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TMI Blog2010 (9) TMI 2X X X X Extracts X X X X X X X X Extracts X X X X ..... interests in the mobile telecommunications industry in India, through a joint venture vehicle, Hutchison Max Telecom Ltd. (renamed Hutchison Essar Ltd - HEL in August 2005). Between 1992 and 2006 Hutchison acquired interests in twenty three mobile telecommunication circles in India. HEL is an Indian company in which shares were acquired by the Hutchison Group of companies through a structural arrangement of holding and subsidiary companies. The moiety of shares of all the operational companies (Indian entities) which were under Hutchison control, direct or indirect, were held either by Mauritius based companies recognized as Overseas Corporate Bodies with tax residency certificates, or through other entities in which Hutchison interests (shareholding over which Hutchison exercised direct or indirect control) were held by a Mauritian company. Ownership structure : 2. In order to facilitate an understanding of the key issues in this case, we reproduce below an ownership structure chart: EXHIBIT - C OWNERSHIP STRUCTURE CHART X x x x x X 3. Hutchison held call options over companies controlled by Asim Ghosh and Analjit Singh as also over SMMS Investments Pvt. Ltd. aggregating t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anies to HMTL, in consideration for which HMTL issued its own shares to these holding companies. Approval of the Foreign Investment Promotion Board of the Union Government (FIPB) was obtained in November 2004 and of the Reserve Bank in December 2004. 9. On 28 October 2005 VIH BV agreed to acquire 5.61% of the shareholding in Bharti Televentures Ltd. (now Bharti Airtel Ltd.). Framework Agreements: 10. On 1 March 2006, Framework Agreements were entered into by Asim Ghosh and Analjit Singh. One agreement was between Asim Gosh, Goldspot Mercantile Company Pvt. Ltd., Plustech Mercantile Co. Pvt. Ltd., 3 Global Services Pvt. Ltd. (3GSPL) and Centrino Trading Co.Pvt. Ltd. Centrino Trading acquired shares in TII. Plustech held 100% shares in Centrino. Goldspot held 100% shars in Plustech. Goldspot was controlled by Asim Ghosh. 3GSPL's holding company was Hutchison TeleServices (India) Holdings Ltd., Mauritius, and in turn, CGPC was the holding company with a 100% shareholding of Hutchison TeleServices (India) Holdings Ltd. 11. 3GSPL (a Hutchison Company) agreed to procure credit support in order to enable Centrino to subscribe to 23.97% shares in TII (which holds directly and indir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loans. The offer was US $10.708 billion on the basis of an enterprise value of US $ 18.250 billion. 18. Bharti Infotel Pvt. Ltd. by a letter dated 9 February 2007 furnished its no objection to the proposed transaction. 19. On 10 February 2007, Vodafone Group Plc made a final binding offer of US $ 11.076 billion, based on an enterprise value of US $ 18.800 billion of HEL. Sale Purchase Agreement : 20. On 11 February 2007, a Sale Purchase Agreement (SPA) was entered into between the Petitioner and HTIL under which HTIL agreed to procure and transfer to the Petitioner the entire issued share capital of CGP, by HTI BVI free from all encumbrances together with all rights attaching or accruing, and together with assignment of loan interests. This was followed by announcement by HTIL and Vodafone of 12 February 2007, the latter stating that it had agreed to acquire a controlling interest in HEL via its subsidiary VIH BV. 21. On 20 February 2007, Vodafone Group Plc on behalf of VIH BV addressed a letter to Essar Teleholdings Ltd. for purchase of Essar's entire shareholding in HEL ('Tag along rights'). Application to FIPB : 22. On 20 February ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ested 41% stake and balance 10% in 2005. * In January 2006, an acquisition was made of 7.577% in HEL through Scorpios, etc. This is postFDI norms altering the sectoral cap for foreign direct investment from 51% to 74%, when Hutch had to shed some equity. * Voting rights legally and beneficially were owned by him. * Structure was filed with FIPB in April 2006 and filed with DoT on 27.04.2006. FIPB confirmed the structure on 01.08.2006. 27. On 6 March 2007, Essar Teleholdings Ltd. filed an objection with FIPB in relation to the proposed transaction for purchase of a controlling interest by the Petitioner in HEL through purchase of overseas holding companies belonging to the Hutchison group, on the ground that HEL and Bharti Airtel are competing ventures in the same field and the proposed transaction would result in both companies having a common foreign partner, which could jeopardise the interests of HEL/Essar. 28. On 14 March 2007, FIPB addressed a letter to HEL seeking the following clarification: "In filing of HTIL before the US SEC in form 6K for the month of March 2006, it has been stated inter alia that the HTIL Group will c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Agreements and details of the transaction for acquisition of the share capital of CGP. 33. On 19 March 2007, FIPB addressed a letter to the Petitioner asking it to clarify under what circumstances Vodafone had agreed to pay a consideration of US $ 11.08 billion for acquiring 67% of HEL when the actual acquisition is only of 51.96%, according to the application. 34. On 19 March 2007, the Petitioner addressed a letter to FIPB stating that it had agreed to acquire from HTIL, interests in HEL which include a 52% equity shareholding, for US $ 11.08 billion and that the price included a control premium, use and rights to the Hutch brand in India, a noncompete agreement with the Hutch group, value of nonvoting nonconvertible preference shares, various loan obligations and an entitlement to acquire a further 15% indirect interest in HEL, subject to Indian foreign investment rules, which together equated to 67% of the economic value of HEL. 35. On 22 March 2007, HEL replied to the notice of 15 March 2007 of the Joint Director of Income Tax (International Taxation) and furnished information relating to HEL. As regards the transaction, HEL stated that it is not in a position to provide a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Director of Income Tax (International Taxation) that HEL had no tax liabilities accruing out of the transaction and that it did not have a locus to review the obligations under Section 195 in relation to nonresident entities regarding any purported tax obligations. 40. On 5 April 2007, FIPB in a letter to the Petitioner sought details of Vodafone Group's projects/joint ventures/subsidiaries/ branches/business interest collaborations in all countries. 41. On 9 April 2007, HTIL filed the agreements pertaining to its transactions with FIPB. FIPB Approval : 42. On 7 May 2007, FIPB conveyed its approval of the transaction to the Petitioner subject to compliance with and observance of all the applicable laws and regulations in India. The approval was also subject to the condition of compliance with the sectoral cap on 74% of foreign direct investment in the Telecom Sector. 43. On 8 May 2007, the Petitioner paid a sum of US $ 10,854,229,859.05 as consideration for the transaction to HTI CHL in terms of the instructions of HTIL dated 19 March 2007. 44. Following this, the share certificate of CGPC was delivered up in Cayman Island ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... notice to show cause was issued under Section 163 to the Petitioner to show cause as to why it should not be treated as an agent/representative assessee of HTIL. CONTENTIONS: A. The Petitioner : 52. Briefly stated, the case of the Petitioner is that if any of the shares held by the Mauritian Companies were sold in India, there would be no capital gains tax payable in India in view of the Convention on avoidance of double taxation between Mauritius and India. Hence, on a transfer of shares of HEL which are admittedly an asset situated in India, there would have been no capital gain tax chargeable in India. However, as the transaction in the present case was that the share of an upstream overseas company which was in a position to exercise control over a Mauritian company was sold, the Revenue has sought to impose capital gains tax on the ground that the transfer resulted in consequential transfer of control over an Indian entity and thereby gave rise to capital gain which is taxable in India. 53. The Petitioner contends that CGP (the subsidiary whose share was transfered to it) through its downstream subsidiary, directly or indirectly controlled equity interes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is received in India; (ii) which accrues and arises in India; and (iii) which is deemed to accrue or arise in India. For income to arise or accrue in India, there must be a right to receive income in India. In the present case, there is no income that accrues or arises in India since the right to receive the money was outside India under a contract entered into outside India and payment was made outside India; (4) In Section 9, Parliament has specifically limited gains arising out of transfers of capital assets to an asset situate in India. The share of CGP is situated outside India. A share is situated where it can be transferred. A share represents a bundle of rights and the transfer of a share results in a transfer of all the underlying rights. However, in law, what is transferred is a share and not individual rights. There is a distinction in law between shareholders and a company and a shareholder has no right in the assets of the company. Hence, the contention of the Revenue that the transfer of control over the business in India constitutes a transfer of an asset in India is without any foundation; (5) By legislation several countries have made "lookthrough" p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital assets. Where the asset is situated outside India and the transfer of that capital asset takes place, the location of the asset does not notionally shift to India because the agreement pursuant to which it is transferred has also led to certain related agreements which have nexus with India; (9) The contention of the Department that the right to use the Hutch Brand during the transition period which was royalty free brings about the transfer of some capital assets in India to which the consideration paid for the shares relates, is misconceived. The Hutch Brand was to be withdrawn from India and all that the agreement permitted was, use during the limited period free of charge. Where a controlling interest in shares is sold, it is usual to incorporate transitory arrangements without specific consideration. The value of the transfer of the enterprise is captured in the sale price of the shares and the gain made by the seller is a capital gain, in the jurisdiction where the property is situated. Independent values are not assigned to these segments; (10) The suggestion of the Revenue that the benefit of the Telecom licence stood transferred is misconceived. Under the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er temporary or permanent does not incur an obligation under Section 195. A foreign entity which has no presence in India, not even a branch office, cannot be subjected to the obligation to deduct and pay tax. It is the recipient who is a potential assessee because he has received a sum chargeable. This by itself does not create a nexus with the payer who has no income chargeable under the Act, nor has a presence of any kind in India. Moreover, Section 198 which deems tax deducted and paid to be income received by the payee and Section 199 which deems such a payment to be payment of tax on behalf of the person from whom such a tax is deducted, would not operate outside India in transactions such as the present. Payment of tax in India would not be a partial discharge of the obligation to pay consideration under the agreement outside India. Hence, even assuming that it is held that some part of the income may be taxable in India, considering the fact that (a) The Petitioner has no presence in India; (b) The transaction was consummated outside India; (c) The transaction related to transfer of a share outside India, contracted to be delivere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nding of the Assessing Officer that he has jurisdiction, is not perverse or arbitrary and would not warrant interference under Article 226 of the Constitution. The submissions may now be summarised: (i) The decision of the Revenue is based on an interpretation of the agreements in question which would render the submission of the Petitioner on "form versus substance" irrelevant. The submission of the Department can be justified on the basis of the form of the transaction as reflected in the transaction documents; (ii) There is a distinction between proceedings for the deduction of tax and regular assessment proceedings where larger issues have to be investigated. The jurisdictional issue is legitimately to be confined to the obligation of the Petitioner under Section 195 to deduct tax. In the absence of HTIL - the deductee - a full determination of facts which lie within its special knowledge would not be fair and proper. Nonetheless, the Revenue has placed its submissions before this Court in order to assist the determination as to whether the transaction was chargeable to tax under Sections 4, 5 and 9; (iii) The essential question is wheth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dium of rights including effective control and management of the joint venture in India as a result of which it stepped into the shoes of HTIL. This arose as a consequence of the Petitioner entering into distinct and independent contracts which have no corelation with the acquisition of CGP equity. Though neither the Petitioner nor its predecessorininterest, HTIL are shareholders in HEL (now VEL), they are able to secure control over the Indian Corporate entity only by reason of their entering into contractual obligations as evidenced from the term sheet agreements between the joint venture partners. The first term sheet agreement of 5 July 2003 inter alia between Essar Teleholdings Ltd. and HTIL contemplated that the operating companies would be consolidated by transferring their shares to an Indian holding company (Holdco). Holdco became HMTL and was renamed as HEL. As a result of such agreements, HTIL secured significant management rights so long as it continued to hold at least 40% of the issued share capital of HEL. All major decisions called "Reserved decisions" were to be at the absolute discretion of HTIL; (vii) Accounting Standard 24 of the Institute of Charte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion was only the transfer of one CGP share. HTIL entered into a settlement with the Essar Group on 15 March 2007, in order to obtain its support in the completion of SPA. By clause 5, HTIL was required to give notice to Essar and to purchase the tag along rights of Essar Teleholdings Ltd. as a minority shareholder of HEL. The Petitioner made an offer on 20 February 2007 for purchasing 33% of Essar interest in HEL for US $ 5.7687 billion. Vodafone and Essar Group entered into a term sheet agreement on 15 March 2007 to regulate the affairs of HEL and the relationship between shareholders of HEL. The Petitioner would have operational control of HEL while Essar would have rights consistent with its shareholding, including a proportionate Board representation. The term sheet agreement was restated in August 2007 after the approval of FIPB was received. On 15 March 2007, Essar, HTIL and Vodafone entered into a Deed of Waiver by which Vodafone waived certain warranties given by the seller in the SPA. All this was unnecessary if the transaction related to only one share of CGP; (xii) Vodafone and Vodafone Group Plc as guarantor of Vodafone, entered into a Put Option agreement on 15 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ver HEL through TII shareholders agreement and the Centrino Framework Agreement dated 1.3.2006; (v) Rights (and options) by providing finance and guarantee to Analjit Singh Group of companies to exercise control over TII and indirectly over HEL through various TII shareholders agreements and the N D Callus Framework Agreement 132006; (vi) Controlling rights over TII through the TII Shareholder's Agreement, in the form of right to appoint two directors with veto power to promote its interests in HEL and thereby hold beneficial interest in 12.30% of the share capital of the Indian company HEL; (vii) Finance to SMMS to acquire shares in ITNL (formerly Omega) with right to acquire the share capital of Omega in future; (viii) Controlling rights over ITNL through the ITNL Shareholders 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; (ix) Interest in the form of loan of USD 231 million to HTI (BVI) which was assigned to Array Holdings Ltd.; (x)Interest in the form of loan of USD 952 million through HTI (BVI) u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rther 15% interest in HEL by virtue of option agreements, framework agreements and shareholders agreements of Asim Ghosh, Analjit Singh and IDFC and credit arrangement with their companies. All these rights essentially did not go with one share of CGP. The significance of the framework agreements with the Analjit Singh Group companies, Asim Ghosh Group companies and IDFC Group companies was that Global Services Private Limited (GSPL), an indirect subsidiary of HTIL held certain subscription rights and call options to subscribe to and to acquire the shares of Indian companies, controlled by Asim Ghosh, Analjit Singh and IDFC, which held investments in TII which in turn held shares in HEL. These rights arose under the 1. ND Callus Framework Agreement dated 1 March 2006. 2. Centrino Framework Agreement dated 1 March 2006. 3. IDFC Framework Agreement dated 7 August 2006. 4. TII Shareholders' agreement dated 1 March 2006. 5. ITNL (Omega) Shareholders' agreement dated 7 August 2006. . The subscription rights and call options were granted to 3Global Services Private Limited (3GSPL) in consideration of 3GSPL procuring credit support to finance the acquisiti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... geable to tax in India. The gains are deemed to arise once the subject matter of the transaction constitutes a capital asset and its location is in India. Section 2(14) defines the expression "capital asset" in wide terms to mean property of any kind held by assessee. This will include rights and interests which are capable of being owned and transferred. The definition of the word "transfer" in Section 2(47) is wide enough to comprehend any method of transfer. The entire enterprise value attributed to HEL, was only on account of the fruits of the investment made by HTIL in India, goodwill/brand value generated by HTIL for the Hutch Brand in India, the telecom licences granted in India, customer base in India and the prospect of future development and expansion of business in India. Further, all obligations cast upon the parties as per the transaction documents, were performed in India, including FIPB approval, Option Agreements, Term Sheet Agreements, Shareholder Agreements, Framework agreements with TII and Omega, Divestment of petitioners interest in Bharti Airtel Ltd., Settlement agreement with Essar, Trade Mark License. Further, the Noncompete condition was enforceable on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sets situated in India. The particular mode of transfer will not alter or determine the situs, nature or character of the asset. (xxii) The expression "person" in Section 195 is not restricted to a person resident in India and the provision can be applied also to a nonresident. The provisions of a statute dealing with machinery for collection of tax have to be construed according to the ordinary rules of construction and to make the charge effective. The Legislature has deliberately not qualified the expression "person" in restrictive terms and it would be impermissible to do so by interpretation. Even though the revenue laws of one country are not enforceable in another, this does not mean that the laws themselves will not be enforced by the Courts of one country against a resident of another country. 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. (xxiii) In the present case, the transfer was not incidentally or marginally related to India. It has been admitted that the price paid to HTIL by the Petitioner was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... our law of the principle that lawful forms of activity can legitimately be arranged by those who transact business to plan for tax implications. So long as the legal structures that are put into place and the instruments of law that are utilized have been utilized bona fide for a business purpose, fiscal law - absent statutory provisions to the contrary - does not permit an enquiry into the motives of the assessee or an investigation into the underlying economic interest. But a transaction which is sham or, what the law describes as a colourable device, stands on an entirely different foundation. A transaction which is sham is one in which though parties employ a legal form, it is in reality a different transaction; one which in reality does not give rise to the legal rights and obligations which arise from its ostensible nature. A sham is ostensible but not real and borders on a fraudulent employment of legal form or structure in aid of collateral ends. Absent a case of a transaction which is sham, fraudulent or colourable, the law respects instruments and structures adopted by business entities within the framework of law in the pursuit of legitimate forms of business activity. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , however, does not preclude the Legislature from legislating otherwise. In certain areas of the law, legislation may adopt a lookthrough provision which mandates a rigorous scrutiny to trace subjects and sources. This is a legislative function. Courts do not assume jurisdiction to themselves to create legislative policy or to legislate by interpretation for that does not lie within the realm of judicial power. In matters involving the interpretation of economic and fiscal legislation, Courts follow interpretative techniques which promote certainty in the application of law. Certainty requires Courts to don a traditional, if even conservative role, by following precedent, maintaining interpretational discipline and recognising that it lies within the realm of legislative policy to alter settled legal doctrine. The need for certainty is accentuated in fiscal and economic matters by two other considerations which are of significance. The first is the perceived lack of expertise on the part of Courts to make the complex decisions that affect fiscal and monetary policy in a seamless world of technology and finance. The second is the constitutional deference to the executive in drawing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tius and not by residents of Mauritius so as to derive the benefits of the Convention. Confronted by a withdrawal of funds by FIIs, CBDT issued a circular on 13 April 2000 clarifying that such entities incorporated under the laws of Mauritius would be considered as residents of Mauritius in accordance with the Convention and that when a certificate of residence is issued by Mauritian authorities, that shall constitute sufficient evidence for accepting the status of residence and beneficial ownership for applying the Convention. This was to also apply to income from capital gains on the sale of shares and accordingly such entities resident in Mauritius would not be taxable in India on income from capital gains arising in India on the sale of shares. 60. The circular issued by the CBDT was quashed by the Delhi High Court, in public interest petitions, on the ground inter alia that the circular was ultra vires the powers of the CBDT insofar as it directed income tax authorities to accept a certificate of residence issued by the authorities in Mauritius as sufficient evidence of the residential status of such an entity. The Delhi High Court held that the Income Tax Officer was entitle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n [ (1984) 1 All ER 530 (HL).] and W.T. Ramsay Ltd. v. IRC [(1982) AC 300. ] did not affect the validity of the principle which had been laid down in the Duke of Westminster's case. The Supreme Court emphasized that the judgment of the majority of the Court in McDowell and Co. Ltd. & Commercial Tax Officer [ (1985) 154 ITR 148.] regarded tax planning as legitimate provided it was within the frame work of law. What was frowned upon were colourable devices resorted to with the object of avoiding the payment of tax by resorting to dubious methods. The judgment of the Delhi High Court was reversed. 63. The following principles are now firmly embedded in our jurisprudence : (i) A transaction or arrangement which is permissible under law which has the effect of reducing the tax burden of an assessee does not incur the wrath of the law; (ii) Citizens and business entities are entitled to structure or plan their affairs with circumspection and within the framework of law with a view to reduce the incidence of tax; (iii) A transaction which is sham or which is a colourable device cannot be countenanced. A transaction which is sham or a colourable device is on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion cannot be displaced by probing into the substance of the transaction". Walfort 65. These principles have now been reiterated in a recent judgment of the Supreme Court in Commissioner of Income Tax v. Walfort Share and Stock Brokers Pvt. Ltd. [2010(6) Scale 471.] . While construing the provisions of Section 14A and Section 94(7) of the Income Tax Act 1961 Mr. Justice S.H. Kapadia, the Learned Chief Justice of India, observed as follows : "At the outset, we may state that we have two sets of cases before us. The lead matter covers assessment years before insertion of Section 94(7) vide Finance Act, 2001 w.e.f. 1.4.2002. With regard to such cases we may state that on facts it is established that there was a "sale". The sale price was received by the assessee. That, the assessee did receive dividend. The fact that the dividend received was taxfree is the position recognized under Section 10(33) of the Act. The assessee had made use of the said provision of the Act. That such use cannot be called "abuse of law". Even assuming that the transaction was preplanned there is nothing to impeach the genuineness of the transaction. With regard to the ruling in McDowell & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e may not have been a transfer. For instance, a transaction by which possession of immovable property is taken or retained in part performance of a contract under Section 53A of the Transfer of Property Act, 1882, is brought within the ambit of the provision. Similarly, by subclause (vi) any transaction which has the effect of transferring or enabling the enjoyment of any immovable property, is within the ambit of the expression "transfer". Subsection (1) of Section 45 brings to tax any profits or gains arising from a transfer of a capital asset effected in the previous year under the head of "capital gains". Principles governing shares and the rights of shareholders. 68. Now, at the outset, it must be noted that under the general principles of law, a share as a chose in action comprises of an indivisible set of rights, not capable of being separately transferred at law. (Gore Browne on Companies).[Volume 2 Chapter 23-2] Under the Indian Law, the privilege of membership can be exercised only by a person whose name is entered in the Register of Members. In Balkrishna Gupta vs. Swadeshi Polytex Ltd., [(1985) 2 SCC 167] the Supreme Court held, while applying this p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the control of the company resides in the voting powers of its shareholders. In this sense, the directors of a company may well be regarded as having "a controlling interest" in the company when they hold and are entered in the share register as holders of the majority of the shares which, under the Articles of Association of the company, carry the right to vote." The Supreme Court emphasized the principle that when a shareholder, holding a majority of the shares, authorised an agent to vote for him, the agent acquired no interest, legal or beneficial, for the title to the shares continued to vest in the shareholder. 70. A controlling interest does not for the purpose of the Income Tax Act, 1961 constitute a distinct capital asset. That is simply because the assumption of control is a right which emanates from the acquisition of a sufficient number of shares in the Company as would enable the holder of the shares to exercise a voting power of a degree and nature as would result in a control of the management. A controlling interest is an incident of the ownership of the shares in a Company; something which flows out of the holding of shares. A controlling interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same legal position in Indian Law, holding that "a share is not a sum of money, but is an interest measured by a sum of money made up of various rights contained in the articles of association." In Vekatesh vs. C.I.T., [(2000) 243 ITR 367] a Division Bench of the Madras High Court held that the price paid by the purchaser of shares even if it was higher than the market price - the difference representing a controlling interest which was transferred by the seller to the buyer - nonetheless remains the price for the shares. The Division Bench held that the Tribunal was correct in upholding the order of the Commissioner and the Assessing Officer who had assessed the sum mentioned in the assessment order as long term capital gains arising out of the sale of the shares held by the assessee under Section 45 of the Income Tax Act, 1961. In that context, the Division Bench held thus: "The fact that the vendor has controlling interest and is in a position to place the vendee in control of the company by transferring all his shares or such part as would enable the vendee to exercise control over the company with the aid of the shares so transferred would only enhance the value o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cquisition of the undertaking. Dealing, as it was, with regulatory legislation designed to give effect to the Directive Principles of State policy, the Supreme Court held that nonetheless Parliament would not be imputed with the intention of sweeping aside fundamental legal concepts governing the incorporation of a Company. Mr.Justice K.K.Mathew, speaking for the Bench, observed as follows: "It is well settled that a company has separate legal personality apart from its shareholders and it is only the company as a juristic person that could own the undertaking. Beyond obtaining control and the right of management of Shahjahanpur Sugar Private Ltd., the purchase of 100 per cent shares had not the effect of an acquisition of the undertaking owned by it. No doubt, on a dissolution of the company, the shareholders would be entitled to a distributive share of the assets of the company. But it does not follow that while the company is a going concern, the shareholders are the owners of its assets including any undertaking. It is the company as a separate entity which alone can own the undertaking and the purchase by the appellant of 100 per cent shares did not make it the ow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofits of the company may be readily conceded but it is not possible to accept the contention that the shareholder acquires any interest in the assets of the company. .. A shareholder has got no interest in the property of the company though he has undoubtedly a right to participate in the profits if and when the company decides to divide them. The interest of a shareholder visavis the company was explained in the Sholapur Mills case, (1950) S.C.R. 869 at 904. That judgment negatives the position taken up on behalf of the appellant that a shareholder has got a right in the property of the company. It is true that the shareholders of the company have the sole determining voice in administering the affairs of the company and are entitled, as provided by 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 does not amount to more than a right to participate in the profits of the company. The company is a juristic person and is distinct from the shareholders. It is the company which owns the property and not the shareholders." The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... validly cast visavis the Company and the resolution would be binding on it. The Control of a Company, opined the Law Lords, resides in the voting power of its shareholders. Farwell, J. in a judgment of the Chancery Division in Borland's Trustee vs. Steel Brothers & Co.Ltd., [(1901) 1 Ch 279] noted that "a share is the interest of a shareholder in the Company measured by a sum of money, for the purpose of liability in the first place, and of interest in the second, but also consisting of a series of mutual covenants entered into by all the shareholders inter se" in accordance with the Companies' Act. A share represents an interest "made up of various rights contained in the contract, including the right to a sum of money". The same principle has been reiterated in the judgment of Viscount Hailsham LC in Commissioner of Inland Revenue vs. Crossman. [(1936) 1 All ER 762] 75. The Court of Appeals in Gramophone & Typewriter Ltd. vs. Stanley, [1908-1910 All ER 833] dealt with a case where an English Company which carried on business in the U.K. held shares of a German Company which was registered as a Company of limited liability under German Law. The members of the Board of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f individual corporators is something wholly different from the management of the business itself. Now, is this principle less true when the holding of the individual corporator is so large that he is able to override the wishes of the other corporators in matters relating to the control of the business of the company. The extent but not the nature of his power is changed by the magnitude of his holding." 76. The position of law which has consistently held the field for over a hundred years in the U.K. and for well over five decades in India, is that the business of a corporation is not the business of its shareholders. The undertaking and the assets of a corporation are not the undertaking and assets of its shareholders. A corporation as an entity incorporated under legislation governing companies has a distinct juristic personality. A shareholder has during the subsistence of the corporate personality, no interest in the assets owned by the corporation. The right of the shareholder is to participate in the profits by receiving the dividend that may be declared by the corporation. A share represents an interest of a shareholder which is made up of various rights conta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... country of residence and the country of source have a valid claim to tax income. Explaining this, Professor Michael J.Graetz of the Yale Law School in his Foundations of International Income Taxation notes that in contrast, a nation that is neither the country of source, or of residence or citizenship, is generally not recognized as having a right to tax. [Michael J. Graetz, Professor of Law, Yale Law School: Foundations of International Income Taxation (Foundation Press 2003).] If both, the resident and source country exercised their right to tax simultaneously, this is liable to result in double tax which is generally regarded as being unfair because it may create substantial barriers to cross border activity and investment. International tax policy seeks to mediate between the claims of residents and source in an effort to ensure that income is taxed only once. In India international agreements on the avoidance of double taxation, such as the one with Mauritius, are sanctified by Section 90 of the Income Tax Act, 1961. Section 5(2) and Section 9(1) : identification of nexus : 78. The charge of income tax under Subsection (1) of Section 4 is on the total inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a, an authority to conclude contracts on behalf of the nonresident, unless his activities are limited to the purchase of goods or merchandise for the nonresident; or (b) has no such authority, but habitually maintains in India a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the nonresident; or (c) habitually secures orders in India, mainly or wholly for the nonresident or for that nonresident and other nonresidents controlling, controlled by, or subject to the same common control, as that nonresident:" Under the proviso, however, a business activity carried out through a broker, or an agent with an independent status, acting in the ordinary course of business, is not to constitute a business connection. Whether, however, a broker or an agent works mainly or wholly on behalf of a nonresident or the nonresident and other nonresidents controlled by the principal nonresident or having a controlling interest in the principal nonresident or subject to common control, he shall not be deemed to be an agent with an independent status. 80. By the provisions of Subsection (2) of Section 5, the income of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom any asset or source of income in India; and in the fourth, by the situs of the capital asset which is transferred, in India. Parliament has been careful to ensure that even while adopting a deeming fiction in defining incomes which are deemed to accrue or arise in India that there must exist a nexus with India upon which the jurisdiction to tax is founded. Apportionment : 82. In certain instances which are known to tax legislation, a need for apportioning income arises when the source rule applies and the income can be taxed in more than one jurisdiction. Judicial precedent emanating from the Supreme Court and the High Courts has analysed situations where a person has earned profits on the sale and purchase of goods abroad or where an assessee engages in a composite activity - such as manufacture and sale - and one component takes place within the jurisdiction of the taxing territory, while another has occurred outside the taxing jurisdiction. Such instances have arisen in British India. A question of apportionment has arisen. 83. In C.I.T. vs. Chunilal B.Mehta, [AIR 1938 PC 232] the assessee was a resident of British India and was held liable during ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business of a manufacturer and trader together. Under Section 42 of the Income Tax Act, 1922, an apportionment could be carried out for ascertaining the profits of a business, a part only of whose operations were carried out in British India where such part could be regarded either as "a business connection in British India" or "a source of income in British India". The result was that the profits received at Bombay from the sale of oil manufactured at Raichur were liable to be apportioned under subSection (3) between the two operations of manufacture and sale and only such portion of the profits as was reasonably attributable to the sale could be deemed to accrue or arise in British India. The rest of the profits attributable to the manufacture at Raichur would have to be regarded as accruing or arising at Hyderabad State. Mr.Justice Mahajan in his judgment also emphasized that it was the operation of manufacture at Raichur that enabled the assessee to sell oil and some portion of the profits must necessarily be attributable to the manufacturing process. In the case of a composite business where a person carries on a number of businesses or activities, the profit or loss would hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a misconception to presume that any profit arises out of the valuation of closing stock and the situs of its arising or accrual is where the valuation is made. The valuation of the unsold stock at the close of an accounting period was held to be a necessary part of determining the trading results and was not the "source" of such profits. The Supreme Court held that the place where the valuation was made could not be regarded as the situs of accrual and observed that "the source of profits and gains of a business is indubitably and the place of their accrual is where the business is carried on". The judgment is, therefore, a precedent for the proposition that the place of the accrual of the profits and gains of a business, is the place where the business is carried on since the source of those profits is the business itself. 88. A decision of the Division Bench of the Calcutta High Court in Income Tax Officer vs. Shriram Bearings Ltd., [(1987) 164 ITR 419] involved an agreement between the Respondent and a Japanese Company. The agreement consisted of two parts, one for the sale of trade secrets and the other for technical assistance. The agreement specifically reco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the sale of a capital asset would be income at the hands of the assessee. The Delhi High Court held that while capital gains may be income, that would have been so if the transaction has taken place either in India or through or from any property in India or from any asset or source of income from India or through the transfer of a capital asset situated in India. The assessee only had some part of its business operation in India. Its capital assets has nothing to do with the business connection in India and the words "business connection" for the purposes of Sections 5 and 9 are confined to profits arising out of business. The Delhi High Court relied upon the judgment of the Supreme Court in CIT vs. R.D.Aggarwal & Co.,[(1965) 56 ITR 20] in which it was noted that the expression "business connection" postulates a real and intimate relation between the trading activity carried out outside the taxing territory and trading activity within the territory, and the relation between the two, contributes to the earning of income by the nonresident in his trading activity. The Delhi High Court held as follows: "Having regard to the purport and object thereof, if the words "busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany was incorporated, they can be effectively dealt with as between the owner for the time being and the company. The law of the place of incorporation of the company decides how shares in the company may be transferred. If they may be transferred only by registration on a particular register, they will be regarded as situate at the place where the register is kept." The reason for this, note the authors, is that shares as an interest in a company are subject to the law of the place of incorporation of the company, which governs all matters concerning the constitution of the company. 95. As far back as in 1924, the Privy Council in Brassard vs. Smith, [(1925) AC 371] recognized that the evidence of title to shares would be the Register of shareholders and the situs of the property would be where the register is situated. A person who was a resident of Nova Scotia died there owning shares in a Bank which were registered at an office maintained by the Company in the same province. The company had its head office in the province of Quebec. The Privy Council followed the established principle that a transfer, in the case of shares, is effectuated by a change in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... perty. Legislation in the U.S. also provides rules with respect to the investment of a foreign person in real property and provides that the gain on the disposition of a United State Real Property Interest (USRPI) would be subject to tax. Such an interest is defined as an interest in real property located in the U.S. and any interest in a domestic corporation which is a real property holding corporation. In the case of income in the form of capital gains on the disposal of assets situated within a territory, some countries do not tax nonresidents on such gains at all. This is the position in the United Kingdom which does not tax nonresidents on capital gains, even gains on the sale of U.K. land. 98. The U.N. Manual for the Negotiation of Bilateral Tax Treaties between Developed and Developing Countries describes the principles of international taxation underlying tax treaties: "1. INTERNATIONAL DOUBLE TAXATION A. Concepts and issues 1. The jurisdiction to impose income tax is based either on the relationship of the income (tax object) to the taxing state (commonly known as the source or situs principle) or the relationship of the taxpayer (tax subject) to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able property situated in an another Contracting State may be taxed in that State. Hence, where the underlying asset is land situated in the source State and where a transfer of shares in a foreign company or other entity owning the land results in an effective transfer of ownership of the land the source State may by legislation impose the tax. 100. Broadly speaking, source rules limit themselves to the taxation of capital gains arising on property situated within the taxing jurisdiction. The OECD model indicates an attempt to initiate provisions which would look behind corporate structures particularly where the ownership of shares represents an interest of a certain value in real estate or immovable property situated within the taxing jurisdiction. We must, however, hasten to add that in this case, the Court is essentially required to construe the provisions of our own taxing legislation. The FIPB Process 101. On 12 January 2005, the Government of India, in the Ministry of Commerce and Industry, issued Pressnote 1. The Pressnote provided that new proposals for foreign investment/technical collaboration would henceforth be allowed under the 'automatic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n HEL. FIPB was requested to take note of the overseas transaction and additionally to give its approval under Press Note 1. 103. Upon receipt of the application, the Government of India in the FIPB unit of the Ministry of Finance addressed a letter on 28 February 2007 to HEL seeking details of the direct and indirect foreign holding in HEL and details of Indian companies together with their stake in HEL. The Government also sought a clarification as to which entity had the beneficial ownership of stakes held in HEL by the entities of Shri Asim Ghosh and Shri Analjit Singh viz. Indusind Telecom Network Private Limited and Telecom Investments India Private Limited together with their subsidiaries. Asim Ghosh clarified by his letter dated 2 March 2007 to HEL, in response to FIPB's letter, that through his 100% Indian companies he held 23.97 % equity in a joint venture company, TII Private Limited which in turn held 19.54% of HEL. Accordingly his indirect equity or beneficial interest in HEL worked out to 4.68%. Asim Ghosh clarified that his interest in these companies was entirely owned by him and that he had received credit support for his investment which had been discl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Analjit Singh and IDFC, who between them held 15% interest in HEL had agreed to retain their shareholding. VIH BV would be entitled subsequently, directly and indirectly, to acquire shares in TII and Omega if permitted under Indian regulatory requirements including the maximum limitation prescribed on foreign direct investment in the telecommunications sector. If and when VIH BV was able to acquire these shares, it would own a 67% interest in HEL. 106. On 19 March 2007 FIPB sought a clarification from VIH BV of the circumstances in which it had agreed to pay a consideration of US $ 11.08 billion for acquiring 67% of HEL when the actual acquisition was only of 51.96% as claimed in the application filed before the FIPB. In its response dated 19 March 2007 VIH BV stated that it had agreed to acquire from HTIL for US $ 11.08 billion, interest in HEL which included a 52% equity shareholding. This price included a control premium, use and rights to the Hutch Brand in India, a noncompete agreement, loan obligations and an entitlement to acquire subject to Indian foreign investment rules a further 15% indirect interest in HEL. These elements together equated to about 67% of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or by draft or by any other mode whichever is earlier, deduct income tax thereon at the rates in force. Under sub section (2), where a person responsible for paying any such sum chargeable under the Act to a nonresident considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application to the Assessing Officer to determine the appropriate proportion of such sum so chargeable. Upon a determination by the Assessing Officer tax is liable to be deducted only on that proportion of the sum which is so chargeable. Under sub section (3) any person entitled to receive interest or other sum on which income tax has to be deducted under sub section (1) may make an application in the prescribed form to the Assessing Officer for a certificate authorizing him to receive the sum without deduction of tax. Where a certificate is granted every person responsible for paying such interest or sum to the holder of the certificate shall so long as the certificate is in force make payment without deducting tax thereon. 10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1. In Transmission Corporation of A.P. Limited V/s. Commissioner of Income Tax [(1999) 239 ITR 587 (S.C.)], the State Electricity Board made certain payments to a nonresident against the purchase of machinery and equipment and against work executed by the nonresident in India of erecting and commissioning the machinery and equipment. The question was whether for these payments, the Board was under an obligation to deduct tax at source under Section 195. The question before the High Court was whether the Board was liable to deduct income tax under Section 195 in respect of payments made to the nonresident and if so whether the tax deductible was liable to be determined on the gross sum paid to the nonresident. On behalf of the assessee, it was contended before the Supreme Court that when the payment made to a nonresident did not entirely comprise of income, but was a trading receipt, no question of deducting income tax at source would arise. In other words, it was urged that tax could be deducted at source when the entire sum paid represented total income chargeable under Section 5. The Supreme Court held that subsections 1, 2 and 3 of Sections 195 and 197 left no doubt ab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax at source once Explanation 2 to Section 10(15)(iv)(c) stood inserted as TDS arises only if the tax is assessable in India". Since tax was not assessable in India, there was no question of TDS being deducted by the assessee. 113. In a subsequent decision in Commissioner of Income Tax V/s. Eli Lilly and Company (India) Private Limited [(1009) 15 SCC 1], the assessee had seconded expatriates to a joint venture in India. The assessee was a joint venture company and the appointment of the expatriates was routed through a Board comprising of the Indian partner. Only a part of the aggregate remuneration was paid in India by the tax deductor assessee. No work was performed by the employees for the foreign company. The Assessing Officer found that the total remuneration paid was only on account of services rendered in India and, therefore, in terms of Section 9(1)(ii) the income derived by the expatriates was taxable in India. Accordingly, the tax deductor assessee was asked to explain why it should not be declared as an assessee in default under Section 201(1) as it had failed to deduct tax at source on the aggregate salary received by the expatriates. The defense was that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubjects which is permissible under Article 245 of the Constitution and the provisions are enforceable within the area where the Act extends through the machinery provided under it. If a particular income falls outside Section 4(1), the Supreme Court held that TDS provisions would not set in. The conclusion which was arrived at by the Supreme Court was as follows : "88 .. Firstly, it cannot be stated as a broad proposition that the TDS provisions which are in the nature of machinery provisions to enable collection and recovery of tax are independent of the charging provisions which determine the assessability in the hands of the assessee employee. Secondly, whether the home salary payment made by the foreign company in foreign currency abroad can be held to be "deemed to accrue or arise in India" would depend upon the indepth examination of the facts in each case. If the home salary / special allowance payment made by the foreign company abroad is for rendition of services in India and if as in the present case of M/s.Eli Lilly & Co. (India) (P) Ltd. no work was found to have been performed for M/s.Eli Lilly Inc., Netherlands then such payment would certainly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shed its earlier judgments in C.I.T. vs. Toshoku Ltd. [ (1980) 125 ITR 525.] and in Ishikawajima Harima Heavy Industries Ltd. v. Director of Income Tax [(2007) 288 ITR 408.]. In Toshoku a nonresident assessee had acted as selling agent outside India and did not carry on business operations in the taxable territory. The commission received by the nonresident for service rendered outside India was held not to have accrued or arisen in India and the mere making of a book entry by the statutory agent was held not to amount to a receipt in India. Ishikawajima, the Supreme Court noted, was one where the entire transaction had been completed on high seas and the profits of sale did not arise in India. In contrast, in the case at hand, the Supreme Court held that the entire catch of fish was brought to an Indian Port and after valuation was complete, the charter fee in the form of 85% of the catch was paid to and received by the nonresident in India. Section 195 was therefore attracted. UNITED KINGDOM : Extra territoriality and the obligation to deduct tax. 115. In 1879, the Court of Appeal held that it was a governing principle that all English Legislation is primarily ter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Appeal and reversed the decision of the Court of Appeal. Lord Scarman observed that the liability to tax under the Act of 1970 depends on the location of the source from which the 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. Section 204 imposes the PAYE system of tax collection in respect of any income assessable under Schedule E and contains no extraterritorial limitation on the extent of the obligation which it imposes. The only limitations were that : (i) Residence is not a necessary condition of tax liability if there be otherwise a sufficient connection between the source of the income, profit or gain and the United Kingdom; and (ii) Section 204, silent itself as to the territorial extent of the obligation it imposes, is a machinery section for the collection of Schedule E tax. Lord Scarman, while adverting to the decision in Ex parte BLAIN (supra) observed thus : "Put into the language of today, the general principle being there stated is simply that, unless the contrary is expressly e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax. Finally, Oceanic had an address for service in the United Kingdom. For these reasons, Lord Scarman concluded that Oceanic by its trading operations within the United Kingdom and in the United Kingdom sector of the North Sea had subjected itself to the liability to deduct tax in respect of those emoluments of its employees which were chargeable to British income tax. 118. In a subsequent decision in Agassi V/s. Robinson (Inspector of Taxes) [(2006) 1 W.L.R. 1380], the House of Lords revisited its earlier decision in Oceanic. Agassi, a wellknown professional tennis player was neither resident nor domiciled in the United Kingdom and in the tax year relevant to the Appeal, he had participated in a tennis tournament in that country, including Wimbledon. Agassi held and controlled a company, whose business included entering into contracts with manufacturers of sports clothing and equipment which was sponsored or advertised by Agassi. Two contracts were entered into with Nike Inc and Head Sport AG, pursuant to which the company received payments during the taxation year. Sections 555 and 556 of the 1988 Act provided that where a person who is an entertainer or a sp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itish 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 jurisdiction; (iv) The principle set out in (iii) above is only a rule of construction and contemplates that a mere presence within the jurisdiction would be sufficient to attract the application of British legislation; (v) Fiscal legislation is drafted in the knowledge that it is a practise of nations not to enforce fiscal legislation of other nations but it does not necessarily follow that Parliament intended any territorial limitation other than that imposed by such unenforceability; (vi) Where an obligation for the deduction of tax by a payer is created by a statutory provision, such a provision is in the nature of a machinery section for the collection of tax. The obligation to deduct tax arises when the payment is made and it arises only in respect of the income assessable under the charging provision; (vii) The critical factor in so far as collection is concerned is whether in the circumstances it can be made effective. A trading presence in the United Kingdom will suffice. In concluding this portion of the judgment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in 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; (viii) Parliament, while imposing a liability to deduct tax has designedly imposed it on a person responsible for paying interest or any other sum to a non resident. Parliament has not restricted the obligation to deduct tax on a resident and the Court will not imply a restriction not imposed by legislation. Section 195 embodies a machinery that would render tax collection effective and must be construed to effectuate the charge of tax. There is no limitation of extra territoriality involved though Parliament is cognisant of the fact that the provisions of the law can be enforced within the territory to which the Act extends. Analysing the facts: 120. The case of of the Petitioner is that the transaction was only in respect of one share of CGP in Cayman Islands and this being a capital asset situated outside India neither had any income accrued or arisen in India, nor would any income be deemed to have accrued or arisen in India. On the other hand, the case of the Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt 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 amended to conform with the requirements of HKFRS 5. Subsequently, Essar Teleholdings Limited ("ETH"), a shareholder of Hutchison Essar, and certain affiliates (collectively Essar") asserted various rights in relation to the Transaction and threatened to commence proceedings in the Indian courts in order to enforce those alleged rights, including by preventing completion of the Transaction. On 15 March 2007, the company entered into a conditional settlement agreement (the "settlement agreement") with Essar pursuant to which Essar agreed to, amongst others: (i) refrain from doing anything which would prevent, delay or inhibit completion of the Transaction; (ii) use all reasonable endeavours to ensure completion of the Transaction is achieved as soon as practically possible; (iii) waive rights it has or claims to have in respect of certain matters including those related to the Transaction; and (iv) terminate certain agreements, alleged agreements and understandings ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 classified as held for sale and (a) representing a separate major line of business or geographical area of operations, (b) as part of a single coordinated plan to dispose of a separate major line of business or geographical area of operations, or (c) as a subsidiary acquired exclusively with a view to resale. The expression "disposal group" includes goodwill acquired in a business combination if the cash generating unit to which goodwill has been allocated, in accordance with the requirements of the reporting standard. 123. Both the interim and final reports are of significance, because they indicate clearly the perception of HTIL. For HTIL the transaction represented a discontinuation of its operations in India upon which it had generated a profit of H.K.$ 70,502 million. From the proceeds of the transaction, HTIL declared a transaction special dividend to its shareholders. From HTIL's perspective it had carried on "Indian mobile te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p; 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 Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , (B) The Vendor has agreed to procure the sale of, and the Purchaser has agreed to purchase, the entire issued share capital of CGP on the terms and conditions set out in this Agreement. The Vendor has further agreed to procure the assignment of, and the Purchaser has agreed to accept an assignment of, the Loans on the terms and conditions set out in this Agreement 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 bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... procure that the wider group companies shall immediately inform VIHBV if there had been any amendment, variation or waiver of any of the rights under the framework agreements and shareholders' agreements and/or if any of the options granted pursuant to such agreements had been triggered or exercised. Under Clause 8.8 the completion of obligations of HTIL included the delivery 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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the earlier term sheet. The term sheet agreement dated 24 August 2007 records that VIH BV has acquired the entire indirect holding of HTIL in Vodafone Essar "including all rights, contractual or otherwise, to acquire directly or indirectly shares in Vodafone Essar owned by others". The recitals further state that parties had entered into the term sheet to regulate the affairs of Vodafone 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... value of US $ 1 Billion and upto a maximum aggregate fair market value of US $ 5 Billion. (v) Tax Deed of Covenant : Apart from the SPA a tax deed of a covenant was entered into between the HTIL and VIH BV on 8 May 2007 in pursuance of Clause 8.8(1) of the SPA indemnifying VIH - BV in respect of taxation or transfer pricing liabilities payable or suffered by the wider group companies (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 an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ttributed to these components, VIH BV by its letter dated 27 March 2007 to the FIPB stated as follows : "1. The various assets and liabilities of CGP including (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 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 vie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngh and Asim Ghosh companies may sell or an HTIL group company may call upon them to sell their entire respective share holdings in the MV Health Care and Plus Stake companies respectively to the HTIL group at a fair market value as may be agreed between the parties. This was subject to regulatory and legal compliance. These options provided for reciprocal rights for the realization of Analjit Singh and Asim Ghosh investments in TII. HTIL 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 Omeg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntrolling rights over ITNC through the ITNC shareholders agreement including the right to appoint directors with a veto power to make its interest in HEL thereby holding a beneficial interest in 2.77 % of the share capital of HEL; 8) Interest in the form of a loan of US $ 231 Million to HTV BVI which was assigned to Array; 9) Interest in the form of a loan of US $ 952 Million through HTV BVI utilized for purchasing shares in HEL by eight Mauritian 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 mob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he benefit of those agreements. 134. The price paid by VIH BV to HTIL of US $ 11.01 Billion factored in, as part of the consideration, diverse rights and entitlements that were being transferred to VIH BV. Many of these entitlements were not relatable to the transfer of the CGP share. Indeed, if the transfer of the solitary share of CGP could have effectuated the purpose it was not necessary for the parties to enter into a complex structure of business documentation. The transactional documents 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 con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness connection in India or (b) through or from any property in India; or (c) through or from any asset or source of income in India or (d) through the transfer of a capital asset situate in India would be deemed to accrue or arise in India. Where an asset or source of income is situated in India or where the capital asset is situated in India, all income which accrues or arises directly or indirectly through or from it shall be treated as income which is deemed to accrue or arise in India. 138. VIH BVs 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... House of Lords in Investors Compensation Scheme Ltd. vs. West Bromwich Building Society & Ors., [(1997) UKHL 28] Lord Hoffmann, while adverting to the principles by which contractual documents are nowadays construed drew attention to the effort in the law "to assimilate the way in which such documents are interpreted by Judges to the common sense principles by which any serious occurrence would be interpreted in the ordinary life". The contemporary principles underlying the interpretation of commercial contracts have been set out in the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... act Law: Fulfilling the Reasonable Expectations of Honest Men" (1997) 113 LQR 433, at 433-434.] in which the Law Lord has noted the distinct trend towards an objective theory of contract which gives effect to the reasonable expectations of honest people. The expectations which will be protected are those that are,in an objective sense, common to both parties. In this regard, there has been a shift away from a blackletter approach to questions of interpretation to a more purposive interpretation. The subject matter of the transaction in the present case, must, 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ducted at source applies not only to the amount paid which wholly represents income chargeable but also to gross sums which may not be income or profits of the recipient. The Supreme Court noted that in some cases, a fraction of the sum may be taxable income while in other cases such as interest, commission, transfer of rights of patents, goodwill or drawings for plant and machinery and such other transactions it may contain a large sum as taxable income under the Act. However, whatever may be the position, the Supreme Court held, the actual computation of income would arise at the time of the 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 recipi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9 Supp(2) SCC 642] thus: Now it is perfectly clear that it is envisaged under our constitutional scheme that Parliament in India may make laws which operate extraterritorially. Article 245(1) of the Constitution prescribes the extent of laws made by Parliament. They may be made for the whole or any part of the territory of India. Article 245(2) declares that no law made by the Parliament shall be deemed to be invalid on the ground that it would have extraterritorial operation. Therefore, a Parliamentary statute having extraterritorial operation cannot be ruled out from contemplation. The operation 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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