S.H. Kapadia, C.J.I
1. Leave granted.
Introduction
2. This matter concerns a tax dispute involving the Vodafone Group with the Indian Tax Authorities [hereinafter referred to for short as ""the
Revenue""], in relation to the acquisition by Vodafone International Holdings BV [for short ""VIH""], a company resident for tax purposes in the
Netherlands, of the entire share capital of CGP 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 Group, Hong Kong (HK) first invested into the telecom business in India in 1992 when the said Group invested in an Indian joint
venture vehicle by the name Hutchison Max Telecom Limited (HMTL) - later renamed as HEL.
4. On 12.01.1998, CGP stood incorporated in Cayman Islands, with limited liability, as an ""exempted company"", its sole shareholder being
Hutchison Telecommunications Limited, Hong Kong [""HTL"" for short], which in September, 2004 stood transferred to HTI (BVI) Holdings
Limited [""HTIHL (BVI)"" for short] vide Board Resolution dated 17.09.2004. HTIHL (BVI) was the buyer of the CGP Share. HTIHL (BVI) was
a wholly owned subsidiary (indirect) of Hutchison Telecommunications International Limited (CI) [""HTIL"" for short].
5. In March, 2004, HTIL stood incorporated and listed on Hong Kong and New York Stock Exchanges in September, 2004.
6. In February, 2005, consolidation of HMTL (later on HEL) got effected. Consequently, all operating companies below HEL got held by one
holding company, i.e., HMTL/HEL. This was with the approval of RBI and FIPB. The ownership of the said holding company, i.e., HMTL/HEL
was consolidated into the tier I companies all based in Mauritius. Telecom Investments India Private Limited [""TII"" for short], IndusInd Telecom
Network Ltd. [""ITNL"" for short] and Usha Martin Telematics Limited [""UMTL"" for short] were the other shareholders, other than Hutchison and
Essar, in HMTL/HEL. They were Indian tier I companies above HMTL/HEL. The consolidation was first mooted as early as July, 2003.
7. On 28.10.2005, VIH agreed to acquire 5.61% shareholding in Bharti Televentures Ltd. (now Bharti Airtel Ltd.). On the same day, Vodafone
Mauritius Limited (subsidiary of VIH) agreed to acquire 4.39% shareholding in Bharti Enterprises Pvt. Ltd. which indirectly held shares in Bharti
Televentures Ltd. (now Bharti Airtel Ltd.).
8. On 3.11.2005, Press Note 5 was issued by the Government of India enhancing the FDI ceiling from 49% to 74% in telecom sector. Under this
Press Note, proportionate foreign component held in any Indian company was also to be counted towards the ceiling of 74%.
9. On 1.03.2006, TII Framework and Shareholders Agreements stood executed under which the shareholding of HEL was restructured through
TII"", an Indian company, in which Analjit Singh (AS) and Asim Ghosh (AG), acquired shares through their Group companies, with the credit
support provided by HTIL. In consideration of the credit support, parties entered into Framework Agreements under which a Call Option was
given to 3 Global Services 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, the
investors (as described in the Framework Agreement) were prepared to invest in ITNL provided that HTIL and GSPL procured financial
assistance for them and in consideration whereof GSPL would have Call Option to buy entire equity shares of SMMS. Hereto, in the Framework
Agreement there were provisions imposing restrictions on Share Transfer, Change of Control etc. On 17.08.2006, a Shareholders Agreement
stood executed which dealt with governance of ITNL.
11. On 22.12.2006, an Open Offer was made by Vodafone Group Plc. on behalf of Vodafone Group to Hutchison Whampoa Ltd., a non-
binding bid for US $11.055 bn being the enterprise value for HTIL''s 67% interest in HEL.
12. On 22.12.2006, a press release was issued by HTIL in Hong Kong and New York Stock Exchanges that it had been approached by various
potentially interested parties regarding a possible sale of ""its equity interests"" (not controlling interest ) in HEL. That, till date no agreement stood
entered into by HTIL with any party.
13. On 25.12.2006, an offer comes from Essar Group to purchase HTIL''s 66.99% shareholding at the highest offer price received by HTIL.
Essar further stated that any sale by HTIL would require its consent as it claimed to be a co-promoter of HEL.
14. On 31.01.2007, a meeting of the Board of Directors of VIH was held approving the submission of a binding offer for 67% of HTIL''s interest
at 100% enterprise value of US $17.5 bn by way of acquisition by VIH of one share (which was the entire shareholding) in CGP, an indirect
Cayman Islands subsidiary of HTIL. The said approval was subject to:
(i) reaching an agreement with Bharti that allowed VIH to make a bid on Hutch; and
(ii) entering into an appropriate partnership arrangement to satisfy FDI Rules in India.
15. On 6.02.2007, HTIL calls for a binding offer from Vodafone Group for its aggregate interests in 66.98% of the issued share capital of HEL
controlled by companies owned, directly or indirectly, by HTIL together with inter-related loans.
16. On 9.02.2007, Vodafone Group makes a revised offer on behalf of VIH to HTIL. The said revised offer was of US $10.708 bn for 66.98%
interest [at the enterprise value of US $18.250 bn] and for US $1.084 bn loans given by the Hutch Group. The offer further confirmed that in
consultation with HTIL, the consideration payable may be reduced to take account of the various amounts which would be payable directly to
certain existing legal local partners in order to extinguish HTIL''s previous obligations to them. The offer further confirmed 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 group. After our due diligence had commenced the seller proposed that CGP Investments (Holdings) Limited should be
added to the target group and made available certain limited information about the company. Although we have reviewed this information, it is not
sufficient for us to be able to comment on any tax risks associated with the company.
20. On 11.02.2007, UBS Limited (Financial Advisors to VIH) submitted a financial report setting out the methodology for valuation of HTIL''s
67% effective interest in HEL through the acquisition of 100% of CGP.
21. On 11.02.2007, VIH and HTIL entered into an Agreement for Sale and Purchase of Share and Loans (""SPA"" for short), under which HTIL
agreed to procure the sale of the entire share capital of CGP which it held through HTIHL (BVI) for VIH. Further, HTIL also agreed to procure
the assignment of Loans owed by CGP and Array Holdings Limited [""Array"" for short] (a 100% subsidiary of CGP) to HTI (BVI) Finance Ltd. (a
direct subsidiary of HTIL). As part of its obligations, HTIL undertook to procure that each Wider Group Company would not terminate or modify
any rights under any of its Framework Agreements or exercise any of their Options under any such agreement. HTIL also provided several
warranties to VIH as set out in Schedule 4 to SPA which included that HTIL was the sole beneficial owner of CGP share.
22. On 11.02.2007, a Side Letter was sent by HTIL to VIH inter alias stating that out of the purchase consideration, up to US $80 million could
be paid to some of its existing partners. By the said Side Letter, HTIL agreed to procure that Hutchison Telecommunications (India) Ltd. (Ms)
[""HTIL Mauritius"" for short], Omega Telecom Holdings Private Limited [""Omega"" for short] and GSPL would enter into IDFC Transaction
Agreement prior to the completion of the acquisition pursuant to SPA, which completion ultimately took place on 8.05.2007.
23. On 12.02.2007, Vodafone makes public announcement to Securities and Exchange Commission [""SEC"" for short], Washington and on
London Stock Exchange which contained two assertions saying that Vodafone had agreed to acquire a controlling interest in HEL via its subsidiary
VIH and, second, that Vodafone had agreed to acquire companies that control a 67% interest in HEL.
24. On the same day, HTIL makes an announcement on HK Stock Exchange stating that it had agreed to sell its entire direct and indirect equity
and loan interests held through subsidiaries, in HEL to VIH.
25. On 20.02.2007, VIH applied for approval to FIPB. 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 had full and unrestricted voting
rights in companies owned by him. That, he had received credit support for his investments, but primary liability was with his companies.
28. A similar letter was addressed by AS on 5.03.2007 to FIPB. It may be noted that in January, 2006, post dilution of FDI cap, HTIL had to
shed its stake to comply with 26% local shareholding guideline. Consequently, AS acquired 7.577% of HEL through his companies.
29. On 6.03.2007, Essar objects with FIPB to HTIL''s proposed sale saying that HEL is a joint venture Indian company between Essar and
Hutchison Group since May, 2000. That, Bharti is also an Indian company in the ""same field"" as HEL. Bharti was a direct competitor of HEL in
India. According to Essar, the effect of the transaction between HTIL and VIH would be that Vodafone with an indirect controlling interest in HEL
and in Bharti violated Press Note 1, particularly, absent consent from Essar. However, vide letter dated 14.03.2007, Essar gave its consent to the
sale. Accordingly, its objection stood withdrawn.
30. On 14.03.2007, FIPB wrote to HEL seeking clarification regarding a statement by HTIL before US SEC stating that HTIL Group would
continue to hold an aggregate interest of 42.34% of HEL and an additional indirect interest through JVCs [TII and Omega] being non-wholly
owned subsidiaries of HTIL which held an aggregate of 19.54% of HEL, which added up to 61.88%, whereas in the communication to FIPB
dated 6.03.2007, the direct and indirect FDI held by HTIL was stated to be 51.96%.
31. By letter of the same date from HEL to FIPB, it was pointed out that HTIL was a company listed on NY SE. Accordingly, it had to file
Statements in accordance with US SECTION That, under US GAAP, HTIL had to consolidate the assets and liabilities of companies even though
not majority owned or controlled by HTIL, because of a US accounting standard that required HTIL to consolidate an entity whereby HTIL had
risk or reward"". Therefore, this accounting consolidation required that even though HTIL held no shares nor management rights still they had to be
computed in the computation of the holding in terms of the Listing Norms. It is the said accounting consolidation which led to the reporting of
additional 19.54% in HEL, which leads to combined holding of 61.88%. On the other hand, under Indian GAAP, the interest as of March, 2006
was 42.34% + 7.28% (rounded up to 49.62%). After the additional purchase of 2.34% from Hindujas in August 2006, the aggregate HTIL direct
and 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 Board of HEL were AS and AG. One more clarification was sought by FIPB from HEL on the credit support
received by AG for his investment in HEL. In answer to the said query, HEL submitted that the credit support for AG Group in respect of 4.68%
stake in HEL through the Asim Ghosh investment entities, was a standby letter of credit issued by Rabobank Hong Kong in favor of Rabo India
Finance Pvt. Ltd. which in turn has made a Rupee loan facility available to Centrino, one of the companies in AG Group.
33. By letter dated 14.03.2007 addressed by VIH to FIPB, it stood confirmed that VIH''s effective shareholding in HEL would be 51.96%. That,
following completion of the acquisition HTIL''s shares in HEL the ownership of HEL was to be as follows:
(i) VIH would own 42% direct interest in HEL through its acquisition of 100% CGP (CI).
(ii) Through CGP (CI), VIH would also own 37.25% in TII which in turn owns 19.54% in HEL and 38% (45.79%) in Omega which in turn owns
5.11% in HEL (i.e. pro-rata route).
(iii) These investments combined would give VIH a controlling interest of 52% in HEL.
(iv) In addition, HTIL''s existing Indian partners AG, AS and IDFC (i.e. SMMS), who between them held a 15% interest in HEL (i.e. option
route), agreed to retain their shareholdings with full control, including voting rights and dividend rights. In other words, none of the Indian partners
exited and, consequently, there was no change of control.
(v) The Essar Group would continue to own 33% of HEL.
34. On 15.03.2007, a Settlement Agreement was signed between HTIL and Essar Group. Under the said Agreement, HTIL agreed to pay US
$415 mn to Essar for the following:
(a) acceptance of the SPA;
(b) for waiving rights or claims in respect of management and conduct of affairs of HEL;
(c) for giving up Right of First Refusal (RoFR), Tag Along Rights (TARs) and shareholders rights under Agreement dated 2.05.2000; and
(d) for giving up its objections before FIPB.
35. Vide Settlement Agreement, HTIL agreed to dispose of its direct and indirect equity, loan and other interests and rights, in and related to HEL,
to VIH. These other rights and interests have been enumerated in the Order of the Revenue dated 31.05.2010 as follows:
1. Right to equity interest (direct and indirect) in HEL.
2. Right to do telecom business in India
3. Right to jointly own and avail the telecom licenses in India
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 HTIL in
HEL, including all rights, contractual or otherwise, to acquire directly or indirectly shares in HEL owned by others which shares shall, for the
purpose of the Term Sheet, be considered to be part of the holding acquired by VIH. The Term Sheet governed the relationship between Essar
and VIH as shareholders of HEL including VIH''s right as a shareholder of HEL:
(a) to nominate 8 directors out of 12 to the Board of Directors;
(b) nominee of Vodafone had to be there to constitute the quorum for the Board of Directors;
(c) to get a RoFR over the shares held by Essar in HEL;
(d) should Vodafone Group shareholder sell its shares in HEL to an outsider, Essar had a TAR in respect of Essar''s shareholding in HEL.
37. On 15.03.2007, a Put Option Agreement was signed between VIH and Essar Group requiring VIH to buy from Essar Group Shareholders all
the Option Shares held by them.
38. By letter dated 17.03.2007, HTIL confirmed in writing to AS that it had no beneficial, or legal or any other right in AS''s TII interest or HEL
interest.
39. On 19.03.2007, a letter was addressed by FIPB to VIH asking VIH to clarify as to under what circumstances VIH agreed to pay US $11.08
bn for acquiring 67% of HEL when the actual acquisition is only 51.96%. This query presupposes that even according to FIPB the actual
acquisition was only 51.96% (52% approx.).
40. On the same day, VIH replied that VIH has agreed to acquire from HTIL, interests in HEL which included 52% equity shareholding for US
$11.08 bn. That, the price included a control premium, use and rights to the Hutch Brand in India, a non-compete agreement with the Hutch
Group, the value of non-voting non-convertible preference shares, various loans obligations and the entitlement to acquire a further 15% indirect
interest in HEL as set out in the letter dated 14.03.2007 addressed to FIPB (see page 6117 of SLP Vol. 26). According to the said letter dated
19.03.2007, all the above elements together equated to 67% of the economic value of HEL.
41. Vide Agreement dated 21.03.2007, VIH diluted its stake in Bharti by 5.61%.
42. In reply to the queries raised by FIPB regarding break up of valuation, VIH confirmed as follows:
Various assets and liabilities of CGP included its rights and entitlements, including subscription rights, call options to acquire in future a further
62.75% of TII, call options to acquire in future a further 54.21% of Omega which together would 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 Indian investors selling any of their respective
stakes.
43. On 5.04.2007, HEL wrote to the Joint Director of Income Tax (International Taxation) stating that HEL had no tax liabilities accruing out of
the subject transaction.
44. Pursuant to the resolution passed by the Board of Directors of CGP on 30.04.2007, it was decided that on acquisition loans owed by CGP to
HTI (BVI) Finance Ltd. would be assigned to VIH; the existing Directors of CGP would resign; Erik de Rijk would become the only Director of
CGP. A similar resolution was passed on the same day by the Board of Directors of Array.
45. On 7.05.2007, FIPB gave its approval to the transaction, subject to compliance with the applicable laws and Regulations in India.
46. On 8.05.2007, consequent upon the Board Resolutions passed by CGP and its downstream companies, the following steps were taken:
(i) resignation of all the directors of Hutch Group;
(ii) appointment of new directors of Vodafone Group;
(iii) resolutions passed by TII, Jaykay Finholding (India) Private Limited, UMT Investments Ltd., UMTL, Omega (Indian incorporated holding
companies) accepting the resignation of HTIL''s nominee directors and appointing VIH''s nominee directors;
(iv) same steps were taken by HEL and its subsidiaries;
(v) sending of a Side Letter by HTIL to VIH relating to completion mechanics;
(vi) computation of net amount payable by VIH to HTIL including retention of a certain amount out of US $11.08 bn paid on 8.05.2007 towards
expenses to operationalize the Option Agreements and adjustments for breach (if any) of warranties, etc.;
(vii) assignment of loans given by HTI (BVI) Finance Ltd. to CGP and Array in favor of VIH;
(viii) cancellation of share certificate of HTIHL (BVI) and entering the name of VIH in the Register of Members of CGP;
(ix) execution of Tax Deed of Covenant indemnifying VIH in respect of tax or transfer pricing liabilities payable by Wider Group (CGP, GSPL,
Mauritius holding companies, Indian operating companies).
(x) a Business Transfer Agreement between GSPL and a subsidiary of HWP Investments Holdings (India) Ltd. (Ms) for sale of Call Centre earlier
owned by GSPL;
(xi) payment of US $10.85 bn by VIH to HTIL (CI).
47. On 5.06.2007, under the Omega Agreement, it was agreed that in view of the SPA there would be a consequent change of control in HTIL
Mauritius, which holds 45.79% in Omega, and that India 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
Company (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 purchase all shares of AG in AG Mercantile Company Pvt. Ltd. at any time and in consideration for such call option,
GSPL agreed to pay to AG an amount of US $6.3 mn annually.
51. On the same day, i.e., 5.07.2007, a Framework Agreement was entered into among AS, his wife, Scorpios, MVH, GSPL, NDC and VIH.
Under Clause 4.4 GSPL had an unconditional right to purchase all shares of AS and his wife held in Scorpios at any time and in consideration for
the call option GSPL agreed to pay AS and his wife an amount of US$ 10.2 mn per annum.
52. On 5.07.2007, TII Shareholders Agreement was entered into among Nadal, NDC, CGP India Investments Limited [""CGP India"" for short],
TII and VIH to regulate the affairs of TII. Under Clause 3.1, NDC had 38.78% shareholding in TII, CGP India had 37.85% and Nadal had
23.57%.
53. It is not necessary to go into the earlier round of litigation. Suffice it to state that on 31.05.2010, an Order was passed by the Department
under Sections 201(1) and 201(1A) of the Income Tax Act, 1961 [""the Act"" for short] declaring that Indian Tax Authorities had jurisdiction to tax
the transaction against which VIH filed Writ Petition No. 1325 of 2010 before the Bombay High Court which was dismissed on 8.09.2010 vide
the impugned judgment [reported in 443668 hence, this Civil Appeal.
B. Ownership Structure
54. In order to understand the above issue, we reproduce below the Ownership Structure Chart as on 11.02.2007. The Chart speaks for itself.
55. To sum up, CGP held 42.34% in HEL through 100% wholly owned subsidiaries [Mauritius companies], 9.62% indirectly through TII and
Omega [i.e. pro rata route], and 15.03% through GSPL route.
56. To explain the GSPL route briefly, it may be mentioned that on 11.02.2007 AG Group of companies held 23.97% in TII, AS Group of
companies held 38.78% in TII whereas SMMS held 54.21% in Omega. Consequently, holding of AG in HEL through TII stood at 4.68%
whereas holding of AS in HEL through TII stood at 7.577% and holding of SMMS in HEL through Omega stood at 2.77%, which adds up to
15.03% in HEL. These holdings of AG, AS and SMMS came under the Option Route. In this connection, it may be mentioned that GSPL is an
Indian company indirectly owned by CGP. It held Call Options and Subscription Options to be exercised in future under circumstances spelt out in
TII and IDFC Framework Agreements (keeping in mind 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 266631 needs to be overruled insofar as it departs from McDowell and Company
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 295329 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 behalf of the Revenue regarding the correctness of Azadi
Bachao (supra) for the simple reason that certain tests laid down in the judgments of the English Courts subsequent to The Commissioners of
Inland Revenue v. His Grace the Duke of Westminster 1935 All E.R. 259 and W.T. Ramsay Ltd. v. Inland Revenue Commissioners (1981) 1 All
E.R. 865 help us to understand the scope of Indo- Mauritius DTAA. It needs to be clarified, that, McDowell dealt with two aspects. First,
regarding validity of the Circular(s) issued by CBDT concerning Indo-Mauritius DTAA. Second, on concept of tax avoidance/evasion. Before us,
arguments were advanced on behalf of the Revenue only regarding the second aspect.
59. The Westminster principle states that, ""given that a document or transaction is genuine, the court cannot go behind it to some supposed
underlying substance"". The said principle has been reiterated in subsequent English Courts Judgments as ""the cardinal principle"".
60. Ramsay was a case of sale-lease back transaction in which gain was sought to be counteracted, so as to avoid tax, by establishing an
allowable loss. The method chosen was to buy from a company a readymade scheme, whose object was to create a neutral situation. The
decreasing asset was to be sold so as to create an artificial loss and the increasing asset was to yield a gain which would be exempt from tax. The
Crown challenged the whole scheme saying that it was an artificial scheme and, therefore, fiscally in-effective. It was held that Westminster did not
compel the court to look at a document or a transaction, isolated from the context to which it properly belonged. It is the task of the Court to
ascertain the legal nature of the transaction and while doing so it has to look at the entire transaction as a whole and not to adopt a dissecting
approach. In the present case, the Revenue has adopted a dissecting approach at the Department level.
61. Ramsay did not discard Westminster but read it in the proper context by which ""device"" which was colorable in nature had to be ignored as
fiscal nullity. Thus, Ramsay lays down the principle of statutory interpretation rather than an over-arching anti-avoidance doctrine imposed upon tax
laws.
62. Furniss (Inspector of Taxes) v. Dawson (1984) 1 All E.R. 530 dealt with the case of interpositioning of a company to evade tax. On facts, it
was held that the inserted step 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
part of para 45, it held that ""colorable device cannot be a part of tax planning and it is wrong to encourage the belief that it is honorable to avoid
payment of tax by resorting to dubious methods"". It is the obligation of every citizen to pay the taxes without resorting to subterfuges. The above
observations should be read with para 46 where the majority holds ""on this aspect one of us, Chinnappa Reddy, J. has proposed a separate
opinion with which we agree"". The words ""this aspect"" express the majority''s agreement with the judgment of Reddy, J. only in relation to tax
evasion through the use of colorable devices and by resorting to dubious methods and subterfuges. Thus, it cannot be said that all tax planning is
illegal/illegitimate/impermissible. Moreover, Reddy, J. himself says that he agrees with the majority. In the judgment of Reddy, J. there are repeated
references to schemes and devices in contradistinction to ""legitimate avoidance of tax liability"" (paras 7-10, 17 & 18). In our view, although
Chinnappa Reddy, J. makes a number of observations regarding the need to depart from the ""Westminster"" and tax avoidance - these are clearly
only in the context of artificial and colorable devices. Reading McDowell, in the manner indicated hereinabove, in cases of treaty shopping and/or
tax avoidance, there is no conflict between McDowell and Azadi Bachao or between McDowell and Mathuram Agrawal.
International Tax Aspects of Holding Structures
65. In the thirteenth century, Pope Innocent IV espoused the theory of the legal fiction by saying that corporate bodies could not be ex-
communicated because they only exist in abstract. This enunciation is the foundation of the separate entity principle.
66. The approach of both the corporate and tax laws, particularly in the matter of corporate taxation, generally is founded on the abovementioned
separate entity principle, i.e., treat a company as a separate person. The Indian Income Tax Act, 1961, in the matter of corporate taxation, is
founded on the principle of the independence of companies and other entities subject to income tax. Companies and other entities are viewed as
economic entities with legal independence vis-a-vis their shareholders/participants. It is fairly well accepted that a subsidiary and its parent are
totally distinct tax payers. Consequently, the entities subject to income tax are taxed on 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 autonomy of the subsidiary''s executive directors. Such a restriction, which is the inevitable
consequences of any group structure, is generally accepted, both in corporate and tax laws. However, where the subsidiary''s executive directors''
competences are transferred to other persons/bodies or where the subsidiary''s executive directors'' decision making has become fully subordinate
to the Holding Company with the consequence that the subsidiary''s executive directors are no more than puppets then the turning point in respect
of the subsidiary''s place of residence comes about. Similarly, if an actual controlling Non-Resident Enterprise (NRE) makes an indirect transfer
through ""abuse of organization form/legal form and without reasonable business purpose"" which results in tax avoidance or avoidance of
withholding tax, then the Revenue may disregard the form of the arrangement or the impugned action through use of Non-Resident Holding
Company, re-characterize the equity transfer according to its economic substance and impose the tax on the actual controlling Non-Resident
Enterprise. Thus, whether a transaction is used principally as a colorable device for the distribution of earnings, profits and gains, is determined by
a review of all the facts and circumstances surrounding the transaction. It is in the above cases that the principle of lifting the corporate veil or the
doctrine of substance over form or the concept of beneficial ownership or the concept of alter ego arises. There are many circumstances, apart
from the one given above, where separate existence of different companies, that are part of the same group, will be totally or partly ignored as a
device or a conduit (in the pejorative sense).
68. The common law jurisdictions do invariably impose taxation against a corporation based on the legal principle that the corporation is ""a person
that is separate from its members. It is the decision of the House of Lords in Salomon v. Salomon (1897) A.C. 22 that opened the door to the
formation of a corporate group. If a ""one man"" corporation could be incorporated, then it would follow that one corporation could be a subsidiary
of another. This legal principle is the basis of Holding Structures. It is a common practice in international law, which is the basis of international
taxation, for foreign investors to invest in Indian companies through an interposed foreign holding 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 the
income tax law. When it comes to taxation of a Holding Structure, at the threshold, the burden is on the Revenue to allege and establish abuse, in
the sense of tax avoidance in the creation and/or use of such structure(s). In the application of a judicial anti-avoidance rule, the Revenue may
invoke the ""substance over form"" principle or ""piercing the corporate veil"" test only after it is able to establish on the basis of the facts and
circumstances surrounding the transaction that the impugned transaction is a sham or tax avoidant. To give an example, if a structure is used for
circular trading or round tripping or to pay bribes then such transactions, though having a legal form, should be discarded by applying the test of
fiscal nullity. Similarly, in a case where the Revenue finds that in a Holding Structure an entity which has no commercial/business substance has
been interposed only to avoid tax then in such cases applying the test of fiscal nullity it would be open to the Revenue to discard such inter-
positioning of that entity. However, this has to be done at the threshold. In this connection, we may reiterate the ""look at"" principle enunciated in
Ramsay (supra) in which it was held that the Revenue or the Court must look at a document or a transaction in a context to which it properly
belongs to. It is the task of the Revenue/Court to ascertain the legal nature of the transaction and while doing so it has to look at the entire
transaction as a whole and not to adopt a dissecting approach. The Revenue cannot start with the question as to whether the impugned transaction
is a tax deferment/saving device but that it should apply the ""look at"" test to ascertain its true legal nature [See Craven v. White (supra) which
further observed that genuine strategic tax planning has not been abandoned by any decision of the English Courts till date]. Applying the above
tests, we are of the view that every strategic foreign direct investment coming to India, as an investment destination, should be seen in a holistic
manner. While doing so, the Revenue/Courts should keep in mind the following factors: the concept of participation in investment, the duration of
time during which the Holding Structure exists; the period of business operations in India; the generation of taxable revenues in India; the timing of
the exit; the continuity of business on such exit. In short, 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 colorable 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 alias 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
taxable in India. That, even if control over HEL were to get transferred in consequence of transfer of the CGP Share outside India, it would yet be
covered by Section 9.
70. We find no merit in the above submission of the Revenue. At the outset, we quote herein below the following Sections of the Income Tax Act,
1961:
Scope of total income.
5. (2) Subject to the provisions of this Act, the total income of any previous year of a person who is a nonresident includes all income from
whatever source derived which-
(a)is received or is deemed to be received in India in such year by or on behalf of such person; or
(b)accrues or arises or is deemed to accrue or arise to him in India during such year.
Income deemed to accrue or arise in India.
9. (1) The following incomes shall be deemed to accrue or arise in India:-
(i)all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in
India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India.
71. Section 9(1)(i) gathers in one place various types of income and directs that income falling under each of the sub-clauses shall be deemed to
accrue or arise in India. Broadly there are four items of income. The income dealt with in each sub-clause is distinct and independent of the other
and the requirements to bring income within each sub-clause, are separately noted. Hence, it is not necessary that income falling in one category
under any one of the sub-clauses should also satisfy the requirements of the other sub-clauses to bring it within the expression ""income deemed to
accrue or arise in India"" in Section 9(1)(i). In this case, we are concerned with the last sub-clause of Section 9(1)(i) which refers to income arising
from ""transfer of a capital asset situate in India"". Thus, charge on capital gains arises on transfer of a capital asset situate in India during the previous
year. The said sub-clause consists of three elements, namely, transfer, existence of a capital asset, and situation of such asset in India. All three
elements should exist in order to make the last sub-clause applicable. Therefore, if such a transfer does not exist in the previous year no charge is
attracted. Further, Section 45 enacts that such income shall be deemed to be the income 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 non-resident
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 itself attracts tax whether the recipient is a resident or
non-resident. This fiction is brought in by the legislature to avoid any possible argument on the part of the non-resident vendor that profit accrued
or arose outside India by reason of the contract to sell having been executed outside India. Thus, income accruing or arising to a non-resident
outside India on transfer of a capital asset situate in India is fictionally deemed to accrue or arise in India, which income is made liable to be taxed
by reason of Section 5(2)(b) of the Act. This is the main purpose behind enactment of Section 9(1)(i) of the Act. We have to give effect to the
language of the section when it is unambiguous and admits of no doubt regarding its interpretation, particularly when a legal fiction is embedded in
that section. A legal fiction has a limited scope. A legal fiction cannot be expanded by giving purposive interpretation particularly if the result of
such interpretation is to transform the concept of chargeability which is also there in Section 9(1)(i), particularly when one reads Section 9(1)(i)
with Section 5(2)(b) of the Act. What is contended on behalf of the Revenue is that u/s 9(1)(i) it can ""look through"" the transfer of shares of a
foreign company holding shares in an Indian company and treat the transfer of shares of the foreign company as equivalent to the transfer of the
shares of the Indian company on the premise that Section 9(1)(i) covers direct and indirect transfers of capital assets. For the above reasons,
Section 9(1)(i) cannot by a process of interpretation be extended to cover indirect transfers of capital assets/property situate in India. To do so,
would amount to changing the content and ambit of Section 9(1)(i). We cannot re-write Section 9(1)(i). The legislature has not used the words
indirect transfer in Section 9(1)(i). If the word indirect is read into Section 9(1)(i), it would render the express statutory requirement of the 4th sub-
clause in Section 9(1)(i) nugatory. This is because Section 9(1)(i) applies to transfers of a capital asset situate in India. This is one of the elements
in the 4th sub-clause of Section 9(1)(i) and if indirect transfer of a capital asset is read into Section 9(1)(i) then the words capital asset situate in
India would be rendered nugatory. Similarly, the words underlying asset do not find place in Section 9(1)(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 existing Section 9(1)(i)
the word indirect cannot be read on the basis of purposive construction. The question of providing ""look through"" in the statute or in the treaty is a
matter of policy. It is to be expressly provided for in the statute or in the treaty. Similarly, limitation of benefits has to be expressly provided for in
the treaty. Such clauses cannot be read into the Section by interpretation. For the foregoing reasons, we hold that Section 9(1)(i) is not a ""look
through"" provision.
Transfer of HTIL''s property rights by Extinguishment?
72. The primary argument advanced on behalf of the Revenue was that the SPA, commercially construed, evidences a transfer of HTIL''s property
rights by their extinguishment. That, HTIL had, under the SPA, directly extinguished its rights of control and management, which are property
rights, over HEL and its subsidiaries and, consequent upon such extinguishment, there was a transfer of capital asset situated in India. In support,
the following features of the SPA were highlighted: (i) the right of HTIL to direct a downstream subsidiary as to the manner in which it should vote.
According to the Revenue, this right was a property right and not a contractual right. It vested in HTIL as HTIL was a parent company, i.e., a
100% shareholder of the subsidiary; (ii) According to the Revenue, the 2006 Shareholders/ Framework Agreements had to be continued upon
transfer of control of HEL to VIH so that VIH could step into the shoes of HTIL. According to the Revenue, such continuance was ensured by
payment of money to AS and AG by VIH failing which AS and AG could have walked out of those agreements which would have jeopardized
VIH''s control over 15% of the shares of HEL and, consequently, the stake of HTIL in TII would have stood reduced to minority; (iii) Termination
of IDFC Framework Agreement of 2006 and its substitution by a fresh Framework Agreement dated 5.06.2007, as warranted by SPA; (iv)
Termination of Term Sheet Agreement dated 5.07.2003. According to the Revenue, that Term Sheet Agreement was given effect to by Clause 5.2
of the SPA which gave Essar the right to Tag Along with HTIL and exit from HEL. That, by a specific Settlement Agreement dated 15.03.2007
between HTIL and Essar, the said Term Sheet Agreement dated 5.07.2003 stood terminated. This, according to the Revenue, was necessary
because the Term Sheet bound the parties; (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 that in this case we are concerned with the sale of shares and not with the sale of assets, item-wise. The
facts of this case show sale of the entire investment made by HTIL, through a Top company, viz. CGP, in the Hutchison Structure. In this case we
need to apply the ""look at"" test. In the impugned judgment, the High Court has rightly observed that the arguments advanced on behalf of the
Department vacillated. The reason for such vacillation was adoption of ""dissecting approach"" by the Department in the course of its arguments.
Ramsay (supra) enunciated the look at test. According to that test, the task of the Revenue is to ascertain the legal nature of the transaction and,
while doing so, it has to look at the entire transaction holistically and not to adopt a dissecting approach. One more aspect needs to be reiterated.
There is a conceptual difference between preordained transaction which is created for tax avoidance purposes, on the one hand, and a transaction
which evidences investment to participate in India. In order to find out whether a given transaction evidences a preordained transaction in the sense
indicated above or investment to participate, one has to take into account the factors enumerated hereinabove, namely, duration of time during
which the holding structure existed, the period of business operations in India, generation of taxable revenue in India during the period of business
operations in India, the timing of the exit, the continuity of business on such exit, etc. Applying these tests to the facts of the present case, we find
that the Hutchison structure has been in place since 1994. It operated during the period 1994 to 11.02.2007. It has paid income tax ranging from
Rs. 3 crore to Rs. 250 crore per annum during the period 2002-03 to 2006-07. Even after 11.02.2007, taxes are being paid by VIH ranging from
Rs. 394 crore to Rs. 962 crore per annum during the period 2007-08 to 2010-11 (these figures are apart from indirect taxes which also run in
crores). Moreover, the SPA indicates ""continuity"" of the telecom business on the exit of its predecessor, namely, HTIL. Thus, it cannot be said that
the structure was created or used as a sham or tax avoidant. It cannot be said that HTIL or VIH was a ""fly by night"" operator/ short time investor.
If one applies the look at test discussed hereinabove, without invoking the 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 V. legal control,
legal rights v. 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, the legal position of any company incorporated abroad is that its powers, functions and
responsibilities are governed by the law of its incorporation. No multinational company can operate in a foreign jurisdiction save by operating
independently as a ""good local citizen"". A company is a separate legal persona and the fact that all its shares are owned by one person or by the
parent company has nothing to do with its separate legal existence. If the owned company is wound up, the liquidator, and not its parent company,
would get hold of the assets of the subsidiary. In none of the authorities have the assets of the subsidiary been held to be those of the parent unless
it is acting as an agent. Thus, even though a subsidiary may normally comply with the request of a parent company it is not just a puppet of the
parent company. The difference is between having power or having a persuasive position. Though it may be advantageous for parent and
subsidiary companies to work as a group, each subsidiary will look to see whether there are separate commercial interests which should be
guarded. When there is a parent company with subsidiaries, is it or is it not the law that the parent company has the ""power"" over the subsidiary. It
depends on the facts of each case. For instance, take the case of a one-man company, where only one man is the shareholder perhaps holding
99% of the shares, his wife holding 1%. In those circumstances, his control over the company may be so complete that it is his alter ego. But, in
case of multinationals it is important to realize that their subsidiaries have a great deal of autonomy in the country concerned except where
subsidiaries are created or used as a sham. of course, in many cases the courts do lift up a corner of the veil but that does not mean that they alter
the legal position between the companies. The directors of the subsidiary under their Articles are the managers of the companies. If new directors
are appointed even at the request of the parent company and even if such directors were removable by the parent company, such directors of the
subsidiary will owe their duty to their companies (subsidiaries). They are not to be dictated by the parent company if it is not in the interests of
those companies (subsidiaries). The fact that the parent company exercises shareholder''s influence on its subsidiaries cannot obliterate 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 downstream subsidiary as to the
manner in which it should vote is concerned, the legal position is well settled, namely, that even though a subsidiary may normally comply with the
request of a parent company, it is not just a puppet of the parent company. The difference is between having the power and having a persuasive
position. A great deal depends on the facts of each case. Further, as stated above, a company is a separate legal persona, and the fact that all the
shares are owned by one person or a company has nothing to do with the existence of a separate company. Therefore, though it may be
advantageous for a parent and subsidiary companies to work as a group, each subsidiary has to protect its own separate commercial interests. In
our view, on the facts and circumstances of this case, the right of HTIL, if at all it is a right, to direct a downstream subsidiary as to the manner in
which it should vote would fall in the category of a persuasive position/influence rather than having a power over the subsidiary. In this connection
the following facts are relevant.
76. Under the Hutchison structure, the business was carried on by the Indian companies under the control of their Board of Directors, though
HTIL, as the Group holding company of a set of companies, which controlled 42% plus 10% (pro rata) shares, did influence or was in a position
to persuade the working of such Board of Directors of the Indian companies. In this connection, we need to have a relook at the ownership
structure. It is not in dispute that 15% out of 67% stakes in HEL was held by AS, AG and IDFC companies. That was one of the main reasons for
entering into separate Shareholders and Framework Agreements in 2006, when Hutchison structure existed, with AS, AG and IDFC. HTIL was
not a party to the agreements with AS and AG, though it was a party to the agreement with IDFC. That, the ownership structure of Hutchison
clearly shows that AS, AG and SMMS (IDFC) group of companies, being Indian companies, possessed 15% control in HEL. Similarly, the term
sheet with Essar dated 5.07.2003 gave Essar the RoFR and Right to Tag Along with HTIL and exit from HEL. Thus, if one keeps in mind the
Hutchison structure in its entirety, HTIL as a Group holding company could have only persuaded its downstream companies to vote in a given
manner as HTIL had no power nor authority under the said structure to direct 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 voting, nomination of directors and management
rights. As regards continuance of the 2006 Shareholders/Framework Agreements by SPA is concerned, one needs to keep in mind two relevant
concepts, viz., participative and protective rights. As stated, this is a case of HTIL exercising its exit right under the holding structure and
continuance of the telecom business operations in India by VIH by acquisition of shares. In the Hutchison structure, exit was also provided for
Essar, Centrino, NDC and SMMS through exercise of Put Option/TARs, subject to sectoral cap being relaxed in future. These exit rights in Essar,
Centrino, NDC and SMMS (IDFC) indicate that these companies were independent companies. Essar was a partner in HEL whereas Centrino,
NDC and SMMS controlled 15% of shares of HEL (minority). A minority investor has what is called as a ""participative"" right, which is a subset of
protective rights"". These participative rights, given to a minority shareholder, enable the minority to overcome the presumption of consolidation of
operations or assets by the controlling shareholder. These participative rights in certain instances restrict the powers of the shareholder with
majority voting interest to control the operations or assets of the investee. At the same time, even the minority is entitled to exit. This ""exit right
comes under ""protective rights"". On examination of the Hutchison structure in its entirety, we find that both, participative and protective rights, were
provided for in the Shareholders/ Framework Agreements of 2006 in favor of Centrino, NDC and SMMS which enabled them to participate,
directly or indirectly, in the operations of HEL. Even without the execution of SPA, such rights existed in the above agreements. Therefore, it
would not be correct to say that such rights flowed from the SPA. One more aspect needs to be mentioned. The Framework Agreements define
change of control with respect to a shareholder"" inter alias as substitution of limited or unlimited liability company, whether directly or indirectly, to
direct the policies/ management of the respective shareholders, viz., Centrino, NDC, Omega. Thus, even without the SPA, upon substitution of
VIH in place of HTIL, on acquisition of CGP share, transition could have taken place. It is important to note that ""transition"" is a wide concept. It
is impossible for the acquirer to visualize all 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 completion of acquisition by VIH
on 8.05.2007) was necessary to assign the benefits of the earlier agreements of 2006 to VIH. This is not correct. The shareholders of ITNL
(renamed as Omega) were Array through HTIL Mauritius and SMMS (an Indian company). The original investors through SMMS (IDFC), an
infrastructure holding company, held 54.21% of the share capital of Omega; that, under the 2006 Framework Agreement, the original investors
were given Put Option by GSPL [an Indian company under Hutchison Teleservices (India) Holdings Limited (Ms)] requiring GSPL to buy the
equity share capital of SMMS; that on completion of acquisition on 8.05.2007 there was a change in control of HTIL Mauritius which held
45.79% in Omega and that changes also took place on 5.06.2007 within the group of original investors with the exit of IDFC and SSKI. In view
of the said changes in the parties, a revised Framework Agreement was executed on 6.06.2007, which again had call and put option. Under the
said Agreement dated 6.06.2007, the Investors once again agreed to grant call option to GSPL to buy the shares of SMMS and to enter into a
Shareholders Agreement to regulate the affairs of Omega. It is important to note that even in the fresh agreement the call option remained with
GSPL and that the said Agreement did not confer any rights on VIH. One more aspect needs to be mentioned. The conferment of call options on
GSPL under the Framework Agreements of 2006 also had a linkage with intra-group loans. CGP was an Investment vehicle. It is through the
acquisition of CGP that VIH had indirectly acquired the rights and obligations of GSPL in the Centrino and NDC Framework Agreements of 2006
[see the report of KPMG dated 18.10.2010] and not through execution of the SPA. Lastly, as stated above, apart from providing for ""standstill"",
an SPA has to provide for transition and all possible future eventualities. In the present case, the change in the investors, after completion of
acquisition on 8.05.2007, under which SSKI and IDFC exited leaving behind IDF alone was a situation which was required to be addressed by
execution of a fresh Framework Agreement under which the call option remained with GSPL. Therefore, the June, 2007 Agreements relied upon
by the Revenue merely reiterated the rights of GSPL which rights existed even in the Hutchison structure as it stood in 2006. It was next contended
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 Indian partners to be kept in the loop. Disputes on existence of
RoFR/ TARs had to be settled. They were settled on 15.03.2007. The rights and obligations created under the SPA had to be preserved. In any
event, preservation of such rights with a view to continue business in India is not extinguishment.
77. For the above reasons, we hold that under the HTIL structure, as it existed in 1994, HTIL occupied only a persuasive position/influence over
the downstream companies qua manner of voting, nomination of directors and management rights. That, the minority shareholders/investors had
participative and protective rights (including RoFR/TARs, call and put options which provided for exit) which flowed from the CGP share. That,
the entire investment was sold to the VIH through the investment vehicle (CGP). Consequently, there was no extinguishment of rights as alleged by
the Revenue.
Role of CGP in the transaction
78. The main contention of the Revenue was that CGP stood inserted at a late stage in the transaction in order to bring in a tax-free entity (or to
create a transaction to avoid tax) and thereby avoid capital gains. That, in December, 2006, HTIL explored the possibility of the sale of shares of
the Mauritius entities and found that such transaction would be taxable as HTIL under that proposal had to be the prime mover behind any
agreement with VIH - prime mover in the sense of being both a seller of shares and the recipient of the sale proceeds there from. Consequently,
HTIL moved upwards in the Hutchison structure and devised an artificial tax avoidance scheme of selling the CGP share when in fact what HTIL
wanted was to sell its property rights in HEL. This, according to the Revenue, was the reason for the CGP share being interposed in the
transaction. We find no merit in these arguments.
79. When a business gets big enough, it does two things. First, it reconfigures itself into a corporate group by dividing itself into a multitude of
commonly owned subsidiaries. Second, it causes various entities in the said group to guarantee each other''s debts. A typical large business
corporation consists of sub-incorporates. Such division is legal. It is recognized by company law, laws of taxation, takeover codes etc. On top is a
parent or a holding company. The parent is the public face of the business. The parent is the only group member that normally discloses 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 correlation. Courts have evolved doctrines like piercing the corporate veil, substance over form etc. enabling taxation of
underlying assets in cases of fraud, sham, tax avoidant, etc. However, genuine strategic tax planning is not ruled out.
80. CGP was incorporated in 1998 in Cayman Islands. It was in the Hutchison structure from 1998. The transaction in the present case was of
divestment and, therefore, the transaction of sale was structured at an appropriate tier, so that the buyer really acquired the same degree of control
as was hitherto exercised by HTIL. VIH agreed to acquire companies and the companies it acquired controlled 67% interest in HEL. CGP was an
investment vehicle. As stated above, it is through the acquisition of CGP that VIH proposed to indirectly acquire the rights and obligations of
GSPL in the Centrino and NDC Framework Agreements. The report of Ernst & Young dated 11.02.2007 inter alias states that when they were
asked to conduct due diligence by VIH, it was in relation to Array and its subsidiaries. The said report evidences that at the negotiation stage,
parties had in mind the transfer of an upstream company rather than the transfer of HEL directly. The transfer of Array had the advantage of
transferring control over the entire shareholding held by downstream Mauritius companies (tier I companies), other than GSPL. On the other hand,
the advantage of transferring the CGP share enabled VIH to indirectly acquire the rights and obligations of GSPL (Indian company) in the Centrino
and NDC Framework agreements. This was the reason for VIH to go by the CGP route. One of the arguments of the Revenue before us was that
the Mauritius route was not available to HTIL for the reason indicated above. In this connection, it was urged that the legal owner of HEL (Indian
company) was not HTIL. Under the transaction, HTIL alone was the seller of the shares. VIH wanted to enter into an agreement only with HTIL
so that if something goes wrong, VIH could look solely to HTIL being the group holding company (parent company). Further, funds were pumped
into HEL by HTIL. These funds were to be received back in the shape of a capital gain which could then be used to declare a special dividend to
the shareholders of HTIL. We find no merit in this argument. Firstly, the tier I (Mauritius companies) were the indirect subsidiaries of HTIL who
could have influenced 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 alias for a smooth transition of business
on divestment by HTIL. As stated, transfer of the CGP share enabled VIH to indirectly acquire the rights and obligations of GSPL in the Centrino
and NDC Framework Agreements. Apart from the said rights and obligations under the Framework Agreements, GSPL also had a call centre
business. VIH intended to take over from HTIL the telecom business. It had no intention to acquire the business of call centre. Moreover, the FDI
norms applicable to the telecom business in India were different and distinct from the FDI norms applicable to the call centre business.
Consequently, in order to avoid legal and regulatory objections from Government of India, the call centre business stood hived off. In our view, this
step was an integral part of transition of business under SPA.
81. On the role of CGP in the transaction, two documents are required to be referred to. One is the Report of the KPMG dated 18.10.2010 in
which it is stated that through the acquisition of CGP, VIH had indirectly acquired the rights and obligations of GSPL in the Centrino and NDC
Framework Agreements. That, the said two agreements were put in place with a view to provide AG and AS with downside protection while
preserving upside value in the growth of HEL. The second document is the Annual Report 2007 of HTIL. Under the caption ""Overview"", the
Report observes that on 11.02.2007, HTIL entered into an agreement to sell its entire interests in CGP, a company which held through various
subsidiaries, the direct and indirect equity and loan interests in HEL (renamed VEL) and its subsidiaries to VIH for a cash consideration of HK
$86.6 bn. As a result of the said Transaction, the net debt of the Group which stood at HK $37,369 mn as on 31.12.2006 became a net cash
balance of HK $25,591 mn as on 31.12.2007. This supports the fact that the sole purpose of CGP was not only to hold shares in subsidiary
companies but also to enable a smooth transition of business, which is the basis of the SPA. Therefore, it cannot be said that the intervened entity
(CGP) had no business or commercial purpose.
82. Before concluding, one more aspect needs to be addressed. It concerns sites of the CGP share. According to the Revenue, under the
Companies Law of Cayman Islands, an exempted company was not entitled to conduct business in the Cayman Islands. CGP was an ""exempted
company"". According to the Revenue, since CGP was a mere holding company and since it could not conduct business in Cayman Islands, the
sites 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 sites 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 sites 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 sites of the CGP share was situated in the place (India) where the underlying assets stood situated.
Did VIH acquire 67% controlling interest in HEL (and not 42%/ 52% as sought to be propounded)?
83. According to the Revenue, the entire case of VIH was that it had acquired only 42% (or, accounting for FIPB Regulations, 52%) is belied by
Clause 5.2 of the Shareholders Agreement. In this connection, it was urged that 15% in HEL was held by AS/ AG/ IDFC because of the FDI cap
of 74% and, consequently, vide Clause 5.2 of the Shareholders Agreement between these entities and HTIL downstream subsidiaries,
AS/AG/IDFC were all reigned in by having to vote only in accordance with HTIL''s dictates as HTIL had funded the purchase by these gentlemen
of the HEL shares through financing of loans. Further, in the Term Sheet dated 15.03.2007, that is, between VIH and Essar, VIH had a right to
nominate 8 directors (i.e. 67% of 12) and Essar had a right to nominate 4 directors which, according to the Revenue, evidences that VIH had
acquired 67% interest in HEL and not 42%/52%, as sought to be propounded by it. According to the Revenue, right from 22.12.2006 onwards
when HTIL made its first public announcement, HTIL on innumerable occasions represented its direct and indirect ""equity interest"" in HEL to be
67% - the direct interest being 42.34% and indirect interest in the sense of shareholding belonging to Indian partners under its control, as 25%.
Further, according to the Revenue, the purchase price paid by VIH was based on an enterprise value of 67% of the share capital of HEL; this
would never have been so if VIH was to buy only 42.34% of the share capital of HEL and that nobody would pay US $2.5 bn extra without
control over 25% in HEL. We find no merit in the above submissions. At the outset, it may be stated that the expression ""control"" is a mixed
question of law and fact. The basic argument of the Revenue is based on the equation of ""equity interest"" with the word ""control"". On perusal of
Hutchison structure, we find that HTIL had, through its 100% wholly owned subsidiaries, invested in 42.34% of HEL (i.e. direct interest).
Similarly, HTIL had invested through its non-100% wholly owned subsidiaries in 9.62% of HEL (through the pro rata route). Thus, in the sense of
shareholding, one can say that HTIL had an effective shareholding (direct and indirect interest) of 51.96% (approx. 52%) 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 the transaction by saying that VIH was acquiring or has acquired effective shareholding of 51.96% in HEL.
84. As regards the Term Sheet dated 15.03.2007, it may be stated that the said Term Sheet was entered into between VIH and Essar. It was
executed after 11.02.2007 when SPA was executed. In the Term Sheet, it has been recited that the parties have agreed to enter into the Term
Sheet in order to regulate the affairs of HEL and in order to regulate the relationship of shareholders of HEL. It is also stated in the Term Sheet that
VIH and Essar shall have to nominate directors on the Board of Directors of HEL in proportion to the aggregate beneficial shareholding held by
members of the respective groups. That, initially VIH shall be entitled to nominate 8 directors and Essar shall be entitled to nominate 4 directors
out of a total Board of Directors of HEL (numbering 12). We must understand the background of this Term Sheet. Firstly, as stated the Term
Sheet was entered into in order to regulate the affairs of HEL and to regulate the relationship of the shareholders of HEL. It was necessary to enter
into such an agreement for smooth running of the business post acquisition. Secondly, we find from the letter addressed by HEL to FIPB dated
14.03.2007 that Articles of Association of HEL did not grant any specific person or entity a right to appoint directors. The said directors were
appointed by the shareholders of HEL in accordance with the provisions of the Indian Company Law. The letter further states that in practice the
directors were appointed pro rata to their respective shareholdings which resulted in 4 directors being appointed from Essar group, 6 directors
being appointed by HTIL and 2 directors were appointed by TII. One such director was AS, the other director was AG. This was the practice
even before the Term Sheet. The Term Sheet continues this practice by guaranteeing or assuring Essar that 4 directors would be appointed from its
Group. The above facts indicate that the object of the SPA was to continue the ""practice"" concerning nomination of directors on the Board of
Directors of HEL which in law is different from a right or power to control and manage and which practice was given to keep the business going,
post acquisition. Under the Company Law, the management control vests in the Board of Directors and not with the shareholders of the company.
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
there from. 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 licenses. It bought an upstream company with the
intention that rights flowing from the CGP share would enable it to gain control over the cluster of Indian operations or operating companies which
owned telecom licenses, business assets, etc. VIH agreed to acquire companies which in turn controlled a 67% interest in HEL and its subsidiaries.
Valuation is a matter of opinion. When the entire business or investment is sold, for valuation purposes, one may take into account the economic
interest or realities. Risks as a discounting factor are also to be taken into consideration apart from loans, receivables, options, RoFR/ TAR, etc. In
this case, Enterprise Value is made up of two parts, namely, the value of HEL, the value of CGP and the companies between CGP and HEL. In
the present case, the Revenue cannot invoke Section 9 of the Income Tax Act on the value of the underlying asset or consequence of acquiring a
share of CGP. In the present case, the Valuation done was on the basis of enterprise value. The price paid as a percentage of the enterprise value
had to be 67% not because the figure of 67% was available in present to VIH, but on account of the fact that the competing Indian bidders would
have had de facto access to the entire 67%, as they were not subject to the limitation of sectoral cap, and, therefore, would have immediately
encashed the call options. The question still remains as to from where did this figure/ expression of 67% of equity interest come? The expression
equity interest"" came from US GAAP. In this connection, we have examined the Notes to the Accounts annexed to the Annual Report 2006 of
HTIL. According to Note 1, the ordinary shares of HTIL stood listed on the Hong Kong Stock Exchange as well as on the New York Stock
Exchange. In Note No. 36, a list of principal subsidiaries of HTIL as on 31.12.2006 has been attached. This list shows the names of HEL (India)
and some of its subsidiaries. In the said Annual Report, there is an annexure to the said Notes to the Accounts under the caption ""Information for
US Investors"". It refers to Variable Interest Entities (VIEs). According to the Annual Report, the Vodafone Group consisting of HTIL and its
subsidiaries conducted its operations inter alias in India through entities in which HTIL did not have the voting control. Since HTIL was listed on
New York Stock Exchange, it had to follow for accounting and disclosure the rules prescribed 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 assets"" within the meaning of Section 2(14) of the
Income Tax Act, 1961. According to the High Court, VIH acquired the CGP share with other rights and entitlements whereas, according to the
Appellant, whatever VIH obtained was through the CGP share (for short ""High Court Approach"").
87. At the outset, it needs to be mentioned that the Revenue has adopted the abovementioned High Court Approach as an alternative contention.
88. We have to view the subject matter of the transaction, in this case, from a commercial and realistic perspective. The present case concerns an
offshore transaction involving a structured investment. This case concerns ""a share sale"" and not an asset sale. It concerns sale of an entire
investment. A ""sale"" may take various forms. Accordingly, tax consequences will vary. The tax consequences of a share sale would be different
from the tax consequences of an asset sale. A slump sale would involve tax consequences which could be different from the tax consequences of
sale of assets on itemized basis. ""Control"" is a mixed question of law and fact. Ownership of shares may, in certain situations, result in the
assumption of an interest which has the character of a controlling interest in the management of the company. A controlling interest is an incident of
ownership of shares in a company, something which flows out of the holding of shares. A controlling interest is, therefore, not an identifiable or
distinct capital asset independent of the holding of shares. The control of a company resides in the voting power of its shareholders and shares
represent an interest of a shareholder which is made up of various rights contained in the contract embedded in the Articles of Association. The
right of a shareholder may assume the character of a controlling interest where the extent of the shareholding enables the shareholder to control the
management. Shares, and the rights which emanate from them, flow together and cannot be dissected. In the felicitous phrase of Lord MacMillan
in IRC v. Crossman (1936) 1 All ER 762, shares in a company consist of a ""congeries of rights and liabilities"" which are a creature of the
Companies Acts and the Memorandum and Articles of Association of the company. Thus, control and management is a facet of the holding of
shares. Applying the above principles governing shares and the rights of the shareholders to the facts 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 totaling 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), totaled 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 analyzed 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
High Court was right in holding that the options constituted capital assets even then Section 9(1)(i) was not applicable as these options have not
been transferred till date. Call and put options were not transferred vide SPA dated 11.02.2007 or under any other document whatsoever.
Moreover, if, on principle, the High Court accepts that the transfer of the CGP share did not lead to the transfer of a capital asset in India, even if it
resulted in a transfer of indirect control over 42.34% (52%) of shares in HEL, then surely the transfer of indirect control over GSPL which held
options (contractual rights), would not make the transfer of the CGP share taxable in India. Acquisition of the CGP share which gave VIH an
indirect control over three genres of companies evidences a straightforward share sale and not an asset sale. There is another fallacy in the
impugned judgment. On examination of the impugned judgment, we find a serious error committed by the High Court in appreciating the case of
VIH before FIPB. On 19.03.2007, FIPB sought a clarification from VIH of the circumstances in which VIH agreed to pay US$ 11.08 bn for
acquiring 67% of HEL when actual acquisition was of 51.96%. In its response dated 19.03.2007, VIH stated that it had agreed to acquire from
HTIL for US$ 11.08 bn, interest in HEL which included a 52% equity shareholding. According to VIH, the price also included a control premium,
use of Hutch brand in India, a non-compete agreement, loan obligations and an entitlement to acquire, subject to the Indian FDI rules, a further
15% indirect interest in HEL. According to the said letter, the above elements together equated to 67% of the economic value of HEL. This
sentence has been misconstrued by the High Court to say that the above elements equated to 67% of the equity capital (See para 124). 67% of
the economic value of HEL is not 67% of the equity capital. If VIH would have acquired 67% of the equity capital, as held by the High Court, the
entire investment would have had breached the FDI norms which had imposed a sectoral cap of 74%. In this connection, it may further be stated
that Essar had 33% stakes in HEL out of which 22% was held by Essar Mauritius. Thus, VIH did not acquire 67% of the equity capital of HEL,
as held by the High Court. This problem has arisen also because of the reason that this case deals with share sale and not asset sale. 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 licenses and
so on as shares constitute a bundle of rights. [See 281675 190317 and 515234 Further, the High Court has failed to examine the nature of the
following items, namely, non-compete agreement, control premium, call and put options, consultancy support, customer base, brand licenses etc.
On facts, we are of the view that the High Court, in the present case, ought to have examined the entire transaction holistically. VIH has rightly
contended that the transaction in question should be looked at as an entire package. The items mentioned hereinabove, like, control premium, non-
compete agreement, consultancy support, customer base, brand licenses, operating licenses etc. were all an integral part of the Holding Subsidiary
Structure which existed for almost 13 years, generating huge revenues, as indicated above. Merely because at the time of exit capital gains tax
becomes not payable or eligible to tax would not make the entire ""share sale"" (investment) a sham or a tax avoidant. The High Court has failed to
appreciate that the payment of US$ 11.08 bn was for purchase of the entire investment made by HTIL in India. The payment was for the entire
package. The parties to the transaction have not agreed upon a separate price for the CGP share and for what the High Court calls as ""other rights
and entitlements"" (including options, right to non-compete, control premium, customer base etc.). Thus, it was not open to the Revenue to split the
payment and consider a part of such payments for each of the above items. The essential character of the transaction as an alienation cannot be
altered by the form of the consideration, the payment of the consideration in installments or on the basis that the payment is related to a contingency
(''options'', in this case), particularly when the transaction does not contemplate such a split up. Where the parties have agreed for a lump sum
consideration without placing separate values for each of the above items which go to make up the entire investment in participation, merely
because certain values are indicated in the correspondence with FIPB which had raised the query, would not mean that the parties had agreed for
the price payable for each of the above items. The transaction remained a contract of outright sale of the entire investment for a lump sum
consideration [see: Commentary on Model Tax Convention on Income and Capital dated 28.01.2003 as also the judgment of this Court in the
case of 277194 Thus, we need to ""look 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 Income Tax Act
89. Section 195 casts an obligation on the payer to deduct tax at source (""TAS"" for short) from payments made to non-residents 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 non-resident, to its Agent/Nominee in India or its PE/Branch Office will
not absolve the payer of his liability u/s 195 to deduct TAS. Section 195(1) casts a duty upon the payer of any income specified therein to a non-
resident to deduct there from the TAS unless such payer is himself liable to pay income tax thereon as an Agent of the payee. Section 201 says
that if such person fails to so deduct TAS he shall be deemed to be an Assessee-in-default in respect of the deductible amount of tax (Section
201). Liability to deduct tax is different from ""assessment"" under the Act. Thus, the person on whom the obligation to deduct TAS is cast is not the
person who has earned the income. Assessment has to be done after liability to deduct TAS has arisen. The object of Section 195 is to ensure that
tax due from non-resident persons is secured at the earliest point of time so that there is no difficulty in collection of tax subsequently at the time of
regular assessment. The present case concerns the transaction of ""outright sale"" between two non-residents of a capital asset (share) outside India.
Further, the said transaction was entered into on principal to principal basis. Therefore, no liability to deduct TAS arose. Further, in the case of
transfer of the Structure in its entirety, one has to look at it holistically as one Single Consolidated Bargain which took place between two foreign
companies outside India for which a lump sum price was paid of US$ 11.08 bn. Under the transaction, there was no split up of payment of US$
11.08 bn. It is the Revenue which has split the consolidated payment and it is the Revenue which wants to assign a value to the rights to control
premium, right to non-compete, right to consultancy support etc. For FDI purposes, the FIPB had asked VIH for the basis of fixing the price of
US$ 11.08 bn. But here also, there was no split up of lump sum payment, asset-wise as claimed by the Revenue. There was no assignment of
price for each right, considered by the Revenue to be a ""capital asset"" in the transaction. In the absence of PE, profits were not attributable to
Indian operations. Moreover, tax presence has to be viewed in the context of the transaction that is subjected to tax and not with reference to an
entirely unrelated matter. The investment made by Vodafone Group companies in Bharti did not make all entities of that Group subject to the
Indian Income Tax Act, 1961 and the jurisdiction of the tax authorities. Tax presence must be construed in the 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"" u/s 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 u/s 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 non-resident for the purposes of the Act. However, merely because a person is an agent or is to be treated as an agent, would not
lead to an automatic conclusion that he becomes liable to pay taxes on behalf of the non-resident. It would only mean that he is to be treated as a
representative Assessee"". Section 161 of the Act makes a ""representative Assessee"" liable only ""as regards the income in respect of which he is a
representative Assessee"" (See: Section 161). Section 161 of the Act makes a representative Assessee liable only if the eventualities stipulated in
Section 161 are satisfied. This is the scope of Sections 9(1)(i), 160(1), 161(1) read with Sections 163(1)(a) to (d). In the present case, the
Department has invoked Section 163(1)(c). Both Sections 163(1)(c) and Section 9(1)(i) state that income should be deemed to accrue or arise in
India. Both these Sections have to be read together. On facts of this case, we hold that Section 163(1)(c) is not attracted as there is no transfer of
a capital asset situated in India. Thus, Section 163(1)(c) is not attracted. Consequently, VIH cannot be proceeded against even u/s 163 of the Act
as a representative Assessee. For the reasons given above, there is no necessity of examining the written submissions advanced on behalf of VIH
by Dr. Abhishek Manu Singhvi on Sections 191 and 201.
Summary of Findings
90. Applying the look at test in order to ascertain the true nature and character of the transaction, we hold, that the Offshore Transaction herein is
a bonafide structured FDI investment into India which fell outside India''s territorial tax jurisdiction, hence not taxable. The said Offshore
Transaction evidences participative investment and not a sham or tax avoidant preordained transaction. The said Offshore Transaction was
between HTIL (a Cayman Islands company) and VIH (a company incorporated in Netherlands). The subject matter of the Transaction was the
transfer of the CGP (a company incorporated in Cayman Islands). Consequently, the Indian Tax Authority had no territorial tax jurisdiction to tax
the said Offshore Transaction.
Conclusion
91. FDI flows towards location with a strong governance infrastructure which includes enactment of laws and how well the legal system works.
Certainty is integral to rule of law. Certainty and stability form the basic foundation of any fiscal system. Tax policy certainty is crucial for taxpayers
(including foreign investors) to make rational economic choices in the most efficient manner. Legal doctrines like ""Limitation of Benefits"" and ""look
through"" are matters of policy. It is for the Government of the day to have them incorporated in the Treaties and in the laws so as to avoid
conflicting views. Investors should know where they stand. It also helps the tax administration in enforcing the provisions of the taxing laws. As
stated above, the Hutchison structure has existed since 1994. According to the details submitted on behalf of the Appellant, we find that from
2002-03 to 2010-11 the Group has contributed an amount of 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 Supreme Court up to the date of
payment. The Registry is directed to return the Bank Guarantee given by the Appellant within four weeks.
K.S. Radhakrishnan, J.
93. The question involved in this case is of considerable public importance, especially on Foreign Direct Investment (FDI), which is indispensable
for a growing economy like India. Foreign investments in India are generally routed through Offshore Finance Centers (OFC) also through the
countries with whom India has entered into treaties. Overseas investments in Joint Ventures (JV) and Wholly Owned Subsidiaries (WOS) have
been recognized as important avenues of global business in India. Potential users of off-shore finance are: international companies, individuals,
investors and Ors. and capital flows through FDI, Portfolio Debt Investment and Foreign Portfolio Equity Investment and so on. Demand for off-
shore facilities has considerably increased owing to high growth rates of cross-border investments and a number of rich global investors have come
forward to use high technology and communication infrastructures. Removal of barriers to cross-border trade, the liberalization of financial markets
and new communication technologies have had positive effects on global economic growth and India has also been greatly benefited.
94. Several international organizations like UN, FATF, OECD, Council of Europe and the European Union offer finance, one way or the other, for
setting up companies all over the world. Many countries have entered into treaties with several offshore companies for cross-border investments
for mutual benefits. India has also entered into treaties with several countries for bilateral trade which has been statutorily recognized in this country.
United Nations Conference on Trade and Development (UNCTAD) Report on World Investment prospects survey 2009-11 states that India
would continue to remain among the top five attractive destinations for foreign investors during the next two years.
95. Merger, Amalgamation, Acquisition, Joint Venture, Takeovers and Slump-sale of assets are few methods of cross-border re-organizations.
Under the FDI Scheme, investment can be made by availing the benefit of treaties, or through tax havens by non-residents 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.
96. 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 judgment of Lord Chief Justice, but reference to
few facts is necessary to address and answer the core issues raised. On all major issues, I fully concur with the views expressed by the Lord Chief
Justice in his erudite and scholarly judgment.
97. Part-I of this judgment deals with the facts, Part-II deals with the general principles, Part-III deals with Indo-Mauritian Treaty, judgments in
266631 and McDowell and Company Limited v. Commercial Tax Officer (1985) 3 SCC 230, Part-IV deals with CGP Interposition, sites etc,
Part-V deals with controlling interest of HTIL/Vodafone and other rights and entitlements, Part-VI deals with the scope of Section 9, Part-VII
deals with Section 195 and other allied provisions and Part-VIII is the conclusions.
Part - I
98. Hutchison Whampoa is a multi-sectional, multi-jurisdictional entity which consolidates on a group basis telecom operations in various countries.
Hutchison Group of Companies (Hong Kong) had acquired interest in the Indian telecom business in the year 1992, when the group invested in
Hutchison Max Telecom Limited (HTML) (later known a Hutchison Essar Limited (HEL), which acquired a cellular license in Mumbai circle in the
year 1994 and commenced its operation in the year 1995. Hutchison Group, with the commercial purpose of consolidating its interest in various
countries, incorporated CGP Investments Holding Limited (for short ""CGP"") in Cayman Islands as a WOS on 12.01.1998 as an Exempted
Company for offshore investments. CGP held shares in two subsidiary companies, namely Array Holdings Limited (for short Array) and Hutchison
Teleservices (India) Holding Ltd. [for short HTIH(M)] both incorporated in Mauritius. CGP(India) Investment (for short CGPM) was
incorporated in Mauritius in December 1997 for the purpose of investing in Telecom Investment (India) Pvt. Limited (for short TII), an Indian
Company. CGPM acquired interests in four Mauritian Companies and entered into a Shareholders'' Agreement (SHA) on 02.05.2000 with Essar
Teleholdings Limited (ETH), CGPM, Mobilvest, CCII (Mauritius) Inc. and few others, to regulate shareholders'' right inter se. Agreement
highlighted the share holding pattern of each composition of Board of Directors, quorum, restriction on transfer of ownership of shares, Right of
First Refusal (ROFR), Tag Along Rights (TARs) etc.
99. 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.
100. 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 short
(AS)], Telecom Investment India Pvt. Ltd. [for short (TII)], and CGP India (M). Further, two Framework Agreements (FWAs) were also entered
into with respect to the restructuring. Credit facilities were given to the companies controlled by AG and AS. FWAs called, Centrino FWA and
N.D. FWA were executed on 01.03.2006. HTIL stood as a guarantor for Centrino, for an amount of Rs. 4,898 billion advanced by Rabo Bank.
HTIL had also stood as a guarantor for ND Callus, for an award of Rs. 7.924 billion advanced by Rabo Bank.
101. Following the credit support given by HTIL to AG and AS so as to enable them to acquire shares in TII, parties entered into separate
agreements with 3 Global Services Pvt. Ltd. (India) [for short 3GSPL], a WOS of HTIL. FWAs also contained call option in favor of 3GSPL, a
right to purchase from Gold Spot (an AG company) and Scorpios (an AS company) their entire shareholding in TII held through Plustech (an AG
company) and MVH (an AS company) respectively. Subscription right was also provided allowing 3GSPL a right to subscribe 97.5% and 97% of
the equity share capital respectively at a pre-determined rate equal to the face value of the shares of Centrino and NDC respectively exercisable
within a period of 10 years from the date of the agreements. Agreements also restricted AG companies and AS companies from transferring any
downstream interests leading to the shareholding in TII.
102. HEL shareholding again underwent change with Hinduja Group exiting and its shareholding being acquired by an Indian company called
SMMS Investments Private Limited (SMMS). SMMS was also a joint venture company formed by India Development Fund (IDF) acting through
IDFC Private Equity Company (IDFCPE), Infrastructure Development Finance Company Limited (IDFC) and SSKI Corporate Finance Pvt. Ltd.
(SSKI) all the three companies were incorporated in India. Pursuant thereto, a FWA was entered into on 07.08.2006 between IDF (through
IDFCPE), IDFC, SSKI, SMMS, HTIL (M), 3GSPL, Indus Ind Telecom Holding Pvt. Ltd. (ITNL) (later named as Omega Telecom Holding
Pvt. Ltd. (Omega) and HTIL. 3GSPL, by that Agreement, had a call option and a right to purchase the entire equity shares of SMMS at a pre-
determined price equal to Rs. 661,250,000 plus 15% compound interest. A SHA was also entered into on 17.08.2006 by SMMS, HTIL (M),
HTIL(CI) and ITNL to regulate 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.
103. 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
104. 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 Non-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 making a ""revised and binding offer"" on behalf of a member of Vodafone Group (Vodafone) for HTIL''s shareholdings in HEL
together with interrelated company loans. Bharati Infotel Pvt. Limited on 09.02.2007 expressed its ''no objection'' to the Chairman, Vodafone
Mauritius Limited regarding proposed acquisition by Vodafone group of direct and / indirect interest in HEL from Hutchison or Essar group.
Bharati Airtel also sent a similar letter to Vodafone.
105. Vodafone Group Plc. on 10.02.2007 made a final binding offer of US$ 11.076 billion ""in cash over HTIL''s interest"", based on an enterprise
value of US$ 18.800 billion of HEL. Ernst and Young LLP, U.K. on 11.02.2007 issued due diligence report in relation to operating companies in
India namely HEL and subsidiaries and also the Mauritian and Cayman Island Companies. Report noticed that CGP(CI) was not within the target
group and was later included at the instance of HTIL. On 11.02.2007, UBS Limited, U.K. issued fairness opinion in relation to the transaction for
acquisition by Vodafone from HTIL of a 67% effective interest in HEL through the acquisition of 100% interest in CGP and granting an option by
Vodafone to Indian Continent Investment Ltd. over a 5.6% stake in Bharati Airtel Limited. Bharati Infotel and Bharati Airtel conveyed their no-
objection to the Vodafone purchasing direct or indirect interest in HEL.
106. Vodafone and HTIL then entered into a Share and Purchase Agreement (SPA) on 11.02.2007 where under HTIL had agreed to procure the
transfer of share capital of CGP by HTIBVI, free from all encumbrances and together with all rights attaching or accruing together with
assignments of loan interest. HTIL on 11.02.2007 issued a side letter to Vodafone inter alias stating that, out of the purchase consideration, up to
US$80 million could be paid to some of its Indian Partners. HTIL had also undertaken that Hutchison Telecommunication (India) Ltd. (HTM),
Omega and 3GSPL, would enter into an agreed form ""IDFC Transaction Agreement"" as soon as practicable. On 11.02.2007, HTIL also sent a
disclosure letter to Vodafone in terms of Clause 9.4 of SPA - Vendor warranties relating to consents and approvals, wider group companies,
material contracts, permits, litigation, arbitration and governmental proceedings to limit HTIL liability.
107. Vodafone on 12.02.2007 made a public announcement to the Securities and Exchange Commission, Washington (SEC), London Stock
Exchange and HK Stock Exchange stating that it had agreed to acquire a Controlling Interest in HEL for a cash consideration of US$ 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.
108. 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 entire issued share capital of CGP and the loans owned by CGP/Array to an indirect WOS. AG on 02.03.2007
sent a letter to HEL confirming that he was the exclusive beneficial owner of his shares and was having full control over related voting rights.
Further, it was also stated that AG had received credit support, but primary liability was with Companies. AS also sent a letter on 05.03.2007 to
FIPB confirming that he was the exclusive beneficial owner of his shares and also of the credit support received.
109. Essar had filed objections with the FIPB on 06.03.2007 to HTIL''s proposed sale and on 14.03.2007, Essar withdrew its objections.
110. FIPB on 14.03.2007 sent a letter to HEL pointing out that in filing of HTIL before the U.S. SEC in Form 6K in the month of March 2006, it
had been stated that HTIL Group would continue to hold an aggregate interest of 42.34% of HEL and an additional indirect interest through JV
companies being non-wholly owned subsidiaries of HTIL which hold an aggregate of 19.54% of HEL and, hence, the combined holding of HTIL
Group would then be 61.88%. Reference was also made to the communication dated 06.03.2007 sent to the FIPB wherein it was stated that the
direct and indirect FDI by HTIL would be 51.96% and, hence, was asked to clarify that discrepancy. Similar letter dated 14.03.2007 was also
received by Vodafone. On 14.03.2007, HEL wrote to FIPB stating that the discrepancy was because of the difference in U.S. GAAP and Indian
GAAP declarations and that the combined holding for U.S. GAAP purposes was 61.88% and for Indian GAAP purposes was 51.98%. It was
pointed out that Indian GAAP number accurately reflected the true equity ownership and control position. On 14.03.2007 itself, HEL wrote to
FIPB confirming that 7.577% stake in HEL was held legally and beneficially by AS and his wife and 4.78% stake in HEL was held legally and
beneficially by AG. Further, it was also pointed out that 2.77% stake in HEL through Omega and S.M.M.S. was legally and beneficially owned by
IDFC Limited, IDFC Private Equity Limited and SSKI Corporate Finance Limited. Further, it was also pointed out that Articles of Association of
HEL did not give any person or entity any right to appoint directors, however, in practice six directors were from HTIL, four from Essar, two from
TII and TII had appointed AG & AS. On credit support agreement, it was pointed out that no permission of any regulatory authority was required.
111. 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.
112. 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$ 373.5 million after
completion and a further US$ 41.5 million after second anniversary of completion. In that agreement, HTIL had agreed to dispose of its direct and
indirect equity, loan and other interests and rights in and related to HEL, to Vodafone pursuant to the SPA. HTIL had also agreed to pay US$ 415
million to Essar in return of its acceptance of the SPA between HTIL and Vodafone. On 15.03.2007 a Deed of Waiver was entered into between
Vodafone and HTIL, whereby Vodafone had waived some of the warranties set out in paragraphs 7.1(a) and 7.1(b) of Schedule 4 of the SPA
and covenanted that till payment of HTIL under Clause 6.1 (a) of the Settlement Agreement of 30.05.2007, Vodafone should not bring any claim
or action. On 15.03.2007 a circular was issued by HTIL including the report of Somerley Limited on the Settlement Agreement between HTIL
and Essar Group.
113. VIHBVI, Essar Tele Holdings Limited (ETH) and ECL entered into a Term Sheet Agreement on 15.03.2007 for regulating the affairs of
HEL and the relationship of its shareholders including setting out VIHBVI''s right as a shareholder of HEL to nominate eight persons out of twelve
to the board of directors, requiring Vodafone to nominate director to constitute a quorum for board meetings and get ROFR over shares owned
by Essar in HEL. Term Sheet also stated that Essar had a TAR in respect of Essar''s shareholding in HEL, should any Vodafone Group
shareholding sell its share or part thereof in HEL to a person not in a Vodafone Group entity. VIHBV and Vodafone Group Plc.(as guarantor of
VIHBV) had entered into a ''Put Option'' Agreement on 15.03.2007 with ETH, ECL (Mauritius), requiring VIHBV to purchase from Essar Group
shareholders'' all the option shares held by them.
114. The Joint Director of Income Tax (International Taxation), in the meanwhile, issued a notice dated 15.03.2007 u/s 133(6) of the Income Tax
Act calling for certain information regarding sale of stake of Hutchison group HK in HEL, to Vodafone Group Plc.
115. HTIL, on 17.3.2007, wrote to AS confirming that HTIL has no beneficial or legal or other rights in AS''s TII interest or HEL interest.
Vodafone received a letter dated 19.3.2007 from FIPB seeking clarifications on the circumstances under which Vodafone had agreed to pay
consideration of US$ 11.08 billion for acquiring 67% of HEL when the actual acquisition was only 51.96% 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 group, value of non-voting, non-convertible
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.
116. 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)
117. 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.
118. HEL received a letter dated 23.3.2007 from the Additional Director Income Tax (International Taxation) intimating that both Vodafone and
Hutchison Telecom Group announcements/press releases/declarations had revealed that HTIL had made substantive gains and consequently HEL
was requested to impress upon HTIL/Hutchison Telecom Group to discharge their liability on gains, before they ceased operations in India. HEL
attention was also drawn to Sections 195, 195(2) and 197 of the Act and stated that u/s 195 obligations were both on the payer and the payee.
119. Vodafone, in the meanwhile, wrote to FIPB on 27.03.2007 confirming that in determining the bid price of US$ 11.09 billion it had taken into
account various assets and liabilities of CGP including:
(a) its 51.96% direct and indirect equity ownership of Hutch Essar;
(b) Its ownership of redeemable preference shares in TII and JKF;
(c) Assumption of liabilities of various subsidiaries of CGP amounting to approximately US$630 million;
(d) subject to Indian Foreign Investment Rules, its rights and entitlements, including subscription rights at par value and call options to acquire in
future a further 62.75% of TII and call options to acquire a further 54.21% of Omega Telecom Holdings Pvt. Ltd, which together would give
Vodafone a further 15.03% proportionate indirect equity ownership of Hutch Essar, various intangible features such as control premium, use and
rights of Hutch branch in India, non compete agreement with HTIL.
HEL on 5.4.2007 wrote to the Joint director of Income Tax stating that it has no liabilities accruing out of the transaction, also the department has
no locus stand to invoke Section 195 in relation to non-resident entities regarding any purported tax obligations. On 09.04.2007 HTIL submitted
FWAs, SHAs, Loan Agreement, Share-pledge Agreements, Guarantees, Hypothecations, Press Announcements, Regulatory filing etc., charts of
TII and Omega Shareholding, note on terms of agreement relating to acquisition by AS, AG and IDFC, presentation by Goldman Sachs on fair
market valuation and confirmation by Vodafone, factors leading to acquisition by AG and AS and rationale for put/call options etc.
120. Vodafone on 09.04.2007 sent a letter to FIPB confirming that valuation of N.D. Callus, Centrino, would occur as per Goldman Sach''s
presentation in Schedule 5 to HTIL''s letter of 09.04.2007 with a minimum value of US$ 266.25 million and US$164.51 million for the equity in
N.D. Callus and Centrino respectively, which would form the basis of the future partnership with AS & AG. Vodafone also wrote a letter to FIPB
setting out details of Vodafone Group''s interest worldwide. On 30.04.07 a resolution was passed by the Board of Directors of CGP pertaining to
loan agreement, resignation and appointment of directors, transfer of shares; all to take effect on completion of SPA. Resolution also accorded
approval of entering into a Deed of Assignment in respect of loans owed to HTI(BVI) Finance Limited in the sums of US$ 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 transfer documentation in relation to CGP share capital in pursuance of SPA and
due execution thereof. On 04.05.2007 HTI BVI delivered the share transfer documentation to the lawyers in Caymen Islands to hold those along
with a resolution passed by the board of directors of HTI BVI to facilitate delivery of instruments of transfer to Vodafone at closing of the
transaction.
121. Vodafone on 07.05.2007 received a letter from FIPB conveying its approval to the transaction subject to compliance of observation of
applicable laws and Regulations in India. On 08.05.2007 a sum of US$10,854,229,859.05 was paid by Vodafone towards consideration for
acquisition of share capital of CGP. On 08.05.2007 Vodafone''s name was entered in the register of members of CGP kept in Caymen Islands
and the share certificate No. 002 of HTI BVI relating to CGP share capital was cancelled. On the same day a Tax Deed of Covenant was entered
into between HTIL and Vodafone in pursuance of SPA indemnifying Vodafone in respect of taxation or transfer pricing liabilities payable or
suffered by wider group companies (as defined by SPA i.e., CGP, 3 GSPL, Mauritian holding and Indian Companies) on or before completion,
including reasonable costs associated with any tax demand.
122. HTIL also sent a side letter to SPA on 08.05.2007 to Vodafone highlighting the termination of the brand licenses and brand support service
agreements between HTIL and 3GSPL and the Indian Operating Companies and stated that the net amount to be paid by Vodafone to HTIL
would be US$ 10,854,229,859.05 and that Vodafone would retain US$ 351.8 million towards expenses incurred to operationalize the option
agreements with AS and AG, out of the total consideration of US$11,076,000,000. On 08.05.2007 loan assignment between HTI BVI Finance
Limited, Array and Vodafone of Array debt in a sum of US$ 231,111,427.41 was effected, whereby rights and benefits of HTI BVI Finance
Limited to receive repayment was assigned in favor of Vodafone as part of the transaction contemplated vide SPA. On the same day loan
assignment between HTI BVI Finance Limited, CGP and Vodafone, of CGP debt in the sum of US$ 28,972,505.70 was effected, whereby rights
and benefits of HTI BVI Finance Limited to receive the repayment was assigned in favor of Vodafone as part of the transactions contemplated
vide SPA. On 08.05.2007, business transfer agreement between 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 where under 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.
123. 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%.
124. An agreement (Omega Agreement) dated 05.06.2007 was entered into between IDF, IDFC, IDFC Private Equity Fund II (IDFCPE),
SMMS, HT India, 3GSPL, Omega, SSKI and VIHBV. Due to that Agreement IDF, IDFC and SSKI would instead of exercising the ''Put
option'' and ''cashless option'' under 2006 IDFC FWA could exercise the same in pursuance of the present Agreement. Further, 3GSPL had
waived its right to exercise the ''call option'' pursuant to 2006 IDFC FWA. On 06.06.2007 a FWA was entered into between IDF, IDFC,
IDFCPE, SMMS, HT India, 3GSPL, Omega and VIHBV. By that Agreement 3GSPL had a ''call option'' to purchase the equity shares of
SMMS. On 07.06.2007 a SHA was entered into between SMMS, HTIL(M), Omega and VIHBV to regulate the affairs of Omega. On
07.06.2007 a Termination Agreement was entered into between IDF, IDFC, SMMS, HTIL, 3GSPL, Omega and HTL terminating the 2006
IDFC FWA and the SHA and waiving their respective rights and claims under those Agreements. On 27.06.2007 HTIL in their 2007 interim
report declared a dividend of HK$ 6.75 per share on account of the gains made by the sale of its entire interest in HEL. On 04.07.2007 fresh
certificates of incorporation was issued by the Registrar of Companies in relation to Indian operating companies whereby the word ""Hutchison
was substituted with word ""Vodafone"".
125. On 05.07.2007, a FWA was entered into between AG, AG Mercantile Pvt. Limited, Plustech Mercantile Company Pvt. Ltd, 3GSPL,
Nadal Trading Company Pvt. Ltd and Vodafone as a confirming party. In consideration for the unconditional ''call option'', 3GSPL agreed to pay
AG an amount of US$ 6.3 million annually. On the same day a FWA was signed by AS and Neetu AS, Scorpio Beverages Pvt. Ltd.(SBP), M.V.
Healthcare Services Pvt. Ltd, 3GSPL, N.D. Callus Info Services Pvt. Ltd and Vodafone, as a confirming party. In consideration for the ''call
option'' 3GSPL agreed to pay AS & Mrs. Neetu AS an amount of US$ 10.02 million annually. TII SHA was entered into on 05.07.2007
between Nadal, NDC, CGP (India), TII and VIHBV to regulate the affairs of TII. On 05.07.2007 Vodafone entered into a Consultancy
Agreement with AS. Under that Agreement, AS was to be paid an amount of US$ 1,050,000 per annum and a one time payment of US$
1,30,00,000 was made to AS.
126. Vodafone sent a letter to FIPB on 27.07.2007 enclosing undertakings of AS, AG and their companies as well as SMMS Group to the effect
that they would not transfer the shares to any foreign entity without requisite approvals.
127. The Income Tax Department on 06.08.2007 issued a notice to VEL u/s 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 u/s 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 notice was issued to Vodafone u/s 201 and 201(1A) by the Income Tax authorities. Vodafone replied to the show cause notice on
29.01.2010. On 31.05.2010 the Income Tax Department passed an order u/s 201 and 201(1A) of the I.T. Act upholding the jurisdiction of the
Department to tax the transaction. A show cause notice was also issued u/s 163(1) of the I.T. Act to Vodafone as to why it should not be treated
as an agent / representative Assessee of HTIL.
128. Vodafone then filed Writ Petition No. 1325 of 2010 before the Bombay High Court on 07.06.2010 challenging the order dated 31.05.2010
issued by the Income Tax Department on various grounds including the jurisdiction of the Tax Department to impose capital gains tax to overseas
transactions. The Assistant Director of Income Tax had issued a letter on 04.06.2010 granting an opportunity to Vodafone to address the
Department on the question of quantification of liability u/s 201 and 201(1A) of the Income Tax Act. Notice was also challenged by Vodafone in
the above writ petition by way of an amendment. The Bombay High Court dismissed the Writ Petition on 08.09.2010 against which the present
SLP has been filed.
129. The High Court upheld the jurisdiction of the Revenue to impose capital gains tax on Vodafone as a representative Assessee after holding that
the transaction between the parties attracted capital gains in India. Court came to the following conclusions:
(a) Transactions between HTIL and Vodafone were fulfilled not merely by transferring a single share of CGP in Cayman Islands, but the
commercial and business understanding between the parties postulated that what was being transferred from HTIL to VIHBV was the ""controlling
interest"" in HEL in India, which is an identifiable capital asset independent of CGP share.
(b) HTIL had put into place during the period when it was in the control of HEL a complex structure including the financing of Indian companies
which in turn had holdings directly or indirectly in HEL and hence got controlling interest in HEL.
(c) Vodafone on purchase of CGP got indirect interest in HEL, controlling right in certain indirect holding companies in HEL, controlling rights
through shareholder agreements which included the right to appoint directors in certain indirect holding companies in HEL, interest in the form of
preference share capital 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 u/s 9(1)(i) or 163 of the I.T. Act.
(g) Court directed the Assessing Officer to do apportionment of income between the income that has deemed to accrue or arise as a result of
nexus with India and that which lies outside. High Court also concluded that the provisions of Section 195 can apply to a non-resident provided
there is sufficient territorial connection or nexus between him and India.
(h) Vodafone, it was held, by virtue of its diverse agreements has nexus with Indian jurisdiction and, 126 hence, the proceedings initiated u/s 201
for failure to withhold tax by Vodafone cannot be held to lack jurisdiction.
130. Shri Harish Salve, learned senior counsel appearing for Vodafone explained in detail how Hutchison Corporate Structure was built up and the
purpose, object and relevance of such vertical Transnational Structures in the international context. Learned Senior counsel submitted that complex
structures are designed not for avoiding tax but for good commercial reasons and Indian legal structure and foreign exchange laws recognize
Overseas Corporate Bodies (OCB). Learned senior counsel also submitted that such Transnational Structures also contain exit option to the
investors. Senior counsel also pointed out that where regulatory provisions mandate investment into corporate structure such structures cannot be
disregarded for tax purposes by lifting the corporate veil especially when there is no motive to avoid tax. Shri Salve also submitted that Hutchison
corporate structure was not designed to avoid tax and the transaction was not a colorable device to achieve that purpose. Senior counsel also
submitted that source of income lies where the transaction is effected and not where the underlying asset is situated or economic interest lies.
Reference was made to judgment in 271933 (SC). Learned Counsel also pointed out that without any express legislation, off-shore transaction
cannot be taxed in India. Reference was made to two judgments of the 39254 . and 17594 Learned senior counsel also pointed out that when a
transaction is between two foreign entities and not with an Indian entity, source of income cannot be traced back to India and nexus cannot be
used to tax u/s 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 sites of
shares, learned senior counsel pointed out that the sites is determined depending upon the place where the asset is situated. Learned senior counsel
also pointed out that on transfer of CGP, Vodafone got control over HEL and merely because Vodafone has presence or chargeable income in
India, it cannot be inferred that it can be taxed in some other transactions. Further, it was also pointed out that there was no transfer of any capital
asset from HTIL to Vodafone pursuant to Option Agreements, FWAs, executed by the various Indian subsidiaries. Learned Senior Counsel also
pointed out that the definition of ""transfer"" u/s 2(47) which provides for ""extinguishment"" is attracted for a transfer of a legal right and not a
contractual right and there was no extinguishment of right by HTIL which gave rise to capital gains tax in India. Reference was made to judgment
279791 . Learned senior counsel also submitted that the acquisition of ""controlling interest"" is a commercial concept and tax is levied on transaction
and not its effect. Learned senior counsel pointed out that to lift the corporate veil of a legally recognized corporate structure time and the stage of
the transaction are very important and not the motive to save the tax. Reference was also made to several judgments of the English Courts viz, IRC
v. Duke of Westminster (1936) AC 1 (HL), W.T. Ramsay v. IRC (1982) AC 300 (HL), Craven v. White (1988) 3 All ER 495, Furniss v.
Dawson (1984) 1 All ER 530 etc. Reference was also made to the judgment of this Court in McDowell, Azadi Bachao Andolan cases (supra) and
few other judgments. Learned senior counsel point out that Azadi Bachao Andolan broadly reflects Indian jurisprudence and that generally Indian
courts used to follow the principles laid down by English Courts on the issue of tax avoidance and tax evasion. Learned Senior counsel also
submitted that Tax Residency Certificate (for short TRC) issued by the Mauritian authorities has to be respected and in the absence of any
Limitation on Benefit (LOB Clause), the benefit of the Indo-Mauritian Treaty is available to third parties who invest in India through Mauritius
route.
131. Mr. Salve also argued on the extra territorial applicability of Section 195 and submitted that the same cannot be enforced on a non-resident
without a presence in India. Counsel also pointed out that the words ""any person"" in Section 195 should 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 u/s 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 Income Tax Act). Senior counsel therefore contended that the findings of the Tax Authorities that
pursuant to the transaction the benefit of telecom license stood transferred to Vodafone is misconceived and that under the telecom policy of India
a telecom license can be held only by an Indian Company and there is no transfer direct or indirect of any license to Vodafone.
132. 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 that CGP share has been interposed at the last minute to artificially remove HTIL from the Indian telecom business. Reference was
made to the Due Diligence Report of Ernst and Young which stated that target structure later included CGP which was not there originally.
Further, it was also pointed out that HTIL extinguished its rights in HEL and put Vodafone in its place and CGP was merely an interloper. Shri
Nariman also pointed out that as per Settlement Agreement, HTIL sold direct and indirect equity holdings, loans, other interests and rights relating
to HEL which clearly reveal something other than CGP share was sold and those transactions were exposed by the SPA. Learned Solicitor
General also referred extensively the provisions of SPA and submitted that the legal owner of CGP is HTIBVI Holdings Ltd., a British Virgin
Islands Company which was excluded from the Agreement with an oblique tax motive.
133. Mr. Nariman also submitted the sites of CGP can only be in India as the entire business purpose of holding that share was to assume control
in Indian telecom operations, the same was managed through Board of Directors controlled by HTIL. The controlling interest expressed by HTIL
would amount to property rights and hence taxable in India. Reference was made to judgments of the Calcutta High Court in 24720 and 821901
Further, it was also pointed out the ""call and put"" options despite being a contingent right are capable of being transferred and they are property
rights and not merely contractual rights and hence would be taxable. Referring to the SPA Shri Nariman submitted that the transaction can be
viewed as extinguishment of HTILs property rights in India and CGP share was merely a mode to transfer capital assets in India. Further, it was
also pointed out that the charging Section should be construed purposively and it contains a look through provision and that the definition of the
transfer in Section 9(1)(i) is an inclusive definition meant to explain the scope of that Section and not to limit it. The resignation of HTIL Directors
on the Board of HEL could be termed as extinguishment and the right to manage a Company through its Board of Directors is a right to property.
Learned Solicitor General also extensively referred to Ramsay Doctrine 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 fa�ade.
134. 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 examine the legal status of
a corporate structure, its usefulness in cross-border transactions and other legal and commercial principles in use in such transactions, which are
germane to our case.
Part - II
CORPORATE STRUCTURE/ GENERAL PRINCIPLES (National and International)
135. Corporate structure is primarily created for business and commercial purposes and multi-national companies who make offshore investments
always aim at better returns to the shareholders and the progress of their companies. Corporation created for such purposes are legal entities
distinct from its members and are capable of enjoying rights and of being subject to duties which are not the same as those enjoyed or borne by its
members. Multi-national companies, for corporate governance, may develop corporate structures, affiliate subsidiaries, joint ventures for
operational efficiency, tax avoidance, mitigate risks etc. On incorporation, the corporate property belongs to the company and members have no
direct proprietary rights to it but merely to their ""shares"" in the undertaking and these shares constitute items of property which are freely
transferable in the absence of any express provision to the contrary.
136. Corporate structure created for genuine business purposes are those which are generally created or acquired: at the time when investment is
being made; or further investments are being made; or the time when the Group is undergoing financial or other overall restructuring; or when
operations, such as consolidation, are carried out, to clean-defused or over-diversified. Sound commercial reasons like hedging business risk,
hedging political risk, mobility of investment, ability to raise loans from diverse investments, often underlie creation of such structures. In
transnational investments, the use of a tax neutral and investor-friendly countries to establish SPV is motivated by the need to create a tax efficient
structure to eliminate double taxation wherever possible and also plan their activities attracting no or lesser tax so as to give maximum benefit to the
investors. Certain countries are exempted from capital gain, certain countries are partially exempted and, in certain countries, there is nil tax on
capital gains. Such factors may go in creating a corporate structure and also restructuring.
137. Corporate structure may also have an exit route, especially when investment is overseas. For purely commercial reasons, a foreign group may
wind up its activities overseas for better returns, due to disputes between partners, unfavorable 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.
138. 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, dishonest purpose, so as to defeat the law.
CORPORATE GOVERNANCE
139. Corporate governance has been a subject of considerable interest in the corporate world. The Organization for Economic cooperation and
Development (OECD) defines corporate governance as follows:
Corporate governance is a system by which business corporations are directed and controlled. The corporate governance structure specifies the
distribution of rights and responsibilities among different participants in the corporation and other stake holders and spells out rules and procedures
for making decisions on corporate affairs. By doing this, it also provides a structure through which the company objectives are set and the means
of attaining those objectives and monitoring performance.
The Ministry of Corporate Affairs to the Government of India, has issued several press notes for information of such global companies, which will
indicate that Indian corporate Law has also accepted the corporate structure consisting of holding companies and several subsidiary companies. A
holding company which owns enough voting stock in a subsidiary can control management and operation by influencing or electing its Board of
Directors. The holding company can also maintain group accounts which is to give members of the holding company a picture of the financial
position of the holding company and its subsidiaries. The form and content of holding company or subsidiary company''s own balance sheet and
profit and loss account are the same as if they were independent companies except that a holding company''s accounts an aggregated value of
shares it holds in its subsidiaries and in related companies and aggregated amount of loss made by it to its subsidiaries and to related companies
and their other indebtedness to it must be shown separately from other assets etc.
140. Corporate governors can also misuse their office, using fraudulent means for unlawful gain, they may also manipulate their records, enter into
dubious transactions for tax evasion. Burden is always on the Revenue to expose and prove such transactions are fraudulent by applying look at
principle.
OVERSEAS COMPANIES and FDI
141. Overseas companies are companies incorporated outside India and neither the Companies Act nor the Income Tax Act enacted in India has
any control over those companies established overseas and they are governed by the 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 communication technologies have
had positive effects on the developing countries including India.
142. 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 Investment Scheme and sale of shares by NRIs/OBCs on non-repatriation
basis; Purchase and sale of securities other than shares and convertible debentures of an Indian company by a non-resident are common. Press
Notes are announced by the Ministry of Commerce and Industry and the Ministry issued Press Note no. 2, 2009 and Press Note 3, 2009, which
deals with calculation of foreign investment in downstream entities and requirement of ownership or control in sectoral cap companies. Many of the
offshore companies use the facilities of Offshore Financial Centers situate in Mauritius, Cayman Islands etc. Many of these offshore holdings and
arrangements are undertaken for sound commercial and legitimate tax planning reasons, without any intent to conceal income or assets from the
home country tax jurisdiction and India has always encouraged such arrangements, unless it is fraudulent or fictitious.
143. Moving offshore or using an OFC does not necessarily lead to the conclusion that they involve in the activities of tax evasion or other criminal
activities. The multi-national companies are attracted to offshore financial centers mainly due to the reason of providing attractive facilities for the
investment. Many corporate conglomerates employ a large number of holding companies and often high-risk assets are parked in separate
companies so as to avoid legal and technical risks to the main group. Instances are also there when individuals form offshore vehicles to engage in
risky investments, through the use of derivatives trading etc. Many of such companies do, of course, involve in manipulation of the market, money
laundering and also indulge in corrupt activities like round tripping, parking black money or offering, accepting etc., advantage or prospect thereof.
144. OECD (Organization for Economic Co-operation and Development) in the year 1998 issued a report called ""Harmful Tax Competition: An
Emerging Global Issue"". The report advocated doing away with tax havens and offshore financial canters, like the Cayman Islands, on the basis
that their low tax regimes provide them with an unfair advantage in the global marketplace and are thus harmful to the economics of more
developed countries. OECD threatened to place the Cayman Islands and other tax havens on a ""black list"" and impose sanctions against them.
145. OECD''s blacklist 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 centers are utilized
for manipulating market, to launder money, 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:
146. 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 general and specific anti-avoidance rule (GAAR) in its Income Tax Legislations. In Australia, GAAR is in Part IVA of the
Income Tax Assessment Act, 1936, which is intended to provide an effective measure against tax avoidance arrangements. South Africa has also
taken initiative in combating impermissible tax avoidance or tax shelters. Countries like China, Japan etc. have also taken remedial measures.
147. Direct Tax Code Bill (DTC) 2010, proposed in India, envisages creation of an economically efficient, effective direct tax system, proposing
GAAR. GAAR intends to prevent tax avoidance, what is inequitable and undesirable. Clause 5(4)(g) provides that the income from transfer,
outside India of a share in a foreign company shall be deemed to arise in if the FMV of assets India owned by the foreign company is at least 50%
of its total assets. Necessity to take effective legislative measures has been felt in this country, but we always lag behind because our priorities are
different. Lack of proper regulatory laws, leads to uncertainty and passing inconsistent orders by Courts, Tribunals and other forums, putting
Revenue and tax payers at bay.
HOLDING COMPANY and SUBSIDIARY COMPANY
148. Companies Act in India and all over the world have statutorily recognized subsidiary company as a separate legal entity. Section 2(47) of the
Indian Companies Act 1956 defines ""subsidiary company"" or ""subsidiary"", a subsidiary company within the meaning of Section 4 of the Act. For
the purpose of Indian Companies Act, a company shall be subject to the provisions of Sub-Section 3 of Section 4, be deemed to be subsidiary of
another, subject to certain conditions, which includes holding of share capital in excess of 50% controlling the composition of Board of Directors
and gaining status of subsidiary with respect to third company by holding company''s subsidization of third company. A holding company is one
which owns sufficient shares in the subsidiary company to determine who shall be its directors and how its affairs shall be conducted. Position in
India and elsewhere is that the holding company controls a number of subsidiaries and respective businesses of companies within the group and
manage and integrate as whole as though they are merely departments of one large undertaking owned by the holding company. But, the business
of a subsidiary is not the business of the holding company (See Gramophone and Typewriter Ltd. v. Stanley (1908-10) All ER Rep 833 at 837).
149. 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.
150. 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 280017 , this
Court held that shareholders'' only rights is to get dividend if and when the company declares it, to participate in the liquidation proceeds and to
vote at the shareholders'' meeting. Refer also to 269682 and Carrasco Investments Ltd. v. Special Director, Enforcement (1994) 79 Comp Case
631 (Del).
151. Holding company, of course, if the subsidiary is a WOS, may appoint or remove any director if it so desires by a resolution in the General
Body Meeting of the subsidiary. Holding companies and subsidiaries can be considered as single economic entity and consolidated balance sheet is
the accounting relationship between the holding company and subsidiary company, which shows the status of the entire business enterprises.
Shares of stock in the subsidiary company are held as assets on the books of the parent company and can be issued as collateral for additional
debt financing. Holding company and subsidiary company are, however, considered as separate legal entities, and subsidiary are allowed
decentralized management. Each subsidiary can reform its own management personnel and holding company may also provide expert, efficient and
competent services for the benefit of the subsidiaries.
152. U.S. Supreme Court in United States v. Bestfoods 524 US 51 (1998) explained that it is a general principle of corporate law and legal
systems that a parent corporation is not liable for the acts of its subsidiary, but the Court went on to explain that corporate veil can be pierced and
the parent company can be held liable for the conduct of its subsidiary, if the corporal form is misused to accomplish certain wrongful purposes,
when the parent company is directly a participant in the wrong complained of. Mere ownership, parental control, management etc. of a subsidiary
is not sufficient to pierce the status of their relationship and, to hold parent company liable. In Adams v. Cape Industries Plc. (1991) 1 All ER 929,
the Court of Appeal emphasized that it is appropriate to pierce the corporate veil where special circumstances exist indicating that it is mere
fa�ade concealing true facts.
153. Courts, however, will not allow the separate corporate entities to be used as a means to carry out fraud or to evade tax. Parent company of a
WOS, is not responsible, legally for the unlawful activities of the subsidiary save in exceptional circumstances, 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
154. shareholders'' 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 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 provisions of the Articles of Association would govern and not
the provisions made in the SHA.
155. The nature of SHA was considered by a two Judges Bench of this Court in 279887 In that case, an agreement was entered into between
shareholders of a private company wherein a restriction was imposed on a living member of the company to transfer his shares only to a member
of his own branch of the family, such restrictions were, however, not envisaged or provided for within the Articles of Association. This Court has
taken the view that provisions of the Shareholders'' Agreement imposing restrictions even when consistent with Company legislation, are to be
authorized only when they are incorporated in the Articles of Association, a view we do not subscribe. This Court in Gherulal Parekh v. Mahadeo
Das Maiya (1959) (2) SCR Supp 406 held that freedom of contract can be restricted by law only in cases where it is for some good for the
community. Companies Act 1956 or the FERA 1973, RBI Regulation or the I.T. Act do not explicitly or impliedly forbid shareholders of a
company to enter into agreements as to how they should exercise voting rights attached to their shares.
156. Shareholders can enter into any agreement in the best interest of the company, but the only thing is that the provisions in Association. The
essential purpose of the SHA is to make provisions for proper and effective internal management of the company. It can visualize the best interest
of the company on diverse issues and can also find different ways not only for the best interest of the shareholders, but also for the company as a
whole. In 291010 this Court held that agreements between non-members and members of the Company will not bind the company, but there is
nothing unlawful in entering into agreement for transferring of shares. of course, the manner in which such agreements are to be enforced in the case
of breach is given in the general law between the company and the shareholders. A breach of SHA which does not breach the Articles of
Association is a valid corporate action but, as we have already indicated, the parties aggrieved can get remedies under the general law of the land
for any breach of that agreement.
157. SHA also provides 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 contractual and determined in an
agreement. ROFR clauses have contractual restrictions that give the holders the option to enter into commercial transactions with the owner on the
basis of some specific terms before the owner may enter into the transactions with a third party. Shareholders'' right to transfer the shares is not
totally prevented, yet a shareholder is obliged to offer the shares first to the existing shareholders. Consequently, the other shareholders will have
the privilege over the third parties with regard to purchase of shares.
(b) Tag Along Rights (TARs): TARs, a facet of ROFR, often refer to the power of a minority shareholder to sell their shares to the prospective
buyer at the same price as any other shareholder would propose to sell. In other words, if one shareholder wants to sell, he can do so only if the
purchaser agrees to purchase the other shareholders, who wish to sell at the same price. TAR often finds a place in the SHA which protects the
interest of the minority shareholders.
(c) Subscription Option: Subscription option gives the beneficiary a right to demand issuance of allotment of shares of the target company. It is for
that reason that a subscription right is normally accompanied by ancillary provisions including an Exit clause where, if dilution crosses a particular
level, the counter parties are given some kind of Exit option.
(d) Call Option: Call option is an arrangement often seen in Merger and Acquisition projects, especially when they aim at foreign investment. A
Call option is given to a foreign buyer by agreement so that the foreign buyer is able to enjoy the permitted minimum equity interests of the target
company. Call option is always granted as a right not an obligation, which can be exercised upon satisfaction of certain conditions and/or within
certain period agreed by the grantor and grantee. The buyer of Call option pays for the right, without the obligation to buy some underlying
instrument from the writer of the option contract at a set future date and at the strike price. Call option is where the beneficiary of the action has a
right to compel a counter-party to transfer his shares at a pre-determined or price fixed in accordance with the pre-determined maxim or even fair
market value which results in a simple transfer of shares.
(e) Put Option: A put option represents the right, but not the requirement to 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.
158. 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, VOTING RIGHTS and CONTROLLING INTERESTS:
159. Shares of any member in a company is a moveable property and can be transferred in the manner provided by the Articles of Association of
the company. Stocks and shares are specifically included in the definition of the Sale of Goods Act, 1930. A share represents a bundle of rights
like right to (1) elect directors, (2) vote on resolution of the company, (3) enjoy the profits of the company if and when dividend is declared or
distributed, (4) share in the surplus, if any, on liquidation.
160. Share is a right to a specified amount of the share capital of a company carrying out certain rights and liabilities, in other words, shares are
bundles of intangible rights against the company. Shares are to be regarded as situate in the country in which it is incorporated and register is kept.
Shares are transferable like any other moveable property under the Companies Act and the Transfer of Property Act. Restriction of Transfer of
Shares is valid, if contained in the Articles of Association of the company. Shares are, therefore, presumed to be freely transferable and restrictions
on their transfer are to be construed strictly. Transfer of shares may result in a host of consequences.
Voting Rights:
161. Voting rights vest in persons who names appear in the Register of Members. Right to vote cannot be decoupled from the share and an
agreement to exercise voting rights in a desired manner, does not take away the right of vote, in fact, it is the shareholders'' right. Voting rights
cannot be denied by a company by its articles or otherwise to holders of shares below a minimum number such as only shareholders holding five or
more shares are entitled to vote and so on, subject to certain limitations.
162. Rights and obligations flowing from voting rights have been the subject matter of several decisions of this Court. In 281675 with regard to
exercise of the right to vote, this Court held that the right to vote for the election of directors, the right to pass resolutions and the right to present a
petition for winding up are personal rights flowing from the ownership of the share and cannot be themselves and apart from the share be acquired
or disposed of or taken possession of. In 281482 this Court noticed the principle laid down in Chiranjit Lal Chowdhuri (supra).
163. Voting arrangements in SHAs or pooling agreements are not ""property"". Contracts that provide for voting in favor 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 favor 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 determine as a property.
Controlling Interest:
164. Shares, we have already indicated, represent congeries of rights and controlling interest is an incident of holding majority shares. Control of a
company vests in the voting powers of its shareholders. Shareholders holding a controlling interest can determine the nature of the business, its
management, enter into contract, borrow money, buy, sell or merge the company. Shares in a company may be subject to premiums or discounts
depending upon whether they represent controlling or minority interest. Control, of course, confers value but the question as to whether one will
pay a premium for controlling interest depends upon whether the potential buyer believes one can enhance the value of the company.
165. The House of Lords in IRC v. V.T. Bibby and Sons (1946) 14 ITR (Supp) 7 9-10, after examining the meaning of the expressions ""control
and ""interest"", held that controlling interest did not depend upon the extent to which they had the power of controlling votes. Principle that emerges
is that where shares in large numbers are transferred, which result in shifting of ""controlling interest"", it cannot be considered as two separate
transactions namely transfer of shares and transfer of controlling interest. Controlling interest forms an inalienable part of the share itself and the
same cannot be traded separately unless otherwise provided by the Statute. Of course, the Indian Company Law does not explicitly throw light on
whether control or controlling interest is a part of or inextricably linked with a share of a company or otherwise, so also the Income Tax Act. In the
impugned judgment, the High Court has taken the stand that controlling interest and shares are distinct assets.
166. Control, in our view, is an interest arising from holding a particular number of shares and the same cannot be separately acquired or
transferred. Each share represents a vote in the management of the company and such a vote can be utilized to control the company. Controlling
interest, therefore, is not an identifiable or distinct capital asset independent of holding of shares and the nature of the transaction has to be
ascertained from the contract and the surrounding circumstances. Controlling interest is inherently contractual right and not property right and
cannot be considered as transfer of property and hence a 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
167. 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 285159
held that the Court is entitled to lift the veil of the corporate entity and pay regard to the economic realities behind the legal fa�ade meaning that
the court has the power to disregard the corporate entity if it is used for tax evasion. In 281585 , this Court held that the corporate veil may be
lifted where a statute itself contemplates lifting of the veil or fraud or improper conduct intended to be prevented or a taxing statute or a beneficial
statute is sought to be evaded or where associated companies are inextricably as to be, in reality part of one concern. Lifting the Corporate Veil
doctrine was also applied in 279272 , wherein this Court noticed that the Assessee firm sought to avoid tax on the amount of compensation
received for the loss of office by claiming that it was capital gain and it was found that the termination of the contract of managing agency was a
collusive transaction. Court held that it was a collusive device, practiced by the managed company and the Assessee firm for the purpose of
evading income tax, both at the hands of the payer and the payee.
168. Lifting the corporate veil doctrine can, therefore, be applied in tax matters even in the absence of any statutory authorization to that effect.
Principle is also being applied in cases of holding company - subsidiary relationship- where in spite of being separate legal personalities, if the facts
reveal that they indulge in dubious methods for tax evasion.
(B) Tax Avoidance and Tax Evasion:
Tax avoidance and tax evasion are two expressions which find no definition either in the Indian Companies Act, 1956 or the Income Tax Act,
1961. But the expressions are being used in different contexts by our Courts as well as the Courts in England and various other countries, when a
subject is sought to be taxed. One of the earliest decisions which came up before the House of Lords in England demanding tax on a transaction
by the Crown is Duke of Westminster (supra). In that case, Duke of Westminster had made an arrangement that he would pay his gardener an
annuity, in which case, a tax deduction could be claimed. Wages of household services were not deductible expenses in computing the taxable
income, therefore, Duke of Westminster was advised by the tax experts that if such an agreement was employed, Duke would get tax exemption.
Under the Tax Legislation then in force, if it was shown as gardener''s wages, then the wages paid would not be deductible. Inland Revenue
contended that the form of the transaction was not acceptable to it and the Duke was taxed on the substance of the transaction, which was that
payment of annuity was treated as a payment 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 business purpose and has been entered into to avoid tax.
The House of Lords, during 1980''s, it seems, began to attach a ""purposive interpretation approach"" and gradually began to give emphasis on
economic substance doctrine"" as a question of statutory interpretation. In a most celebrated case in Ramsay (supra), the House of Lords
considered this question again. That was a case whereby the taxpayer entered into a circular series of transactions designed to produce a loss for
tax purposes, but which together produced no commercial result. Viewed that transaction as a whole, the series of transactions was self-canceling,
the taxpayer was in precisely the same commercial position at the end as at the beginning of the series of transactions. House of Lords ruled that,
notwithstanding the rule in Duke of Westminster''s case, the series of transactions should be disregarded for tax purposes and the manufactured
loss, therefore, was not available to the taxpayer. Lord Wilberforce opined as follows:
While obliging the court to accept documents or transactions, found to be genuine, as such, it does not compel the court to look at a document or
a transaction in blinkers, isolated from any context to which it properly belongs. If it can be seen that a document or transaction was intended to
have effect as part of a nexus or series of transactions, or as an ingredient of a wider transaction intended as a whole, there is nothing in the
doctrine to prevent it being so regarded; to do so in not to prefer form to substance, or substance to form. It is the task of the court to ascertain the
legal nature of any transaction to which it is sought to attach a tax or a tax consequence and if that emerges from a series or combination of
transactions intended to operate as such, it is that series or combination which may be regarded.
(Emphasis supplied)
House of Lords, therefore, made the following important remarks concerning what action the Court should consider in cases that involve tax
avoidance:
(a) A taxpayer was only to be taxed if the Legislation clearly indicated that this was the case;
(b) A taxpayer was entitled to manage his or her affairs so as to reduce tax;
(c) Even if the purpose or object of a transaction was to avoid tax this did not invalidate a transaction unless an anti-avoidance provision applied;
and
(d) If a document or transaction was genuine and not a sham in the traditional sense, the Court had to adhere to the form of the transaction
following the Duke Westminster concept.
169. 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.
170. 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-canceling series of transactions. Lord Diplock, in that case, confirmed the judicial view that a development of the
jurisprudence was taking place, stating that Ramsay case marked a significant change in the approach adopted by the House of Lords to a pre-
ordained series of transactions. Ramay and Burmah cases, it may be noted, were against self-canceling artificial tax schemes which were
widespread in England in 1970''s. Rather than striking down the self-canceling transactions, of course, few of the speeches of Law Lords gave the
impression that the tax effectiveness of a scheme should be judged by reference to its commercial substance rather than its legal form. On this, of
course, there was some conflict with the principle laid down in Duke of Westminster. Duke of Westminster was concerned with the ""single tax
avoidance step"". During 1970''s, the Courts in England had to deal with several pre-planned avoidance schemes containing a number of steps. In
fact, earlier in IRC v. Plummer (1979) 3 All ER 775, Lord Wilberforce commented about a scheme stating that the same was carried out with
almost military precision"" which required the court to look at the scheme as a whole. The scheme in question was a ""circular annuity"" plan, in
which a charity made a capital payment to the taxpayer in consideration of his covenant to make annual payments of income over five years. The
House of Lords held that the scheme was valid. Basically, the Ramsay was dealing with ""readymade schemes"".
171. The House of Lords, however, had to deal with a non self-canceling tax avoidance scheme in Dawson (supra). Dawsons, in that case, held
shares in two operating companies which agreed in principle in September 1971 to sell their entire shareholding to Wood Bastow Holdings Ltd.
Acting on advice, to escape capital gains tax, Dawsons decided not to sell directly to Wood Bastow, rather arranged to exchange their shares for
shares in an investment company to be incorporated in the Isle of Man. Greenjacket Investments Ltd. was then incorporated in the Isle of Man on
16.12.1971 and two arrangements were finalized (i) Greenjacket would purchase Dawsons shares in the operating company for �152,000 to be
satisfied by the issue of shares of Greenjacket and (ii) an agreement for Greenjacket to sell the shares in the operating company to Wood Bastow
for �152,000.
172. The High Court and the Court of Appeal ruled that Ramsay principle applied only where steps forming part of the scheme were self-canceling
and they considered that it did not allow share 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.
173. 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 tax. The House of Lords held in favor of the taxpayers,
dismissing the crown''s appeal by a majority of three to two. House of Lords noticed that when the share exchange took place, there was no
certainty that the shares in Q Ltd would be sold. Lord Oliver, speaking for the majority, opined that Ramsay, Burmah and Dawson did not
produce any legal principle that would nullify any transaction that has no intention besides tax avoidance and opined as follows:
My Lords, for my part I find myself unable to accept that Dawson either established or can properly be used to support a general proposition that
any transaction which is effected for avoiding tax on a contemplated subsequent transaction and is therefore planned, is for that reason, necessarily
to be treated as one with that subsequent transaction and as having no independent effect.
Craven made it clear that: (1) Strategic tax planning undertaken for months or possible years before the event (of-sale) in anticipation of which it
was effected; (2) A series of transactions undertaken at the time of disposal/sale, including an intermediate transaction interposed into having no
independent life, could under Ramsay principle be looked at and treated as a composite whole transaction to which the fiscal results of the single
composite whole are to be applied, i.e. that an intermediate transfer which was, at the time when it was effected, so closely interconnected with the
ultimate disposition, could properly be described as not, in itself, a real transaction at all, but merely an element in some different and larger whole
without independent effect.
174. Later, House of Lords in Ensign Tankers (Leasing) Ltd. v. Stokes (1992) 1 AC 655 made a review of the various tax avoidance cases from
Floor v. Davis(1978) 2 All ER 1079: (1978) Ch 295 to Craven (supra). In Ensign Tankers, a company became a partner of a limited partnership
that had acquired the right to produce the film ""Escape to Victory"". 75% of the cost of making the film was financed by way of a non-recourse loan
from the production company, the company claimed the benefit of depreciation allowances based upon the full amount of the production cost. The
House of Lords disallowed the claim, but allowed depreciation calculated on 25% of the cost for which the limited partnership was at risk. House
of Lords examined the transaction as a whole and concluded that the limited partnership had only ''incurred capital expenditure on the provision of
machinery or plant'' of 25% and no more.
175. 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"".
176. 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 intention of the scheme was to convert the income from shares by way of dividend
to a capital receipt. Schemes'' intention was to make a capital receipt in addition to a tax dividend. Mc.Guckian had affirmed the fiscal nullity
doctrine from the approach of United Kingdom towards tax penalties which emerged from tax avoidance schemes. The analysis of the transaction
was under the principles laid down in Duke of Westminster, since the entire transaction was not a tax avoidance scheme.
177. House of Lords in MacNiven v. Westmoreland Investments Limited (2003) 1 AC 311 examined the scope of Ramsay principle approach
and held that it was one of purposive construction. In fact, Ramsay''s case and case of Duke of Westminister were reconciled by Lord Hoffmann
in MacNiven. Lord Hoffmann clarified stating as follows
if the legal position is that tax is imposed by reference to a legally designed concept, such as stamp duty payable on a document which constitute
conveyance or sale, the court cannot tax a transaction which uses no such document on the ground that it achieves the same economic effect. On
the other hand, the legal position is that the tax is imposed by reference to a commercial concept, then to have regard to the business ""substance
of the matter is not to ignore the legal position but to give effect to it.
178. In other words, Lord Hoffmann reiterated that tax statutes must be interpreted ""in a purposive manner to achieve the intention of the
Legislature"". Ramsay and Dawson are said to be examples of these fundamental principles.
179. Lord Hoffmann, therefore, stated that when Parliament intended to give a legal meaning to a statutory term or phrase, then Ramsay approach
does not require or permit an examination of the commercial nature of the transaction, rather, it requires a consideration of the legal effect of what
was done.
180. MacNiven approach has been reaffirmed by the House of Lord in Barclays Mercantile Business Finance Limited v. Mawson (2005) AC 685
(HL). In Mawson, BGE, an Irish Company had applied for a pipeline and it sold the pipeline to (BMBF) taxpayer for � 91.3 Million. BMBF
later leased the pipeline back to BGE which granted a sub-lease onwards to its UK subsidiary. BGE immediately deposited the sale proceeds as
Barclays had no access to it for 31 years. Parties had nothing to loose with the transaction designed to produce substantial 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 favor 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.
181. 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 securities and that there was, thus, no qualifying contract. The line
drawn by House of Lords between Mawson and Scottish Provident Institution in holding that in one case there was a composite transaction to
which statute applied, while in the other there was not.
182. Lord Hoffmann later in an article ""Tax Avoidance"" reported in (2005) BTR 197 commented on the judgment in BMBF as follows:
the primacy of the construction of the particular taxing provision and the illegitimacy of the rules of general application has been reaffirmed by the
recent decision of the House in ""BMBF"". Indeed, it may be said that this case has killed off Ramsay doctrine as a special theory of revenue law
and subsumed it within the general theory of the interpretation of statutes.
Above discussion would indicate that a clear-cut distinction between tax avoidance and tax evasion is still to emerge in England and in the absence
of any legislative guidelines, there bound to be uncertainty, but to say that the principle of Duke of Westminster has been exorcised in England is
too tall a statement and not seen accepted. House of Lords in McGuckian and MacNiven, it may be noted, has emphasized that the Ramsay
approach as a principle of statutory interpretation rather than an over-arching anti avoidance doctrine imposed upon tax laws. Ramsay approach
ultimately concerned with the statutory interpretation of a tax avoidance scheme and the principles laid down in Duke of Westminster, it cannot be
said, has been given a complete go by Ramsay, Dawson or other judgments of the House o f Lords.
PART-III
INDO-MAURITIUS TREATY - AZADI BACHAO ANDOLAN
183. The Constitution Bench of this Court in McDowell (supra) examined at length the concept of tax evasion and tax avoidance in the light of the
principles laid down by the House of Lords in several judgments like Duke of Westminster, Ramsay, Dawson etc. The scope of Indo-Mauritius
Double Tax Avoidance Agreement (in short DTAA)], Circular No. 682 dated 30.3.1994 and Circular No. 789 dated 13.4.2000 issued by
CBDT, later came up for consideration before a two Judges Bench of this Court in Azadi Bachao Andolan. Learned Judges made some
observations with regard to the opinion expressed by Justice Chinnappa Reddy in a Constitution Bench judgment of this Court in McDowell,
which created some confusion with regard to the understanding of the Constitution Bench judgment, which needs clarification. Let us, however,
first examine the scope of the India-Mauritius Treaty and its follow-up.
184. 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 company paying the dividends and (b) 15% of the gross amount of the dividends in all other cases.
185. CBDT issued Circular No. 682 dated 30.03.1994 clarifying that capital gains derived by a resident of Mauritius by alienation of shares of an
Indian company shall be taxable only in Mauritius according to Mauritius Tax Law. In the year 2000, the Revenue authorities sought to deny the
treaty benefits to some Mauritius resident companies pointing out that the beneficial ownership in those companies was outside Mauritius and thus
the foremost purpose of investing in India via Mauritius was tax avoidance. Tax authorities took the stand that Mauritius was merely being used as
a conduit and thus sought to deny the treaty benefits despite the absence of a limitation of benefits (LOB) clause in the Treaty. CBDT then issued
Circular No. 789 dated 13.04.2000 stating that the Mauritius Tax Residency Certificate (TRC) issued by the Mauritius Tax Office was a sufficient
evidence of tax response of that company in Mauritius and that such companies were entitled to claim treaty benefits.
186. Writ Petitions in public interest were filed before the Delhi High Court challenging the constitutional validity of the above mentioned circulars.
Delhi High Court quashed Circular No. 789 stating that inasmuch as the circular directs the Income Tax authorities to accept as a certificate of
residence issued by the authorities of Mauritius as sufficient evidence as regards the status of resident and beneficial ownership, was ultra vires the
powers of CBDT. The Court also held that the Income Tax Office was entitled to lift the corporate veil in India to see whether a company was a
resident of Mauritius or not and whether the company was paying income tax in Mauritius or not. The Court also held that the ""Treaty Shopping
by which the resident of a third country takes advantage of the provisions of the agreement was illegal and necessarily to be forbidden. Union of
India preferred appeal against the judgment of the Delhi High Court, before this Court. This Court in Azadi Bachao Andolan allowed the appeal
and Circular No. 789 was declared valid.
Limitation of Benefit Clause (LOB)
187. India Mauritius Treaty does not contain any Limitation of Benefit (LOB) clause, similar to the Indo-US Treaty, wherein Article 24 stipulates
that benefits will be available if 50% of the shares of a company 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 non-citizens/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 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.
188. 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 Purpose Vehicles (SPVs) created specifically to route investments into India, meets with our approval.
We acknowledge that on a subsequent sale/transfer/disinvestment of shares by the Mauritian company, after a reasonable time, the sale proceeds
would be received by the Mauritius Company as the registered holder/owner of such shares, such benefits could be sent back to the Foreign
Principal/100% shareholder of Mauritius company either by way of a declaration of special dividend by Mauritius company and/or by way of
repayment of loans received by the Mauritius company from the Foreign Principal/ shareholder for the purpose of making the investment. Mr.
Chinoy is right in his contention that apart from DTAA, which provides for tax exemption in the case of capital gains received by a Mauritius
company/shareholder at the time of disinvestment/exit and the fact that Mauritius does not levy tax on dividends declared and paid by a Mauritius
company/subsidiary to its Foreign Shareholders/Principal, there is no other reason for this quantum of funds to be invested from/through Mauritius.
189. We are, therefore, of the view that in the absence of LOB Clause and the presence of Circular No. 789 of 2000 and TRC certificate, on the
residence and beneficial interest/ownership, tax department cannot at the time of sale/disinvestment/exit from such FDI, deny benefits to such
Mauritius companies of the Treaty by stating that FDI was only routed through a Mauritius company, by a company/principal resident in a third
country; or the Mauritius company had received all its funds from a foreign principal/company; or the Mauritius subsidiary is controlled/managed
by the Foreign Principal; or the Mauritius company had no assets or business other than holding the investment/shares in the Indian company; or
the Foreign Principal/100% shareholder of Mauritius company had played a dominant role in deciding the time and price of the
disinvestment/sale/transfer; or the sale proceeds received by the Mauritius company had ultimately been paid over by it to the Foreign Principal/ its
100% shareholder either by way of Special Dividend or by way of repayment of loans received; or the real owner/beneficial owner of the shares
was the foreign Principal Company. Setting up of a WOS Mauritius subsidiary/SPV by Principals/genuine substantial long term FDI in India
from/through Mauritius, pursuant to the DTAA and Circular No. 789 can never be considered to be set up for tax evasion.
TRC whether conclusive
190. 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 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 transaction may be subjected to tax. In other words, TRC does not prevent enquiry into a tax fraud, for example, where an OCB is used
by an Indian resident for round-tripping or any other illegal activities, nothing prevents the Revenue from looking into special agreements, contracts
or arrangements made or effected by Indian the OCB in the entire transaction.
191. No court will recognize sham transaction or a colorable device or adoption of a dubious method to evade tax, but to say that the Indo-
Mauritian Treaty will recognize FDI and FII only if it originates from Mauritius, not the investors from third countries, incorporating company in
Mauritius, is pitching it too high, especially when statistics reveals that for the last decade the FDI in India was US$ 178 billion and, of this, 42%
i.e. US$ 74.56 billion was through Mauritian route. Presently, it is known, FII in India is Rs. 450,000 crores, out of which Rs. 70,000 crores is
from Mauritius. Facts, therefore, clearly show that almost the entire FDI and FII made in India from Mauritius under DTAA does not originate
from that country, but has been made by Mauritius Companies / SPV, which are owned by companies/individuals of third countries providing
funds for making FDI by such companies/individuals not from Mauritius, but from third countries.
192. Mauritius, and India, it is known, has also signed a Memorandum of Understanding (MOU) laying down the rules for information, exchange
between the two countries which provides for the two signatory authorities to assist each other in the detection of fraudulent market practices,
including the insider dealing and market manipulation in the areas of securities transactions and derivative dealings. The object and purpose of the
MOU is to track down transactions tainted by fraud and financial crime, not to target the bona fide legitimate transactions. Mauritius has also
enacted stringent ""Know Your Clients"" (KYC) Regulations and Anti-Money Laundering laws which seek to avoid abusive use of treaty.
193. Viewed in the above perspective, we also find no reason to import the ""abuse of rights doctrine"" (abus de droit) to India. The above doctrine
was seen applied by the Swiss Court in A Holding Aps. (8 ITRL), unlike Courts following Common Law. That was a case where a Danish
company was interposed to hold all the shares in a Swiss Company and there was 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.
194. 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 how they are understood in the corporate world.
TAX HAVENS, TREATY SHOPPING and SHELL COMPANIES
195. 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 the tax laws and the term is used in its pejorative sense, namely as a company which exits only on paper, but in
reality, they are investment companies. Meaning of the expression ''Treaty Shopping'' was elaborately dealt with in Azadi Bachao Andolan and
hence not repeated.
196. Tax Justice Network Project (U.K.), however, in its report published in September, 2005, stated as follows:
The role played by tax havens in encouraging and profiteering from tax avoidance, tax evasion and capital flight from developed and developing
countries is a scandal of gigantic proportions.
The project recorded that one per cent of the world''s population holds more than 57% of total global worth and that approximately US $ 255
billion annually was involved in using offshore havens to escape taxation, an amount which would more than plug the financing gap to achieve the
Millennium Development Goal of reducing the world poverty by 50% by 2015. (""Tax Us If You Can"" September 2005, 78 available at
http:/www.taxjustice.net). Necessity of proper legislation for charging those types of transactions have already been emphasized by us.
Round Tripping
197. India is considered to be the most attractive investment destinations and, it is known, has received $37.763 billion in FDI and $29.048 billion
in FII investment in the year to March 31, 2010. FDI inflows it is reported were of $ 22.958 billion between April 2010 and January, 2011 and
FII investment were $ 31.031 billions. Reports are afloat that million of rupees go out of the country only to be returned as FDI or FII. Round
Tripping can take many formats like under-invoicing and over-invoicing of exports and imports. Round Tripping involves getting the money out of
India, say Mauritius, and then come to India like FDI or FII. Article 4 of the Indo-Mauritius DTAA defines a ''resident'' to mean any person, who
under the laws of the contracting State is liable to taxation therein by reason of his domicile, residence, place of business or any other similar
criteria. An Indian Company, with the idea of tax evasion can also incorporate a company off-shore, say in a Tax Haven, and then create a WOS
in Mauritius and after obtaining a TRC may invest in India. Large amounts, therefore, can be routed back to India using TRC as a defense, but
once it is established that such an investment is black money or capital that is hidden, it is nothing but circular movement of capital known as Round
Tripping; then TRC can be ignored, since the transaction is fraudulent and against national interest.
198. 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:
199. 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 Company (1968) 1 SCC 10, 275625 the judgments in Bank of
Chettinad Ltd. v. CIT (1940) 8 ITR 522 (PC), 283922 289363 and the views expressed by Viscount Simon in Latilla v. IRC. 26 TC 107 :
(1943) AC 377 stated as follows:
Tax planning may be legitimate provided it is within the framework of law. Colorable devices cannot be part of tax planning and it is wrong to
encourage or entertain the belief that is honorable to avoid the payment of tax by resorting to dubious methods. It is the obligation of every citizen
to pay the taxes honestly without resorting to subterfuges.
200. Justice Shah in Raman (supra) has stated that avoidance of tax liability by so arranging the commercial affairs that charge of tax is distributed
is not prohibited and a tax payer may resort to a device to divert the income before it accrues or arises to him and the effectiveness of the device
depends not upon considerations of morality, but on the operation of the Income Tax Act. Justice Shah made the same observation in B.N.
Kharwar (supra) as well and after quoting a passage from the judgment of the Privy Council stated as follows:
The Taxing authority is entitled and is indeed bound to determine the true legal relation resulting from a transaction. If the parties have chosen to
conceal by a device the legal relation, it is open to the taxing authorities to unravel the device and to determine the true character of the relationship.
But the legal effect of a transaction cannot be displaced by probing into the ""substance of the transaction"".
In Jiyajeerao (supra) also, this Court made the following observation:
Every person is entitled so to arrange his affairs as to avoid taxation, but the arrangement must be real and genuine and not a sham or makebelieve.
201. In Vadilal Lalubhai (supra) this Court re-affirmed the principle of strict interpretation of the charging provisions and also affirmed the decision
of the Gujarat High Court in 706805 , which had drawn a distinction between the legitimate avoidance and tax evasion. Lalita''s case (supra)
dealing with a tax avoidance scheme, has also expressly affirmed the principle that genuine arrangements would be permissible and may result in an
Assessee escaping tax.
202. 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 ghost of Westminster (in the words of Lord
Roskill) has been exorcised in England. In our view, what transpired in England is not the ratio of McDowell and cannot be and remains merely an
opinion or view.
203. Confusion arose (see Paragraph 46 of the judgment) when Justice Mishra has stated after referring to the concept of tax planning as follows:
On this aspect, one of us Chinnappa Reddy, J. has proposed a separate and detailed opinion with which we agree.
204. Justice Reddy, we have already indicated, himself has stated that he is entirely agreeing with Justice Mishra and has only supplemented what
Justice Mishra has stated on Tax Avoidance, therefore, we have go by what Justice Mishra has spoken on tax avoidance.
205. Justice Reddy has depreciated the practice of setting up of Tax Avoidance Projects, in our view, rightly because the same is/was the situation
in England and Ramsay and other judgments had depreciated the Tax Avoidance Schemes.
206. In our view, the ratio of the judgment is what is spoken by Justice Mishra for himself and on behalf of three other judges, on which Justice
Reddy has agreed. Justice Reddy has clearly stated that he is only supplementing what Justice Mishra has said on Tax avoidance.
207. Justice Reddy has endorsed the view of Lord Roskill that the ghost of Westminster had been exorcised in England and that one should not
allow its head rear over India. If one scans through the various judgments of the House of Lords in England, which we have already done, one
thing is clear that it has been a cornerstone of law, that a tax payer is enabled to arrange his affairs so as to reduce the liability of tax and the fact
that the motive for a transaction is to avoid tax does not invalidate it unless a particular enactment so provides (Westminster Principle). Needless to
say if the arrangement is to be effective, it is essential that the transaction has some economic or commercial substance. Lord Roskill''s view is not
seen as the correct view so also Justice Reddy''s, for the reasons we have already explained in earlier part of this judgment.
208. A five Judges Bench judgment of this Court in 295329 after referring to the judgment in B.C. Kharwar (supra) as well as the opinion
expressed by Lord Roskill on Duke of Westminster stated that the subject is not to be taxed by inference 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
209. 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 Indisputedly, that the contracts have to be read holistically to arrive at a conclusion as to the real nature of a transaction.
Revenue''s stand was that the CGP share was a mode or mechanism to achieve a transfer of control, so that the tax be imposed on the transfer of
control not on transfer of the CGP share. Revenue''s stand, relying upon Dawson test, was that CGP''s interposition in the Hutchison structure was
an arrangement to deceive the Revenue with the object of hiding or rejecting the tax liability which otherwise would incur.
210. Revenue contends that the entire corporate structure be looked at as on artificial tax avoidance scheme wherein CGP was introduced into the
structure at the last moment, especially when another route was available for HTIL to transfer its controlling interest in HEL to Vodafone. Further it
was pointed out that the original idea of the parties was to sell shares in HEL directly but at the last moment the parties changed their mind and
adopted a different route since HTIL wanted to declare a special dividend out of US $ 11 million for payment and the same would not have been
possible if they had adopted Mauritian route.
211. Petitioner pointed out that if the motive of HTIL was only to save tax it had the option to sell the shares of Indian companies directly held
Mauritius entities, especially when there is no LOB clause in India-Mauritius Treaty. Further, it was pointed out that if the Mauritius companies had
sold the shares of HEL, then Mauritius companies would have continued to be the subsidiary of HTIL, their account could have been consolidated
in the hands of HTIL and HTIL would have accounted for the accounts exactly the same way that it had accounted for the accounts in HTIL
BVI/nominated payee. Had HTIL adopted the Mauritius route, then it would have been cumbersome to sell the shares of a host of Mauritian
companies.
212. CGP was incorporated in the year 1998 and the same became part of the Hutchison Corporate structure in the year 2005. Facts would
clearly indicate that the CGP held shares in Array and Hutchison Teleservices (India) Holdings Limited (MS), both incorporated in Mauritius.
HTIL, after acquiring the share of CGP (CI) in the year 1994 which constituted approximately 42% direct interest in HEL, had put in place various
FWAs, SHAs for arranging its affairs so that it can also have interest in the functioning of HEL along with Indian partners.
213. Self centered operations 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 investment is made, at the time where
further investments are being made at the time of consolidation etc.
214. 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 honorable, exits from the
structure can also be honorable.
215. 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 of HEL. HTIL in its commercial wisdom noticed the
disadvantage of preferring Array, which would have created problems for HTIL. Hutchison Teleservices (India) Mauritius had a subsidiary, namely
3GSPL which carried on the call centre business in India and the transfer of CGP share would give control over 3GSPL, an indirect subsidiary
which was incorporated in the year 1999. It would also obviate problems arising on account of call and put options arrangements and voting rights
enjoyed by 3GSPL. If Array was transferred, the disadvantage was that HTIL had to deal with call and put options of 3GSPL. In the above
circumstances, HTIL in their commercial wisdom thought of transferring CGP share rather than going for any other alternatives. Further 3GSPL
was also a party to various agreements between itself and the companies of AS, AG and IDFC Group. If Array had been transferred the
disadvantage would be that the same would result in hiving off the call centre business from 3GSPL. Consolidation operations of HEL were
evidently done in the year 2005 not for tax purposes but for commercial reasons and the contention that CGP was inserted at a very late stage in
order to bring a pre tax entity or to create a transaction that would avoid tax, cannot be accepted.
216. The Revenue has no case that HTIL structure was a device or an artifice, but all along the contention was that CGP was interposed at the last
moment and applying the Dawson test, it was contended that such an artificially interposed device be ignored, and applying Ramsay test of
purposive interpretation, the transaction be taxed for gain. CGP, it may be noted, was already part of the HTIL''s Corporate Structure and the
decision taken to sell CGP (Share) so as to exit from the Indian Telecom Sector was not the fall out of a tax exploitation scheme, but a genuine
commercial decision taking into consideration the best interest of the investors and the corporate entity.
217. Principle of Fiscal nullity was applied by Vinelott, J. in favor of the Assessee in Dawson, where the judge rejected the contention of the
Crown that the transaction was hit by the Ramsay principle, holding that a transaction cannot be disregarded and treated as fiscal nullity if it has
enduring legal consequences. Principle was again explained by Lord Brightman stating that the Ramsay test would apply not only where the steps
are 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 pre-ordained 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 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
218. Sites of CGP share stands where, is the next question. Law on sites of share has already been discussed by us in the earlier part of the
judgment. Sites 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 Cayman Island and materials placed before us would indicate that Cayman Island law, unlike other laws does
not recognize the multiplicity of registers. Section 184 of the Cayman Island Act provides that the company may be exempt if it gives to the
Registrar, a declaration that ""operation of an exempted company will be conducted mainly outside the Island"". Section 193 of the Cayman Island
Act expressly recognizes that even exempted companies may, to a limited extent trade within the Islands. Section 193 permits activities by way of
trading which are incidental of off shore operations also all rights to enter into the contract etc. The facts in this case as well as the provisions of the
Caymen Island Act would clearly indicate that the CGP (CI) share situates in Caymen Island. The legal principle on which sites of an asset, such as
share of the company is determined, is well settled. Reference may be made to the judgments in Brassard v. Smith (1925) AC 371, London and
South American Investment Trust v. British Tobacco Company (Australia) (1927) 1 Ch. 107. Erie Beach Company v. Attorney General for
Ontario 1930 AC 161 PC 10, R. v. Williams (1942) AC 541. Sites of CGP share, therefore, situates in Cayman Islands and on transfer in
Cayman Islands would not shift to India.
PART-V
219. Sale of CGP, on facts, we have found was not the fall out of an artificial tax avoidance scheme or an artificial device, pre-ordained, or pre-
conceived with the sole object of tax avoidance, but was a genuine commercial decision to exit from the Indian Telecom Sector.
220. HTIL had the following controlling interest in HEL before its exit from the Indian Telecom Sector:
(i) HTIL held its direct equity interest in HEL amounting approximately to 42% through eight Mauritius companies.
(ii) HTIL indirect subsidiary CGP(M) held 37.25% of equity interest in TII, an Indian Company, which in turn held 12.96% equity interest in HEL.
CGP(M), as a result of its 37.25% interest in TII had an interest in several downstream companies which held interest in HEL, as a result of which
HTIL obtained indirect equity interest of 7.24% in HEL.
(iii) HTIL held in Indian Company Omega Holdings, an Indian Company, interest to the extent of 45.79% of share capital through HTIM which
held shareholding of 5.11% in HEL, resulting in holding of 2.34% interest in the Indian Company HEL.
HTIL could, therefore, exercise its 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
221. 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 approximately 10% (pro rata)
indirect in HEL and not 67% as contended by the Revenue.
222. 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 of those agreements, had the following interests:
(i) Rights (and Options) by providing finance and guarantee to Asim Ghosh Group of companies to exercise control over TII and indirectly over
HEL through TII Shareholders Agreement and the Centrino Framework Agreement dated 1.3.2006;
(ii) Rights (and Options) by providing finance and guarantee to Analjit Singh Group of companies to 206 exercise control over TII and indirectly
over HEL through various TII shareholders agreements and the N.D. Callus Framework Agreement dated 1.3.2006.
(iii) Controlling rights over TII through the TII Shareholder''s Agreement in the form of rights to appoint two directors with veto power to promote
its interest in HEL and thereby hold beneficial interest in 12.30% of the share capital in HEL.
(iv) Finance to SMMS to acquire shares in ITNL (formerly Omega) with right to acquire the share capital of Omega in future.
(v) Rights over ITNL through the ITNL Shareholder''s Agreement, in the form of right to appoint two directors with veto power to promote its
interests in HEL and thereby it held beneficial interest in 2.77% of the share capital of the Indian company HEL;
(vi) Interest in the form of loan of US$231 million to HTI (BVI) which was assigned to Array Holdings Ltd.;
(vii) Interest in the form of loan of US$ 952 million through HTI (BVI) utilized for purchasing shares in the Indian company HEL by the 8 Mauritius
companies;
(viii) Interest in the form of Preference share capital in JKF and TII to the extent of US$ 167.5 million and USD 337 million respectively. These
two companies hold 19.54% equity in HEL.
(ix) Right to do telecom business in India through joint venture;
(x) Right to avail of the telecom licenses in India and right to do business in India;
(xi) Right to use the Hutch brand in India;
(xii) Right to appoint/remove directors in the board of the Indian company HEL and its other Indian subsidiaries;
(xiii) Right to exercise control over the management and affairs of the business of the Indian company HEL (Management Rights);
(xiv) Right to take part in all the investment, management and financial decisions of the Indian company HEL;
(xv) Right to control premium;
(xvi) Right to consultancy support in the use of Oracle license for the Indian business;
Revenue''s stand before us was that the SPA on a commercial construction brought about an extinguishment 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.
223. Vodafone on acquisition of CGP share got controlling interest of 42% over HEL/VEL through voting rights through eight Mauritian
subsidiaries, the same was the position of HTIL as well. On acquiring CGP share, CGP has become a direct subsidiary of Vodafone, but both are
legally independent entities. Vodafone does not own any assets of CGP. Management and the business of CGP vests on the Board of Directors of
CGP but of course, Vodafone could appoint or remove members of the Board of Directors of CGP. On acquisition of CGP from HTIL, Array
became an indirect subsidiary of Vodafone. Array is also a separate legal entity managed by its own Board of Directors. Share of CGP situates in
Cayman Islands and that of Array in Mauritius. Mauritian entities which hold 42% shares in HEL became the direct and indirect subsidiaries of
Array, on Vodafone purchasing the CGP share. Voting rights, controlling rights, right to manage etc., of Mauritian Companies vested in those
companies. HTIL has never sold nor Vodafone purchased any shares of either Array or the Mauritian of which situates in Cayman Islands. By
purchasing the CGP share its sites will not shift either to Mauritius or to India, a legal issue, already explained by us. Array being a WOS of CGP,
CGP may appoint or remove any of its directors, if it wishes by a resolution in the general body of the subsidiary, but CGP, Array and all
Mauritian entities are separate legal entities and have de-centralized management and each of the Mauritian subsidiaries has its own management
personnels.
224. Vodafone on purchase of CGP share got controlling interest in the Mauritian Companies and the incident of transfer of CGP share cannot be
considered to be two distinct and separate transactions, one shifting of the share and another shifting of the controlling interest. Transfer of CGP
share automatically results in host of consequences including transfer of controlling interest and that controlling interest as such cannot be dissected
from CGP share without legislative intervention. Controlling interest of CGP over Array is an incident of holding majority shares and the control of
Company vests in the voting power of its shareholders. Mauritian entities being a WOS of Array, Array as a holding Company can influence the
shareholders of various Mauritian Companies. Holding Companies like CGP, Array, may exercise control over the subsidiaries, whether 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 totaling to 42% and that does not mean that the sites of CGP share has shifted to India for the purpose of charging
capital gains tax.
225. 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
interests in Omega, an Indian Company which in turn held equity interests in HEL. On transfer of CGP share, Vodafone gets controlling interest in
its indirect subsidiaries which are situated in Mauritius which have equity interests in TII and Omega, Indian Companies which are independent
legal entities. Controlling interest, which stood transferred to Vodafone from HTIL accompany the CGP share and cannot be dissected so as to be
treated as transfer of controlling interest of Mauritian entities and then that of Indian entities and ultimately that of HEL. Sites of CGP share,
therefore, determines the transferability of the share and/or interest which flows out of that share including controlling interest. Ownership of shares,
as already explained by us, carries other valuable rights like, right to receive dividend, right to transmit the shares, right to vote, right to act as per
one''s wish, or to vote in a particular manner etc; and on transfer of shares those rights also sail along with them.
226. Vodafone, on purchase of CGP share got all those rights, and the price paid by Vodafone is for all those rights, in other words, control
premium paid, not over and above the CGP share, but is the integral part of the price of the share. On transfer of CGP share situated in Cayman
Islands, the entire rights, which accompany stood transferred not in India, but offshore and the facts reveal that the offshore holdings and
arrangements made by HTIL and Vodafone were for sound commercial and legitimate tax planning, not with the motive of evading tax.
227. Vodafone, on purchase of CGP share also got control over its WOS, HTSH(M) which is having control over its WOS, 3GSPL, an Indian
Company which exercised voting rights in HEL. 3GSPL, was incorporated on 16.03.99 and run call centre business in India. The advantage of
transferring share of CGP rather than Array was that it would obviate the problems arising on account of the call and put agreements and voting
rights enjoyed by 3GSPL. 3GSPL was also a party to various agreements between itself and Companies of AS, AG and IDFC Groups. AS, AG
& IDFC have agreed to retain their shareholdings with full control including voting rights and dividend rights. In fact, on 02.03.2007 AG wrote to
HEL confirming that his indirect equity or beneficial interest in HEL worked out to be as 4.68% and it was stated, he was the beneficiary of 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.
228. 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 favor of 3GSPL and continue to be so even
after entry of Vodafone.
229. 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 Mauritian entities (which were shareholders of the Indian operating Companies) and other shareholders in some
of the other operating companies in India held shares in HEL related to the management of the subsidiaries of AS, AG and IDFC and did not
relate to the management of the affairs of HEL and HTIL was not a party to those agreements, and hence there was no question of assigning or
relinquishing any right to Vodafone.
230. IDFC FWA of August 2006 also conferred upon 3 GSPL only call option rights and a right to nominate a buyer if investors decided to exit
as long as the buyer paid a fair market value. June 2007 Agreement became necessary because the composition of Indian investors changed with
some Indian investors going out and other Indian investors coming in. On June 2007, changes took place within the Group of Indian investors, in
that SSKI and IDFC went out leaving IDF alone as the Indian investor. Parties decided to keep June 2007 transaction to effectuate their intention
within the broad contours of June 2006 FWA. On 06.06.2007 FWA has also retained the rights and options in favor of 3GSPL but conferred no
rights on Vodafone and Vodafone was only a confirming party to that Agreement. Call and put options, we have already mentioned, were the
subject matter of three FWAs viz., Centrino, N.D. Callus, IDFC and in Centrino and N.D. Callus FWAs, neither HTIL was a party, nor was
Vodafone. HTIL was only a confirming party in IDFC FWA, so also Vodafone. Since HTIL, and later Vodafone were not parties to those SHAs
and FWAs, we fail to see how they are bound by the terms and conditions contained therein, so also the rights and obligations that flow out of
them. HTIL and Vodafone have, of course, had the interest to see the SHAs and FWAs, be put in proper place but that interest cannot be termed
as property rights, attracting capital gains tax.
231. We have dealt with the legal effect of exercising call option, put option, tag along rights, ROFR, subscription rights and so on and all those
rights and obligations we have indicated fall within the realm of contract between various shareholders and interested parties and in any view, are
not binding on HTIL or Vodafone. Rights (and options) by providing finance and guarantee to AG Group of Companies to exercise control over
TII and indirectly over HEL through TII SHA and Centrino FWA dated 01.03.2006 were only 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.
232. 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.
233. 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 beneficiary of
the put options remained with the downstream company 3 GSPL and the counter-party of the put option remained with AG/AS Group
Companies.
234. Fresh set of agreements of 2007 as already referred to were entered into between IDFC, AG, AS, 3 GSPL and Vodafone and in fact, those
agreements were irrelevant for the transfer of CGP share. FWAs with AG and AS did not constitute transaction documents or give rise to a
transfer of an asset, so also the IDFC FWA. All those FWAs contain some adjustments with regard to certain existing rights, however, the
options, the extent of rights in relation to options, the price etc. all continue to remain in place as they stood. Even if they had not been so entered
into, all those agreements would have remained in place because they were in favor of 3GSPL, subsidiary of CGP.
235. The High Court has reiterated the common law principle that the controlling interest is an incident of the ownership of the share of the
company, something which flows out of holding of shares and, therefore, not an identifiable or distinct capital asset independent of the holding of
shares, but at the same time speaks of change in the controlling interest of VEL, without there being any transfer of shares of VEL. Further, the
High Court failed to note on transfer of CGP share, there was only transfer of certain off-shore loan transactions which is unconnected with
underlying controlling interest in the Indian Operating Companies. The other rights, interests and entitlements continue to remain with Indian
Operating Companies and there is nothing to show they stood transferred in law.
236. The High Court has ignored the vital fact that as far as the put options are concerned there were pre-existing agreements between the
beneficiaries and counter parties and fresh agreements were also on similar lines. Further, the High Court has ignored the fact that Term Sheet
Agreement with Essar had nothing to do with the transfer of CGP, which was a separate transaction which came about on account of independent
settlement between Essar and Hutch Group, for a separate consideration, unrelated to the consideration of CGP share. The High Court committed
an error in holding that there were some rights vested in HTIL under SHA dated 5.7.2003 which is also an agreement, conferring no right to any
party and accordingly none could have been transferred. The 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 present 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
237. 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 or accruing to them at completion. Loans were defined in the SPA to mean, all inter-company loans
owing by CGP and Array to a vendor group company including accrued or unpaid interest, if any, on the completion date. HTIL warranted and
undertook that, as on completion, loans set out in Part IV of Schedule 1 shall be the only indebtedness owing by the Wider group company to any
member of the vendor group. Vendor was obliged to procure that the loans set out in Part IV of Schedule 1 shall not be repaid on or before
completion and further, that any loan in addition to those identified will be non-interest bearing. Clause 7.4 of the SPA stipulated that any loans in
addition to those identified in Part IV of Schedule 1 of the SPA would be non-interest bearing and on terms equivalent to the terms of those loans
identified in Part IV of Schedule 1 of the SPA. The sum of such indebtedness comprised of:
a) US$ 672,361,225 (Loan 1) - reflected in a Loan Agreement (effective date of loan: 31 December 2006; date of Loan Agreement: 28 April
2007);
b) HK$ 377,859,382.40 (Loan 2) - reflected in a Loan Agreement (effective date of Loan 31st December 2006; date of Loan Agreement: 28
April 2007) [(i) + (ii): US$ 1,050,220,607.40]
c) US$ 231,111,427.41 (Loan 3) - reflected in a Receivable Novation Agreement i.e. HTM owed HTI BVI Finance such sum, which Array
undertook to repay in pursuance of an inter-group loan restructuring, which was captured in such Receivable Novation Agreement dated 28 April
2007.
HTI BVI Finance Limited, Array and Vodafone entered into a Deed of Assignment on 08.05.2007 pertaining to the Array indebtedness. On
transfer of CGP shares, Array became a subsidiary of VIHBV. The price was calculated on a gross asset basis (enterprise value of underlying
assets), the intra group loans would have to be assigned at face value, since nothing was payable by VIHBV for the loans as they had already paid
for the gross assets.
238. CGP had acknowledged indebtedness of HTI BVI Finance Limited in the sum of US$161,064,952.84 as at the date of completion. The sum
of such indebtedness was comprised of:
a) US$ 132,092,447.14, reflected in a Loan Agreement (effective date of loan: 31 December 2006; date of Loan Agreement: 28 April 2007)
b) US$ 28,972,505.70, reflected in a Loan Agreement (effective date of loan: 14 February 2007; date of Loan Agreement: 15 February 2007).
HTI BVI Finance Limited, CGP and the Purchaser entered into the Deed of Assignment on 08.05.2007 pertaining to the CGP indebtedness.
239. 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
Agreement
CGP HTI (BVI) Finance US$28,972,505.70 15 February 2007 14 February 2007
Limited
Array and CGP stood outside of obligation to repay an aggregate US$ 1,442,396.987.61 to HTI BVI Finance Limited and VHIBV became the
creditor of Array and CGP in the place and stepped off a HTI BVI Finance Limited on 8.5.2007 when VHIBV stepped into the shoes of HTI
BVI Finance Limited.
240. Agreements referred to above including the provisions for assignments in the SPA, indicate that all loan agreements and assignments of loans
took place outside India at face value and, hence, there is no question of transfer of any capital assets out of those transactions in India, attracting
capital gains tax.
Preference Shares:
241. Vodafone while determining bid price had taken into consideration, inter alias, its ownership of redeemable preference shares in TII and JFK.
Right to preference shares or rights thereto cannot be termed as transfer in terms of Section 2(47) of the Act. Any agreement with TII, Indian
partners contemplated fresh investment, by subscribing to the preference shares were redeemable only by accumulated profit or by issue of fresh
capital and hence any issue of fresh capital cannot be equated to the continuation of old preference shares or transfer thereof.
NON COMPETE AGREEMENT
242. SPA contains a Non Compete Agreement which is a pure Contractual Agreement, a negative covenant, the purpose of which is only to see
that the transferee does not immediately start a compete business. At times an agreement provides that a particular amount to be paid towards
non-compete undertaking, in sale consideration, which may be assessable as business income u/s 28(va) of the IT Act, which has nothing to do
with the transfer of controlling interest. However, a non-compete agreement as an adjunct to a share transfer, which is not for any consideration,
cannot give rise to a taxable income. In our view, a non-compete agreement entered into outside India would not give rise to a taxable event in
India. An agreement for a non-compete clause was executed offshore and, by no principle of law, can be termed as ""property"" so as to come
within the meaning of capital gains taxable in India in the absence of any legislation.
HUTCH BRAND
243. HTIL did not have any direct interest in the brand. The facts would indicate that brand/Intellectual Property Right were 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:
244. 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.
245. We, therefore, conclude that on transfer of CGP share, HTIL had transferred only 42% equity interest it had in HEL and approximately 10%
(pro-rata) to Vodafone, the transfer was off-shore, money was paid off-shore, parties were no-residents and hence there was no transfer of a
capital asset situated in India. Loan agreements extended by virtue of transfer of CGP share were also off-shore and hence cannot be termed to be
a transfer of asset situated in India. Rights and entitlements referred to also, in our view, cannot be termed as capital assets, attracting capital gains
tax and even after transfer of CGP share, all those rights and entitlements remained as such, by virtue of various FWAs, SHAs, in which neither
HTIL nor Vodafone was a party.
246. Revenue, however, wanted to bring in all those rights and entitlements within the ambit of Section 9(1)(i) on a liberal construction of that
Section applying the principle of purposive interpretation and hence we may examine the scope of Section 9.
PART VI
SECTION 9 and ITS APPLICATION
247. Shri Nariman, submitted that this Court should give a purposive construction to Section 9(1) of the Income Tax Act when read along with
Section 5(2) of the Act. Referring extensively to the various provisions of the Income Tax Act, 1922, and also Section 9(1)(i), Shri Nariman
contended that the expression ""transfer"" in Section 2(47) read with Section 9 has to be understood as an inclusive definition comprising of both
direct and indirect transfers so as to expand the scope of Section 9 of the Act. Shri Nariman also submitted that the object of Section 9 would be
defeated if one gives undue weightage to the term ""situate in India"", which is intended to tax a non-resident who has a source in India. Shri Nariman
contended that the effect of SPA is not only to effect the transfer of a solitary share, but transfer of rights and entitlements which falls within the
expression ""capital asset"" defined in Section 2(14) meaning property of any kind held by the Assessee. Further, it was stated that the word
property"" is also an expression of widest amplitude and would include anything capable of being raised including beneficial interest. Further, it was
also pointed out that the SPA extinguishes all the rights of HTIL in HEL and such extinguishment would fall u/s 2(47) of the Income Tax Act and
hence, a capital asset.
248. Shri Harish Salve, learned senior counsel appearing for the 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 279791 learned senior counsel
submitted that SPA has not relinquished any right of HTIL giving rise to capital gains tax in India.
249. 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 asset situated in India. Mr. Chenoy submitted that only the last limb of Section 9(1)
(i) deals with the transfer of a capital asset situated in India and can be taxed as a capital receipt. Learned senior counsel submitted to apply
Section 9(1)(i) the capital asset must situate in India and cannot by a process of interpretation or construction extend the meaning of that section to
cover indirect transfers of capital assets/properties situated in India. Learned senior counsel pointed out that there are cases, where the
assets/shares situate in India are not transferred, but where the shares of foreign company holding/owning such shares are transferred.
250. Shri Mohan Parasaran, Additional Solicitor General, submitted that on a close analysis of the language employed in Section 9 and the various
expressions used therein, would self-evidently demonstrate that Section 9 seeks to capture income arising directly or indirectly from direct or
indirect transfer. Shri Parasaran submitted, if a holding company incorporated offshore through a maze of subsidiaries, which are investment
companies incorporated in various jurisdictions indirectly contacts a company in India and seeks to divest its interest, by the sale of shares or
stocks, which are held by one of its upstream subsidiaries located in a foreign country to another foreign company and the foreign company step
into the shoes of the holding company, then Section 9 would get attracted. Learned Counsel submitted that it would be a case of indirect transfer
and a case of income accruing indirectly in India and consequent to the sale of a share outside India, there would be a transfer or divestment or
extinguishment of holding company''s rights and interests, resulting in transfer of capital asset situated in India.
251. Section 9 of the Income Tax Act deals with the incomes which shall be deemed to accrue or arise in India. Under the general theory of nexus
relevant for examining the territorial operation of the legislation, two principles that are generally accepted for imposition of tax are: (a) Source and
(b) Residence. Section 5 of the Income Tax Act specifies the principle on which tax can be levied. Section 5(1) prescribes ""residence"" as a
primary basis for imposition of tax and makes the global income of the resident liable to tax. Section 5(2) is the source based rule in relation to
residents and is confined to: 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:
(i) Any income which is received or deemed to be received in India in the relevant previous year by or on behalf of such person;
(ii) Any income which accrues or arises or is deemed to accrue or arise in India to him during the relevant previous year; and
(iii) 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 income. It is as follows:
Any income which is received or is deemed to be received in India during the relevant previous year by or on behalf of such person; and
Any income which accrues or arises or is deemed to accrue or arise to him in India during the relevant previous year.
252. Section 9 of the Income Tax Act extends its provisions to certain incomes which are deemed to accrue or arise in India. Four kinds of
income which otherwise may not fall in Section 9, would be deemed to accrue or arise in India, which are (a) a business connection in India; (b) a
property in India; (c) an establishment or source in India; and (d) transfer of a capital asset in India.
Income deemed to accrue or arise in India
Section 9
(1) The following incomes shall be deemed to accrue or arise in India:
(i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property
in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India.
[Explanation 1] - For the purposes of this clause -
(a) in the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue
or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India;
(b) in the case of a non-resident, no income shall be deemed to accrue or arise in India to him through or from operations which are confined to the
purchase of goods in India for the purpose of export;
(c) in the case of a non-resident, being a person engaged in the business of running a news agency or of publishing newspapers, magazines or
journals, no income shall be deemed to accrue or arise in India to him through or from activities which are confined to the collection of news and
views in India for transmission out of India;]
(a) in the case of a non-resident, being -
(1) an individual who is not a citizen of India; or
(2) a firm which does not have any partner who is a citizen of India who is resident in India; or
(3) a company which does not have any shareholder who is a citizen of India or who is resident in India.
253. The meaning that we have to give to the expressions ""either directly or indirectly"", ""transfer"", ""capital asset"" and ""situated in 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, stocking-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 u/s 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-
1. any stock-in-trade, consumable stores or raw materials held for the purposes of his business or profession;
xxx xxx xxx
xxx xxx xxx
254. The meaning of the words ""either directly or indirectly"", when read textually and contextually, would indicate that they govern the words those
precede them, namely the words ""all income accruing or arising"". The section provides that all income accruing or arising, whether directly or
indirectly, would fall within the category of income that is deemed to accrue or arise in India. Resultantly, it is only where factually it is established
that there is either a business connection in India, or a property in India, or an asset or source in India or a capital asset in India, the transfer of
which has taken place, the further question arises whether there is any income deeming to accrue in India from those situations. In relation to the
expression ""through or from a business connection in India"", it must be established in the first instance that (a) there is a non-resident; (b) who has a
business connection in India; and (c) income arises from this business connection.
255. Same is the situation in the case of income that ""arises through or from a property in India"", i.e. (a) there must be, in the first instance, a
property situated in India; and (b) income must arise from such property. Similarly, in the case of ""transfer of a capital asset in India"", the following
test has to be applied: (a) there must be a capital asset situated in India, (b) the capital asset has to be transferred, and (c) the transfer of this asset
must yield a gain. The word ''situate'', means to set, place, locate. The words ""situate in India"" were added in Section 9(1)(i) of the Income Tax
Act pursuant to the recommendations of the 12th Law Commission dated 26.9.1958.
256. Section 9 on a plain reading would show, it refers to a property that yields an income and that property should have the sites in India and it is
the income that arises through or from that property which is taxable. Section 9, therefore, covers only income arising from a transfer of a capital
asset situated in India and it does not purport to cover income arising from the indirect transfer of capital asset in India.
SOURCE
257. Revenue placed reliance on ""Source Test"" to contend that the transaction had a deep connection with India, i.e. ultimately to transfer control
over HEL and hence the source of the gain to HTIL was India.
258. Source in relation to an income has been construed to be where the transaction of sale takes place and not where the item of value, which
was the subject of the transaction, was acquired or derived from. HTIL and Vodafone are offshore 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.
259. 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, 263870
260. Power to impose tax is essentially a legislative function which finds in its expression Article 265 of the Constitution of India. Article 265 states
that no tax shall be levied except by authority of law. Further, it is also well settled that the subject is not to be taxed without clear words for that
purpose; and also that every Act of Parliament must be read according to the natural construction of its words. Viscount Simon quoted with
approval a passage from Rowlatt, J. expressing the principle in the following words:
In a taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no
presumption as to tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used. [Cape Brandy Syndicate v.
IRC (1921) 1 KB 64, P. 71 (Rowlatt, J.)]
261. In Ransom (Inspector of Tax) v. Higgs 1974 3 All ER 949 (HL), Lord Simon stated that it may seem hard that a cunningly advised tax-payer
should be able to avoid what appears to be his equitable share of the general fiscal burden and cast it on the shoulders of his fellow citizens. But for
the Courts to try to stretch the law to meet hard cases (whether the hardship appears to bear on the individual tax-payer or on the general body of
tax-payers as represented by the Inland Revenue) is not merely to make bad law but to run the risk of subverting the rule of law itself. The proper
course in construing revenue Acts is to give a fair and reasonable construction to their language without leaning to one side or the other but keeping
in mind that no tax can be imposed without words and that equitable construction of the words is not permissible [Ormond Investment Company v.
Betts (1928) All ER Rep 709 (HL)], a principle entrenched in our jurisprudence as well. In Mathuram Aggarwal (supra), this Court relied on the
judgment in Duke of Westminster and opined that the charging section has to be strictly construed. An invitation to purposively construe Section 9
applying look through provision without legislative sanction, would be contrary to the ratio of Mathuram Aggarwal.
262. Section 9(1)(i) covers only income arising or accruing directly or indirectly or through the transfer of a capital asset situated in India. Section
9(1)(i) cannot by a process of ""interpretation"" or ""construction"" be extended to cover ""indirect transfers"" of capital assets/property situate in India.
263. 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 does not 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.
264. 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 indirectly on
and after 1.6.73 to the son''s wife by such individual otherwise than for adequate consideration. The same was noticed by this Court in 273034
Similar expression like ""from asset transferred directly or indirectly"", we find in Sections 64(7) and (8) as well. On a comparison of Section 64 and
Section 9(1)(i) what is discernible is that the Legislature has not chosen to extend Section 9(1)(i) to ""indirect transfers"". Wherever ""indirect
transfers"" are intended to be covered, the Legislature has expressly provided so. The words ""either directly or indirectly"", textually or contextually,
cannot be construed to govern the words that follow, but must govern the words that precede them, namely the words ""all income accruing or
arising"". The words ""directly or indirectly"" occurring in Section 9, therefore, relate to the relationship and connection between a non-resident
Assessee and the income and these words cannot and do not govern the relationship between the transaction that gave rise to income and the
territory that seeks to tax the income. In other words, when an Assessee is sought to be taxed in relation to an income, it must be on the basis that
it arises to that Assessee directly or it may arise to the Assessee indirectly. In other words, for imposing tax, it must be shown that there is specific
nexus between earning of the income and the territory which seeks to lay tax on that income. Reference may also be made to the judgment of this
Court in 269919 and 285132
265. Section 9 has no ""look through provision"" and such a provision cannot be brought through construction or interpretation of a word ''through''
in Section 9. In any view, ""look through provision"" will not shift the sites of an asset from one country to another. Shifting of only by express
legislation. Federal Commission of Taxation v. Lamesa Holdings BV (LN) - (1998) 157 A.L.R. 290 gives an insight as to how ""look through
provisions are enacted. Section 9, in our view, has no inbuilt ""look through mechanism"".
266. Capital gains are chargeable u/s 45 and their computation is to be in accordance with the provisions that follow Section 45 and there is no
notion of indirect transfer in Section 45.
267. Section 9(1)(i), 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.
268. Vodafone, whether, could be proceeded against u/s 195(1) for not deducting tax at source and, alternatively, u/s 163 of the Income Tax Act
as a representative Assessee, is the next issue.
SECTION 195 and OFFSHORE TRANSACTIONS
269. 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 machinery 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 purpose of Section 195, if he owns or holds assets in India or is liable to
pay income tax in India. Further, it is also the stand of the Revenue that once chargeability is established, no further requirements of nexus needs to
be satisfied for attracting Section 195.
270. Vodafone had ""presence"" in India, according to the Revenue at the time of the transaction because it was a Joint Venture (JV) Partner and
held 10% equity interest in Bharti Airtel Limited, a listed company in India. Further, out of that 10%, 5.61% shares were held directly by
Vodafone itself. Vodafone had also a right to vote as a shareholder of Bharati Airtel Limited and the right to appoint two directors on the Board of
Directors of Bharti Airtel Limited. Consequently, it was stated that Vodafone had a presence by reason of being a JV Partner in HEL on
completion of HEL''s acquisition. Vodafone had also entered into Term Sheet Agreement with Essar Group on 15.03.2007 to regulate the affairs
of VEL which was restated by a fresh Term Sheet Agreement dated 24.08.2007, entered into with Essar Group and formed a JV Partnership in
India. Further, Vodafone itself applied for IFPB approval and was granted such approval on 07.05.2007. On perusal of the approval, according
to the Revenue, it would be clear that Vodafone had a presence in India on the date on which it made the payment because of the approval to the
transaction accorded by FIPB. Further, it was also pointed out that, in fact, Vodafone had presence in India, since by mid 1990, it had entered
into a JV arrangement with RPG Group in the year 1994-95 providing cellular services in Madras, Madhya Pradesh circles. After parting with its
stake in RPG Group, in the year 2003, Vodafone in October, 2005 became a 10% JV Partner in HEL. Further, it was pointed out that, in any
view, Vodafone could be treated as a representative Assessee of HTIL and hence, notice u/s 163 was validly issued to Vodafone.
271. Vodafone has taken up a specific stand that ""tax presence"" has to be viewed in the context of the transaction that is subject to tax and not
with reference to an entirely unrelated matter. Investment made by Vodafone group in Bharti Airtel would not make all entities of Vodafone group
of companies subject to the Indian Law and jurisdiction of the Taxing Authorities. ""Presence"", it was pointed out, be considered in the context of
the 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.
272. 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.
273. 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 being income chargeable under the head ""Salaries"" shall, at the time of
credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other
mode, whichever is earlier, deduct income tax thereon at the rates in force:
Provided that in the case of interest payable by the Government or a public sector bank within the meaning of Clause (23D) of Section 10 or a
public financial institution within the meaning of that clause, deduction of tax shall be made only at the time of payment thereof in cash or by the
issue of a cheque or draft or by any other mode:
Provided further that no such deduction shall be made in respect of any dividends referred to in Section 115O.
Explanation: For the purposes of this section, where any interest or other sum as aforesaid is credited to any account, whether called ""Interest
payable account"" or ""Suspense account"" or by any other name, in the books of account of the person liable to pay such income, such crediting
shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly.
Section 195 finds a place in Chapter XVII of the Income Tax Act which deals with collection and recovery of tax. Requirement to deduct tax is
not limited to deduction and payment of tax. It requires compliance with a host of statutory requirements like Section 203 which casts an obligation
on the Assessee to issue a certificate for the tax deducted, obligation to file return u/s 200(3), obligation to obtain ""tax deduction and collection
number"" u/s 203A etc. Tax deduction provisions enables the Revenue to collect taxes in advance before the final assessment, which is essentially
meant to make tax collection easier. The Income Tax Act also provides penalties for failure to deduct tax at source. If a person fails to deduct tax,
then u/s 201 of the Act, he can be treated as an Assessee in default. Section 271C stipulates a penalty on the amount of tax which has not been
deducted. Penalty of jail sentence can also be imposed u/s 276B. Therefore, failure to deduct tax at source u/s 195 may attract various penal
provisions.
274. Article 246 of the Constitution gives Parliament the authority to make laws which are extra-territorial in application. Article 245(2) says that
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.
275. 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.
276. The expression ""any person"", in our view, looking at the context in which Section 195 has been placed, would mean any person who is a
resident in India. This view is also supported, if we look at similar situations in other countries, when tax was sought to be imposed on non-
residents. One of the earliest rulings which paved the way for many, was the decision in Ex Parte Blain; In re Sawers (1879) LR 12 ChD 522 at
526, wherein the Court stated that ""if a foreigner remain abroad, if he has never come into this country at all, it seems impossible to imagine that the
English Legislature could ever have intended to make such a person subject to particular English Legislation."" In Clark (Inspector of Taxes) v.
Oceanic Contractors Inc. (1983) 1 ALL ER 133, the House of Lords had to consider the question whether chargeability has ipso facto sufficient
nexus to attract TDS provisions. A TDS provision for payment made outside England was not given extra territorial application based on the
principle of statutory interpretation. Lord Scarman, Lord Wilberforce and Lord Roskill held so on behalf of the majority and Lord Edmond Davies
and Lord Lowry in dissent. Lord Scarman said:
unless the contrary is expressly enacted or so plainly implied as to make it the duty of an English court to give effect to it, United Kingdom
Legislation is applicable only to British subjects or to foreigners who by coming into this country, whether for a long or short time, have made
themselves during that time subject to English jurisdiction.
The above principle was followed in Agassi v. Robinson (2006) 1 WLR 2126.
277. This Court in 270361 had occasion to consider the scope of Sections 192, 195 etc. That was a case where Eli Lilly Netherlands seconded
expatriates to work in India for an India-incorporated joint venture (JV) between Eli Lilly Netherlands and another Indian Company. The
expatriates rendered services only to the JV and received a portion of their salary from the JV. The JV withheld taxes on the salary actually paid in
India. However, the salary costs paid by Eli Lilly Netherlands were not borne by the JV and that portion of the income was not subject to
withholding tax by Eli Lilly or the overseas entity. In that case, this Court held that the chargeability u/s 9 would constitute sufficient nexus on the
basis of which any payment made to non- residents as salaries 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.
278. 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 a contract executed outside India. Consideration was also passed outside India. That
transaction has no nexus with the underlying assets in India. In order to establish a nexus, the legal nature of the transaction has to be examined and
not the indirect transfer of rights and entitlements in India. Consequently, Vodafone is not legally obliged to respond to Section 163 notice which
relates to the treatment of a purchaser of an asset as a representative Assessee.
PART-VIII
CONCLUSION:
279. I, therefore, find it difficult to agree with the conclusions arrived at by the High Court that the sale of CGP share by HTIL to Vodafone would
amount to transfer of a capital asset within the meaning of Section 2(14) of the Indian Income Tax Act and the rights and entitlements flow from
FWAs, SHAs, Term Sheet, loan assignments, brand license etc. form integral part of CGP share attracting capital gains tax. Consequently, the
demand of nearly Rs. 12,000 crores by way of capital gains tax, in my view, would amount to imposing capital punishment for capital investment
since it lacks authority of law and, therefore, stands quashed and I also concur with all the other directions given in the judgment delivered by the
Lord Chief Justice.
280. 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 Supreme Court up to the date of
payment. The Registry is directed to return the Bank Guarantee given by the Appellant within four weeks.
281. No orders are required to be passed on intervention applications.
