TMI Blog2010 (9) TMI 2X X X X Extracts X X X X X X X X Extracts X X X X ..... ) which expression is defined to mean property of any kind held by an assessee. - income is taxable in India u/s 5(2) - once this Court comes to the conclusion that the transaction between HTIL and VIH BV had a sufficient nexus with Indian fiscal jurisdiction, the issue of jurisdiction would have to be answered by holding that the Indian tax authorities acted within their jurisdiction in issuing a notice to show cause to the Petitioner for not deducting tax at source. From the perspective of Income Tax Law what is relevant is the place from which or the source from which the profits or gains have generated or have accrued or arisen to the seller. The income accrued and arose and was derived as a consequence of the divestment of HTIL's interest in India. If there was no divestment or relinquishment of its interest in India, there was no occasion for the income to arise. The real taxable event is the divestment of HTIL's interests which comprises in itself various facets or components which include a transfer of interests in different group entities. - 1325 OF 2010 - - - Dated:- 8-9-2010 - DR. D. Y. CHANDRACHUD AND J. P.D EVADHAR, JJ. For the Petitioner : Mr.Harish Sal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of Telecommunications (DoT) to Hutchison Max Telecom Ltd. (HMTL). 50% of the share capital in HMTL was held by an Indian company, Max Telecom Venture, 49% by Hutchison Telecommunications (India) Ltd. Mauritius (HTM) and 1% by another company. The parent company of HTM, at the material time, was Hutchison Telecommunications (India) Ltd. Cayman Islands (HTC). HTC, in turn, was a joint venture of the Hutchison Group (60%) and Distacom India Co.Ltd., BVI (40%). Distacom left the joint venture in 2004. Subsequently, a number of investments were made through other companies: . In 1998, MTV sold a 40% stake in HMTL to Telecom Investments India Ltd. (TII). . In 2004, Essar (Mauritius) purchased the 40% stake of Distacom in HTC who then transferred the shares to HTI BVI Holdings Ltd. HTM transferred 19.6% of its holding in HMTL to the Essar Group. . In 2006, Kotak Group sold its 51% stake in TII to ND Callus Info Services Pvt. Ltd., a company controlled by Analjit Singh. Simultaneously, Centrino Trading Co. Pvt. Ltd. subscribed to 23.97% stake in TII. . In 2006, the Hinduja Group, which held a 5.11% stake in HEL, sold its stake to Hutchison Group. 5. On 12 January 1998 CGP Inv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pot Put Option). The transfer price/fair market value of the Plustech shares was to be determined in terms of a comprehensive mechanism agreed to between the parties, set out in Schedule 2. 12. There was a similar Framework Agreement between Analjit Singh, Scorpios Beverages Pvt. Ltd. (held 100% by Mr./Mrs.Analjit Singh), MV Healthcare Services Pvt.Ltd. (held 100% by Scorpios) and ND Callus Info Services Pvt. Ltd. (held 100% by MV Healthcare). 13. In consideration of 3GSPL procuring financial assistance for N.D. Callus to subscribe to 38.78% shares in TII (which holds directly and indirectly 19.54% in HEL), Scorpios granted 3GSPL. a right to subscribe to equity in ND Callus and/or purchase equity of MV. Healthcare. 3GSPL granted Scorpios Beverages an option to require 3GSPL to purchase equity shares of MV Healthcare. The transfer price/fair market value of the MV Healthcare shares was to be determined in terms of Schedule 2, which set out a mechanism somewhat at variance with the mechanism in the other Framework Agreement. 14. Similarly on 7 August 2006, a Framework Agreement was executed between IDFC Pvt. Equity Co. Ltd., Hutchison Telecommunications (India) Ltd., ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in Bharti Airtel through Bharti Infotel Pvt. Ltd. and Bharti Telecom Ltd. The Petitioner intended to acquire the share capital of CGP indirectly from HTIL. CGP owns directly and indirectly through its subsidiaries an aggregate of 42.34% of the issued share capital of HEL. This was an overseas transaction between two overseas companies, which requires noting, and does not require approval of FIPB. The Petitioner will acquire an indirect controlling interest of 51.96% in HEL, a company competing in the same field with Bharti, attracting Press Note 1. The Consent of Bharti has been secured. The Petitioner requested the FIPB to take note and grant approval under Press Note 1 to the indirect acquisition of a 51.96% stake in HEL through an overseas acquisition of the entire share capital of CGP from HTIL. 23. On 22 February 2007, HTIL made an announcement on the Hong Kong Stock Exchange stating that it intended to use the proceeds from the sale of its interest in HEL by declaring a special dividend of HK $ 6.75 per share, utilising HK $ 13.9 billion to reduce debt and the remainder for investment in telecommunications businesses. 24. On 28 February 2007, FIP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct FDI by HTIL is stated to be 51.96%. This may kindly be clarified. 29. A similar letter was addressed to the Petitioner. In reply HEL by its letter addressed to FIPB on 14 March 2007 clarified that ...In summary, it is because of this difference in the US GAAP and Indian GAAP declarations that the combined holding for US GAAP purposes was 61.88% and for Indian GAAP purposes is now 51.98%. The Indian GAAP number reflects accurately the true equity ownership and control position . 30. The Petitioner by its clarification to FIPB dated 14 March 2007 stated that its effective shareholding in HEL will be 51.96% and consisted as follows: Vodafone will own a 42% direct interest in HEL through its acquisition of 100% of CGP Investments (Holdings) Limited. Through CGP Vodafone will also own 37% in Telecom Investments India Private Limited ('TII') which in turn owns 20% in HEL and 38% in Omega Telecom Holdings Private Limited ('Omega'), which in turn owns 5% in HEL. Both TIL and Omega are Indian companies. These investments combined give Vodafone a controlling interest of 52% in HEL. In addition, HTIL's existing Indian partners Asim Ghos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch 2007, the Additional Director of Income Tax (International Taxation) Range 2, Mumbai, issued a letter to HEL intimating that both Vodafone Group Plc and Hutchison Telecom group announcements evidenced that HTIL had made substantial gains. HEL was consequently requested to impress upon HTIL/Hutchison Telecom group to discharge tax liability on gains, before they cease operations in India. Additionally, the attention of HEL was drawn to Sections 195 and 197 of the Act. The letter seemed to proceed on the basis that the shares of HEL were being sold and that hence HEL would be in a position to get the requisite information. 38. On 27 March 2007, the Petitioner addressed a letter to FIPB confirming that it had taken into account : i. The various assets and liabilities of CGPC including (i) (a) its 51.96% direct and indirect equity ownership of Hutch Essar; (b) its ownership of nonvoting, nonconvertible, redeemable preference shares in Telecom Investments India Private Limited (TII) and Jaykay Finholding (India) Private Limited; (c) assumption of liabilities in various subsidiaries of CGP amounting to approximately US $ 630 million; and (d) subject to Indian foreign investm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on or before completion, including any reasonable costs associated with any tax demand. 46. Separately Loan Assignments were entered into inter alia by the Petitioner and HTI (BVI) Finance Ltd., by which the rights of the latter to receive loan repayments was assigned to the Petitioner as part of the transactions contemplated under the SPA. Notice under Sections 163, 201(1), 201(1A) : 47. On 6 August 2007, a notice to show cause was issued to VEL under Section 163 of the Income Tax Act, 1961 to explain why it should not be treated as a representative assessee of the Petitioner. The notice was challenged by VEL in a Writ Petition under Article 226 of the Constitution before this Court. 48. On 19 September 2007, the Assistant Director of Income Tax (International Taxation), issued a notice to the Petitioner under Sections 201(1) and 201(1A) to show cause as to why it should not be treated as an assesseeindefault for failure to withhold tax. 49. On 3 December 2008, a Division Bench of this Court dismissed the Petition, declining to exercise its jurisdiction under Article 226 in a challenge to the show cause notice. Directions of the Supreme Court : 50. In a Special Le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r is not taxable in India because the asset is not situated in India. Hence, there was no sum chargeable to tax in India and the obligation to deduct tax under Section 195 did not, as a result, arise. The submissions can now be summarised. (1) The case of the Department has vacillated: (i) The notice to show cause suggested that the transaction was sham and colourable. The impugned order proceeds on the basis that though holding companies are permissible and the transaction was not by itself a sham, the holding companies had no commercial operations. The transfer of the CGP share resulted in a transfer of 66.9848% interest in HEL. However, in the course of submissions the ASG, developed a new case that the transfer of the CGP share resulted only in a transfer of 42.34% interest in HEL and the balance must necessarily have been transferred through some device. The ASG had urged that the shares held by companies controlled by Analjit Singh and Asim Ghosh were beneficially held by HTIL. The Revenue cannot be permitted to challenge FIPB's acceptance to the contrary in collateral proceedings. The Department, when it decides to challenge a quasi judicial order, cannot assign a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion; (6) The SPA represents an arms length commercial transaction which was entered into between the two large foreign corporations. It is not the case of the Revenue that the document is sham or colourable. If the shares of an Indian company which are held by companies resident in Mauritius were transferred to the Petitioner directly and without intervention of any intermediate company, there would be no liability to capital gains tax because it would be fully covered by the IndoMauritius Tax Treaty. The Department would not in law be permitted to go behind a corporation resident in Mauritius in view of the judgment of the Supreme Court in Azadi Bachao. The SPA dispels any notion that there was anything more than the transfer of the CGP share for consideration. The other clauses relate to consequential changes that would flow from the downstream effect of the transfer of the CGPC share; (7) As regards the framework agreements, it has been submitted that (i) The framework agreements dated 1 March 2006 relating to Asim Ghosh and Analjit Singh Group companies confer rights upon 3GSPL. Neither of those agreements confers any right upon HTIL; (ii) The framework agreement of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly a reporting requirement has been made; (11) There is no legal requirement of obtaining permission of the FIPB for a transfer of shares. The shares in Telecom companies can be bought and sold and the only requirement is a reporting requirement. The Petitioner was required to obtain a formal permission under Press Note1 as would any other buyer if he had a joint venture in the same field in India or held shares in any other companies in India. The need to obtain permission by the Petitioner, asserted by the Revenue, does not shift the situs of the share in India. The proceedings before the FIPB show that enquiries were held on whether HEL had permitted excessive FDI by virtue of the beneficial interest in the shares held by Analjit Singh and Asim Ghosh Group of companies in reality being held by HTIL. After a thorough enquiry, this suggestion was negated and an undertaking secured that as and when they do transfer the shares, they would seek FIPB permission. This militated against the case of the Revenue that there was some transfer in praesenti; (12) For the purpose of taxation, the corporate veil can be lifted only where a tax fraud is being perpetrated; (13) Section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Act . Hence, where a demand is made of tax against a person on the ground that there was a failure to deduct tax under Section 195, it is open to such a person to challenge the demand on the ground that the condition precedent - of there being a sum chargeable under the Act - is absent and the demand is without jurisdiction. Where there is a sum chargeable under the Act, then obviously two options would be to pay the tax on the gross amount or to seek and deduct tax under subsections (2) and (3) of Section 195. Where nothing is chargeable, it is not mandatory for the payer to seek a determination under Section 195(2). In a case such as the present, where the payment has no element which could be made liable to tax in India and the payer does not withhold any tax and the Department thereafter makes a demand of tax which allegedly should have been withheld under Section 195, it is open to the payer to contend that his action was justified on the ground that there was no sum chargeable under the provisions of the Act. Such an issue if raised has to be decided and not only on a prima facie basis. 2) SUBMISSIONS OF THE UNION OF INDIA: 54. The core submission on behalf of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... discontinued operation; (iv) The subject matter of the transaction between HTIL and the Petitioner was a transfer of 67% in HEL. The acquisition of one CGP share is only one of means to achieve that object. The nexus of the transaction with India is evident from the nature of HTIL's rights in HEL which were : (i) A direct and indirect interest of 51.96% in the equity of HEL through its wholly owned subsidiaries; (ii) Indirect interest in the equity of HEL of 15.03% through Call Options in the companies held by Analjit Singh, Asim Ghosh and IDFC; (iii) Right to do business through telecom licence granted to the Special Purpose Vehicle promoted by HTIL and Essar as promoter and joint venture partner; (iv) Acquisition and devolution of Hutch brand; (v) Management rights over HEL flowing through Term Sheets and shareholder agreements; and (vi) Debt/loans through intermediaries for infusion as equity or debt in HEL. (v) Besides procuring the sale of one share belonging to CGP, HTIL had necessarily to adopt several steps to consummate the transaction of transferring all its rights in HEL in India. These steps included (i) Procuring assignment of loans; ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iented towards the India specific joint venture. These rights have enured independent of the CGP share as would be evident from the Restated Term Sheet dated 24 August 2007; (ix) In order to appreciate the terms of and the impact of the SPA, the circumstances which transpired prior to and subsequent to its execution are relevant. The name which parties attribute to a transaction which is the source of receipt or the characterization of the receipt is not conclusive and the true nature and character has to be ascertained from the covenants of the contract in the light of surrounding circumstances; (x) Several valueable rights which are property rights and capital assets stand relinquished in favour of the Petitioner by reason of the agreements which form part of the composite transaction and not merely by the simple transfer of one CGP share. These rights are property and constitute an asset of a capital nature which is situated in India. But for these agreements, HTIL would not have been able to effectively transfer to the Petitioner, controlling interest in the joint venture to the extent of 66.9828% in HEL; (xi) An Analysis of the SPA shows that clause 2 is expressly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ii) In clause 8 of the SPA, HTIL assumed the responsibility to ensure execution of the terms of the transaction documents by the Indian entities and persons. Clause 9.5 of the SPA contemplated that in the event of breach, the agreement would be treated as requiring HTIL to procure the delivery of 66.9848% of the issued share capital of HEL to Vodafone and HTIL will be deemed to have transferred that proportion of the share capital of HEL. Clause 10.4 requires the replacement of the Oracle licence in favour of HEL and so that the consulting agreement is not terminated as a result of the SPA. Clause 14.1 embodied a noncompete clause restraining the vendor from carrying on any competing business in India. The extent of this restriction was coterminus with the rights conferred on HTIL under its noncompete agreement with Hutchison Whampoa Ltd. in 2004 at the time of restructuring of the Hutchison Group; (xiv) The transaction between HTIL and VIH BV took into consideration the following: (i) The interest held in HEL through eight Mauritius companies characterized as a direct interest aggregating to 42.34%; (ii)Interest held in the Indian Company TII (to the extent of 37.25% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... HEL (Management Rights); (xvi) Right to take part in all the investment, management and financial decisions of the Indian company HEL; (xvii) Right to control premium; (xviii) Right to consultancy support in the use of Oracle license for the Indian business; The rights enumerated above are subject matter of transfer between HTIL and Vodafone and are enumerated in clauses 6.1(ix), 6.2(b), 6.4, 8.8, 8.9, 10.1, 10.4, 10.5 and 14.1 of the SPA. The price paid by Vodafone was for the acquisition of all the above enumerated composite rights which it held in HEL. It is not for the mere transfer of a CPG share. (xv). HTIL's interest in HEL arose by way of indirect equity shareholding, option agreements, finance agreements, shareholders' agreements etc., the aggregate of which confers a controlling interest of 66.9848% in HEL. All these varied interests did not emerge only from one share of CGP and could not have been conveyed by the transfer of only one equity share. HTIL held its direct equity interest in HEL amounting to 42.34% through eight Mauritian companies. HTIL exercised management control on account of the collective shareholdings of diverse entities and o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hts under these agreements unless it acquired those rights by entering into separate agreements with the Indian companies. Vodafone entered into similar agreements with the Indian companies to assure rights in its favour. (xvii) Under Section 9(1), the deeming fiction is of a wide amplitude and all kinds of income derived by a nonresident from whatever source are brought within the ambit of the provision. Clause (i) of Section 9(1) provides that income is deemed to accrue or arise in India whether directly or indirectly inter alia through or from (a) a business connection in India; (b) property in India; (c ) any asset in India; (d) any source of income in India; or (e) through the transfer of a capital asset situated in India. The common thread is that the income should have sufficient territorial or economic nexus with India. Unlike the OECD Group of countries, India has a wide net of source based taxation to preserve its tax base. It is for this reason that Section 9 is of a wide amplitude and a comparison with the OECD system of taxation will not be appropriate. (xviii) HEL is situated in India and its business of telecommunications was carried out entirely in India w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... involves a transfer of a bundle of interests in various entities and it would be simplistic to assume that what was transferred was only a share of a Company in Cayman Islands and that all the other rights were incidental to the transfer. (xx) The acquisition of an interest in a joint venture does amount to the acquisition of a capital asset. The acquisition of a bundle of interests amounted to acquisition of property in India. HTIL could transfer its controlling interest in HEL only upon extinguishing its rights in the Indian Company. A divestment of its right, title or interest necessarily preceded divestment of the controlling interest. The divestment by HTIL of its interests would result in an enduring benefit to VIH BV, resulting in the acquisition of a capital asset in India. HTIL relinquished its asset, namely, its interest in HEL so as to fall within the ambit of the expression transfer as defined in Section 2(47). The object of the transfer was to enable the VIH BV to acquire a controlling interest in HEL and thereby a right to manage HEL. In the present case a debt was also assigned in favour of the Petitioner. (xxi) In the present case, VIH BV disregarded t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deduction and does not cause any prejudice to the person who is responsible to deduct the tax from the monies payable. No prejudice is caused to the deductor or to the deductee. The obligation to deduct tax under Section 195 is activated once the payment being made has the character of income for the purpose of the Act. A payment which has a character of income as defined in Section 2(24) will be income chargeable to tax for purpose of Section 195 and tax must be deducted. Once the payment has a character of income in the hands of the payee, the payer has a duty to deduct tax and the deductor is not concerned whether on regular assessment, the Department will find the income chargeable or otherwise. The provision has adequate safeguards. If a deductor is unsure whether the particular payment is deductible he can under Subsection (2) of Section 195 seek a clarification. The obligation to deduct tax is not extinguished merely because the payment is made by a nonresident to another nonresident outside in India. If the amount paid has nexus with India, it is the duty of the payer either to deduct tax or to approach the Department and seek a clarification on whether the deduction shoul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITR 692] held that in the absence of any suggestion of bad faith or fraud, the true principle is that the taxing statute has to be applied in accordance with the legal rights of the parties to the transaction. The Supreme Court held that when the transaction is embodied in a document between parties, the liability to tax depends upon the meaning of the language used in accordance with the ordinary rules of construction. In 1999, a Constitution Bench of the Supreme Court in Mathuram Agrawal v. State of Madhya Pradesh, [(1999) 8 SCC 667 ] dealt with the issue in the following observations: The intention of the Legislature in a taxation statute is to be gathered from the language of the provisions particularly where the language is plain and unambiguous. In a taxing Act it is not possible to assume any intention or governing purpose of the statute more than what is stated in the plain language. It is not the economic results sought to be obtained by making the provision which is relevant in interpreting a fiscal statute. Equally impermissible is an interpretation which does not follow from the plain, unambiguous language of the statute. Words cannot be added to or substituted so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the Avoidance of Double Taxation. The object of the Convention was to avoid double taxation and to prevent fiscal evasion of taxes on income and capital gains and to encourage mutual trade and investment. Article 13 of the Convention enunciated rules for taxation of capital gains and Clause 4 provided that gains derived by the alienation of shares by a resident of a contracting state shall be taxable only in that state. Capital gains derived by a resident of Mauritius on the alienation of shares were taxable only in Mauritius. Article 4 defined the expression resident of a contracting state to be a person who under the laws of that state is liable to taxation therein by reason of his domicile, residence, place of management or a criterion of a similar nature. By a circular dated 30 March 1994, CBDT in exercise of powers under Section 90 of the Income Tax Act 1961 clarified that capital gains derived by any resident of Mauritius on the alienation of shares of an Indian company shall be taxable only in Mauritius according to the taxation laws of that country and would not be liable to tax in India. Notwithstanding this, the income tax authorities issued notices to show cause in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovisions of the Act would apply only to the extent to which they were more beneficial to the assessee. The Central Government was empowered to make provisions necessary for implementing the agreement. The Supreme Court held that the circular was within the purview of Section 90 and would prevail even if it was inconsistent with the provisions of the Act in relation to assessees covered by the convention. 62. Before the Supreme Court, the Respondents criticized the act of incorporation of FIIs under Mauritian law as sham and a device actuated by improper motives. The Supreme Court adverted to the dictum of Lord Tomlin in IRC v. Duke of Westminster [(1936) AC 1 (HL).] that a person is entitled if he can to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be . The Court also referred to the earlier statement by Lord Sumner in IRC v. Fisher's Executors [(1926) AC 395] that the highest authorities have always recognized that the subject is entitled so to arrange his affairs as not to attract taxes imposed by the Crown, so far as he can do so within the law, and that he may legitimately claim the advantage of any expressed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omic result sought to be obtained by making the provision which is of relevance and the duty of the Court is to follow the plain and unambiguous language of the statute. Kharwar : the issue of subtance vs. form: 64. In Commissioner of Income Tax v. B.M. Kharwar [ (1969) 72 ITR 603.],a partnership firm closed the manufacturing part of its business and transferred its machinery to a private limited company in the share capital of which the partners had the same interest. The Assessing Officer brought to tax the excess realized over the written down value of the machinery. The High Court held that in a tax case it would not look at the form which a transaction has, but at the real nature of the transaction and that though legally the transaction was a sale, in substance it was only a readjustment made by certain persons to carry on business in one form than in another. The Supreme Court held that it was now well settled that the taxing authorities are not entitled in determining whether a receipt is liable to be taxed to ignore the legal character of the transaction which is the source of the receipt and to proceed on what they regard as the substance of the matter . The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asset to mean property of any kind held by an assessee, whether or not connected with his business or profession . The definition proceeds to list in clauses (i) to (vi) what is not included within the ambit of the expression. Clause 42A of Section 2 defines the expression shortterm capital asset to mean a capital asset held by an assessee for not more than thirtysix months immediately preceding the date of its transfer. The proviso stipulates, inter alia, that in the case of a share held in a Company or any other security listed in a recognised stock exchange in India, the provisions of the clause would have effect as if the words twelve months have been substituted for thirtysix months . Subclause (c) of Clause (i) to Explanation 1 provides that in determining the period for which any capital asset is held by the assessee, in a case where the asset consists of a share of an Indian Company which becomes the property of the assessee in consideration of a transfer referred to in clause (vii) of Section 47, the period for which the shares in the amalgamating company were held by the assessee shall be included. Shares constitute capital assets within the meaning of clause (14) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mbers, persons whose names are borne on the Register of Members to whom dividend declared by a company is payable. As between the transferor and transferee certain equities may arise at law. Among them, is the right to claim the dividend declared and paid by the Company. These equities, however, as noted by the Supreme Court, do not touch the Company, and no claim by the transferee whose name is not in the Register of Members can be made against the Company. As between the shareholders in a Company, the right to vote belongs to a person legally entitled to the shares by reason of his presence on the Register of Members. Even an order of attachment does not deprive the holder of shares to the title to shares. 69. Ownership 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. The extent of shareholding which is sufficient to vest in the holder of shares an interest which assumes the character of a controlling interest may again vary from case to case. In C.I.T. vs. Messrs Jeewanlal Ltd., [(1953) 24 ITR 475] a Constitution Bench of the Supreme Court, while considering the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est. The High Court did not find any justification for the view of the Tribunal and held as follows: This view of the Tribunal proceeds on the assumption that controlling interest is a distinct capital asset which can be acquired or transferred independently of the shares. We see no justification for the view. Controlling interest is an incidence arising from holding a particular number of shares in a company. It cannot be separately acquired or transferred. It flows from the fact that a number of shares are held by a person. If for acquiring that number of shares, a person is required to pay more than the market price of a share and if the transaction is genuine, as has been found in the present case, then, really speaking, the cost of acquisition of the block of shares purchased by the assessee is that which she has in fact paid for holding that block. Referring to a judgment of the Bombay High Court in Baijnath Chaturbhuj v. CIT, [(1957) 31 ITR 643] where a composite consideration had been paid by the assessee for the transfer of shares and the assignment of a Managing Agency, the Court observed that in such a case, there should be two distinct assets each capable of be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eries. The Sugar Factory was in financial difficulty. The Appellant proposed to float a Company for taking over the sugar unit and for working it as an undertaking of the Company to be formed. The Appellant was to be entitled to the allotment of all the shares of the new Company in addition to the consideration paid for the transfer of the sugar unit. The Appellant sought the approval of the Company Law Board under Section 372 of the Companies' Act, 1956 which was declined. The issue before the Supreme Court was whether the provisions of Section 23(4) of the Monopolies and Restrictive Trade Practices Act, 1969 were attracted. These provisions applied where an undertaking proposed to acquire by purchase, takeover or otherwise, the whole or part of an undertaking which would result in the creation of an undertaking to which the Part applied or in an undertaking becoming an interconnected undertaking of another undertaking to which the part applied. A Constitution Bench of the Supreme Court held that by the proposal to acquire all the shares of the Company which was to be floated, the Appellant could acquire only control and the right to manage the Company. The Appellant would not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Supreme Court in Bacha F.Guzdar vs. CIT, [(1955) 25 Comp Cases 1] that the Company has a juristic personality distinct from its shareholders, the Delhi High Court held that the undertaking of a Company cannot be equated with the shares held in a Company. The judgment of the Delhi High Court held thus: The undertaking of a company is not the same thing as shares of that company. ... Even though a shareholder acquires a right to participate in the profits of the company, the shareholder acquires no interest in the assets of the company. The Supreme Court in Mrs.Bacha F.Guzdar v. CIT [1955] 25 Comp Cas 1 (SC); AIR 1955 SC 74, observed that a shareholder had got no right in the property of the company and that it was true that the shareholders had the sole determining voice in administering the affairs of the company and were entitled, as provided in the articles of association, to declare that dividends should be distributed out of the profits of the company to the shareholders but the interest of the shareholder either individually or collectively did not amount to more than a right to participate in the profits of the company. In its decision in Bacha Guzdar, which is the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r equitable charges to other mortgagees. On the bankruptcy of the owner his trustees disclaimed all his interest in the shares. As a blank transfer was not completed and lodged, the name of the bankrupt remained on the Register. The Court held that as between himself and the Company, the bankrupt so long as his name remains on the Register was entitled to vote in respect of the shares though as between himself and the mortgagees he could only vote as they dictate. Nearly forty years prior to the decision in Wise Vs. Lansdell, Chitty, J in re: Wala Wynaad Indian Gold Mining Mining Co. had observed that a shareholder means the holder of the shares and that the term as commonly used only means the person who holds the shares by having his name on the Register. 74. In Inland Revenue Commissioners vs. Bibby Sons Ltd., [(1946) 14 ITR (Suppl) 7] the House of Lords considered whether the Director of a Company had a controlling interest upon which rested the outcome of an assessment to excess profits tax. The House of Lords held that by that expression what was meant was the extent to which they have vested in them the power of controlling by votes, the decisions which will bind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ense that it may enable him by exercising his voting powers to turn out the directors and to enforce his own views as to policy, but it does not in any way diminish the rights or powers of the directors or make the property or assets of the company his as distinct from the corporation's. Nor does it make any difference if he acquires not practically the whole, but absolutely the whole of the shares. The business of the company does not thereby becomes his business. He is still entitled to receive dividends on his shares, but no more. Fletcher Moulton, L.J. and Buckley, L.J. held that the English holder was only liable for such profits as he actually received in the U.K. by way of dividend and was not responsible for what the actual profits of the Corporation shall have been. The profits of the Corporation were not the profits of any business carried on by them in a foreign country, as the English holders did not carry on the business of the Corporation: This legal proposition that the legal corporator cannot be held to be wholly or partly carrying on the business of the corporation is not weakened by the fact that the extent of his interest in it entitles him to exercis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... but they cannot exist independently of the inherent attributes with which a share has been created. Control and management is one facet of the holding of shares. Taxation of nonresidents: 77. The jurisdiction of a State to tax nonresidents is based on the existence of a nexus connecting the person sought to be taxed with the jurisdiction which seeks to tax. The nexus may arise as a result of the physical presence of the nonresident. The nexus of a nonresident with the taxing jurisdiction arises where the source of income originates in the jurisdiction. The source of income is determined in accordance with source rules. The source of income may be relevant in a number of ways. For example, the source enables the taxing jurisdiction to determine whether a country may tax a particular item of income under the source principle of taxation or to determine whether the income has a foreign source so as to be eligible for a foreign tax credit. The source principle of taxation is also used to refer to the category of income from which a particular item of income originates. The source principle of taxation is a principle for allocating taxing jurisdiction over income, according ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to accrue or arise to him in India during such year. Hence, in the case of a nonresident, the nexus for the purpose of chargeability to income tax is provided by the receipt or accrual of the income in India. 79. Subsection (1) of Section 9 stipulates incomes which shall be deemed to accrue or arise in India. Clause (i) of sub section (1) is to the following effect : (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 or from any asset or source of income in India, or through the transfer of a capital asset situate in India. Explanation (1) provides in clause (a) that where all the operations of a business are not carried out in India, the income of the business which is deemed 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. Clause (b) stipulates that in the case of a nonresident, no income shall be deemed to accrue or arise in India from operations confined to the purchase of goods within the country for the purpose of export. Explanation (2) declares that for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... used in contradistinction to the word receive and indicate a right to receive. ... It is clear, therefore, that the income may accrue to an assessee without actual receipt of the same. If the assessee acquires a right to receive the income, the income can be said to accrue to him, though it may be received later, on its being ascertained. The basic conception is that he must have acquired a right to receive the income (see E.D. Sassoon and Co. Ltd. v. Commissioner of Incometax, (1954) 26 ITR 51. Section 9(1) defines the circumstances in which income is deemed to accrue or arise in India. Subsection (1) of Section 9 defines in clause (i), income which shall be deemed to accrue or arise in India. Sub clause (i) is in turn, distributed into four categories. These categories cover income accruing or arising, whether directly or indirectly: (i) Through or from any business connection in India; (ii) Through or from any property in India; (iii) Through or from any asset or source of income in India; or (iv) Through the transfer of a capital asset situated in India. In each of these four categories, the law has postulated the existence of a nexus with India which invokes taxing ju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he contract could not be ruled out a priori. In that case, the Privy Council held that the contracts were neither framed, nor carried out in British India and the High Court's conclusion that the profits accrued or arose outside British India was well founded. 84. In C.I.T. vs. Ahmadbhai Umarbhai, [(1950) 18 ITR 472] an assessee was a resident of British India and besides a manufacturing facility in Mumbai, had a manufacturing unit in the State of Hyderabad at Raichur. The assessee contended that a part of the profits derived from sale in British India of oil manufactured at Raichur, was attributable to the manufacturing operation at Raichur and should be excluded from assessment for excess profits tax. Chief Justice Harilal Kania, who delivered one of the judgments of the Constitution Bench, held that the question as to where income has accrued has to be determined on the facts of each case. The income may accrue or arise at the place of the source or elsewhere. When the manufacturing portion of the activity of the assessee was in one province and the sale in another, the whole of the profits would not necessarily be construed as arising from the sale though they may be r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was a PartB State. After processing, the mica was exported to locations in Part A and C States and was sold to purchasers there. The Supreme Court held that the profits had accrued to the assessee at the place where the sales were effected and the property in the goods passed to purchasers. The assessee became entitled to the price of the goods only when the title to the goods passed to purchasers in the Part A and C States and the income was, therefore, regarded as having accrued in those States. 87. In Chainrup Sampatram vs. Commissioner of Income Tax, West Bengal, [(1953) 24 ITR 481] the assessee which was a partnership firm, carried on business at Calcutta and despatched in the year of account bars of silver to the Indian State of Bikaner where the partners resided and their value at cost was credited in the assessee's books. The case of the assessee that the silver had been sold to the partners was found not to be genuine and the finding was that the silver still formed a part of the assessee's stockintrade. In the assessment, a sum representing the excess arising from the valuation of the silver bars at the market rate at which the rest of the closing stock at Ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecifically says that the said sale is effected in Japan. We are unable to see on what basis it can be said that any part of the said amount has been earned in India. The judgment of the Calcutta High Court, therefore, clearly proceeded on the basis that the sale of the trade secrets took place outside India and that no part of the activity or operation of the nonresident company was carried on in India. The judgment of the Supreme Court emphasized that the sale of the trade secrets had taken place in Japan. The Supreme Court held that no part of the amount had been earned in India. 90. In the context of the transfer of a capital asset, there is a judgment of a Division Bench of the Delhi High Court consisting of S.B.Sinha, C.J. (as His Lordship then was) and A.K.Sikri, J. in C.I.T. vs. Quantas Airways Ltd. [256 ITR 84] Quantas which is a nonresident incorporated in Australia carried on a worldwide air transport business and sold aircraft which were its capital assets. The sales were effected outside India. The question before the Delhi High Court was as to whether the sale of such capital assets was income proportionately assessable in terms of the provisions of the Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m the transfer of a capital asset. The statutory provision recognizes the principle that income from the transfer of a capital asset arises at the place where the asset is situated. The situs of the capital asset within India is what determines exigibility to tax. 92. Having now dealt with the position in Indian law, it would be appropriate to turn to the transnational law on the subject. Transnational Law : 93. Transnational law recognizes that the jurisdiction of a State to tax nonresidents is based on the existence of a nexus of the person sought to be taxed or his activities with the taxing jurisdiction. Such nexus may exist either as a result of physical presence or, in relation to the source rule, where the income earned by the nonresident has a source in the taxing jurisdiction. 94. Shares constitute capital assets and are recognized to be so in transnational jurisdictions. Dicey, Morris and Collins in their seminal work on The Conflict of Laws, [Fourteenth Edition, under the general editorship of Sir Lawrence Collins, Sweet Maxwell 2006 Edition, Vol.2 pages 11256] explain the situs of shares thus: (7) Shares in companies ... the basic principle her ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ined to include an indirect Australian real property interest. Where a CGT event happens in relation to an indirect Australian real property interest owned by a nonresident, the nonresident is subject to Australian tax. An entity (the holding entity) has an indirect Australian real property interest in another entity if the holding entity has a membership interest in the latter and that interest satisfies two tests; a nonportfolio test and principal assets test. The nonportfolio test is satisfied if the direct participation interest held by the holding entity is ten per cent or more. The principal assets test requires that more than fifty per cent of the value of the assets held are attributable to Australian real property, whether held directly or indirectly. Australian law contains legislation in the nature of a lookthrough provision under which the holding of an indirect real property interest implicates the capital gains tax regime. Canadian legislation contains provisions for the imposition of capital gains tax on the disposition of taxable Canadian property. Lookthrough provisions have been enacted to bring within the ambit of the taxing power situations involving the holding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch an enterprise of a Contracting State has in the other Contracting State, including such gains from the alienation of such a permanent establishment (alone or with the whole enterprise), may be taxed in that other State. 3. Gains from the alienation of ships or aircraft operated in international traffic, boats engaged in inland waterways transports or movable property pertaining to the operation of such ships, aircraft or boats, shall be taxable only in the Contracting State in which the place of effective management of the enterprise is situated. 4. Gains derived by a resident of a Contracting State from the alienation of shares deriving more than 50 per cent of their value directly or indirectly from immovable property situated in the other Contracting State may be taxed in that other State. 5. Gains from the alienation of any property, other than that referred to in paragraphs 1, 2, 3 and 4, shall be taxable only in the Contracting State of which the alienator is a resident. The OECD Model is illustrative of the manner in which a value driven deeming nexus may be created by legislation. Thus, capital gains derived from an alienation of shares which derives m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the entire share capital in CGP from HTIL was an overseas transaction under which there was a transfer of shares of an overseas company from one nonresident to another. This acquisition according to VIH BV did not fall within the jurisdiction of the FIPB though the overseas transaction would require to be noted by the FIPB. As a result of the transaction VIH - BV would acquire an indirect controlling interest of 51.96% in HEL. Since Bharati Airtel and HEL were engaged in activities in the same field as stated in the provisions of Press Note 1 the approval of the Government was necessitated. VIH BV stated that the overseas transaction did not require the approval of FIPB, being a transfer of shares of an overseas company from one nonresident to another. The application was, however, submitted in order to enable the FIPB to note the revised position following the completion of the overseas transaction. In addition, since as a result of the overseas transaction VIH - BV would acquire an indirect interest in HEL, a company competing in the same field with Bharti Airtel the provisions of Press Note 1 were attracted. On 9 February 2007 Bharti Airtel had furnished its consent to the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... FIPB in which the direct and indirect interest of HTIL was stated to be 51.96%. A clarification was sought on the discrepancy. HEL furnished a clarification on 14 March 2007 stating that as a company listed on the New York Stock Exchange HTIL's filings were made in accordance with the requirements of the SEC. Under U.S. GAPP requirements, HTIL had to consolidate the assets and liabilities of companies even though they were not owned or controlled by HTIL in accordance with U.S. accounting standards. This accounting consolidation was required even though these companies were not legally subsidiaries. This was not the case under Indian GAAP requirements under which the aggregate of the direct and indirect FDI held by HTIL was 51.96%. The difference between 61.88% disclosed to the SEC in the U.S. and 51.96% reported in India was stated to be due to different accounting standards applied in the two jurisdictions. HEL furnished a clarification to the FIPB on 14 March 2007. VIH - BV in a letter addressed to the FIPB on 14 March 2007 clarified that in addition to obtaining a controlling interest of 52% in HEL as a result of the acquisition of the CGP share, HEL's existing Indian ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the same field for which approval is granted. Now VIH BV had moved the FIPB initially to take note of its proposed overseas transaction as a result of which, through the acquisition of the issued share capital of CGP from HTIL, VIH BV would acquire a 51.96% controlling interest indirectly in HEL. In addition, FIPB approval was sought in terms of Press Note 1 in view of the fact that it held a 5.61 % stake in Bharati Airtel which was a competitor in the same sector. FIPB after an enquiry accorded its permission in terms of Press Note 3 subject to compliance of the sectoral cap of 74%. Counsel for VIH BV has stated before the Court that if and when the put agreements are enforced, there would be an acquisition of the shares of an Indian company upon which capital gains would be liable to be taxed under Indian tax legislation. Section 195 of the Income Tax Act 1961 108. Section 195 postulates that any person responsible for paying to a nonresident, not being a foreign company, or to a foreign company any interest or any other sum chargeable under the provisions of the Act ( not being income chargeable under the head 'salaries') shall, at the time of credit of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act. If there is a dispute on quantum, an obligation still arises, but if it is not chargeable at all then the Section does not apply and this would raise a jurisdictional issue; (ii) The person is one on whom the Revenue can legitimately, consistent with the principles of the conflict of laws cast an obligation. 110. Now while evaluating the submission it would be necessary to elucidate the essential requirements of sub section (1) of Section 195. The first requirement is that there is a person responsible for paying to a nonresident any interest or any other sum. Responsibility postulates a legally enforceable obligation to pay a non resident. An obligation may arise under a contract or otherwise. The second requirement is that the interest or the other sum must be chargeable under the provisions of the Act other than under the head of 'salaries'. Chargeability under the Act is mandated before the obligation to deduct arises. If these requirements are met, income tax thereon has to be deducted at the rates in force at the time of credit of such income to the account of the payee or at the time of payment, whichever is earlier. 111. In Transmission Corporat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Commissioner of Income Tax [(2009) 314 ITR 309 (S.C.)], the issue which arose for determination before the Supreme Court was whether the assessee was bound to deduct TDS under Section 195(1) in respect of usance interest paid for the purchase of a vessel for ship breaking. The assessee contended that usance interest had the character of the purchase price and hence TDS was not deductible. The Supreme Court held that it was not required to examine this question in the light of the judgment of the Gujarat High Court since after the judgment in the Appeal was delivered, Explanation 2 was added by an amendment to Section 10(15)(iv)(c) to declare that usance interest payable outside India by an undertaking engaged in the business of ship breaking in respect of the purchase of a ship from outside India would be deemed to be interest payable on a debt incurred in a foreign country in respect of the purchase outside India. On reading Explanation 2, it was clear that usance interest is exempt from the payment of incometax, if paid in respect of ship breaking activity. The Supreme Court held that the assessee was not bound to deduct tax at source once Explanation 2 to Section 10(15)(i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us between the person sought to be charged and the country seeking to tax him, income tax may extend to that person in respect of his foreign income. The connection can be based on the residence of the person or business connection within the territory of the taxing State; and the situation within the State of the money or property from which the taxable income is derived (see The Law and Practice of Income Tax by Kanga and Palkhivala, 7th Edn. At p. 10) . The Supreme Court held, following the decision of the Federal Court in A.H. Wadia V/s. CIT, (1949) 17 ITR 63 (FC), that if the payments of home salary abroad by the foreign company to the expatriate has any connection or nexus with his rendition of service in India then such payment would constitute income which is deemed to accrue or arise to the recipient in India as salary earned in India in terms of Section 9(1)(ii). Section 9, held the Supreme Court, was a typical example of a combination of a machinery provision which also provides for chargeability. The Court held that the 1961 Act has extraterritorial operations in respect of subjectmatters and subjects which is permissible under Article 245 of the Constitution and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed at by the Assessing Officer, the Commissioner, Tribunal and the High Court that the assessee was liable to deduct tax at source and was in default of its obligation to do so. The Supreme Court held that the chartered vessels together with the entire catch were brought to an Indian Port, where the catch was certified for consumption, valued and it was after Customs and Port clearances that the nonresident received 85% of the catch. It was after the catch was apportioned at Chennai, that the nonresident obtained control over its share of 85%. The Supreme Court held that the question as to whether income had arisen or accrued or whether it would be deemed to have arisen or accrued in India would have to be determined in the light of the terms of the contract. The receipt of 85% of the catch being in India, the Supreme Court observed that this being the first receipt in the eye of law would be chargeable to tax in India. The income earned by the nonresident was in substance, a receipt for value in India and was held to be chargeable to tax under Section 5(2). The Supreme Court distinguished its earlier judgments in C.I.T. vs. Toshoku Ltd. [ (1980) 125 ITR 525.] and in Ishikawajima H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sels. The company carried on operations throughout the world, among them in the United Kingdom sector of the North Sea, which were designated areas under the Continental Shelf Act 1964. The Company deducted PAYE tax in respect of its employees, who were employed at establishments in United Kingdom. But those employed in the United Kingdom sector of the North Sea were paid in United States Dollars free of tax. The employees were liable to tax under Schedule E in respect of their earnings in the U.K. Sector of the North Sea. The Crown claimed that the company was required by Section 204 of the Income and Corporation Tax of 1970 to deduct PAYE tax payable under Schedule E from wages and salaries paid to the employees, who worked in the U.K. sector of the North Sea. The Court of Appeal had held that although Section 204 was general, Parliament could not have intended to cast on a foreigner who was not resident of the United Kingdom the role of tax collector for the Revenue and Section 204 was to be presumed not to have extraterritorial effect. The House of Lords allowed the Appeal and reversed the decision of the Court of Appeal. Lord Scarman observed that the liability to tax under th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n intended any territorial limitation other than that imposed by such unenforceability. Having said this, Lord Scarman observed that the case was concerned with the territorial limitation to be implied into a Section which establishes a method of tax collection. The method is to require the person paying the income to deduct it from his payments and account for it to the Revenue. The only critical factor, so far as collection is concerned, is whether in the circumstances it can be made effective. The test which was applied by the House of Lords was that of a trading presence in the United Kingdom. A trading presence in the United Kingdom was held to suffice in order to attract the liability to deduct tax. On facts, it was held that the trading presence was made out. For the purposes of Corporation Tax, Oceanic carried on a trade in the United Kingdom which included its operations in the United Kingdom sector of the North Sea. For the purposes of this trade it employed a workforce in that sector, whose earnings were assessable to British income tax. Finally, Oceanic had an address for service in the United Kingdom. For these reasons, Lord Scarman concluded that Oceanic by its tradin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ead into the statutory provisions a limitation preventing the collection regime from applying where the payer is a foreign entity with no UK presence and thereby relieving the foreign entertainer / sportsman from the charge to tax cannot, in my opinion, possibly be justified on the basis of a presumed legislative intention . (emphasis supplied). 119. The decisions in the United Kingdom indicate the following position : (i) Liability to tax depends on the location of the source from which taxable income is derived or the residence of the person whose income is to be taxed. If either the source of income or the residence of the owner of the income is in the United Kingdom, the income is liable to tax; (ii) If there exists a sufficient connection between the source of the income, profit or gain and the United Kingdom, residence is not a necessary condition of tax liability; (iii) The broad general principle is that unless the contrary is expressly enacted or plainly implied, United Kingdom legislation applies to British subjects or to foreigners who by coming to United Kingdom, whether for a short or long period of time, have made themselves subject to British jurisdicti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ught to be charged and the country seeking to tax him, income tax may extend to that person. The connection can be based on the residence of the person or a business connection within the territory of a taxing State or a situation within the State of the money or property from which the taxable income is derived; (vi) TDS provisions which are in the nature of machinery provisions constitute an integrated Code under the Act of 1961 together with charging provisions. Hence, those provisions are not independent of the charging provisions which determine assessability to tax; (vii) Whether a payment made by a foreign company in foreign currency abroad can be deemed to accrue or arise in India, would depend upon an examination of the facts and circumstances of each case. In Eli Lily the payment made abroad by the foreign company was for the rendition of service in India and no work was found to have been performed for the foreign company. Such a payment was held to fall within the ambit of Section 192(1) read with Section 9(1)(ii). The Indian company was liable to deduct tax on the aggregate salary received by the expatriates including payments made by the foreign company; (vi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ebt of H.K.$ 37,369 million as of 31 December 2006 to a net cash balance of H.K.$ 26,624 million as at 30 June 2007. The following extract from the report, indicates how HTIL viewed the transaction: 8. PROFIT FROM DISCONTINUED OPERATIONS On 11 February 2007, the company entered into an agreement to sell its entire interests in CGP, a company which held all of the company's direct and indirect equity and loan interests in its Indian mobile telecommunications operation, comprising Hutchison Essar Limited (now known as Vodafone Essar Limited') ( Hutchison Essar ) and its subsidiaries to Vodafone International Holdings B.V. ( Vodafone ), a wholly owned subsidiary of Vodafone Group Plc, for a cash consideration of approximately US$ 11.1 billion (approximately HK$ 86.6 billion)(the Transaction ). Accordingly, the results of the Group's Indian mobile telecommunications operations were presented as discontinued operations in accordance with HKFRS 5 Noncurrent assets held for sale and discontinued operations . The presentation of comparative information in respect of the six months ended 30 June 2006 which was previously reported in the 2006 interim accounts has been a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 30 June 2007, HTIL stated that it had declared a special cash dividend ( the transaction special dividend ) of H.K.$ 6.75 per share or approximately H.K.$ 32,234 million in aggregate. The transaction Special Dividend was paid out of the proceeds from the transaction. 122. HTIL in its Annual Report for 2007 stated that in the first half we announced .. the completion of the sale of CGP Investments (Holdings) Limited which held through various subsidiaries all our interests in India . The report refers to the transaction of 11 February 2007 and reports the results pertaining to the India mobile telecommunications operations .. presented as discontinued operations in accordance with the Hong Kong Financial Reporting Standard (HKFRS). HKFRS adopts the classification held for sale and introduced a concept of the disposal group , being a group of assets to be disposed of by sale or otherwise, together as a group in a single transaction and liabilities directly associated with those assets that would be transferred in the transaction. The terms which are defined therein included discontinued operations as a component of an entity that either has been disposed of or is classi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich were offered to HTIL. Alternatively, it expressed that it was willing to enter into a partnership with Essar on appropriate terms. AppendixA to the offer set out the basis of working out the consideration payable to HTIL for HTIL's interest in HEL. The consideration was factored on the following basis: US$m Hutch enterprise value 18,250.0 Less: Hutch net debt (1,327.1) Hutch equity value 16,922.9 66.9848% of Hutch equity value 11,335.8 Less: Holdco net debt (628.0) Less: Intercompany loans (1,084.0) Equity value of HTIL's 100% stake in CGP 9,623.8 Add: Intercompany Loans 1,084.0 Consideration to HTIL for HTIL's interest 10,707.8 The equity value of HTIL's 100% stake in CGP was computed on the basis of HELs enterprise value of US $ 18,250 million and by computing 66.9848% of equity value. The entire value that was ascribed to HTIL's stake in CGP was computed only on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eement and the Loan Assignments. 'Company interests' are defined to be the aggregate interests in 66.9848 % of the issued share capital of Hutchison Essar Limited (HEL). Clause 2 of the SPA provides that upon and subject to the terms and conditions of this agreement HTIL agreed to procure the sale of and VIH BV agreed to purchase one ordinary share of CGP representing the entire issued share capital of CGP together with the rights attaching or accruing to it. HTIL also agreed to procure the assignment of loans (defined to mean all inter company loans owing by CGP and Array to a vendor group company). The obligation under Clause 2 was subject to the conditions prescribed in Clause 4.1, Subclause (a) of which required all requisite consents of the FIPB to the sale and purchase of the share having been obtained . VIH BV was required to use all reasonable endeavours including communications with the FIPB to ensure satisfaction of this condition and by the third business day following the agreement was required to submit an application to the FIPB for Press Note 1 consent. Hence, the transaction was subject to the consent and approval of FIPB. Fulfillment of the cond ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ivery of loan assignments duly executed by CGP or Array, as the case may be, and HTI (BVI) Finance; the written resignations in agreed terms of each of the directors of each group company; the execution of the Hutch brand licence; a tax deed duly executed by the vendor and the GSPL transfer agreement. From Clause 8 it is evident that it was the obligation of HTIL to ensure execution of the terms of the transaction documents by the respective Indian entities. Through the modality of Clause 8.8 and Clause 8.9 the exercise of controlling power over HEL was effectively transferred to VIH BV. Clause 9.5 stipulated that for the purpose of assessing damages suffered by VIH BV for any breach of the agreement, the agreement shall be treated as requiring in HTIL to procure the delivery of 66.9848 % of the issued share capital of HEL to the purchaser and the vendor will be deemed to have transferred 66.9848 % of the issued share capital to the purchaser on completion. Clause 10.4 envisaged that HTIL undertook to facilitate the procuring of a replacement of the Oracle licence for the relevant group companies. Clause 14.1 incorporated a noncompete agreement whereby HITL was restrained dire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dafone Essar (VEL) and the relationship between its shareholders. Under Clause 2.1, Vodafone and Essar acquired the right to nominate directors in proportion to their beneficial shareholding; initially the Vodafone group was entitled to nominate eight directors while the Essar Group was entitled to nominate four directors. Under Clause 2.2 the Chairman of the company was to be nominated by the Vodafone group. Under Clause 2.3 Vodafone acquired the right to nominate the Chief Executive Officer, Chief Financial Officer, Chief Commercial Officer, Chief Marketing Officer and Chief Technical Officer. Clause 5.1 imposes restrictions on the transfer of ownership of shares and inter alia provided that no share could be transferred other than pursuant to the provisions of the term sheet or put option agreements. Clause 6 created a right of first refusal. Under Clause 7.1 a change of control in each group would entitle the other to require a sale of the shareholders' interest. By Clause 8 Vodafone granted to the Essar group tag along rights in respect of the shareholding of the Essar group . Under Clause 10 certain decisions were regarded as reserved so long as Vodafone continued to hold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es (as defined by the SPA) on or before completion including any reasonable cost associated with any tax demand. Before this Court, VIH BV has stated that no arbitral proceedings have been initiated with HTIL pursuant to the agreement, and neither a claim nor a formal notice of claim has been served upon the vendor under the agreement. The documents exchanged between the parties include a disclosure letter dated 11 February 2007 issued by HTIL to VIH BV. The disclosure letter deems certain information to have been disclosed, so as to obviate future disputes. (vi) The Brand Licence Agreement The Brand Licence Agreement contains a transitional arrangement, for a limited duration, under which a nontransferable royalty free right was given to VIH - BV as licensee to use the trademarks and other intellectual property rights authorized by the licensor. As a matter of fact, after completion of the transaction VIH BV in conformity with its obligation under Clause 13(b) of the SPA took steps for the introduction of brand Vodafone into the Indian market and a trademark licence agreement was entered into on 19 December 2008 for the introduction of brand Vodafone into India by VIH BV. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sumption of liabilities in various subsidiaries of CGP amounting to approximately US $ 630 million and (d) subject to Indian foreign investment rules, its rights and entitlements, including subscription rights at par value and call options, to acquire in the future a further 62.75 % of TII, and call options, to acquire in the future, a further 54.21 % of Omega Telecom Holdings Private Limited ( Omega ) which together would give us a further 15.03 % proportionate indirect equity ownership of Hutch Essar; and 2. Various other intangible factors such as control premium, use and rights to the Hutch brand in India and a noncompete agreement with HTIL. We did not, in reaching this price, put an individual price on each of these components. Rather, they were viewed as the package based on which we should make our offer to HTIL. Our approach was to look at the total package of assets, liabilities and other intangible factors represented by the ownership of CGP and to assess the total value. 128. Now at this stage, it would be material to advert to the position of the Analjit Singh and Asim Ghosh companies, taking as the basis HTIL's letter dated 9 April 2007 to the FIPB. Ana ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TIL was also granted an option to subscribe for new shares in Centrino or ND Callus representing 97 % of their enlarged share capital. In order to effectuate the performance of the put and call options, Analjit Singh, Asim Ghosh and their respective holding companies undertook not to transfer or allot shares except as allowed in the framework agreements. IDFC group investments in Omega 130. Omega Telecom Holdings Private Limited ( Omega ) is an Indian company in which Hutchison Telecommunications (India) Limited, a Mauritian company has a holding of 45.79 %. Omega held 5.11 % of the share holding of HEL. In June 2006 the Hinduja group and Sumitomo of Japan decided to sell their interest in HEL by disposing of all their interest in Omega. HTIL arrived at an agreement with the Hinduja group for an additional sale and purchase agreement under which HTIL purchased the foreign component of 45.79 % of Omega and HTIL would procure a third party to acquire the Indian stake in Omega. The Hinduja group sold 54.21 % of the Indian share holding in Omega to a joint venture company promoted by the IDFC group. HTIL provided a guarantee for financing. HTIL was in turn given future righ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... companies; 10) Interest in the form of preference share capital in JKF and TII to the extent of US $ 165.7 Million and US $ 337 Million attributing to a holding of 19.54 % of equity of HEL 132. The facts clearly establish that it would be simplistic to assume that the entire transaction between HTIL and VIH BV was fulfilled merely upon the transfer of a single share of CGP in the Cayman Islands. The commercial and business understanding between the parties postulated that what was being transferred from HTIL to VIH BV was the controlling interest in HEL. HTIL had through its investments in HEL carried on operations in India which HTIL in its annual report of 2007 represented to be the Indian mobile telecommunication operations. The transaction between HTIL and VIH BV was structured so as to achieve the object of discontinuing the operations of HTIL in relation to the Indian mobile telecommunication operations by transferring the rights and entitlements of HTIL to VIH BV. HEL was at all times intended to be the target company and a transfer of the controlling interest in HEL was the purpose which was achieved by the transaction. Ernst and Young who carried out a due diligence o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cuments are not merely incidental or consequential to the transfer of the CGP share, but recognized independently the rights and entitlements of HTIL in relation to the Indian business which were being transferred to VIH BV. 135. We began the record of submissions by adverting to the contention of the Petitioner that if any of the shares held by the Mauritian companies were sold in India, there would be no liability to capital gains tax because of the Convention on the Avoidance of Double Taxation between India and Mauritius. The crux of the submission is that the entire transaction in the case is subsumed in the transfer of a share of an upstream overseas company which exercised control over Mauritian companies. As we have noted earlier, it is simplistic to assume that all that the transaction involved was the transfer of one share of an upstream overseas company which was in a position to exercise control over a Mauritian company. The transaction between VIH BV and HTIL was a composite transaction which covered a complex web of structures and arrangements, not referable to the transfer of one share of an upstream overseas company alone. The transfer of that one share alone w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disclosure to the FIPB is indicative of the fact that the consideration that was paid to HTIL in the amount of US $ 11.01 Billion was for the acquisition of a panoply of entitlements including a control premium, use and rights to the Hutch brand in India, a noncompete agreement with the Hutch group, the value of nonvoting non convertible preference shares, various loan obligations and the entitlement to acquire subject to Indian foreign investment rules, a further 15% indirect interest in HEL. 139. The manner in which the consideration should be apportioned is not something which can be determined at this stage. Apportionment lies within the jurisdiction of the Assessing Officer during the course of the assessment proceedings. Undoubtedly it would be for the Assessing Officer to apportion the income which has resulted to HTIL between that which has accrued or arisen or what is deemed to have accrued or arisen as a result of a nexus within the Indian taxing jurisdiction and that which lies outside. Such an enquiry would lie outside the realm of the present proceedings. But once this Court comes to the conclusion that the transaction between HTIL and VIH BV had a sufficient nex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... judgment: (1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract. (2) The background was famously referred to by Lord Wilberforce as the matrix of fact , but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man. (3) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore, be viewed from a commercial and realistic perspective. That perspective respects the form of the transaction adopted by the parties. The terms of the transaction is what the court interprets applying rules of ordinary and natural construction. That perspective would adopt what a normal and commercially prudent investor would have viewed. From the perspective of Income Tax Law what is relevant is the place from which or the source from which the profits or gains have generated or have accrued or arisen to the seller. The income accrued and arose and was derived as a consequence of the divestment of HTIL's interest in India. If there was no divestment or relinquishment of its interest in India, there was no occasion for the income to arise. The real taxable event is the divestment of HTIL's interests which comprises in itself various facets or components which include a transfer of interests in different group entities. 142. That leads to the question as to the obligation to deduct tax under Section 195. While construing the provisions of Section 18(3A) and Section 42 of the Indian Income Tax Act, 1922 in Agarwal Chambers of Comerce Ltd. vs. Ganpat Rai Hira L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regular assessment. In other words, Section 195 is a provision for tentative deduction of income tax subject to regular assessment. The rights of the payee or of the recipient are safeguarded by subsections (2) and (3) of Section 195 and Section 197. For, as the Supreme Court observed: Further, the rights of the payee or recipient are fully safeguarded under sections 195(2), 195(3) and 197. The only thing which is required to be done by them is to file an application for determination by the Assessing Officer that such sum would not be chargeable to tax in the case of the recipient, or for determination of the appropriate proportion of such sum so chargeable, or for grant of certificate authorising the recipient to receive the amount without deduction of tax, or deduction of incometax at any lower rates or no deduction. On such determination, tax at the appropriate rate could be deducted at the source. If no such application is filed, incometax on such sum is to be deducted and it is the statutory obligation of the person responsible for paying such sum to deduct tax thereon before making payment. He has to discharge the obligation of tax deduction at source. 143. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the law can extend to persons, things and acts outside the territory of India. The general principle, flowing from the sovereignty of States, is that laws made by one state can have no operation in another State. The apparent opposition between the two positions is reconciled by the statement found in British Columbia Electric Railway Company Limited v. King (2 (1946( AC 527: A legislature which passes a law having extraterritorial operation may find that what it has enacted cannot be directly enforced, but the act is not invalid on that account, and the courts of its country must enforce the law with the machinery available to them. In other words, while the enforcement of the law cannot be contemplated in a foreign State, it can, nonetheless, be enforced by the courts of the enacting State to the degree that is permissible with the machinery available to them. They will not be regarded by such courts as invalid on the ground of such extraterritoriality. Chargeability and enforceability are distinct legal conceptions. A mere difficulty in compliance or in enforcement is not a ground to avoid observance. In the present case, the transaction in question had a sig ..... X X X X Extracts X X X X X X X X Extracts X X X X
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