agreement to exercise voting rights in a desired manner, does not take away the right of vote, in fact, it is the shareholders right. Voting rights cannot be denied by a company by its articles or otherwise to holders of shares below a minimum number such as only shareholders holding five or more shares are entitled to vote and so on, subject to certain limitations. 70. Rights and obligations flowing from voting rights have been the subject matter of several decisions of this Court. In Chiranjit Lal Chowdhuri v. Union of India (1950) 1 SCR 869 at 909 : AIR 1951 SC 41, with regard to exercise of the right to vote, this Court held that the right to vote for the ele ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ining the meaning of the expressions control and interest , held that controlling interest did not depend upon the extent to which they had the power of controlling votes. Principle that emerges is that where shares in large numbers are transferred, which result in shifting of controlling interest , it cannot be considered as two separate transactions namely transfer of shares and transfer of controlling interest. Controlling interest forms an inalienable part of the share itself and the same cannot be traded separately unless otherwise provided by the Statute. Of course, the Indian Company Law does not explicitly throw light on whether control or controlling interest is a part of or inextricably linked with a share of a company or otherwise, so also the Income Tax Act. In the impugned judgment, the High Court has taken the stand that controlling interest and shares are distinct assets. 74. Control, in our view, is an interest arising from holding a particular number of shares and the same cannot be separately acquired or transferred. Each share represents a vote in the management of the company and such a vote can be utilized to control the company. Controlling interest, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orate veil doctrine can, therefore, be applied in tax matters even in the absence of any statutory authorisation to that effect. Principle is also being applied in cases of holding company subsidiary relationship- where in spite of being separate legal personalities, if the facts reveal that they indulge in dubious methods for tax evasion. (B) Tax Avoidance and Tax Evasion: Tax avoidance and tax evasion are two expressions which find no definition either in the Indian Companies Act, 1956 or the Income Tax Act, 1961. But the expressions are being used in different contexts by our Courts as well as the Courts in England and various other countries, when a subject is sought to be taxed. One of the earliest decisions which came up before the House of Lords in England demanding tax on a transaction by the Crown is Duke of Westminster (supra). In that case, Duke of Westminster had made an arrangement that he would pay his gardener an annuity, in which case, a tax deduction could be claimed. Wages of household services were not deductible expenses in computing the taxable income, therefore, Duke of Westminster was advised by the tax experts that if such an agreement was employed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... series of transactions should be disregarded for tax purposes and the manufactured loss, therefore, was not available to the taxpayer. Lord Wilberforce opined as follows: While obliging the court to accept documents or transactions, found to be genuine, as such, it does not compel the court to look at a document or a transaction in blinkers, isolated from any context to which it properly belongs. If it can be seen that a document or transaction was intended to have effect as part of a nexus or series of transactions, or as an ingredient of a wider transaction intended as a whole, there is nothing in the doctrine to prevent it being so regarded; to do so in not to prefer form to substance, or substance to form. It is the task of the court to ascertain the legal nature of any transaction to which it is sought to attach a tax or a tax consequence and if that emerges from a series or combination of transactions intended to operate as such, it is that series or combination which may be regarded. (emphasis supplied) House of Lords, therefore, made the following important remarks concerning what action the Court should consider in cases that involve tax avoidance: (1) A taxp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earlier in IRC v. Plummer (1979) 3 All ER 775, Lord Wilberforce commented about a scheme stating that the same was carried out with almost military precision which required the court to look at the scheme as a whole. The scheme in question was a circular annuity plan, in which a charity made a capital payment to the taxpayer in consideration of his covenant to make annual payments of income over five years. The House of Lords held that the scheme was valid. Basically, the Ramsay was dealing with readymade schemes . 79. The House of Lords, however, had to deal with a non self-cancelling tax avoidance scheme in Dawson (supra). Dawsons, in that case, held shares in two operating companies which agreed in principle in September 1971 to sell their entire shareholding to Wood Bastow Holdings Ltd. Acting on advice, to escape capital gains tax, Dawsons decided not to sell directly to Wood Bastow, rather arranged to exchange their shares for shares in an investment company to be incorporated in the Isle of Man. Greenjacket Investments Ltd. was then incorporated in the Isle of Man on 16.12.1971 and two arrangements were finalized (i) Greenjacket would purchase Dawsons shares in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... action and as having no independent effect. Craven made it clear that: (1) Strategic tax planning undertaken for months or possible years before the event (ofsale) in anticipation of which it was effected; (2) A series of transactions undertaken at the time of disposal/sale, including an intermediate transaction interposed into having no independent life, could under Ramsay principle be looked at and treated as a composite whole transaction to which the fiscal results of the single composite whole are to be applied, i.e. that an intermediate transfer which was, at the time when it was effected, so closely interconnected with the ultimate disposition, could properly be described as not, in itself, a real transaction at all, but merely an element in some different and larger whole without independent effect. 81. Later, House of Lords in Ensign Tankers (Leasing) Ltd. v. Stokes (1992) 1 AC 655 made a review of the various tax avoidance cases from Floor v. Davis (1978) 2 All ER 1079 : (1978) Ch 295 to Craven (supra). In Ensign Tankers, a company became a partner of a limited partnership that had acquired the right to produce the film Escape to Victory . 75% of the cost of making ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tating as follows if the legal position is that tax is imposed by reference to a legally designed concept, such as stamp duty payable on a document which constitute conveyance or sale, the court cannot tax a transaction which uses no such document on the ground that it achieves the same economic effect. On the other hand, the legal position is that the tax is imposed by reference to a commercial concept, then to have regard to the business substance of the matter is not to ignore the legal position but to give effect to it. 86. In other words, Lord Hoffmann reiterated that tax statutes must be interpreted in a purposive manner to achieve the intention of the Legislature . Ramsay and Dawson are said to be examples of these fundamental principles. 87. Lord Hoffmann, therefore, stated that when Parliament intended to give a legal meaning to a statutory term or phrase, then Ramsay approach does not require or permit an examination of the commercial nature of the transaction, rather, it requires a consideration of the legal effect of what was done. 88. MacNiven approach has been reaffirmed by the House of Lord in Barclays Mercantile Business Finance Limited v. Mawson (2005 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... indicate that a clear-cut distinction between tax avoidance and tax evasion is still to emerge in England and in the absence of any legislative guidelines, there bound to be uncertainty, but to say that the principle of Duke of Westminster has been exorcised in England is too tall a statement and not seen accepted even in England. House of Lords in McGuckian and MacNiven, it may be noted, has emphasised that the Ramsay approach as a principle of statutory interpretation rather than an overarching anti avoidance doctrine imposed upon tax laws. Ramsay approach ultimately concerned with the statutory interpretation of a tax avoidance scheme and the principles laid down in Duke of Westminster, it cannot be said, has been given a complete go by Ramsay, Dawson or other judgments of the House of Lords. PART-III INDO-MAURITIUS TREATY AZADI BACHAO ANDOLAN 91. The Constitution Bench of this Court in McDowell (supra) examined at length the concept of tax evasion and tax avoidance in the light of the principles laid down by the House of Lords in several judgments like Duke of Westminster, Ramsay, Dawson etc. The scope of Indo- Mauritius Double Tax Avoidance Agreement (in short ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... benefits (LOB) clause in the Treaty. CBDT then issued Circular No. 789 dated 13.04.2000 stating that the Mauritius Tax Residency Certificate (TRC) issued by the Mauritius Tax Office was a sufficient evidence of tax response of that company in Mauritius and that such companies were entitled to claim treaty benefits. 94. Writ Petitions in public interest were filed before the Delhi High Court challenging the constitutional validity of the above mentioned circulars. Delhi High Court quashed Circular No. 789 stating that inasmuch as the circular directs the Income Tax authorities to accept as a certificate of residence issued by the authorities of Mauritius as sufficient evidence as regards the status of resident and beneficial ownership, was ultra vires the powers of CBDT. The Court also held that the Income Tax Office was entitled to lift the corporate veil in India to see whether a company was a resident of Mauritius or not and whether the company was paying income tax in Mauritius or not. The Court also held that the Treaty Shopping by which the resident of a third country takes advantage of the provisions of the agreement was illegal and necessarily to be forbidden. Union of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apital gains received by a Mauritius company/shareholder at the time of disinvestment/exit and the fact that Mauritius does not levy tax on dividends declared and paid by a Mauritius company/subsidiary to its Foreign Shareholders/Principal, there is no other reason for this quantum of funds to be invested from/through Mauritius. 97. We are, therefore, of the view that in the absence of LOB Clause and the presence of Circular No. 789 of 2000 and TRC certificate, on the residence and beneficial interest/ownership, tax department cannot at the time of sale/disinvestment/exit from such FDI, deny benefits to such Mauritius companies of the Treaty by stating that FDI was only routed through a Mauritius company, by a company/principal resident in a third country; or the Mauritius company had received all its funds from a foreign principal/company; or the Mauritius subsidiary is controlled/managed by the Foreign Principal; or the Mauritius company had no assets or business other than holding the investment/shares in the Indian company; or the Foreign Principal/100% shareholder of Mauritius company had played a dominant role in deciding the time and price of the disinvestment/sale/transf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the last decade the FDI in India was US$ 178 billion and, of this, 42% i.e. US$ 74.56 billion was through Mauritian route. Presently, it is known, FII in India is ₹ 450,000 crores, out of which ₹ 70,000 crores is from Mauritius. Facts, therefore, clearly show that almost the entire FDI and FII made in India from Mauritius under DTAA does not originate from that country, but has been made by Mauritius Companies / SPV, which are owned by companies/individuals of third countries providing funds for making FDI by such companies/individuals not from Mauritius, but from third countries. 100. Mauritius, and India, it is known, has also signed a Memorandum of Understanding (MOU) laying down the rules for information, exchange between the two countries which provides for the two signatory authorities to assist each other in the detection of fraudulent market practices, including the insider dealing and market manipulation in the areas of securities transactions and derivative dealings. The object and purpose of the MOU is to track down transactions tainted by fraud and financial crime, not to target the bona fide legitimate transactions. Mauritius has also enacted string ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... $ 255 billion annually was involved in using offshore havens to escape taxation, an amount which would more than plug the financing gap to achieve the Millennium Development Goal of reducing the world poverty by 50% by 2015. ( Tax Us If You Can September 2005, 78 available at http:/www.taxjustice.net). Necessity of proper legislation for charging those types of transactions have already been emphasised by us. Round Tripping 105. India is considered to be the most attractive investment destinations and, it is known, has received $37.763 billion in FDI and $29.048 billion in FII investment in the year to March 31, 2010. FDI inflows it is reported were of $ 22.958 billion between April 2010 and January, 2011 and FII investment were $ 31.031 billions. Reports are afloat that million of rupees go out of the country only to be returned as FDI or FII. Round Tripping can take many formats like under-invoicing and over-invoicing of exports and imports. Round Tripping involves getting the money out of India, say Mauritius, and then come to India like FDI or FII. Art. 4 of the Indo-Mauritius DTAA defines a resident to mean any person, who under the laws of the contracting State is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tly without resorting to subterfuges. 108. Justice Shah in Raman (supra) has stated that avoidance of tax liability by so arranging the commercial affairs that charge of tax is distributed is not prohibited and a tax payer may resort to a device to divert the income before it accrues or arises to him and the effectiveness of the device depends not upon considerations of morality, but on the operation of the Income Tax Act. Justice Shah made the same observation in B.N. Kharwar (supra) as well and after quoting a passage from the judgment of the Privy Council stated as follows :- The Taxing authority is entitled and is indeed bound to determine the true legal relation resulting from a transaction. If the parties have chosen to conceal by a device the legal relation, it is open to the taxing authorities to unravel the device and to determine the true character of the relationship. But the legal effect of a transaction cannot be displaced by probing into the substance of the transaction . In Jiyajeerao (supra) also, this Court made the following observation: Every person is entitled so to arrange his affairs as to avoid taxation, but the arrangement must be real and ge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve go by what Justice Mishra has spoken on tax avoidance. 113. Justice Reddy has depreciated the practice of setting up of Tax Avoidance Projects, in our view, rightly because the same is/was the situation in England and Ramsay and other judgments had depreciated the Tax Avoidance Schemes. 114. In our view, the ratio of the judgment is what is spoken by Justice Mishra for himself and on behalf of three other judges, on which Justice Reddy has agreed. Justice Reddy has clearly stated that he is only supplementing what Justice Mishra has said on Tax avoidance. 115. Justice Reddy has endorsed the view of Lord Roskill that the ghost of Westminster had been exorcised in England and that one should not allow its head rear over India. If one scans through the various judgments of the House of Lords in England, which we have already done, one thing is clear that it has been a cornerstone of law, that a tax payer is enabled to arrange his affairs so as to reduce the liability of tax and the fact that the motive for a transaction is to avoid tax does not invalidate it unless a particular enactment so provides (Westminster Principle). Needless to say if the arrangement is to be effec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly when another route was available for HTIL to transfer its controlling interest in HEL to Vodafone. Further it was pointed out that the original idea of the parties was to sell shares in HEL directly but at the last moment the parties changed their mind and adopted a different route since HTIL wanted to declare a special dividend out of US $ 11 million for payment and the same would not have been possible if they had adopted Mauritian route. 120. Petitioner pointed out that if the motive of HTIL was only to save tax it had the option to sell the shares of Indian companies directly held Mauritius entities, especially when there is no LOB clause in India-Mauritius Treaty. Further, it was pointed out that if the Mauritius companies had sold the shares of HEL, then Mauritius companies would have continued to be the subsidiary of HTIL, their account could have been consolidated in the hands of HTIL and HTIL would have accounted for the accounts exactly the same way that it had accounted for the accounts in HTIL BVI/nominated payee. Had HTIL adopted the Mauritius route, then it would have been cumbersome to sell the shares of a host of Mauritian companies. 121. CGP was incorporat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... their commercial wisdom thought of transferring CGP share rather than going for any other alternatives. Further 3GSPL was also a party to various agreements between itself and the companies of AS, AG and IDFC Group. If Array had been transferred the disadvantage would be that the same would result in hiving off the call centre business from 3GSPL. Consolidation operations of HEL were evidently done in the year 2005 not for tax purposes but for commercial reasons and the contention that CGP was inserted at a very late stage in order to bring a pre tax entity or to create a transaction that would avoid tax, cannot be accepted. 125. The Revenue has no case that HTIL structure was a device or an artifice, but all along the contention was that CGP was interposed at the last moment and applying the Dawson test, it was contended that such an artificially interposed device be ignored, and applying Ramsay test of purposive interpretation, the transaction be taxed for gain. CGP, it may be noted, was already part of the HTIL s Corporate Structure and the decision taken to sell CGP (Share) so as to exit from the Indian Telecom Sector was not the fall out of a tax exploitation scheme, but a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The facts in this case as well as the provisions of the Caymen Island Act would clearly indicate that the CGP (CI) share situates in Caymen Island. The legal principle on which situs of an asset, such as share of the company is determined, is well settled. Reference may be made to the judgments in Brassard v. Smith [1925] AC 371, London and South American Investment Trust v. British Tobacco Co. (Australia) [1927] 1 Ch. 107. Erie Beach Co. v. Attorney-General for Ontario, 1930 AC 161 PC 10, R. v. Williams [1942] AC 541. Situs of CGP share, therefore, situates in Cayman Islands and on transfer in Cayman Islands would not shift to India. PART-V 128. Sale of CGP, on facts, we have found was not the fall out of an artificial tax avoidance scheme or an artificial device, pre-ordained, or pre-conceived with the sole object of tax avoidance, but was a genuine commercial decision to exit from the Indian Telecom Sector. 129. HTIL had the following controlling interest in HEL before its exit from the Indian Telecom Sector:- 1. HTIL held its direct equity interest in HEL amounting approximately to 42% through eight Mauritius companies. 2. HTIL indirect subsidiary CGP(M) held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the form of rights to appoint two directors with veto power to promote its interest in HEL and thereby hold beneficial interest in 12.30% of the share capital of the in HEL. (iv) Finance to SMMS to acquire shares in ITNL (formerly Omega) with right to acquire the share capital of Omega in future. (v) Rights over ITNL through the ITNL Shareholder s Agreement, in the form of right to appoint two directors with veto power to promote its interests in HEL and thereby it held beneficial interest in 2.77% of the share capital of the Indian company HEL; (vi) Interest in the form of loan of US$231 million to HTI (BVI) which was assigned to Array Holdings Ltd.; (vii) Interest in the form of loan of US$ 952 million through HTI (BVI) utilized for purchasing shares in the Indian company HEL by the 8 Mauritius companies; (viii) Interest in the form of Preference share capital in JKF and TII to the extent of US$ 167.5 million and USD 337 million respectively. These two companies hold 19.54% equity in HEL. (ix) Right to do telecom business in India through joint venture; (x) Right to avail of the telecom licenses in India and right to do business in India; (xi) Right to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... own Board of Directors. Share of CGP situates in Cayman Islands and that of Array in Mauritius. Mauritian entities which hold 42% shares in HEL became the direct and indirect subsidiaries of Array, on Vodafone purchasing the CGP share. Voting rights, controlling rights, right to manage etc., of Mauritian Companies vested in those companies. HTIL has never sold nor Vodafone purchased any shares of either Array or the Mauritian subsidiaries, but only CGP, the share of which situates in Cayman Islands. By purchasing the CGP share its situs will not shift either to Mauritius or to India, a legal issue, already explained by us. Array being a WOS of CGP, CGP may appoint or remove any of its directors, if it wishes by a resolution in the general body of the subsidiary, but CGP, Array and all Mauritian entities are separate legal entities and have de-centralised management and each of the Mauritian subsidiaries has its own management personnels. 133. Vodafone on purchase of CGP share got controlling interest in the Mauritian Companies and the incident of transfer of CGP share cannot be considered to be two distinct and separate transactions, one shifting of the share and another shifti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore, determines the transferability of the share and/or interest which flows out of that share including controlling interest. Ownership of shares, as already explained by us, carries other valuable rights like, right to receive dividend, right to transmit the shares, right to vote, right to act as per one's wish, or to vote in a particular manner etc; and on transfer of shares those rights also sail along with them. 135. Vodafone, on purchase of CGP share got all those rights, and the price paid by Vodafone is for all those rights, in other words, control premium paid, not over and above the CGP share, but is the integral part of the price of the share. On transfer of CGP share situated in Cayman Islands, the entire rights, which accompany stood transferred not in India, but offshore and the facts reveal that the offshore holdings and arrangements made by HTIL and Vodafone were for sound commercial and legitimate tax planning, not with the motive of evading tax. 136. Vodafone, on purchase of CGP share also got control over its WOS, HTSH(M) which is having control over its WOS, 3GSPL, an Indian Company which exercised voting rights in HEL. 3GSPL, was incorporated on 16.0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s long as the buyer paid a fair market value. June 2007 Agreement became necessary because the composition of Indian investors changed with some Indian investors going out and other Indian investors coming in. On June 2007, changes took place within the Group of Indian investors, in that SSKI and IDFC went out leaving IDF alone as the Indian investor. Parties decided to keep June 2007 transaction to effectuate their intention within the broad contours of June 2006 FWA. On 06.06.2007 FWA has also retained the rights and options in favour of 3GSPL but conferred no rights on Vodafone and Vodafone was only a confirming party to that Agreement. Call and put options, we have already mentioned, were the subject matter of three FWAs viz., Centrino, N.D. Callus, IDFC and in Centrino and N.D. Callus FWAs, neither HTIL was a party, nor was Vodafone. HTIL was only a confirming party in IDFC FWA, so also Vodafone. Since HTIL, and later Vodafone were not parties to those SHAs and FWAs, we fail to see how they are bound by the terms and conditions contained therein, so also the rights and obligations that flow out of them. HTIL and Vodafone have, of course, had the interest to see the SHAs and FW ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he options, the extent of rights in relation to options, the price etc. all continue to remain in place as they stood. Even if they had not been so entered into, all those agreements would have remained in place because they were in favour of 3GSPL, subsidiary of CGP. 144. The High Court has reiterated the common law principle that the controlling interest is an incident of the ownership of the share of the company, something which flows out of holding of shares and, therefore, not an identifiable or distinct capital asset independent of the holding of shares, but at the same time speaks of change in the controlling interest of VEL, without there being any transfer of shares of VEL. Further, the High Court failed to note on transfer of CGP share, there was only transfer of certain off-shore loan transactions which is unconnected with underlying controlling interest in the Indian Operating Companies. The other rights, interests and entitlements continue to remain with Indian Operating Companies and there is nothing to show they stood transferred in law. 145. The High Court has ignored the vital fact that as far as the put options are concerned there were pre-existing agreement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loan in addition to those identified will be non-interest bearing. Clause 7.4 of the SPA stipulated that any loans in addition to those identified in Part IV of Schedule 1 of the SPA would be non-interest bearing and on terms equivalent to the terms of those loans identified in Part IV of Schedule 1 of the SPA. The sum of such indebtedness comprised of: a) US$ 672,361,225 (Loan 1) reflected in a Loan Agreement (effective date of loan: 31 December 2006; date of Loan Agreement: 28 April 2007); b) HK$ 377,859,382.40 (Loan 2) reflected in a Loan Agreement (effective date of Loan 31 st December 2006; date of Loan Agreement: 28 April 2007) [(i) + (ii): US$ 1,050,220,607.40] c) US$ 231,111,427.41 (Loan 3) reflected in a Receivable Novation Agreement i.e. HTM owed HTI BVI Finance such sum, which Array undertook to repay in pursuance of an intergroup loan restructuring, which was captured in such Receivable Novation Agreement dated 28 April 2007. HTI BVI Finance Limited, Array and Vodafone entered into a Deed of Assignment on 08.05.2007 pertaining to the Array indebtedness. On transfer of CGP shares, Array became a subsidiary of VIHBV. The price was calculated on a gross ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ments of loans took place outside India at face value and, hence, there is no question of transfer of any capital assets out of those transactions in India, attracting capital gains tax. Preference Shares: 150. Vodafone while determining bid price had taken into consideration, inter alia its ownership of redeemable preference shares in TII and JFK. Right to preference shares or rights thereto cannot be termed as transfer in terms of Section 2(47) of the Act. Any agreement with TII, Indian partners contemplated fresh investment, by subscribing to the preference shares were redeemable only by accumulated profit or by issue of fresh capital and hence any issue of fresh capital cannot be equated to the continuation of old preference shares or transfer thereof. NON COMPETE AGREEMENT 151. SPA contains a Non Compete Agreement which is a pure Contractual Agreement, a negative covenant, the purpose of which is only to see that the transferee does not immediately start a compete business. At times an agreement provides that a particular amount to be paid towards non-compete undertaking, in sale consideration, which may be assessable as business income under Section 28(va) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... attracting capital gains tax and even after transfer of CGP share, all those rights and entitlements remained as such, by virtue of various FWAs, SHAs, in which neither HTIL nor Vodafone was a party. 155. Revenue, however, wanted to bring in all those rights and entitlements within the ambit of Section 9(1)(i) on a liberal construction of that Section applying the principle of purposive interpretation and hence we may examine the scope of Section 9. PART VI SECTION 9 AND ITS APPLICATION 156. Shri Nariman, submitted that this Court should give a purposive construction to Section 9(1) of the Income Tax Act when read along with Section 5(2) of the Act. Referring extensively to the various provisions of the Income Tax Act, 1922, and also Section 9(1)(i), Shri Nariman contended that the expression transfer in Section 2(47) read with Section 9 has to be understood as an inclusive definition comprising of both direct and indirect transfers so as to expand the scope of Section 9 of the Act. Shri Nariman also submitted that the object of Section 9 would be defeated if one gives undue weightage to the term situate in India , which is intended to tax a non-resident who has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed out that there are cases, where the assets/shares situate in India are not transferred, but where the shares of foreign company holding/owning such shares are transferred. 159. Shri Mohan Parasaran, Additional Solicitor General, submitted that on a close analysis of the language employed in Section 9 and the various expressions used therein, would self-evidently demonstrate that Section 9 seeks to capture income arising directly or indirectly from direct or indirect transfer. Shri Parasaran submitted, if a holding company incorporated offshore through a maze of subsidiaries, which are investment companies incorporated in various jurisdictions indirectly contacts a company in India and seeks to divest its interest, by the sale of shares or stocks, which are held by one of its upstream subsidiaries located in a foreign country to another foreign company and the foreign company step into the shoes of the holding company, then Section 9 would get attracted. Learned counsel submitted that it would be a case of indirect transfer and a case of income accruing indirectly in India and consequent to the sale of a share outside India, there would be a transfer or divestment or extinguis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t fall in Section 9, would be deemed to accrue or arise in India, which are (a) a business connection in India; (b) a property in India; (c) an establishment or source in India; and (d) transfer of a capital asset in India. Income deemed to accrue or arise in India Section 9 (1) The following incomes shall be deemed to accrue or arise in India :- (i) 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 orfrom any asset or source of income in India, or through the transfer of a capital asset situate in India. [Explanation 1] For the purposes of this clause (a) in the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India ; (b) in the case of a non-resident, no income shall be deemed to accrue or arise in India to him through or from operations which are confined to the purchase of goods in India for the purpose of export; (c) in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on in India, or a property in India, or an asset or source in India or a capital asset in India, the transfer of which has taken place, the further question arises whether there is any income deeming to accrue in India from those situations. In relation to the expression through or from a business connection in India , it must be established in the first instance that (a) there is a non-resident; (b) who has a business connection in India; and (c) income arises from this business connection. 164. Same is the situation in the case of income that arises through or from a property in India , i.e. (a) there must be, in the first instance, a property situated in India; and (b) income must arise from such property. Similarly, in the case of transfer of a capital asset in India , the following test has to be applied: (a) there must be a capital asset situated in India, (b) the capital asset has to be transferred, and (c) the transfer of this asset must yield a gain. The word situate , means to set, place, locate. The words situate in India were added in Section 9(1)(i) of the Income Tax Act pursuant to the recommendations of the 12th Law Commission dated 26.9.1958. 165. Sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wlatt, J. expressing the principle in the following words: In a taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used. [Cape Brandy Syndicate v. IRC (1921) 1 KB 64, P. 71 (Rowlatt,J.)] 170. In Ransom (Inspector of Tax) v. Higgs 1974 3 All ER 949 (HL), Lord Simon stated that it may seem hard that a cunningly advised tax-payer should be able to avoid what appears to be his equitable share of the general fiscal burden and cast it on the shoulders of his fellow citizens. But for the Courts to try to stretch the law to meet hard cases (whether the hardship appears to bear on the individual tax-payer or on the general body of tax-payers as represented by the Inland Revenue) is not merely to make bad law but to run the risk of subverting the rule of law itself. The proper course in construing revenue Acts is to give a fair and reasonable construction to their language without leaning to one side or the other but keeping in mind that no tax can be imposed without words clearly s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gislature has not chosen to extend Section 9(1)(i) to indirect transfers . Wherever indirect transfers are intended to be covered, the Legislature has expressly provided so. The words either directly or indirectly , textually or contextually, cannot be construed to govern the words that follow, but must govern the words that precede them, namely the words all income accruing or arising . The words directly or indirectly occurring in Section 9, therefore, relate to the relationship and connection between a non-resident assessee and the income and these words cannot and do not govern the relationship between the transaction that gave rise to income and the territory that seeks to tax the income. In other words, when an assessee is sought to be taxed in relation to an income, it must be on the basis that it arises to that assessee directly or it may arise to the assessee indirectly. In other words, for imposing tax, it must be shown that there is specific nexus between earning of the income and the territory which seeks to lay tax on that income. Reference may also be made to the judgment of this Court in Ishikawajma-Harima Heavy Industries Ltd. v. Director of Income Tax, Mu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... because it was a Joint Venture (JV) Partner and held 10% equity interest in Bharti Airtel Limited, a listed company in India. Further, out of that 10%, 5.61% shares were held directly by Vodafone itself. Vodafone had also a right to vote as a shareholder of Bharati Airtel Limited and the right to appoint two directors on the Board of Directors of Bharti Airtel Limited. Consequently, it was stated that Vodafone had a presence by reason of being a JV Partner in HEL on completion of HEL s acquisition. Vodafone had also entered into Term Sheet Agreement with Essar Group on 15.03.2007 to regulate the affairs of VEL which was restated by a fresh Term Sheet Agreement dated 24.08.2007, entered into with Essar Group and formed a JV Partnership in India. Further, Vodafone itself applied for IFPB approval and was granted such approval on 07.05.2007. On perusal of the approval, according to the Revenue, it would be clear that Vodafone had a presence in India on the date on which it made the payment because of the approval to the transaction accorded by FIPB. Further, it was also pointed out that, in fact, Vodafone had presence in India, since by mid 1990, it had entered into a JV arrangeme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ernment or a public sector bank within the meaning of clause (23D) of section 10 or a public financial institution within the meaning of that clause, deduction of tax shall be made only at the time of payment thereof in cash orby the issue of a cheque or draft or by any other mode: Provided further that no such deduction shall be made in respect of any dividends referred to in section 115-O. Explanation: For the purposes of this section, where any interest or other sum as aforesaid is credited to any account, whether called Interest payable account or Suspense account or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly. Section 195 finds a place in Chapter XVII of the Income Tax Act which deals with collection and recovery of tax. Requirement to deduct tax is not limited to deduction and payment of tax. It requires compliance with a host of statutory requirements like Section 203 which casts an obligation on the assessee to issue a certificate for the tax deducted, obligation to file return ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (1879) LR 12 ChD 522 at 526, wherein the Court stated that if a foreigner remain abroad, if he has never come into this country at all, it seems impossible to imagine that the English Legislature could ever have intended to make such a person subject to particular English Legislation. In Clark (Inspector of Taxes) v. Oceanic Contractors Inc. (1983) 1 ALL ER 133, the House of Lords had to consider the question whether chargeability has ipso facto sufficient nexus to attract TDS provisions. A TDS provision for payment made outside England was not given extra territorial application based on the principle of statutory interpretation. Lord Scarman, Lord Wilberforce and Lord Roskill held so on behalf of the majority and Lord Edmond Davies and Lord Lowry in dissent. Lord Scarman said : unless the contrary is expressly enacted or so plainly implied as to make it the duty of an English court to give effect to it, United Kingdom Legislation is applicable only to British subjects or to foreigners who by coming into this country, whether for a long or short time, have made themselves during that time subject to English jurisdiction. The above principle was followed in Agassi v. Robins ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... legally obliged to respond to Section 163 notice which relates to the treatment of a purchaser of an asset as a representative assessee. PART-VIII CONCLUSION: 188. I, therefore, find it difficult to agree with the conclusions arrived at by the High Court that the sale of CGP share by HTIL to Vodafone would amount to transfer of a capital asset within the meaning of Section 2(14) of the Indian Income Tax Act and the rights and entitlements flow from FWAs, SHAs, Term Sheet, loan assignments, brand license etc. form integral part of CGP share attracting capital gains tax. Consequently, the demand of nearly ₹ 12,000 crores by way of capital gains tax, in my view, would amount to imposing capital punishment for capital investment since it lacks authority of law and, therefore, stands quashed and I also concur with all the other directions given in the judgment delivered by the Lord Chief Justice. J. (K.S. Radhakrishnan) New Delhi January 20, 2012 ------------------------------------------------------------------- Hon'ble the Chief Justice pronounced the judgement on behalf of His Lordship and Hon'ble Mr. Justice Swatanter Kumar, while ..... 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