TaxTMI 
TaxTMI 
2010 (9) TMI 2
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.... Group Plc. U.K. In 1992 the Hutchison Group of Hong Kong acquired interests in the mobile telecommunications industry in India, through a joint venture vehicle, Hutchison Max Telecom Ltd. (renamed Hutchison Essar Ltd - HEL in August 2005). Between 1992 and 2006 Hutchison acquired interests in twenty three mobile telecommunication circles in India. HEL is an Indian company in which shares were acquired by the Hutchison Group of companies through a structural arrangement of holding and subsidiary companies. The moiety of shares of all the operational companies (Indian entities) which were under Hutchison control, direct or indirect, were held either by Mauritius based companies recognized as Overseas Corporate Bodies with tax residency certificates, or through other entities in which Hutchison interests (shareholding over which Hutchison exercised direct or indirect control) were held by a Mauritian company. Ownership structure : 2. In order to facilitate an understanding of the key issues in this case, we reproduce below an ownership structure chart: 3. Hutchison held call options over companies controlled by Asim Ghosh and Analjit Singh as also over SMMS Investments ....
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....f several operating companies were transferred by diverse holding companies to HMTL, in consideration for which HMTL issued its own shares to these holding companies. Approval of the Foreign Investment Promotion Board of the Union Government (FIPB) was obtained in November 2004 and of the Reserve Bank in December 2004. 9. On 28 October 2005 VIH BV agreed to acquire 5.61% of the shareholding in Bharti Televentures Ltd. (now Bharti Airtel Ltd.). Framework Agreements: 10. On 1 March 2006, Framework Agreements were entered into by Asim Ghosh and Analjit Singh. One agreement was between Asim Gosh, Goldspot Mercantile Company Pvt. Ltd., Plustech Mercantile Co. Pvt. Ltd., 3 Global Services Pvt. Ltd. (3GSPL) and Centrino Trading Co. Pvt. Ltd. Centrino Trading acquired shares in TII. Plustech held 100% shares in Centrino. Goldspot held 100% shares in Plustech. Goldspot was controlled by Asim Ghosh. 3GSPL's holding company was Hutchison Teleservices (India) Holdings Ltd., Mauritius, and in turn, CGPC was the holding company with a 100% shareholding of Hutchison Tele Services (India) Holdings Ltd. 11. 3GSPL (a Hutchison Company) agreed to procure credit support in order to ena....
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.... offer to HTIL on behalf of Vodafone International Holdings BV for HTIL's shareholdings in HEL together with inter related company loans. The offer was US $10.708 billion on the basis of an enterprise value of US $ 18.250 billion. 18. Bharti Infotel Pvt. Ltd. by a letter dated 9 February 2007 furnished its no objection to the proposed transaction. 19. On 10 February 2007, Vodafone Group Plc made a final binding offer of US $ 11.076 billion, based on an enterprise value of US $ 18.800 billion of HEL. Sale Purchase Agreement : 20. On 11 February 2007, a Sale Purchase Agreement (SPA) was entered into between the Petitioner and HTIL under which HTIL agreed to procure and transfer to the Petitioner the entire issued share capital of CGP, by HTI BVI free from all encumbrances together with all rights attaching or accruing, and together with assignment of loan interests. This was followed by announcement by HTIL and Vodafone of 12 February 2007, the latter stating that it had agreed to acquire a controlling interest in HEL via its subsidiary VIH BV. 21. On 20 February 2007, Vodafone Group Plc on behalf of VIH BV addressed a letter to Essar Teleholdings Ltd. for pur....
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....imary liability is with his companies. 26. On 5 March 2007, Analjit Singh addressed a communication to FIPB confirming that • he is the founder and Chairman of Hutchison Max Telecom, now HEL. • In 1998, Max divested 41% stake and balance 10% in 2005. • In January 2006, an acquisition was made of 7.577% in HEL through Scorpios, etc. This is postFDI norms altering the sectoral cap for foreign direct investment from 51% to 74%, when Hutch had to shed some equity. • Voting rights legally and beneficially were owned by him. • Structure was filed with FIPB in April 2006 and filed with DoT on 27.04.2006. FIPB confirmed the structure on 01.08.2006. 27. On 6 March 2007, Essar Teleholdings Ltd. filed an objection with FIPB in relation to the proposed transaction for purchase of a controlling interest by the Petitioner in HEL through purchase of overseas holding companies belonging to the Hutchison group, on the ground that HEL and Bharti Airtel are competing ventures in the same field and the proposed transaction would result in both companies having a common foreign partner, which could jeopardise the interests ....
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.... On 15 March 2007, the Joint Director of Income Tax (International Taxation) issued a notice under Section 133(6) of the Income Tax Act, 1961 to HEL seeking information regarding the sale of the stake of the Hutchison group, Hong Kong in HEL to Vodafone Group Plc, including in relation to the Shareholders Agreements and details of the transaction for acquisition of the share capital of CGP. 33. On 19 March 2007, FIPB addressed a letter to the Petitioner asking it to clarify under what circumstances Vodafone had agreed to pay a consideration of US $ 11.08 billion for acquiring 67% of HEL when the actual acquisition is only of 51.96%, according to the application. 34. On 19 March 2007, the Petitioner addressed a letter to FIPB stating that it had agreed to acquire from HTIL, interests in HEL which include a 52% equity shareholding, for US $ 11.08 billion and that the price included a control premium, use and rights to the Hutch brand in India, a noncompete agreement with the Hutch group, value of nonvoting nonconvertible preference shares, various loan obligations and an entitlement to acquire a further 15% indirect interest in HEL, subject to Indian foreign investment rules, w....
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....ete Agreement with HTIL. It also confirmed that in determining the bid price, there was no individual price placed on any of these items. The approach was to look at a total package, represented by the ownership of CGP and to assess the total value. 39. On 5 April 2007, HEL clarified to the Director of Income Tax (International Taxation) that HEL had no tax liabilities accruing out of the transaction and that it did not have a locus to review the obligations under Section 195 in relation to nonresident entities regarding any purported tax obligations. 40. On 5 April 2007, FIPB in a letter to the Petitioner sought details of Vodafone Group's projects/joint ventures/subsidiaries/ branches/business interest collaborations in all countries. 41. On 9 April 2007, HTIL filed the agreements pertaining to its transactions with FIPB. FIPB Approval : 42. On 7 May 2007, FIPB conveyed its approval of the transaction to the Petitioner subject to compliance with and observance of all the applicable laws and regulations in India. The approval was also subject to the condition of compliance with the sectoral cap on 74% of foreign direct investmen....
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.... a second notice to show cause was issued to the Petitioner under Section 201 on 30 October 2009 to which the Petitioner filed a reply dated 28 January 2010. On 31 May 2010 the impugned order was passed by the Second Respondent under Section 201 upholding jurisdiction. 51. On 31 May 2010, a notice to show cause was issued under Section 163 to the Petitioner to show cause as to why it should not be treated as an agent/representative assessee of HTIL. CONTENTIONS: A. The Petitioner : 52. Briefly stated, the case of the Petitioner is that if any of the shares held by the Mauritian Companies were sold in India, there would be no capital gains tax payable in India in view of the Convention on avoidance of double taxation between Mauritius and India. Hence, on a transfer of shares of HEL which are admittedly an asset situated in India, there would have been no capital gain tax chargeable in India. However, as the transaction in the present case was that the share of an upstream overseas company which was in a position to exercise control over a Mauritian company was sold, the Revenue has sought to impose capital gains tax on the ground that the transfer resulted in conse....
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....39;put' options. The revised case of the Department is fallacious; (3) Section 5(1) legislates with respect to nexus based on residence while Section 5(2) is based on nexus relatable to source. As regards nexus arising from source, tax can be imposed on income which (i) is received in India; (ii) which accrues and arises in India; and (iii) which is deemed to accrue or arise in India. For income to arise or accrue in India, there must be a right to receive income in India. In the present case, there is no income that accrues or arises in India since the right to receive the money was outside India under a contract entered into outside India and payment was made outside India; (4) In Section 9, Parliament has specifically limited gains arising out of transfers of capital assets to an asset situate in India. The share of CGP is situated outside India. A share is situated where it can be transferred. A share represents a bundle of rights and the transfer of a share results in a transfer of all the underlying rights. However, in law, what is transferred is a share and not individual rights. There is a distinction in law between shareholders and a company....
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....a is neither supportable in principle nor on authority. The tax relates to gains arising out of a transfer of a capital asset situated in India, not a capital asset, the transfer of which has some nexus with India. Parliament has deliberately used the word "situate in India" in relation to capital assets. Where the asset is situated outside India and the transfer of that capital asset takes place, the location of the asset does not notionally shift to India because the agreement pursuant to which it is transferred has also led to certain related agreements which have nexus with India; (9) The contention of the Department that the right to use the Hutch Brand during the transition period which was royalty free brings about the transfer of some capital assets in India to which the consideration paid for the shares relates, is misconceived. The Hutch Brand was to be withdrawn from India and all that the agreement permitted was, use during the limited period free of charge. Where a controlling interest in shares is sold, it is usual to incorporate transitory arrangements without specific consideration. The value of the transfer of the enterprise is captured in the sa....
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....tion 195 cast on the payer is accompanied by a duty under Section 200 to pay the tax and is visited with penal consequences for breach. All these consequences which operate against a person who is not an assessee can arise only where the person concerned has some nexus with India. A person who has no residential nexus whatsoever either temporary or permanent does not incur an obligation under Section 195. A foreign entity which has no presence in India, not even a branch office, cannot be subjected to the obligation to deduct and pay tax. It is the recipient who is a potential assessee because he has received a sum chargeable. This by itself does not create a nexus with the payer who has no income chargeable under the Act, nor has a presence of any kind in India. Moreover, Section 198 which deems tax deducted and paid to be income received by the payee and Section 199 which deems such a payment to be payment of tax on behalf of the person from whom such a tax is deducted, would not operate outside India in transactions such as the present. Payment of tax in India would not be a partial discharge of the obligation to pay consideration under the agreement outside India. Hen....
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....on constitutes a transfer of the composite rights of HTIL in HEL as a result of the divestment of HTIL rights which paved the way for the Petitioner to step into the shoes of HTIL. The transaction in question, it is urged, has a sufficient territorial nexus to India and is chargeable to tax under the Income Tax Act, 1961. Hence, the finding of the Assessing Officer that he has jurisdiction, is not perverse or arbitrary and would not warrant interference under Article 226 of the Constitution. The submissions may now be summarised: (i) The decision of the Revenue is based on an interpretation of the agreements in question which would render the submission of the Petitioner on "form versus substance" irrelevant. The submission of the Department can be justified on the basis of the form of the transaction as reflected in the transaction documents; (ii) There is a distinction between proceedings for the deduction of tax and regular assessment proceedings where larger issues have to be investigated. The jurisdictional issue is legitimately to be confined to the obligation of the Petitioner under Section 195 to deduct tax. In the absence of HTIL - the deductee ....
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....ndependent of the transfer of the CGP share. The consideration paid by the Petitioner to HTIL was for a package of composite rights and not for a mere transfer of a CGP share. (vi) The acquisition of the shareholding in CGP did not transfer in itself all the rights and interests which flow to the Petitioner from the transaction. The Petitioner obtained a compendium of rights including effective control and management of the joint venture in India as a result of which it stepped into the shoes of HTIL. This arose as a consequence of the Petitioner entering into distinct and independent contracts which have no corelation with the acquisition of CGP equity. Though neither the Petitioner nor its predecessor in interest, HTIL are shareholders in HEL (now VEL), they are able to secure control over the Indian Corporate entity only by reason of their entering into contractual obligations as evidenced from the term sheet agreements between the joint venture partners. The first term sheet agreement of 5 July 2003 inter alia between Essar Teleholdings Ltd. and HTIL contemplated that the operating companies would be consolidated by transferring their shares to an Indian holding c....
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....to obtain FIPB approval. The transaction is subject to the consent and approval of the Indian regulatory authority, FIPB. The fulfillment of the condition precedes the vesting of the rights and obligations of the parities under the contract and if FIPB approval is not obtained, HTIL was permitted to terminate the agreement. The approval of FIPB would not have been required if the transaction was only the transfer of one CGP share. HTIL entered into a settlement with the Essar Group on 15 March 2007, in order to obtain its support in the completion of SPA. By clause 5, HTIL was required to give notice to Essar and to purchase the tag along rights of Essar Teleholdings Ltd. as a minority shareholder of HEL. The Petitioner made an offer on 20 February 2007 for purchasing 33% of Essar interest in HEL for US $ 5.7687 billion. Vodafone and Essar Group entered into a term sheet agreement on 15 March 2007 to regulate the affairs of HEL and the relationship between shareholders of HEL. The Petitioner would have operational control of HEL while Essar would have rights consistent with its shareholding, including a proportionate Board representation. The term sheet agreement was restated in Au....
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.... in the Indian company HEL; (iii)Interest held in the Indian company Omega Holdings (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; (iv) 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; (v) Rights (and options) by providing finance and guarantee to Analjit Singh Group of companies to exercise control over TII and indirectly over HEL through various TII shareholders agreements and the N D Callus Framework Agreement 132006; (vi) Controlling rights over TII through the TII Shareholder's Agreement, in the form of right to appoint two directors with veto power to promote its interests in HEL and thereby hold beneficial interest in 12.30% of the share capital of the Indian company HEL; (vii) Finance to SMMS to acquire shares in ITNL (formerly Omega) with right to acquire the share capital of Omega in future; (viii) Controlling rights ....
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....unt of shareholders' agreements, term sheet agreements and other arrangements negotiated with the joint venture partners. HTIL's indirect subsidiary, CGPM held 37.25% equity interest in TII, an Indian company which in turn, held a 12.96% equity interest in HEL. CGPM, as a result of its 37.25% interest in TII had an interest in several downstream companies which in turn, held interests in HEL, as a result of which HTIL obtained an indirect equity interest of 7.24% in HEL. HTIL had a further 15% interest in HEL by virtue of option agreements, framework agreements and shareholders agreements of Asim Ghosh, Analjit Singh and IDFC and credit arrangement with their companies. All these rights essentially did not go with one share of CGP. The significance of the framework agreements with the Analjit Singh Group companies, Asim Ghosh Group companies and IDFC Group companies was that Global Services Private Limited (GSPL), an indirect subsidiary of HTIL held certain subscription rights and call options to subscribe to and to acquire the shares of Indian companies, controlled by Asim Ghosh, Analjit Singh and IDFC, which held investments in TII which in turn held shares in HEL. These ....
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....a and its business of telecommunications was carried out entirely in India with relevant licences and regulatory clearances granted under Indian Laws. There has been a transfer of controlling interest in HEL from one non-resident to another non-resident. The business of HEL is based on property located within India. The gains received by HTIL through the transfer of the CGP share, the value of which was determined on the basis of the enterprise value of HEL being property situated in India and other valuable rights transferred by way of agreement are chargeable to tax in India. The gains are deemed to arise once the subject matter of the transaction constitutes a capital asset and its location is in India. Section 2(14) defines the expression "capital asset" in wide terms to mean property of any kind held by assessee. This will include rights and interests which are capable of being owned and transferred. The definition of the word "transfer" in Section 2(47) is wide enough to comprehend any method of transfer. The entire enterprise value attributed to HEL, was only on account of the fruits of the investment made by HTIL in India, goodwill/brand value generated by HTIL for the....
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....gned in favour of the Petitioner. (xxi) In the present case, VIH BV disregarded the Indian corporate personality of the intermediary companies in the transfer of the asset and in the appropriation of income. The mode of the transfer of an asset is not determinative of the nature of the asset. Shares in themselves may be an asset but in many cases like the present, they may be merely a mode or a vehicle to transfer some other assets. In the present case, the subject matter of transfer is not just the shares of the Cayman Islands Company but assets situated in India. The particular mode of transfer will not alter or determine the situs, nature or character of the asset. (xxii) The expression "person" in Section 195 is not restricted to a person resident in India and the provision can be applied also to a nonresident. The provisions of a statute dealing with machinery for collection of tax have to be construed according to the ordinary rules of construction and to make the charge effective. The Legislature has deliberately not qualified the expression "person" in restrictive terms and it would be impermissible to do so by interpretation. Even though the revenue laws ....
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....ayer either to deduct tax or to approach the Department and seek a clarification on whether the deduction should be made. 55. The submission can now be considered. Structuring business for tax planning : 56. Indian Law recognises that an assessee, who engages in legitimate business activity and organizes business around accepted legal structures is entitled to plan his transactions in a manner that would reduce the incidence of tax. An assessee who does so, does not tread upon a moral dilemma or risk a legal invalidation. There is a recognition in our law of the principle that lawful forms of activity can legitimately be arranged by those who transact business to plan for tax implications. So long as the legal structures that are put into place and the instruments of law that are utilized have been utilized bona fide for a business purpose, fiscal law - absent statutory provisions to the contrary - does not permit an enquiry into the motives of the assessee or an investigation into the underlying economic interest. But a transaction which is sham or, what the law describes as a colourable device, stands on an entirely different foundation. A transaction which is sham ....
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....le is an interpretation which does not follow from the plain, unambiguous language of the statute. Words cannot be added to or substituted so as to give a meaning to the statute which will serve the spirit and intention of the Legislature" 58. The principle of law is that in interpreting fiscal legislation, the Court is guided by the plain language and the words used. The Court would not ignore a legal relationship which arises out of a business transaction in search of substance over form or in pursuit of the underlying economic interest. This, however, does not preclude the Legislature from legislating otherwise. In certain areas of the law, legislation may adopt a lookthrough provision which mandates a rigorous scrutiny to trace subjects and sources. This is a legislative function. Courts do not assume jurisdiction to themselves to create legislative policy or to legislate by interpretation for that does not lie within the realm of judicial power. In matters involving the interpretation of economic and fiscal legislation, Courts follow interpretative techniques which promote certainty in the application of law. Certainty requires Courts to don a traditional, if....
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....ation laws of that country and would not be liable to tax in India. Notwithstanding this, the income tax authorities issued notices to show cause in 2000 to Foreign Institutional Investors (FIIs) to explain why they should not be taxed for profits and dividends which accrued to them in India. The basis of the notices was that the recipients were shell companies incorporated in Mauritius whose main purpose was investment of funds in India. Moreover, it was alleged that those companies were controlled and managed from countries other than India and Mauritius and not by residents of Mauritius so as to derive the benefits of the Convention. Confronted by a withdrawal of funds by FIIs, CBDT issued a circular on 13 April 2000 clarifying that such entities incorporated under the laws of Mauritius would be considered as residents of Mauritius in accordance with the Convention and that when a certificate of residence is issued by Mauritian authorities, that shall constitute sufficient evidence for accepting the status of residence and beneficial ownership for applying the Convention. This was to also apply to income from capital gains on the sale of shares and accordingly such entities resi....
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....irs as not to attract taxes imposed by the Crown, so far as he can do so within the law, and that he may legitimately claim the advantage of any expressed terms or of any omissions that he can find in his favour in taxing Acts". The Supreme Court held that far from being exorcised in its country or region, the dictum in Duke of Westminster's case "continues to be alive and kicking in England". In holding thus, the Supreme Court noted that subsequent decisions of the House of Lords in Craven v. White [(1988) 3 ALL ER 495.], Furniss v. Dawson [(1984) 1 All ER 530 (HL).] and W.T. Ramsay Ltd. v. IRC [(1982) AC 300.] did not affect the validity of the principle which had been laid down in the Duke of Westminster's case. The Supreme Court emphasized that the judgment of the majority of the Court in McDowell and Co. Ltd. & Commercial Tax Officer [(1985) 154 ITR 148.] regarded tax planning as legitimate provided it was within the frame work of law. What was frowned upon were colourable devices resorted to with the object of avoiding the payment of tax by resorting to dubious methods. The judgment of the Delhi High Court was reversed. 63. The following principles are now fir....
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....ipt is liable to be taxed to ignore the legal character of the transaction which is the source of the receipt and to proceed on what they regard as "the substance of the matter". The Supreme Court observed that while the authorities are bound to determine the true legal relations resulting from a transaction yet if the parties have chosen to conceal a legal relationship by a device, it would be open to them to unravel the device and determine the true character of the relationship. However, the Supreme Court noted that "the legal effect of a transaction cannot be displaced by probing into the substance of the transaction". Walfort 65. These principles have now been reiterated in a recent judgment of the Supreme Court in Commissioner of Income Tax v. Walfort Share and Stock Brokers Pvt. Ltd. [2010(6) Scale 471.] . While construing the provisions of Section 14A and Section 94(7) of the Income Tax Act 1961 Mr. Justice S.H. Kapadia, the Learned Chief Justice of India, observed as follows : "At the outset, we may state that we have two sets of cases before us. The lead matter covers assessment years before insertion of Section 94(7) vide Finance Act, 2001 w.e.f. 1.4.....
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.... referred to in clause (vii) of Section 47, the period for which the shares in the amalgamating company were held by the assessee shall be included. Shares constitute capital assets within the meaning of clause (14) of Section 2. Shares are recognized as assets and a transfer of shares is recognized in clause (42A) of Section 2. Clause 47 of Section 2 defines the expression "transfer" in relation to a capital asset to include a sale of the asset. The definition of the expression "transfer" artificially brings in certain cases where in law, there may not have been a transfer. For instance, a transaction by which possession of immovable property is taken or retained in part performance of a contract under Section 53A of the Transfer of Property Act, 1882, is brought within the ambit of the provision. Similarly, by subclause (vi) any transaction which has the effect of transferring or enabling the enjoyment of any immovable property, is within the ambit of the expression "transfer". Subsection (1) of Section 45 brings to tax any profits or gains arising from a transfer of a capital asset effected in the previous year under the head of "capital gains". Principles governing....
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....interest which assumes the character of a controlling interest may again vary from case to case. In C.I.T. vs. Messrs Jeewanlal Ltd., [(1953) 24 ITR 475] a Constitution Bench of the Supreme Court, while considering the ambit of the expression "controlling interest" under Section 2(21) of the Excess Profits Tax Act, defined the concept thus: "In common parlance a person is said to have a "controlling interest" in a company when such a person acquires, by purchase or otherwise, the majority of the vote carrying shares in that company, for the control of the company resides in the voting powers of its shareholders. In this sense, the directors of a company may well be regarded as having "a controlling interest" in the company when they hold and are entered in the share register as holders of the majority of the shares which, under the Articles of Association of the company, carry the right to vote." The Supreme Court emphasized the principle that when a shareholder, holding a majority of the shares, authorised an agent to vote for him, the agent acquired no interest, legal or beneficial, for the title to the shares continued to vest in the shareholder. 70. A controlling....
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....R 643] where a composite consideration had been paid by the assessee for the transfer of shares and the assignment of a Managing Agency, the Court observed that in such a case, "there should be two distinct assets each capable of being acquired or transferred separately". However, a controlling interest could not by itself be acquired or transferred but was an incident which arose out of the holding of a particular number of shares. 71. In Commissioner of Wealth Tax vs. Mahadeo Jalan, [(1972) 86 ITR 621] the Supreme Court recognised the same legal position in Indian Law, holding that "a share is not a sum of money, but is an interest measured by a sum of money made up of various rights contained in the articles of association." In Vekatesh vs. C.I.T., [(2000) 243 ITR 367] a Division Bench of the Madras High Court held that the price paid by the purchaser of shares even if it was higher than the market price - the difference representing a controlling interest which was transferred by the seller to the buyer - nonetheless remains the price for the shares. The Division Bench held that the Tribunal was correct in upholding the order of the Commissioner and the Assessing Office....
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....rt applied. A Constitution Bench of the Supreme Court held that by the proposal to acquire all the shares of the Company which was to be floated, the Appellant could acquire only control and the right to manage the Company. The Appellant would not, as a result, acquire the undertaking owned by the new Company by purchase, takeover or otherwise. Applying the doctrine that the Company has a distinct juristic personality from its shareholders, the Supreme Court held that the purchase of all the shares would not have the effect of an acquisition of the undertaking. Dealing, as it was, with regulatory legislation designed to give effect to the Directive Principles of State policy, the Supreme Court held that nonetheless Parliament would not be imputed with the intention of sweeping aside fundamental legal concepts governing the incorporation of a Company. Mr. Justice K.K. Mathew, speaking for the Bench, observed as follows: "It is well settled that a company has separate legal personality apart from its shareholders and it is only the company as a juristic person that could own the undertaking. Beyond obtaining control and the right of management of Shahjahanpur Sugar Priv....
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....ibuted out of the profits of the company to the shareholders but the interest of the shareholder either individually or collectively did not amount to more than a right to participate in the profits of the company." In its decision in Bacha Guzdar, which is the locus classicus on the point, the Supreme Court in a decision of five Learned Judges laid down the following principle which has been consistently applied. The principle of law expounded in the case is thus: "That a shareholder acquires a right to participate in the profits of the company may be readily conceded but it is not possible to accept the contention that the shareholder acquires any interest in the assets of the company. .. A shareholder has got no interest in the property of the company though he has undoubtedly a right to participate in the profits if and when the company decides to divide them. The interest of a shareholder vis-a-vis the company was explained in the Sholapur Mills case, (1950) S.C.R. 869 at 904. That judgment negatives the position taken up on behalf of the appellant that a shareholder has got a right in the property of the company. It is true that the shareholders of the compan....
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.... Company had a controlling interest upon which rested the outcome of an assessment to excess profits tax. The House of Lords held that by that expression what was meant was "the extent to which they have vested in them the power of controlling by votes, the decisions which will bind the Company in the shape of resolutions passed by the shareholders in general meeting" and the fact that a vote carrying share was vested in a Director as a trustee was immaterial. Even if power were exercised in breach of trust, the vote would be treated as validly cast visavis the Company and the resolution would be binding on it. The Control of a Company, opined the Law Lords, resides in the voting power of its shareholders. Farwell, J. in a judgment of the Chancery Division in Borland's Trustee vs. Steel Brothers & Co.Ltd., [(1901) 1 Ch 279] noted that "a share is the interest of a shareholder in the Company measured by a sum of money, for the purpose of liability in the first place, and of interest in the second, but also consisting of a series of mutual covenants entered into by all the shareholders inter se" in accordance with the Companies' Act. A share represents an interest "made up of....
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.... the English holders did not carry on the business of the Corporation: "This legal proposition that the legal corporator cannot be held to be wholly or partly carrying on the business of the corporation is not weakened by the fact that the extent of his interest in it entitles him to exercise a greater or less control over the manner in which that business is carried on. Such control is inseparable from his position as a corporator and is a wholly different thing both in fact and in law from carrying on the business himself. .. The control of individual corporators is something wholly different from the management of the business itself. Now, is this principle less true when the holding of the individual corporator is so large that he is able to override the wishes of the other corporators in matters relating to the control of the business of the company. The extent but not the nature of his power is changed by the magnitude of his holding." 76. The position of law which has consistently held the field for over a hundred years in the U.K. and for well over five decades in India, is that the business of a corporation is not the business of its shareholders. The unde....
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....oreign source so as to be eligible for a foreign tax credit. The source principle of taxation is also used to refer to the category of income from which a particular item of income originates. The source principle of taxation is a principle for allocating taxing jurisdiction over income, according to which a country may tax income having its source in that country, regardless of the residence of the tax payer.[IBFD International Tax Glossary revised 6th edition, Ed. Julie Rogers Glabush pp 294, 394.] Nations recognize that both the country of residence and the country of source have a valid claim to tax income. Explaining this, Professor Michael J. Graetz of the Yale Law School in his Foundations of International Income Taxation notes that in contrast, a nation that is neither the country of source, or of residence or citizenship, is generally not recognized as having a right to tax. [Michael J. Graetz, Professor of Law, Yale Law School: Foundations of International Income Taxation (Foundation Press 2003).] If both, the resident and source country exercised their right to tax simultaneously, this is liable to result in double tax which is generally regarded as being unfair bec....
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....income as is reasonably attributable to the operations carried out in India. Clause (b) stipulates that in the case of a non-resident, no income shall be deemed to accrue or arise in India from operations confined to the purchase of goods within the country for the purpose of export. Explanation (2) declares that for the removal of doubts that "business connection" shall include any business activity carried out through a person who, acting on behalf of the non-resident, "(a) has and habitually exercises in India, an authority to conclude contracts on behalf of the non-resident, unless his activities are limited to the purchase of goods or merchandise for the non-resident; or (b) has no such authority, but habitually maintains in India a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the non-resident; or (c) habitually secures orders in India, mainly or wholly for the non-resident or for that non-resident and other non-residents controlling, controlled by, or subject to the same common control, as that non-resident:" Under the proviso, however, a business activity carried out through a broker,....
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....tly or indirectly: (i) Through or from any business connection in India; (ii) Through or from any property in India; (iii) Through or from any asset or source of income in India; or (iv) Through the transfer of a capital asset situated in India. In each of these four categories, the law has postulated the existence of a nexus with India which invokes taxing jurisdiction. The nexus is provided in the case of the first category from a business connection in India; in the second, by the situs of the property in India; in the third, from any asset or source of income in India; and in the fourth, by the situs of the capital asset which is transferred, in India. Parliament has been careful to ensure that even while adopting a deeming fiction in defining incomes which are deemed to accrue or arise in India that there must exist a nexus with India upon which the jurisdiction to tax is founded. Apportionment : 82. In certain instances which are known to tax legislation, a need for apportioning income arises when the source rule applies and the income can be taxed in more than one jurisdiction. Judicial precedent emanating from the Supreme Court and the High Courts has analysed si....
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....as to where income has accrued has to be determined on the facts of each case. The income may accrue or arise at the place of the source or elsewhere. When the manufacturing portion of the activity of the assessee was in one province and the sale in another, the whole of the profits would not necessarily be construed as arising from the sale though they may be received from the sale of the product. The profits could be apportioned between manufacturing and trading activities, particularly when the assessee carried on business of a manufacturer and trader together. Under Section 42 of the Income Tax Act, 1922, an apportionment could be carried out for ascertaining the profits of a business, a part only of whose operations were carried out in British India where such part could be regarded either as "a business connection in British India" or "a source of income in British India". The result was that the profits received at Bombay from the sale of oil manufactured at Raichur were liable to be apportioned under sub-Section (3) between the two operations of manufacture and sale and only such portion of the profits as was reasonably attributable to the sale could be deemed to accrue or ....
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....see's books. The case of the assessee that the silver had been sold to the partners was found not to be genuine and the finding was that the silver still formed a part of the assessee's stockintrade. In the assessment, a sum representing the excess arising from the valuation of the silver bars at the market rate at which the rest of the closing stock at Calcatta was valued was included. Affirming the finding that the aforesaid value was in law, assessable to tax, the Supreme Court held that it was a misconception to presume that any profit arises out of the valuation of closing stock and the situs of its arising or accrual is where the valuation is made. The valuation of the unsold stock at the close of an accounting period was held to be a necessary part of determining the trading results and was not the "source" of such profits. The Supreme Court held that the place where the valuation was made could not be regarded as the situs of accrual and observed that "the source of profits and gains of a business is indubitably and the place of their accrual is where the business is carried on". The judgment is, therefore, a precedent for the proposition that the place of the accru....
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....irways Ltd. [256 ITR 84] Quantas which is a non-resident incorporated in Australia carried on a worldwide air transport business and sold aircraft which were its capital assets. The sales were effected outside India. The question before the Delhi High Court was as to whether the sale of such capital assets was income proportionately assessable in terms of the provisions of the Act. Both the Commissioner of Appeals and the Tribunal had disapproved the view of the Assessing Officer that the profits arising out of the sale of a capital asset would be income at the hands of the assessee. The Delhi High Court held that while capital gains may be income, that would have been so if the transaction has taken place either in India or through or from any property in India or from any asset or source of income from India or through the transfer of a capital asset situated in India. The assessee only had some part of its business operation in India. Its capital assets has nothing to do with the business connection in India and the words "business connection" for the purposes of Sections 5 and 9 are confined to profits arising out of business. The Delhi High Court relied upon the judgment of th....
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....g jurisdiction. 94. Shares constitute capital assets and are recognized to be so in transnational jurisdictions. Dicey, Morris and Collins in their seminal work on The Conflict of Laws, [Fourteenth Edition, under the general editorship of Sir Lawrence Collins, Sweet & Maxwell 2006 Edition, Vol.2 pages 11256] explain the situs of shares thus: "(7) Shares in companies ... the basic principle here is that shares are situate in the country where, under the law of the country in which the company was incorporated, they can be effectively dealt with as between the owner for the time being and the company. The law of the place of incorporation of the company decides how shares in the company may be transferred. If they may be transferred only by registration on a particular register, they will be regarded as situate at the place where the register is kept." The reason for this, note the authors, is that shares as an interest in a company are subject to the law of the place of incorporation of the company, which governs all matters concerning the constitution of the company. 95. As far back as in 1924, the Privy Council in Brassard vs. Smith, [(1925) AC 371] rec....
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.... contains legislation in the nature of a look-through provision under which the holding of an indirect real property interest implicates the capital gains tax regime. Canadian legislation contains provisions for the imposition of capital gains tax on the disposition of taxable Canadian property. Look-through provisions have been enacted to bring within the ambit of the taxing power situations involving the holding of a specified proportion of assets or shares in real property or resource property. Legislation in the U.S. also provides rules with respect to the investment of a foreign person in real property and provides that the gain on the disposition of a United State Real Property Interest (USRPI) would be subject to tax. Such an interest is defined as an interest in real property located in the U.S. and any interest in a domestic corporation which is a real property holding corporation. In the case of income in the form of capital gains on the disposal of assets situated within a territory, some countries do not tax nonresidents on such gains at all. This is the position in the United Kingdom which does not tax nonresidents on capital gains, even gains on the sale of U.K. land.....
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....ly from immovable property situated in the other Contracting State may be taxed in that other State. 5. Gains from the alienation of any property, other than that referred to in paragraphs 1, 2, 3 and 4, shall be taxable only in the Contracting State of which the alienator is a resident." The OECD Model is illustrative of the manner in which a value driven deeming nexus may be created by legislation. Thus, capital gains derived from an alienation of shares which derives more than fifty per cent of their value from immovable property situated in an another Contracting State may be taxed in that State. Hence, where the underlying asset is land situated in the source State and where a transfer of shares in a foreign company or other entity owning the land results in an effective transfer of ownership of the land the source State may by legislation impose the tax. 100. Broadly speaking, source rules limit themselves to the taxation of capital gains arising on property situated within the taxing jurisdiction. The OECD model indicates an attempt to initiate provisions which would look behind corporate structures particularly where the ownership of shares represents an....
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....rseas company from one non-resident to another. The application was, however, submitted in order to enable the FIPB to note the revised position following the completion of the overseas transaction. In addition, since as a result of the overseas transaction VIH - BV would acquire an indirect interest in HEL, a company competing in the same field with Bharti Airtel the provisions of Press Note 1 were attracted. On 9 February 2007 Bharti Airtel had furnished its consent to the indirect acquisition of shares by VIH BV in HEL. FIPB was requested to take note of the overseas transaction and additionally to give its approval under Press Note 1. 103. Upon receipt of the application, the Government of India in the FIPB unit of the Ministry of Finance addressed a letter on 28 February 2007 to HEL seeking details of the direct and indirect foreign holding in HEL and details of Indian companies together with their stake in HEL. The Government also sought a clarification as to which entity had the beneficial ownership of stakes held in HEL by the entities of Shri Asim Ghosh and Shri Analjit Singh viz. Indusind Telecom Network Private Limited and Telecom Investments India Private Limited tog....
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.... indirect FDI held by HTIL was 51.96%. The difference between 61.88% disclosed to the SEC in the U.S. and 51.96% reported in India was stated to be due to different accounting standards applied in the two jurisdictions. HEL furnished a clarification to the FIPB on 14 March 2007. VIH - BV in a letter addressed to the FIPB on 14 March 2007 clarified that in addition to obtaining a controlling interest of 52% in HEL as a result of the acquisition of the CGP share, HEL's existing Indian partners Asim Ghosh and Analjit Singh and IDFC, who between them held 15% interest in HEL had agreed to retain their shareholding. VIH BV would be entitled subsequently, directly and indirectly, to acquire shares in TII and Omega if permitted under Indian regulatory requirements including the maximum limitation prescribed on foreign direct investment in the telecommunications sector. If and when VIH BV was able to acquire these shares, it would own a 67% interest in HEL. 106. On 19 March 2007 FIPB sought a clarification from VIH BV of the circumstances in which it had agreed to pay a consideration of US $ 11.08 billion for acquiring 67% of HEL when the actual acquisition was only of 51.96% a....
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....be an acquisition of the shares of an Indian company upon which capital gains would be liable to be taxed under Indian tax legislation. Section 195 of the Income Tax Act 1961 108. Section 195 postulates that any person responsible for paying to a nonresident, not being a foreign company, or to a foreign company any interest or any other sum chargeable under the provisions of the Act ( not being income chargeable under the head 'salaries') shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or by draft or by any other mode whichever is earlier, deduct income tax thereon at the rates in force. Under sub section (2), where a person responsible for paying any such sum chargeable under the Act to a non-resident considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application to the Assessing Officer to determine the appropriate proportion of such sum so chargeable. Upon a determination by the Assessing Officer tax is liable to be deducted only on that proportion of the sum which is so chargeable. Under sub section (3) any per....
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....ntract or otherwise. The second requirement is that the interest or the other sum must be chargeable under the provisions of the Act other than under the head of 'salaries'. Chargeability under the Act is mandated before the obligation to deduct arises. If these requirements are met, income tax thereon has to be deducted at the rates in force "at the time of credit of such income to the account of the payee" or at the time of payment, whichever is earlier. 111. In Transmission Corporation of A.P. Limited V/s. Commissioner of Income Tax [(1999) 239 ITR 587 (S.C.)], the State Electricity Board made certain payments to a non-resident against the purchase of machinery and equipment and against work executed by the non-resident in India of erecting and commissioning the machinery and equipment. The question was whether for these payments, the Board was under an obligation to deduct tax at source under Section 195. The question before the High Court was whether the Board was liable to deduct income tax under Section 195 in respect of payments made to the non-resident and if so whether the tax deductible was liable to be determined on the gross sum paid to the non-res....
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....ble outside India by an undertaking engaged in the business of ship breaking in respect of the purchase of a ship from outside India would be deemed to be interest payable on a debt incurred in a foreign country in respect of the purchase outside India. On reading Explanation 2, it was clear that usance interest is exempt from the payment of income-tax, if paid in respect of ship breaking activity. The Supreme Court held that "the assessee was not bound to deduct tax at source once Explanation 2 to Section 10(15)(iv)(c) stood inserted as TDS arises only if the tax is assessable in India". Since tax was not assessable in India, there was no question of TDS being deducted by the assessee. 113. In a subsequent decision in Commissioner of Income Tax V/s. Eli Lilly and Company (India) Private Limited [(1009) 15 SCC 1], the assessee had seconded expatriates to a joint venture in India. The assessee was a joint venture company and the appointment of the expatriates was routed through a Board comprising of the Indian partner. Only a part of the aggregate remuneration was paid in India by the tax deductor assessee. No work was performed by the employees for the foreign company. The As....
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....onnection or nexus with his rendition of service in India then such payment would constitute income which is deemed to accrue or arise to the recipient in India as salary earned in India in terms of Section 9(1)(ii). Section 9, held the Supreme Court, was a typical example of a combination of a machinery provision which also provides for chargeability. The Court held that the 1961 Act has extraterritorial operations in respect of subject-matters and subjects which is permissible under Article 245 of the Constitution and the provisions are enforceable within the area where the Act extends through the machinery provided under it. If a particular income falls outside Section 4(1), the Supreme Court held that TDS provisions would not set in. The conclusion which was arrived at by the Supreme Court was as follows : "88 .. Firstly, it cannot be stated as a broad proposition that the TDS provisions which are in the nature of machinery provisions to enable collection and recovery of tax are independent of the charging provisions which determine the assessability in the hands of the assessee employee. Secondly, whether the home salary payment made by the foreign comp....
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....ould be deemed to have arisen or accrued in India would have to be determined in the light of the terms of the contract. The receipt of 85% of the catch being in India, the Supreme Court observed that this being the first receipt in the eye of law would be chargeable to tax in India. The income earned by the non-resident was in substance, a receipt for value in India and was held to be chargeable to tax under Section 5(2). The Supreme Court distinguished its earlier judgments in C.I.T. vs. Toshoku Ltd. [ (1980) 125 ITR 525.] and in Ishikawajima Harima Heavy Industries Ltd. v. Director of Income Tax [(2007) 288 ITR 408.]. In Toshoku a non-resident assessee had acted as selling agent outside India and did not carry on business operations in the taxable territory. The commission received by the non-resident for service rendered outside India was held not to have accrued or arisen in India and the mere making of a book entry by the statutory agent was held not to amount to a receipt in India. Ishikawajima, the Supreme Court noted, was one where the entire transaction had been completed on high seas and the profits of sale did not arise in India. In contrast, in the case at hand, the Su....
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....educt PAYE tax payable under Schedule E from wages and salaries paid to the employees, who worked in the U.K. sector of the North Sea. The Court of Appeal had held that although Section 204 was general, Parliament could not have intended to cast on a foreigner who was not resident of the United Kingdom the role of tax collector for the Revenue and Section 204 was to be presumed not to have extraterritorial effect. The House of Lords allowed the Appeal and reversed the decision of the Court of Appeal. Lord Scarman observed that the liability to tax under the Act of 1970 depends on the location of the source from which the taxable income is derived or the residence of the person whose income is to be taxed. If either the source of income or the residence of the owner of the income is in the United Kingdom, the income is liable to tax. Section 204 imposes the PAYE system of tax collection in respect of any income assessable under Schedule E and contains no extraterritorial limitation on the extent of the obligation which it imposes. The only limitations were that : (i) Residence is not a necessary condition of tax liability if there be otherwise a sufficient connection between the sou....
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....rading presence in the United Kingdom was held to suffice in order to attract the liability to deduct tax. On facts, it was held that the trading presence was made out. For the purposes of Corporation Tax, Oceanic carried on a trade in the United Kingdom which included its operations in the United Kingdom sector of the North Sea. For the purposes of this trade it employed a workforce in that sector, whose earnings were assessable to British income tax. Finally, Oceanic had an address for service in the United Kingdom. For these reasons, Lord Scarman concluded that Oceanic by its trading operations within the United Kingdom and in the United Kingdom sector of the North Sea had subjected itself to the liability to deduct tax in respect of those emoluments of its employees which were chargeable to British income tax. 118. In a subsequent decision in Agassi V/s. Robinson (Inspector of Taxes) [(2006) 1 W.L.R. 1380], the House of Lords revisited its earlier decision in Oceanic. Agassi, a well known professional tennis player was neither resident nor domiciled in the United Kingdom and in the tax year relevant to the Appeal, he had participated in a tennis tournament in ....
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....e taxed. If either the source of income or the residence of the owner of the income is in the United Kingdom, the income is liable to tax; (ii) If there exists a sufficient connection between the source of the income, profit or gain and the United Kingdom, residence is not a necessary condition of tax liability; (iii) The broad general principle is that unless the contrary is expressly enacted or plainly implied, United Kingdom legislation applies to British subjects or to foreigners who by coming to United Kingdom, whether for a short or long period of time, have made themselves subject to British jurisdiction; (iv) The principle set out in (iii) above is only a rule of construction and contemplates that a mere presence within the jurisdiction would be sufficient to attract the application of British legislation; (v) Fiscal legislation is drafted in the knowledge that it is a practise of nations not to enforce fiscal legislation of other nations but it does not necessarily follow that Parliament intended any territorial limitation other than that imposed by such unenforceability; (vi) Where an obligation for the deduction of tax by a payer ....
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....ions. Hence, those provisions are not independent of the charging provisions which determine assessability to tax; (vii) Whether a payment made by a foreign company in foreign currency abroad can be deemed to accrue or arise in India, would depend upon an examination of the facts and circumstances of each case. In Eli Lily the payment made abroad by the foreign company was for the rendition of service in India and no work was found to have been performed for the foreign company. Such a payment was held to fall within the ambit of Section 192(1) read with Section 9(1)(ii). The Indian company was liable to deduct tax on the aggregate salary received by the expatriates including payments made by the foreign company; (viii) Parliament, while imposing a liability to deduct tax has designedly imposed it on a person responsible for paying interest or any other sum to a non resident. Parliament has not restricted the obligation to deduct tax on a resident and the Court will not imply a restriction not imposed by legislation. Section 195 embodies a machinery that would render tax collection effective and must be construed to effectuate the charge of tax. There is no limitation of e....
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....mmunications operation, comprising Hutchison Essar Limited (now known as "Vodafone Essar Limited') ("Hutchison Essar") and its subsidiaries to Vodafone International Holdings B.V. ("Vodafone"), a wholly owned subsidiary of Vodafone Group Plc, for a cash consideration of approximately US$ 11.1 billion (approximately HK$ 86.6 billion)(the "Transaction"). Accordingly, the results of the Group's Indian mobile telecommunications operations were presented as discontinued operations in accordance with HKFRS 5 "Noncurrent assets held for sale and discontinued operations". The presentation of comparative information in respect of the six months ended 30 June 2006 which was previously reported in the 2006 interim accounts has been amended to conform with the requirements of HKFRS 5. Subsequently, Essar Teleholdings Limited ("ETH"), a shareholder of Hutchison Essar, and certain affiliates (collectively Essar") asserted various rights in relation to the Transaction and threatened to commence proceedings in the Indian courts in order to enforce those alleged rights, including by preventing completion of the Transaction. On 15 March 2007, the company entered into a conditional s....
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....s subsidiaries all our interests in India". The report refers to the transaction of 11 February 2007 and reports "the results pertaining to the India mobile telecommunications operations .. presented as discontinued operations" in accordance with the Hong Kong Financial Reporting Standard (HKFRS). HKFRS adopts the classification "held for sale" and introduced a concept of the "disposal group", being a group of assets to be disposed of by sale or otherwise, together as a group in a single transaction and liabilities directly associated with those assets that would be transferred in the transaction. The terms which are defined therein included "discontinued operations" as a component of an entity that either has been disposed of or is classified as held for sale and (a) representing a separate major line of business or geographical area of operations, (b) as part of a single coordinated plan to dispose of a separate major line of business or geographical area of operations, or (c) as a subsidiary acquired exclusively with a view to resale. The expression "disposal group" includes goodwill acquired in a business combination if the cash generating unit to which goodwill has b....
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....value 16,922.9 66.9848% of Hutch equity value 11,335.8 Less: Holdco net debt (628.0) Less: Intercompany loans (1,084.0) Equity value of HTIL's 100% stake in CGP 9,623.8 Add: Intercompany Loans 1,084.0 Consideration to HTIL for HTIL's interest 10,707.8 The equity value of HTIL's 100% stake in CGP was computed on the basis of HELs enterprise value of US $ 18,250 million and by computing 66.9848% of equity value. The entire value that was ascribed to HTIL's stake in CGP was computed only on the basis of the enterprise value of HEL. 125. Now it is in this background, that it would be necessary to consider and analyse the documents on the record: (i) Term Sheet agreement 5 July 2003: On 5 July 2003, a Term sheet agreement was entered into between HTIL, Essar Teleholdings Ltd. and Usha Martin Telematics Ltd. The document contemplated that the operating companies would be consolidated by transferring all their shares to an Indian holding company, Holdco. The holding company became HMTL and thereafter HEL. The Term sheet postulated that a shareholders' agreement would be entered into for Holdco which would inclu....
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....group company). The obligation under Clause 2 was subject to the conditions prescribed in Clause 4.1, Subclause (a) of which required "all requisite consents of the FIPB to the sale and purchase of the share having been obtained". VIH BV was required to use all reasonable endeavours including communications with the FIPB to ensure satisfaction of this condition and by the third business day following the agreement was required to submit an application to the FIPB for Press Note 1 consent. Hence, the transaction was subject to the consent and approval of FIPB. Fulfillment of the conditions set out in Clause 4.1 preceded the vesting of rights and obligations under the contract. The purchaser was entitled to waive the condition set out in Clause 4.1(a). Clause 4.3(c) stipulated that if FIPB approval was not obtained, HTIL could at its sole discretion terminate the agreement and parties would have no claim against each other. Under Clause 5.2 VIH BV was obliged to make an offer to Essar Teleholdings Limited for the acquisition of its entire shareholding in the company at a price which valued its interest in the company on the same basis as the interest of the vendor. The tag along righ....
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....ated that for the purpose of assessing damages suffered by VIH BV for any breach of the agreement, the agreement shall be treated as requiring in HTIL to procure the delivery of 66.9848 % of the issued share capital of HEL to the purchaser and the vendor will be deemed to have transferred 66.9848 % of the issued share capital to the purchaser on completion. Clause 10.4 envisaged that HTIL undertook to facilitate the procuring of a replacement of the Oracle licence for the relevant group companies. Clause 14.1 incorporated a noncompete agreement whereby HITL was restrained directly or indirectly from carrying on, engaging in or being economically interested in within India any business carried on in competition with the business now carried on by HEL or its subsidiaries. By the noncompete agreement HTIL and all its affiliates were restrained from carrying on telecom activity in India. Significantly, the restriction relates to the business which was being carried on in India by HEL, the control over which was transferred by the SPA from HTIL to VIH BV. The diverse clauses of the SPA are indicative of the fact that parties were conscious of the composite nature of the transaction a....
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....ses restrictions on the transfer of ownership of shares and inter alia provided that no share could be transferred other than pursuant to the provisions of the term sheet or put option agreements. Clause 6 created a right of first refusal. Under Clause 7.1 a change of control in each group would entitle the other to require a sale of the shareholders' interest. By Clause 8 Vodafone granted to the Essar group tag along rights in respect of the shareholding of the Essar group . Under Clause 10 certain decisions were regarded as reserved so long as Vodafone continued to hold directly or indirectly at least 50% of the equity of the issued share capital of the company. Under Clause 16 the primary brand under which the company would trade was to be the Vodafone brand. Under Clause 22 Vodafone agreed not to compete with the business of VEL or to enter into any telecommunications business in India. Clause 28.7 provided that the term sheet would be governed by and in accordance with the laws of India. By the Term sheet agreement of 24 August 2007, VIH BV as successor in interest of HTIL spelt out how the Indian company is to be operated and the rights and obligations of the sharehold....
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....ce Agreement contains a transitional arrangement, for a limited duration, under which a nontransferable royalty free right was given to VIH - BV as licensee to use the trademarks and other intellectual property rights authorized by the licensor. As a matter of fact, after completion of the transaction VIH BV in conformity with its obligation under Clause 13(b) of the SPA took steps for the introduction of brand Vodafone into the Indian market and a trademark licence agreement was entered into on 19 December 2008 for the introduction of brand Vodafone into India by VIH BV. The Brand Licence had provided for a transitional arrangement till the Vodafone brand was introduced into India. (vii) Loan Assignment Agreements The structure at the time when the SPA was executed was that the share of CGP which was owned by HTI BVI was to be sold. However, loans had been advanced by a direct wholly owned subsidiary of HTIL. These loans owed by Array to an HTIL subsidiary would now be repayable to VIH - BV. Accordingly, loan assignment agreements were entered into on 8 May 2007. 126. Now at this stage, it would be necessary to advert to the admitted position as it emerges from the disclosur....
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....um, use and rights to the Hutch brand in India and a noncompete agreement with HTIL. We did not, in reaching this price, put an individual price on each of these components. Rather, they were viewed as the package based on which we should make our offer to HTIL. Our approach was to look at the total package of assets, liabilities and other intangible factors represented by the ownership of CGP and to assess the total value." 128. Now at this stage, it would be material to advert to the position of the Analjit Singh and Asim Ghosh companies, taking as the basis HTIL's letter dated 9 April 2007 to the FIPB. Analjit Singh together with his wife held a 100% stake in Scorpio Beverages, an Indian company which in turn held a 100 % stake in MV Health Care Services (an Indian company). The latter held a 100 % stake in ND Callus which was also an Indian Company. Asim Ghosh held a 100 % stake in Gold Spot, an Indian company. Gold Spot in turn held 100 % in Plustech, also an Indian company which in turn held a 100 % stake in Centrino, an Indian company. TII is an Indian company of which 37.25% of the total share holding was held by CGP India Investments Limited, a Ma....
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....ding of 45.79 %. Omega held 5.11 % of the share holding of HEL. In June 2006 the Hinduja group and Sumitomo of Japan decided to sell their interest in HEL by disposing of all their interest in Omega. HTIL arrived at an agreement with the Hinduja group for an additional sale and purchase agreement under which HTIL purchased the foreign component of 45.79 % of Omega and HTIL would procure a third party to acquire the Indian stake in Omega. The Hinduja group sold 54.21 % of the Indian share holding in Omega to a joint venture company promoted by the IDFC group. HTIL provided a guarantee for financing. HTIL was in turn given future rights over the Omega interests acquired by the IDFC group in consideration of the support extended by HTIL for financing their acquisition. Put and call options were contractually created under framework agreements under which inter alia the HTIL group was entitled to call upon the IDFC group to sell their share holdings in their investment vehicle (SMMS) to the HTIL group. 131. The facts which have been disclosed before the Court support the contention of the Additional Solicitor general that the transaction between HTIL and VIH BV took into considerati....
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.... being transferred from HTIL to VIH BV was the controlling interest in HEL. HTIL had through its investments in HEL carried on operations in India which HTIL in its annual report of 2007 represented to be the Indian mobile telecommunication operations. The transaction between HTIL and VIH BV was structured so as to achieve the object of discontinuing the operations of HTIL in relation to the Indian mobile telecommunication operations by transferring the rights and entitlements of HTIL to VIH BV. HEL was at all times intended to be the target company and a transfer of the controlling interest in HEL was the purpose which was achieved by the transaction. Ernst and Young who carried out a due diligence of the telecommunications business carried on by HEL and its subsidiaries have made the following disclosure in its report : "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 abo....
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....of Double Taxation between India and Mauritius. The crux of the submission is that the entire transaction in the case is subsumed in the transfer of a share of an upstream overseas company which exercised control over Mauritian companies. As we have noted earlier, it is simplistic to assume that all that the transaction involved was the transfer of one share of an upstream overseas company which was in a position to exercise control over a Mauritian company. The transaction between VIH BV and HTIL was a composite transaction which covered a complex web of structures and arrangements, not referable to the transfer of one share of an upstream overseas company alone. The transfer of that one share alone would not have been sufficient to consummate the transaction. The transaction documents are adequate in themselves to establish the untenability of the Petitioner's submissions. 136. The submission of VIH BV that the transaction involves merely a sale of a share of a foreign company from one non-resident company to another cannot be accepted. The edifice of the submission has been built around the theory that the share of CGP, a company situated in the Cayman Islands was a capit....
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....rect interest in HEL. 139. The manner in which the consideration should be apportioned is not something which can be determined at this stage. Apportionment lies within the jurisdiction of the Assessing Officer during the course of the assessment proceedings. Undoubtedly it would be for the Assessing Officer to apportion the income which has resulted to HTIL between that which has accrued or arisen or what is deemed to have accrued or arisen as a result of a nexus within the Indian taxing jurisdiction and that which lies outside. Such an enquiry would lie outside the realm of the present proceedings. But once this Court comes to the conclusion that the transaction between HTIL and VIH BV had a sufficient nexus with Indian fiscal jurisdiction, the issue of jurisdiction would have to be answered by holding that the Indian tax authorities acted within their jurisdiction in issuing a notice to show cause to the Petitioner for not deducting tax at source. 140. In assessing the true nature and character of a transaction, the label which parties may ascribe to the transaction is not determinative of its character. The nature of the transaction has to be ascertained from the covenant....
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....y include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man. (3) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear. But this is not the occasion on which to explore them. (4) The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars' the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable....
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....rom which the profits or gains have generated or have accrued or arisen to the seller. The income accrued and arose and was derived as a consequence of the divestment of HTIL's interest in India. If there was no divestment or relinquishment of its interest in India, there was no occasion for the income to arise. The real taxable event is the divestment of HTIL's interests which comprises in itself various facets or components which include a transfer of interests in different group entities. 142. That leads to the question as to the obligation to deduct tax under Section 195. While construing the provisions of Section 18(3A) and Section 42 of the Indian Income Tax Act, 1922 in Agarwal Chambers of Commerce Ltd. vs. Ganpat Rai Hira Lal, [(1958) 33 ITR 245] the Supreme Court held thus: "Those persons who are bound under the Act to make deduction at the time of payment of any income, profits or gains are not concerned with the ultimate results of the assessment.. The scheme of the Act is that deductions are required to be made out of "salaries", "interest on securities" and other heads of "income, profits and gains" and adjustments are made final....
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....g which is required to be done by them is to file an application for determination by the Assessing Officer that such sum would not be chargeable to tax in the case of the recipient, or for determination of the appropriate proportion of such sum so chargeable, or for grant of certificate authorising the recipient to receive the amount without deduction of tax, or deduction of income tax at any lower rates or no deduction. On such determination, tax at the appropriate rate could be deducted at the source. If no such application is filed, income tax on such sum is to be deducted and it is the statutory obligation of the person responsible for paying such "sum" to deduct tax thereon before making payment. He has to discharge the obligation of tax deduction at source." 143. The same view was taken by Hon'ble Shri Justice S.H. Kapadia (as the Learned Chief Justice then was) when His Lordship spoke for a Division Bench of this Court in Commissioner of Income Tax vs. Tata Engineering and Locomotive Co.Ltd. [(2000) 245 ITR 823] The Division Bench observed that the provision under Section 195 is only for a tentative deduction of income subject to regular assessment and the right....
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....ture which passes a law having extraterritorial operation may find that what it has enacted cannot be directly enforced, but the act is not invalid on that account, and the courts of its country must enforce the law with the machinery available to them." In other words, while the enforcement of the law cannot be contemplated in a foreign State, it can, nonetheless, be enforced by the courts of the enacting State to the degree that is permissible with the machinery available to them. They will not be regarded by such courts as invalid on the ground of such extraterritoriality." Chargeability and enforceability are distinct legal conceptions. A mere difficulty in compliance or in enforcement is not a ground to avoid observance. In the present case, the transaction in question had a significant nexus with India. The essence of the transaction was a change in the controlling interest in HEL which constituted a source of income in India. The transaction between the parties covered within its sweep, diverse rights and entitlements. The Petitioner by the diverse agreements that it entered into has a nexus with Indian jurisdiction. In these circumstances, the proceedings which ....