Vodafone International Holdings Vs Union of India

be, in reality part of one concern.
Lifting the Corporate Veil doctrine was also applied

i n Juggilal Kampalpat v. Commissioner of Income Tax, U.P.
MANU/SC/0091/1968 : AIR 1969 SC 932 : (1969) 1 SCR 988, wherein this Court
noticed that the Assessee firm sought to avoid tax on the amount of compensation
received for the loss of office by claiming that it was capital gain and it was found
that the termination of the contract of managing agency was a collusive transaction.
Court held that it was a collusive device, practiced by the managed company and the
Assessee firm for the purpose of evading income tax, both at the hands of the payer
and the payee.
168. Lifting the corporate veil doctrine can, therefore, be applied in tax matters even
in the absence of any statutory authorization to that effect. Principle is also being
applied in cases of holding company - subsidiary relationship- where in spite of being
separate legal personalities, if the facts reveal that they indulge in dubious methods
for tax evasion.
(B) Tax Avoidance and Tax Evasion:
Tax avoidance and tax evasion are two expressions which find no definition either in
the Indian Companies Act, 1956 or the Income Tax Act, 1961. But the expressions are
being used in different contexts by our Courts as well as the Courts in England and
various other countries, when a subject is sought to be taxed. One of the earliest
decisions which came up before the House of Lords in England demanding tax on a
transaction by the Crown is Duke of Westminster (supra). In that case, Duke of
Westminster had made an arrangement that he would pay his gardener an annuity, in
which case, a tax deduction could be claimed. Wages of household services were not
deductible expenses in computing the taxable income, therefore, Duke of
Westminster was advised by the tax experts that if such an agreement was employed,
Duke would get tax exemption. Under the Tax Legislation then in force, if it was
shown as gardener's wages, then the wages paid would not be deductible. Inland
Revenue contended that the form of the transaction was not acceptable to it and the
Duke was taxed on the substance of the transaction, which was that payment of
annuity was treated as a payment of salary or wages. Crown's claim of substance
doctrine was, however, rejected by the House of Lords. Lord Tomlin's celebrated
words are quoted below:
Every man is entitled if he can to order his affairs so that the tax attaching
under the appropriate Acts is less than it otherwise would be. If he succeeds
in ordering them so as to secure this result, then, however unappreciative the
Commissioners of Inland Revenue or his fellow taxpayers may be of his
ingenuity, he cannot be compelled to pay an increased tax. This so called
doctrine of 'the substance' seems to me to be nothing more than an attempt
to make a man pay notwithstanding that he has so ordered his affairs that
the amount of tax sought from him is not legally claimable.
Lord Atkin, however, dissented and stated that "the substance of the transaction was
that what was being paid was remuneration."
The principles which have emerged from that judgment are as follows:
(1) A legislation is to receive a strict or literal interpretation;
(2) An arrangement is to be looked at not in by its economic or commercial
substance but by its legal form; and
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(3) An arrangement is effective for tax purposes even if it has no business
purpose and has been entered into to avoid tax.
The House of Lords, during 1980's, it seems, began to attach a "purposive
interpretation approach" and gradually began to give emphasis on "economic
substance doctrine" as a question of statutory interpretation. In a most celebrated
case in Ramsay (supra), the House of Lords considered this question again. That was
a case whereby the taxpayer entered into a circular series of transactions designed to
produce a loss for tax purposes, but which together produced no commercial result.
Viewed that transaction as a whole, the series of transactions was self-cancelling, the
taxpayer was in precisely the same commercial position at the end as at the
beginning of the series of transactions. House of Lords ruled that, notwithstanding
the rule in Duke of Westminster's case, the series of transactions should be
disregarded for tax purposes and the manufactured loss, therefore, was not available
to the taxpayer. Lord Wilberforce opined as follows:
While obliging the court to accept documents or transactions, found to be
genuine, as such, it does not compel the court to look at a document or a
transaction in blinkers, isolated from any context to which it properly
belongs. If it can be seen that a document or transaction was intended to
have effect as part of a nexus or series of transactions, or as an ingredient of
a wider transaction intended as a whole, there is nothing in the doctrine to
prevent it being so regarded; to do so in not to prefer form to substance, or
substance to form. It is the task of the court to ascertain the legal nature of
any transaction to which it is sought to attach a tax or a tax consequence and
if that emerges from a series or combination of transactions intended to
operate as such, it is that series or combination which may be regarded.
(Emphasis supplied)
House of Lords, therefore, made the following important remarks concerning what
action the Court should consider in cases that involve tax avoidance:
(a) A taxpayer was only to be taxed if the Legislation clearly indicated that
this was the case;
(b) A taxpayer was entitled to manage his or her affairs so as to reduce tax;
(c) Even if the purpose or object of a transaction was to avoid tax this did
not invalidate a transaction unless an anti-avoidance provision applied; and
(d) If a document or transaction was genuine and not a sham in the
traditional sense, the Court had to adhere to the form of the transaction
following the Duke Westminster concept.
169. In Ramsay (supra) it may be noted, the taxpayer produced a profit that was
liable to capital gains tax, but a readymade claim was set up to create an allowable
loss that was purchased by the taxpayer with the intention of avoiding the capital
gains tax. Basically, the House of Lords, cautioned that the technique of tax
avoidance might progress and technically improve and Courts are not obliged to be at
a standstill. In other words, the view expressed was that that a subject could be
taxed only if there was a clear intendment and the intendment has to be ascertained
on clear principles and the Courts would not approach the issue on a mere literal
interpretation. Ramsay was, therefore, seen as a new approach to artificial tax

avoidance scheme.
170. Ramsay was followed by the House of Lords in another decision in IRC v.
Burmah Oil Co Ltd. (1982) 54 TC 200. This case was also concerned with a self-
cancelling series of transactions. Lord Diplock, in that case, confirmed the judicial
view that a development of the jurisprudence was taking place, stating that Ramsay
case marked a significant change in the approach adopted by the House of Lords to a
pre-ordained series of transactions. Ramay and Burmah cases, it may be noted, were
against self-cancelling artificial tax schemes which were widespread in England in
1970's. Rather than striking down the self-cancelling transactions, of course, few of
the speeches of Law Lords gave the impression that the tax effectiveness of a scheme
should be judged by reference to its commercial substance rather than its legal form.
On this, of course, there was some conflict with the principle laid down in Duke of
Westminster. Duke of Westminster was concerned with the "single tax avoidance
step". During 1970's, the Courts in England had to deal with several pre-planned
avoidance schemes containing a number of steps. In fact, earlier in IRC v. Plummer
(1979) 3 All ER 775, Lord Wilberforce commented about a scheme stating that the
same was carried out with "almost military precision" which required the court to
look at the scheme as a whole. The scheme in question was a "circular annuity" plan,
in which a charity made a capital payment to the taxpayer in consideration of his
covenant to make annual payments of income over five years. The House of Lords
held that the scheme was valid. Basically, the Ramsay was dealing with "readymade
schemes".
1 7 1 . The House of Lords, however, had to deal with a non self-cancelling tax
avoidance scheme in Dawson (supra). Dawsons, in that case, held shares in two
operating companies which agreed in principle in September 1971 to sell their entire
shareholding to Wood Bastow Holdings Ltd. Acting on advice, to escape capital gains
tax, Dawsons decided not to sell directly to Wood Bastow, rather arranged to
exchange their shares for shares in an investment company to be incorporated in the
Isle of Man. Greenjacket Investments Ltd. was then incorporated in the Isle of Man on
16.12.1971 and two arrangements were finalized (i) Greenjacket would purchase
Dawsons shares in the operating company for Â£152,000 to be satisfied by the issue
of shares of Greenjacket and (ii) an agreement for Greenjacket to sell the shares in
the operating company to Wood Bastow for Â£152,000.
172. The High Court and the Court of Appeal ruled that Ramsay principle applied
only where steps forming part of the scheme were self-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, although it had a business effect.
1 7 3 . Even though in Dawson, the House of Lords seems to strike down the
transaction by the taxpayer for the purpose of tax avoidance, House of Lords in
Craven (supra) clarified the position further. In that case, the taxpayers exchanged
their shares in a trading company (Q Ltd) for shares in an Isle of Man holding
company (M Ltd), in anticipation of a potential sale or merger of the business.
Taxpayers, in the meanwhile, had abandoned negotiations with one interested party,
and later concluded a sale of Q Ltd's shares with another. M Ltd subsequently loaned

the entire sale proceeds to the taxpayers, who appealed against assessments to
capital gains tax. The House of Lords held in favor of the taxpayers, dismissing the
crown's appeal by a majority of three to two. House of Lords noticed that when the
share exchange took place, there was no certainty that the shares in Q Ltd would be
sold. Lord Oliver, speaking for the majority, opined that Ramsay, Burmah and
Dawson did not produce any legal principle that would nullify any transaction that
has no intention besides tax avoidance and opined as follows:
My Lords, for my part I find myself unable to accept that Dawson either
established or can properly be used to support a general proposition that any
transaction which is effected for avoiding tax on a contemplated subsequent
transaction and is therefore planned, is for that reason, necessarily to be
treated as one with that subsequent transaction and as having no
independent effect.
Craven made it clear that: (1) Strategic tax planning undertaken for months or
possible years before the event (of-sale) in anticipation of which it was effected; (2)
A series of transactions undertaken at the time of disposal/sale, including an
intermediate transaction interposed into having no independent life, could under
Ramsay principle be looked at and treated as a composite whole transaction to which
the fiscal results of the single composite whole are to be applied, i.e. that an
intermediate transfer which was, at the time when it was effected, so closely
interconnected with the ultimate disposition, could properly be described as not, in
itself, a real transaction at all, but merely an element in some different and larger
whole without independent effect.
174. Later, House of Lords in Ensign Tankers (Leasing) Ltd. v. Stokes (1992) 1
AC 655 made a review of the various tax avoidance cases from Floor v. Davis(1978)
2 All ER 1079: (1978) Ch 295 to Craven (supra). In Ensign Tankers, a company
became a partner of a limited partnership that had acquired the right to produce the
film "Escape to Victory". 75% of the cost of making the film was financed by way of a
non-recourse loan from the production company, the company claimed the benefit of
depreciation allowances based upon the full amount of the production cost. The
House of Lords disallowed the claim, but allowed depreciation calculated on 25% of
the cost for which the limited partnership was at risk. House of Lords examined the
transaction as a whole and concluded that the limited partnership had only 'incurred
capital expenditure on the provision of machinery or plant' of 25% and no more.
175. Lord Goff explained the meaning of "unacceptable tax avoidance" in Ensign
Tankers and held that unacceptable tax avoidance typically involves the creation of
complex artificial structures by which, as though by the wave of a magic wand, the
taxpayer conjures out of the air a loss, or a gain, or expenditure, or whatever it may
be, which otherwise would never have existed. This, of course, led to further debate
as to what is "unacceptable tax avoidance" and "acceptable tax avoidance".
1 7 6 . House of Lords, later in Inland Revenue Commissioner v. McGuckian
(1997) BTC 346 said that the substance of a transaction may be considered if it is a
tax avoidance scheme. Lord Steyn observed as follows:
While Lord Tomlin's observations in the Duke of Westminster case [1936]
A.C. 1 still point to a material consideration, namely the general liberty of the
citizen to arrange his financial affairs as he thinks fit, they have ceased to be
canonical as to the consequence of a tax avoidance scheme.

McGuckian was associated with a tax avoidance scheme. The intention of the scheme
was to convert the income from shares by way of dividend to a capital receipt.
Schemes' intention was to make a capital receipt in addition to a tax dividend.
Mc.Guckian had affirmed the fiscal nullity doctrine from the approach of United
Kingdom towards tax penalties which emerged from tax avoidance schemes. The
analysis of the transaction was under the principles laid down in Duke of
Westminster, since the entire transaction was not a tax avoidance scheme.
177. House of Lords in MacNiven v. Westmoreland Investments Limited (2003)
1 AC 311 examined the scope of Ramsay principle approach and held that it was one
of purposive construction. In fact, Ramsay's case and case of Duke of Westminister
were reconciled by Lord Hoffmann in MacNiven. Lord Hoffmann clarified stating as
follows
if the legal position is that tax is imposed by reference to a legally designed
concept, such as stamp duty payable on a document which constitute
conveyance or sale, the court cannot tax a transaction which uses no such
document on the ground that it achieves the same economic effect. On the
other hand, the legal position is that the tax is imposed by reference to a
commercial concept, then to have regard to the business "substance" of the
matter is not to ignore the legal position but to give effect to it.
178. In other words, Lord Hoffmann reiterated that tax statutes must be interpreted
"in a purposive manner to achieve the intention of the Legislature". Ramsay and
Dawson are said to be examples of these fundamental principles.
179. Lord Hoffmann, therefore, stated that when Parliament intended to give a legal
meaning to a statutory term or phrase, then Ramsay approach does not require or
permit an examination of the commercial nature of the transaction, rather, it requires
a consideration of the legal effect of what was done.
180. MacNiven approach has been reaffirmed by the House of Lord in Barclays
Mercantile Business Finance Limited v. Mawson (2005) AC 685 (HL). In
Mawson, BGE, an Irish Company had applied for a pipeline and it sold the pipeline to
(BMBF) taxpayer for Â£ 91.3 Million. BMBF later leased the pipeline back to BGE
which granted a sub-lease onwards to its UK subsidiary. BGE immediately deposited
the sale proceeds as Barclays had no access to it for 31 years. Parties had nothing to
loose with the transaction designed to produce substantial tax deduction in UK and
no other economic consequence of any significance. Revenue denied BMBF's
deduction for depreciation because the series of transactions amounted to a single
composite transaction that did not fall within Section 24(1) of the Capital Cost
Allowance Act, 1990. House of Lords, in a unanimous decision held in favor of the tax
payer and held as follows "driving principle in Ramsay's line of cases continues to
involve a general rule of statutory interpretation and unblinked approach to the
analysis of facts. The ultimate question is whether the relevant statutory provisions,
construed purposively, were intended to apply to a transaction, viewed realistically.
181. On the same day, House of Lords had an occasion to consider the Ramsay
approach in Inland Revenue Commissioner v. Scottish Provident Institution
2004 (1) WLR 3172. The question involved in Scottish Provident Institution was
whether there was "a debt contract for the purpose of Section 150A(1) of the Finance
Act, 1994." House of Lords upheld the Ramsay principle and considered the series of
transaction as a composite transaction and held that the composite transaction

created no entitlement to securities and that there was, thus, no qualifying contract.
The line drawn by House of Lords between Mawson and Scottish Provident Institution
in holding that in one case there was a composite transaction to which statute
applied, while in the other there was not.
182. Lord Hoffmann later in an article "Tax Avoidance" reported in (2005) BTR 197
commented on the judgment in BMBF as follows:
the primacy of the construction of the particular taxing provision and the
illegitimacy of the rules of general application has been reaffirmed by the
recent decision of the House in "BMBF". Indeed, it may be said that this case
has killed off Ramsay doctrine as a special theory of revenue law and
subsumed it within the general theory of the interpretation of statutes.
Above discussion would indicate that a clear-cut distinction between tax avoidance
and tax evasion is still to emerge in England and in the absence of any legislative
guidelines, there bound to be uncertainty, but to say that the principle of Duke of
Westminster has been exorcised in England is too tall a statement and not seen
accepted. House of Lords in McGuckian and MacNiven, it may be noted, has
emphasized that the Ramsay approach as a principle of statutory interpretation rather
than an over-arching anti avoidance doctrine imposed upon tax laws. Ramsay
approach ultimately concerned with the statutory interpretation of a tax avoidance
scheme and the principles laid down in Duke of Westminster, it cannot be said, has
been given a complete go by Ramsay, Dawson or other judgments of the House o f
Lords.
PART-III
INDO-MAURITIUS TREATY - AZADI BACHAO ANDOLAN
183. The Constitution Bench of this Court in McDowell (supra) examined at length
the concept of tax evasion and tax avoidance in the light of the principles laid down
by the House of Lords in several judgments like Duke of Westminster, Ramsay,
Dawson etc. The scope of Indo-Mauritius Double Tax Avoidance Agreement (in short
DTAA)], Circular No. 682 dated 30.3.1994 and Circular No. 789 dated 13.4.2000
issued by CBDT, later came up for consideration before a two Judges Bench of this
Court in Azadi Bachao Andolan. Learned Judges made some observations with regard
to the opinion expressed by Justice Chinnappa Reddy in a Constitution Bench
judgment of this Court in McDowell, which created some confusion with regard to the
understanding of the Constitution Bench judgment, which needs clarification. Let us,
however, first examine the scope of the India-Mauritius Treaty and its follow-up.
184. India-Mauritius Treaty was executed on 1.4.1983 and notified on 16.12.1983.
Article 13 of the Treaty deals with the taxability of capital gains. Article 13(4) covers
the taxability of capital gains arising from the sale/transfer of shares and stipulates
that "Gains derived by a resident of a Contracting State from the alienation of any
property other than those mentioned in paragraphs 1, 2 and 3 of that Article, shall be
taxable only in that State". Article 10 of the Treaty deals with the taxability of
Dividends. Article 10(1) specifies that "Dividends paid by a company which is a
resident of a Contracting State to a resident of other contracting State, may be taxed
in that other State". Article 10(2) stipulates that "such dividend may also be taxed in
the Contracting State of which the company paying the dividends is a resident but if
the recipient was the beneficial owner of the dividends, the tax should not exceed;
(a) 5% of the gross amount of the dividends if the recipient of the dividends holds at

least 10% of the capital of the company paying the dividends and (b) 15% of the
gross amount of the dividends in all other cases.
185. CBDT issued Circular No. 682 dated 30.03.1994 clarifying that capital gains
derived by a resident of Mauritius by alienation of shares of an Indian company shall
be taxable only in Mauritius according to Mauritius Tax Law. In the year 2000, the
Revenue authorities sought to deny the treaty benefits to some Mauritius resident
companies pointing out that the beneficial ownership in those companies was outside
Mauritius and thus the foremost purpose of investing in India via Mauritius was tax
avoidance. Tax authorities took the stand that Mauritius was merely being used as a
conduit and thus sought to deny the treaty benefits despite the absence of a
limitation of benefits (LOB) clause in the Treaty. CBDT then issued Circular No. 789
dated 13.04.2000 stating that the Mauritius Tax Residency Certificate (TRC) issued by
the Mauritius Tax Office was a sufficient evidence of tax response of that company in
Mauritius and that such companies were entitled to claim treaty benefits.
1 8 6 . Writ Petitions in public interest were filed before the Delhi High Court
challenging the constitutional validity of the above mentioned circulars. Delhi High
Court quashed Circular No. 789 stating that inasmuch as the circular directs the
Income Tax authorities to accept as a certificate of residence issued by the authorities
of Mauritius as sufficient evidence as regards the status of resident and beneficial
ownership, was ultra vires the powers of CBDT. The Court also held that the Income
Tax Office was entitled to lift the corporate veil in India to see whether a company
was a resident of Mauritius or not and whether the company was paying income tax
in Mauritius or not. The Court also held that the "Treaty Shopping" by which the
resident of a third country takes advantage of the provisions of the agreement was
illegal and necessarily to be forbidden. Union of India preferred appeal against the
judgment of the Delhi High Court, before this Court. This Court in Azadi Bachao
Andolan allowed the appeal and Circular No. 789 was declared valid.
Limitation of Benefit Clause (LOB)
187. India Mauritius Treaty does not contain any Limitation of Benefit (LOB) clause,
similar to the Indo-US Treaty, wherein Article 24 stipulates that benefits will be
available if 50% of the shares of a company are owned directly or indirectly by one
or more individual residents of a controlling state. LOB clause also finds a place in
India-Singapore DTA. Indo Mauritius Treaty does not restrict the benefit to companies
whose shareholders are non-citizens/residents of Mauritius, or where the beneficial
interest is owned by non-citizens/residents of Mauritius, in the event where there is
no justification in prohibiting the residents of a third nation from incorporating
companies in Mauritius and deriving benefit under the treaty. No Tax Department is
unaware that the quantum of both FDI and FII do not originate from Mauritius but
from other global investors situate outside Mauritius. Maurtius, it is well known is
incapable of bringing FDI worth millions of dollars into India. If the Union of India
and Tax Department insist that the investment would directly come from Mauritius
and Mauritius alone then the Indo-Mauritius treaty would be dead letter.
188. Mr. Aspi Chinoy, learned senior counsel contended that in the absence of LOB
Clause in the India Mauritius Treaty, the scope of the treaty would be positive from
Mauritius Special Purpose Vehicles (SPVs) created specifically to route investments
into India, meets with our approval. We acknowledge that on a subsequent
sale/transfer/disinvestment of shares by the Mauritian company, after a reasonable
time, the sale proceeds would be received by the Mauritius Company as the

registered holder/owner of such shares, such benefits could be sent back to the
Foreign Principal/100% shareholder of Mauritius company either by way of a
declaration of special dividend by Mauritius company and/or by way of repayment of
loans received by the Mauritius company from the Foreign Principal/ shareholder for
the purpose of making the investment. Mr. Chinoy is right in his contention that apart
from DTAA, which provides for tax exemption in the case of capital gains received by
a Mauritius company/shareholder at the time of disinvestment/exit and the fact that
Mauritius does not levy tax on dividends declared and paid by a Mauritius
company/subsidiary to its Foreign Shareholders/Principal, there is no other reason for
this quantum of funds to be invested from/through Mauritius.
1 8 9 . We are, therefore, of the view that in the absence of LOB Clause and the
presence of Circular No. 789 of 2000 and TRC certificate, on the residence and
beneficial interest/ownership, tax department cannot at the time of
sale/disinvestment/exit from such FDI, deny benefits to such Mauritius companies of
the Treaty by stating that FDI was only routed through a Mauritius company, by a
company/principal resident in a third country; or the Mauritius company had received
all its funds from a foreign principal/company; or the Mauritius subsidiary is
controlled/managed by the Foreign Principal; or the Mauritius company had no assets
or business other than holding the investment/shares in the Indian company; or the
Foreign Principal/100% shareholder of Mauritius company had played a dominant role
in deciding the time and price of the disinvestment/sale/transfer; or the sale
proceeds received by the Mauritius company had ultimately been paid over by it to
the Foreign Principal/ its 100% shareholder either by way of Special Dividend or by
way of repayment of loans received; or the real owner/beneficial owner of the shares
was the foreign Principal Company. Setting up of a WOS Mauritius subsidiary/SPV by
Principals/genuine substantial long term FDI in India from/through Mauritius,
pursuant to the DTAA and Circular No. 789 can never be considered to be set up for
tax evasion.
TRC whether conclusive
1 9 0 . LOB and look through provisions cannot be read into a tax treaty but the
question may arise as to whether the TRC is so conclusive that the Tax Department
cannot pierce the veil and look at the substance of the transaction. DTAA and Circular
No. 789 dated 13.4.2000, in our view, would not preclude the Income Tax
Department from denying the tax treaty benefits, if it is established, on facts, that the
Mauritius company has been interposed as the owner of the shares in India, at the
time of disposal of the shares to a third party, solely with a view to avoid tax without
any commercial substance. Tax Department, in such a situation, notwithstanding the
fact that the Mauritian company is required to be treated as the beneficial owner of
the shares under to look at the entire transaction of sale as a whole and if it is
established that the Mauritian company has been interposed as a device, it is open to
the Tax Department to discard the device and take into consideration the real
transaction between the parties, and the transaction may be subjected to tax. In other
words, TRC does not prevent enquiry into a tax fraud, for example, where an OCB is
used by an Indian resident for round-tripping or any other illegal activities, nothing
prevents the Revenue from looking into special agreements, contracts or
arrangements made or effected by Indian the OCB in the entire transaction.
191. No court will recognize sham transaction or a colorable device or adoption of a
dubious method to evade tax, but to say that the Indo-Mauritian Treaty will recognize
FDI and FII only if it originates from Mauritius, not the investors from third countries,

incorporating company in Mauritius, is pitching it too high, especially when statistics
reveals that for the last decade the FDI in India was US$ 178 billion and, of this,
42% i.e. US$ 74.56 billion was through Mauritian route. Presently, it is known, FII in
India is Rs. 450,000 crores, out of which Rs. 70,000 crores is from Mauritius. Facts,
therefore, clearly show that almost the entire FDI and FII made in India from
Mauritius under DTAA does not originate from that country, but has been made by
Mauritius Companies / SPV, which are owned by companies/individuals of third
countries providing funds for making FDI by such companies/individuals not from
Mauritius, but from third countries.
1 9 2 . Mauritius, and India, it is known, has also signed a Memorandum of
Understanding (MOU) laying down the rules for information, exchange between the
two countries which provides for the two signatory authorities to assist each other in
the detection of fraudulent market practices, including the insider dealing and market
manipulation in the areas of securities transactions and derivative dealings. The
object and purpose of the MOU is to track down transactions tainted by fraud and
financial crime, not to target the bona fide legitimate transactions. Mauritius has also
enacted stringent "Know Your Clients" (KYC) Regulations and Anti-Money Laundering
laws which seek to avoid abusive use of treaty.
193. Viewed in the above perspective, we also find no reason to import the "abuse of
rights doctrine" (abus de droit) to India. The above doctrine was seen applied by the
Swiss Court in A Holding Aps. (8 ITRL), unlike Courts following Common Law. That
was a case where a Danish company was interposed to hold all the shares in a Swiss
Company and there was a clear finding of fact that it was interposed for the sole
purpose of benefiting from the Swiss-Denmark DTA which had the effect of reducing
a normal 35% withholding tax on dividend out of Switzerland down to 0%. Court in
that case held that the only reason for the existence of the Danish company was to
benefit from the zero withholding tax under the tax treaty. On facts also, the above
case will not apply to the case in hand.
194. Cayman Islands, it was contended, was a tax heaven and CGP was a shell
company, hence, they have to be looked at with suspicion. We may, therefore, briefly
examine what those expressions mean and how they are understood in the corporate
world.
TAX HAVENS, TREATY SHOPPING and SHELL COMPANIES
195. Tax Havens" is not seen defined or mentioned in the Tax Laws of this country
Corporate world gives different meanings to that expression, so also the Tax
Department. The term "tax havens" is sometime described as a State with nil or
moderate level of taxation and/or liberal tax incentives for undertaking specific
activities such as exporting. The expression "tax haven" is also sometime used as a
"secrecy jurisdiction. The term "Shell Companies" finds no definition in the tax laws
and the term is used in its pejorative sense, namely as a company which exits only
on paper, but in reality, they are investment companies. Meaning of the expression
'Treaty Shopping' was elaborately dealt with in Azadi Bachao Andolan and hence not
repeated.
1 9 6 . Tax Justice Network Project (U.K.), however, in its report published in
September, 2005, stated as follows:
The role played by tax havens in encouraging and profiteering from tax
avoidance, tax evasion and capital flight from developed and developing

countries is a scandal of gigantic proportions.
The project recorded that one per cent of the world's population holds more than
57% of total global worth and that approximately US $ 255 billion annually was
involved in using offshore havens to escape taxation, an amount which would more
than plug the financing gap to achieve the Millennium Development Goal of reducing
the world poverty by 50% by 2015. ("Tax Us If You Can" September 2005, 78
available at http:/www.taxjustice.net). Necessity of proper legislation for charging
those types of transactions have already been emphasized by us.
Round Tripping
197. India is considered to be the most attractive investment destinations and, it is
known, has received $37.763 billion in FDI and $29.048 billion in FII investment in
the year to March 31, 2010. FDI inflows it is reported were of $ 22.958 billion
between April 2010 and January, 2011 and FII investment were $ 31.031 billions.
Reports are afloat that million of rupees go out of the country only to be returned as
FDI or FII. Round Tripping can take many formats like under-invoicing and over-
invoicing of exports and imports. Round Tripping involves getting the money out of
India, say Mauritius, and then come to India like FDI or FII. Article 4 of the Indo-
Mauritius DTAA defines a 'resident' to mean any person, who under the laws of the
contracting State is liable to taxation therein by reason of his domicile, residence,
place of business or any other similar criteria. An Indian Company, with the idea of
tax evasion can also incorporate a company off-shore, say in a Tax Haven, and then
create a WOS in Mauritius and after obtaining a TRC may invest in India. Large
amounts, therefore, can be routed back to India using TRC as a defense, but once it
is established that such an investment is black money or capital that is hidden, it is
nothing but circular movement of capital known as Round Tripping; then TRC can be
ignored, since the transaction is fraudulent and against national interest.
1 9 8 . Facts stated above are food for thought to the legislature and adequate
legislative measures have to be taken to plug the loopholes, all the same, a genuine
corporate structure set up for purely commercial purpose and indulging in genuine
investment be recognized. However, if the fraud is detected by the Court of Law, it
can pierce the corporate structure since fraud unravels everything, even a statutory
provision, if it is a stumbling block, because legislature never intents to guard fraud.
Certainly, in our view, TRC certificate though can be accepted as a conclusive
evidence for accepting status of residents as well as beneficial ownership for applying
the tax treaty, it can be ignored if the treaty is abused for the fraudulent purpose of
evasion of tax.
McDowell - WHETHER CALLS FOR RECONSDIERATION:
199. McDowell has emphatically spoken on the principle of Tax Planning. Justice
Ranganath Mishra, on his and on behalf of three other Judges, after referring to the
observations of Justice S.C. Shah in CIT v. A. Raman and Company (1968) 1 SCC
10, CIT v. B.M. Kharwar MANU/SC/0231/1968 : (1969) 1 SCR 651, the judgments
in Bank of Chettinad Ltd. v. CIT (1940) 8 ITR 522 (PC), Jiyajeerao Cotton Mills
Ltd. v. Commissioner of Income Tax and Excess Profits Tax, Bombay
MANU/SC/0074/1958 : AIR 1959 SC 270;CIT v. Vadilal Lallubhai
MANU/SC/0293/1972 : (1973) 3 SCC 17 and the views expressed by Viscount Simon
in Latilla v. IRC. 26 TC 107 : (1943) AC 377 stated as follows:
Tax planning may be legitimate provided it is within the framework of law.

Colorable devices cannot be part of tax planning and it is wrong to encourage
or entertain the belief that is honorable to avoid the payment of tax by
resorting to dubious methods. It is the obligation of every citizen to pay the
taxes honestly without resorting to subterfuges.
200. Justice Shah in Raman (supra) has stated that avoidance of tax liability by so
arranging the commercial affairs that charge of tax is distributed is not prohibited and
a tax payer may resort to a device to divert the income before it accrues or arises to
him and the effectiveness of the device depends not upon considerations of morality,
but on the operation of the Income Tax Act. Justice Shah made the same observation
in B.N. Kharwar (supra) as well and after quoting a passage from the judgment of the
Privy Council stated as follows:
The Taxing authority is entitled and is indeed bound to determine the true
legal relation resulting from a transaction. If the parties have chosen to
conceal by a device the legal relation, it is open to the taxing authorities to
unravel the device and to determine the true character of the relationship.
But the legal effect of a transaction cannot be displaced by probing into the
"substance of the transaction".
In Jiyajeerao (supra) also, this Court made the following observation:
Every person is entitled so to arrange his affairs as to avoid taxation, but the
arrangement must be real and genuine and not a sham or makebelieve.
2 0 1 . 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 MANU/GJ/0030/1974 : (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.
2 0 2 . Justice Chinnappa Reddy starts his concurring judgment in McDowell as
follows:
While I entirely agree with my brother Ranganath Mishra, J. in the judgment
proposed to be delivered by me, I wish to add a few paragraphs, particularly
to supplement what he has said on the "fashionable" topic of tax avoidance.
(Emphasis supplied)
Justice Reddy has, the above quoted portion shows, entirely agreed with Justice
Mishra and has stated that he is only supplementing what Justice Mishra has spoken
on tax avoidance. Justice Reddy, while agreeing with Justice Mishra and the other
three judges, has opined that in the very country of its birth, the principle of
Westminster has been given a decent burial and in that country where the phrase "tax
avoidance" originated the judicial attitude towards tax avoidance has changed and the
Courts are now concerning themselves not merely with the genuineness of a
transaction, but with the intended effect of it for fiscal purposes. Justice Reddy also
opined that no one can get away with the tax avoidance project with the mere
statement that there is nothing illegal about it. Justice Reddy has also opined that the
ghost of Westminster (in the words of Lord Roskill) has been exorcised in England. In
our view, what transpired in England is not the ratio of McDowell and cannot be and

remains merely an opinion or view.
203. Confusion arose (see Paragraph 46 of the judgment) when Justice Mishra has
stated after referring to the concept of tax planning as follows:
On this aspect, one of us Chinnappa Reddy, J. has proposed a separate and
detailed opinion with which we agree.
204. Justice Reddy, we have already indicated, himself has stated that he is entirely
agreeing with Justice Mishra and has only supplemented what Justice Mishra has
stated on Tax Avoidance, therefore, we have go by what Justice Mishra has spoken on
tax avoidance.
2 0 5 . Justice Reddy has depreciated the practice of setting up of Tax Avoidance
Projects, in our view, rightly because the same is/was the situation in England and
Ramsay and other judgments had depreciated the Tax Avoidance Schemes.
206. In our view, the ratio of the judgment is what is spoken by Justice Mishra for
himself and on behalf of three other judges, on which Justice Reddy has agreed.
Justice Reddy has clearly stated that he is only supplementing what Justice Mishra
has said on Tax avoidance.
2 0 7 . Justice Reddy has endorsed the view of Lord Roskill that the ghost of
Westminster had been exorcised in England and that one should not allow its head
rear over India. If one scans through the various judgments of the House of Lords in
England, which we have already done, one thing is clear that it has been a
cornerstone of law, that a tax payer is enabled to arrange his affairs so as to reduce
the liability of tax and the fact that the motive for a transaction is to avoid tax does
not invalidate it unless a particular enactment so provides (Westminster Principle).
Needless to say if the arrangement is to be effective, it is essential that the
transaction has some economic or commercial substance. Lord Roskill's view is not
seen as the correct view so also Justice Reddy's, for the reasons we have already
explained in earlier part of this judgment.
208. A five Judges Bench judgment of this Court in Mathuram Agrawal v. State of
Madhya Pradesh MANU/SC/0692/1999 : (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 replenish the treasury. Revenue's stand that
the ratio laid down in McDowell is contrary to what has been laid down in Azadi
Bachao Andolan, in our view, is unsustainable and, therefore, calls for no
reconsideration by a larger branch.
PART-IV
CGP and ITS INTERPOSITION
209. CGP's interposition in the HTIL Corporate structure and its disposition, by way
of transfer, for exit, was for a commercial or business purpose or with an ulterior
motive for evading tax, is the next question. Parties, it is trite, are free to choose

whatever lawful arrangement which will suit their business and commercial purpose,
but the true nature of the transaction can be ascertained only by looking into the
legal arrangement actually entered into and Indisputedly, that the contracts have to
be read holistically to arrive at a conclusion as to the real nature of a transaction.
Revenue's stand was that the CGP share was a mode or mechanism to achieve a
transfer of control, so that the tax be imposed on the transfer of control not on
transfer of the CGP share. Revenue's stand, relying upon Dawson test, was that CGP's
interposition in the Hutchison structure was an arrangement to deceive the Revenue
with the object of hiding or rejecting the tax liability which otherwise would incur.
2 1 0 . Revenue contends that the entire corporate structure be looked at as on
artificial tax avoidance scheme wherein CGP was introduced into the structure at the
last moment, especially when another route was available for HTIL to transfer its
controlling interest in HEL to Vodafone. Further it was pointed out that the original
idea of the parties was to sell shares in HEL directly but at the last moment the
parties changed their mind and adopted a different route since HTIL wanted to
declare a special dividend out of US $ 11 million for payment and the same would
not have been possible if they had adopted Mauritian route.
211. Petitioner pointed out that if the motive of HTIL was only to save tax it had the
option to sell the shares of Indian companies directly held Mauritius entities,
especially when there is no LOB clause in India-Mauritius Treaty. Further, it was
pointed out that if the Mauritius companies had sold the shares of HEL, then Mauritius
companies would have continued to be the subsidiary of HTIL, their account could
have been consolidated in the hands of HTIL and HTIL would have accounted for the
accounts exactly the same way that it had accounted for the accounts in HTIL
BVI/nominated payee. Had HTIL adopted the Mauritius route, then it would have been
cumbersome to sell the shares of a host of Mauritian companies.
2 1 2 . CGP was incorporated in the year 1998 and the same became part of the
Hutchison Corporate structure in the year 2005. Facts would clearly indicate that the
CGP held shares in Array and Hutchison Teleservices (India) Holdings Limited (MS),
both incorporated in Mauritius. HTIL, after acquiring the share of CGP (CI) in the year
1994 which constituted approximately 42% direct interest in HEL, had put in place
various FWAs, SHAs for arranging its affairs so that it can also have interest in the
functioning of HEL along with Indian partners.
213. Self centered operations in India were with 3GSPL an Indian company which
held options through various FWAs entered into with Indian partners. One of the tests
to examine the genuineness of the structure is the "timing test" that is timing of the
incorporation of the entities or transfer of shares etc. Structures created for genuine
business reasons are those which are generally created or investment is made, at the
time where further investments are being made at the time of consolidation etc.
214. HTIL preferred CGP route rather than adopting any other method (why ?) for
which we have to examine whether HTIL has got any justification for adopting this
route, for sound commercial reasons or purely for evasion of tax. In international
investments, corporate structures are designed to enable a smooth transition which
can be by way of divestment or dilution. Once entry into the structure is honorable,
exits from the structure can also be honorable.
215. HTIL structure was created over a period of time and this was consolidated in
2004 to provide a working model by which HTIL could make best use of its

investments and exercise control over and strategically influence the affairs of HEL.
HTIL in its commercial wisdom noticed the disadvantage of preferring Array, which
would have created problems for HTIL. Hutchison Teleservices (India) Mauritius had a
subsidiary, namely 3GSPL which carried on the call centre business in India and the
transfer of CGP share would give control over 3GSPL, an indirect subsidiary which
was incorporated in the year 1999. It would also obviate problems arising on account
of call and put options arrangements and voting rights enjoyed by 3GSPL. If Array
was transferred, the disadvantage was that HTIL had to deal with call and put options
of 3GSPL. In the above circumstances, HTIL in their commercial wisdom thought of
transferring CGP share rather than going for any other alternatives. Further 3GSPL
was also a party to various agreements between itself and the companies of AS, AG
and IDFC Group. If Array had been transferred the disadvantage would be that the
same would result in hiving off the call centre business from 3GSPL. Consolidation
operations of HEL were evidently done in the year 2005 not for tax purposes but for
commercial reasons and the contention that CGP was inserted at a very late stage in
order to bring a pre tax entity or to create a transaction that would avoid tax, cannot
be accepted.
216. The Revenue has no case that HTIL structure was a device or an artifice, but all
along the contention was that CGP was interposed at the last moment and applying
the Dawson test, it was contended that such an artificially interposed device be
ignored, and applying Ramsay test of purposive interpretation, the transaction be
taxed for gain. CGP, it may be noted, was already part of the HTIL's Corporate
Structure and the decision taken to sell CGP (Share) so as to exit from the Indian
Telecom Sector was not the fall out of a tax exploitation scheme, but a genuine
commercial decision taking into consideration the best interest of the investors and
the corporate entity.
217. Principle of Fiscal nullity was applied by Vinelott, J. in favor of the Assessee in
Dawson, where the judge rejected the contention of the Crown that the transaction
was hit by the Ramsay principle, holding that a transaction cannot be disregarded and
treated as fiscal nullity if it has enduring legal consequences. Principle was again
explained by Lord Brightman stating that the Ramsay test would apply not only where
the steps are pre-contracted, but also they are pre-ordained, if there is no contractual
right and in all likelihood the steps would follow. On Fiscal nullity, Lord Brightman
again explained that there should be a pre-ordained series of transactions and there
should be steps inserted that have no commercial purpose and the inserted steps are
to be disregarded for fiscal purpose and, in such situations, Court must then look at
the end result, precisely how the end result will be taxed will depend on terms of the
taxing statute sought to be applied. Sale of CGP share, for exiting from the Indian
Telecommunication Sector, in our view, cannot be considered as other than tax
avoidance. Sale of CGP share, in our view, was a genuine business transaction, not a
fraudulent or dubious method to avoid capital gains tax.
SITUS of CGP
218. Sites of CGP share stands where, is the next question. Law on sites of share has
already been discussed by us in the earlier part of the judgment. Sites of shares
situates at the place where the company is incorporated and/ or the place where the
share can be dealt with by way of transfer. CGP share is registered in Cayman Island
and materials placed before us would indicate that Cayman Island law, unlike other
laws does not recognize the multiplicity of registers. Section 184 of the Cayman
Island Act provides that the company may be exempt if it gives to the Registrar, a

declaration that "operation of an exempted company will be conducted mainly outside
the Island". Section 193 of the Cayman Island Act expressly recognizes that even
exempted companies may, to a limited extent trade within the Islands. Section 193
permits activities by way of trading which are incidental of off shore operations also
all rights to enter into the contract etc. The facts in this case as well as the provisions
of the Caymen Island Act would clearly indicate that the CGP (CI) share situates in
Caymen Island. The legal principle on which sites of an asset, such as share of the
company is determined, is well settled. Reference may be made to the judgments in
Brassard v. Smith (1925) AC 371, London and South American Investment
Trust v. British Tobacco Company (Australia) (1927) 1 Ch. 107. Erie Beach
Company v. Attorney General for Ontario 1930 AC 161 PC 10, R. v. Williams
(1942) AC 541. Sites of CGP share, therefore, situates in Cayman Islands and on
transfer in Cayman Islands would not shift to India.
PART-V
219. Sale of CGP, on facts, we have found was not the fall out of an artificial tax
avoidance scheme or an artificial device, pre-ordained, or pre-conceived with the sole
object of tax avoidance, but was a genuine commercial decision to exit from the
Indian Telecom Sector.
220. HTIL had the following controlling interest in HEL before its exit from the Indian
Telecom Sector:
(i) HTIL held its direct equity interest in HEL amounting approximately to
42% through eight Mauritius companies.
(ii) HTIL indirect subsidiary CGP(M) held 37.25% of equity interest in TII, an
Indian Company, which in turn held 12.96% equity interest in HEL. CGP(M),
as a result of its 37.25% interest in TII had an interest in several
downstream companies which held interest in HEL, as a result of which HTIL
obtained indirect equity interest of 7.24% in HEL.
(iii) HTIL held in Indian Company Omega Holdings, an Indian Company,
interest to the extent of 45.79% of share capital through HTIM which held
shareholding of 5.11% in HEL, resulting in holding of 2.34% interest in the
Indian Company HEL.
HTIL could, therefore, exercise its control over HEL, through the voting rights of its
indirect subsidiary Array (Mauritius) which in turn controlled 42% shares through
Mauritian Subsidiaries in HEL. Mauritian subsidiaries controlled 42% voting rights in
HEL and HTIL could not however exercise voting rights as stated above, in HEL
directly but only through indirect subsidiary CGP(M) which in turn held equity interest
in TII, an Indian company which held equity interest in HEL. HTIL likewise through an
indirect subsidiary HTI(M), which held equity interest in Omega an Indian company
which held equity interest in HEL, could exercise only indirect voting rights in HEL
221. HTIL, by holding CGP share, got control over its WOS Hutchison Tele Services
(India) Holdings Ltd (MS). HTSH(MS) was having control over its WOS 3GSPL, an
Indian company which exercised voting rights in HEL. HTIL, therefore, by holding
CGP approximately 10% (pro rata) indirect in HEL and not 67% as contended by the
Revenue.
222. HTIL had 15% interest in HEL by virtue of FWAs, SHAs Call and Put Option

Agreements and Subscription Agreements and not controlling interest as such in HEL.
HTIL, by virtue of those agreements, had the following interests:
(i) Rights (and Options) by providing finance and guarantee to Asim Ghosh
Group of companies to exercise control over TII and indirectly over HEL
through TII Shareholders Agreement and the Centrino Framework Agreement
dated 1.3.2006;
(ii) Rights (and Options) by providing finance and guarantee to Analjit Singh
Group of companies to 206 exercise control over TII and indirectly over HEL
through various TII shareholders agreements and the N.D. Callus Framework
Agreement dated 1.3.2006.
(iii) Controlling rights over TII through the TII Shareholder's Agreement in
the form of rights to appoint two directors with veto power to promote its
interest in HEL and thereby hold beneficial interest in 12.30% of the share
capital in HEL.
(iv) Finance to SMMS to acquire shares in ITNL (formerly Omega) with right
to acquire the share capital of Omega in future.
(v) Rights over ITNL through the ITNL Shareholder's Agreement, in the form
of right to appoint two directors with veto power to promote its interests in
HEL and thereby it held beneficial interest in 2.77% of the share capital of
the Indian company HEL;
(vi) Interest in the form of loan of US$231 million to HTI (BVI) which was
assigned to Array Holdings Ltd.;
(vii) Interest in the form of loan of US$ 952 million through HTI (BVI)
utilized for purchasing shares in the Indian company HEL by the 8 Mauritius
companies;
(viii) Interest in the form of Preference share capital in JKF and TII to the
extent of US$ 167.5 million and USD 337 million respectively. These two
companies hold 19.54% equity in HEL.
(ix) Right to do telecom business in India through joint venture;
(x) Right to avail of the telecom licenses in India and right to do business in
India;
(xi) Right to use the Hutch brand in India;
(xii) Right to appoint/remove directors in the board of the Indian company
HEL and its other Indian subsidiaries;
(xiii) Right to exercise control over the management and affairs of the
business of the Indian company HEL (Management Rights);
(xiv) Right to take part in all the investment, management and financial
decisions of the Indian company HEL;
(xv) Right to control premium;

(xvi) Right to consultancy support in the use of Oracle license for the Indian
business;
Revenue's stand before us was that the SPA on a commercial construction brought
about an extinguishment of HTIL's rights of management and control over HEL,
resulting in transfer of capital asset in India. Further, it was pointed out that the
assets, rights and entitlements are property rights pertaining to HTIL and its
subsidiaries and the transfer of CGP share would have no effect on the Telecom
operations in India, but for the transfer of the above assets, rights and entitlements.
SPA and other agreements, if examined, as a whole, according to the Revenue, leads
to the conclusion that the substance of the transaction was the transfer of various
property rights of HTIL in HEL to Vodafone attracting capital gains tax in India.
Further, it was pointed out that moment CGP share was transferred off-shore, HTIL's
right of control over HEL and its subsidiaries stood extinguished, thus leading to
income indirectly earned, outside India through the medium of sale of the CGP share.
All these issues have to be examined without forgetting the fact that we are dealing
with a taxing statute and the Revenue has to bring home all its contentions within the
four corners of taxing statute and not on assumptions and presumptions.
223. Vodafone on acquisition of CGP share got controlling interest of 42% over
HEL/VEL through voting rights through eight Mauritian subsidiaries, the same was the
position of HTIL as well. On acquiring CGP share, CGP has become a direct subsidiary
of Vodafone, but both are legally independent entities. Vodafone does not own any
assets of CGP. Management and the business of CGP vests on the Board of Directors
of CGP but of course, Vodafone could appoint or remove members of the Board of
Directors of CGP. On acquisition of CGP from HTIL, Array became an indirect
subsidiary of Vodafone. Array is also a separate legal entity managed by its own
Board of Directors. Share of CGP situates in Cayman Islands and that of Array in
Mauritius. Mauritian entities which hold 42% shares in HEL became the direct and
indirect subsidiaries of Array, on Vodafone purchasing the CGP share. Voting rights,
controlling rights, right to manage etc., of Mauritian Companies vested in those
companies. HTIL has never sold nor Vodafone purchased any shares of either Array
or the Mauritian of which situates in Cayman Islands. By purchasing the CGP share its
sites will not shift either to Mauritius or to India, a legal issue, already explained by
us. Array being a WOS of CGP, CGP may appoint or remove any of its directors, if it
wishes by a resolution in the general body of the subsidiary, but CGP, Array and all
Mauritian entities are separate legal entities and have de-centralized management and
each of the Mauritian subsidiaries has its own management personnels.
224. Vodafone on purchase of CGP share got controlling interest in the Mauritian
Companies and the incident of transfer of CGP share cannot be considered to be two
distinct and separate transactions, one shifting of the share and another shifting of
the controlling interest. Transfer of CGP share automatically results in host of
consequences including transfer of controlling interest and that controlling interest as
such cannot be dissected from CGP share without legislative intervention. Controlling
interest of CGP over Array is an incident of holding majority shares and the control of
Company vests in the voting power of its shareholders. Mauritian entities being a
WOS of Array, Array as a holding Company can influence the shareholders of various
Mauritian Companies. Holding Companies like CGP, Array, may exercise control over
the subsidiaries, whether a WOS or otherwise by influencing the voting rights,
nomination of members of the Board of Directors and so on. On transfer of shares of
the holding Company, the controlling interest may also pass on to the purchaser
along with the shares. Controlling interest might have percolated down the line to the

operating companies but that controlling interest is inherently contractual and not a
property right unless otherwise provided for in the statue. Acquisition of shares, may
carry the acquisition of controlling interest which is purely a commercial concept and
the tax can be levied only on the transaction and not on its effect. Consequently, on
transfer of CGP share to Vodafone, Vodafone got control over eight Mauritian
Companies which owned shares in VEL totaling to 42% and that does not mean that
the sites of CGP share has shifted to India for the purpose of charging capital gains
tax.
225. Vodafone could exercise only indirect voting rights in VEL through its indirect
subsidiary CGP(M) which held equity interests in TII, an Indian Company, which held
equity interests in VEL. Similarly, Vodafone could exercise only indirect voting rights
through HTI(M) which held equity interests in Omega, an Indian Company which in
turn held equity interests in HEL. On transfer of CGP share, Vodafone gets controlling
interest in its indirect subsidiaries which are situated in Mauritius which have equity
interests in TII and Omega, Indian Companies which are independent legal entities.
Controlling interest, which stood transferred to Vodafone from HTIL accompany the
CGP share and cannot be dissected so as to be treated as transfer of controlling
interest of Mauritian entities and then that of Indian entities and ultimately that of
HEL. Sites of CGP share, therefore, determines the transferability of the share and/or
interest which flows out of that share including controlling interest. Ownership of
shares, as already explained by us, carries other valuable rights like, right to receive
dividend, right to transmit the shares, right to vote, right to act as per one's wish, or
to vote in a particular manner etc; and on transfer of shares those rights also sail
along with them.
226. Vodafone, on purchase of CGP share got all those rights, and the price paid by
Vodafone is for all those rights, in other words, control premium paid, not over and
above the CGP share, but is the integral part of the price of the share. On transfer of
CGP share situated in Cayman Islands, the entire rights, which accompany stood
transferred not in India, but offshore and the facts reveal that the offshore holdings
and arrangements made by HTIL and Vodafone were for sound commercial and
legitimate tax planning, not with the motive of evading tax.
227. Vodafone, on purchase of CGP share also got control over its WOS, HTSH(M)
which is having control over its WOS, 3GSPL, an Indian Company which exercised
voting rights in HEL. 3GSPL, was incorporated on 16.03.99 and run call centre
business in India. The advantage of transferring share of CGP rather than Array was
that it would obviate the problems arising on account of the call and put agreements
and voting rights enjoyed by 3GSPL. 3GSPL was also a party to various agreements
between itself and Companies of AS, AG and IDFC Groups. AS, AG & IDFC have
agreed to retain their shareholdings with full control including voting rights and
dividend rights. In fact, on 02.03.2007 AG wrote to HEL confirming that his indirect
equity or beneficial interest in HEL worked out to be as 4.68% and it was stated, he
was the beneficiary of full dividend rights attached to his shares and he had received
credit support and primarily the liability for re-payment was of his company. Further,
it was also pointed out that he was the exclusive beneficial owner of his shares in his
companies, enjoying full and exclusive rights to vote and participate in any benefits
accruing to those shares. On 05.03.2007 AS also wrote to the Government on the
same lines.
228. Vodafone, on acquisition of CGP, is in a position to replace the directors of
holding company of 3GSPL so as to get control over 3GSPL. 3GSPL has call option as

well as the obligation of the put option. Rights and obligations which flow out of call
and put options have already been explained by us in the earlier part of the
judgment. Call and put options are contractual rights and do not sound in property
and hence they cannot be, in the absence of a statutory stipulation, considered as
capital assets. Even assuming so, they are in favor of 3GSPL and continue to be so
even after entry of Vodafone.
229. We have extensively dealt with the terms of the various FWAs, SHAs and Term
Sheets and in none of those Agreements HTIL or Vodafone figure as parties. SHAs
between Mauritian entities (which were shareholders of the Indian operating
Companies) and other shareholders in some of the other operating companies in
India held shares in HEL related to the management of the subsidiaries of AS, AG and
IDFC and did not relate to the management of the affairs of HEL and HTIL was not a
party to those agreements, and hence there was no question of assigning or
relinquishing any right to Vodafone.
230. IDFC FWA of August 2006 also conferred upon 3 GSPL only call option rights
and a right to nominate a buyer if investors decided to exit as long as the buyer paid
a fair market value. June 2007 Agreement became necessary because the composition
of Indian investors changed with some Indian investors going out and other Indian
investors coming in. On June 2007, changes took place within the Group of Indian
investors, in that SSKI and IDFC went out leaving IDF alone as the Indian investor.
Parties decided to keep June 2007 transaction to effectuate their intention within the
broad contours of June 2006 FWA. On 06.06.2007 FWA has also retained the rights
and options in favor of 3GSPL but conferred no rights on Vodafone and Vodafone was
only a confirming party to that Agreement. Call and put options, we have already
mentioned, were the subject matter of three FWAs viz., Centrino, N.D. Callus, IDFC
and in Centrino and N.D. Callus FWAs, neither HTIL was a party, nor was Vodafone.
HTIL was only a confirming party in IDFC FWA, so also Vodafone. Since HTIL, and
later Vodafone were not parties to those SHAs and FWAs, we fail to see how they are
bound by the terms and conditions contained therein, so also the rights and
obligations that flow out of them. HTIL and Vodafone have, of course, had the
interest to see the SHAs and FWAs, be put in proper place but that interest cannot be
termed as property rights, attracting capital gains tax.
231. We have dealt with the legal effect of exercising call option, put option, tag
along rights, ROFR, subscription rights and so on and all those rights and obligations
we have indicated fall within the realm of contract between various shareholders and
interested parties and in any view, are not binding on HTIL or Vodafone. Rights (and
options) by providing finance and guarantee to AG Group of Companies to exercise
control over TII and indirectly over HEL through TII SHA and Centrino FWA dated
01.03.2006 were only contractual rights, as also the revised SHAs and FWAs entered
into on the basis of SPA. Rights (and options) by providing finance and guarantee to
AS Group of Companies to exercise control over TII and indirectly over HEL through
various TII SHAs and N.D. Callus FWA dated 01.03.2006 were also contractual rights,
and continue to be so on entry of Vodafone.
232. Controlling right over TII through TII SHAs in the form of right to appoint two
Directors with veto power to promote its interest in HEL and thereby held beneficial
interest in 12.30% of share capital in the HEL are also contractual rights. Finance to
SMMS to acquire shares in ITNL (ultimately Omega) with right to acquire share
capital of Omega were also contractual rights between the parties. On transfer of CGP
share to Vodafone corresponding rearrangement were made in the SHAs and FWAs

and Term Sheet Agreements in which Vodafone was not a party.
233. SPA, through the transfer of CGP, indirectly conferred the benefit of put option
from the transferee of CGP share to be enjoyed in the same manner as they were
enjoyed by the transferor and the revised set of 2007 agreements were exactly
between the parties that is the beneficiary of the put options remained with the
downstream company 3 GSPL and the counter-party of the put option remained with
AG/AS Group Companies.
2 3 4 . Fresh set of agreements of 2007 as already referred to were entered into
between IDFC, AG, AS, 3 GSPL and Vodafone and in fact, those agreements were
irrelevant for the transfer of CGP share. FWAs with AG and AS did not constitute
transaction documents or give rise to a transfer of an asset, so also the IDFC FWA.
All those FWAs contain some adjustments with regard to certain existing rights,
however, the options, the extent of rights in relation to options, the price etc. all
continue to remain in place as they stood. Even if they had not been so entered into,
all those agreements would have remained in place because they were in favor of
3GSPL, subsidiary of CGP.
235. The High Court has reiterated the common law principle that the controlling
interest is an incident of the ownership of the share of the company, something
which flows out of holding of shares and, therefore, not an identifiable or distinct
capital asset independent of the holding of shares, but at the same time speaks of
change in the controlling interest of VEL, without there being any transfer of shares
of VEL. Further, the High Court failed to note on transfer of CGP share, there was
only transfer of certain off-shore loan transactions which is unconnected with
underlying controlling interest in the Indian Operating Companies. The other rights,
interests and entitlements continue to remain with Indian Operating Companies and
there is nothing to show they stood transferred in law.
236. The High Court has ignored the vital fact that as far as the put options are
concerned there were pre-existing agreements between the beneficiaries and counter
parties and fresh agreements were also on similar lines. Further, the High Court has
ignored the fact that Term Sheet Agreement with Essar had nothing to do with the
transfer of CGP, which was a separate transaction which came about on account of
independent settlement between Essar and Hutch Group, for a separate consideration,
unrelated to the consideration of CGP share. The High Court committed an error in
holding that there were some rights vested in HTIL under SHA dated 5.7.2003 which
is also an agreement, conferring no right to any party and accordingly none could
have been transferred. The High Court has also committed an error in holding that
some rights vested with HTIL under the agreement dated 01.08.2006, in fact, that
agreement conferred right on Hutichison Telecommunication (India) Ltd., which is a
Mauritian Company and not HTIL, the vendor of SPA. The High court has also ignored
the vital fact that FIPB had elaborately examined the nature of call and put option
agreement rights and found no right in present has been transferred to Vodafone and
that as and when rights are to be transferred by AG and AS Group Companies, it
would specifically require Government permission since such a sale would attract
capital gains, and may be independently taxable. We may now examine whether the
following rights and entitlements would also amount to capital assets attracting
capital gains tax on transfer of CGP share.
Debts/Loans through Intermediaries

237. SPA contained provisions for assignment of loans either at Mauritius or Cayman
Islands and all loans were assigned at the face value. Clause 2.2 of the SPA
stipulated that HTIL shall procure the assignment of and purchaser agrees to accept
an assignment of loans free from encumbrances together with all rights attaching or
accruing to them at completion. Loans were defined in the SPA to mean, all inter-
company loans owing by CGP and Array to a vendor group company including
accrued or unpaid interest, if any, on the completion date. HTIL warranted and
undertook that, as on completion, loans set out in Part IV of Schedule 1 shall be the
only indebtedness owing by the Wider group company to any member of the vendor
group. Vendor was obliged to procure that the loans set out in Part IV of Schedule 1
shall not be repaid on or before completion and further, that any loan in addition to
those identified will be non-interest bearing. Clause 7.4 of the SPA stipulated that any
loans in addition to those identified in Part IV of Schedule 1 of the SPA would be
non-interest bearing and on terms equivalent to the terms of those loans identified in
Part IV of Schedule 1 of the SPA. The sum of such indebtedness comprised of:
a) US$ 672,361,225 (Loan 1) - reflected in a Loan Agreement (effective date
of loan: 31 December 2006; date of Loan Agreement: 28 April 2007);
b) HK$ 377,859,382.40 (Loan 2) - reflected in a Loan Agreement (effective
date of Loan 31st December 2006; date of Loan Agreement: 28 April 2007)
[(i) + (ii): US$ 1,050,220,607.40]
c) US$ 231,111,427.41 (Loan 3) - reflected in a Receivable Novation
Agreement i.e. HTM owed HTI BVI Finance such sum, which Array undertook
to repay in pursuance of an inter-group loan restructuring, which was
captured in such Receivable Novation Agreement dated 28 April 2007.
HTI BVI Finance Limited, Array and Vodafone entered into a Deed of Assignment on
08.05.2007 pertaining to the Array indebtedness. On transfer of CGP shares, Array
became a subsidiary of VIHBV. The price was calculated on a gross asset basis
(enterprise value of underlying assets), the intra group loans would have to be
assigned at face value, since nothing was payable by VIHBV for the loans as they had
already paid for the gross assets.
238. CGP had acknowledged indebtedness of HTI BVI Finance Limited in the sum of
US$161,064,952.84 as at the date of completion. The sum of such indebtedness was
comprised of:
a) US$ 132,092,447.14, reflected in a Loan Agreement (effective date of
loan: 31 December 2006; date of Loan Agreement: 28 April 2007)
b) US$ 28,972,505.70, reflected in a Loan Agreement (effective date of loan:
14 February 2007; date of Loan Agreement: 15 February 2007).
HTI BVI Finance Limited, CGP and the Purchaser entered into the Deed of Assignment
on 08.05.2007 pertaining to the CGP indebtedness.
239. In respect of Array Loan No. 3 i.e. US$ 231,111,427.41, the right that was
being assigned was not the right under a Loan Agreement, but the right to receive
payment from Array pursuant to the terms of a Receiveable Novation Agreement
dated 28.04.2007 between Array, HTIL and HTI BVI Finance Limited. Under the terms
of the Receiveable Novation Agreement, HTIL's obligation to repay the loan was
novated from HTI BVI Finance to Array, the consideration for this novation was US$

231,111,427.41 payable by Array to HTI BVI Finance Limited. It was this right to
receive the amount from Array that was assigned to VHI BV under the relevant Loan
Assignment. It was envisaged that, between signing and completion of the
agreement, there would be a further loan up to US$ 29.7 million between CGP (as
borrower) from a Vendor Group Company (vide Clause 6.4 of the SPA) and the
identity of the lender has not been identified in the SPA. The details of the loan were
ultimately as follows:
Borrower Lender Amount of Loan Date of Effective date
Agreement of Agreement
CGP HTI (BVI)US$28,972,505.7015 February 14 February
Finance 2007 2007
Limited
Array and CGP stood outside of obligation to repay an aggregate US$
1,442,396.987.61 to HTI BVI Finance Limited and VHIBV became the creditor of Array
and CGP in the place and stepped off a HTI BVI Finance Limited on 8.5.2007 when
VHIBV stepped into the shoes of HTI BVI Finance Limited.
240. Agreements referred to above including the provisions for assignments in the
SPA, indicate that all loan agreements and assignments of loans took place outside
India at face value and, hence, there is no question of transfer of any capital assets
out of those transactions in India, attracting capital gains tax.
Preference Shares:
241. Vodafone while determining bid price had taken into consideration, inter alias,
its ownership of redeemable preference shares in TII and JFK. Right to preference
shares or rights thereto cannot be termed as transfer in terms of Section 2(47) of the
Act. Any agreement with TII, Indian partners contemplated fresh investment, by
subscribing to the preference shares were redeemable only by accumulated profit or
by issue of fresh capital and hence any issue of fresh capital cannot be equated to the
continuation of old preference shares or transfer thereof.
NON COMPETE AGREEMENT
242. SPA contains a Non Compete Agreement which is a pure Contractual Agreement,
a negative covenant, the purpose of which is only to see that the transferee does not
immediately start a compete business. At times an agreement provides that a
particular amount to be paid towards non-compete undertaking, in sale consideration,
which may be assessable as business income 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
243. HTIL did not have any direct interest in the brand. The facts would indicate that
brand/Intellectual Property Right were held by Hutchison Group Company based in
Luxemburg. SPA only assured Vodafone that they would not have to overnight cease

the use of the Hutch brand name, which might have resulted in a disruption of
operations in India. The bare license to use a brand free of charge, is not itself a
"property" and, in any view, if the right to property is created for the first time and
that too free of charge, it cannot give rise to a chargeable income. Under the SPA, a
limited window of license was given and it was expressly made free of charge and,
therefore, the assurance given by HTIL to Vodafone that the brand name would not
cease overnight, cannot be described as "property" rights so as to consider it as a
capital asset chargeable to tax in India.
ORACLE LICENSE:
244. Oracle License was an accounting license, the benefit of which was extended till
such time VEL replaced it with its own accounting package. There is nothing to show
that this accounting package, which is a software, was transferred to Vodafone. In
any view, this license cannot be termed as a capital asset since it has never been
transferred to the Petitioner.
245. We, therefore, conclude that on transfer of CGP share, HTIL had transferred
only 42% equity interest it had in HEL and approximately 10% (pro-rata) to
Vodafone, the transfer was off-shore, money was paid off-shore, parties were no-
residents and hence there was no transfer of a capital asset situated in India. Loan
agreements extended by virtue of transfer of CGP share were also off-shore and
hence cannot be termed to be a transfer of asset situated in India. Rights and
entitlements referred to also, in our view, cannot be termed as capital assets,
attracting capital gains tax and even after transfer of CGP share, all those rights and
entitlements remained as such, by virtue of various FWAs, SHAs, in which neither
HTIL nor Vodafone was a party.
246. Revenue, however, wanted to bring in all those rights and entitlements within
the ambit of Section 9(1)(i) on a liberal construction of that Section applying the
principle of purposive interpretation and hence we may examine the scope of Section
9.
PART VI
SECTION 9 and ITS APPLICATION
247. Shri Nariman, submitted that this Court should give a purposive construction to
Section 9(1) of the Income Tax Act when read along with Section 5(2) of the Act.
Referring extensively to the various provisions of the Income Tax Act, 1922, and also
Section 9(1)(i), Shri Nariman contended that the expression "transfer" in Section
2(47) read with Section 9 has to be understood as an inclusive definition comprising
of both direct and indirect transfers so as to expand the scope of Section 9 of the Act.
Shri Nariman also submitted that the object of Section 9 would be defeated if one
gives undue weightage to the term "situate in India", which is intended to tax a non-
resident who has a source in India. Shri Nariman contended that the effect of SPA is
not only to effect the transfer of a solitary share, but transfer of rights and
entitlements which falls within the expression "capital asset" defined in Section 2(14)
meaning property of any kind held by the Assessee. Further, it was stated that the
word "property" is also an expression of widest amplitude and would include
anything capable of being raised including beneficial interest. Further, it was also
pointed out that the SPA extinguishes all the rights of HTIL in HEL and such
extinguishment would fall under Section 2(47) of the Income Tax Act and hence, a
capital asset.

2 4 8 . Shri Harish Salve, learned senior counsel appearing for the Petitioner,
submitted that Section 9(1)(i) of the Income Tax Act deals with taxation on income
"deemed to accrue or arise" in India through the transfer of a capital asset situated in
India and stressed that the source of income lies where the transaction is effected
and not where the economic interest lies and pointed out that there is a distinction
between a legal right and a contractual right. Referring to the definition of "transfer"
in Section 2 (47) of the Income Tax Act which provides for extinguishment, it was
submitted, that the same is attracted for transfer of a legal right. Placing reliance on
the judgment of this Court in Commissioner of Income Tax v. Grace Collins and
Ors. MANU/SC/0130/2001 : 248 ITR 323, learned senior counsel submitted that SPA
has not relinquished any right of HTIL giving rise to capital gains tax in India.
249. Mr. S.P. Chenoy, senior counsel, on our request, argued at length, on the scope
and object of Section 9 of the Income Tax Act. Learned senior counsel submitted that
the first four clauses/parts of Section 9(1)(i) deal with taxability of revenue receipts,
income arising through or from holding an asset in India, income arising from the
transfer of an asset situated in India. Mr. Chenoy submitted that only the last limb of
Section 9(1)(i) deals with the transfer of a capital asset situated in India and can be
taxed as a capital receipt. Learned senior counsel submitted to apply Section 9(1)(i)
the capital asset must situate in India and cannot by a process of interpretation or
construction extend the meaning of that section to cover indirect transfers of capital
assets/properties situated in India. Learned senior counsel pointed out that there are
cases, where the assets/shares situate in India are not transferred, but where the
shares of foreign company holding/owning such shares are transferred.
250. Shri Mohan Parasaran, Additional Solicitor General, submitted that on a close
analysis of the language employed in Section 9 and the various expressions used
therein, would self-evidently demonstrate that Section 9 seeks to capture income
arising directly or indirectly from direct or indirect transfer. Shri Parasaran submitted,
if a holding company incorporated offshore through a maze of subsidiaries, which are
investment companies incorporated in various jurisdictions indirectly contacts a
company in India and seeks to divest its interest, by the sale of shares or stocks,
which are held by one of its upstream subsidiaries located in a foreign country to
another foreign company and the foreign company step into the shoes of the holding
company, then Section 9 would get attracted. Learned Counsel submitted that it
would be a case of indirect transfer and a case of income accruing indirectly in India
and consequent to the sale of a share outside India, there would be a transfer or
divestment or extinguishment of holding company's rights and interests, resulting in
transfer of capital asset situated in India.
251. Section 9 of the Income Tax Act deals with the incomes which shall be deemed
to accrue or arise in India. Under the general theory of nexus relevant for examining
the territorial operation of the legislation, two principles that are generally accepted
for imposition of tax are: (a) Source and (b) Residence. Section 5 of the Income Tax
Act specifies the principle on which tax can be levied. Section 5(1) prescribes
"residence" as a primary basis for imposition of tax and makes the global income of
the resident liable to tax. Section 5(2) is the source based rule in relation to residents
and is confined to: income that has been received in India; and income that has
accrued or arisen in India or income that is deemed to accrue or arise in India. In the
case of Resident in India, the total income, according to the residential status is as
under:
(a)Any income which is received or deemed to be received in India in the

relevant previous year by or on behalf of such person;
(b)Any income which accrues or arises or is deemed to accrue or arise in
India during the relevant previous year; and
(c) Any income which accrues or arises outside India during the relevant
previous year.
In the case of Resident but not Ordinarily Resident in India, the principle is as
follows:
(i) Any income which is received or deemed to be received in India in the
relevant previous year by or on behalf of such person;
(ii) Any income which accrues or arises or is deemed to accrue or arise in
India to him during the relevant previous year; and
(iii) Any income which accrues or arises to him outside India during the
relevant previous year, if it is derived from a business controlled in or a
profession set up in India.
In the case of Non-Resident, income from whatsoever source derived forms part of
the total income. It is as follows:
Any income which is received or is deemed to be received in India during the
relevant previous year by or on behalf of such person; and
Any income which accrues or arises or is deemed to accrue or arise to him in
India during the relevant previous year.
252. Section 9 of the Income Tax Act extends its provisions to certain incomes which
are deemed to accrue or arise in India. Four kinds of income which otherwise may
not fall in Section 9, would be deemed to accrue or arise in India, which are (a) a
business connection in India; (b) a property in India; (c) an establishment or source
in India; and (d) transfer of a capital asset in India.
Income deemed to accrue or arise in India
Section 9
(1) The following incomes shall be deemed to accrue or arise in India:
(i) all income accruing or arising, whether directly or indirectly,
through or from any business connection in India, or through or
from any property in India, or through or from any asset or source of
income in India, or through the transfer of a capital asset situate in
India.
[Explanation 1] - For the purposes of this clause -
(a) in the case of a business of which all the operations are not carried out in
India, the income of the business deemed under this clause to accrue or arise
in India shall be only such part of the income as is reasonably attributable to
the operations carried out in India;

(b) in the case of a non-resident, no income shall be deemed to accrue or
arise in India to him through or from operations which are confined to the
purchase of goods in India for the purpose of export;
(c) in the case of a non-resident, being a person engaged in the business of
running a news agency or of publishing newspapers, magazines or journals,
no income shall be deemed to accrue or arise in India to him through or from
activities which are confined to the collection of news and views in India for
transmission out of India;]
(a) in the case of a non-resident, being -
(1) an individual who is not a citizen of India; or
(2) a firm which does not have any partner who is a citizen of India
who is resident in India; or
(3) a company which does not have any shareholder who is a citizen
of India or who is resident in India.
2 5 3 . The meaning that we have to give to the expressions "either directly or
indirectly", "transfer", "capital asset" and "situated in India" is of prime importance
so as to get a proper insight on the scope and ambit of Section 9(1)(i) of the Income
Tax Act. The word "transfer" has been defined in Section 2(47) of the Income Tax
Act. The relevant portion of the same is as under:
2(47) "Transfer", in relation to a capital asset, includes.-
(i) the sale, exchange or relinquishment of the asset; or
(ii) the extinguishment of any rights therein; or
(iii) the compulsory acquisition thereof under any law; or
(iv) in a case where the asset is converted by the owner thereof into, or is
treated by him as, stocking-trade of a business carried on by him, such
conversion or treatment; or
xxx xxx xxx
xxx xxx xxx
The term "capital asset" is also defined under Section 2(14) of the Income Tax Act,
the relevant portion of which reads as follows:
2(14) "Capital asset" means property of any kind held by an Assessee,
whether or not connected with the business or profession, but does not
include-
1 . any stock-in-trade, consumable stores or raw materials held for the
purposes of his business or profession;
xxx xxx xxx
xxx xxx xxx

254. The meaning of the words "either directly or indirectly", when read textually
and contextually, would indicate that they govern the words those precede them,
namely the words "all income accruing or arising". The section provides that all
income accruing or arising, whether directly or indirectly, would fall within the
category of income that is deemed to accrue or arise in India. Resultantly, it is only
where factually it is established that there is either a business connection in India, or
a property in India, or an asset or source in India or a capital asset in India, the
transfer of which has taken place, the further question arises whether there is any
income deeming to accrue in India from those situations. In relation to the
expression "through or from a business connection in India", it must be established
in the first instance that (a) there is a non-resident; (b) who has a business
connection in India; and (c) income arises from this business connection.
255. Same is the situation in the case of income that "arises through or from a
property in India", i.e. (a) there must be, in the first instance, a property situated in
India; and (b) income must arise from such property. Similarly, in the case of
"transfer of a capital asset in India", the following test has to be applied: (a) there
must be a capital asset situated in India, (b) the capital asset has to be transferred,
and (c) the transfer of this asset must yield a gain. The word 'situate', means to set,
place, locate. The words "situate in India" were added in Section 9(1)(i) of the
Income Tax Act pursuant to the recommendations of the 12th Law Commission dated
26.9.1958.
256. Section 9 on a plain reading would show, it refers to a property that yields an
income and that property should have the sites in India and it is the income that
arises through or from that property which is taxable. Section 9, therefore, covers
only income arising from a transfer of a capital asset situated in India and it does not
purport to cover income arising from the indirect transfer of capital asset in India.
SOURCE
257. Revenue placed reliance on "Source Test" to contend that the transaction had a
deep connection with India, i.e. ultimately to transfer control over HEL and hence the
source of the gain to HTIL was India.
258. Source in relation to an income has been construed to be where the transaction
of sale takes place and not where the item of value, which was the subject of the
transaction, was acquired or derived from. HTIL and Vodafone are offshore
companies and since the sale took place outside India, applying the source test, the
source is also outside India, unless legislation ropes in such transactions.
259. Substantial territorial nexus between the income and the territory which seeks
to tax that income, is of prime importance to levy tax. Expression used in Section
9(1)(i) is "source of income in India" which implies that income arises from that
source and there is no question of income arising indirectly from a source in India.
Expression used is "source of income in India" and not "from a source in India".
Section 9 contains a "deeming provision" and in interpreting a provision creating a
legal fiction, the Court is to ascertain for what purpose the fiction is created, but in
construing the fiction it is not to be extended beyond the purpose for which it is
created, or beyond the language of section by which it is created. [See C.I.T.
Bombay City II v. Shakuntala (1962) 2 SCR 871, Mancheri Puthusseri Ahmed
v. Kuthiravattam Estate Receiver MANU/SC/1238/1996 : (1996) 6 SCC 185].
2 6 0 . Power to impose tax is essentially a legislative function which finds in its

expression Article 265 of the Constitution of India. Article 265 states that no tax shall
be levied except by authority of law. Further, it is also well settled that the subject is
not to be taxed without clear words for that purpose; and also that every Act of
Parliament must be read according to the natural construction of its words. Viscount
Simon quoted with approval a passage from Rowlatt, J. expressing the principle in
the following words:
In a taxing Act one has to look merely at what is clearly said. There is no
room for any intendment. There is no equity about a tax. There is no
presumption as to tax. Nothing is to be read in, nothing is to be implied. One
can only look fairly at the language used. [Cape Brandy Syndicate v. IRC
(1921) 1 KB 64, P. 71 (Rowlatt, J.)]
261. In Ransom (Inspector of Tax) v. Higgs 1974 3 All ER 949 (HL), Lord Simon
stated that it may seem hard that a cunningly advised tax-payer should be able to
avoid what appears to be his equitable share of the general fiscal burden and cast it
on the shoulders of his fellow citizens. But for the Courts to try to stretch the law to
meet hard cases (whether the hardship appears to bear on the individual tax-payer or
on the general body of tax-payers as represented by the Inland Revenue) is not
merely to make bad law but to run the risk of subverting the rule of law itself. The
proper course in construing revenue Acts is to give a fair and reasonable construction
to their language without leaning to one side or the other but keeping in mind that no
tax can be imposed without words and that equitable construction of the words is not
permissible [Ormond Investment Company v. Betts (1928) All ER Rep 709 (HL)],
a principle entrenched in our jurisprudence as well. In Mathuram Aggarwal (supra),
this Court relied on the judgment in Duke of Westminster and opined that the
charging section has to be strictly construed. An invitation to purposively construe
Section 9 applying look through provision without legislative sanction, would be
contrary to the ratio of Mathuram Aggarwal.
262. Section 9(1)(i) covers only income arising or accruing directly or indirectly or
through the transfer of a capital asset situated in India. Section 9(1)(i) cannot by a
process of "interpretation" or "construction" be extended to cover "indirect transfers"
of capital assets/property situate in India.
263. On transfer of shares of a foreign company to a nonresident off-shore, there is
no transfer of shares of the Indian Company, though held by the foreign company, in
such a case it cannot be contended that the transfer of shares of the foreign holding
company, results in an extinguishment of the foreign company control of the does not
situate in India. Transfer of the foreign holding company's share off-shore, cannot
result in an extinguishment of the holding company right of control of the Indian
company nor can it be stated that the same constitutes extinguishment and transfer
of an asset/ management and control of property situated in India.
264. The Legislature wherever wanted to tax income which arises indirectly from the
assets, the same has been specifically provided so. For example, reference may be
made to Section 64 of the Indian Income Tax Act, which says that in computing the
total income of an individual, there shall be included all such income as arises
directly or indirectly: to the son's wife, of such individual, from assets transferred
directly or indirectly on and after 1.6.73 to the son's wife by such individual
otherwise than for adequate consideration. The same was noticed by this Court in
CIT v. Kothari (CM), MANU/SC/0100/1963 : (1964) 2 SCR 531. Similar expression
like "from asset transferred directly or indirectly", we find in Sections 64(7) and (8)

as well. On a comparison of Section 64 and Section 9(1)(i) what is discernible is that
the Legislature has not chosen to extend Section 9(1)(i) to "indirect transfers".
Wherever "indirect transfers" are intended to be covered, the Legislature has
expressly provided so. The words "either directly or indirectly", textually or
contextually, cannot be construed to govern the words that follow, but must govern
the words that precede them, namely the words "all income accruing or arising". The
words "directly or indirectly" occurring in Section 9, therefore, relate to the
relationship and connection between a non-resident Assessee and the income and
these words cannot and do not govern the relationship between the transaction that
gave rise to income and the territory that seeks to tax the income. In other words,
when an Assessee is sought to be taxed in relation to an income, it must be on the
basis that it arises to that Assessee directly or it may arise to the Assessee indirectly.
In other words, for imposing tax, it must be shown that there is specific nexus
between earning of the income and the territory which seeks to lay tax on that
income. Reference may also be made to the judgment of this Court in Ishikawajma-
Harima Heavy Industries Ltd. v. Director of Income Tax, Mumbai
MANU/SC/0528/2007 : (2007) 3 SCC 481 andCIT v. R.D. Aggarwal
MANU/SC/0137/1964 : (1965) 1 SCR 660.
265. Section 9 has no "look through provision" and such a provision cannot be
brought through construction or interpretation of a word 'through' in Section 9. In
any view, "look through provision" will not shift the sites of an asset from one
country to another. Shifting of only by express legislation. Federal Commission of
Taxation v. Lamesa Holdings BV (LN) - (1998) 157 A.L.R. 290 gives an insight as
to how "look through" provisions are enacted. Section 9, in our view, has no inbuilt
"look through mechanism".
266. Capital gains are chargeable 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.
2 6 7 . Section 9(1)(i), therefore, in our considered opinion, will not apply to the
transaction in question or on the rights and entitlements, stated to have transferred,
as a fall out of the sale of CGP share, since the Revenue has failed to establish both
the tests, Resident Test as well the Source Test.
268. Vodafone, whether, could be proceeded against under Section 195(1) for not
deducting tax at source and, alternatively, under Section 163 of the Income Tax Act
as a representative Assessee, is the next issue.
SECTION 195 and OFFSHORE TRANSACTIONS
269. Section 195 provides that any person responsible for making any payment to a
non-resident which is chargeable to tax must deduct from such payment, the income
tax at source. Revenue contended that if a non-resident enters into a transaction
giving rise to income chargeable to tax in India, the necessary nexus of such non-
resident with India is established and the machinery provisions governing the
collection of taxes in respect of such chargeable income will spring into operation.
Further, it is also the stand of the Revenue that the person, who is a non-resident,
and not having a physical presence can be said to have a presence in India for the
purpose of Section 195, if he owns or holds assets in India or is liable to pay income
tax in India. Further, it is also the stand of the Revenue that once chargeability is
established, no further requirements of nexus needs to be satisfied for attracting

Section 195.
270. Vodafone had "presence" in India, according to the Revenue at the time of the
transaction because it was a Joint Venture (JV) Partner and held 10% equity interest
in Bharti Airtel Limited, a listed company in India. Further, out of that 10%, 5.61%
shares were held directly by Vodafone itself. Vodafone had also a right to vote as a
shareholder of Bharati Airtel Limited and the right to appoint two directors on the
Board of Directors of Bharti Airtel Limited. Consequently, it was stated that Vodafone
had a presence by reason of being a JV Partner in HEL on completion of HEL's
acquisition. Vodafone had also entered into Term Sheet Agreement with Essar Group
on 15.03.2007 to regulate the affairs of VEL which was restated by a fresh Term
Sheet Agreement dated 24.08.2007, entered into with Essar Group and formed a JV
Partnership in India. Further, Vodafone itself applied for IFPB approval and was
granted such approval on 07.05.2007. On perusal of the approval, according to the
Revenue, it would be clear that Vodafone had a presence in India on the date on
which it made the payment because of the approval to the transaction accorded by
FIPB. Further, it was also pointed out that, in fact, Vodafone had presence in India,
since by mid 1990, it had entered into a JV arrangement with RPG Group in the year
1994-95 providing cellular services in Madras, Madhya Pradesh circles. After parting
with its stake in RPG Group, in the year 2003, Vodafone in October, 2005 became a
10% JV Partner in HEL. Further, it was pointed out that, in any view, Vodafone could
be treated as a representative Assessee of HTIL and hence, notice under Section 163
was validly issued to Vodafone.
271. Vodafone has taken up a specific stand that "tax presence" has to be viewed in
the context of the transaction that is subject to tax and not with reference to an
entirely unrelated matter. Investment made by Vodafone group in Bharti Airtel would
not make all entities of Vodafone group of companies subject to the Indian Law and
jurisdiction of the Taxing Authorities. "Presence", it was pointed out, be considered in
the context of the transaction and not in a manner that brings a non-resident
Assessee under jurisdiction of Indian Tax Authorities. Further, it was stated that a
"tax presence" might arise where a foreign company, on account of its business in
India, becomes a resident in India through a permanent establishment or the
transaction relates to the permanent establishment.
272. Vodafone group of companies was a JV Partner in Bharti Airtel Limited which
has absolutely no connection whatsoever with the present transaction. The mere fact
that the Vodafone group of companies had entered into some transactions with
another company cannot be treated as its presence in a totally unconnected
transaction.
273. To examine the rival stand taken up by Vodafone and the Revenue, on the
interpretation of Section 195(1) it is necessary to examine the scope and ambit of
Section 195(1) of the Income Tax Act and other related provisions. For easy
reference, we may extract Section 195(1) which reads as follows:
Section 195. OTHER SUMS.- (1) Any person responsible for paying to a non-
resident, not being a company, or to a foreign company, any interest or any
other sum chargeable under the provisions of this Act (not being income
chargeable under the head "Salaries" shall, at the time of credit of such
income to the account of the payee or at the time of payment thereof in cash
or by the issue of a cheque or draft or by any other mode, whichever is
earlier, deduct income-tax thereon at the rates in force:

Provided that in the case of interest payable by the Government or a public
sector bank within the meaning of Clause (23D) of Section 10 or a public
financial institution within the meaning of that clause, deduction of tax shall
be made only at the time of payment thereof in cash or by the issue of a
cheque or draft or by any other mode:
Provided further that no such deduction shall be made in respect of any
dividends referred to in Section 115O.
Explanation: For the purposes of this section, where any interest or other
sum as aforesaid is credited to any account, whether called "Interest payable
account" or "Suspense account" or by any other name, in the books of
account of the person liable to pay such income, such crediting shall be
deemed to be credit of such income to the account of the payee and the
provisions of this section shall apply accordingly.
Section 195 finds a place in Chapter XVII of the Income Tax Act which deals with
collection and recovery of tax. Requirement to deduct tax is not limited to deduction
and payment of tax. It requires compliance with a host of statutory requirements like
Section 203 which casts an obligation on the Assessee to issue a certificate for the
tax deducted, obligation to file return 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.
274. Article 246 of the Constitution gives Parliament the authority to make laws
which are extra-territorial in application. Article 245(2) says that no law made by the
Parliament shall be deemed to be invalid on the ground that it would have extra
territorial operation. Now the question is whether Section 195 has got extra territorial
operations. It is trite that laws made by a country are intended to be applicable to its
own territory, but that presumption is not universal unless it is shown that the
intention was to make the law applicable extra territorially. We have to examine
whether the presumption of territoriality holds good so far as Section 195 of the
Income Tax Act is concerned and is there any reason to depart from that
presumption.
2 7 5 . A literal construction of the words "any person responsible for paying" as
including non-residents would lead to absurd consequences. A reading of Sections
191A, 194B, 194C, 194D, 194E, 194I, 194J read with Sections 115BBA, 194I, 194J
would show that the intention of the Parliament was first to apply Section 195 only to
the residents who have a tax presence in India. It is all the more so, since the person
responsible has to comply with various statutory requirements such as compliance of
Sections 200(3), 203 and 203A.
2 7 6 . The expression "any person", in our view, looking at the context in which
Section 195 has been placed, would mean any person who is a resident in India. This
view is also supported, if we look at similar situations in other countries, when tax
was sought to be imposed on non-residents. One of the earliest rulings which paved

the way for many, was the decision in Ex Parte Blain; In re Sawers (1879) LR 12 ChD
522 at 526, wherein the Court stated that "if a foreigner remain abroad, if he has
never come into this country at all, it seems impossible to imagine that the English
Legislature could ever have intended to make such a person subject to particular
English Legislation." In Clark (Inspector of Taxes) v. Oceanic Contractors Inc.
(1983) 1 ALL ER 133, the House of Lords had to consider the question whether
chargeability has ipso facto sufficient nexus to attract TDS provisions. A TDS
provision for payment made outside England was not given extra territorial
application based on the principle of statutory interpretation. Lord Scarman, Lord
Wilberforce and Lord Roskill held so on behalf of the majority and Lord Edmond
Davies and Lord Lowry in dissent. Lord Scarman said:
unless the contrary is expressly enacted or so plainly implied as to make it
the duty of an English court to give effect to it, United Kingdom Legislation is
applicable only to British subjects or to foreigners who by coming into this
country, whether for a long or short time, have made themselves during that
time subject to English jurisdiction.
The above principle was followed in Agassi v. Robinson (2006) 1 WLR 2126.
2 7 7 . This Court in CIT v. Eli Lilly and Company (India) P. Ltd.
MANU/SC/0487/2009 : (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 no occasion to consider a situation where salaries
were paid by non-residents to another non- resident. Eli Lilly was a part of the JV and
services were rendered in India for the JV. In our view, the ruling in that case is of
no assistance to the facts of the present case since, here, both parties were non-
residents and payment was also made offshore, unlike the facts in Eli Lilly where the
services were rendered in India and received a portion of their salary from JV situated
in India.
278. In the instant case, indisputedly, CGP share was transferred offshore. Both the
companies were incorporated not in India but offshore. Both the companies have no
income or fiscal assets in India, leave aside the question of transferring, those fiscal
assets in India. Tax presence has to be viewed in the context of transaction in
question and not with reference to an entirely unrelated transaction. Section 195, in
our view, would apply only if payments made from a resident to another non-resident
and not between two nonresidents situated outside India. In the present case, the
transaction was between two non-resident entities through a contract executed
outside India. Consideration was also passed outside India. That transaction has no
nexus with the underlying assets in India. In order to establish a nexus, the legal
nature of the transaction has to be examined and not the indirect transfer of rights
and entitlements in India. Consequently, Vodafone is not legally obliged to respond
to Section 163 notice which relates to the treatment of a purchaser of an asset as a
representative Assessee.

PART-VIII
CONCLUSION:
279. I, therefore, find it difficult to agree with the conclusions arrived at by the High
Court that the sale of CGP share by HTIL to Vodafone would amount to transfer of a
capital asset within the meaning of Section 2(14) of the Indian Income Tax Act and
the rights and entitlements flow from FWAs, SHAs, Term Sheet, loan assignments,
brand license etc. form integral part of CGP share attracting capital gains tax.
Consequently, the demand of nearly Rs. 12,000 crores by way of capital gains tax, in
my view, would amount to imposing capital punishment for capital investment since
it lacks authority of law and, therefore, stands quashed and I also concur with all the
other directions given in the judgment delivered by the Lord Chief Justice.
280. For the above reasons, we set aside the impugned judgment of the Bombay
High Court dated 8.09.2010 in Writ Petition No. 1325 of 2010. Accordingly, the Civil
Appeal stands allowed with no order as to costs. The Department is hereby directed
to return the sum of Rs. 2,500 crores, which came to be deposited by the Appellant in
terms of our interim order, with interest at the rate of 4% per annum within two
months from today. The interest shall be calculated from the date of withdrawal by
the Department from the Registry of the Supreme Court up to the date of payment.
The Registry is directed to return the Bank Guarantee given by the Appellant within
four weeks.
281. No orders are required to be passed on intervention applications.
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be, in reality part of one concern.

Lifting the Corporate Veil doctrine was also applied

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