TaxTMI 
TaxTMI 
2012 (1) TMI 52
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 under....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... 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 struct....
X X X X Extracts X X X X
X X X X Extracts X X X X
....panies 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 shareholding....
X X X X Extracts X X X X
X X X X Extracts X X X X
....evenue 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 licences 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rding 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 transacti....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... (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. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....dings 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 Union of India v. Azadi Bachao Andolan (2004) 10 SCC 1 needs to be overruled insofar as it departs from McDowell and Co. Ltd. v. CTO (1985) 3 SCC 230 principle for the following : i) Para 46 of McDowell judgment has been missed which reads as under: "on this aspect Chinnappa Reddy, J. has proposed a separate opinion with which we agree". [i.e. Westminster principle is dead]. ii) That, Azadi Bachao failed to read paras 41-45 and 46 of McDowell in entirety. If so read, the only conclusion one could draw is that four learned judges speaking through Misra, J. agreed with the observations of Chinnappa Reddy, J. as to how in certain circumstances tax avoidance should be brought within the tax net. iii) That, subsequent to McDowell, ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....llity. 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 defer....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ation 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 regar....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ng 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 colourable or artificial device. The stronger the evidence of a device, the stronger the corporate business purpose must exist to overcome the evidence of a device. Whether Section 9 is a "look through" provision as submitted on behalf of the Revenue? 69. According to the Revenue, if its primary argument (namely, that HTIL has, under the SPA, directly extinguished its property rights in HEL and its subsidiaries) fails, even then in any event, income from the sale of CGP share would nonetheless fall within Section 9 of the Income Tax Act, 1961 as that Section provides for a "look through". In this connection, it was submitted that the word "th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ists 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ction 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 offsh....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t 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 to....
X X X X Extracts X X X X
X X X X Extracts X X X X
....). 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 vs. legal control, legal rights vs. practical rights, etc. 74. Be that as it may, did HTIL possess a legal right to appoint directors onto the board of HEL and as such had some "property right" in HEL? If not, the question of such a right getting "extinguished" will not arise. A legal right is an enforceable right. Enforceable by a ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f 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 SP....
X X X X Extracts X X X X
X X X X Extracts X X X X
....L. 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 co....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 Hutchi....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 ar....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ing 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 o....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 82. Before concluding, one more aspect needs to be addressed. It concerns situs 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 situs of the CGP share existed where the "underlying assets are situated", that is to say, India. That, since CGP as an exempted company conducts no business either in the Cayman Islands or elsewhere and since its sole purpose is to hold shares in a subsidiary company situated outside the Cayman Islands, the situs of the CGP share, in the present case, existed "where the underlying assets stood situated" (India). We find no merit in these arguments. At the outset, we do not wish to pronounce authoritatively on the Companies Law of Cayman Islands. Be that as it may, under the Indian Companies Act, 1956, the situs of the shares would be where the company is incorporated and where its shares can be transferred. In the present case, it has been asserted by VIH that the transfer of the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on 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 no....
X X X X Extracts X X X X
X X X X Extracts X X X X
....te 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 therefrom. In the latter case, we have to see the conditions on which the tax becomes payable under the Income Tax Act. Valuation may be a science, not law. In valuation, to....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he 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 alia 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 entitl....
X X X X Extracts X X X X
X X X X Extracts X X X X
....elicitous 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 totalling to 42.34%; CGP India (Ms), which in turn held shares in TII and Omega and which on a pro rata basis (the FDI principle), totalled up to 9.62% in HEL and an indirect control over Hutchison Tele-Services (India) Holdings Ltd. (Ms), which in turn owned shares in GSPL, which held call and put options. Although the High Court ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....eed 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 CIT (Central), Calcutta v. Mugneeram Bangur and Company (Land Deptt.), (1965) 57 ITR 299 (SC)]. 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 IT Act 89. Section 195 casts an obligation on the payer to deduct tax at source ("TAS" for short) from payments made to nonresidents which payments are chargeable to tax. Such payment(s) must have an element of income embedded in it which is chargeable to tax in India. If the sum paid or credited by the payer is not chargeable to tax then no obligation to deduct the tax would arise. Shareholding in companies incorporated outside India (CGP) is property located outside India. Where such shares become sub....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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" under Section 163 of the Act. Section 163 does not relate to deduction of tax. It relates to treatment of a purchaser of an asset as a representative assessee. A conjoint reading of Section 160(1)(i), Section 161(1) and Section 163 of the Act shows that, under given circumstances, certain persons can be treated as "representative assessee" on behalf of non-resident specified in Section 9(1). Th....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... said Offshor 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 Pe....
X X X X Extracts X X X X
X X X X Extracts X X X X
....AD) 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. 3. Merger, Amalgamation, Acquisition, Joint Venture, Takeovers and Slump-sale of assets are few methods of cross-border re-organisations. 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 a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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. 7. 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o 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 thatAgreement, 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. 11. HTIL issued a press release on 22.12.2006 in the HK and NY Stock Exchanges announcing that it had been approached by various potentially interested parties regarding a possible sale of "its equity interest" in HEL in the Telecom Sector in India. HTIL had adopted those measures after procuring all assignments of loans, facilitating FWAs, SHAs, transferring Hutch Branch, transferring Oracle License etc. 12. Vodafone Group Plc. came to know of the possible exit of Hutch from Indian telecom business ....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... (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. 15. 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. 16. Vodafone on 20.02.2007 filed an application with Foreign Investment Promotion Board (FIPB) requesting it to take note of and grant approval under Press note no.1 to the indirect acquisition by Vodafone of 51.96% stake in HEL through an overseas ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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. 19. Vodafone also wrote to FIPB on 14.03.2007 confirming that VIHBV's effective shareholding in HEL would be 51.96% i.e. Vodafone would own 42% direct interest in HEL through its acquisition of 100% of CGP Investments (Holdings) Limited (CGPIL) and through CGPIL Vodafone would also own 37% in TII which in turn owned 20% in HEL and 38% in Omega which in turn owned 5% in HEL. It was pointed out that both TII and Omega were Indian companies and those investments combined would give Vodafone a controlling interest of 52% in HEL. Further, it was pointed out that HTIL's Indian partners AG, AS, IDFC who between them held a 15% interest in HEL on aggre....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... calling for certain information regarding sale of stake of Hutchison group HK in HEL, to Vodafone Group Plc. 23. 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 agreement with Hutch group, value of non-voting, non-convertible preference shares, various loans obligations and entitlement and to acquire further 15% indirect interest in HEL, subject to Indian foreign investment rules, which together equated to about 67% of the economic value of HEL. 24. VIHBVI and Indian continent Investors Limited (ICIL) had entered into an SHA on 21.03.2007 whereby VIHBVI had to sell 106.470.268 share....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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. 28. 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hereby rights and benefits of HTI BVI Finance Limited to receive repayment was assigned in favour 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 favour 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 whereunder HTIL had agreed that out of the total consideration payable in terms of Clause 8.10(b) of the SPA, Vodafone would be entitled to retain US$ 351.8 million by way of HTIL's contribution towards acquisition cost of options i.e., stake of AS & AG. On 08.05.2007 Vodafone paid US$ 10,854,229,859.0....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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. 34. 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. 35. The Income Tax Department on 06.08.2007 issued a notice to VEL under Section 163 of the Income Tax Act to show cause why it should not be treated as a representative assessee of Vodafone. The notice was challenged by VEL in Writ Petition No.1942 of 2007 before the Bombay High Court. The Assistant Director of Income Tax (Intl.) Circle 2(2), Mumbai, issued a show cause notice to Vodafone under Section 201(1) and 201(1A) of the I.T. Act as to why Vodafone should not be treated a assessee-in-default for failure to withhold tax. Vodafone then filed a Writ Petition 2550/2007 before the Bombay High Court for se....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ring 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) ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ointed out that without any express legislation, off-shore transaction cannot be taxed in India. Reference was made to two judgments of the Calcutta High Court Assam Consolidated Tea Estates v. Income Tax Officer "A" Ward (1971) 81 ITR 699 Cal. and C.I.T. West Bengal v. National and Grindlays Bank Ltd. (1969) 72 ITR 121 Cal. 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 under Section 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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. 39. 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 under Section 195 of the Indian Income Tax Act, do not apply to offshore entities making off-shore payments and the said Section could be triggered only if it can be established that the payment under consideration is of a "sum chargeable" under the Income Tax Act (for short IT Act). Senior counsel therefore contended that the findings of the Tax Authorities that pursuant to the transact....
X X X X Extracts X X X X
X X X X Extracts X X X X
....al 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 bei....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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. 45. 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, unfavourable fiscal policies, uncertain political situations, strengthen fiscal loans and its application, threat to its investment, insecurity, weak and time consuming judicial system etc., all can be contributing factors that may drive its exit or restructuring. Clearly, there is a fundamental difference in transnational investment made overseas and domestic investment. Domestic investments are made in the home country and meant to stay as it were, but when the trans-n....
X X X X Extracts X X X X
X X X X Extracts X X X X
....from other assets etc. 48. 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 49. 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 t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ospect thereof. 52. OECD (Organisation 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. 53. 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 centres are utilized for manipulating market, to launder money, to evade tax, to finance terrorism, indulge in corruption etc. All the same, it is stated that OFCs have an important role in the international economy, offering advantages for multi-national companies and individuals for investments and also for legitimate financial planning and risk management.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sidiary 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 & Typewriter Ltd. v. Stanley, (1908-10) All ER Rep 833 at 837). 57. Subsidiary companies are, therefore, the integral part of corporate structure. Activities of the companies over the years have grown enormously of its incorporation and outside and their structures have become more complex. Multi National Companies having large volume of business nationally or internationally will have to depend upon their subsidiary companies in the national and international level for better returns for the investors and for the growth of the company. When a holding company owns all o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 façade concealing true facts. 61. 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 62. hareholders' Agreement ( for short SHA) is essentially a contract between some or all other shareholders in a company, the purpose of which is to confer rights and impose obligations over and above those pro....
X X X X Extracts X X X X
X X X X Extracts X X X X
....CR 720, 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. 65. 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 resoluti....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 counterparty 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. 66. SHA, therefor....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... 70. Rights and obligations flowing from voting rights have been the subject matter of several decisions of this Court. In Chiranjit Lal Chowdhuri v. Union of India (1950) 1 SCR 869 at 909 : AIR 1951 SC 41, 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 Dwarkadas Shrinivas of Bombay v. Sholapur Spinning & Weaving Company (1954) SCR 674 at 726 : AIR 1954 SC 119, this Court noticed the principle laid down in Chiranjit Lal Chowdhuri (supra). 71. Voting arrangements in SHAs or pooling agreements are not "property". Contracts that provide for voting in favour of or against a resolution or acting in support of another shareholder create only "contractual obligations". A contract that creates contractual rights thereby, the owner of the share (and the owner of the right to vote) agrees to vote in a particular manner does not decouple the right to vote from the share and ass....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... assets. 74. 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 terms of 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 75. Lifting the corporate veil doctrine is readily applied in the cases coming within the Company Law , Law of Contract, Law of Taxation. Once the transaction is shown to be fraudulent, sham, circuitous or a device designed to defeat the interests of the shareholders, investors, partie....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s 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: (1) A taxpayer was only to be taxed if the Legislation clearly indicated that this was the case; (2) A taxpayer was entitled to manage his or her affairs so as to reduce tax; (3) 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 (4) 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. 77. In Ramsay (supra) it may be noted, the taxpayer produced a profit that was liable to capital gains tax, but a readymade claim was set up to create an allowable loss that was purchased by the taxpayer with the intention of avoiding the capital gains tax. Basically, the House of Lords, cautioned that the technique of tax avoidance might progress and technically improve and Co....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ly 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 GBP152,000 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 GBP152,000. 80. The High Court and the Court of Appeal ruled that Ramsay principle applied only where steps forming part of the scheme were self-cancelling 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tokes (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. 83. Lord Goff explained the meaning of "unacceptable tax avoidance" in Ensign Tankers and held that unacceptable tax avoidance typically involves the creation of complex artificial structures by which, as though by the wave of a magic wand, the taxpayer conjures out of the air a loss, or a gain, or expenditure, or whatever it may be, which otherwise would....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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. 88. 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 favour of the tax payer and held as follows "driving principle in Ramsay's line of cases continues to involve a general rule of statutory interp....
X X X X Extracts X X X X
X X X X Extracts X X X X
....titution 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. 92. India-Mauritius Treaty was executed on 1.4.1983 and notified on 16.12.1983. Article 13 of the Treaty deals with the taxability of capital gains. Article 13(4) covers the taxability of capital gains arising from the sale/transfer of shares and stipulates that "Gains derived by a resident of a Contracting State f....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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) 95. 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 noncitizens/ residents of Mauritius, or where the beneficial interest is owned by non-citizens/residents of Mauritius, in the event where there is no justification in prohibiting the residents of a third nation from....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ntrolled/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 98. LOB and look through provisions cannot be read into a tax treaty but the question may arise as to whether the TRC is so conclusive that the Tax Department cannot pierce the veil and look at the substance of the transaction. DTAA and Circular No. 789 dated 13.4.2000, in our view, would not preclude the Income Tax Department f....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nsider 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. 101. 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.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....er-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. Art. 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 defence, 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. 106. Facts stated above are food for thought to the legislature and adequate legislative measures have to be taken to plug the loopholes, all the same, a genuine corporate structure set up for purely commercial purpose and indulging in genuine investment be recognize....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 make-believe." 109. 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 Sankarlal Balabhai v. ITO (1975) 100 ITR 97 (Guj.), 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. 110. Justice Chinnappa Reddy starts his concurring judgment in McDowell as follows: "While I entirely agree with my brother Ranganath Mishra, J. in the judgment proposed to be delivered by me, I wish to add a few paragraphs, particularly to supplement what he has said on the "fashionable" topic of tax avoidance." (emphasis supplied) Justice Reddy has, ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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. 116. A five Judges Bench judgment of this Court in Mathuram Agrawal v. State of Madhya Pradesh (1999) 8 SCC 667, 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 r....
X X X X Extracts X X X X
X X X X Extracts X X X X
....IL 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. 121. 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. 122. Self centred 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 creat....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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. 126. Principle of Fiscal nullity was applied by Vinelott, J. in favour 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 preordained series of transactions and there should be steps inserted that have no commercial purpose and the inserted steps are to be disregarded for fi....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Telecom Sector. 129. HTIL had the following controlling interest in HEL before its exit from the Indian Telecom Sector:- 1. HTIL held its direct equity interest in HEL amounting approximately to 42% through eight Mauritius companies. 2. 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. 3. HTIL held in Indian Company Omega Holdings, an Indian Co., 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 subs....
X X X X Extracts X X X X
X X X X Extracts X X X X
....xtent 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 Teleco....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... has its own management personnels. 133. 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 li....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ial and legitimate tax planning, not with the motive of evading tax. 136. 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 vo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nce 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. 140. 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.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he other rights, interests and entitlements continue to remain with Indian Operating Companies and there is nothing to show they stood transferred in law. 145. 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ceivable 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. 147. 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 Limited, CGP and the Purchaser entered into the Deed of Assignment on 08.05.2007 pertaining to the CGP indebtedness. 148. In respect of Array Loan No. 3 i.e. US$ 231,111,427.41, the right that was being assigned was not ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e 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 under Section 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 152. 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.....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 under Section 2(47) of the Income Tax Act and hence, a capital asset. 157. 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 th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ng 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. 160. 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tributable 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." 162. 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 d....
X X X X Extracts X X X X
X X X X Extracts X X X X
....(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. 165. Section 9 on a plain reading would show, it refers to a property that yields an income and that property should have the situs 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 166. 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. 167. 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 off-shore companies and since the sale took place outside I....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o 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 clearly showing an intention to lay the burden and that equitable construction of the words is not permissible [Ormond Investment Co. 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. 171. 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. 172. On transfer of shares of a foreign company to a nonresident off-shore, there ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sing 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 Ishikawajma-Harima Heavy Industries Ltd. v. Director of Income Tax, Mumbai (2007) 3 SCC 481 and CIT v. R.D. Aggarwal (1965) 1 SCR 660. 174. 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 situs of an asset from one country to another. Shifting of situs can be done 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". 175. Capital gains are chargeable under Section 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. 176. Section 9(1)(i), therefore, in our considered opinion, will not apply to the transaction in question or on the righ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....at 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 under Section 163 was validly issued to Vodafone. 180. 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f 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 under Section 200(3), obligation to obtain "tax deduction and collection number" under Section 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 under Section 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 under Section 276B. Therefore, failure to deduct tax at source under Section 195 may attract various penal provisions. 183. 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 gr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ted 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. 186. This Court in CIT v. Eli Lilly and Company (India) P. Ltd. (2009) 15 SCC 1 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 under Section 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
........................J. (K.S. Radhakrishnan) New Delhi January 20, 2012 ------------------------------------------------------------------- Hon'ble the Chief Justice pronounced the judgement on behalf of His Lordship and Hon'ble Mr. Justice Swatanter Kumar, while granting leave, to the following effect "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. No orders are required to be passed on intervention applications Hon'ble Mr. Justice K.S. Radhakrishnan pronounced His Lordship's separate judgement concurring with the judgement delivered ....