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TMI Blog2012 (1) TMI 52X X X X Extracts X X X X X X X X Extracts X X X X ..... as "the Revenue"], in relation to the acquisition by Vodafone International Holdings BV [for short "VIH"], a company resident for tax purposes in the Netherlands, of the entire share capital of CGP Investments (Holdings) Ltd. [for short "CGP"], a company resident for tax purposes in the Cayman Islands ["CI" for short] vide transaction dated 11.02.2007, whose stated aim, according to the Revenue, was "acquisition of 67% controlling interest in HEL", being a company resident for tax purposes in India which is disputed by the appellant saying that VIH agreed to acquire companies which in turn controlled a 67% interest, but not controlling interest, in Hutchison Essar Limited ("HEL" for short). According to the appellant, CGP held indirectly through other companies 52% shareholding interest in HEL as well as Options to acquire a further 15% shareholding interest in HEL, subject to relaxation of FDI Norms. In short, the Revenue seeks to tax the capital gains arising from the sale of the share capital of CGP on the basis that CGP, whilst not a tax resident in India, holds the underlying Indian assets. Facts A. Evolution of the Hutchison structure and the Transaction 3. The Hutchison ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... credit support provided by HTIL. In consideration of the credit support, parties entered into Framework Agreements under which a Call Option was given to 3 Global Services Private Limited ["GSPL" for short], a subsidiary of HTIL, to buy from Goldspot Mercantile Company Private Limited ["Goldspot" for short] (an AG company) and Scorpios Beverages Private Limited ["Scorpios" for short] (an AS company) their entire shareholding in TII. Additionally, a Subscription Right was also provided allowing GSPL a right to subscribe to the shares of Centrino Trading Company Private Limited ["Centrino" for short] and ND Callus Info Services Private Limited ["NDC" for short]. GSPL was an Indian company under a Mauritius subsidiary of CGP which stood indirectly held by HTIL. These agreements also contained clauses which imposed restrictions to transfer downstream interests, termination rights, subject to objection from any party, etc. 10. The shareholding of HEL again underwent a change on 7.08.2006 through execution of 2006 IDFC Framework Agreement with the Hinduja Group exiting and its shareholding being acquired by SMMS Investments Private Limited ["SMMS" for short], an Indian company. Hereto, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich would be payable directly to certain existing legal local partners in order to extinguish HTIL's previous obligations to them. The offer further confirmed that VIH had come to arrangements with HTIL's existing local partners [AG, AS and Infrastructure Development Finance Company Limited (IDFC)] to maintain the local Indian shareholdings in accordance with the Indian FDI requirements. The offer also expressed VIH's willingness to offer Essar the same financial terms in HEL which stood offered to HTIL. 17. On the same day, i.e., 9.02.2007, Bharti conveys its no objection to the proposal made by Vodafone Group to purchase a direct or indirect interest in HEL from the Hutchison Group and/ or Essar Group. 18. On 10.02.2007, a re-revised offer was submitted by Vodafone valuing HEL at an enterprise value of US $18.80 bn and offering US $11.076 bn for HTIL's interest in HEL. 19. On 11.02.2007, a Tax Due Diligence Report was submitted by Ernst & Young. The relevant observation from the said Report reads as follows: "The target structure now also includes a Cayman company, CGP Investments (Holdings) Limited, CGP Investments (Holdings) Limited was not originally within the target gro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... direct and indirect equity and loan interests held through subsidiaries, in HEL to VIH. 25. On 20.02.2007, VIH applied for approval to FIPB. This application was made pursuant to Press Note 1 which applied to the acquisition of an indirect interest in HEL by VIH from HTIL. It was stated that "CGP owns directly and indirectly through its subsidiaries an aggregate of 42.34% of the issued share capital of HEL and a further indirect interests in 9.62% of the issued share capital of HEL". That, the transaction would result in VIH acquiring an indirect controlling interest of 51.96% in HEL, a company competing with Bharti, hence, approval of FIPB became necessary. It is to be noted that on 20.02.2007, VIH held 5.61% stake (directly) in Bharti. 26. On the same day, i.e., 20.02.2007, in compliance of Clause 5.2 of SPA, an Offer Letter was issued by Vodafone Group Plc on behalf of VIH to Essar for purchase of its entire shareholding (33%) in HEL. 27. On 2.03.2007, AG wrote to HEL, confirming that he, through his 100% Indian companies, owned 23.97% of a joint venture company-TII, which in turn owned 19.54% of HEL and, accordingly, his indirect interest in HEL worked out to 4.68%. That, he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7.28% (rounded up to 49.62%). After the additional purchase of 2.34% from Hindujas in August 2006, the aggregate HTIL direct and indirect FDI stood at 51.96%. In short, due to the difference in the US GAAP and the Indian GAAP the Declarations varied. The combined holding for US GAAP purposes was 61.88% whereas for Indian GAAP purposes it was 51.96%. Thus, according to HEL, the Indian GAAP number reflected the true equity ownership and control position. 32. By letter dated 9.03.2007, addressed by FIPB to HEL, several queries were raised. One of the questions FIPB had asked was "as to which entity was entitled to appoint the directors to the Board of Directors of HEL on behalf of TIIL which owns 19.54% of HEL?" In answer, vide letter dated 14.03.2007, HEL informed FIPB that under the Articles of HEL the directors were appointed by its shareholders in accordance with the provisions of the Indian company law. However, in practice the directors of HEL have been appointed pro rata to their respective shareholdings which resulted in 4 directors being appointed from the Essar Group, 6 directors from HTIL Group and 2 directors from TII. In practice, the directors appointed by TII to the Bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a 4. Right to use the Hutch brand in India 5. Right to appoint/remove directors from the Board of HEL and its subsidiaries 6. Right to exercise control over the management and affairs of the business of HEL (Management Rights) 7. Right to take part in all the investment, management and financial decisions of HEL 8. Right over the assigned loans and advances utilized for the business in India 9. Right of subscribing at par value in certain Indian companies 10. Right to exercise call option at the price agreed in Indian companies 11. Right to control premium 12. Right to non-compete against HTIL within the territory of India 13. Right to consultancy support in the use of Oracle license for the Indian business 14. Other intangible rights (right of customer base, goodwill etc.) 36. On 15.03.2007, a Term Sheet Agreement between VIH and Essar Teleholdings Limited, an Indian company which held 11% in HEL, and Essar Communications Limited, a Mauritius company which held 22% in HEL, was entered into for regulating the affairs of HEL and the relationship of the shareholders of HEL. In the recitals, it was stated that VIH had agreed to acquire the entire indirect shareholding of H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture a further 54.21% of Omega which together would give a further 15.03% proportionate indirect equity ownership of HEL, control premium, use and rights to Hutch brand in India and a non-compete agreement with HTIL. No individual price was assigned to any of the above items. That, under IFRS, consolidation included TII and Omega and, consequently, the accounts under IFRS showed the total shareholding in HEL as 67% (approx.). Thus, arrangements relating to Options stood valued as assets of CGP. In global basis valuation, assets of CGP consisted of: its downstream holdings, intangibles and arrangement relating to Options, i.e. Bundle of Rights acquired by VIH. This reply was in the letter dated 27.03.2007 in which it was further stated that HTIL had conducted an auction for sale of its interests in HEL in which HTIL had asked each bidder to name its price with reference to the enterprise value of HEL. As a consequence of the transaction, Vodafone will effectively step into the shoes of HTIL including all the rights in respect of its Indian investments that HTIL enjoyed. Lastly, the Indian joint venture partners would remain invested in HEL as the transaction did not involve the Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , and that India Development Fund ("IDF" for short), IDFC and SSKI Corporate Finance Private Limited ("SSKI" for short) would, instead of exercising Put Option and Cashless Option under 2006 IDFC Framework Agreement, exercise the same in pursuance of Omega Agreement. That, under the Omega Agreement, GSPL waived its right to exercise the Call Option under the 2006 IDFC Framework Agreement. 48. On 6.06.2007, a Framework Agreement was entered into among IDF, IDFC, SMMS, IDFC PE, HTIL Mauritius, GSPL, Omega and VIH by which GSPL had a Call Option to buy the entire equity shares of SMMS. Consequently, on 7.06.2007, a Shareholders Agreement was executed by which the shareholding pattern of Omega changed with SMMS having 61.6% and HTIL Mauritius having 38.4%. 49. On 27.06.2007, HTIL declared a special dividend of HK $6.75 per share, on account of the gains made by sale of HTIL's entire interest in HEL. 50. On 5.07.2007, a Framework Agreement was entered into among AG, AG Mercantile Company Private Limited, Plustech Mercantile Co. (P) Ltd ["Plustech" for short], GSPL, Nadal Trading Company Private Limited ["Nadal" for short] and VIH. Under clause 4.4, GSPL had an unconditional right to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the sectoral cap of 74%). Correctness of Azadi Bachao case - Re: Tax Avoidance/Evasion 57. Before us, it was contended on behalf of the Revenue that Union of India v. Azadi Bachao Andolan (2004) 10 SCC 1 needs to be overruled insofar as it departs from McDowell and Co. Ltd. v. CTO (1985) 3 SCC 230 principle for the following : i) Para 46 of McDowell judgment has been missed which reads as under: "on this aspect Chinnappa Reddy, J. has proposed a separate opinion with which we agree". [i.e. Westminster principle is dead]. ii) That, Azadi Bachao failed to read paras 41-45 and 46 of McDowell in entirety. If so read, the only conclusion one could draw is that four learned judges speaking through Misra, J. agreed with the observations of Chinnappa Reddy, J. as to how in certain circumstances tax avoidance should be brought within the tax net. iii) That, subsequent to McDowell, another matter came before the Constitution Bench of five Judges in Mathuram Agrawal v. State of Madhya Pradesh (1999) 8 SCC 667, in which Westminster principle was quoted which has not been noticed by Azadi Bachao. Our Analysis 58. Before coming to Indo-Mauritius DTAA, we need to clear the doubts raised on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tep had no business purpose, except deferment of tax although it had a business effect. Dawson went beyond Ramsay. It reconstructed the transaction not on some fancied principle that anything done to defer the tax be ignored but on the premise that the inserted transaction did not constitute "disposal" under the relevant Finance Act. Thus, Dawson is an extension of Ramsay principle. 63. After Dawson, which empowered the Revenue to restructure the transaction in certain circumstances, the Revenue started rejecting every case of strategic investment/tax planning undertaken years before the event saying that the insertion of the entity was effected with the sole intention of tax avoidance. In Craven (Inspector of Taxes) v. White (Stephen) (1988) 3 All. E.R. 495 it was held that the Revenue cannot start with the question as to whether the transaction was a tax deferment/saving device but that the Revenue should apply the look at test to ascertain its true legal nature. It observed that genuine strategic planning had not been abandoned. 64. The majority judgment in McDowell held that "tax planning may be legitimate provided it is within the framework of law" (para 45). In the latter p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n profits derived by them on standalone basis, irrespective of their actual degree of economic independence and regardless of whether profits are reserved or distributed to the shareholders/ participants. Furthermore, shareholders/ participants, that are subject to (personal or corporate) income-tax, are generally taxed on profits derived in consideration of their shareholding/participations, such as capital gains. Now a days, it is fairly well settled that for tax treaty purposes a subsidiary and its parent are also totally separate and distinct tax payers. 67. It is generally accepted that the group parent company is involved in giving principal guidance to group companies by providing general policy guidelines to group subsidiaries. However, the fact that a parent company exercises shareholder's influence on its subsidiaries does not generally imply that the subsidiaries are to be deemed residents of the State in which the parent company resides. Further, if a company is a parent company, that company's executive director(s) should lead the group and the company's shareholder's influence will generally be employed to that end. This obviously implies a restriction on the autonom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olding or operating company, such as Cayman Islands or Mauritius based company for both tax and business purposes. In doing so, foreign investors are able to avoid the lengthy approval and registration processes required for a direct transfer (i.e., without a foreign holding or operating company) of an equity interest in a foreign invested Indian company. However, taxation of such Holding Structures very often gives rise to issues such as double taxation, tax deferrals and tax avoidance. In this case, we are concerned with the concept of GAAR. In this case, we are not concerned with treaty-shopping but with the anti-avoidance rules. The concept of GAAR is not new to India since India already has a judicial anti-avoidance rule, like some other jurisdictions. Lack of clarity and absence of appropriate provisions in the statute and/or in the treaty regarding the circumstances in which judicial anti-avoidance rules would apply has generated litigation in India. Holding Structures are recognized in corporate as well as tax laws. Special Purpose Vehicles (SPVs) and Holding Companies have a place in legal structures in India, be it in company law, takeover code under SEBI or even under th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt, the onus will be on the Revenue to identify the scheme and its dominant purpose. The corporate business purpose of a transaction is evidence of the fact that the impugned transaction is not undertaken as a colourable or artificial device. The stronger the evidence of a device, the stronger the corporate business purpose must exist to overcome the evidence of a device. Whether Section 9 is a "look through" provision as submitted on behalf of the Revenue? 69. According to the Revenue, if its primary argument (namely, that HTIL has, under the SPA, directly extinguished its property rights in HEL and its subsidiaries) fails, even then in any event, income from the sale of CGP share would nonetheless fall within Section 9 of the Income Tax Act, 1961 as that Section provides for a "look through". In this connection, it was submitted that the word "through" in Section 9 inter alia means "in consequence of". It was, therefore, argued that if transfer of a capital asset situate in India happens "in consequence of" something which has taken place overseas (including transfer of a capital asset), then all income derived even indirectly from such transfer, even though abroad, becomes taxa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the previous year in which transfer took place. Consequently, there is no room for doubt that such transfer should exist during the previous year in order to attract the said sub-clause. The fiction created by Section 9(1)(i) applies to the assessment of income of non-residents. In the case of a resident, it is immaterial whether the place of accrual of income is within India or outside India, since, in either event, he is liable to be charged to tax on such income. But, in the case of a non-resident, unless the place of accrual of income is within India, he cannot be subjected to tax. In other words, if any income accrues or arises to a non-resident, directly or indirectly, outside India is fictionally deemed to accrue or arise in India if such income accrues or arises as a sequel to the transfer of a capital asset situate in India. Once the factum of such transfer is established by the Department, then the income of the nonresident arising or accruing from such transfer is made liable to be taxed by reason of Section 5(2)(b) of the Act. This fiction comes into play only when the income is not charged to tax on the basis of receipt in India, as receipt of income in India by i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (i). Further, "transfer" should be of an asset in respect of which it is possible to compute a capital gain in accordance with the provisions of the Act. Moreover, even Section 163(1)(c) is wide enough to cover the income whether received directly or indirectly. Thus, the words directly or indirectly in Section 9(1)(i) go with the income and not with the transfer of a capital asset (property). Lastly, it may be mentioned that the Direct Tax Code (DTC) Bill, 2010 proposes to tax income from transfer of shares of a foreign company by a non-resident, where at any time during 12 months preceding the transfer, the fair market value of the assets in India, owned directly or indirectly, by the company, represents at least 50% of the fair market value of all assets owned by the company. Thus, the DTC Bill, 2010 proposes taxation of offshore share transactions. This proposal indicates in a way that indirect transfers are not covered by the existing Section 9(1)(i) of the Act. In fact, the DTC Bill, 2009 expressly stated that income accruing even from indirect transfer of a capital asset situate in India would be deemed to accrue in India. These proposals, therefore, show that in the existin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arties; (v) the SPA ignores legal entities interposed between HTIL and HEL enabling HTIL to directly nominate the Directors on the Board of HEL; (vi) Qua management rights, even if the legal owners of HEL's shares (Mauritius entities) could have been directed to vote by HTIL in a particular manner or to nominate a person as a Director, such rights existed dehors the CGP share; (vii) Vide clause 6.2 of the SPA, HTIL was required to exercise voting rights in the specified situations on the diktat of VIH ignoring the legal owner of CGP share [HTIHL (BVI)]. Thus, according to the Revenue, HTIL ignored its subsidiaries and was exercising the voting rights qua the CGP and the HEL shares directly, ignoring all the intermediate subsidiaries which are 100% held and which are non-operational. According to the Revenue, extinguishment took place dehors the CGP share. It took place by virtue of various clauses of SPA as HTIL itself disregarded the corporate structure it had set up; (viii) As a holder of 100% shares of downstream subsidiaries, HTIL possessed de facto control over such subsidiaries. Such de facto control was the subject matter of the SPA. 73. At the outset, we need to reiterate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e dissecting approach, then, in our view, extinguishment took place because of the transfer of the CGP share and not by virtue of various clauses of SPA. In a case like the present one, where the structure has existed for a considerable length of time generating taxable revenues right from 1994 and where the court is satisfied that the transaction satisfies all the parameters of "participation in investment" then in such a case the court need not go into the questions such as de facto control vs. legal control, legal rights vs. practical rights, etc. 74. Be that as it may, did HTIL possess a legal right to appoint directors onto the board of HEL and as such had some "property right" in HEL? If not, the question of such a right getting "extinguished" will not arise. A legal right is an enforceable right. Enforceable by a legal process. The question is what is the nature of the "control" that a parent company has over its subsidiary. It is not suggested that a parent company never has control over the subsidiary. For example, in a proper case of "lifting of corporate veil", it would be proper to say that the parent company and the subsidiary form one entity. But barring such cases, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the decision-making power or authority of its (subsidiary's) directors. They cannot be reduced to be puppets. The decisive criteria is whether the parent company's management has such steering interference with the subsidiary's core activities that subsidiary can no longer be regarded to perform those activities on the authority of its own executive directors. 75. Before dealing with the submissions advanced on behalf of the Revenue, we need to appreciate the reason for execution of the SPA. Exit is an important right of an investor in every strategic investment. The present case concerns transfer of investment in entirety. As stated above, exit coupled with continuity of business is one of the important tell-tale circumstance which indicates the commercial/business substance of the transaction. Thus, the need for SPA arose to re-adjust the outstanding loans between the companies; to provide for standstill arrangements in the interregnum between the date of signing of the SPA on 11.02.2007 and its completion on 8.05.2007; to provide for a seamless transfer and to provide for fundamental terms of price, indemnities, warranties etc. As regards the right of HTIL to direct a downstr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect any of its downstream companies to vote in a manner as directed by it (HTIL). Facts of this case show that both the parent and the subsidiary companies worked as a group since 1994. That, as a practice, the subsidiaries did comply with the arrangement suggested by the Group holding company in the matter of voting, failing which the smooth working of HEL generating huge revenues was not possible. In this case, we are concerned with the expression "capital asset" in the income tax law. Applying the test of enforceability, influence/ persuasion cannot be construed as a right in the legal sense. One more aspect needs to be highlighted. The concept of "de facto" control, which existed in the Hutchison structure, conveys a state of being in control without any legal right to such state. This aspect is important while construing the words "capital asset" under the income tax law. As stated earlier, enforceability is an important aspect of a legal right. Applying these tests, on the facts of this case and that too in the light of the ownership structure of Hutchison, we hold that HTIL, as a Group holding company, had no legal right to direct its downstream companies in the matter of vo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll events that may take place between the date of execution of the SPA and completion of acquisition. Therefore, we have a provision for standstill in the SPA and so also the provision for transition. But, from that, it does not follow that without SPA, transition could not ensue. Therefore, in the SPA, we find provisions concerning Vendor's Obligations in relation to the conduct of business of HEL between the date of execution of SPA and the closing date, protection of investment during the said period, agreement not to amend, terminate, vary or waive any rights under the Framework/ Shareholders Agreements during the said period, provisions regarding running of business during the said period, assignment of loans, consequence of imposition of prohibition by way of injunction from any court, payment to be made by VIH to HTIL, giving of warranties by the Vendor, use of Hutch Brand, etc. The next point raised by the Revenue concerns termination of IDFC Framework Agreement of 2006 and its substitution by a fresh Framework Agreement dated 5.06.2007 in terms of the SPA. The submission of the Revenue before us was that the said Agreement dated 5.06.2007 (which is executed after the compl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the 2003 Term Sheet with Essar was given effect to by clause 5.2 of the SPA which gave Essar the Right to Tag Along with HTIL and exit from HEL. That, the Term Sheet of 5.07.2003 had legal effect because by a specific settlement dated 15.03.2007 between HTIL and Essar, the said Term Sheet stood terminated which was necessary because the Term Sheet bound the parties in the first place. We find no merit in the above arguments of the Revenue. The 2003 Term Sheet was between HTIL, Essar and UMTL. Disputes arose between Essar and HTIL. Essar asserted RoFR rights when bids were received by HTIL, which dispute ultimately came to be settled on 15.03.2007, that is after the SPA dated 11.02.2007. The SPA did not create any rights. The RoFR/TARs existed in the Hutchison structure. Thus, even without SPA, within the Hutchison structure these rights existed. Moreover, the very object of the SPA is to cover the situations which may arise during the transition and those which are capable of being anticipated and dealt with. Essar had 33% stakes in HEL. As stated, the Hutchison structure required the parent and the subsidiary to work together as a group. The said structure required the Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... financial results. Below the parent company are the subsidiaries which hold operational assets of the business and which often have their own subordinate entities that can extend layers. If large firms are not divided into subsidiaries, creditors would have to monitor the enterprise in its entirety. Subsidiaries reduce the amount of information that creditors need to gather. Subsidiaries also promote the benefits of specialization. Subsidiaries permit creditors to lend against only specified divisions of the firm. These are the efficiencies inbuilt in a holding structure. Subsidiaries are often created for tax or regulatory reasons. They at times come into existence from mergers and acquisitions. As group members, subsidiaries work together to make the same or complementary goods and services and hence they are subject to the same market supply and demand conditions. They are financially inter-linked. One such linkage is the intra-group loans and guarantees. Parent entities own equity stakes in their subsidiaries. Consequently, on many occasions, the parent suffers a loss whenever the rest of the group experiences a downturn. Such grouping is based on the principle of internal corr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nced the former to sell the shares of Indian companies in which event the gains would have arisen to the Mauritius companies, who are not liable to pay capital gains tax under the Indo- Mauritius DTAA. That, nothing prevented the Mauritius companies from declaring dividend on gains made on the sale of shares. There is no tax on dividends in Mauritius. Thus, the Mauritius route was available but it was not opted for because that route would not have brought in the control over GSPL. Secondly, if the Mauritius companies had sold the shares of HEL, then the Mauritius companies would have continued to be the subsidiaries of HTIL, their accounts would have been consolidated in the hands of HTIL and HTIL would have accounted for the gains in exactly the same way as it has accounted for the gains in the hands of HTIHL (CI) which was the nominated payee. Thus, in our view, two routes were available, namely, the CGP route and the Mauritius route. It was open to the parties to opt for any one of the two routes. Thirdly, as stated above, in the present case, the SPA was entered into inter alia for a smooth transition of business on divestment by HTIL. As stated, transfer of the CGP share enab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ayman Islands, the situs of the CGP share existed where the "underlying assets are situated", that is to say, India. That, since CGP as an exempted company conducts no business either in the Cayman Islands or elsewhere and since its sole purpose is to hold shares in a subsidiary company situated outside the Cayman Islands, the situs of the CGP share, in the present case, existed "where the underlying assets stood situated" (India). We find no merit in these arguments. At the outset, we do not wish to pronounce authoritatively on the Companies Law of Cayman Islands. Be that as it may, under the Indian Companies Act, 1956, the situs of the shares would be where the company is incorporated and where its shares can be transferred. In the present case, it has been asserted by VIH that the transfer of the CGP share was recorded in the Cayman Islands, where the register of members of the CGP is maintained. This assertion has neither been rebutted in the impugned order of the Department dated 31.05.2010 nor traversed in the pleadings filed by the Revenue nor controverted before us. In the circumstances, we are not inclined to accept the arguments of the Revenue that the situs of the CGP sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) in HEL. On the basis of the shareholding test, HTIL could be said to have a 52% control over HEL. By the same test, it could be equally said that the balance 15% stakes in HEL remained with AS, AG and IDFC (Indian partners) who had through their respective group companies invested 15% in HEL through TII and Omega and, consequently, HTIL had no control over 15% stakes in HEL. At this stage, we may state that under the Hutchison structure shares of Plustech in the AG Group, shares of Scorpios in the AS Group and shares of SMMS came under the options held by GSPL. Pending exercise, options are not management rights. At the highest, options could be treated as potential shares and till exercised they cannot provide right to vote or management or control. In the present case, till date GSPL has not exercised its rights under the Framework Agreement 2006 because of the sectoral cap of 74% which in turn restricts the right to vote. Therefore, the transaction in the present case provides for a triggering event, viz. relaxation of the sectoral cap. Till such date, HTIL/VIH cannot be said to have a control over 15% stakes in HEL. It is for this reason that even FIPB gave its approval to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Therefore, neither from Clause 5.2 of the Shareholders Agreement nor from the Term Sheet dated 15.03.2007, one could say that VIH had acquired 67% controlling interest in HEL. 85. As regards the question as to why VIH should pay consideration to HTIL based on an enterprise value of 67% of the share capital of HEL is concerned, it is important to note that valuation cannot be the basis of taxation. The basis of taxation is profits or income or receipt. In this case, we are not concerned with tax on income/ profit arising from business operations but with tax on transfer of rights (capital asset) and gains arising therefrom. In the latter case, we have to see the conditions on which the tax becomes payable under the Income Tax Act. Valuation may be a science, not law. In valuation, to arrive at the value one has to take into consideration the business realities, like the business model, the duration of its operations, concepts such as cash flow, the discounting factors, assets and liabilities, intangibles, etc. In the present case, VIH paid US $11.08 bn for 67% of the enterprise value of HEL plus its downstream companies having operational licences. It bought an upstream comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rescribed by US GAAP. Now, in the present case, HTIL as a listed company was required to make disclosures of potential risk involved in the investment under the Hutchison structure. HTIL had furnished Letters of Credit to Rabo Bank which in turn had funded AS and AG, who in turn had agreed to place the shares of Plustech and Scorpios under Options held by GSPL. Thus, giving of the Letters of Credit and placing the shares of Plustech and Scorpios under Options were required to be disclosed to the US investors under the US GAAP, unlike Indian GAAP. Thus, the difference between the 52% figure (control) and 67% (equity interest) arose on account of the difference in computation under the Indian and US GAAP. Approach of the High Court (acquisition of CGP share with "other rights and entitlements") 86. Applying the "nature and character of the transaction" test, the High Court came to the conclusion that the transfer of the CGP share was not adequate in itself to achieve the object of consummating the transaction between HTIL and VIH. That, intrinsic to the transaction was a transfer of other "rights and entitlements" which rights and entitlements constituted in themselves "capital as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of this case, we find that this case concerns a straightforward share sale. VIH acquired Upstream shares with the intention that the congeries of rights, flowing from the CGP share, would give VIH an indirect control over the three genres of companies. If one looks at the chart indicating the Ownership Structure, one finds that the acquisition of the CGP share gave VIH an indirect control over the tier I Mauritius companies which owned shares in HEL totalling to 42.34%; CGP India (Ms), which in turn held shares in TII and Omega and which on a pro rata basis (the FDI principle), totalled up to 9.62% in HEL and an indirect control over Hutchison Tele-Services (India) Holdings Ltd. (Ms), which in turn owned shares in GSPL, which held call and put options. Although the High Court has analysed the transactional documents in detail, it has missed out this aspect of the case. It has failed to notice that till date options have remained un-encashed with GSPL. Therefore, even if it be assumed that the options under the Framework Agreements 2006 could be considered to be property rights, there has been no transfer or assignment of options by GSPL till today. Even if it be assumed that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ale. This case does not involve sale of assets on itemized basis. The High Court ought to have applied the look at test in which the entire Hutchison structure, as it existed, ought to have been looked at holistically. This case concerns investment into India by a holding company (parent company), HTIL through a maze of subsidiaries. When one applies the "nature and character of the transaction test", confusion arises if a dissecting approach of examining each individual asset is adopted. As stated, CGP was treated in the Hutchison structure as an investment vehicle. As a general rule, in a case where a transaction involves transfer of shares lock, stock and barrel, such a transaction cannot be broken up into separate individual components, assets or rights such as right to vote, right to participate in company meetings, management rights, controlling rights, control premium, brand licences and so on as shares constitute a bundle of rights. [See Charanjit Lal v. Union of India AIR 1951 SC 41, Venkatesh (minor) v. CIT 243 ITR 367 (Mad) and Smt. Maharani Ushadevi v. CIT 131 ITR 445 (MP)] Further, the High Court has failed to examine the nature of the following items, namely, non-comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at" the entire Ownership Structure set up by Hutchison as a single consolidated bargain and interpret the transactional documents, while examining the Offshore Transaction of the nature involved in this case, in that light. Scope and applicability of Sections 195 and 163 of IT Act 89. Section 195 casts an obligation on the payer to deduct tax at source ("TAS" for short) from payments made to nonresidents which payments are chargeable to tax. Such payment(s) must have an element of income embedded in it which is chargeable to tax in India. If the sum paid or credited by the payer is not chargeable to tax then no obligation to deduct the tax would arise. Shareholding in companies incorporated outside India (CGP) is property located outside India. Where such shares become subject matter of offshore transfer between two non-residents, there is no liability for capital gains tax. In such a case, question of deduction of TAS would not arise. If in law the responsibility for payment is on a non-resident, the fact that the payment was made, under the instructions of the nonresident, to its Agent/Nominee in India or its PE/Branch Office will not absolve the payer of his liability under Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he context, and in a manner that brings the non-resident assessee under the jurisdiction of the Indian tax authorities. Lastly, in the present case, the Revenue has failed to establish any connection with Section 9(1)(i). Under the circumstances, Section 195 is not applicable. Alternatively, the Revenue contended before us that VIH can be proceeded against as "representative assessee" under Section 163 of the Act. Section 163 does not relate to deduction of tax. It relates to treatment of a purchaser of an asset as a representative assessee. A conjoint reading of Section 160(1)(i), Section 161(1) and Section 163 of the Act shows that, under given circumstances, certain persons can be treated as "representative assessee" on behalf of non-resident specified in Section 9(1). This would include an agent of non-resident and also who is treated as an agent under Section 163 of the Act which in turn deals with special cases where a person can be regarded as an agent. Once a person comes within any of the clauses of Section 163(1), such a person would be the "Agent" of the nonresident for the purposes of the Act. However, merely because a person is an agent or is to be treated as an agent, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent manner. Legal doctrines like "Limitation of Benefits" and "look through" are matters of policy. It is for the Government of the day to have them incorporated in the Treaties and in the laws so as to avoid conflicting views. Investors should know where they stand. It also helps the tax administration in enforcing the provisions of the taxing laws. As stated above, the Hutchison structure has existed since 1994. According to the details submitted on behalf of the appellant, we find that from 2002-03 to 2010-11 the Group has contributed an amount of Rs. 20,242 crores towards direct and indirect taxes on its business operations in India. Order 92. For the above reasons, we set aside the impugned judgment of the Bombay High Court dated 8.09.2010 in Writ Petition No. 1325 of 2010. Accordingly, the Civil Appeal stands allowed with no order as to costs. The Department is hereby directed to return the sum of Rs. 2,500 crores, which came to be deposited by the appellant in terms of our interim order, with interest at the rate of 4% per annum within two months from today. The interest shall be calculated from the date of withdrawal by the Department from the Registry of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dents in the share/convertible debentures/preference shares of an Indian company but the question which looms large is whether our Company Law, Tax Laws and Regulatory Laws have been updated so that there can be greater scrutiny of non-resident enterprises, ranging from foreign contractors and service providers, to finance investors. Case in hand is an eye-opener of what we lack in our regulatory laws and what measures we have to take to meet the various unprecedented situations, that too without sacrificing national interest. Certainty in law in dealing with such cross-border investment issues is of prime importance, which has been felt by many countries around the world and some have taken adequate regulatory measures so that investors can arrange their affairs fruitfully and effectively. Steps taken by various countries to meet such situations may also guide us, a brief reference of which is being made in the later part of this judgment. 4. We are, in the present case, concerned with a matter relating to cross-border investment and the legal issues emanate from that. Facts have been elaborately dealt with by the High Court in the impugned judgment and also in the leading judgme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . HTIL, a part of Hutchison Whampoa Group, incorporated in Cayman Islands in the year 2004 was listed in Hong Kong (HK) and New York (NY) Stock Exchanges. In the year 2005, as contemplated in the Term Sheet Agreement dated 05.07.2003, HTIL consolidated its Indian business operations through six companies in a single holding company HMTL, later renamed as Hutchison Essar Ltd. (HEL). On 03.11.2005, Press Note 5 of 2005 series was issued by the Government of India enhancing the FDI ceiling from 49% to 74% in the Telecom Sector. On 28.10.2005, Vodafone International Holding BV (VIHBV) (Netherlands) had agreed to acquire 5.61% of shareholding in Bharati Tele Ventures Limited (Bharati Airtel Limited) and on the same day Vodafone Mauritius Limited (Subsidiary of VIHBV) had agreed to acquire 4.39% shareholding in Bharati Enterprises Pvt. Ltd. (renamed Bharati Infotel Ltd.), which indirectly held shares in Bharati Airtel Ltd. 8. HEL shareholding was then restructured through TII and an SHA was executed on 01.03.2006 between Centrino Trading Company Pvt. Ltd. (Centrino), an Asim Ghosh (Group) [for short (AG)], ND Callus Info Services Pvt. Ltd. (for short NDC), an Analjit Singh (Group) [for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te affairs of ITNL. Agreement referred to the presence of at least one of the directors nominated by HTIL in the Board of Directors of Omega. HTIL was only a confirming party to this Agreement since it was the parent company. 11. HTIL issued a press release on 22.12.2006 in the HK and NY Stock Exchanges announcing that it had been approached by various potentially interested parties regarding a possible sale of "its equity interest" in HEL in the Telecom Sector in India. HTIL had adopted those measures after procuring all assignments of loans, facilitating FWAs, SHAs, transferring Hutch Branch, transferring Oracle License etc. 12. Vodafone Group Plc. came to know of the possible exit of Hutch from Indian telecom business and on behalf of Vodafone Group made a non-binding offer on 22.12.06, for a sum of US$ 11.055 million in cash for HTIL's shareholdings in HEL. The offer was valued at an "enterprise value" of US$ 16.5 billion. Vodafone then appointed on 02.01.2007 Ernst and Young LLP to conduct due diligence, and a Nonwww. Disclosure (Confidentiality) Agreement dated 02.01.2007 was entered into between HTIL and Vodafone. On 09.02.2007 Vodafone Group Plc. wrote a letter to HTIL ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nge Commission, Washington (SEC), London Stock Exchange and HK Stock Exchange stating that it had agreed to acquire a Controlling Interest in HEL for a cash consideration of US$ 11.1 billion. HTIL Chairman sent a letter to the Vice-Chairman of Essar Group on 14.02.2007 along with a copy of Press announcement made by HTIL, setting out the principal terms of the intended sale of HTIL of its equity and loans in HEL, by way of sale of CGP share and loan assignment to VIHBV. 16. Vodafone on 20.02.2007 filed an application with Foreign Investment Promotion Board (FIPB) requesting it to take note of and grant approval under Press note no.1 to the indirect acquisition by Vodafone of 51.96% stake in HEL through an overseas acquisition of the entire share capital of CGP from HTIL. HTIL made an announcement on HK Stock Exchange regarding the intended use of proceeds from sale of HTIL's interest in HEL viz., declaring a special dividend of HK$ 6.75 per share, HK$ 13.9 billion to reduce debt and the remainder to be invested in telecommunication business, both for expansion and towards working capital and general policies. Reference was also made to the sale share and sale loans as being the en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out that no permission of any regulatory authority was required. 19. Vodafone also wrote to FIPB on 14.03.2007 confirming that VIHBV's effective shareholding in HEL would be 51.96% i.e. Vodafone would own 42% direct interest in HEL through its acquisition of 100% of CGP Investments (Holdings) Limited (CGPIL) and through CGPIL Vodafone would also own 37% in TII which in turn owned 20% in HEL and 38% in Omega which in turn owned 5% in HEL. It was pointed out that both TII and Omega were Indian companies and those investments combined would give Vodafone a controlling interest of 52% in HEL. Further, it was pointed out that HTIL's Indian partners AG, AS, IDFC who between them held a 15% interest in HEL on aggregate had agreed to retain their shareholding with full control including voting rights and dividend rights. 20. HTIL, Essar Teleholding Limited (ETL), Essar Communication Limited (ECL), Essar Tele Investments Limited (ETIL), Essar Communications (India) Limited (ECIL) signed a settlement agreement on 15.03.2007 regarding Essar Group's support for completion of the proposed transaction and covenant not to sue any Hutchison Group Company etc., in lieu of payment by HTIL of US$ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... % as per the application. Vodafone on 19.03.2007 wrote to FIPB stating that it had agreed to acquire from HTIL interest in HEL which included 52% equity shareholding for US$ 11.08 billion which price included control premium, use and rights to Hutch brand in India, a non-compete agreement with Hutch group, value of non-voting, non-convertible preference shares, various loans obligations and entitlement and to acquire further 15% indirect interest in HEL, subject to Indian foreign investment rules, which together equated to about 67% of the economic value of HEL. 24. VIHBVI and Indian continent Investors Limited (ICIL) had entered into an SHA on 21.03.2007 whereby VIHBVI had to sell 106.470.268 shares in Bharati Airtel to ICIL for a cash consideration of US$ 1,626,930.881 (which was later amended on 09.05.2007) 25. HEL on 22.3.2007 replied to the letter of 15.03.2007, issued by the Joint Director of Income Tax (International Taxation) furnishing requisite information relating to HEL clarifying that it was neither a party to the transaction nor would there be any transfer of shares of HEL. 26. HEL received a letter dated 23.3.2007 from the Additional Director Income Tax (Internati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty in N.D. Callus and Centrino respectively, which would form the basis of the future partnership with AS & AG. Vodafone also wrote a letter to FIPB setting out details of Vodafone Group's interest worldwide. On 30.04.07 a resolution was passed by the Board of Directors of CGP pertaining to loan agreement, resignation and appointment of directors, transfer of shares; all to take effect on completion of SPA. Resolution also accorded approval of entering into a Deed of Assignment in respect of loans owed to HTI(BVI) Finance Limited in the sums of US$ 132,092,447.14 and US$ 28,972,505.70. Further resolution also accorded approval to the resignations of certain persons as Directors of the Company, to take effect on completion of SPA. Further, approval was also accorded to the appointment of Erik de Rjik as a sole director of CGP. Resolution also accorded approval to the transfer of CGP from HTI BVI to Vodafone. On 30.04.2007 a board of resolution was passed by the directors of Array for the assignment of loans and resignation of existing directors and appointment of new directors namely Erik de Rjik and two others. On 30.04.2007, the board of directors of HTI BVI approved the trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etween 3GSPL and Hutchison Whampoa Properties (India) Limited, a WOS of HWP Investments Holdings (India) Limited, Mauritius, for the sale of business to 3GSPL of maintaining and operating a call centre as a going concern on slump-sale-basis for a composite price of Rs. 640 million. On 08.05.2007, as already stated, a Deed of Retention was executed between HTIL and Vodafone whereunder HTIL had agreed that out of the total consideration payable in terms of Clause 8.10(b) of the SPA, Vodafone would be entitled to retain US$ 351.8 million by way of HTIL's contribution towards acquisition cost of options i.e., stake of AS & AG. On 08.05.2007 Vodafone paid US$ 10,854,229,859.05 to HTIL. 31. Vodafone on 18.05.2007 sent a letter to FIPB confirming that VIHBV had no existing joint venture or technology transfer/trade mark agreement in the same field as HEL except with Bharati as disclosed and since 20.02.2007 a member of Bharati Group had exercised the option to acquire a further 5.6% interest from Vodafone such that Vodafone's direct and indirect stake in Bharati Airtel would be reduced to 4.39%. 32. An agreement (Omega Agreement) dated 05.06.2007 was entered into between I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the shares to any foreign entity without requisite approvals. 35. The Income Tax Department on 06.08.2007 issued a notice to VEL under Section 163 of the Income Tax Act to show cause why it should not be treated as a representative assessee of Vodafone. The notice was challenged by VEL in Writ Petition No.1942 of 2007 before the Bombay High Court. The Assistant Director of Income Tax (Intl.) Circle 2(2), Mumbai, issued a show cause notice to Vodafone under Section 201(1) and 201(1A) of the I.T. Act as to why Vodafone should not be treated a assessee-in-default for failure to withhold tax. Vodafone then filed a Writ Petition 2550/2007 before the Bombay High Court for setting aside the notice dated 19.09.2007. Vodafone had also challenged the constitutional validity of the retrospective amendment made in 2008 to Section 201 and 191 of the I.T. Act. On 03.12.2008 the High Court dismissed the Writ Petition No.2550 of 2007 against which Vodafone filed SLP No.464/2009 before this Court and this Court on 23.01.2009 disposed of the SLP directing the Income Tax Authorities to determine the jurisdictional challenge raised by Vodafone as a preliminary issue. On 30.10.2009 a 2nd show cause n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l in indirect holding companies of HEL, rights to use Hutch brand in India, non-compete agreement with Hutch brand in India etc., which all constitute capital asset as per Section 2(14) of the I.T. Act. (d) The price paid by Vodafone to HTIL of US$ 11.08 billion factored in as part of the consideration of those diverse rights and entitlements and many of those entitlements are relatable to the transfer of CGP share and that the transactional documents are merely incidental or consequential to the transfer of CGP share but recognized independently the rights and entitlements of HTIL in relation to Indian business which are being transferred to VIHBV. (e) High Court held that the transfer of CGP share was not adequate in itself to achieve the object of consummating the transaction between HTIL and VIHBV and the rights and entitlements followed would amount to capital gains. (f) The Court also held that where an asset or source of income is situated in India, the income of 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, hence, chargeable under Section 9(1)(i) or 163 of the I.T. Act. (g) Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 9. Further, it was also pointed out that language in Section 9 does not contain "look through provisions" and even the words "indirectly" or "through" appearing in Section 9 would not make a transaction of a non-resident taxable in India unless there is a transfer of capital asset situated in India. Learned Senior counsel also submitted that the Income Tax Department has committed an error in proceeding on a "moving theory of nexus" on the basis that economic interest and underlying asset are situated in India. It was pointed out that there cannot be transfer of controlling interest in a Company independent from transfer of shares and under the provisions of the Company Law. Acquisition of shares in a Company entitles the Board a right of "control" over the Company. Learned Senior Counsel also pointed out the right to vote, right to appoint Board of Directors, and other management rights are incidental to the ownership of shares and there is no change of control in the eye of law but only in commercial terms. Mr. Salve emphasized that, in absence of the specific legislation, such transactions should not be taxed. On the situs of shares, learned senior counsel pointed out that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld be construed to apply to payers who have a presence in India or else enforcement would be impossible and such a provision should be read down in case of payments not having any nexus with India. Senior counsel also submitted that the withholding tax provisions under Section 195 of the Indian Income Tax Act, do not apply to offshore entities making off-shore payments and the said Section could be triggered only if it can be established that the payment under consideration is of a "sum chargeable" under the Income Tax Act (for short IT Act). Senior counsel therefore contended that the findings of the Tax Authorities that pursuant to the transaction the benefit of telecom licence stood transferred to Vodafone is misconceived and that under the telecom policy of India a telecom licence can be held only by an Indian Company and there is no transfer direct or indirect of any licence to Vodafone. 40. Mr. R.F. Nariman, Learned Solicitor General appearing for the Income Tax Department submitted that the sale of CGP share was nothing but an artificial avoidance scheme and CGP was fished out of the HTIL legal structure as an artificial tax avoidance contrivance. Shri Nariman pointed out t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and submitted that if business purpose as opposed to effect is to artificially avoid tax then that step should be ignored and the courts should adopt a purposive construction on the SPA. Considerable reliance was placed on judgment of this Court in Mc.Dowell and submitted that the same be followed and not Azadi Bachao Andolan which has been incorrectly decided. Further, it was also pointed out that Circular No.789 as regards the conclusiveness of TRC would apply only to dividend clause and as regards capital gains, it would still have to satisfy the twin tests of Article 13(4) of the treaty namely the shares being "alienated and the gains being derived" by a Mauritian entity. Learned Solicitor General also submitted that the Department can make an enquiry into whether capital gains have been factually and legally assigned to a Mauritian entity or to third party and whether the Mauritian Company was a façade. 42. Learned counsels, on either side, in support of their respective contentions, referred to several judgments of this Court, foreign Courts, international expert opinions, authoritative articles written by eminent authors etc. Before examining the same, let us first e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... investment is overseas. For purely commercial reasons, a foreign group may wind up its activities overseas for better returns, due to disputes between partners, unfavourable fiscal policies, uncertain political situations, strengthen fiscal loans and its application, threat to its investment, insecurity, weak and time consuming judicial system etc., all can be contributing factors that may drive its exit or restructuring. Clearly, there is a fundamental difference in transnational investment made overseas and domestic investment. Domestic investments are made in the home country and meant to stay as it were, but when the trans-national investment is made overseas away from the natural residence of the investing company, provisions are usually made for exit route to facilitate an exit as and when necessary for good business and commercial reasons, which is generally foreign to judicial review. 46. Revenue/Courts can always examine whether those corporate structures are genuine and set up legally for a sound and veritable commercial purpose. Burden is entirely on the Revenue to show that the incorporation, consolidation, restructuring etc. has been effected to achieve a fraudulent, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laws in the countries where they are established. From country to country laws governing incorporation, management, control, taxation etc. may change. Many developed and wealthy Nations may park their capital in such off-shore companies to carry on business operations in other countries in the world. Many countries give facilities for establishing companies in their jurisdiction with minimum control and maximum freedom. Competition is also there among various countries for setting up such offshore companies in their jurisdiction. Demand for offshore facilities has considerably increased, in recent times, owing to high growth rates of cross-border investments and to the increased number of rich investors who are prepared to use high technology and communication infrastructures to go offshore. Removal of barriers to cross-border trade, the liberalization of financial markets and new communication technologies have had positive effects on the developing countries including India. 50. Investment under foreign Direct Investment Scheme (FDI scheme), investment by Foreign Institutional Investors (FIIs) under the Portfolio Investment Scheme, investment by NRIs/OBCs under the Portfolio In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lacklist was avoided by Cayman Islands in May 2000 by committing itself to a string of reforms to improve transparency, remove discriminatory practices and began to exchange information with OECD. Often, complaints have been raised stating that these centres are utilized for manipulating market, to launder money, to evade tax, to finance terrorism, indulge in corruption etc. All the same, it is stated that OFCs have an important role in the international economy, offering advantages for multi-national companies and individuals for investments and also for legitimate financial planning and risk management. It is often said that insufficient legislation in the countries where they operate gives opportunities for money laundering, tax evasion etc. and, hence, it is imperative that that Indian Parliament would address all these issues with utmost urgency. Need for Legislation: 54. Tax avoidance is a problem faced by almost all countries following civil and common law systems and all share the common broad aim, that is to combat it. Many countries are taking various legislative measures to increase the scrutiny of transactions conducted by non-resident enterprises. Australia has both ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany (See Gramophone & Typewriter Ltd. v. Stanley, (1908-10) All ER Rep 833 at 837). 57. Subsidiary companies are, therefore, the integral part of corporate structure. Activities of the companies over the years have grown enormously of its incorporation and outside and their structures have become more complex. Multi National Companies having large volume of business nationally or internationally will have to depend upon their subsidiary companies in the national and international level for better returns for the investors and for the growth of the company. When a holding company owns all of the voting stock of another company, the company is said to be a WOS of the parent company. Holding companies and their subsidiaries can create pyramids, whereby subsidiary owns a controlling interest in another company, thus becoming its parent company. 58. Legal relationship between a holding company and WOS is that they are two distinct legal persons and the holding company does not own the assets of the subsidiary and, in law, the management of the business of the subsidiary also vests in its Board of Directors. In Bacha F. Guzdar v. CIT AIR 1955 SC 74, this Court held that shareholders ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such as a company is a sham or the agent of the shareholder, the parent company is regarded as a shareholder. Multi-National Companies, by setting up complex vertical pyramid like structures, would be able to distance themselves and separate the parent from operating companies, thereby protecting the multi-national companies from legal liabilities. SHAREHOLDERS' AGREEMENT 62. hareholders' Agreement ( for short SHA) is essentially a contract between some or all other shareholders in a company, the purpose of which is to confer rights and impose obligations over and above those provided by the Company Law. SHA is a private contract between the shareholders compared to Articles of Association of the Company, which is a public document. Being a private document it binds parties thereof and not the other remaining shareholders in the company. Advantage of SHA is that it gives greater flexibility, unlike Articles of Association. It also makes provisions for resolution of any dispute between the shareholders and also how the future capital contributions have to be made. Provisions of the SHA may also go contrary to the provisions of the Articles of Association, in that event, naturally ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for matters such as restriction of transfer of shares i.e. Right of First Refusal (ROFR), Right of First Offer (ROFO), Drag-Along Rights (DARs) and Tag-Along Rights (TARs), Pre-emption Rights, Call option, Put option, Subscription option etc. SHA in a characteristic Joint Venture Enterprise may regulate its affairs on the basis of various provisions enumerated above, because Joint Venture enterprise may deal with matters regulating the ownership and voting rights of shares in the company, control and manage the affairs of the company, and also may make provisions for resolution of disputes between the shareholders. Many of the above mentioned provisions find a place in SHAs, FWAs, Term Sheet Agreement etc. in the present case, hence, we may refer to some of those provisions. (a) Right of First Refusal (ROFR): ROFR permits its holders to claim the transfer of the subject of the right with a unilateral declaration of intent which can either be contractual or legal. No statutory recognition has been given to that right either in the Indian Company Law or the Income Tax Laws. Some foreign jurisdictions have made provisions regulating those rights by statutes. Generally, ROFR is contra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sell a set number of shares of stock, which one do not yet own, at a pre-determined strike price, before the option reaches the expiration date. A put option is purchased with the belief that the underlying stock price will drop well before the strike price, at which point one may choose to exercise the option. (f) Cash and Cashless Options: Cash and Cashless options are related arrangement to call and put options creating a route by which the investors could carry out their investment, in the event of an appreciation in the value of shares. 66. SHA, therefore, regulate the ownership and voting rights of shares in the company including ROFR, TARs, DARs, Preemption Rights, Call Options, Put Options, Subscription Option etc. in relation to any shares issued by the company, restriction of transfer of shares or granting securities interest over shares, provision for minority protection, lock-down or for the interest of the shareholders and the company. Provisions referred to above, which find place in a SHA, may regulate the rights between the parties which are purely contractual and those rights will have efficacy only in the course of ownership of shares by the parties. SHARES, V ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 54) SCR 674 at 726 : AIR 1954 SC 119, this Court noticed the principle laid down in Chiranjit Lal Chowdhuri (supra). 71. Voting arrangements in SHAs or pooling agreements are not "property". Contracts that provide for voting in favour of or against a resolution or acting in support of another shareholder create only "contractual obligations". A contract that creates contractual rights thereby, the owner of the share (and the owner of the right to vote) agrees to vote in a particular manner does not decouple the right to vote from the share and assign it to another. A contract that is entered into to provide voting in favour of or against the resolution or acting in support of another shareholder, as we have already noted, creates contractual obligation. Entering into any such contract constitutes an assertion (and not an assignment) of the right to vote for the reason that by entering into the contract: (a) the owner of the share asserts that he has a right to vote; (b) he agrees that he is free to vote as per his will; and (c) he contractually agrees that he will vote in a particular manner. Once the owner of a share agrees to vote in a particular manner, that itself would not de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital asset unless the Statute stipulates otherwise. Acquisition of shares may carry the acquisition of controlling interest, which is purely a commercial concept and tax is levied on the transaction, not on its effect. A. LIFTING THE VEIL - TAX LAWS 75. Lifting the corporate veil doctrine is readily applied in the cases coming within the Company Law , Law of Contract, Law of Taxation. Once the transaction is shown to be fraudulent, sham, circuitous or a device designed to defeat the interests of the shareholders, investors, parties to the contract and also for tax evasion, the Court can always lift the corporate veil and examine the substance of the transaction. This Court in Commissioner of Income Tax v. Sri Meenakshi Mills Ltd., Madurai, AIR 1967 SC 819 held that the Court is entitled to lift the veil of the corporate entity and pay regard to the economic realities behind the legal façade meaning that the court has the power to disregard the corporate entity if it is used for tax evasion. In Life Insurance Corporation of India v. Escorts Limited and Others (1986) 1 SCC 264, this Court held that the corporate veil may be lifted where a statute itself contemplates lift ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of salary or wages. Crown's claim of substance doctrine was, however, rejected by the House of Lords. Lord Tomlin's celebrated words are quoted below: "Every man 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. If he succeeds in ordering them so as to secure this result, then, however unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax. This so called doctrine of 'the substance' seems to me to be nothing more than an attempt to make a man pay notwithstanding that he has so ordered his affairs that the amount of tax sought from him is not legally claimable." Lord Atkin, however, dissented and stated that "the substance of the transaction was that what was being paid was remuneration." The principles which have emerged from that judgment are as follows: (1) A legislation is to receive a strict or literal interpretation; (2) An arrangement is to be looked at not in by its economic or commercial substance but by its legal form; and (3) An arrangement is effective for tax purposes even if it has no busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ham in the traditional sense, the Court had to adhere to the form of the transaction following the Duke Westminster concept. 77. In Ramsay (supra) it may be noted, the taxpayer produced a profit that was liable to capital gains tax, but a readymade claim was set up to create an allowable loss that was purchased by the taxpayer with the intention of avoiding the capital gains tax. Basically, the House of Lords, cautioned that the technique of tax avoidance might progress and technically improve and Courts are not obliged to be at a standstill. In other words, the view expressed was that that a subject could be taxed only if there was a clear intendment and the intendment has to be ascertained on clear principles and the Courts would not approach the issue on a mere literal interpretation. Ramsay was, therefore, seen as a new approach to artificial tax avoidance scheme. 78. Ramsay was followed by the House of Lords in another decision in IRC v. Burmah Oil Co Ltd. (1982) 54 TC 200. This case was also concerned with a self-cancelling series of transactions. Lord Diplock, in that case, confirmed the judicial view that a development of the jurisprudence was taking place, stating that R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re exchange and sale agreements to be distributed as steps in the scheme, because they had an enduring legal effect. The House of Lords, however, held that steps inserted in a preordained series of transactions with no commercial purpose other than tax avoidance should be disregarded for tax purposes, notwithstanding that the inserted step (i.e. the introduction of Greenjacket) had a business effect. Lord Brightman stated that inserted step had no business purpose apart from the deferment of tax, although it had a business effect. 81. Even though in Dawson, the House of Lords seems to strike down the transaction by the taxpayer for the purpose of tax avoidance, House of Lords in Craven (supra) clarified the position further. In that case, the taxpayers exchanged their shares in a trading company (Q Ltd) for shares in an Isle of Man holding company (M Ltd), in anticipation of a potential sale or merger of the business. Taxpayers, in the meanwhile, had abandoned negotiations with one interested party, and later concluded a sale of Q Ltd's shares with another. M Ltd subsequently loaned the entire sale proceeds to the taxpayers, who appealed against assessments to capital gains ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded that the limited partnership had only 'incurred capital expenditure on the provision of machinery or plant' of 25% and no more. 83. Lord Goff explained the meaning of "unacceptable tax avoidance" in Ensign Tankers and held that unacceptable tax avoidance typically involves the creation of complex artificial structures by which, as though by the wave of a magic wand, the taxpayer conjures out of the air a loss, or a gain, or expenditure, or whatever it may be, which otherwise would never have existed. This, of course, led to further debate as to what is "unacceptable tax avoidance" and "acceptable tax avoidance". 84. House of Lords, later in Inland Revenue Commissioner v. McGuckian (1997) BTC 346 said that the substance of a transaction may be considered if it is a tax avoidance scheme. Lord Steyn observed as follows: "While Lord Tomlin's observations in the Duke of Westminster case [1936] A.C. 1 still point to a material consideration, namely the general liberty of the citizen to arrange his financial affairs as he thinks fit, they have ceased to be canonical as to the consequence of a tax avoidance scheme." McGuckian was associated with a tax avoidance scheme. The inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l tax deduction in UK and no other economic consequence of any significance. Revenue denied BMBF's deduction for depreciation because the series of transactions amounted to a single composite transaction that did not fall within Section 24(1) of the Capital Cost Allowance Act, 1990. House of Lords, in a unanimous decision held in favour of the tax payer and held as follows "driving principle in Ramsay's line of cases continues to involve a general rule of statutory interpretation and unblinked approach to the analysis of facts. The ultimate question is whether the relevant statutory provisions, construed purposively, were intended to apply to a transaction, viewed realistically. 89. On the same day, House of Lords had an occasion to consider the Ramsay approach in Inland Revenue Commissioner v. Scottish Provident Institution (2004 [1] WLR 3172). The question involved in Scottish Provident Institution was whether there was "a debt contract for the purpose of Section 150A(1) of the Finance Act, 1994." House of Lords upheld the Ramsay principle and considered the series of transaction as a composite transaction and held that the composite transaction created no entitlement to securit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stitution Bench judgment, which needs clarification. Let us, however, first examine the scope of the India-Mauritius Treaty and its follow-up. 92. India-Mauritius Treaty was executed on 1.4.1983 and notified on 16.12.1983. Article 13 of the Treaty deals with the taxability of capital gains. Article 13(4) covers the taxability of capital gains arising from the sale/transfer of shares and stipulates that "Gains derived by a resident of a Contracting State from the alienation of any property other than those mentioned in paragraphs 1, 2 and 3 of that Article, shall be taxable only in that State". Article 10 of the Treaty deals with the taxability of Dividends. Article 10(1) specifies that "Dividends paid by a company which is a resident of a Contracting State to a resident of other contracting State, may be taxed in that other State". Article 10(2) stipulates that "such dividend may also be taxed in the Contracting State of which the company paying the dividends is a resident but if the recipient was the beneficial owner of the dividends, the tax should not exceed; (a) 5% of the gross amount of the dividends if the recipient of the dividends holds at least 10% of the capital of the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are owned directly or indirectly by one or more individual residents of a controlling state. LOB clause also finds a place in India- Singapore DTA. Indo Mauritius Treaty does not restrict the benefit to companies whose shareholders are noncitizens/ residents of Mauritius, or where the beneficial interest is owned by non-citizens/residents of Mauritius, in the event where there is no justification in prohibiting the residents of a third nation from incorporating companies in Mauritius and deriving benefit under the treaty. No presumption can be drawn that the Union of India or the Tax Department is unaware that the quantum of both FDI and FII do not originate from Mauritius but from other global investors situate outside Mauritius. Maurtius, it is well known is incapable of bringing FDI worth millions of dollars into India. If the Union of India and Tax Department insist that the investment would directly come from Mauritius and Mauritius alone then the Indo-Mauritius treaty would be dead letter. 96. Mr. Aspi Chinoy, learned senior counsel contended that in the absence of LOB Clause in the India Mauritius Treaty, the scope of the treaty would be positive from Mauritius Special Pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the DTAA and Circular No. 789 can never be considered to be set up for tax evasion. TRC whether conclusive 98. LOB and look through provisions cannot be read into a tax treaty but the question may arise as to whether the TRC is so conclusive that the Tax Department cannot pierce the veil and look at the substance of the transaction. DTAA and Circular No. 789 dated 13.4.2000, in our view, would not preclude the Income Tax Department from denying the tax treaty benefits, if it is established, on facts, that the Mauritius company has been interposed as the owner of the shares in India, at the time of disposal of the shares to a third party, solely with a view to avoid tax without any commercial substance. Tax Department, in such a situation, notwithstanding the fact that the Mauritian company is required to be treated as the beneficial owner of the shares under Circular No. 789 and the Treaty is entitled to look at the entire transaction of sale as a whole and if it is established that the Mauritian company has been interposed as a device, it is open to the Tax Department to discard the device and take into consideration the real transaction between the parties , and the transacti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as a clear finding of fact that it was interposed for the sole purpose of benefiting from the Swiss- Denmark DTA which had the effect of reducing a normal 35% withholding tax on dividend out of Switzerland down to 0%. Court in that case held that the only reason for the existence of the Danish company was to benefit from the zero withholding tax under the tax treaty. On facts also, the above case will not apply to the case in hand. 102. Cayman Islands, it was contended, was a tax heaven and CGP was a shell company, hence, they have to be looked at with suspicion. We may, therefore, briefly examine what those expressions mean and understood in the corporate world. TAX HAVENS, TREATY SHOPPING AND SHELL COMPANIES 103. Tax Havens" is not seen defined or mentioned in the Tax Laws of this country Corporate world gives different meanings to that expression, so also the Tax Department. The term "tax havens" is sometime described as a State with nil or moderate level of taxation and/or liberal tax incentives for undertaking specific activities such as exporting. The expression "tax haven" is also sometime used as a "secrecy jurisdiction. The term "Shell Companies" finds no definition in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut circular movement of capital known as Round Tripping; then TRC can be ignored, since the transaction is fraudulent and against national interest. 106. Facts stated above are food for thought to the legislature and adequate legislative measures have to be taken to plug the loopholes, all the same, a genuine corporate structure set up for purely commercial purpose and indulging in genuine investment be recognized. However, if the fraud is detected by the Court of Law, it can pierce the corporate structure since fraud unravels everything, even a statutory provision, if it is a stumbling block, because legislature never intents to guard fraud. Certainly, in our view, TRC certificate though can be accepted as a conclusive evidence for accepting status of residents as well as beneficial ownership for applying the tax treaty, it can be ignored if the treaty is abused for the fraudulent purpose of evasion of tax. McDowell - WHETHER CALLS FOR RECONSDIERATION: 107. McDowell has emphatically spoken on the principle of Tax Planning. Justice Ranganath Mishra, on his and on behalf of three other Judges, after referring to the observations of Justice S.C. Shah in CIT v. A. Raman and Co. (19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esult in an assessee escaping tax. 110. Justice Chinnappa Reddy starts his concurring judgment in McDowell as follows: "While I entirely agree with my brother Ranganath Mishra, J. in the judgment proposed to be delivered by me, I wish to add a few paragraphs, particularly to supplement what he has said on the "fashionable" topic of tax avoidance." (emphasis supplied) Justice Reddy has, the above quoted portion shows, entirely agreed with Justice Mishra and has stated that he is only supplementing what Justice Mishra has spoken on tax avoidance. Justice Reddy, while agreeing with Justice Mishra and the other three judges, has opined that in the very country of its birth, the principle of Westminster has been given a decent burial and in that country where the phrase "tax avoidance" originated the judicial attitude towards tax avoidance has changed and the Courts are now concerning themselves not merely with the genuineness of a transaction, but with the intended effect of it for fiscal purposes. Justice Reddy also opined that no one can get away with the tax avoidance project with the mere statement that there is nothing illegal about it. Justice Reddy has also opined that the g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce or analogy, but only by the plain words of a statute applicable to the facts and circumstances of each case. 117. Revenue cannot tax a subject without a statute to support and in the course we also acknowledge that every tax payer is entitled to arrange his affairs so that his taxes shall be as low as possible and that he is not bound to choose that pattern which will replenish the treasury.Revenue's stand that the ratio laid down in McDowell is contrary to what has been laid down in Azadi Bachao Andolan, in our view, is unsustainable and, therefore, calls for no reconsideration by a larger branch. PART-IV CGP AND ITS INTERPOSITION 118. CGP's interposition in the HTIL Corporate structure and its disposition, by way of transfer, for exit, was for a commercial or business purpose or with an ulterior motive for evading tax, is the next question. Parties, it is trite, are free to choose whatever lawful arrangement which will suit their business and commercial purpose, but the true nature of the transaction can be ascertained only by looking into the legal arrangement actually entered into and carried out. Indisputedly, that the contracts have to be read holistically to arrive a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in India were with 3GSPL an Indian company which held options through various FWAs entered into with Indian partners. One of the tests to examine the genuineness of the structure is the "timing test" that is timing of the incorporation of the entities or transfer of shares etc. Structures created for genuine business reasons are those which are generally created or acquired at the time when investment is made, at the time where further investments are being made at the time of consolidation etc. 123. HTIL preferred CGP route rather than adopting any other method (why ?) for which we have to examine whether HTIL has got any justification for adopting this route, for sound commercial reasons or purely for evasion of tax. In international investments, corporate structures are designed to enable a smooth transition which can be by way of divestment or dilution. Once entry into the structure is honourable, exits from the structure can also be honourable. 124. HTIL structure was created over a period of time and this was consolidated in 2004 to provide a working model by which HTIL could make best use of its investments and exercise control over and strategically influence the affairs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e pre-contracted, but also they are pre-ordained, if there is no contractual right and in all likelihood the steps would follow. On Fiscal nullity, Lord Brightman again explained that there should be a preordained series of transactions and there should be steps inserted that have no commercial purpose and the inserted steps are to be disregarded for fiscal purpose and, in such situations, Court must then look at the end result, precisely how the end result will be taxed will depend on terms of the taxing statute sought to be applied. Sale of CGP share, for exiting from the Indian Telecommunication Sector, in our view, cannot be considered as pre-ordained transaction, with no commercial purpose, other than tax avoidance. Sale of CGP share, in our view, was a genuine business transaction, not a fraudulent or dubious method to avoid capital gains tax. SITUS OF CGP 127. Situs of CGP share stands where, is the next question. Law on situs of share has already been discussed by us in the earlier part of the judgment. Situs of shares situates at the place where the company is incorporated and/ or the place where the share can be dealt with by way of transfer. CGP share is registered in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... control over HEL, through the voting rights of its indirect subsidiary Array (Mauritius) which in turn controlled 42% shares through Mauritian Subsidiaries in HEL. Mauritian subsidiaries controlled 42% voting rights in HEL and HTIL could not however exercise voting rights as stated above, in HEL directly but only through indirect subsidiary CGP(M) which in turn held equity interest in TII, an Indian company which held equity interest in HEL. HTIL likewise through an indirect subsidiary HTI(M), which held equity interest in Omega an Indian company which held equity interest in HEL, could exercise only indirect voting rights in HEL . 130. HTIL, by holding CGP share, got control over its WOS Hutchison Tele Services (India) Holdings Ltd (MS). HTSH(MS) was having control over its WOS 3GSPL, an Indian company which exercised voting rights in HEL. HTIL, therefore, by holding CGP share, had 52% equity interest, direct 42% and approximately 10% (pro rata) indirect in HEL and not 67% as contended by the Revenue. 131. HTIL had 15% interest in HEL by virtue of FWAs, SHAs Call and Put Option Agreements and Subscription Agreements and not controlling interest as such in HEL. HTIL, by virtue o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hment of HTIL's rights of management and control over HEL, resulting in transfer of capital asset in India. Further, it was pointed out that the assets, rights and entitlements are property rights pertaining to HTIL and its subsidiaries and the transfer of CGP share would have no effect on the Telecom operations in India, but for the transfer of the above assets, rights and entitlements. SPA and other agreements, if examined, as a whole, according to the Revenue, leads to the conclusion that the substance of the transaction was the transfer of various property rights of HTIL in HEL to Vodafone attracting capital gains tax in India. Further, it was pointed out that moment CGP share was transferred off-shore, HTIL's right of control over HEL and its subsidiaries stood extinguished, thus leading to income indirectly earned, outside India through the medium of sale of the CGP share. All these issues have to be examined without forgetting the fact that we are dealing with a taxing statute and the Revenue has to bring home all its contentions within the four corners of taxing statute and not on assumptions and presumptions. 132. Vodafone on acquisition of CGP share got controlling inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er a WOS or otherwise by influencing the voting rights, nomination of members of the Board of Directors and so on. On transfer of shares of the holding Company, the controlling interest may also pass on to the purchaser along with the shares. Controlling interest might have percolated down the line to the operating companies but that controlling interest is inherently contractual and not a property right unless otherwise provided for in the statue. Acquisition of shares, may carry the acquisition of controlling interest which is purely a commercial concept and the tax can be levied only on the transaction and not on its effect. Consequently, on transfer of CGP share to Vodafone, Vodafone got control over eight Mauritian Companies which owned shares in VEL totalling to 42% and that does not mean that the situs of CGP share has shifted to India for the purpose of charging capital gains tax. 134. Vodafone could exercise only indirect voting rights in VEL through its indirect subsidiary CGP(M) which held equity interests in TII, an Indian Company, which held equity interests in VEL. Similarly, Vodafone could exercise only indirect voting rights through HTI(M) which held equity interes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... full dividend rights attached to his shares and he had received credit support and primarily the liability for re-payment was of his company. Further, it was also pointed out that he was the exclusive beneficial owner of his shares in his companies, enjoying full and exclusive rights to vote and participate in any benefits accruing to those shares. On 05.03.2007 AS also wrote to the Government on the same lines. 137. Vodafone, on acquisition of CGP, is in a position to replace the directors of holding company of 3GSPL so as to get control over 3GSPL. 3GSPL has call option as well as the obligation of the put option. Rights and obligations which flow out of call and put options have already been explained by us in the earlier part of the judgment. Call and put options are contractual rights and do not sound in property and hence they cannot be, in the absence of a statutory stipulation, considered as capital assets. Even assuming so, they are in favour of 3GSPL and continue to be so even after entry of Vodafone. 138. We have extensively dealt with the terms of the various FWAs, SHAs and Term Sheets and in none of those Agreements HTIL or Vodafone figure as parties. SHAs between M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nly contractual rights, as also the revised SHAs and FWAs entered into on the basis of SPA. Rights (and options) by providing finance and guarantee to AS Group of Companies to exercise control over TII and indirectly over HEL through various TII SHAs and N.D. Callus FWA dated 01.03.2006 were also contractual rights, and continue to be so on entry of Vodafone. 141. Controlling right over TII through TII SHAs in the form of right to appoint two Directors with veto power to promote its interest in HEL and thereby held beneficial interest in 12.30% of share capital in the HEL are also contractual rights. Finance to SMMS to acquire shares in ITNL (ultimately Omega) with right to acquire share capital of Omega were also contractual rights between the parties. On transfer of CGP share to Vodafone corresponding rearrangement were made in the SHAs and FWAs and Term Sheet Agreements in which Vodafone was not a party. 142. SPA, through the transfer of CGP, indirectly conferred the benefit of put option from the transferee of CGP share to be enjoyed in the same manner as they were enjoyed by the transferor and the revised set of 2007 agreements were exactly between the parties that is the be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... High Court has also committed an error in holding that some rights vested with HTIL under the agreement dated 01.08.2006, in fact, that agreement conferred right on Hutichison Telecommunication (India) Ltd., which is a Mauritian Company and not HTIL, the vendor of SPA. The High court has also ignored the vital fact that FIPB had elaborately examined the nature of call and put option agreement rights and found no right in presenti has been transferred to Vodafone and that as and when rights are to be transferred by AG and AS Group Companies, it would specifically require Government permission since such a sale would attract capital gains, and may be independently taxable. We may now examine whether the following rights and entitlements would also amount to capital assets attracting capital gains tax on transfer of CGP share. Debts/Loans through Intermediaries 146. SPA contained provisions for assignment of loans either at Mauritius or Cayman Islands and all loans were assigned at the face value. Clause 2.2 of the SPA stipulated that HTIL shall procure the assignment of and purchaser agrees to accept an assignment of loans free from encumbrances together with all rights attaching o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7). HTI BVI Finance Limited Limited, CGP and the Purchaser entered into the Deed of Assignment on 08.05.2007 pertaining to the CGP indebtedness. 148. In respect of Array Loan No. 3 i.e. US$ 231,111,427.41, the right that was being assigned was not the right under a Loan Agreement, but the right to receive payment from Array pursuant to the terms of a Receiveable Novation Agreement dated 28.04.2007 between Array, HTIL and HTI BVI Finance Limited. Under the terms of the Receiveable Novation Agreement, HTIL's obligation to repay the loan was novated from HTI BVI Finance to Array, the consideration for this novation was US$ 231,111,427.41 payable by Array to HTI BVI Finance Limited. It was this right to receive the amount from Array that was assigned to VHI BV under the relevant Loan Assignment. It was envisaged that, between signing and completion of the agreement, there would be a further loan up to US$ 29.7 million between CGP (as borrower) from a Vendor Group Company (vide Clause 6.4 of the SPA) and the identity of the lender has not been identified in the SPA. The details of the loan were ultimately as follows: Borrower Lender Amount of Loan Date of Agreement Effective date of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere held by Hutchison Group Company based in Luxemburg. SPA only assured Vodafone that they would not have to overnight cease the use of the Hutch brand name, which might have resulted in a disruption of operations in India. The bare license to use a brand free of charge, is not itself a "property" and, in any view, if the right to property is created for the first time and that too free of charge, it cannot give rise to a chargeable income. Under the SPA, a limited window of license was given and it was expressly made free of charge and, therefore, the assurance given by HTIL to Vodafone that the brand name would not cease overnight, cannot be described as "property" rights so as to consider it as a capital asset chargeable to tax in India. ORACLE LICENSE: 153. Oracle License was an accounting license, the benefit of which was extended till such time VEL replaced it with its own accounting package. There is nothing to show that this accounting package, which is a software, was transferred to Vodafone. In any view, this license cannot be termed as a capital asset since it has never been transferred to the petitioner. 154. We, therefore, conclude that on transfer of CGP share, HT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he petitioner, submitted that Section 9(1)(i) of the Income Tax Act deals with taxation on income "deemed to accrue or arise" in India through the transfer of a capital asset situated in India and stressed that the source of income lies where the transaction is effected and not where the economic interest lies and pointed out that there is a distinction between a legal right and a contractual right. Referring to the definition of "transfer" in Section 2(47) of the Income Tax Act which provides for extinguishment, it was submitted, that the same is attracted for transfer of a legal right. Placing reliance on the judgment of this Court in Commissioner of Income Tax v. Grace Collins and Others, 248 ITR 323, learned senior counsel submitted that SPA has not relinquished any right of HTIL giving rise to capital gains tax in India. 158. Mr. S.P. Chenoy, senior counsel, on our request, argued at length, on the scope and object of Section 9 of the Income Tax Act. Learned senior counsel submitted that the first four clauses/parts of Section 9(1)(i) deal with taxability of revenue receipts, income arising through or from holding an asset in India, income arising from the transfer of an asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : income that has been received in India; and income that has accrued or arisen in India or income that is deemed to accrue or arise in India. In the case of Resident in India, the total income, according to the residential status is as under: (a) Any income which is received or deemed to be received in India in the relevant previous year by or on behalf of such person; (b) Any income which accrues or arises or is deemed to accrue or arise in India during the relevant previous year; and (c) Any income which accrues or arises outside India during the relevant previous year. In the case of Resident but not Ordinarily Resident in India, the principle is as follows: (a) Any income which is received or deemed to be received in India in the relevant previous year by or on behalf of such person; (b) Any income which accrues or arises or is deemed to accrue or arise in India to him during the relevant previous year; and (c) Any income which accrues or arises to him outside India during the relevant previous year, if it is derived from a business controlled in or a profession set up in India. In the case of Non-Resident, income from whatsoever source derived forms part of the total i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India" is of prime importance so as to get a proper insight on the scope and ambit of Section 9(1)(i) of the Income Tax Act. The word "transfer" has been defined in Section 2(47) of the Income Tax Act. The relevant portion of the same is as under: "2(47) "Transfer", in relation to a capital asset, includes.- (i) the sale, exchange or relinquishment of the asset; or (ii) the extinguishment of any rights therein; or (iii) the compulsory acquisition thereof under any law; or (iv) in a case where the asset is converted by the owner thereof into, or is treated by him as, stock-in-trade of a business carried on by him, such conversion or treatment; or xxx xxx xxx xxx xxx xxx" The term "capital asset" is also defined under Section 2(14) of the Income Tax Act, the relevant portion of which reads as follows: "2(14) "Capital asset" means property of any kind held by an assessee, whether or not connected with the business or profession, but does not include- (i) any stock-in-trade, consumable stores or raw materials held for the purposes of his business or profession; xxx xxx xxx xxx xxx xxx" 163. The meaning of the words "either directly or indirectly", when read textually and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... saction, was acquired or derived from. HTIL and Vodafone are off-shore companies and since the sale took place outside India, applying the source test, the source is also outside India, unless legislation ropes in such transactions. 168. Substantial territorial nexus between the income and the territory which seeks to tax that income, is of prime importance to levy tax. Expression used in Section 9(1)(i) is "source of income in India" which implies that income arises from that source and there is no question of income arising indirectly from a source in India. Expression used is "source of income in India" and not "from a source in India". Section 9 contains a "deeming provision" and in interpreting a provision creating a legal fiction, the Court is to ascertain for what purpose the fiction is created, but in construing the fiction it is not to be extended beyond the purpose for which it is created, or beyond the language of section by which it is created. [See C.I.T. Bombay City II v. Shakuntala (1962) 2 SCR 871, Mancheri Puthusseri Ahmed v. Kuthiravattam Estate Receiver (1996) 6 SCC 185]. 169. Power to impose tax is essentially a legislative function which finds in its ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operty situate in India. 172. On transfer of shares of a foreign company to a nonresident off-shore, there is no transfer of shares of the Indian Company, though held by the foreign company, in such a case it cannot be contended that the transfer of shares of the foreign holding company, results in an extinguishment of the foreign company control of the Indian company and it also does not constitute an extinguishment and transfer of an asset situate in India. Transfer of the foreign holding company's share off-shore, cannot result in an extinguishment of the holding company right of control of the Indian company nor can it be stated that the same constitutes extinguishment and transfer of an asset/ management and control of property situated in India. 173. The Legislature wherever wanted to tax income which arises indirectly from the assets, the same has been specifically provided so. For example, reference may be made to Section 64 of the Indian Income Tax Act, which says that in computing the total income of an individual, there shall be included all such income as arises directly or indirectly: to the son's wife, of such individual, from assets transferred directly or indirect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore, in our considered opinion, will not apply to the transaction in question or on the rights and entitlements, stated to have transferred, as a fall out of the sale of CGP share, since the Revenue has failed to establish both the tests, Resident Test as well the Source Test. 177. Vodafone, whether, could be proceeded against under Section 195(1) for not deducting tax at source and, alternatively, under Section 163 of the Income Tax Act as a representative assessee, is the next issue. SECTION 195 AND OFFSHORE TRANSACTIONS 178. Section 195 provides that any person responsible for making any payment to a non-resident which is chargeable to tax must deduct from such payment, the income tax at source. Revenue contended that if a non-resident enters into a transaction giving rise to income chargeable to tax in India, the necessary nexus of such non-resident with India is established and the machinary provisions governing the collection of taxes in respect of such chargeable income will spring into operation. Further, it is also the stand of the Revenue that the person, who is a non-resident, and not having a physical presence can be said to have a presence in India for the pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transaction and not in a manner that brings a non-resident assessee under jurisdiction of Indian Tax Authorities. Further, it was stated that a "tax presence" might arise where a foreign company, on account of its business in India, becomes a resident in India through a permanent establishment or the transaction relates to the permanent establishment. 181. Vodafone group of companies was a JV Partner in Bharti Airtel Limited which has absolutely no connection whatsoever with the present transaction. The mere fact that the Vodafone group of companies had entered into some transactions with another company cannot be treated as its presence in a totally unconnected transaction. 182. To examine the rival stand taken up by Vodafone and the Revenue, on the interpretation of Section 195(1) it is necessary to examine the scope and ambit of Section 195(1) of the Income Tax Act and other related provisions. For easy reference, we may extract Section 195(1) which reads as follows: "Section 195. OTHER SUMS.- (1) Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest or any other sum chargeable under the provisions of this Act (not bei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no law made by the Parliament shall be deemed to be invalid on the ground that it would have extra territorial operation. Now the question is whether Section 195 has got extra territorial operations. It is trite that laws made by a country are intended to be applicable to its own territory, but that presumption is not universal unless it is shown that the intention was to make the law applicable extra territorially. We have to examine whether the presumption of territoriality holds good so far as Section 195 of the Income Tax Act is concerned and is there any reason to depart from that presumption. 184. A literal construction of the words "any person responsible for paying" as including non-residents would lead to absurd consequences. A reading of Sections 191A, 194B, 194C, 194D, 194E, 194I, 194J read with Sections 115BBA, 194I, 194J would show that the intention of the Parliament was first to apply Section 195 only to the residents who have a tax presence in India. It is all the more so, since the person responsible has to comply with various statutory requirements such as compliance of Sections 200(3), 203 and 203A. 185. The expression "any person", in our view, looking at the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would come under the scanner of Section 192. But the Court had no occasion to consider a situation where salaries were paid by non-residents to another non-resident. Eli Lilly was a part of the JV and services were rendered in India for the JV. In our view, the ruling in that case is of no assistance to the facts of the present case since, here, both parties were non-residents and payment was also made offshore, unlike the facts in Eli Lilly where the services were rendered in India and received a portion of their salary from JV situated in India. 187. In the instant case, indisputedly, CGP share was transferred offshore. Both the companies were incorporated not in India but offshore. Both the companies have no income or fiscal assets in India, leave aside the question of transferring, those fiscal assets in India. Tax presence has to be viewed in the context of transaction in question and not with reference to an entirely unrelated transaction. Section 195, in our view, would apply only if payments made from a resident to another non-resident and not between two nonresidents situated outside India. In the present case, the transaction was between two non-resident entities through ..... 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