REPORTABLE IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO.733 OF 2012

(arising out of S.L.P. (C) No. 26529 of 2010)

Vodafone International Holdings B.V. … Appellant(s)

         versus

Union of India & Anr.        …Respondent(s)

J U D G M E N T

S.H. KAPADIA, CJI

1. Leave granted.

Introduction

2. This  matter  concerns  a  tax  dispute  involving  the  

Vodafone Group with the Indian Tax Authorities [hereinafter  

referred to for  short  as “the Revenue”],  in relation to the  

acquisition by Vodafone International Holdings BV [for short  

“VIH”],  a  company  resident  for  tax  purposes  in  the  

Netherlands, of the entire share capital of CGP Investments

(Holdings) Ltd. [for short “CGP”], a company resident for tax  

purposes  in  the  Cayman  Islands  [“CI”  for  short]  vide  

transaction dated 11.02.2007, whose stated aim, according  

to the Revenue, was “acquisition of 67% controlling interest  

in HEL”, being a company resident for tax purposes in India  

which is disputed by the appellant saying that VIH agreed to  

acquire companies which in turn controlled a 67% interest,  

but  not  controlling  interest,  in  Hutchison  Essar  Limited  

(“HEL”  for  short).   According  to  the  appellant,  CGP  held  

indirectly  through  other  companies  52%  shareholding  

interest in HEL as well as Options to acquire a further 15%  

shareholding interest in HEL, subject to relaxation of FDI  

Norms.  In short, the Revenue seeks to tax the capital gains  

arising  from the  sale  of  the  share  capital  of  CGP on the  

basis that CGP, whilst not a tax resident in India, holds the  

underlying Indian assets.

Facts

A. Evolution  of  the  Hutchison  structure  and  the  

Transaction

3. The Hutchison Group, Hong Kong (HK) first invested  

into the telecom business in India in 1992 when the said  

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Group invested  in  an Indian joint  venture  vehicle  by the  

name  Hutchison  Max  Telecom  Limited  (HMTL)  –  later  

renamed as HEL.   

4. On  12.01.1998,  CGP  stood  incorporated  in  Cayman  

Islands, with limited liability,  as an “exempted company”,  

its  sole  shareholder  being  Hutchison  Telecommunications  

Limited, Hong Kong [“HTL” for short], which in September,  

2004  stood  transferred  to  HTI  (BVI)  Holdings  Limited  

[“HTIHL  (BVI)”  for  short]  vide  Board  Resolution  dated  

17.09.2004. HTIHL (BVI) was the buyer of the CGP Share.  

HTIHL  (BVI)  was  a  wholly  owned  subsidiary  (indirect)  of  

Hutchison  Telecommunications  International  Limited  (CI)  

[“HTIL” for short].  

5. In March, 2004, HTIL stood incorporated and listed on  

Hong Kong and New York Stock Exchanges in September,  

2004.   

6. In  February,  2005,  consolidation  of  HMTL  (later  on  

HEL)  got  effected.  Consequently,  all  operating  companies  

below  HEL  got  held  by  one  holding  company,  i.e.,  

HMTL/HEL.  This was with the approval of RBI and FIPB.  

The  ownership  of  the  said  holding  company,  i.e.,  

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HMTL/HEL was consolidated into the tier I companies all  

based  in  Mauritius.  Telecom  Investments  India  Private  

Limited  [“TII”  for  short],  IndusInd  Telecom  Network  Ltd.  

[“ITNL”  for  short]  and  Usha  Martin  Telematics  Limited  

[“UMTL” for short] were the other shareholders, other than  

Hutchison and Essar, in HMTL/HEL.  They were Indian tier  

I companies above HMTL/HEL.  The consolidation was first  

mooted as early as July, 2003.   

7. On  28.10.2005,  VIH  agreed  to  acquire  5.61%  

shareholding in Bharti Televentures Ltd. (now Bharti Airtel  

Ltd.).   On  the  same  day,  Vodafone  Mauritius  Limited  

(subsidiary of VIH) agreed to acquire 4.39% shareholding in  

Bharti Enterprises Pvt. Ltd. which indirectly held shares in  

Bharti Televentures Ltd. (now Bharti Airtel Ltd.).

8. On  3.11.2005,  Press  Note  5  was  issued  by  the  

Government of India enhancing the FDI ceiling from 49% to  

74% in telecom sector.  Under this Press Note, proportionate  

foreign component held in any Indian company was also to  

be counted towards the ceiling of 74%.

9. On  1.03.2006,  TII  Framework  and  Shareholders  

Agreements stood executed under which the shareholding of  

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HEL was restructured through “TII”, an Indian company, in  

which Analjit  Singh (AS)  and Asim Ghosh (AG),  acquired  

shares  through  their  Group  companies,  with  the  credit  

support  provided by HTIL.   In consideration of  the credit  

support, parties entered into Framework Agreements under  

which a Call Option was given to 3 Global Services Private  

Limited [“GSPL” for short], a subsidiary of HTIL, to buy from  

Goldspot  Mercantile  Company  Private  Limited  [“Goldspot”  

for short] (an AG company) and Scorpios Beverages Private  

Limited [“Scorpios” for short] (an AS company) their entire  

shareholding in TII.  Additionally, a Subscription Right was  

also  provided  allowing  GSPL  a  right  to  subscribe  to  the  

shares  of  Centrino  Trading  Company  Private  Limited  

[“Centrino”  for short]  and ND Callus Info Services Private  

Limited [“NDC” for short].   GSPL was an Indian company  

under a Mauritius subsidiary of CGP which stood indirectly  

held  by  HTIL.   These  agreements  also  contained  clauses  

which  imposed  restrictions  to  transfer  downstream  

interests, termination rights, subject to objection from any  

party, etc.  

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10. The shareholding of HEL again underwent a change on  

7.08.2006  through  execution  of  2006  IDFC  Framework  

Agreement  with  the  Hinduja  Group  exiting  and  its  

shareholding being acquired by SMMS Investments Private  

Limited [“SMMS” for short], an Indian company.  Hereto, the  

investors (as described in the Framework Agreement) were  

prepared to  invest  in  ITNL provided that  HTIL and GSPL  

procured financial assistance for them and in consideration  

whereof GSPL would have Call Option to buy entire equity  

shares  of  SMMS.   Hereto,  in  the  Framework  Agreement  

there  were  provisions  imposing  restrictions  on  Share  

Transfer,  Change  of  Control  etc.   On  17.08.2006,  a  

Shareholders  Agreement  stood  executed  which  dealt  with  

governance of ITNL.   

11. On 22.12.2006, an Open Offer was made by Vodafone  

Group  Plc.  on  behalf  of  Vodafone  Group  to  Hutchison  

Whampoa Ltd., a non-binding bid for US $11.055 bn being  

the enterprise value for HTIL’s 67% interest in HEL.   

12. On 22.12.2006, a press release was issued by HTIL in  

Hong Kong and New York Stock Exchanges that it had been  

approached  by  various  potentially  interested  parties  

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regarding  a  possible  sale  of  “its  equity  interests”  (not  

controlling interest ) in HEL.  That, till date no agreement  

stood entered into by HTIL with any party.   

13. On 25.12.2006, an offer comes from Essar Group to  

purchase HTIL’s 66.99% shareholding at the highest offer  

price received by HTIL.  Essar further stated that any sale  

by HTIL would require its consent as it claimed to be a co-

promoter of HEL.

14. On 31.01.2007, a meeting of the Board of Directors of  

VIH was held approving the submission of a binding offer  

for 67% of HTIL’s interest at 100% enterprise value of US  

$17.5 bn by way of acquisition by VIH of one share (which  

was the entire shareholding)  in CGP, an indirect  Cayman  

Islands subsidiary of HTIL.  The said approval was subject  

to:

(i) reaching an agreement with Bharti that allowed VIH  

to make a bid on Hutch; and

(ii) entering  into  an  appropriate  partnership  

arrangement to satisfy FDI Rules in India.

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15. On  6.02.2007,  HTIL  calls  for  a  binding  offer  from  

Vodafone Group for its aggregate interests in 66.98% of the  

issued share capital of HEL controlled by companies owned,  

directly  or  indirectly,  by  HTIL  together  with  inter-related  

loans.  

16. On 9.02.2007, Vodafone Group makes a revised offer  

on behalf of VIH to HTIL.  The said revised offer was of US  

$10.708 bn for 66.98% interest [at the enterprise value of  

US $18.250 bn] and for US $1.084 bn loans given by the  

Hutch  Group.   The  offer  further  confirmed  that  in  

consultation with HTIL, the consideration payable may be  

reduced  to  take  account  of  the  various  amounts  which  

would  be  payable  directly  to  certain  existing  legal  local  

partners in order to extinguish HTIL’s previous obligations  

to them.  The offer further confirmed that VIH had come to  

arrangements  with HTIL’s  existing  local  partners  [AG,  AS  

and Infrastructure Development Finance Company Limited  

(IDFC)]  to  maintain  the  local  Indian  shareholdings  in  

accordance with the Indian FDI requirements.  The offer  

also  expressed  VIH’s  willingness  to  offer  Essar  the  same  

financial terms in HEL which stood offered to HTIL.

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17. On the same day, i.e., 9.02.2007, Bharti conveys its no  

objection  to  the  proposal  made  by  Vodafone  Group  to  

purchase  a  direct  or  indirect  interest  in  HEL  from  the  

Hutchison Group and/ or Essar Group.   

18. On 10.02.2007, a  re-revised offer was submitted by  

Vodafone valuing HEL at an enterprise value of US $18.80  

bn and offering US $11.076 bn for HTIL’s interest in HEL.  

19. On  11.02.2007,  a  Tax  Due  Diligence  Report  was  

submitted by Ernst & Young.  The relevant observation from  

the said Report reads as follows:

“The  target  structure  now  also  includes  a  Cayman company, CGP Investments (Holdings)  Limited,  CGP  Investments  (Holdings)  Limited  was not originally within the target group. After  our  due  diligence  had  commenced  the  seller  proposed  that  CGP  Investments  (Holdings)  Limited should be added to the target group and  made  available  certain  limited  information  about the company. Although we have reviewed  this information, it is not sufficient for us to be  able  to  comment  on  any  tax  risks  associated  with the company.”

20. On  11.02.2007,  UBS  Limited  (Financial  Advisors  to  

VIH)  submitted  a  financial  report  setting  out  the  

methodology for valuation of HTIL’s 67% effective interest in  

HEL through the acquisition of 100% of CGP.

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21. On  11.02.2007,  VIH  and  HTIL  entered  into  an  

Agreement for Sale and Purchase of Share and Loans (“SPA”  

for short), under which HTIL agreed to procure the sale of  

the entire share capital of CGP which it held through HTIHL  

(BVI)  for  VIH.   Further,  HTIL  also  agreed to  procure  the  

assignment  of  Loans  owed  by  CGP  and  Array  Holdings  

Limited [“Array” for short] (a 100% subsidiary of CGP) to HTI  

(BVI) Finance Ltd. (a direct subsidiary of HTIL).  As part of  

its obligations, HTIL undertook to procure that each Wider  

Group Company would not terminate or modify any rights  

under any of its Framework Agreements or exercise any of  

their  Options  under  any  such  agreement.   HTIL  also  

provided several warranties to VIH as set out in Schedule 4  

to  SPA which included  that  HTIL  was  the  sole  beneficial  

owner of CGP share.   

22. On 11.02.2007, a Side Letter was sent by HTIL to VIH  

inter alia stating that out of the purchase consideration, up  

to  US  $80  million  could  be  paid  to  some  of  its  existing  

partners.  By the said Side Letter, HTIL agreed to procure  

that Hutchison Telecommunications (India) Ltd. (Ms) [“HTIL  

Mauritius”  for  short],  Omega  Telecom  Holdings  Private  

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Limited [“Omega” for short] and GSPL would enter into IDFC  

Transaction  Agreement  prior  to  the  completion  of  the  

acquisition pursuant to SPA, which completion ultimately  

took place on 8.05.2007.

23. On 12.02.2007, Vodafone makes public announcement  

to Securities and Exchange Commission [“SEC” for short],  

Washington  and  on  London  Stock  Exchange  which  

contained two assertions saying that Vodafone had agreed  

to acquire a controlling interest in HEL via its subsidiary  

VIH  and,  second,  that  Vodafone  had  agreed  to  acquire  

companies that control a 67%  interest in HEL.  

24. On the same day, HTIL makes an announcement on  

HK Stock Exchange stating  that  it  had agreed to  sell  its  

entire  direct  and  indirect  equity  and  loan  interests  held  

through subsidiaries, in HEL to VIH.   

25. On 20.02.2007, VIH applied for approval to FIPB.  This  

application  was  made  pursuant  to  Press  Note  1  which  

applied to the acquisition of an indirect interest in HEL by  

VIH from HTIL.  It was stated that “CGP owns directly and  

indirectly through its subsidiaries an aggregate of 42.34% of  

the  issued  share  capital  of  HEL  and  a  further  indirect  

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interests  in  9.62%  of  the  issued  share  capital  of  HEL”.  

That,  the  transaction  would  result  in  VIH  acquiring  an  

indirect controlling interest of 51.96% in HEL, a company  

competing  with  Bharti,  hence,  approval  of  FIPB  became  

necessary.  It is to be noted that on 20.02.2007, VIH held  

5.61% stake (directly) in Bharti.   

26. On the same day,  i.e.,  20.02.2007,  in compliance of  

Clause 5.2 of SPA, an Offer Letter was issued by Vodafone  

Group Plc  on behalf  of  VIH  to  Essar  for  purchase  of  its  

entire shareholding (33%) in HEL.

27. On 2.03.2007, AG wrote to HEL, confirming that he,  

through his  100% Indian companies,  owned 23.97% of  a  

joint venture company-TII, which in turn owned 19.54% of  

HEL and, accordingly, his indirect interest in HEL worked  

out  to  4.68%.   That,  he  had full  and unrestricted  voting  

rights in companies owned by him.  That, he had received  

credit support for his investments, but primary liability was  

with his companies.   

28. A similar letter was addressed by AS on 5.03.2007 to  

FIPB.  It may be noted that in January, 2006, post dilution  

of FDI cap, HTIL had to shed its stake to comply with 26%  

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local  shareholding  guideline.   Consequently,  AS  acquired  

7.577% of HEL through his companies.   

29. On  6.03.2007,  Essar  objects  with  FIPB  to  HTIL’s  

proposed  sale  saying  that  HEL  is  a  joint  venture  Indian  

company between Essar and Hutchison Group since May,  

2000.  That, Bharti is also an Indian company in the “same  

field”  as HEL.   Bharti  was a direct  competitor  of  HEL in  

India.   According  to  Essar,  the  effect  of  the  transaction  

between  HTIL  and  VIH  would  be  that  Vodafone  with  an  

indirect controlling interest in HEL and in Bharti  violated  

Press  Note  1,  particularly,  absent  consent  from  Essar.  

However,  vide  letter  dated  14.03.2007,  Essar  gave  its  

consent  to  the  sale.   Accordingly,  its  objection  stood  

withdrawn.   

30. On  14.03.2007,  FIPB  wrote  to  HEL  seeking  

clarification regarding a statement by HTIL before US SEC  

stating  that  HTIL  Group  would  continue  to  hold  an  

aggregate  interest  of  42.34%  of  HEL  and  an  additional  

indirect interest through JVCs [TII and Omega] being non-

wholly owned subsidiaries of HTIL which held an aggregate  

of 19.54% of HEL, which added up to 61.88%, whereas in  

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the communication to FIPB dated 6.03.2007, the direct and  

indirect FDI held by HTIL was stated to be 51.96%.   

31. By letter of the same date from HEL to FIPB, it was  

pointed  out  that  HTIL  was  a  company  listed  on  NY  SE.  

Accordingly, it had to file Statements in accordance with US  

SEC.  That, under US GAAP, HTIL had to  consolidate the  

assets and liabilities of companies even though not majority  

owned or controlled by HTIL,  because of a US accounting  

standard  that  required  HTIL  to  consolidate  an  entity  

whereby  HTIL  had   “risk  or  reward”.   Therefore,  this  

accounting  consolidation  required  that  even though HTIL  

held no shares nor management rights still they had to be  

computed in the computation of the holding in terms of the  

Listing Norms.  It is the said accounting consolidation which  

led  to  the  reporting  of  additional  19.54% in  HEL,  which  

leads to combined holding of 61.88%.   On the other hand,  

under  Indian  GAAP,  the  interest  as  of  March,  2006  was  

42.34%  +  7.28%  (rounded  up  to  49.62%).   After  the  

additional  purchase  of  2.34%  from  Hindujas  in  August  

2006, the aggregate HTIL direct and indirect FDI stood at  

51.96%.  In short, due to the difference in the US GAAP and  

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the  Indian GAAP the Declarations  varied.   The combined  

holding  for  US  GAAP  purposes  was  61.88%  whereas  for  

Indian GAAP purposes it was 51.96%.   Thus, according to  

HEL,  the  Indian  GAAP  number  reflected  the  true  equity  

ownership and control position.  

32. By letter dated 9.03.2007, addressed by FIPB to HEL,  

several queries were raised.  One of the questions FIPB had  

asked was “as to  which  entity  was  entitled to appoint  the  

directors to the Board of Directors of HEL on behalf  of TIIL   

which owns 19.54% of HEL?”  In answer, vide letter dated  

14.03.2007, HEL informed FIPB that under the Articles of  

HEL  the  directors  were  appointed  by  its  shareholders  in  

accordance with the provisions of the Indian company law.  

However,  in  practice  the  directors  of  HEL  have  been  

appointed pro rata to their respective shareholdings which  

resulted  in  4  directors  being  appointed  from  the  Essar  

Group, 6 directors from HTIL Group and 2 directors from  

TII.  In practice, the directors appointed by TII to the Board  

of HEL were AS and AG.  One more clarification was sought  

by FIPB from HEL on the credit support received by AG for  

his investment in HEL.  In answer to the said query, HEL  

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submitted that the credit support for AG Group in respect of  

4.68% stake in HEL through the Asim Ghosh investment  

entities, was a standby letter of credit issued by Rabobank  

Hong Kong in favour of Rabo India Finance Pvt. Ltd. which  

in turn has made a Rupee loan facility available to Centrino,  

one of the companies in AG Group.   

33. By letter dated 14.03.2007 addressed by VIH to FIPB,  

it  stood  confirmed  that  VIH’s  effective  shareholding in  

HEL would be 51.96%.  That, following completion of the  

acquisition HTIL’s shares in HEL the ownership of HEL was  

to be as follows :

(i) VIH  would  own  42%  direct  interest  in  HEL  

through its acquisition of 100% CGP (CI).

(ii) Through CGP (CI), VIH would also own 37.25% in  

TII which in turn owns 19.54% in HEL and 38%  

(45.79%) in Omega which in turn owns 5.11% in  

HEL (i.e. pro-rata route).

(iii) These  investments  combined  would  give  VIH  a  

controlling interest of 52% in HEL.

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(iv) In addition, HTIL’s existing Indian partners AG,  

AS and IDFC (i.e. SMMS), who between them held  

a 15% interest in HEL (i.e. option route), agreed  

to  retain  their  shareholdings  with  full  control,  

including  voting  rights  and dividend rights.   In  

other words, none of the Indian partners exited  

and,  consequently,  there  was  no  change  of  

control.

(v) The Essar Group would continue to own 33% of  

HEL.

34. On 15.03.2007,  a  Settlement  Agreement  was  signed  

between HTIL and Essar Group.  Under the said Agreement,  

HTIL agreed to pay US $415 mn to Essar for the following:

(a)acceptance of the SPA;

(b)for  waiving  rights  or  claims  in  respect  of  

management and conduct of affairs of HEL;

(c) for giving up Right of First Refusal (RoFR), Tag Along  

Rights  (TARs)  and  shareholders  rights  under  

Agreement dated 2.05.2000; and

(d)for giving up its objections before FIPB.

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35. Vide Settlement Agreement, HTIL agreed to dispose of  

its direct and indirect equity, loan and other interests and  

rights, in and related to HEL, to VIH.  These other rights  

and  interests  have  been enumerated  in  the  Order  of  the  

Revenue dated 31.05.2010 as follows :

1. Right  to  equity  interest  (direct  and  indirect)  in  

HEL.

2. Right to do telecom business in India

3. Right to jointly own and avail the telecom licences  

in India

4. Right to use the Hutch brand in India

5. Right to appoint/remove directors from the Board  

of HEL and its subsidiaries

6. Right  to  exercise  control  over  the  management  

and affairs of the business of HEL (Management  

Rights)

7. Right  to  take  part  in  all  the  investment,  

management and financial decisions of HEL

8. Right  over  the  assigned  loans  and  advances  

utilized for the business in India

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9. Right of subscribing at par value in certain Indian  

companies

10. Right to exercise call option at the price agreed in  

Indian companies

11. Right to control premium

12. Right  to  non-compete  against  HTIL  within  the  

territory of India

13. Right to consultancy support in the use of Oracle  

license for the Indian business

14. Other  intangible  rights  (right  of  customer base,  

goodwill etc.)

36. On 15.03.2007, a Term Sheet Agreement between VIH  

and Essar Teleholdings Limited, an Indian company which  

held 11% in HEL, and Essar  Communications  Limited,  a  

Mauritius company which held 22% in HEL, was entered  

into for regulating the affairs of HEL and the relationship of  

the shareholders of HEL.  In the recitals, it was stated that  

VIH had agreed to acquire the entire indirect shareholding  

of  HTIL  in  HEL,  including  all  rights,  contractual  or  

otherwise,  to  acquire  directly  or  indirectly  shares  in  HEL  

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owned by others which shares shall, for the purpose of the  

Term Sheet, be considered to be part of the holding acquired  

by VIH.  The Term Sheet governed the relationship between  

Essar and VIH as shareholders of HEL including VIH’s right  

as a shareholder of HEL:  

(a)to nominate 8 directors out of 12 to the Board of  

Directors;

(b)nominee of Vodafone had to be there to constitute  

the quorum for the Board of Directors;

(c) to get a RoFR over the shares held by Essar in HEL;

(d)should Vodafone Group shareholder sell its shares  

in HEL to an outsider, Essar had a TAR in respect of  

Essar’s shareholding in HEL.

37. On 15.03.2007,  a Put  Option Agreement was signed  

between VIH and Essar Group requiring VIH to buy from  

Essar  Group Shareholders  all  the  Option Shares  held  by  

them.  

2

38. By letter dated 17.03.2007, HTIL confirmed in writing  

to AS that it had no beneficial, or legal or any other right in  

AS’s TII interest or HEL interest.   

39. On 19.03.2007, a letter was addressed by FIPB to VIH  

asking VIH to clarify as to under what circumstances VIH  

agreed to pay US $11.08 bn for acquiring 67% of HEL when  

the  actual  acquisition  is  only  51.96%.   This  query  

presupposes  that  even  according  to  FIPB  the  actual  

acquisition was only 51.96% (52% approx.).

40. On the same day, VIH replied that VIH has agreed to  

acquire  from HTIL,  interests  in  HEL which included 52%  

equity  shareholding  for  US  $11.08  bn.   That,  the  price  

included a control premium, use and rights to the Hutch  

Brand in India, a non-compete agreement with the Hutch  

Group,  the value of  non-voting non-convertible  preference  

shares,  various  loans  obligations  and  the  entitlement  to  

acquire a further 15% indirect interest in HEL as set out in  

the  letter  dated  14.03.2007  addressed  to  FIPB (see  page  

6117 of  SLP Vol.  26).   According to the said letter  dated  

19.03.2007, all the above elements together equated to 67%  

of the economic value of HEL.

2

41. Vide  Agreement  dated  21.03.2007,  VIH  diluted  its  

stake in Bharti by 5.61%.  

42. In reply to the queries raised by FIPB regarding break  

up of valuation, VIH confirmed as follows:   

Various assets and liabilities of CGP included its rights  

and entitlements, including subscription rights, call options  

to acquire in future a further 62.75% of TII, call options to  

acquire in future a further 54.21% of Omega which together  

would give a further 15.03% proportionate indirect equity  

ownership  of  HEL,  control  premium,  use  and  rights  to  

Hutch brand in India and a non-compete agreement with  

HTIL.  No individual price was assigned to any of the above  

items.   That,  under  IFRS,  consolidation  included TII  and  

Omega and, consequently, the accounts under IFRS showed  

the  total  shareholding  in  HEL  as  67%  (approx.).   Thus,  

arrangements relating to Options stood valued as assets of  

CGP.  In global basis valuation, assets of CGP consisted of:  

its  downstream  holdings,  intangibles  and  arrangement  

relating to Options, i.e. Bundle of Rights acquired by VIH.  

This reply was in the letter dated 27.03.2007 in which it  

was further stated that HTIL had conducted an auction for  

2

sale of its interests in HEL in which HTIL had asked each  

bidder  to  name its  price  with  reference  to  the  enterprise  

value  of  HEL.   As  a  consequence  of  the  transaction,  

Vodafone  will  effectively  step  into  the  shoes  of  HTIL  

including all the rights in respect of its Indian investments  

that HTIL enjoyed.  Lastly, the Indian joint venture partners  

would remain invested in HEL as the transaction did not  

involve the Indian investors selling any of their  respective  

stakes.  

43. On  5.04.2007,  HEL  wrote  to  the  Joint  Director  of  

Income Tax (International Taxation) stating that HEL had no  

tax liabilities accruing out of the subject transaction.

44. Pursuant  to  the  resolution  passed  by  the  Board  of  

Directors  of  CGP  on  30.04.2007,  it  was  decided  that  on  

acquisition loans owed by CGP to HTI (BVI)  Finance Ltd.  

would  be  assigned  to  VIH;  the  existing  Directors  of  CGP  

would resign; Erik de Rijk would become the only Director  

of CGP.  A similar resolution was passed on the same day  

by the Board of Directors of Array.

2

45. On  7.05.2007,  FIPB  gave  its  approval  to  the  

transaction, subject to compliance with the applicable laws  

and regulations in India.

46. On 8.05.2007, consequent upon the Board Resolutions  

passed  by  CGP  and  its  downstream  companies,  the  

following steps were taken:

(i) resignation of all the directors of Hutch Group;

(ii) appointment of new directors of Vodafone Group;

(iii) resolutions  passed  by  TII,  Jaykay  Finholding  

(India)  Private  Limited,  UMT  Investments  Ltd.,  

UMTL,  Omega  (Indian  incorporated  holding  

companies)  accepting  the  resignation  of  HTIL’s  

nominee directors and appointing VIH’s nominee  

directors;

(iv) same  steps  were  taken  by  HEL  and  its  

subsidiaries;

(v) sending of a Side Letter by HTIL to VIH relating to  

completion mechanics;

(vi) computation  of  net  amount  payable  by  VIH  to  

HTIL including retention of a certain amount out  

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of  US  $11.08  bn  paid  on  8.05.2007  towards  

expenses to operationalize the Option Agreements  

and adjustments for breach (if any) of warranties,  

etc.;

(vii) assignment of loans given by HTI (BVI) Finance  

Ltd. to CGP and Array in favour of VIH;

(viii) cancellation  of  share  certificate  of  HTIHL  (BVI)  

and entering the name of VIH in the Register of  

Members of CGP;

(ix) execution of Tax Deed of Covenant indemnifying  

VIH in respect of tax or transfer pricing liabilities  

payable by Wider Group (CGP, GSPL, Mauritius  

holding companies, Indian operating companies).

(x) a  Business  Transfer  Agreement  between  GSPL  

and a subsidiary  of  HWP Investments  Holdings  

(India)  Ltd.  (Ms)  for  sale  of  Call  Centre  earlier  

owned by GSPL;

(xi) payment of US $10.85 bn by VIH to HTIL (CI).

2

47. On  5.06.2007,  under  the  Omega  Agreement,  it  was  

agreed that in view of the SPA there would be a consequent  

change of control in HTIL Mauritius, which holds 45.79% in  

Omega, and that India Development Fund (“IDF” for short),  

IDFC and SSKI Corporate Finance Private Limited (“SSKI”  

for  short)  would,  instead  of  exercising  Put  Option  and  

Cashless Option under 2006 IDFC Framework Agreement,  

exercise the same in pursuance of Omega Agreement.  That,  

under  the  Omega  Agreement,  GSPL  waived  its  right  to  

exercise the Call Option under the 2006 IDFC Framework  

Agreement.

48. On 6.06.2007,  a  Framework  Agreement  was entered  

into among IDF, IDFC, SMMS, IDFC PE, HTIL Mauritius,  

GSPL, Omega and VIH by which GSPL had a Call Option to  

buy the entire equity shares of SMMS.  Consequently, on  

7.06.2007,  a  Shareholders  Agreement  was  executed  by  

which  the  shareholding  pattern  of  Omega  changed  with  

SMMS having 61.6% and HTIL Mauritius having 38.4%.

2

49. On 27.06.2007, HTIL declared a  special dividend of  

HK $6.75 per share, on account of the gains made by sale of  

HTIL’s entire interest in HEL.  

50. On 5.07.2007, a  Framework Agreement was entered  

into  among AG,  AG Mercantile  Company Private  Limited,  

Plustech Mercantile Co. (P) Ltd [“Plustech” for short], GSPL,  

Nadal Trading Company Private Limited [“Nadal” for short]  

and VIH.  Under  clause 4.4,  GSPL had an unconditional  

right  to  purchase  all  shares  of  AG  in  AG  Mercantile  

Company Pvt. Ltd. at any time and in consideration for such  

call option,  GSPL agreed to pay to AG an amount of US  

$6.3 mn annually.

51. On  the  same  day,  i.e.,  5.07.2007,  a  Framework  

Agreement was entered into among AS, his wife, Scorpios,  

MVH, GSPL, NDC and VIH.  Under clause 4.4 GSPL had an  

unconditional  right  to  purchase  all  shares of  AS and his  

wife held in Scorpios at any time and in consideration for  

the  call  option GSPL agreed to  pay  AS and his  wife  an  

amount of US$ 10.2 mn per annum.

2

52. On  5.07.2007,  TII  Shareholders  Agreement was  

entered  into  among  Nadal,  NDC,  CGP  India  Investments  

Limited [“CGP India” for short], TII and VIH to regulate the  

affairs  of  TII.   Under  clause  3.1,  NDC  had  38.78%  

shareholding in TII, CGP India had 37.85% and Nadal had  

23.57%.   

53. It  is  not  necessary  to  go  into  the  earlier  round  of  

litigation.  Suffice it to state that on 31.05.2010, an Order  

was passed by the Department under Sections 201(1) and  

201(1A) of the Income Tax Act,  1961 [“the Act”  for short]  

declaring that Indian Tax Authorities had jurisdiction to tax  

the  transaction  against  which  VIH filed  Writ  Petition  No.  

1325  of  2010  before  the  Bombay  High  Court  which  was  

dismissed  on  8.09.2010  vide  the  impugned  judgment  

[reported in 329 ITR 126], hence, this Civil Appeal.  

B. Ownership Structure

54. In order to understand the above issue, we reproduce  

below  the  Ownership  Structure  Chart  as  on  11.02.2007.  

The Chart speaks for itself.    

2

2

55. To sum up, CGP held 42.34% in HEL through 100%  

wholly  owned  subsidiaries  [Mauritius  companies],  9.62%  

indirectly through TII and Omega [i.e. pro rata route], and  

15.03% through GSPL route.   

56. To explain the GSPL route briefly, it may be mentioned  

that on 11.02.2007 AG Group of companies held 23.97% in  

TII,  AS  Group  of  companies  held  38.78% in  TII  whereas  

SMMS held 54.21% in Omega.  Consequently, holding of AG  

in HEL through TII stood at 4.68% whereas holding of AS in  

HEL through TII stood at 7.577% and holding of SMMS in  

HEL  through  Omega  stood  at  2.77%,  which  adds  up  to  

15.03% in HEL.  These holdings of AG, AS and SMMS came  

under  the  Option  Route.   In  this  connection,  it  may  be  

mentioned  that  GSPL  is  an  Indian  company  indirectly  

owned  by  CGP.   It  held  Call  Options  and  Subscription  

Options to be exercised in future under circumstances spelt  

out  in  TII  and  IDFC  Framework  Agreements  (keeping  in  

mind the sectoral cap of 74%).   

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Correctness  of  Azadi  Bachao  case  -  Re:  Tax  Avoidance/Evasion

57. Before us, it was contended on behalf of the Revenue  

that  Union of India v. Azadi Bachao Andolan (2004) 10  

SCC  1  needs  to  be  overruled  insofar  as  it  departs  from  

McDowell and Co. Ltd. v. CTO (1985) 3 SCC 230 principle  

for the following :   i)  Para 46 of  McDowell judgment has  

been  missed  which  reads  as  under:   “on  this  aspect  

Chinnappa Reddy, J. has proposed a separate opinion with  

which  we  agree”.   [i.e.  Westminster  principle  is  dead].  

ii) That, Azadi Bachao failed to read paras 41-45 and 46 of  

McDowell in entirety.  If so read, the only conclusion one  

could  draw is  that  four  learned  judges  speaking through  

Misra, J. agreed with the observations of Chinnappa Reddy,  

J. as to how in certain circumstances tax avoidance should  

be  brought  within  the  tax  net.   iii)  That,  subsequent  to  

McDowell,  another  matter  came  before  the  Constitution  

Bench of  five  Judges  in  Mathuram Agrawal  v.  State  of  

Madhya Pradesh (1999) 8 SCC 667, in which Westminster  

principle was quoted which has not been noticed by Azadi  

Bachao.

3

Our Analysis 58. Before  coming  to  Indo-Mauritius  DTAA,  we  need  to  

clear the doubts raised on behalf of the Revenue regarding  

the  correctness  of  Azadi  Bachao (supra)  for  the  simple  

reason that certain tests laid down in the judgments of the  

English  Courts  subsequent  to  The  Commissioners  of  

Inland Revenue v. His Grace the Duke of Westminster  

1935  All  E.R.  259 and  W.T.  Ramsay  Ltd.  v.  Inland  

Revenue Commissioners (1981) 1 All E.R. 865 help us to  

understand the scope of Indo-Mauritius DTAA.  It needs to  

be clarified, that,  McDowell dealt with two aspects.  First,  

regarding  validity  of  the  Circular(s)  issued  by  CBDT  

concerning  Indo-Mauritius  DTAA.   Second,  on concept  of  

tax  avoidance/evasion.   Before  us,  arguments  were  

advanced  on  behalf  of  the  Revenue  only  regarding  the  

second aspect.  

59. The  Westminster  principle  states  that,  “given  that  a  

document  or  transaction is  genuine,  the  court  cannot  go  

behind it  to  some supposed  underlying  substance”.   The  

said  principle  has  been  reiterated  in  subsequent  English  

Courts Judgments as “the cardinal principle”.

3

60. Ramsay was a case of sale-lease back transaction in  

which gain was sought to be counteracted, so as to avoid  

tax, by establishing an allowable loss.  The method chosen  

was to buy from a company a readymade scheme, whose  

object  was to  create  a neutral  situation.   The  decreasing  

asset was to be sold so as to create an artificial loss and the  

increasing asset was to yield a gain which would be exempt  

from tax.  The Crown challenged the whole scheme saying  

that it was an artificial scheme and, therefore, fiscally in-

effective.  It was held that Westminster did not compel the  

court to look at a document or a transaction, isolated from  

the context to which it properly belonged.  It is the task of  

the Court to ascertain the legal nature of the transaction  

and while doing so it has to look at the entire transaction  

as a whole and not to adopt a dissecting approach.  In the  

present  case,  the  Revenue  has  adopted  a  dissecting  

approach at the Department level.   

61. Ramsay did not discard Westminster but read it in the  

proper context by which “device” which was colourable in  

nature had to be ignored as fiscal nullity.  Thus, Ramsay  

lays  down  the  principle  of  statutory  interpretation  

3

rather  than  an  over-arching  anti-avoidance  doctrine  

imposed upon tax laws.    

62. Furniss (Inspector of Taxes) v. Dawson (1984) 1 All  

E.R.  530 dealt  with  the  case  of  interpositioning  of  a  

company  to  evade  tax.  On  facts,  it  was  held  that  the  

inserted step had no business purpose, except deferment of  

tax although it had a business effect. Dawson went beyond  

Ramsay.  It  reconstructed  the  transaction  not  on  some  

fancied  principle  that  anything  done  to  defer  the  tax  be  

ignored but on the premise that the inserted transaction did  

not  constitute  “disposal”  under  the  relevant  Finance  Act.  

Thus, Dawson is an extension of Ramsay principle.

63. After  Dawson,  which  empowered  the  Revenue  to  

restructure  the  transaction  in  certain  circumstances,  the  

Revenue  started  rejecting  every  case  of  strategic  

investment/tax planning undertaken years before the event  

saying that the insertion of the entity was effected with the  

sole intention of tax avoidance.   In  Craven (Inspector of  

Taxes)  v.  White (Stephen) (1988) 3 All. E.R. 495 it was  

held that the Revenue cannot start with the question as to  

whether the transaction was a tax deferment/saving device  

3

but  that  the  Revenue  should  apply  the  look  at test  to  

ascertain  its  true  legal  nature.  It  observed  that  genuine  

strategic planning had not been abandoned.

64. The  majority  judgment  in  McDowell held  that  “tax  

planning  may  be  legitimate  provided  it  is  within  the  

framework of law” (para 45). In the latter part of para 45, it  

held that “colourable device cannot be a part of tax planning  

and it is wrong to encourage the belief that it is honourable  

to avoid payment of tax by resorting to dubious methods”. It  

is the obligation of every citizen to pay the taxes without  

resorting to subterfuges. The above observations should be  

read with para 46 where the majority holds “on this aspect  

one of us,  Chinnappa Reddy, J.  has proposed a separate  

opinion  with  which  we  agree”.  The  words  “this  aspect”  

express  the  majority’s  agreement  with  the  judgment  of  

Reddy, J. only in relation to tax evasion through the use of  

colourable devices and by resorting to dubious methods and  

subterfuges. Thus, it cannot be said that all tax planning is  

illegal/illegitimate/impermissible.  Moreover,  Reddy,  J.  

himself  says  that  he  agrees  with  the  majority.  In  the  

judgment  of  Reddy,  J.  there  are  repeated  references  to  

3

schemes  and  devices  in  contradistinction  to  “legitimate  

avoidance of  tax liability”  (paras 7-10,  17 & 18).   In our  

view,  although Chinnappa Reddy,  J.  makes  a  number  of  

observations  regarding  the  need  to  depart  from  the  

“Westminster” and tax avoidance – these are clearly only in  

the  context  of  artificial  and  colourable  devices.  Reading  

McDowell, in the manner indicated hereinabove, in cases of  

treaty shopping and/or tax avoidance, there is no conflict  

between  McDowell  and   Azadi  Bachao  or   between  

McDowell and Mathuram Agrawal.      

International Tax Aspects of Holding Structures 65. In the thirteenth century, Pope Innocent IV espoused  

the theory of the legal fiction by saying that corporate bodies  

could not be ex-communicated because they only exist in  

abstract.   This  enunciation  is  the  foundation  of  the  

separate entity principle.

66. The  approach  of  both  the  corporate  and  tax  laws,  

particularly in the matter of corporate taxation, generally is  

founded on the abovementioned separate entity principle,  

i.e.,  treat  a  company  as  a  separate  person.   The  Indian  

Income Tax Act, 1961, in the matter of corporate taxation, is  

founded on the principle of the independence of companies  

3

and other entities subject to income-tax.  Companies and  

other  entities  are  viewed  as  economic  entities  with  legal  

independence vis-a-vis their shareholders/participants. It is  

fairly  well  accepted  that  a  subsidiary  and  its  parent  are  

totally  distinct  tax  payers.   Consequently,  the  entities  

subject to income-tax are taxed on profits derived by them  

on standalone basis,  irrespective of  their  actual degree of  

economic  independence  and regardless  of  whether  profits  

are  reserved  or  distributed  to  the  shareholders/  

participants.  Furthermore, shareholders/ participants, that  

are  subject  to  (personal  or  corporate)  income-tax,  are  

generally taxed on profits derived in consideration of their  

shareholding/participations, such as capital gains.  Now a  

days, it is fairly well settled that for tax treaty purposes a  

subsidiary  and  its  parent  are  also  totally  separate  and  

distinct tax payers.

67. It is generally accepted that the group parent company  

is involved in giving principal guidance to group companies  

by providing general policy guidelines to group subsidiaries.  

However,  the  fact  that  a  parent  company  exercises  

shareholder’s  influence  on  its  subsidiaries  does  not  

3

generally  imply  that  the  subsidiaries  are  to  be  deemed  

residents of the State in which the parent company resides.  

Further, if a company is a parent company, that company’s  

executive  director(s)  should  lead  the  group  and  the  

company’s  shareholder’s  influence  will  generally  be  

employed to that end. This obviously implies a restriction on  

the autonomy of the subsidiary’s executive directors.  Such  

a restriction, which is the inevitable consequences of any  

group  structure,  is  generally  accepted,  both  in  corporate  

and tax laws.   However,  where the subsidiary’s  executive  

directors’  competences  are  transferred  to  other  

persons/bodies  or  where  the  subsidiary’s  executive  

directors’ decision making has become fully subordinate to  

the  Holding  Company  with  the  consequence  that  the  

subsidiary’s executive directors are no more than puppets  

then the turning point in respect of the subsidiary’s place of  

residence comes about.  Similarly, if an actual controlling  

Non-Resident Enterprise (NRE) makes an indirect transfer  

through “abuse of organisation form/legal form and without  

reasonable  business  purpose”  which  results  in  tax  

avoidance  or  avoidance  of  withholding  tax,  then  the  

3

Revenue may disregard the form of the arrangement or the  

impugned  action  through  use  of  Non-Resident  Holding  

Company,  re-characterize  the equity transfer  according to  

its economic substance and impose the tax on the actual  

controlling  Non-Resident  Enterprise.   Thus,  whether  a  

transaction is used principally as a colourable device for the  

distribution of earnings, profits and gains, is determined by  

a review of all the facts and circumstances surrounding the  

transaction.  It is in the above cases that the principle of  

lifting the corporate veil or the doctrine of substance over  

form or the concept of beneficial ownership or the concept of  

alter ego arises.  There are many circumstances, apart from  

the one given above, where separate existence of different  

companies, that are part of the same group, will be totally or  

partly  ignored as a device or  a conduit  (in the  pejorative  

sense).

68. The  common  law  jurisdictions  do  invariably  impose  

taxation against a corporation based on the legal principle  

that the corporation is “a person” that is separate from its  

members.   It  is  the  decision  of  the  House  of  Lords  in  

Salomon v. Salomon (1897) A.C. 22 that opened the door  

3

to  the  formation  of  a  corporate  group.   If  a  “one  man”  

corporation could be incorporated, then it would follow that  

one corporation could be a subsidiary of another.  This legal  

principle  is  the  basis  of  Holding  Structures.   It  is  a  

common practice in international law, which is the basis of  

international  taxation,  for  foreign  investors  to  invest  in  

Indian companies through an interposed foreign holding or  

operating company, such as Cayman Islands or Mauritius  

based  company  for  both  tax  and business  purposes.   In  

doing  so,  foreign  investors  are  able  to  avoid  the  lengthy  

approval  and  registration  processes  required  for  a  direct  

transfer  (i.e.,  without  a  foreign  holding  or  operating  

company) of an equity interest in a foreign invested Indian  

company.   However,  taxation  of  such  Holding  Structures  

very often gives rise to issues such as double taxation, tax  

deferrals and tax avoidance.  In this case, we are concerned  

with  the  concept  of  GAAR.   In  this  case,  we  are  not  

concerned with treaty-shopping but with the anti-avoidance  

rules.  The concept of GAAR is not new to India since India  

already has a judicial anti-avoidance rule, like some other  

jurisdictions.   Lack of  clarity  and absence  of  appropriate  

4

provisions in the statute and/or in the treaty regarding the  

circumstances in which judicial anti-avoidance rules would  

apply has generated litigation in India.  Holding Structures  

are  recognized  in  corporate  as well  as  tax laws.   Special  

Purpose  Vehicles  (SPVs)  and  Holding  Companies  have  a  

place  in  legal  structures  in  India,  be  it  in  company  law,  

takeover code under SEBI or even under the income tax law.  

When it  comes to taxation of a Holding Structure, at  the  

threshold,  the  burden  is  on  the  Revenue  to  allege  and  

establish  abuse,  in  the  sense  of  tax  avoidance  in  the  

creation and/or use of such structure(s).   In the application  

of a judicial  anti-avoidance rule, the Revenue may invoke  

the  “substance  over  form”  principle  or  “piercing  the  

corporate veil” test only after it is able to establish on the  

basis  of  the  facts  and  circumstances  surrounding  the  

transaction that the impugned transaction is a sham or tax  

avoidant.   To give  an example,  if  a  structure  is  used for  

circular trading or round tripping or to pay bribes then such  

transactions,  though  having  a  legal  form,  should  be  

discarded by applying the test of fiscal nullity.  Similarly, in  

a case where the Revenue finds that in a Holding Structure  

4

an entity which has no commercial/business substance has  

been  interposed  only  to  avoid  tax  then  in  such  cases  

applying the test  of fiscal  nullity  it  would be open to the  

Revenue to discard such inter-positioning   of  that  entity.  

However,  this  has  to  be  done  at  the  threshold.   In  this  

connection,  we  may  reiterate  the  “look  at”  principle  

enunciated in Ramsay (supra) in which it was held that the  

Revenue  or  the  Court  must  look  at a  document  or  a  

transaction in a context to which it properly belongs to.  It is  

the task of the Revenue/Court to ascertain the legal nature  

of the transaction and while doing so it has to look at the  

entire transaction as a whole and not to adopt a dissecting  

approach.  The Revenue cannot start with the question as to  

whether  the  impugned  transaction  is  a  tax  

deferment/saving device but that it should apply the “look  

at”  test  to  ascertain its  true  legal  nature  [See  Craven v.  

White (supra) which further observed that genuine strategic  

tax planning has not been abandoned by any decision of the  

English Courts till date].  Applying the above tests, we are of  

the  view  that  every  strategic  foreign  direct  investment  

coming to India,  as an investment destination,  should be  

4

seen  in  a  holistic  manner.   While  doing  so,  the  

Revenue/Courts should keep in mind the following factors:  

the concept of participation in investment, the duration of  

time during which the Holding Structure exists; the period  

of  business operations in India;  the generation of  taxable  

revenues in India; the timing of the exit; the continuity of  

business on such exit.  In short, the onus will be on the  

Revenue to identify the scheme and its dominant purpose.  

The corporate business purpose of a transaction is evidence  

of the fact that the impugned transaction is not undertaken  

as  a  colourable  or  artificial  device.   The  stronger  the  

evidence  of  a  device,  the  stronger  the  corporate  business  

purpose must exist to overcome the evidence of a device.   

Whether  Section  9  is  a  “look  through”  provision  as  submitted on behalf of the Revenue?

69. According  to  the  Revenue,  if  its  primary  argument  

(namely,  that  HTIL  has,  under  the  SPA,  directly  

extinguished its property rights in HEL and its subsidiaries)  

fails, even then in any event, income from the sale of CGP  

share would nonetheless fall within Section 9 of the Income  

Tax Act, 1961 as that Section provides for a “look through”.  

In this connection, it was submitted that the word “through”  

4

in Section 9  inter alia  means “in consequence of”.  It was,  

therefore, argued that if transfer of a capital asset situate in  

India  happens  “in  consequence  of”  something  which  has  

taken place overseas (including transfer of a capital asset),  

then all income derived even indirectly from such transfer,  

even though abroad, becomes taxable in India.  That, even if  

control over HEL were to get transferred in consequence of  

transfer  of  the  CGP Share  outside  India,  it  would yet  be  

covered by Section 9.

70. We  find  no  merit  in  the  above  submission  of  the  

Revenue.  At the outset, we quote hereinbelow the following  

Sections of the Income Tax Act, 1961:

Scope of total income. 5.  (2) Subject to the provisions of this Act,  the total  income of any previous year of a  person  who is  a  non-resident  includes  all  income from whatever source derived which —

(a)is  received   or  is  deemed  to  be  received in India in such year by or  on behalf of such person ; or (b)accrues or arises or is deemed to  accrue or arise to him in India during  such year.

Income  deemed  to  accrue  or  arise  in  India.    9.  (1) The  following  incomes  shall  be  deemed to accrue or arise in India :—

4

(i)all  income  accruing  or  arising,  whether  directly  or  indirectly,  through  or  from  any  business  connection  in  India,  or  through  or  from  any  property   in  India,  or  through or from any asset or source  of  income  in  India,  or  through  the  transfer of a capital asset situate in  India.

71. Section  9(1)(i)  gathers  in  one  place  various  types  of  

income and directs that income falling under each of the  

sub-clauses shall  be  deemed to  accrue or  arise  in India.  

Broadly there are four items of income.  The income dealt  

with in each sub-clause is distinct and independent of the  

other  and  the  requirements  to  bring  income within  each  

sub-clause, are separately noted.  Hence, it is not necessary  

that income falling in one category under any one of the  

sub-clauses  should  also  satisfy  the  requirements  of  the  

other sub-clauses to bring it within the expression “income  

deemed to accrue or arise in India” in Section 9(1)(i).  In this  

case, we are concerned with the last sub-clause of Section  

9(1)(i)  which  refers  to  income  arising  from “transfer  of  a  

capital  asset  situate  in  India”.   Thus,  charge  on  capital  

gains arises on transfer of a capital asset situate in India  

during the previous year.  The said sub-clause consists of  

4

three  elements,  namely,  transfer,  existence  of  a  capital  

asset,  and  situation  of  such  asset  in  India.   All  three  

elements should exist in order to make the last sub-clause  

applicable.  Therefore, if such a transfer does not exist in  

the previous year no charge is attracted.  Further, Section  

45  enacts  that  such  income  shall  be  deemed  to  be  the  

income of the previous year in which transfer took place.  

Consequently, there is no room for doubt that such transfer  

should exist during the previous year in order to attract the  

said  sub-clause.   The  fiction  created  by  Section  9(1)(i)  

applies to the assessment of income of non-residents.  In  

the case of a resident, it is immaterial whether the place of  

accrual of income is within India or outside India, since, in  

either  event,  he  is  liable  to  be  charged  to  tax  on  such  

income.  But, in the case of a non-resident, unless the place  

of accrual of income is within India, he cannot be subjected  

to tax.  In other words, if any income accrues or arises to a  

non-resident,  directly  or  indirectly,  outside  India  is  

fictionally deemed to accrue or arise in India if such income  

accrues or arises as a sequel  to the transfer of  a capital  

asset situate in India.  Once the factum of such transfer is  

4

established by the Department, then the income of the non-

resident  arising  or  accruing  from  such  transfer  is  made  

liable to be taxed by reason of Section 5(2)(b)  of  the Act.  

This fiction comes into play only when the income is not  

charged to tax on the basis of receipt in India, as receipt of  

income in India by itself attracts tax whether the recipient is  

a resident or non-resident.  This fiction is brought in by the  

legislature to avoid any possible argument on the part of the  

non-resident  vendor  that  profit  accrued  or  arose  outside  

India by reason of the contract to sell having been executed  

outside India.  Thus, income accruing or arising to a non-

resident outside India on transfer of a capital asset situate  

in India is  fictionally  deemed to accrue or arise in India,  

which  income  is  made  liable  to  be  taxed  by  reason  of  

Section 5(2)(b) of the Act.  This is the main purpose behind  

enactment  of  Section 9(1)(i)  of  the  Act.   We have to  give  

effect to the language of the section when it is unambiguous  

and  admits  of  no  doubt  regarding  its  interpretation,  

particularly  when  a  legal  fiction  is  embedded  in  that  

section.  A legal fiction has a limited scope.  A legal fiction  

cannot  be  expanded  by  giving  purposive  interpretation  

4

particularly  if  the  result  of  such  interpretation  is  to  

transform the concept of chargeability which is also there in  

Section 9(1)(i),  particularly  when one reads Section 9(1)(i)  

with Section 5(2)(b) of the Act.  What is contended on behalf  

of  the  Revenue is  that  under  Section  9(1)(i)  it  can “look  

through”  the  transfer  of  shares  of  a  foreign  company  

holding shares in an Indian company and treat the transfer  

of  shares  of  the  foreign  company  as  equivalent  to  the  

transfer  of   the  shares  of  the  Indian  company  on  the  

premise  that  Section  9(1)(i)  covers  direct  and  indirect  

transfers of capital assets.  For the above reasons, Section  

9(1)(i) cannot by a process of interpretation be extended to  

cover  indirect transfers  of capital assets/property situate  

in India.  To do so, would amount to changing the content  

and ambit  of  Section 9(1)(i).   We  cannot  re-write  Section  

9(1)(i).   The  legislature  has  not  used  the  words  indirect  

transfer in Section 9(1)(i). If the word indirect is read into  

Section  9(1)(i),  it  would  render  the  express  statutory  

requirement of the 4th sub-clause in Section 9(1)(i) nugatory.  

This  is  because  Section  9(1)(i)  applies  to  transfers  of  a  

capital asset situate in India. This is one of the elements in  

4

the 4th sub-clause of Section 9(1)(i) and if indirect transfer of  

a capital  asset is read into Section 9(1)(i)  then the words  

capital asset situate in India would be rendered nugatory.  

Similarly, the words underlying asset do not find place in  

Section 9(1)(i).  Further, “transfer” should be of an asset in  

respect of which it is possible to compute a capital gain in  

accordance with the provisions of the Act.  Moreover, even  

Section  163(1)(c)  is  wide  enough  to  cover  the  income  

whether  received  directly  or  indirectly.   Thus,  the  words  

directly or indirectly in Section 9(1)(i)  go with the income  

and  not  with  the  transfer  of  a  capital  asset  (property).  

Lastly, it may be mentioned that the Direct Tax Code (DTC)  

Bill, 2010 proposes to tax income from transfer of shares of  

a  foreign company by a  non-resident,  where  at  any time  

during 12 months preceding the transfer, the fair market  

value of the assets in India, owned directly or indirectly, by  

the  company,  represents at  least  50% of  the  fair  market  

value of all assets owned by the company.  Thus, the DTC  

Bill, 2010 proposes taxation of offshore share transactions.  

This proposal indicates in a way that indirect transfers are  

not covered by the existing Section 9(1)(i) of the Act.  In fact,  

4

the DTC Bill,  2009 expressly stated that income accruing  

even  from  indirect  transfer  of  a  capital  asset  situate  in  

India would be deemed to accrue in India.  These proposals,  

therefore, show that in the existing Section 9(1)(i) the word  

indirect  cannot  be  read  on  the  basis  of  purposive  

construction.  The question of providing “look through” in  

the statute or in the treaty is a matter of policy.  It is to be  

expressly  provided  for  in  the  statute  or  in  the  treaty.  

Similarly,  limitation  of  benefits has  to  be  expressly  

provided for in the treaty.  Such clauses cannot be read into  

the Section by interpretation.  For the foregoing reasons, we  

hold that Section 9(1)(i) is not a “look through” provision.

Transfer of HTIL’s property rights by Extinguishment?

72. The  primary  argument  advanced  on  behalf  of  the  

Revenue  was  that  the  SPA,  commercially  construed,  

evidences  a  transfer  of  HTIL’s  property  rights  by  their  

extinguishment.  That, HTIL had, under the SPA, directly  

extinguished its rights of control and management, which  

are  property  rights,  over  HEL  and  its  subsidiaries  and,  

consequent upon such extinguishment, there was a transfer  

of capital asset situated in India.  In support, the following  

5

features of the SPA were highlighted: (i) the right of HTIL to  

direct a downstream subsidiary as to the manner in which it  

should vote.   According to the Revenue,  this  right  was a  

property right and not a contractual right.  It vested in HTIL  

as HTIL was a parent company, i.e., a 100% shareholder of  

the  subsidiary;  (ii)  According  to  the  Revenue,  the  2006  

Shareholders/ Framework Agreements had to be continued  

upon transfer of control of HEL to VIH so that VIH could  

step into the shoes of HTIL.  According to the Revenue, such  

continuance was ensured by payment of money to AS and  

AG by VIH failing which AS and AG could have walked out  

of  those  agreements  which  would  have  jeopardized  VIH’s  

control over 15% of the shares of HEL and, consequently,  

the  stake  of  HTIL  in  TII  would  have  stood  reduced  to  

minority; (iii) Termination of IDFC Framework Agreement of  

2006 and its substitution by a fresh Framework Agreement  

dated 5.06.2007, as warranted by SPA; (iv) Termination of  

Term Sheet Agreement dated 5.07.2003.  According to the  

Revenue, that Term Sheet Agreement was given effect to by  

clause 5.2 of  the  SPA which gave Essar  the right  to Tag  

Along with HTIL and exit  from HEL.   That,  by  a  specific  

5

Settlement Agreement dated 15.03.2007 between HTIL and  

Essar,  the  said  Term  Sheet  Agreement  dated  5.07.2003  

stood  terminated.   This,  according  to  the  Revenue,  was  

necessary because the Term Sheet bound the parties; (v) the  

SPA ignores legal entities interposed between HTIL and HEL  

enabling  HTIL  to  directly  nominate  the  Directors  on  the  

Board of HEL; (vi) Qua management rights, even if the legal  

owners of HEL’s shares (Mauritius entities) could have been  

directed  to  vote  by  HTIL  in  a  particular  manner  or  to  

nominate a person as a Director, such rights existed dehors  

the CGP share; (vii) Vide clause 6.2 of the SPA, HTIL was  

required to exercise voting rights in the specified situations  

on the diktat of VIH ignoring the legal owner of CGP share  

[HTIHL  (BVI)].   Thus,  according  to  the  Revenue,  HTIL  

ignored its subsidiaries and was exercising the voting rights  

qua the CGP and the HEL shares directly, ignoring all the  

intermediate subsidiaries which are 100% held and which  

are  non-operational.   According  to  the  Revenue,  

extinguishment took place dehors the CGP share.  It took  

place  by  virtue  of  various  clauses  of  SPA  as  HTIL  itself  

disregarded the corporate structure it had set up; (viii) As a  

5

holder  of  100% shares  of  downstream subsidiaries,  HTIL  

possessed  de facto control over such subsidiaries.  Such  

de facto control was the subject matter of the SPA.

73. At the outset, we need to reiterate that in this case we  

are concerned with the sale of shares and not with the sale  

of assets, item-wise.  The facts of this case show sale of the  

entire investment made by HTIL, through a Top company,  

viz. CGP, in the Hutchison Structure.  In this case we need  

to apply the “look at” test.  In the impugned judgment, the  

High  Court  has  rightly  observed  that  the  arguments  

advanced  on  behalf  of  the  Department  vacillated.   The  

reason  for  such  vacillation  was  adoption  of  “dissecting  

approach”  by  the  Department  in  the  course  of  its  

arguments.  Ramsay (supra) enunciated the  look at  test.  

According  to  that  test,  the  task  of  the  Revenue  is  to  

ascertain  the  legal  nature  of  the  transaction  and,  while  

doing so, it has to look at the entire transaction holistically  

and not to adopt a dissecting approach.  One more aspect  

needs  to  be  reiterated.   There  is  a  conceptual  difference  

between  preordained transaction which is created for tax  

avoidance  purposes,  on the  one  hand,  and a  transaction  

5

which evidences  investment to participate  in India.  In  

order to find out whether a given transaction evidences a  

preordained  transaction  in  the  sense  indicated  above  or  

investment to participate,  one has to take into account  

the  factors  enumerated  hereinabove,  namely,  duration  of  

time during which the holding structure existed, the period  

of  business  operations  in  India,  generation  of  taxable  

revenue in India during the period of business operations in  

India, the timing of the exit, the continuity of business on  

such  exit,  etc.   Applying  these  tests  to  the  facts  of  the  

present case, we find that the Hutchison structure has been  

in place since 1994.  It operated during the period 1994 to  

11.02.2007.  It has paid income tax ranging from `3 crore to  

`250 crore per annum during the period 2002-03 to 2006-

07.   Even after  11.02.2007,  taxes  are  being paid by VIH  

ranging from `394 crore to `962 crore per annum during the  

period  2007-08  to  2010-11  (these  figures  are  apart  from  

indirect taxes which also run in crores).  Moreover, the SPA  

indicates “continuity” of the telecom business on the exit of  

its predecessor, namely, HTIL.  Thus, it cannot be said that  

the  structure  was  created  or  used  as  a  sham  or  tax  

5

avoidant.  It cannot be said that HTIL or VIH was a “fly by  

night” operator/ short time investor.  If one applies the look  

at  test  discussed  hereinabove,  without  invoking  the  

dissecting approach, then, in our view, extinguishment took  

place because of the transfer of the CGP share and not by  

virtue of various clauses of SPA.  In a case like the present  

one,  where  the  structure  has  existed  for  a  considerable  

length of time generating taxable revenues right from 1994  

and  where  the  court  is  satisfied  that  the  transaction  

satisfies all the parameters of “participation in investment”  

then in such a case the court need not go into the questions  

such as de facto control  vs.  legal  control,  legal  rights vs.  

practical rights, etc.     

74. Be that as it  may, did HTIL possess a legal right to  

appoint directors onto the board of HEL and as such had  

some “property right” in HEL?  If not, the question of such a  

right getting “extinguished” will not arise.  A legal right is an  

enforceable  right.   Enforceable  by  a  legal  process.   The  

question is what is the nature of the “control” that a parent  

company has over its subsidiary.  It is not suggested that a  

parent company never has control over the subsidiary.  For  

5

example,  in  a  proper  case  of  “lifting  of  corporate  veil”,  it  

would be proper to say that the parent company and the  

subsidiary  form one entity.   But  barring  such cases,  the  

legal position of any company incorporated abroad is that  

its powers,  functions and responsibilities are governed by  

the law of its incorporation.  No multinational company can  

operate  in  a  foreign  jurisdiction  save  by  operating  

independently  as a  “good local  citizen”.   A  company is  a  

separate legal persona and the fact that all its shares are  

owned by one person or by the parent company has nothing  

to  do  with  its  separate  legal  existence.   If  the  owned  

company is  wound up,  the  liquidator,  and not its  parent  

company, would get hold of the assets of the subsidiary.  In  

none of  the authorities  have  the assets of  the subsidiary  

been held to be those of the parent unless it is acting as an  

agent.   Thus,  even  though  a  subsidiary  may  normally  

comply with the request of a parent company it is not just a  

puppet of the parent company.  The difference is between  

having power or having a persuasive position.  Though it  

may be advantageous for parent and subsidiary companies  

to work as a group, each subsidiary will look to see whether  

5

there  are  separate  commercial  interests  which  should  be  

guarded.   When  there  is  a  parent  company  with  

subsidiaries,  is  it  or  is  it  not  the  law  that  the  parent  

company has the “power” over the subsidiary.  It depends  

on the facts of each case.  For instance, take the case of a  

one-man company, where only one man is the shareholder  

perhaps holding 99% of the shares, his wife holding 1%.  In  

those circumstances, his control over the company may be  

so  complete  that  it  is  his  alter  ego.   But,  in  case  of  

multinationals  it  is  important  to  realise  that  their  

subsidiaries have a great deal of autonomy in the country  

concerned except where subsidiaries are created or used as  

a sham.  Of course, in many cases the courts do lift up a  

corner of the veil but that does not mean that they alter the  

legal position between the companies.  The directors of the  

subsidiary  under  their  Articles  are  the  managers  of  the  

companies.   If  new  directors  are  appointed  even  at  the  

request of the parent company and even if such directors  

were removable by the parent company, such directors of  

the  subsidiary  will  owe  their  duty  to  their  companies  

(subsidiaries).   They are not to be dictated by the parent  

5

company  if  it  is  not  in  the  interests  of  those  companies  

(subsidiaries).  The fact that the parent company exercises  

shareholder’s influence on its subsidiaries cannot obliterate  

the decision-making power or authority of its (subsidiary’s)  

directors.   They  cannot  be  reduced  to  be  puppets.   The  

decisive  criteria  is  whether  the  parent  company’s  

management  has  such  steering  interference  with  the  

subsidiary’s core activities that subsidiary can no longer be  

regarded to perform those activities on the authority of its  

own executive directors.   

75. Before  dealing  with  the  submissions  advanced  on  

behalf of the Revenue, we need to appreciate the reason for  

execution  of  the  SPA.   Exit  is  an  important  right  of  an  

investor  in  every  strategic  investment.   The  present  case  

concerns  transfer  of  investment  in  entirety.   As  stated  

above, exit coupled with continuity of business is one of the  

important  tell-tale  circumstance  which  indicates  the  

commercial/business substance of the transaction.  Thus,  

the need for SPA arose to re-adjust the outstanding loans  

between  the  companies;  to  provide  for  standstill  

arrangements  in  the  interregnum  between  the  date  of  

5

signing  of  the  SPA on  11.02.2007 and its  completion  on  

8.05.2007; to provide for a seamless transfer and to provide  

for fundamental terms of price, indemnities, warranties etc.  

As  regards  the  right  of  HTIL  to  direct  a  downstream  

subsidiary  as  to  the  manner  in  which  it  should  vote  is  

concerned,  the legal  position is  well  settled,  namely,  that  

even though a  subsidiary  may  normally  comply  with  the  

request of a parent company, it is not just a puppet of the  

parent  company.   The  difference  is  between  having  the  

power and  having  a  persuasive  position.   A  great  deal  

depends on the facts of each case.  Further, as stated above,  

a company is a separate legal persona, and the fact that all  

the  shares  are  owned  by  one  person  or  a  company  has  

nothing  to  do with  the  existence  of  a  separate  company.  

Therefore, though it may be advantageous for a parent and  

subsidiary companies to work as a group, each subsidiary  

has to protect its own separate commercial interests.  In our  

view, on the facts and circumstances of this case, the right  

of  HTIL,  if  at  all  it  is  a  right,  to  direct  a  downstream  

subsidiary as to the manner in which it should vote would  

fall in the category of a persuasive position/influence rather  

5

than having a power over the subsidiary.  In this connection  

the following facts are relevant.

76. Under  the  Hutchison  structure,  the  business  was  

carried  on by the  Indian companies  under  the  control  of  

their Board of Directors, though HTIL, as the Group holding  

company of a set of companies, which controlled 42% plus  

10% (pro rata) shares, did influence or was in a position to  

persuade  the  working  of  such  Board  of  Directors  of  the  

Indian companies.  In this connection, we need to have a  

relook at the ownership structure.  It is not in dispute that  

15% out of  67% stakes in HEL was held by AS, AG and  

IDFC companies.   That  was one  of  the  main reasons  for  

entering  into  separate  Shareholders  and  Framework  

Agreements  in  2006,  when  Hutchison  structure  existed,  

with  AS,  AG  and  IDFC.   HTIL  was  not  a  party  to  the  

agreements with AS and AG, though it was a party to the  

agreement  with  IDFC.   That,  the  ownership  structure  of  

Hutchison  clearly  shows  that  AS,  AG  and  SMMS (IDFC)  

group  of  companies,  being  Indian  companies,  possessed  

15% control in HEL.  Similarly, the term sheet with Essar  

dated  5.07.2003  gave  Essar  the  RoFR  and  Right  to  Tag  

6

Along with HTIL and exit from HEL.  Thus, if one keeps in  

mind  the  Hutchison  structure  in  its  entirety,  HTIL  as  a  

Group  holding  company  could  have  only  persuaded  its  

downstream companies to vote in a given manner as HTIL  

had  no  power  nor  authority  under  the  said  structure  to  

direct any of its downstream companies to vote in a manner  

as directed by it (HTIL).  Facts of this case show that both  

the parent and the subsidiary companies worked as a group  

since 1994.  That, as a practice, the subsidiaries did comply  

with  the  arrangement  suggested  by  the  Group  holding  

company in the matter of voting, failing which the smooth  

working of HEL generating huge revenues was not possible.  

In this case, we are concerned with the expression “capital  

asset”  in  the  income  tax  law.   Applying  the  test  of  

enforceability,  influence/  persuasion  cannot  be  construed  

as a right in the legal sense.  One more aspect needs to be  

highlighted.  The concept of “de facto” control, which existed  

in  the  Hutchison  structure,  conveys  a  state  of  being  in  

control without any legal right to such state.  This aspect is  

important while construing the words “capital asset” under  

the income tax law.  As stated earlier, enforceability is an  

6

important aspect of a legal right.  Applying these tests, on  

the  facts  of  this  case  and  that  too  in  the  light  of  the  

ownership structure of Hutchison, we hold that HTIL, as a  

Group  holding  company,  had  no  legal  right  to  direct  its  

downstream companies in the matter of voting, nomination  

of  directors  and  management  rights.   As  regards  

continuance  of  the  2006  Shareholders/Framework  

Agreements by SPA is concerned, one needs to keep in mind  

two  relevant  concepts,  viz.,  participative  and  protective  

rights.  As stated, this is a case of HTIL exercising its exit  

right under the holding structure and continuance of the  

telecom business operations in India by VIH by acquisition  

of  shares.   In  the  Hutchison  structure,  exit  was  also  

provided  for  Essar,  Centrino,  NDC  and  SMMS  through  

exercise of Put Option/TARs, subject to sectoral cap being  

relaxed in future.  These exit rights in Essar, Centrino, NDC  

and  SMMS  (IDFC)  indicate  that  these  companies  were  

independent  companies.   Essar  was  a  partner  in  HEL  

whereas Centrino, NDC and SMMS controlled 15% of shares  

of HEL (minority).  A minority investor has what is called  

as  a  “participative”  right,  which  is  a  subset  of  

6

“protective rights”.  These participative rights, given to a  

minority shareholder, enable the minority to overcome the  

presumption of consolidation of operations or assets by the  

controlling  shareholder.   These  participative  rights  in  

certain instances restrict the powers of the shareholder with  

majority voting interest to control the operations or assets of  

the investee.  At the same time, even the minority is entitled  

to exit.   This “exit  right”  comes under “protective rights”.  

On examination of the Hutchison structure in its entirety,  

we find that both, participative and protective rights, were  

provided for in the Shareholders/ Framework Agreements of  

2006 in favour of Centrino, NDC and SMMS which enabled  

them to participate, directly or indirectly, in the operations  

of  HEL.  Even without the execution of  SPA,  such rights  

existed in the above agreements.  Therefore, it would not be  

correct to say that such rights flowed from the SPA.  One  

more  aspect  needs  to  be  mentioned.   The  Framework  

Agreements  define  “change  of  control  with  respect  to  a  

shareholder”  inter  alia  as  substitution  of  limited  or  

unlimited liability company, whether directly or indirectly,  

to  direct  the  policies/  management  of  the  respective  

6

shareholders,  viz.,  Centrino,  NDC,  Omega.   Thus,  even  

without the SPA, upon substitution of VIH in place of HTIL,  

on acquisition of  CGP share,  transition could have taken  

place.   It  is  important  to note that  “transition”  is  a  wide  

concept.   It  is  impossible  for  the acquirer  to visualize  all  

events that may take place between the date of execution of  

the SPA and completion of acquisition.  Therefore, we have a  

provision for standstill in the SPA and so also the provision  

for  transition.   But,  from  that,  it  does  not  follow  that  

without SPA, transition could not ensue.  Therefore, in the  

SPA, we find provisions concerning Vendor’s Obligations in  

relation to the conduct of business of HEL between the date  

of  execution  of  SPA  and  the  closing  date,  protection  of  

investment during the said period, agreement not to amend,  

terminate, vary or waive any rights under the Framework/  

Shareholders Agreements during the said period, provisions  

regarding  running  of  business  during  the  said  period,  

assignment  of  loans,  consequence  of  imposition  of  

prohibition by way of injunction from any court, payment to  

be made by VIH to HTIL, giving of warranties by the Vendor,  

use of  Hutch Brand,  etc.    The next  point  raised  by the  

6

Revenue  concerns  termination  of  IDFC  Framework  

Agreement  of  2006  and  its  substitution  by  a  fresh  

Framework Agreement dated 5.06.2007 in terms of the SPA.  

The submission of the Revenue before us was that the said  

Agreement  dated  5.06.2007  (which  is  executed  after  the  

completion  of  acquisition  by  VIH  on  8.05.2007)  was  

necessary to assign the benefits of the earlier agreements of  

2006 to VIH. This is not correct. The shareholders of ITNL  

(renamed  as  Omega)  were  Array  through  HTIL  Mauritius  

and  SMMS  (an  Indian  company).  The  original  investors  

through SMMS (IDFC), an infrastructure holding company,  

held 54.21% of the share capital of Omega; that, under the  

2006  Framework  Agreement,  the  original  investors  were  

given  Put  Option  by  GSPL  [an  Indian  company  under  

Hutchison  Teleservices  (India)  Holdings  Limited  (Ms)]  

requiring GSPL to buy the equity share capital  of  SMMS;  

that on completion of acquisition on 8.05.2007 there was a  

change in control of HTIL Mauritius which held 45.79% in  

Omega  and  that  changes  also  took  place  on  5.06.2007  

within the group of original investors with the exit of IDFC  

and  SSKI.  In  view  of  the  said  changes  in  the  parties,  a  

6

revised Framework Agreement was executed on 6.06.2007,  

which  again  had  call  and  put  option.  Under  the  said  

Agreement dated 6.06.2007, the Investors once again agreed  

to grant call option to GSPL to buy the shares of SMMS and  

to  enter  into  a  Shareholders  Agreement  to  regulate  the  

affairs of Omega. It is important to note that even in the  

fresh agreement  the  call  option remained with GSPL and  

that the said Agreement did not confer any rights on VIH.  

One more aspect needs to be mentioned. The conferment of  

call options on GSPL under the Framework Agreements of  

2006 also had a linkage with intra-group loans. CGP was an  

Investment vehicle. It is through the acquisition of CGP that  

VIH had indirectly  acquired  the  rights  and obligations  of  

GSPL in the Centrino and NDC Framework Agreements of  

2006 [see the report of KPMG dated 18.10.2010] and not  

through execution of the SPA. Lastly, as stated above, apart  

from providing for  “standstill”,  an SPA has to provide for  

transition  and  all  possible  future  eventualities.  In  the  

present case, the change in the investors, after completion  

of acquisition on 8.05.2007, under which SSKI and IDFC  

exited leaving behind IDF alone was a situation which was  

6

required to be addressed by execution of a fresh Framework  

Agreement under which the call option remained with GSPL.  

Therefore,  the June, 2007 Agreements relied upon by the  

Revenue merely reiterated the rights of GSPL which rights  

existed even in the Hutchison structure as it stood in 2006.  

It was next contended that the 2003 Term Sheet with Essar  

was  given effect  to  by  clause  5.2  of  the  SPA which gave  

Essar the Right to Tag Along with HTIL and exit from HEL.  

That, the Term Sheet of 5.07.2003 had legal effect because  

by a specific settlement dated 15.03.2007 between HTIL and  

Essar,  the  said  Term Sheet  stood  terminated  which  was  

necessary because the Term Sheet bound the parties in the  

first place. We find no merit in the above arguments of the  

Revenue. The 2003 Term Sheet was between HTIL, Essar  

and UMTL. Disputes arose between Essar and HTIL. Essar  

asserted  RoFR  rights  when  bids  were  received  by  HTIL,  

which dispute ultimately came to be settled on 15.03.2007,  

that is  after  the SPA dated 11.02.2007.  The SPA did not  

create any rights. The RoFR/TARs existed in the Hutchison  

structure.  Thus,  even without  SPA,  within the Hutchison  

structure these rights existed. Moreover, the very object of  

6

the SPA is to cover the situations which may arise during  

the  transition  and  those  which  are  capable  of  being  

anticipated and dealt with. Essar had 33% stakes in HEL.  

As stated, the Hutchison structure required the parent and  

the  subsidiary  to  work  together  as  a  group.  The  said  

structure  required  the  Indian  partners  to  be  kept  in  the  

loop.  Disputes  on  existence  of  RoFR/  TARs  had  to  be  

settled.  They  were  settled  on 15.03.2007.  The  rights  and  

obligations created under the SPA had to be preserved. In  

any  event,  preservation  of  such  rights  with  a  view  to  

continue business in India is not extinguishment.

77. For the above reasons, we hold that under the HTIL  

structure,  as  it  existed  in  1994,  HTIL  occupied  only  a  

persuasive  position/influence  over  the  downstream  

companies  qua manner  of  voting,  nomination of  directors  

and  management  rights.  That,  the  minority  

shareholders/investors  had  participative  and  protective  

rights (including RoFR/TARs,  call  and put options which  

provided for exit) which flowed from the CGP share. That,  

the  entire  investment  was  sold  to  the  VIH  through  the  

6

investment  vehicle  (CGP).  Consequently,  there  was  no  

extinguishment of rights as alleged by the Revenue.

Role of CGP in the transaction

78. The  main  contention  of  the  Revenue  was  that  CGP  

stood inserted at a late stage in the transaction in order to  

bring in a tax-free entity (or to create a transaction to avoid  

tax)  and thereby avoid capital  gains.  That, in December,  

2006, HTIL explored the possibility of the sale of shares of  

the  Mauritius  entities  and  found  that  such  transaction  

would be taxable as HTIL under that proposal had to be the  

prime mover behind any agreement with VIH – prime mover  

in  the  sense  of  being  both  a  seller  of  shares  and  the  

recipient  of  the  sale  proceeds  therefrom.   Consequently,  

HTIL  moved  upwards  in  the  Hutchison  structure  and  

devised an artificial tax avoidance scheme of selling the CGP  

share  when  in  fact  what  HTIL  wanted  was  to  sell  its  

property rights in HEL.  This, according to the Revenue, was  

the  reason  for  the  CGP  share  being  interposed  in  the  

transaction.  We find no merit in these arguments.

79. When a business gets big enough, it does two things.  

First, it reconfigures itself into a corporate group by dividing  

6

itself  into  a  multitude  of  commonly  owned  subsidiaries.  

Second,  it  causes  various  entities  in  the  said  group  to  

guarantee  each  other’s  debts.   A  typical  large  business  

corporation consists of sub-incorporates.  Such division is  

legal.   It  is  recognized by company law, laws of taxation,  

takeover  codes  etc.   On  top  is  a  parent  or  a  holding  

company.  The parent is the public face of the business.  

The  parent  is  the  only  group  member  that  normally  

discloses financial results.  Below the parent company are  

the  subsidiaries  which  hold  operational  assets  of  the  

business  and  which  often  have  their  own  subordinate  

entities that can extend layers.  If large firms are not divided  

into  subsidiaries,  creditors  would  have  to  monitor  the  

enterprise in its entirety.  Subsidiaries reduce the amount of  

information that creditors need to gather.  Subsidiaries also  

promote the benefits of specialization.  Subsidiaries permit  

creditors to lend against only specified divisions of the firm.  

These  are  the  efficiencies  inbuilt  in  a  holding  structure.  

Subsidiaries are often created for tax or regulatory reasons.  

They  at  times  come  into  existence  from  mergers  and  

acquisitions.  As group members, subsidiaries work together  

7

to make the same or complementary goods and services and  

hence  they  are  subject  to  the  same  market  supply  and  

demand conditions.  They are financially inter-linked.  One  

such  linkage  is  the  intra-group  loans  and  guarantees.  

Parent  entities  own  equity  stakes  in  their  subsidiaries.  

Consequently, on many occasions, the parent suffers a loss  

whenever  the  rest  of  the  group  experiences  a  downturn.  

Such  grouping  is  based  on  the  principle  of  internal  

correlation.  Courts have evolved doctrines like piercing the  

corporate veil, substance over form etc. enabling taxation of  

underlying assets in cases of fraud, sham, tax avoidant, etc.  

However, genuine strategic tax planning is not ruled out.   

80. CGP was incorporated in 1998 in Cayman Islands.  It  

was in the Hutchison structure from 1998.  The transaction  

in the present case was of divestment and, therefore, the  

transaction of sale was structured at an appropriate tier, so  

that the buyer really acquired the same degree of control as  

was  hitherto  exercised  by  HTIL.   VIH  agreed  to  acquire  

companies  and the companies  it  acquired controlled 67%  

interest in HEL.  CGP was an investment vehicle.  As stated  

above,  it  is  through  the  acquisition  of  CGP  that  VIH  

7

proposed to indirectly acquire the rights and obligations of  

GSPL  in  the  Centrino  and  NDC  Framework  Agreements.  

The report  of  Ernst  & Young dated 11.02.2007 inter  alia  

states that when they were asked to conduct due diligence  

by VIH, it was in relation to Array and its subsidiaries.  The  

said report evidences that at the negotiation stage, parties  

had in mind the transfer of an upstream company rather  

than the transfer of HEL directly.  The transfer of Array had  

the  advantage  of  transferring  control  over  the  entire  

shareholding held by downstream Mauritius companies (tier  

I  companies),  other  than  GSPL.   On the other  hand,  the  

advantage  of  transferring  the  CGP  share  enabled  VIH  to  

indirectly acquire the rights and obligations of GSPL (Indian  

company) in the Centrino and NDC Framework agreements.  

This was the reason for VIH to go by the CGP route.  One of  

the  arguments  of  the  Revenue  before  us  was  that  the  

Mauritius  route was not available  to HTIL for  the  reason  

indicated above.  In this connection, it was urged that the  

legal owner of HEL (Indian company) was not HTIL.  Under  

the  transaction,  HTIL alone was the  seller  of  the  shares.  

VIH wanted to enter into an agreement only with HTIL so  

7

that if something goes wrong, VIH could look solely to HTIL  

being  the  group  holding  company  (parent  company).  

Further,  funds  were  pumped  into  HEL  by  HTIL.   These  

funds were to be received back in the shape of a capital gain  

which could then be used to declare a special dividend to  

the  shareholders  of  HTIL.   We  find  no  merit  in  this  

argument.  Firstly, the tier I (Mauritius companies) were the  

indirect subsidiaries of HTIL who could have influenced the  

former to sell the shares of Indian companies in which event  

the gains would have arisen to the Mauritius  companies,  

who are not liable to pay capital gains tax under the Indo-

Mauritius  DTAA.   That,  nothing  prevented  the  Mauritius  

companies from declaring dividend on gains made on the  

sale of shares.  There is no tax on dividends in Mauritius.  

Thus,  the  Mauritius  route  was  available  but  it  was  not  

opted for because that route would not have brought in the  

control  over GSPL.  Secondly,  if  the Mauritius companies  

had sold the shares of HEL, then the Mauritius companies  

would have continued to be the subsidiaries of HTIL, their  

accounts  would  have  been  consolidated  in  the  hands  of  

HTIL  and  HTIL  would  have  accounted  for  the  gains  in  

7

exactly the same way as it has accounted for the gains in  

the hands of HTIHL (CI)  which was the nominated payee.  

Thus, in our view, two routes were available, namely, the  

CGP route  and the Mauritius  route.   It  was open to  the  

parties to opt for any one of the two routes.   Thirdly,  as  

stated above, in the present case, the SPA was entered into  

inter alia for a smooth transition of business on divestment  

by HTIL.  As stated, transfer of the CGP share enabled VIH  

to indirectly acquire the rights and obligations of GSPL in  

the Centrino and NDC Framework Agreements.  Apart from  

the  said  rights  and  obligations  under  the  Framework  

Agreements,  GSPL also  had a  call  centre  business.   VIH  

intended to take over from HTIL the telecom business.  It  

had  no  intention  to  acquire  the  business  of  call  centre.  

Moreover, the FDI norms applicable to the telecom business  

in  India  were  different  and  distinct  from  the  FDI  norms  

applicable  to  the  call  centre  business.   Consequently,  in  

order  to  avoid  legal  and  regulatory  objections  from  

Government of India, the call centre business stood hived  

off.  In our view, this step was an integral part of transition  

of business under SPA.

7

81. On the role of CGP in the transaction, two documents  

are  required to be referred to.   One is  the  Report  of  the  

KPMG dated 18.10.2010 in which it is stated that through  

the  acquisition  of  CGP,  VIH  had  indirectly  acquired  the  

rights  and obligations of  GSPL in  the  Centrino and NDC  

Framework  Agreements.   That,  the  said  two  agreements  

were put in place with a view to provide AG and AS with  

downside  protection  while  preserving  upside  value  in  the  

growth of HEL.  The second document is the Annual Report  

2007 of  HTIL.   Under  the caption “Overview”,  the  Report  

observes  that  on  11.02.2007,  HTIL  entered  into  an  

agreement  to  sell  its  entire  interests  in  CGP,  a  company  

which  held  through  various  subsidiaries,  the  direct  and  

indirect  equity  and loan  interests  in  HEL (renamed VEL)  

and its subsidiaries to VIH for a cash consideration of HK  

$86.6 bn.  As a result of the said Transaction, the net debt  

of  the  Group  which  stood  at  HK  $37,369  mn  as  on  

31.12.2006 became a net cash balance of HK $25,591 mn  

as  on  31.12.2007.   This  supports  the  fact  that  the  sole  

purpose of CGP was not only to hold shares in subsidiary  

companies  but  also  to  enable  a  smooth  transition  of  

7

business,  which  is  the  basis  of  the  SPA.   Therefore,  it  

cannot  be  said  that  the  intervened  entity  (CGP)  had  no  

business or commercial purpose.

82. Before  concluding,  one  more  aspect  needs  to  be  

addressed.  It concerns situs of the CGP share.  According  

to  the  Revenue,  under  the  Companies  Law  of  Cayman  

Islands, an exempted company was not entitled to conduct  

business in the Cayman Islands.  CGP was an “exempted  

company”.   According  to  the  Revenue,  since  CGP  was  a  

mere  holding  company  and  since  it  could  not  conduct  

business  in  Cayman Islands,  the  situs  of  the  CGP share  

existed where the “underlying assets are situated”, that is to  

say,  India.   That,  since  CGP  as  an  exempted  company  

conducts  no  business  either  in  the  Cayman  Islands  or  

elsewhere and since its sole purpose is to hold shares in a  

subsidiary company situated outside the Cayman Islands,  

the  situs  of  the  CGP share,  in  the  present  case,  existed  

“where  the  underlying  assets  stood situated”  (India).   We  

find no merit in these arguments.  At the outset, we do not  

wish to pronounce authoritatively on the Companies Law of  

Cayman  Islands.   Be  that  as  it  may,  under  the  Indian  

7

Companies  Act,  1956,  the  situs  of  the  shares  would  be  

where  the  company is  incorporated and where  its  shares  

can  be  transferred.   In  the  present  case,  it  has  been  

asserted  by  VIH that  the  transfer  of  the  CGP share  was  

recorded  in  the  Cayman  Islands,  where  the  register  of  

members  of  the  CGP  is  maintained.   This  assertion  has  

neither  been  rebutted  in  the  impugned  order  of  the  

Department  dated  31.05.2010  nor  traversed  in  the  

pleadings filed by the Revenue nor controverted before us.  

In  the  circumstances,  we  are  not  inclined  to  accept  the  

arguments of the Revenue that the situs of the CGP share  

was  situated  in  the  place  (India)  where  the  underlying  

assets stood situated.   

Did VIH acquire 67% controlling interest in HEL (and  not 42%/ 52% as sought to be propounded)?   83. According to the Revenue, the entire case of VIH was  

that  it  had  acquired  only  42%  (or,  accounting  for  FIPB  

regulations, 52%) is belied by clause 5.2 of the Shareholders  

Agreement.  In this connection,  it was urged that 15% in  

HEL was held by AS/ AG/ IDFC because of the FDI cap of  

74% and, consequently, vide clause 5.2 of the Shareholders  

Agreement  between  these  entities  and  HTIL  downstream  

7

subsidiaries, AS/AG/IDFC were all reigned in by having to  

vote only in accordance with HTIL’s dictates as HTIL had  

funded the purchase by these gentlemen of the HEL shares  

through  financing  of  loans.   Further,  in  the  Term Sheet  

dated 15.03.2007, that is, between VIH and Essar, VIH had  

a right to nominate 8 directors (i.e. 67% of 12) and Essar  

had a right to nominate 4 directors which, according to the  

Revenue, evidences that VIH had acquired 67% interest in  

HEL and not 42%/52%, as sought to be propounded by it.  

According to the Revenue, right from 22.12.2006 onwards  

when HTIL  made its  first  public  announcement,  HTIL  on  

innumerable  occasions represented its  direct  and indirect  

“equity interest” in HEL to be 67% - the direct interest being  

42.34% and indirect interest in the sense of shareholding  

belonging  to  Indian  partners  under  its  control,  as  25%.  

Further, according to the Revenue, the purchase price paid  

by  VIH was  based on an enterprise  value  of  67% of  the  

share capital of HEL; this would never have been so if VIH  

was to buy only 42.34% of the share capital of HEL and that  

nobody would pay US $2.5 bn extra without control  over  

25% in HEL.  We find no merit in the above submissions.  

7

At  the  outset,  it  may  be  stated  that  the expression  

“control” is a mixed question of law and fact.  The basic  

argument of the Revenue is based on the equation of “equity  

interest” with the word “control”. On perusal of Hutchison  

structure, we find that HTIL had, through its 100% wholly  

owned subsidiaries, invested in 42.34% of HEL (i.e. direct  

interest).   Similarly,  HTIL  had  invested  through  its  non-

100% wholly owned subsidiaries in 9.62% of HEL (through  

the pro rata route).   Thus, in the sense of shareholding, one  

can say that HTIL had an  effective shareholding (direct  

and indirect interest) of 51.96% (approx. 52%) in HEL.  On  

the basis of  the shareholding test,  HTIL could be said to  

have a 52% control over HEL.  By the same test, it could be  

equally said that the balance 15% stakes in HEL remained  

with AS, AG and IDFC (Indian partners) who had through  

their  respective  group  companies  invested  15%  in  HEL  

through  TII  and  Omega  and,  consequently,  HTIL  had  no  

control over 15% stakes in HEL.  At this stage, we may state  

that under the Hutchison structure shares of Plustech in  

the  AG  Group,  shares  of  Scorpios  in  the  AS  Group  and  

shares  of  SMMS came  under  the  options  held  by  GSPL.  

7

Pending exercise, options are not management rights.   At  

the  highest,  options  could  be  treated  as  potential  shares  

and  till  exercised  they  cannot  provide  right  to  vote  or  

management or control.  In the present case, till date GSPL  

has  not  exercised  its  rights  under  the  Framework  

Agreement 2006 because of the sectoral cap of 74% which  

in turn restricts the right to vote.  Therefore, the transaction  

in  the  present  case  provides  for  a  triggering  event,  viz.  

relaxation of the sectoral cap.    Till such date, HTIL/VIH  

cannot be said to have a control over 15% stakes in HEL.  It  

is for this reason that even FIPB gave its approval to the  

transaction  by  saying  that  VIH  was  acquiring  or  has  

acquired effective shareholding of 51.96% in HEL.

84. As regards the Term Sheet dated 15.03.2007, it may be  

stated that the said Term Sheet was entered into between  

VIH and Essar.  It was executed after 11.02.2007 when SPA  

was executed.  In the Term Sheet, it has been recited that  

the parties have agreed to enter into the Term Sheet in order  

to regulate the affairs of HEL and in order to regulate the  

relationship of shareholders of HEL.  It is also stated in the  

Term  Sheet  that  VIH  and  Essar  shall  have  to  nominate  

8

directors on the Board of Directors of HEL in proportion to  

the aggregate beneficial  shareholding held by members of  

the respective groups. That, initially VIH shall be entitled to  

nominate  8  directors  and  Essar  shall  be  entitled  to  

nominate 4 directors out of a total Board of Directors of HEL  

(numbering 12).   We must understand the background of  

this  Term Sheet.   Firstly,  as  stated  the  Term Sheet  was  

entered into in order to regulate the affairs of HEL and to  

regulate the relationship of the shareholders of HEL.  It was  

necessary  to  enter  into  such  an  agreement  for  smooth  

running of the business post acquisition.  Secondly, we find  

from the letter addressed by HEL to FIPB dated 14.03.2007  

that Articles of Association of HEL did not grant any specific  

person  or  entity  a  right  to  appoint  directors.   The  said  

directors  were  appointed  by  the  shareholders  of  HEL  in  

accordance with the provisions of the Indian Company Law.  

The letter further states that in practice the directors were  

appointed pro rata to their respective shareholdings which  

resulted in 4 directors being appointed from Essar group, 6  

directors  being  appointed  by  HTIL  and  2  directors  were  

appointed  by  TII.   One  such  director  was  AS,  the  other  

8

director  was  AG.   This  was  the  practice  even before  the  

Term Sheet.   The  Term Sheet  continues  this  practice  by  

guaranteeing or assuring Essar that 4 directors would be  

appointed from its Group.  The above facts indicate that the  

object of the SPA was to continue the “practice” concerning  

nomination of directors on the Board of Directors of HEL  

which in law is different from a right or power to control and  

manage and which practice was given to keep the business  

going,  post  acquisition.   Under  the  Company  Law,  the  

management control vests in the Board of Directors and not  

with the shareholders of the company.  Therefore, neither  

from Clause 5.2 of the Shareholders Agreement nor from the  

Term Sheet dated 15.03.2007, one could say that VIH had  

acquired 67% controlling interest in HEL.     

85. As  regards  the  question  as  to  why  VIH  should  pay  

consideration to HTIL based on an enterprise value of 67%  

of the share capital of HEL is concerned, it is important to  

note that valuation cannot be the basis of taxation.  The  

basis of taxation is profits or income or receipt.  In this case,  

we  are  not  concerned  with  tax  on income/ profit  arising  

from business operations but with tax on transfer of rights  

8

(capital  asset)  and gains  arising  therefrom.   In  the  latter  

case,  we  have  to  see  the  conditions  on  which  the  tax  

becomes payable under the Income Tax Act.  Valuation may  

be a science, not law.  In valuation, to arrive at the value  

one has to  take into  consideration  the  business  realities,  

like  the  business  model,  the  duration  of  its  operations,  

concepts such as cash flow, the discounting factors, assets  

and liabilities,  intangibles,  etc.   In the  present  case,  VIH  

paid US $11.08 bn for 67% of the enterprise value of HEL  

plus its downstream companies having operational licences.  

It  bought  an  upstream  company  with  the  intention  that  

rights flowing from the CGP share would enable it to gain  

control  over  the  cluster  of  Indian operations  or  operating  

companies which owned telecom licences, business assets,  

etc.   VIH  agreed  to  acquire  companies  which  in  turn  

controlled  a  67%  interest  in  HEL  and  its  subsidiaries.  

Valuation is a matter of opinion.  When the entire business  

or investment is sold, for valuation purposes, one may take  

into account the economic interest or realities.  Risks as a  

discounting factor are also to be taken into consideration  

apart from loans, receivables, options, RoFR/ TAR, etc. In  

8

this case, Enterprise Value is made up of two parts, namely,  

the  value  of  HEL,  the  value  of  CGP  and  the  companies  

between CGP and HEL.  In the present case, the Revenue  

cannot invoke Section 9 of the Income Tax Act on the value  

of the underlying asset or consequence of acquiring a share  

of CGP.  In the present case, the Valuation done was on the  

basis of enterprise value.  The price paid as a percentage of  

the enterprise value had to be 67% not because the figure of  

67% was available in praesenti to VIH, but on account of the  

fact that the competing Indian bidders would have had de  

facto  access to the entire 67%, as they were not subject to  

the  limitation  of  sectoral  cap,  and,  therefore,  would have  

immediately encashed the call  options.  The question still  

remains as to from where did this figure/ expression of 67%  

of  equity interest  come?  The expression “equity  interest”  

came from US GAAP.  In this connection, we have examined  

the Notes to the Accounts annexed to the Annual Report  

2006 of HTIL.  According to Note 1, the ordinary shares of  

HTIL stood listed on the Hong Kong Stock Exchange as well  

as on the New York Stock Exchange.  In Note No. 36, a list  

of principal subsidiaries of HTIL as on 31.12.2006 has been  

8

attached.  This  list  shows  the  names  of  HEL  (India)  and  

some of its subsidiaries.  In the said Annual Report, there is  

an annexure to the said Notes to the Accounts under the  

caption “Information for US Investors”.  It refers to Variable  

Interest Entities (VIEs).  According to the Annual Report, the  

Vodafone  Group  consisting  of  HTIL  and  its  subsidiaries  

conducted its operations inter alia in India through entities  

in which HTIL did not have the voting control.  Since HTIL  

was listed on New York Stock Exchange, it had to follow for  

accounting and disclosure the rules prescribed by US GAAP.  

Now,  in the  present  case,  HTIL as a listed company was  

required to make disclosures of  potential  risk involved in  

the investment under the Hutchison structure.  HTIL had  

furnished Letters of Credit to Rabo Bank which in turn had  

funded AS and AG, who in turn had agreed to place the  

shares  of  Plustech  and  Scorpios  under  Options  held  by  

GSPL.  Thus, giving of the Letters of Credit and placing the  

shares  of  Plustech  and  Scorpios  under  Options  were  

required to be disclosed to the US investors under the US  

GAAP, unlike Indian GAAP.  Thus, the difference between  

the 52% figure (control) and 67% (equity interest) arose on  

8

account of the difference in computation under the Indian  

and US GAAP.   

Approach of the High Court (acquisition of CGP share  with “other rights and entitlements”)

 86. Applying the “nature and character of the transaction”  

test,  the  High  Court  came  to  the  conclusion  that  the  

transfer  of  the  CGP  share  was  not  adequate  in  itself  to  

achieve the object of consummating the transaction between  

HTIL  and  VIH.   That,  intrinsic  to  the  transaction  was  a  

transfer  of  other  “rights and entitlements”  which rights  

and entitlements constituted in themselves “capital assets”  

within the meaning of Section 2(14) of the Income Tax Act,  

1961.  According to the High Court, VIH acquired the CGP  

share with other rights and entitlements whereas, according  

to the appellant,  whatever VIH obtained was through the  

CGP share (for short “High Court Approach”).   

87. At  the  outset,  it  needs  to  be  mentioned  that  the  

Revenue  has  adopted  the  abovementioned  High  Court  

Approach as an alternative contention.

8

88. We have to view the subject matter of the transaction,  

in this  case,  from a commercial  and realistic  perspective.  

The present case concerns an offshore transaction involving  

a structured investment.  This case concerns “a share sale”  

and  not  an asset  sale.   It  concerns  sale  of  an  entire  

investment.  A “sale” may take various forms.  Accordingly,  

tax  consequences  will  vary.   The  tax  consequences  of  a  

share sale would be different from the tax consequences of  

an  asset  sale.   A  slump  sale  would  involve  tax  

consequences  which  could  be  different  from  the  tax  

consequences of sale of assets on itemized basis.  “Control”  

is a mixed question of law and fact.  Ownership of shares  

may, in certain situations, result in the assumption of an  

interest which has the character of a  controlling interest  

in the management of the company.  A controlling interest is  

an incident of ownership of shares in a company, something  

which  flows  out  of  the  holding  of  shares.   A  controlling  

interest is, therefore, not an identifiable or distinct capital  

asset independent of the holding of shares.  The control of a  

company resides in the voting power of its shareholders and  

shares represent an interest of a shareholder which is made  

8

up of various rights contained in the contract embedded in  

the Articles of Association.  The right of a shareholder may  

assume the  character  of  a  controlling  interest  where  the  

extent  of  the  shareholding  enables  the  shareholder  to  

control  the  management.   Shares,  and  the  rights  which  

emanate from them, flow together and cannot be dissected.  

In  the  felicitous  phrase  of  Lord  MacMillan  in  IRC  v.  

Crossman [1936] 1 All ER 762, shares in a company consist  

of a “congeries of rights and liabilities” which are a creature  

of the Companies Acts and the Memorandum and Articles of  

Association  of  the  company.   Thus,  control  and  

management is a facet of the holding of shares.  Applying  

the above principles governing shares and the rights of the  

shareholders to the facts of this case, we find that this case  

concerns  a  straightforward  share  sale.   VIH  acquired  

Upstream shares with the intention that  the  congeries  of  

rights,  flowing  from  the  CGP  share,  would  give  VIH  an  

indirect control over the three genres of companies.  If one  

looks at the chart indicating the Ownership Structure, one  

finds  that  the  acquisition of  the  CGP share  gave  VIH an  

indirect control over the tier I Mauritius companies which  

8

owned shares in HEL totalling to 42.34%; CGP India (Ms),  

which in turn held shares in TII and Omega and which on a  

pro rata basis (the FDI principle),  totalled up to 9.62% in  

HEL and an indirect  control  over  Hutchison Tele-Services  

(India) Holdings Ltd. (Ms), which in turn owned shares in  

GSPL, which held call and put options.  Although the High  

Court has analysed the transactional documents in detail, it  

has missed out  this  aspect  of  the  case.   It  has failed  to  

notice  that  till  date  options  have  remained  un-encashed  

with  GSPL.   Therefore,  even  if  it  be  assumed  that  the  

options  under  the  Framework  Agreements  2006 could  be  

considered to be property rights, there has been no transfer  

or assignment of options by GSPL till  today. Even if it  be  

assumed that the High Court was right in holding that the  

options constituted capital assets even then Section 9(1)(i)  

was  not  applicable  as  these  options  have  not  been  

transferred  till  date.   Call  and  put  options  were  not  

transferred vide SPA dated 11.02.2007 or under any other  

document whatsoever.  Moreover, if, on principle, the High  

Court accepts that the transfer of the CGP share did not  

lead to  the transfer  of  a  capital  asset  in India,  even if  it  

8

resulted in a transfer of indirect control over 42.34% (52%)  

of shares in HEL, then surely the transfer of indirect control  

over  GSPL which held  options  (contractual  rights),  would  

not make the transfer of the CGP share taxable in India.  

Acquisition of  the CGP share which gave VIH an indirect  

control  over  three  genres  of  companies  evidences  a  

straightforward share sale and not an asset sale.  There is  

another fallacy in the impugned judgment.  On examination  

of  the  impugned  judgment,  we  find  a  serious  error  

committed by the High Court in appreciating the case of VIH  

before  FIPB.   On 19.03.2007,  FIPB sought  a  clarification  

from VIH of the circumstances in which VIH agreed to pay  

US$  11.08  bn  for  acquiring  67%  of  HEL  when  actual  

acquisition  was  of  51.96%.   In  its  response  dated  

19.03.2007, VIH stated that it had agreed to acquire from  

HTIL for US$ 11.08 bn, interest in HEL which included a  

52% equity shareholding.  According to VIH, the price also  

included a control premium, use of Hutch brand in India, a  

non-compete  agreement,  loan  obligations  and  an  

entitlement to acquire,  subject  to the Indian FDI rules,  a  

further 15% indirect interest in HEL.  According to the said  

9

letter,  the above elements together equated to 67% of the  

economic  value  of  HEL.   This  sentence  has  been  

misconstrued  by  the  High  Court  to  say  that  the  above  

elements  equated  to  67% of  the  equity  capital  (See  para  

124).  67% of the economic value of HEL is not 67% of the  

equity  capital.   If  VIH  would  have  acquired  67%  of  the  

equity  capital,  as  held  by  the  High  Court,  the  entire  

investment would have had breached the FDI norms which  

had imposed a sectoral cap of 74%.  In this connection, it  

may further be stated that Essar had 33% stakes in HEL  

out of which 22% was held by Essar Mauritius.  Thus, VIH  

did not acquire 67% of the equity capital of HEL, as held by  

the High Court.  This problem has arisen also because of  

the  reason that  this  case  deals  with  share sale and not  

asset sale.   This case does not involve sale  of  assets  on  

itemized basis.  The High Court ought to have applied the  

look at test in which the entire Hutchison structure, as it  

existed, ought to have been looked at holistically.  This case  

concerns  investment  into  India  by  a  holding  company  

(parent  company),  HTIL  through  a  maze  of  subsidiaries.  

When  one  applies  the  “nature  and  character  of  the  

9

transaction test”, confusion arises if a dissecting approach  

of examining each individual asset is adopted.  As stated,  

CGP  was  treated  in  the  Hutchison  structure  as  an  

investment vehicle.  As a general rule, in a case where a  

transaction  involves  transfer  of  shares  lock,  stock  and  

barrel,  such  a  transaction  cannot  be  broken  up  into  

separate  individual  components,  assets  or  rights  such as  

right  to  vote,  right  to  participate  in  company  meetings,  

management  rights,  controlling  rights,  control  premium,  

brand licences and so on as shares constitute a bundle of  

rights. [See  Charanjit Lal v. Union of India AIR 1951 SC  

41, Venkatesh (minor) v. CIT 243 ITR 367 (Mad) and Smt.  

Maharani Ushadevi v. CIT 131 ITR 445 (MP)]  Further, the  

High Court has failed to examine the nature of the following  

items,  namely,  non-compete  agreement,  control  premium,  

call and put options, consultancy support, customer base,  

brand licences etc.  On facts, we are of the view that the  

High Court, in the present case, ought to have examined the  

entire  transaction holistically.   VIH has rightly  contended  

that the transaction in question should be looked at as an  

entire  package.   The  items  mentioned  hereinabove,  like,  

9

control  premium,  non-compete  agreement,  consultancy  

support, customer base, brand licences, operating licences  

etc.  were  all  an  integral  part  of  the  Holding  Subsidiary  

Structure  which  existed  for  almost  13  years,  generating  

huge revenues, as indicated above.  Merely because at the  

time of exit capital gains tax becomes not payable or exigible  

to tax would not make the entire “share sale” (investment)  

a sham or a tax avoidant.   The High Court  has failed to  

appreciate  that  the  payment  of  US$  11.08  bn  was  for  

purchase of the entire investment made by HTIL in India.  

The payment was for the entire package. The parties to the  

transaction have not agreed upon a separate price for the  

CGP  share  and  for  what  the  High  Court  calls  as  “other  

rights  and entitlements”  (including  options,  right  to  non-

compete, control premium, customer base etc.). Thus, it was  

not open to the Revenue to split the payment and consider a  

part  of  such  payments  for  each of  the  above  items.  The  

essential  character  of  the  transaction  as  an  alienation  

cannot  be  altered  by  the  form  of  the  consideration,  the  

payment of the consideration in instalments or on the basis  

that the payment is related to a contingency (‘options’,  in  

9

this  case),  particularly  when  the  transaction  does  not  

contemplate such a split up. Where the parties have agreed  

for  a  lump  sum  consideration  without  placing  separate  

values for each of the above items which go to make up the  

entire investment in participation, merely because certain  

values are indicated in the correspondence with FIPB which  

had raised the query,  would not mean that the parties had  

agreed for the price payable for each of the above items. The  

transaction remained a contract of outright sale of the entire  

investment for a lump sum consideration [see: Commentary  

on  Model  Tax  Convention  on  Income  and  Capital  dated  

28.01.2003 as also the judgment of this Court in the case of  

CIT  (Central),  Calcutta  v.   Mugneeram  Bangur  and  

Company (Land Deptt.), (1965) 57 ITR 299 (SC)]. Thus, we  

need to “look at” the entire Ownership Structure set up by  

Hutchison as a  single consolidated bargain and interpret  

the transactional documents, while examining the Offshore  

Transaction of the nature involved in this case, in that light.

9

Scope and applicability of Sections 195 and 163 of IT  Act

89. Section 195 casts an obligation on the payer to deduct  

tax at source (“TAS” for short) from payments made to non-

residents  which  payments  are  chargeable  to  tax.   Such  

payment(s) must have an element of income embedded in it  

which is  chargeable  to  tax  in  India.   If  the  sum paid  or  

credited  by  the  payer  is  not  chargeable  to  tax  then  no  

obligation to deduct the tax would arise.  Shareholding in  

companies  incorporated  outside  India  (CGP)  is  property  

located outside India.  Where such shares become subject  

matter of offshore transfer between two non-residents, there  

is no liability for capital gains tax.  In such a case, question  

of  deduction  of  TAS  would  not  arise.   If  in  law  the  

responsibility for payment is on a non-resident, the fact that  

the payment was made, under the instructions of the non-

resident,  to its  Agent/Nominee in India or its  PE/Branch  

Office will not absolve the payer of his liability under Section  

195 to deduct TAS.  Section 195(1) casts a duty upon the  

payer of any income specified therein to a non-resident to  

deduct  therefrom  the  TAS  unless  such  payer  is  himself  

liable to pay income-tax thereon as an Agent of the payee.  

9

Section 201 says that if such person fails to so deduct TAS  

he shall be deemed to be an assessee-in-default in respect  

of the deductible amount of tax (Section 201).  Liability to  

deduct  tax  is  different  from “assessment”  under  the  Act.  

Thus, the person on whom the obligation to deduct TAS is  

cast  is  not  the  person  who  has  earned  the  income.  

Assessment has to be done after liability to deduct TAS has  

arisen.  The object of Section 195 is to ensure that tax due  

from non-resident persons is secured at the earliest point of  

time  so  that  there  is  no  difficulty  in  collection  of  tax  

subsequently  at  the  time  of  regular  assessment.   The  

present  case  concerns  the  transaction  of  “outright  sale”  

between two non-residents of a capital asset (share) outside  

India.   Further,  the said transaction was entered into on  

principal to principal basis.  Therefore, no liability to deduct  

TAS arose.  Further, in the case of transfer of the Structure  

in its entirety, one has to look at it holistically as one Single  

Consolidated Bargain which took place between two foreign  

companies outside India for which a lump sum price was  

paid of US$ 11.08 bn.  Under the transaction, there was no  

split  up of payment of  US$ 11.08 bn.  It  is the Revenue  

9

which  has  split  the  consolidated  payment  and  it  is  the  

Revenue  which  wants  to  assign  a  value  to  the  rights  to  

control premium, right to non-compete, right to consultancy  

support etc.  For FDI purposes, the FIPB had asked VIH for  

the basis of fixing the price of US$ 11.08 bn.  But here also,  

there was no split up of lump sum payment, asset-wise as  

claimed by the Revenue.  There was no assignment of price  

for each right, considered by the Revenue to be a “capital  

asset” in the transaction.  In the absence of PE, profits were  

not  attributable  to  Indian  operations.   Moreover,  tax  

presence has to be viewed in the context of the transaction  

that is subjected to tax and not with reference to an entirely  

unrelated matter.  The investment made by Vodafone Group  

companies in Bharti did not make all entities of that Group  

subject  to  the  Indian  Income  Tax  Act,  1961  and  the  

jurisdiction of the tax authorities.  Tax presence must be  

construed in the context, and in a manner that brings the  

non-resident assessee under the jurisdiction of the Indian  

tax authorities.   Lastly,  in the present case, the Revenue  

has failed to establish any connection with Section 9(1)(i).  

Under  the  circumstances,  Section  195  is  not  applicable.  

9

Alternatively, the Revenue contended before us that VIH can  

be proceeded against as  “representative assessee” under  

Section  163  of  the  Act.  Section  163  does  not  relate  to  

deduction of tax.  It relates to treatment of a purchaser of  

an asset as a representative assessee.  A conjoint reading  

of Section 160(1)(i), Section 161(1) and Section 163 of the  

Act shows that, under given circumstances, certain persons  

can be treated as  “representative assessee” on behalf of  

non-resident specified in Section 9(1).  This would include  

an  agent of  non-resident  and  also  who is  treated  as  an  

agent under Section 163 of the Act which in turn deals with  

special cases where a person can be regarded as an agent.  

Once a person comes within any of the clauses of Section  

163(1),  such a  person would  be  the  “Agent”  of  the  non-

resident  for  the  purposes  of  the  Act.   However,  merely  

because a person is an agent or is to be treated as an agent,  

would not lead to an automatic conclusion that he becomes  

liable to pay taxes on behalf of the non-resident.  It would  

only mean that  he is  to be treated as a  “representative  

assessee”.  Section 161 of the Act makes a “representative  

assessee” liable only “as regards the income in respect of  

9

which he is a representative assessee” (See: Section 161).  

Section  161  of  the  Act  makes  a  representative  assessee  

liable only if the eventualities stipulated in Section 161 are  

satisfied.  This is the scope of Sections 9(1)(i), 160(1), 161(1)  

read with Sections 163(1) (a) to (d).  In the present case, the  

Department has invoked Section 163(1)(c).   Both Sections  

163(1)(c)  and  Section  9(1)(i)  state  that  income  should  be  

deemed to accrue or arise  in India.   Both these Sections  

have to be read together.  On facts of this case, we hold that  

Section 163(1)(c) is not attracted as there is no transfer of a  

capital  asset situated in India.  Thus, Section 163(1)(c) is  

not  attracted.   Consequently,  VIH  cannot  be  proceeded  

against  even  under  Section  163  of  the  Act  as  a  

representative assessee.  For the reasons given above, there  

is  no  necessity  of  examining  the  written  submissions  

advanced on behalf of VIH by Dr. Abhishek Manu Singhvi  

on Sections 191 and 201.

Summary of Findings

90. Applying the look at test in order to ascertain the true  

nature and character of the transaction, we hold, that the  

Offshore  Transaction  herein is  a  bonafide  structured FDI  

9

investment  into  India  which fell  outside  India’s  territorial  

tax  jurisdiction,  hence  not  taxable.   The  said  Offshore  

Transaction evidences participative investment and not a  

sham or  tax  avoidant  preordained  transaction.   The said  

Offshore Transaction was between HTIL (a Cayman Islands  

company)  and  VIH  (a  company  incorporated  in  

Netherlands).   The subject matter  of  the Transaction was  

the transfer of the CGP (a company incorporated in Cayman  

Islands).   Consequently,  the Indian Tax Authority had no  

territorial  tax  jurisdiction  to  tax  the  said  Offshore  

Transaction.

Conclusion

91. FDI flows towards location with a strong governance  

infrastructure which includes enactment of laws and how  

well the legal system works.  Certainty is integral to rule of  

law.  Certainty and stability form the basic foundation of  

any  fiscal  system.   Tax  policy  certainty  is  crucial  for  

taxpayers  (including  foreign  investors)  to  make  rational  

economic  choices  in  the  most  efficient  manner.   Legal  

doctrines  like  “Limitation  of  Benefits” and  “look  

1

through” are matters of policy.  It is for the Government of  

the day to have them incorporated in the Treaties and in the  

laws so as to avoid conflicting views.  Investors should know  

where they stand.  It also helps the tax administration in  

enforcing the provisions of the taxing laws.  As stated above,  

the Hutchison structure has existed since 1994.  According  

to the details submitted on behalf of the appellant, we find  

that from 2002-03 to 2010-11 the Group has contributed  

an  amount  of  `20,242 crores  towards  direct  and indirect  

taxes on its business operations in India.

Order

92. For  the  above  reasons,  we  set  aside  the  impugned  

judgment  of  the  Bombay  High  Court  dated  8.09.2010  in  

Writ  Petition  No.  1325  of  2010.   Accordingly,  the  Civil  

Appeal  stands  allowed  with  no  order  as  to  costs.   The  

Department is hereby directed to return the sum of  `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  

1

the date of payment.  The Registry is directed to return the  

Bank Guarantee given by the appellant within four weeks.  

…..……………………….......CJI (S. H. Kapadia)

.........…………………………..J. (Swatanter Kumar)

New Delhi;  January 20, 2012  

1

REPORTABLE

IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.733 OF 2012 (Arising out of SLP (C)) No.26529 of 2010)

Vodafone International Holdings B.V.   …       Appellant(s)

Vs.

Union of India and Anr.    …    Respondent(s)

J U D G M E N T

K.S. Radhakrishnan, J.

The question involved in this case is of considerable  

public importance, especially on Foreign Direct Investment  

(FDI),  which  is  indispensable  for  a  growing  economy like  

India.   Foreign investments  in  India  are  generally  routed  

through Offshore Finance Centres (OFC) also through the  

countries  with  whom  India  has  entered  into  treaties.  

Overseas  investments  in  Joint  Ventures  (JV)  and  Wholly  

Owned  Subsidiaries  (WOS)  have  been  recognised  as  

important  avenues of  global  business  in  India.   Potential  

users  of  off-shore  finance  are:  international  companies,  

individuals, investors and others and capital flows through

FDI, Portfolio Debt Investment and Foreign Portfolio Equity  

Investment and so on.  Demand for off-shore facilities has  

considerably increased owing to high growth rates of cross-

border investments and a number of rich global investors  

have  come  forward  to  use  high  technology  and  

communication  infrastructures.   Removal  of  barriers  to  

cross-border  trade,  the  liberalisation  of  financial  markets  

and  new  communication  technologies  have  had  positive  

effects on global economic growth and India has also been  

greatly benefited.   

2. Several  international  organisations  like  UN,  FATF,  

OECD,  Council  of  Europe  and the  European  Union offer  

finance, one way or the other, for setting up companies all  

over the world.  Many countries have entered into treaties  

with  several  offshore  companies  for  cross-border  

investments for mutual benefits.  India has also entered into  

treaties with several countries for bilateral trade which has  

been statutorily recognised in this country.  United Nations  

Conference on Trade and Development (UNCTAD) Report on  

World  Investment  prospects  survey  2009-11  states  that  

104

India would continue to remain among the top five attractive  

destinations for foreign investors during the next two years.

3. Merger,  Amalgamation,  Acquisition,  Joint  Venture,  

Takeovers  and  Slump-sale  of  assets  are  few  methods  of  

cross-border  re-organisations.  Under  the  FDI  Scheme,  

investment can be made by availing the benefit of treaties,  

or  through  tax  havens  by  non-residents  in  the  

share/convertible  debentures/preference  shares  of  an  

Indian  company  but  the  question  which  looms  large  is  

whether our Company Law, Tax Laws and Regulatory Laws  

have been updated so that there can be greater scrutiny of  

non-resident  enterprises,  ranging from foreign contractors  

and service providers, to finance investors.  Case in hand is  

an eye-opener of what we lack in our regulatory laws and  

what  measures  we  have  to  take  to  meet  the  various  

unprecedented  situations,  that  too  without  sacrificing  

national  interest.   Certainty  in  law  in  dealing  with  such  

cross-border  investment  issues  is  of  prime  importance,  

which has been felt  by many countries around the world  

and some have taken adequate regulatory measures so that  

investors can arrange their affairs fruitfully and effectively.  

105

Steps taken by various countries to meet such situations  

may also guide us, a brief reference of which is being made  

in the later part of this judgment.   

4. We are, in the present case, concerned with a matter  

relating  to  cross-border  investment  and  the  legal  issues  

emanate from that.  Facts have been elaborately dealt with  

by the High Court in the impugned judgment and also in  

the leading judgment of Lord Chief Justice, but reference to  

few facts is necessary to address and answer the core issues  

raised.  On all major issues, I fully concur with the views  

expressed  by  the  Lord  Chief  Justice  in  his  erudite  and  

scholarly judgment.    

5. Part-I  of  this  judgment  deals  with  the  facts,  Part-II  

deals with the general principles, Part-III deals with Indo-

Mauritian Treaty,  judgments in  Union of India v. Azadi  

Bachao  Andolan  and  Another (2004)  10  SCC  1  and  

McDowell  and  Company  Limited  v.  Commercial  Tax  

Officer (1985)  3  SCC  230,  Part-IV  deals  with  CGP  

Interposition, situs etc, Part-V deals with controlling interest  

106

of HTIL/Vodafone and other rights and entitlements, Part-VI  

deals with the scope of Section 9, Part-VII deals with Section  

195  and  other  allied  provisions  and  Part-VIII  is  the  

conclusions.   

Part – I

6. Hutchison  Whampoa  is  a  multi-sectional,  multi-

jurisdictional  entity  which  consolidates  on  a  group  basis  

telecom operations in various countries.  Hutchison Group  

of  Companies  (Hong  Kong)  had  acquired  interest  in  the  

Indian telecom business in the year 1992, when the group  

invested in Hutchison Max Telecom Limited (HTML) (later  

known a Hutchison Essar Limited (HEL), which acquired a  

cellular  license  in  Mumbai  circle  in  the  year  1994  and  

commenced  its  operation  in  the  year  1995.   Hutchison  

Group,  with  the  commercial  purpose  of  consolidating  its  

interest in various countries, incorporated CGP Investments  

Holding Limited (for short “CGP”) in Cayman Islands as a  

WOS on 12.01.1998 as an Exempted Company for offshore  

investments.  CGP held shares in two subsidiary companies,  

namely  Array  Holdings  Limited  (for  short  Array)  and  

Hutchison  Teleservices  (India)  Holding  Ltd.  [for  short  

107

HTIH(M)]  both  incorporated  in  Mauritius.  CGP(India)  

Investment (for short CGPM) was incorporated in Mauritius  

in December 1997 for the purpose of investing in Telecom  

Investment  (India)  Pvt.  Limited  (for  short  TII),  an  Indian  

Company.   CGPM  acquired  interests  in  four  Mauritian  

Companies  and  entered  into  a  Shareholders’  Agreement  

(SHA) on 02.05.2000 with Essar Teleholdings Limited (ETH),  

CGPM, Mobilvest, CCII (Mauritius) Inc. and few others, to  

regulate shareholders’ right inter se.  Agreement highlighted  

the share holding pattern of each composition of Board of  

Directors,  quorum, restriction on transfer of ownership of  

shares,  Right  of  First  Refusal  (ROFR),  Tag  Along  Rights  

(TARs) etc.

7. HTIL,  a  part  of  Hutchison  Whampoa  Group,  

incorporated in Cayman Islands in the year 2004 was listed  

in Hong Kong (HK) and New York (NY) Stock Exchanges.  In  

the  year  2005,  as  contemplated  in  the  Term  Sheet  

Agreement dated 05.07.2003, HTIL consolidated its Indian  

business  operations  through  six  companies  in  a  single  

holding company HMTL, later renamed as Hutchison Essar  

108

Ltd. (HEL).  On 03.11.2005, Press Note 5 of 2005 series was  

issued  by  the  Government  of  India  enhancing  the  FDI  

ceiling  from  49%  to  74%  in  the  Telecom  Sector.   On  

28.10.2005,  Vodafone  International  Holding  BV  (VIHBV)  

(Netherlands) had agreed to acquire 5.61% of shareholding  

in  Bharati  Tele  Ventures  Limited  (Bharati  Airtel  Limited)  

and  on  the  same  day  Vodafone  Mauritius  Limited  

(Subsidiary  of  VIHBV)  had  agreed  to  acquire  4.39%  

shareholding  in  Bharati  Enterprises  Pvt.  Ltd.  (renamed  

Bharati Infotel Ltd.), which indirectly held shares in Bharati  

Airtel Ltd.

8. HEL shareholding was then restructured through TII  

and an SHA was executed on 01.03.2006 between Centrino  

Trading  Company  Pvt.  Ltd.  (Centrino),  an  Asim  Ghosh  

(Group) [for short (AG)],  ND Callus Info Services Pvt. Ltd.  

(for  short NDC),  an Analjit  Singh (Group)  [for  short (AS)],  

Telecom Investment India Pvt.Ltd. [for short (TII)], and CGP  

India (M).  Further, two Framework Agreements (FWAs) were  

also entered into with respect to the restructuring.  Credit  

facilities were given to the companies controlled by AG and  

109

AS.   FWAs  called,  Centrino  FWA  and  N.D.  FWA  were  

executed  on  01.03.2006.   HTIL  stood  as  a  guarantor  for  

Centrino,  for  an amount  of   `  4,898  billion  advanced  by  

Rabo Bank.  HTIL had also stood as a guarantor for  ND  

Callus, for an award of  `  7.924 billion advanced by Rabo  

Bank.  

9. Following the credit support given by HTIL to AG and  

AS so as to enable them to acquire shares in TII, parties  

entered into separate agreements with 3 Global Services Pvt.  

Ltd. (India) [for short 3GSPL], a WOS of HTIL.  FWAs also  

contained  call  option in  favour  of  3GSPL,  a  right  to  

purchase from Gold Spot (an AG company) and Scorpios (an  

AS company) their entire shareholding in TII held through  

Plustech  (an  AG  company)  and  MVH  (an  AS  company)  

respectively.  Subscription right was also provided allowing  

3GSPL a right to subscribe 97.5% and 97% of the equity  

share capital respectively at a pre-determined rate equal to  

the  face  value  of  the  shares  of  Centrino  and  NDC  

respectively exercisable within a period of 10 years from the  

date  of  the  agreements.   Agreements  also  restricted  AG  

110

companies  and  AS  companies  from  transferring  any  

downstream interests leading to the shareholding in TII.   

10. HEL  shareholding  again  underwent  change  with  

Hinduja Group exiting and its shareholding being acquired  

by  an  Indian  company  called  SMMS Investments  Private  

Limited (SMMS).  SMMS was also a joint venture company  

formed  by  India  Development  Fund  (IDF)  acting  through  

IDFC  Private  Equity  Company  (IDFCPE),  Infrastructure  

Development  Finance  Company  Limited  (IDFC)  and  SSKI  

Corporate Finance Pvt. Ltd. (SSKI) all the three companies  

were incorporated in India.  Pursuant thereto, a FWA  was  

entered into on 07.08.2006 between IDF (through IDFCPE),  

IDFC, SSKI,  SMMS, HTIL (M),  3GSPL, Indus Ind Telecom  

Holding  Pvt.  Ltd.  (ITNL)  (later  named  as  Omega  Telecom  

Holding  Pvt.  Ltd.  (Omega)  and  HTIL.   3GSPL,  by  that  

Agreement, had a  call option and a right to purchase the  

entire  equity  shares  of  SMMS at  a  pre-determined  price  

equal to  ` 661,250,000 plus 15% compound interest. A SHA  

was also entered into on 17.08.2006 by SMMS, HTIL (M),  

HTIL(CI) and ITNL to regulate affairs of ITNL.  Agreement  

111

referred  to  the  presence  of  at  least  one  of  the  directors  

nominated  by  HTIL  in  the  Board  of  Directors  of  Omega.  

HTIL was only a confirming party to this Agreement since  

it was the parent company.

11. HTIL issued a press release on 22.12.2006 in the HK  

and  NY  Stock  Exchanges  announcing  that  it  had  been  

approached  by  various  potentially  interested  parties  

regarding a possible sale of “its equity interest” in HEL in  

the  Telecom  Sector  in  India.   HTIL  had  adopted  those  

measures  after  procuring  all  assignments  of  loans,  

facilitating  FWAs,  SHAs,  transferring  Hutch  Branch,  

transferring Oracle License etc.

12. Vodafone Group Plc. came to know of the possible exit  

of  Hutch  from  Indian  telecom  business  and  on  behalf  of  

Vodafone Group made a non-binding offer on 22.12.06, for a  

sum of US$ 11.055 million in cash for HTIL’s shareholdings  

in HEL.  The offer was valued at an “enterprise value” of  

US$  16.5  billion.  Vodafone  then  appointed  on  02.01.2007  

Ernst and Young LLP to conduct due diligence, and a Non-

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Disclosure (Confidentiality) Agreement dated 02.01.2007 was  

entered into  between HTIL and Vodafone.   On 09.02.2007  

Vodafone Group Plc. wrote a letter to HTIL making a “revised  

and binding offer” on behalf of a member of Vodafone Group  

(Vodafone)  for  HTIL’s  shareholdings  in  HEL  together  with  

interrelated company loans. Bharati  Infotel  Pvt. Limited on  

09.02.2007  expressed  its  ‘no  objection’  to  the  Chairman,  

Vodafone Mauritius Limited regarding proposed acquisition  

by Vodafone group of direct and / indirect interest in HEL  

from Hutchison or Essar group.  Bharati Airtel also sent a  

similar letter to Vodafone.

13. Vodafone  Group  Plc.  on  10.02.2007  made  a  final  

binding  offer  of  US$  11.076  billion  “in  cash  over  HTIL’s  

interest”, based on an enterprise value of US$ 18.800 billion  

of HEL.  Ernst and Young LLP, U.K. on 11.02.2007 issued  

due  diligence  report  in  relation  to  operating  companies  in  

India namely HEL and subsidiaries and also the Mauritian  

and Cayman Island Companies.  Report noticed that CGP(CI)  

was not within the target group and was later included at the  

instance of HTIL.  On 11.02.2007, UBS Limited, U.K. issued  

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fairness opinion in relation to the transaction for acquisition  

by Vodafone from  HTIL of  a  67% effective  interest  in HEL  

through the acquisition of 100% interest in CGP and granting  

an option by Vodafone to Indian Continent Investment Ltd.  

over a 5.6% stake in Bharati Airtel Limited.  Bharati Infotel  

and  Bharati  Airtel  conveyed  their  no-objection  to  the  

Vodafone purchasing direct or indirect interest in HEL.

14. Vodafone  and  HTIL  then  entered  into  a  Share  and  

Purchase Agreement (SPA) on 11.02.2007 whereunder HTIL  

had agreed to procure the transfer of share capital of CGP  

by HTIBVI, free from all encumbrances and together with all  

rights  attaching or accruing together with assignments of  

loan interest.  HTIL on 11.02.2007 issued a  side  letter  to  

Vodafone  inter  alia  stating  that,  out  of  the  purchase  

consideration, up to US$80 million could be paid to some of  

its  Indian  Partners.   HTIL  had  also  undertaken  that  

Hutchison  Telecommunication  (India)  Ltd.  (HTM),  Omega  

and  3GSPL,  would  enter  into  an  agreed  form  “IDFC  

Transaction  Agreement”  as  soon  as  practicable.    On  

11.02.2007, HTIL also sent a disclosure letter to Vodafone  

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in terms of Clause 9.4 of SPA – Vendor warranties relating  

to consents and approvals, wider group companies, material  

contracts, permits, litigation, arbitration and governmental  

proceedings to limit HTIL liability.  

15. Vodafone on 12.02.2007 made a public announcement  

to  the  Securities  and Exchange  Commission,  Washington  

(SEC),  London  Stock  Exchange  and  HK  Stock  Exchange  

stating that  it had agreed to acquire a Controlling Interest  

in HEL for a cash consideration of US$ 11.1 billion.  HTIL  

Chairman  sent  a  letter  to  the  Vice-Chairman  of  Essar  

Group  on  14.02.2007  along  with  a  copy  of  Press  

announcement  made  by  HTIL,  setting  out  the  principal  

terms of the intended sale of HTIL of its equity and loans in  

HEL, by way of sale of CGP share and loan assignment to  

VIHBV.

16. Vodafone  on  20.02.2007  filed  an  application  with  

Foreign Investment Promotion Board (FIPB) requesting it to  

take note of and grant approval under Press note no.1  to  

the indirect acquisition by Vodafone of 51.96% stake in HEL  

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through an overseas acquisition of the entire share capital  

of CGP from HTIL.  HTIL made an announcement on HK  

Stock  Exchange  regarding  the  intended  use  of  proceeds  

from sale of HTIL’s  interest in HEL viz., declaring a special  

dividend of HK$ 6.75 per share, HK$ 13.9 billion to reduce  

debt and the remainder to be invested in telecommunication  

business, both for expansion and towards working capital  

and general policies.  Reference was also made to the sale  

share  and  sale  loans  as  being  the  entire  issued  share  

capital  of  CGP and the loans owned by CGP/Array to an  

indirect  WOS.   AG  on  02.03.2007  sent  a  letter  to  HEL  

confirming that he was the exclusive beneficial owner of his  

shares  and  was  having  full  control  over  related  voting  

rights.   Further,  it  was also stated that AG had received  

credit  support,  but  primary  liability  was  with  his  

Companies.   AS also sent a letter on 05.03.2007 to FIPB  

confirming that he was the exclusive beneficial owner of his  

shares and also of the credit support received.   

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17. Essar  had  filed  objections  with  the  FIPB  on  

06.03.2007  to  HTIL’s  proposed  sale  and  on  14.03.2007,  

Essar withdrew its objections.  

18. FIPB on 14.03.2007 sent a letter to HEL pointing out  

that in filing of HTIL before the U.S. SEC in Form 6K in the  

month of March 2006, it had been stated that HTIL Group  

would continue  to hold an aggregate interest of 42.34% of  

HEL and  an  additional  indirect  interest  through  JV  

companies  being  non-wholly  owned  subsidiaries  of  HTIL  

which hold an aggregate of 19.54% of HEL and, hence, the  

combined  holding of  HTIL  Group would  then be  61.88%.  

Reference  was  also  made  to  the  communication  dated  

06.03.2007 sent to the FIPB wherein it was stated that the  

direct  and  indirect  FDI  by  HTIL  would  be  51.96% and,  

hence, was asked to clarify that discrepancy.  Similar letter  

dated  14.03.2007  was  also  received  by  Vodafone.   On  

14.03.2007, HEL wrote to FIPB stating that the discrepancy  

was  because  of  the  difference  in  U.S.  GAAP  and  Indian  

GAAP declarations and that the combined holding for U.S.  

GAAP purposes was 61.88% and for Indian GAAP purposes  

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was 51.98%.  It was pointed out that Indian GAAP number  

accurately reflected the true equity ownership and control  

position.   On  14.03.2007  itself,  HEL  wrote  to  FIPB  

confirming that  7.577% stake in HEL was held legally and  

beneficially by AS and his wife and 4.78% stake in HEL was  

held legally  and beneficially  by AG.  Further,  it  was also  

pointed out that  2.77% stake in HEL through Omega and  

S.M.M.S.  was  legally  and  beneficially  owned  by  IDFC  

Limited,  IDFC Private Equity Limited and SSKI Corporate  

Finance  Limited.   Further,  it  was  also  pointed  out  that  

Articles of Association of HEL did not give any person or  

entity any right to appoint directors, however, in practice six  

directors were from HTIL, four from Essar, two from TII and  

TII had appointed AG & AS.  On credit support agreement, it  

was  pointed  out  that  no  permission  of  any  regulatory  

authority was required.   

19. Vodafone also wrote to FIPB on 14.03.2007 confirming  

that  VIHBV’s  effective  shareholding  in  HEL  would  be  

51.96% i.e. Vodafone would own 42% direct interest in HEL  

through  its  acquisition  of  100%  of  CGP Investments  

(Holdings)  Limited  (CGPIL)  and  through  CGPIL  Vodafone  

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would also own 37% in TII which in turn owned 20% in HEL  

and 38% in Omega which in turn owned 5% in HEL.  It was  

pointed out that both TII and Omega were Indian companies  

and  those  investments  combined  would  give  Vodafone  a  

controlling interest of 52% in HEL.  Further, it was pointed  

out that HTIL’s Indian partners AG, AS, IDFC who between  

them held a 15% interest in HEL on aggregate had agreed to  

retain their shareholding with full control including voting  

rights and dividend rights.

20. HTIL,  Essar  Teleholding  Limited  (ETL),  Essar  

Communication  Limited  (ECL),  Essar  Tele  Investments  

Limited  (ETIL),  Essar  Communications  (India)  Limited  

(ECIL)  signed  a  settlement  agreement  on  15.03.2007  

regarding  Essar  Group’s  support  for  completion  of  the  

proposed  transaction  and  covenant  not  to  sue  any  

Hutchison Group Company etc., in lieu of payment by HTIL  

of  US$ 373.5 million after  completion and a further  US$  

41.5 million after second anniversary of completion.  In that  

agreement,  HTIL  had  agreed  to  dispose  of  its  direct  and  

indirect equity, loan and other interests and rights in and  

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related to HEL, to Vodafone pursuant to the SPA.  HTIL had  

also agreed to pay US$ 415 million to Essar in return of its  

acceptance  of  the  SPA between  HTIL  and  Vodafone.   On  

15.03.2007  a  Deed  of  Waiver  was  entered  into  between  

Vodafone and HTIL, whereby Vodafone had waived some of  

the warranties  set  out  in paragraphs 7.1(a)  and 7.1(b)  of  

Schedule 4 of the SPA and covenanted that till payment of  

HTIL under  Clause  6.1(a)  of  the  Settlement  Agreement of  

30.05.2007, Vodafone should not bring any claim or action.  

On 15.03.2007 a circular was issued by HTIL including the  

report  of  Somerley  Limited  on  the  Settlement  Agreement  

between HTIL and Essar Group.

21. VIHBVI, Essar Tele Holdings Limited (ETH) and ECL  

entered  into  a  Term Sheet  Agreement  on  15.03.2007  for  

regulating  the  affairs  of  HEL  and  the  relationship  of  its  

shareholders  including  setting  out  VIHBVI’s  right  as  a  

shareholder of HEL to nominate eight persons out of twelve  

to the board of directors,  requiring Vodafone to nominate  

director to constitute a quorum for board meetings and get  

ROFR over shares owned by Essar in HEL.  Term Sheet also  

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stated  that  Essar  had  a  TAR  in  respect  of  Essar’s  

shareholding  in  HEL,  should  any  Vodafone  Group  

shareholding  sell  its  share  or  part  thereof  in  HEL  to  a  

person  not  in  a  Vodafone  Group  entity.   VIHBV  and  

Vodafone  Group Plc.(as  guarantor  of  VIHBV)  had entered  

into  a ‘Put Option’  Agreement on 15.03.2007 with ETH,  

ECL (Mauritius), requiring VIHBV to purchase from Essar  

Group shareholders’ all the option shares held by them.

22. The  Joint  Director  of  Income  Tax  (International  

Taxation),  in  the  meanwhile,  issued  a  notice  dated  

15.03.2007  under  Section  133(6)  of  the  Income  Tax  Act  

calling  for  certain  information  regarding  sale  of  stake  of  

Hutchison group HK in HEL, to Vodafone Group Plc.   

23. HTIL, on 17.3.2007, wrote to AS confirming that HTIL  

has no beneficial or legal or other rights in AS’s TII interest  

or HEL interest.  Vodafone received a letter dated 19.3.2007  

from  FIPB  seeking  clarifications  on  the  circumstances  

under which Vodafone had agreed to pay consideration of  

US$ 11.08 billion for acquiring 67% of HEL when the actual  

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acquisition  was  only  51.96% as  per  the  application.  

Vodafone on 19.03.2007 wrote to FIPB stating that it had  

agreed to acquire from HTIL interest in HEL which included  

52% equity shareholding for US$ 11.08 billion which price  

included control premium, use and rights to Hutch brand  

in India, a non-compete agreement with Hutch group, value  

of  non-voting,  non-convertible  preference  shares,  various  

loans  obligations  and  entitlement  and  to  acquire  further  

15%  indirect  interest  in  HEL,  subject  to  Indian  foreign  

investment rules, which together equated to about 67% of  

the economic value of HEL.   

24. VIHBVI and Indian continent Investors Limited (ICIL)  

had entered into an SHA on 21.03.2007 whereby VIHBVI  

had to sell 106.470.268 shares in Bharati Airtel to ICIL for a  

cash consideration of US$ 1,626,930.881 (which was later  

amended on 09.05.2007)

25. HEL on 22.3.2007 replied to the letter of 15.03.2007,  

issued by the Joint Director of  Income Tax (International  

Taxation) furnishing requisite information relating to HEL  

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clarifying that it was neither a party to the transaction nor  

would there be any transfer of shares of HEL.

26. HEL  received  a  letter  dated  23.3.2007  from  the  

Additional  Director  Income  Tax  (International  Taxation)  

intimating  that  both  Vodafone  and  Hutchison  Telecom  

Group  announcements/press  releases/declarations  had  

revealed  that  HTIL  had  made  substantive  gains  and  

consequently  HEL  was  requested  to  impress upon  

HTIL/Hutchison Telecom Group to discharge their liability  

on  gains,  before  they  ceased  operations  in  India.   HEL  

attention was also drawn to Sections 195, 195(2) and 197 of  

the Act and stated that under Section 195 obligations were  

both on the payer and the payee.

27. Vodafone,  in  the  meanwhile,  wrote  to  FIPB  on  

27.03.2007 confirming that in determining the bid price of  

US$ 11.09 billion it had taken into account various assets  

and liabilities of CGP including:

(a) its  51.96%  direct  and  indirect  equity  ownership of Hutch Essar;     

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(b)  Its  ownership  of  redeemable  preference  shares in TII and JKF;     

(c)   Assumption  of  liabilities  of  various  subsidiaries of CGP amounting to approximately  US$630 million;  

(d)    subject to Indian Foreign Investment Rules,  its  rights  and  entitlements,  including  subscription rights at par value and call options  to acquire in future a further 62.75% of TII and  call options to acquire a further 54.21% of Omega  Telecom Holdings Pvt. Ltd, which together would  give  Vodafone  a  further  15.03%  proportionate  indirect equity ownership of Hutch Essar, various  intangible features such as control premium, use  and rights of Hutch branch in India, non compete  agreement with HTIL.

HEL on 5.4.2007 wrote to the Joint director of Income Tax  

stating  that  it  has  no  liabilities  accruing  out  of  the  

transaction,  also  the  department  has  no  locus  standi to  

invoke  Section  195  in  relation  to  non-resident  entities  

regarding  any  purported  tax  obligations.   On 09.04.2007  

HTIL submitted FWAs, SHAs, Loan Agreement, Share-pledge  

Agreements,  Guarantees,  Hypothecations,  Press  

Announcements,  Regulatory  filing  etc.,  charts  of  TII  and  

Omega Shareholding, note on terms of agreement relating to  

acquisition by AS, AG and IDFC, presentation by Goldman  

Sachs  on  fair  market  valuation  and  confirmation  by  

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Vodafone, factors leading to acquisition by AG and AS and  

rationale for put/call options etc.   

28. Vodafone  on  09.04.2007  sent  a  letter  to  FIPB  

confirming that valuation of  N.D.  Callus,  Centrino,  would  

occur as per Goldman Sach's presentation in Schedule 5 to  

HTIL's letter of 09.04.2007 with a minimum value of US$  

266.25 million and US$164.51 million for the equity in N.D.  

Callus  and  Centrino  respectively,  which  would  form  the  

basis of the future partnership with AS & AG.  Vodafone  

also wrote a letter to FIPB setting out details of Vodafone  

Group's interest worldwide.  On 30.04.07 a resolution was  

passed by the Board of Directors of CGP pertaining to loan  

agreement,  resignation  and  appointment  of  directors,  

transfer of shares; all to take effect on completion of SPA.  

Resolution also accorded approval of entering into a Deed of  

Assignment  in respect  of  loans owed to  HTI(BVI)  Finance  

Limited  in  the  sums  of  US$  132,092,447.14  and  US$  

28,972,505.70.  Further resolution also accorded approval  

to  the resignations of  certain persons as Directors of  the  

Company,  to  take  effect  on completion  of  SPA.   Further,  

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approval was also accorded to the appointment of Erik de  

Rjik as a sole director of  CGP.  Resolution also accorded  

approval to the transfer of CGP from HTI BVI to Vodafone.  

On 30.04.2007  a  board  of  resolution  was  passed  by  the  

directors  of  Array  for  the  assignment  of  loans  and  

resignation  of  existing  directors  and  appointment  of  new  

directors  namely  Erik  de  Rjik  and  two  others.   On  

30.04.2007, the board of directors  of HTI BVI approved the  

transfer documentation in relation to CGP share capital in  

pursuance  of  SPA  and  due  execution  thereof.   On  

04.05.2007  HTI  BVI  delivered  the  share  transfer  

documentation to  the  lawyers  in  Caymen Islands to  hold  

those  along  with  a  resolution  passed  by  the  board  of  

directors of HTI BVI to facilitate delivery of instruments of  

transfer to Vodafone at closing of the transaction.

29. Vodafone  on 07.05.2007 received a  letter  from FIPB  

conveying  its  approval  to  the  transaction  subject  to  

compliance  of  observation  of  applicable  laws  and  

regulations  in  India.  On  08.05.2007  a  sum  of  

US$10,854,229,859.05  was  paid  by  Vodafone  towards  

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consideration for acquisition of share capital of CGP.  On  

08.05.2007 Vodafone's name was entered in the register of  

members  of  CGP kept  in  Caymen  Islands  and the  share  

certificate No.002 of HTI BVI relating to CGP share capital  

was cancelled.  On the same day a Tax Deed of Covenant  

was entered into between HTIL and Vodafone in pursuance  

of  SPA  indemnifying  Vodafone  in  respect  of  taxation  or  

transfer pricing liabilities payable or suffered by wider group  

companies (as defined by SPA i.e., CGP, 3 GSPL, Mauritian  

holding  and  Indian  Companies)  on  or  before  completion,  

including reasonable costs associated with any tax demand.  

30. HTIL also sent a side letter to SPA on 08.05.2007 to  

Vodafone highlighting the termination of the brand licences  

and brand support  service agreements between HTIL and  

3GSPL and the Indian Operating Companies and stated that  

the net amount to be paid by Vodafone to HTIL would be  

US$  10,854,229,859.05  and  that  Vodafone  would  retain  

US$  351.8  million  towards  expenses  incurred  to  

operationalize the option agreements with AS and AG, out of  

the  total  consideration  of  US$11,076,000,000.  On  

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08.05.2007  loan  assignment  between  HTI  BVI  Finance  

Limited, Array and Vodafone of Array debt in a sum of US$  

231,111,427.41 was effected, whereby rights and benefits of  

HTI BVI Finance Limited to receive repayment was assigned  

in  favour  of  Vodafone  as  part  of  the  transaction  

contemplated vide SPA.  On the same day loan assignment  

between HTI  BVI  Finance Limited,  CGP and Vodafone,  of  

CGP debt in the sum of US$ 28,972,505.70 was effected,  

whereby rights and benefits of HTI BVI Finance Limited to  

receive the repayment was assigned in favour of Vodafone  

as  part  of  the  transactions  contemplated  vide  SPA.   On  

08.05.2007,  business  transfer  agreement  between  3GSPL  

and Hutchison Whampoa Properties (India) Limited, a WOS  

of HWP Investments Holdings (India) Limited, Mauritius, for  

the sale of business to 3GSPL of maintaining and operating  

a call centre as a going concern on slump-sale-basis for a  

composite price of ` 640 million.  On 08.05.2007, as already  

stated,  a Deed of Retention was executed between HTIL and  

Vodafone whereunder HTIL had agreed that out of the total  

consideration payable in terms of Clause 8.10(b) of the SPA,  

Vodafone would be entitled to retain US$ 351.8 million by  

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way  of  HTIL's  contribution  towards  acquisition  cost  of  

options i.e.,  stake of AS & AG.  On 08.05.2007 Vodafone  

paid US$ 10,854,229,859.05 to HTIL.

31. Vodafone  on  18.05.2007  sent  a  letter  to  FIPB  

confirming  that  VIHBV  had  no  existing  joint  venture  or  

technology transfer/trade mark agreement in the same field  

as  HEL  except  with  Bharati  as  disclosed  and  since  

20.02.2007 a member of Bharati Group had exercised the  

option  to  acquire  a  further  5.6%  interest  from  Vodafone  

such that Vodafone's direct  and indirect stake in Bharati  

Airtel would be reduced to 4.39%.

32. An  agreement  (Omega  Agreement)  dated  05.06.2007  

was entered into between IDF, IDFC, IDFC Private Equity  

Fund II (IDFCPE), SMMS, HT India, 3GSPL, Omega, SSKI  

and VIHBV.  Due to that Agreement IDF, IDFC and SSKI  

would instead of exercising the  'Put option’ and  'cashless  

option’ under 2006 IDFC FWA could exercise the same in  

pursuance of the present Agreement.  Further, 3GSPL had  

waived its  right  to  exercise  the  'call  option’  pursuant  to  

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2006 IDFC FWA.  On 06.06.2007 a FWA was entered into  

between  IDF,  IDFC,  IDFCPE,  SMMS,  HT  India,  3GSPL,  

Omega and VIHBV.  By that Agreement 3GSPL had a  'call  

option’ to  purchase  the  equity  shares  of  SMMS.   On  

07.06.2007  a  SHA  was  entered  into  between  SMMS,  

HTIL(M),  Omega  and  VIHBV  to  regulate  the  affairs  of  

Omega.   On  07.06.2007  a  Termination  Agreement  was  

entered  into  between  IDF,  IDFC,  SMMS,  HTIL,  3GSPL,  

Omega and HTL terminating the 2006 IDFC FWA and the  

SHA and waiving their respective rights and claims under  

those  Agreements.   On  27.06.2007  HTIL  in  their  2007  

interim report declared a dividend of HK$ 6.75 per share on  

account of the gains made by the sale of its entire interest in  

HEL.  On 04.07.2007 fresh certificates of incorporation was  

issued by the Registrar of Companies in relation to Indian  

operating  companies  whereby  the  word  "Hutchison"  was  

substituted with word "Vodafone".

33. On 05.07.2007, a FWA was entered into between AG,  

AG Mercantile Pvt.  Limited, Plustech Mercantile  Company  

Pvt.Ltd,  3GSPL,  Nadal  Trading  Company  Pvt.  Ltd  and  

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Vodafone as a confirming party.   In consideration for the  

unconditional  'call  option’,  3GSPL  agreed  to  pay  AG  an  

amount of US$ 6.3 million annually.  On the same day a  

FWA was signed by AS and Neetu AS, Scorpio Beverages  

Pvt.  Ltd.(SBP),  M.V.  Healthcare  Services Pvt.  Ltd,  3GSPL,  

N.D.  Callus  Info  Services  Pvt.  Ltd  and  Vodafone,  as  a  

confirming  party.   In  consideration  for  the  'call  option’  

3GSPL agreed to pay AS & Mrs. Neetu AS an amount of US$  

10.02  million  annually.   TII  SHA  was  entered  into  on  

05.07.2007  between  Nadal,  NDC,  CGP  (India),  TII  and  

VIHBV  to  regulate  the  affairs  of  TII.   On  05.07.2007  

Vodafone entered into a Consultancy Agreement with AS.  

Under that Agreement, AS was to be paid an amount of US$  

1,050,000   per  annum and a  one  time  payment  of  US$  

1,30,00,000 was made to AS.

34. Vodafone sent a letter to FIPB on 27.07.2007 enclosing  

undertakings  of  AS,  AG  and  their  companies  as  well  as  

SMMS Group to the effect that they would not transfer the  

shares to any foreign entity without requisite approvals.

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35. The Income Tax Department on 06.08.2007 issued a  

notice to VEL under Section 163 of the Income Tax Act to  

show cause why it should not be treated as a representative  

assessee of Vodafone.  The notice was challenged by VEL in  

Writ  Petition  No.1942  of  2007  before  the  Bombay  High  

Court.  The Assistant Director of Income Tax (Intl.)  Circle  

2(2),  Mumbai,  issued  a  show  cause  notice  to  Vodafone  

under Section 201(1) and 201(1A) of the I.T. Act as to why  

Vodafone  should  not  be  treated  a  assessee-in-default  for  

failure to withhold tax.  Vodafone then filed a Writ Petition  

2550/2007 before the Bombay High Court for setting aside  

the notice dated 19.09.2007.  Vodafone had also challenged  

the constitutional  validity  of  the retrospective amendment  

made in 2008 to Section 201 and 191 of the I.T. Act.  On  

03.12.2008  the  High  Court  dismissed  the  Writ  Petition  

No.2550  of  2007  against  which  Vodafone  filed  SLP  

No.464/2009  before  this  Court  and  this  Court  on  

23.01.2009 disposed of  the SLP directing the Income Tax  

Authorities to determine the jurisdictional challenge raised  

by Vodafone as a preliminary issue.  On 30.10.2009 a 2nd  

show cause notice  was issued to Vodafone under Section  

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201 and 201(1A) by the Income Tax authorities.  Vodafone  

replied  to  the  show  cause  notice  on  29.01.2010.   On  

31.05.2010 the  Income Tax  Department  passed  an order  

under Section 201 and 201(1A) of the I.T. Act upholding the  

jurisdiction  of  the  Department  to  tax  the  transaction.   A  

show cause notice was also issued under Section 163(1) of  

the I.T. Act to Vodafone as to why it should not be treated  

as an agent / representative assessee of HTIL.

36. Vodafone  then  filed  Writ  Petition  No.1325  of  2010  

before the Bombay High Court on 07.06.2010 challenging  

the  order  dated  31.05.2010  issued  by  the  Income  Tax  

Department on various grounds including the jurisdiction of  

the Tax Department to impose capital gains tax to overseas  

transactions.    The Assistant  Director of  Income Tax had  

issued a letter  on 04.06.2010 granting  an opportunity  to  

Vodafone  to  address  the  Department  on  the  question  of  

quantification of liability under Section 201 and 201(1A) of  

the  Income  Tax  Act.   Notice  was  also  challenged  by  

Vodafone  in  the  above  writ  petition  by  way  of  an  

amendment.  The Bombay High Court dismissed the Writ  

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Petition on 08.09.2010 against which the present SLP has  

been filed.

37. The High Court upheld the jurisdiction of the Revenue  

to impose capital gains tax on Vodafone as a representative  

assessee  after  holding  that  the  transaction  between  the  

parties attracted capital gains in India.   Court came to the  

following conclusions:

(a) Transactions between HTIL and Vodafone were  fulfilled  not  merely  by  transferring  a  single  share  of  CGP  in  Cayman  Islands,  but  the  commercial  and  business  understanding  between the parties postulated that what was  being transferred from HTIL to VIHBV was the  “controlling interest” in HEL in India, which is  an  identifiable  capital  asset  independent  of  CGP share.

(b) HTIL  had  put  into  place  during  the  period  when it was in the control of HEL a complex  structure  including  the  financing  of  Indian  companies which in turn had holdings directly  or indirectly in HEL and hence got controlling  interest in HEL.

(c) Vodafone  on  purchase  of  CGP  got  indirect  interest  in  HEL,  controlling  right  in  certain  indirect holding companies in HEL, controlling  rights through shareholder agreements which  included  the  right  to  appoint  directors  in  certain  indirect  holding  companies  in  HEL,  interest in the form of preference share capital  in indirect holding companies of HEL, rights to  use  Hutch  brand  in  India,  non-compete  

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agreement  with  Hutch  brand  in  India  etc.,  which  all  constitute  capital  asset  as  per  Section 2(14) of the I.T. Act.

(d) The  price  paid  by  Vodafone  to  HTIL  of  US$  11.08  billion  factored  in  as  part  of  the  consideration  of  those  diverse  rights  and  entitlements  and many of  those entitlements  are relatable to the transfer of CGP share and  that  the  transactional  documents  are  merely  incidental  or consequential  to the transfer  of  CGP share  but  recognized  independently  the  rights and entitlements of HTIL in relation to  Indian business which are being transferred to  VIHBV.

(e) High Court held that the transfer of CGP share  was not adequate in itself to achieve the object  of  consummating  the  transaction  between  HTIL  and  VIHBV  and  the  rights  and  entitlements followed would amount to capital  gains.   

(f) The  Court  also  held  that  where  an  asset  or  source  of  income  is  situated  in  India,  the  income of which accrues or arises directly or  indirectly through or from it shall be treated as  income which is deemed to accrue or arise in  India, hence, chargeable under Section 9(1)(i)  or 163 of the I.T. Act.

(g) Court  directed  the  Assessing  Officer  to  do  apportionment of income between the income  that has deemed to accrue or arise as a result  of  nexus  with  India  and  that  which  lies  outside.  High Court also concluded that the  provisions of Section 195 can apply to a non- resident provided there is sufficient territorial  connection or nexus between him and India.   

(h) Vodafone, it was held, by virtue of its diverse  agreements has nexus with Indian jurisdiction  

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and,  hence,  the  proceedings  initiated  under  Section  201  for  failure  to  withhold  tax  by  Vodafone cannot be held to lack jurisdiction.

38. Shri Harish Salve, learned senior counsel appearing for  

Vodafone  explained  in  detail  how  Hutchison  Corporate  

Structure  was  built  up  and  the  purpose,  object  and  

relevance of such vertical Transnational Structures in the  

international  context.   Learned  Senior  counsel  submitted  

that complex structures are designed not for avoiding tax  

but for good commercial reasons and Indian legal structure  

and  foreign  exchange  laws  recognize  Overseas  Corporate  

Bodies (OCB).  Learned senior counsel also submitted that  

such Transnational  Structures also contain exit  option to  

the investors.  Senior counsel also pointed out that where  

regulatory  provisions  mandate  investment  into  corporate  

structure  such  structures  cannot  be  disregarded  for  tax  

purposes by lifting the corporate veil especially when there  

is no motive to avoid tax.  Shri Salve also submitted that  

Hutchison corporate structure was not designed to avoid tax  

and the transaction was not a colourable device to achieve  

that purpose.  Senior counsel also submitted that source of  

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income lies where the transaction is effected and not where  

the underlying asset is situated or economic interest lies.  

Reference  was  made  to  judgment  in  Seth  Pushalal  

Mansinghka  (P)  Ltd.  v.  CIT (1967)  66  ITR  159  (SC).  

Learned counsel also pointed out that without any express  

legislation, off-shore transaction cannot be taxed in India.  

Reference was made to two judgments of the Calcutta High  

Court Assam Consolidated Tea Estates  v.  Income Tax  

Officer “A” Ward (1971) 81 ITR 699 Cal. and C.I.T. West  

Bengal v. National and Grindlays Bank Ltd. (1969) 72  

ITR 121 Cal.  Learned senior counsel also pointed out that  

when a transaction is between two foreign entities and not  

with an Indian entity,  source of income cannot be traced  

back  to  India  and  nexus  cannot  be  used  to  tax  under  

Section 9.  Further, it was also pointed out that language in  

Section 9 does not contain “look through provisions” and  

even  the  words  “indirectly”  or  “through”  appearing  in  

Section 9 would not make a transaction of a non-resident  

taxable in India unless there is a transfer of capital asset  

situated in India.  Learned Senior counsel also submitted  

that the Income Tax Department has committed an error in  

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proceeding on a “moving theory of nexus” on the basis that  

economic  interest  and  underlying  asset  are  situated  in  

India.  It was pointed out that there cannot be transfer of  

controlling interest in a Company independent from transfer  

of shares and under the provisions of the Company Law.  

Acquisition  of  shares  in  a  Company entitles  the  Board  a  

right  of  “control”  over  the  Company.   Learned  Senior  

Counsel also pointed out the right to vote, right to appoint  

Board  of  Directors,  and  other  management  rights  are  

incidental to the ownership of shares and there is no change  

of control in the eye of law but only in commercial terms.  

Mr.  Salve  emphasized  that,  in  absence  of  the  specific  

legislation, such transactions should not be taxed.  On the  

situs of shares, learned senior counsel pointed out that the  

situs  is  determined  depending  upon the  place  where  the  

asset is situated.  Learned senior counsel also pointed out  

that on transfer of CGP, Vodafone got control over HEL and  

merely  because  Vodafone  has  presence  or  chargeable  

income in India, it cannot be inferred that it can be taxed in  

some other transactions.  Further, it was also pointed out  

that there was no transfer of any capital asset from HTIL to  

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Vodafone pursuant to Option Agreements, FWAs, executed  

by the various Indian subsidiaries.  Learned Senior Counsel  

also  pointed  out  that  the  definition  of  “transfer”  under  

Section  2(47)  which  provides  for  “extinguishment”  is  

attracted for a transfer of a legal right and not a contractual  

right  and  there  was  no  extinguishment  of  right  by  HTIL  

which gave rise to capital gains tax in India.  Reference was  

made to judgment  CIT v. Grace Collis (2001) 3 SCC 430.  

Learned senior counsel also submitted that the acquisition  

of “controlling interest” is a commercial concept and tax is  

levied  on  transaction  and  not  its  effect.   Learned  senior  

counsel pointed out that to lift the corporate veil of a legally  

recognised  corporate  structure  time  and  the  stage  of  the  

transaction are very important and not the motive to save  

the tax.  Reference was also made to several judgments of  

the English Courts viz, IRC v. Duke of Westminster (1936)  

AC  1  (HL),  W.  T.  Ramsay  v.  IRC  (1982)  AC  300  (HL),  

Craven v. White (1988) 3 All ER 495, Furniss v. Dawson  

(1984) 1 All ER 530 etc.  Reference was also made to the  

judgment  of  this  Court  in  McDowell,  Azadi  Bachao  

Andolan cases (supra) and few other judgments.  Learned  

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senior counsel point out that Azadi Bachao Andolan broadly  

reflects  Indian  jurisprudence  and  that  generally  Indian  

courts used to follow the principles laid down by English  

Courts  on  the  issue  of  tax  avoidance  and  tax  evasion.  

Learned Senior counsel also submitted that Tax Residency  

Certificate  (for  short  TRC)  issued  by  the  Mauritian  

authorities has to be respected and in the absence of any  

Limitation on Benefit (LOB Clause), the benefit of the Indo-

Mauritian Treaty is available to third parties who invest in  

India through Mauritius route.   

39. Mr.  Salve  also  argued  on  the  extra  territorial  

applicability  of  Section 195 and submitted that the same  

cannot be enforced on a non-resident without a presence in  

India.  Counsel also pointed out that the words “any person”  

in Section 195 should be construed to apply to payers who  

have  a  presence  in  India  or  else  enforcement  would  be  

impossible and such a provision should be read down in  

case of payments not having any nexus with India.  Senior  

counsel also submitted that the withholding tax provisions  

under  Section  195 of  the  Indian Income Tax Act,  do  not  

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apply  to  offshore  entities  making off-shore  payments  and  

the  said  Section  could  be  triggered  only  if  it  can  be  

established that  the  payment under  consideration  is  of  a  

“sum chargeable”  under  the Income Tax Act  (for  short IT  

Act). Senior counsel therefore contended that the findings of  

the  Tax  Authorities  that  pursuant  to  the  transaction  the  

benefit of telecom licence stood transferred to Vodafone is  

misconceived and that under the telecom policy of India a  

telecom licence can be held only by an Indian Company and  

there  is  no  transfer  direct  or  indirect  of  any  licence  to  

Vodafone.

40. Mr. R.F. Nariman, Learned Solicitor General appearing  

for the Income Tax Department submitted that the sale of  

CGP share was nothing but an artificial avoidance scheme  

and CGP was fished out of the HTIL legal structure as an  

artificial tax avoidance contrivance.  Shri Nariman pointed  

out that CGP share has been interposed at the last minute  

to artificially remove HTIL from the Indian telecom business.  

Reference was made to the Due Diligence Report of Ernst  

and Young which stated that target structure later included  

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CGP which was not there originally.  Further, it was also  

pointed out that HTIL extinguished its rights in HEL and  

put Vodafone in its place and CGP was merely an interloper.  

Shri  Nariman  also  pointed  out  that  as  per  Settlement  

Agreement,  HTIL sold direct  and indirect  equity holdings,  

loans,  other  interests  and  rights  relating  to  HEL  which  

clearly reveal something other than CGP share was sold and  

those  transactions  were  exposed  by  the  SPA.   Learned  

Solicitor General also referred extensively the provisions of  

SPA and submitted that the legal owner of CGP is HTIBVI  

Holdings Ltd., a British Virgin Islands Company which was  

excluded from the Agreement with an oblique tax motive.

41. Mr. Nariman also submitted the situs of CGP can only  

be in India as the entire business purpose of holding that  

share was to assume control in Indian telecom operations,  

the  same  was  managed  through  Board  of  Directors  

controlled by HTIL.  The controlling interest expressed by  

HTIL would amount to property rights and hence taxable in  

India.   Reference was made to judgments of  the Calcutta  

High Court in CIT v. National Insurance Company (1978)  

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113 ITR 37(Cal.) and Laxmi Insurance Company Pvt. Ltd.  

v.  CIT  (1971)  80  ITR  575  (Delhi).   Further,  it  was  also  

pointed  out  the  “call  and  put”  options  despite  being  a  

contingent right are capable of being transferred and they  

are property rights and not merely contractual rights and  

hence would be taxable.  Referring to the SPA Shri Nariman  

submitted  that  the  transaction  can  be  viewed  as  

extinguishment of HTILs property rights in India and CGP  

share was merely a mode to transfer capital assets in India.  

Further, it was also pointed out that the charging Section  

should  be  construed  purposively  and  it  contains  a  look  

through provision and that the definition of the transfer in  

Section 9(1)(i) is an inclusive definition meant to explain the  

scope of that Section and not to limit it.  The resignation of  

HTIL Directors  on the  Board of  HEL could be termed as  

extinguishment  and  the  right  to  manage  a  Company  

through  its  Board  of  Directors  is  a  right  to  property.  

Learned  Solicitor  General  also  extensively  referred  to  

Ramsay Doctrine and submitted that if business purpose as  

opposed to effect is to artificially avoid tax then that step  

should be ignored and the courts should adopt a purposive  

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construction on the SPA.  Considerable reliance was placed  

on judgment of this Court in Mc.Dowell and submitted that  

the  same  be  followed  and  not  Azadi  Bachao  Andolan  

which has been incorrectly decided.  Further,  it  was also  

pointed  out  that  Circular  No.789  as  regards  the  

conclusiveness of TRC would apply only to dividend clause  

and as regards capital gains, it would still  have to satisfy  

the twin tests of Article 13(4) of the treaty namely the shares  

being   “alienated  and  the  gains  being  derived”  by  a  

Mauritian entity.  Learned Solicitor General also submitted  

that  the  Department  can  make  an  enquiry  into  whether  

capital gains have been factually and legally assigned to a  

Mauritian entity or to third party and whether the Mauritian  

Company was a façade.

42. Learned counsels,  on either side,  in support of their  

respective contentions, referred to several judgments of this  

Court,  foreign  Courts,  international  expert  opinions,  

authoritative  articles  written  by  eminent  authors  etc.  

Before examining the same, let us first  examine the legal  

status  of  a  corporate  structure,  its  usefulness  in  cross-

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border  transactions  and  other  legal  and  commercial  

principles in use in such transactions, which are germane  

to our case.

Part – II

CORPORATE  STRUCTURE  /  GENERAL  PRINCIPLES  (National and International)

43. Corporate structure is primarily created for business  

and  commercial  purposes  and  multi-national  companies  

who make offshore investments always aim at better returns  

to  the  shareholders  and the  progress of  their  companies.  

Corporation  created  for  such  purposes  are  legal  entities  

distinct from its members and are capable of enjoying rights  

and of being subject to duties which are not the same as  

those enjoyed or borne by its members.    Multi-national  

companies, for corporate governance, may develop corporate  

structures,  affiliate  subsidiaries,  joint  ventures  for  

operational efficiency, tax avoidance, mitigate risks etc.  On  

incorporation,  the  corporate  property  belongs  to  the  

company and members have no direct proprietary rights to  

it but merely to their “shares” in the undertaking and these  

shares  constitute  items  of  property  which  are  freely  

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transferable in the absence of any express provision to the  

contrary.   

44. Corporate  structure  created  for  genuine  business  

purposes are those which are generally created or acquired:  

at  the  time  when  investment  is  being  made;  or  further  

investments are being made; or the time when the Group is  

undergoing financial or other overall restructuring; or when  

operations, such as consolidation, are carried out, to clean-

defused or over-diversified.  Sound commercial reasons like  

hedging  business  risk,  hedging  political  risk,  mobility  of  

investment, ability to raise loans from diverse investments,  

often underlie creation of such structures.  In transnational  

investments, the use of a tax neutral and investor-friendly  

countries  to  establish  SPV  is  motivated  by  the  need  to  

create a tax efficient structure to eliminate double taxation  

wherever possible and also plan their activities attracting no  

or lesser tax so as to give maximum benefit to the investors.  

Certain countries  are  exempted from capital  gain,  certain  

countries are partially exempted and, in certain countries,  

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there is nil tax on capital gains.   Such factors may go in  

creating a corporate structure and also restructuring.   

45. Corporate  structure  may  also  have  an  exit  route,  

especially  when  investment  is  overseas.   For  purely  

commercial  reasons,  a  foreign  group  may  wind  up  its  

activities overseas for better returns, due to disputes between  

partners,  unfavourable  fiscal  policies,  uncertain  political  

situations, strengthen fiscal loans and its application, threat  

to  its  investment,  insecurity,  weak  and  time  consuming  

judicial system etc., all can be contributing factors that may  

drive  its  exit  or  restructuring.    Clearly,  there  is  a  

fundamental  difference  in  transnational  investment  made  

overseas and domestic investment.   Domestic investments  

are made in the home country and meant to stay as it were,  

but  when  the  trans-national  investment  is  made  overseas  

away from the natural residence of the investing company,  

provisions are usually made for exit route to facilitate an exit  

as and when necessary for  good business and commercial  

reasons, which is generally foreign to judicial review.

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46. Revenue/Courts  can  always  examine  whether  those  

corporate  structures  are  genuine  and  set  up  legally  for  a  

sound and veritable commercial purpose.  Burden is entirely  

on  the  Revenue  to  show  that  the  incorporation,  

consolidation, restructuring etc. has been effected to achieve  

a fraudulent, dishonest purpose, so as to defeat the law.    

CORPORATE GOVERNANCE

47. Corporate  governance  has  been  a  subject  of  

considerable  interest  in  the  corporate  world.   The  

Organisation  for  Economic  cooperation  and  Development  

(OECD) defines corporate governance as follows :-

“Corporate  governance  is  a  system  by  which  business  corporations  are  directed  and  controlled.  The  corporate  governance  structure  specifies  the  distribution  of  rights  and  responsibilities  among  different  participants  in  the  corporation  and  other  stake holders and spells out rules and procedures for  making decisions on corporate affairs.  By doing this,  it  also  provides  a  structure  through  which  the  company  objectives  are  set  and  the  means  of  attaining  those  objectives  and  monitoring  performance.”

The Ministry of Corporate Affairs to the Government of India,  

has issued several press notes for information of such global  

companies, which will indicate that Indian corporate Law has  

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also accepted the corporate structure consisting of holding  

companies  and  several  subsidiary  companies.   A  holding  

company which owns enough voting stock in a subsidiary  

can  control  management  and  operation  by  influencing  or  

electing its Board of Directors.   The holding company can  

also maintain group accounts which is to give members of  

the holding company a picture of the financial position of the  

holding company and its subsidiaries.  The form and content  

of  holding  company  or  subsidiary  company’s  own balance  

sheet and profit  and loss account are the same as if  they  

were  independent  companies  except  that  a  holding  

company’s accounts an aggregated value of shares it holds in  

its  subsidiaries  and  in  related  companies  and  aggregated  

amount of loss made by it to its subsidiaries and to related  

companies and their other indebtedness to it must be shown  

separately from other assets etc.   

48. Corporate governors can also misuse their office, using  

fraudulent  means  for  unlawful  gain,  they  may  also  

manipulate their records, enter into dubious transactions for  

tax evasion.  Burden is always on the Revenue to expose and  

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prove such transactions are fraudulent by applying  look at  

principle.

OVERSEAS COMPANIES AND FDI

49. Overseas  companies  are  companies  incorporated  

outside India and neither the Companies Act nor the Income  

Tax  Act  enacted  in  India  has  any  control  over  those  

companies established overseas and they are governed by the  

laws  in  the  countries  where  they  are  established.   From  

country  to  country  laws  governing  incorporation,  

management,  control,  taxation  etc.  may  change.   Many  

developed  and  wealthy  Nations  may  park  their  capital  in  

such off-shore companies to carry on business operations in  

other countries in the world.   Many countries give facilities  

for  establishing  companies  in  their  jurisdiction  with  

minimum control  and  maximum freedom.   Competition  is  

also  there  among  various  countries  for  setting  up  such  

offshore companies in their jurisdiction.  Demand for offshore  

facilities has considerably increased, in recent times, owing  

to high growth rates of cross-border investments and to the  

increased number of rich investors who are prepared to use  

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high  technology  and  communication  infrastructures  to  go  

offshore.     Removal  of  barriers  to  cross-border trade,  the  

liberalization of  financial  markets  and new communication  

technologies  have  had  positive  effects  on  the  developing  

countries including India.   

50. Investment  under  foreign  Direct  Investment  Scheme  

(FDI scheme), investment by Foreign Institutional Investors  

(FIIs) under the Portfolio Investment Scheme, investment by  

NRIs/OBCs under the Portfolio Investment Scheme and sale  

of shares by NRIs/OBCs on non-repatriation basis; Purchase  

and  sale  of  securities  other  than  shares  and  convertible  

debentures  of  an  Indian  company  by  a  non-resident  are  

common.    Press Notes  are  announced by  the  Ministry  of  

Commerce and Industry and the Ministry issued Press Note  

no.  2,  2009  and  Press  Note  3,  2009,  which  deals  with  

calculation of foreign investment in downstream entities and  

requirement  of  ownership  or  control  in  sectoral  cap  

companies.    Many  of  the  offshore  companies  use  the  

facilities of Offshore Financial Centres situate in Mauritius,  

Cayman Islands etc.  Many of these offshore holdings and  

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arrangements  are  undertaken  for  sound  commercial  and  

legitimate  tax  planning  reasons,  without  any  intent  to  

conceal  income  or  assets  from  the  home  country  tax  

jurisdiction  and  India  has  always  encouraged  such  

arrangements, unless it is fraudulent or fictitious.    

51. Moving offshore or using an OFC does not necessarily  

lead to the conclusion that they involve in the activities of  

tax evasion or other criminal activities.  The multi-national  

companies are attracted to offshore financial centres mainly  

due to  the  reason of  providing attractive  facilities  for  the  

investment.  Many corporate conglomerates employ a large  

number of holding companies and often high-risk assets are  

parked  in  separate  companies  so  as  to  avoid  legal  and  

technical risks to the main group.  Instances are also there  

when individuals form offshore vehicles to engage in risky  

investments,  through  the  use  of  derivatives  trading  etc.  

Many  of  such  companies  do,  of  course,  involve  in  

manipulation  of  the  market,  money  laundering  and  also  

indulge  in  corrupt  activities  like  round  tripping,  parking  

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black money or offering, accepting etc.,   directly or indirectly    

bribe or any other undue advantage or prospect thereof.     

52. OECD  (Organisation  for  Economic  Co-operation  and  

Development)  in  the  year  1998  issued  a  report  called  

“Harmful Tax Competition: An Emerging Global Issue”.  The  

report advocated doing away with tax havens and offshore  

financial canters, like the Cayman Islands, on the basis that  

their low-tax regimes provide them with an unfair advantage  

in  the  global  marketplace  and  are  thus  harmful  to  the  

economics of more developed countries.   OECD threatened  

to  place  the  Cayman  Islands  and  other  tax  havens  on  a  

“black list” and impose sanctions against them.   

53. OECD’s  blacklist  was  avoided  by  Cayman  Islands  in  

May  2000  by  committing  itself  to  a  string  of  reforms  to  

improve transparency, remove discriminatory practices and  

began  to  exchange  information  with  OECD.   Often,  

complaints have been raised stating that these centres are  

utilized for manipulating market, to launder money, to evade  

tax, to finance terrorism, indulge in corruption etc.   All the  

same, it is stated that OFCs have an important role in the  

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international economy, offering advantages for multi-national  

companies  and  individuals  for  investments  and  also  for  

legitimate  financial  planning and risk management.    It  is  

often said that insufficient legislation in the countries where  

they operate gives opportunities  for  money laundering,  tax  

evasion  etc.  and,  hence,  it  is  imperative  that  that  Indian  

Parliament  would  address  all  these  issues  with  utmost  

urgency.    

Need for Legislation:

54. Tax  avoidance  is  a  problem  faced  by  almost  all  

countries  following  civil  and common law systems and all  

share the common broad aim, that is to combat it.   Many  

countries are taking various legislative measures to increase  

the  scrutiny  of  transactions  conducted  by  non-resident  

enterprises.   Australia  has  both general  and specific  anti-

avoidance rule (GAAR) in its Income Tax Legislations.    In  

Australia, GAAR is in Part IVA of the Income Tax Assessment  

Act, 1936, which is intended to provide an effective measure  

against tax avoidance arrangements.  South Africa has also  

taken initiative in combating impermissible tax avoidance or  

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tax  shelters.   Countries  like  China,  Japan  etc.  have  also  

taken remedial measures.    

55. Direct  Tax  Code  Bill  (DTC)  2010,  proposed  in  India,  

envisages creation of an economically efficient, effective direct  

tax system, proposing GAAR.  GAAR intends to prevent tax  

avoidance,  what  is  inequitable  and  undesirable.   Clause  

5(4)(g) provides that the income from transfer, outside India  

of a share in a foreign company shall be deemed to arise in if  

the FMV of assets India owned by the foreign company is at  

least  50% of  its  total  assets.    Necessity  to  take  effective  

legislative  measures  has  been felt  in  this  country,  but  we  

always lag behind because our priorities are different.   Lack  

of proper regulatory laws, leads to uncertainty and passing  

inconsistent orders by Courts, Tribunals and other forums,  

putting Revenue and tax payers at bay.   

HOLDING COMPANY AND SUBSIDIARY COMPANY

56. Companies  Act  in  India  and  all  over  the  world  have  

statutorily recognised subsidiary company as a separate legal  

entity.   Section  2(47)  of  the  Indian  Companies  Act  1956  

defines  “subsidiary  company”  or  “subsidiary”,  a  subsidiary  

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company within the meaning of Section 4 of the Act.  For the  

purpose  of  Indian  Companies  Act,  a  company  shall  be  

subject  to the provisions of  sub-section 3 of  Section 4,  be  

deemed  to  be  subsidiary  of  another,  subject  to  certain  

conditions, which includes holding of share capital in excess  

of 50% controlling the composition of Board of Directors and  

gaining status of subsidiary with respect to third company by  

holding  company’s  subsidization  of  third  company.   A  

holding company is one which owns sufficient shares in the  

subsidiary company to determine who shall be its directors  

and how its affairs shall be conducted.  Position in India and  

elsewhere is that the holding company controls a number of  

subsidiaries and respective businesses of companies within  

the group and manage and integrate as whole as though they  

are merely departments of one large undertaking owned by  

the holding company.  But, the business of a subsidiary is  

not  the  business  of  the  holding  company (See  

Gramophone &  Typewriter  Ltd. v. Stanley,  (1908-10) All  

ER Rep 833 at 837).

57. Subsidiary companies are, therefore, the integral part of  

corporate  structure.   Activities  of  the  companies  over  the  

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years  have  grown  enormously  of  its  incorporation  and  

outside  and  their  structures  have  become  more  complex.  

Multi  National Companies having large volume of business  

nationally or internationally will have to depend upon their  

subsidiary companies in the national and international level  

for better returns for the investors and for the growth of the  

company.   When a holding company owns all of the voting  

stock of another company, the company is said to be a WOS  

of  the  parent  company.   Holding  companies  and  their  

subsidiaries can create pyramids, whereby subsidiary owns a  

controlling interest in another company, thus becoming its  

parent company.   

58. Legal relationship between a holding company and WOS  

is that they are two distinct legal persons and the holding  

company does not own the assets of the subsidiary and, in  

law, the management of the business of the subsidiary also  

vests in its Board of Directors.  In Bacha F. Guzdar v. CIT  

AIR  1955  SC  74,  this  Court  held  that  shareholders’  only  

rights is to get dividend if and when the company declares it,  

to participate in the liquidation proceeds and to vote at the  

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shareholders’  meeting. Refer also to  Carew and Company  

Ltd.  v.  Union of  India (1975)  2  SCC 791 and  Carrasco  

Investments Ltd. v. Special Director, Enforcement (1994)  

79 Comp Case 631 (Delhi).    

59. Holding company, of course, if the subsidiary is a WOS,  

may  appoint  or  remove  any  director  if  it  so  desires  by  a  

resolution  in  the  General  Body  Meeting  of  the  subsidiary.  

Holding  companies  and  subsidiaries  can  be  considered  as  

single economic entity and consolidated balance sheet is the  

accounting  relationship  between the holding company  and  

subsidiary  company,  which shows the status of  the  entire  

business  enterprises.   Shares  of  stock  in  the  subsidiary  

company  are  held  as  assets  on  the  books  of  the  parent  

company and can be issued as collateral for additional debt  

financing.   Holding company and subsidiary company are,  

however,  considered  as  separate  legal  entities,  and  

subsidiary  are  allowed  decentralized  management.   Each  

subsidiary  can reform its  own management personnel  and  

holding  company  may  also  provide  expert,  efficient  and  

competent services for the benefit of the subsidiaries.    

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60.  U.S.  Supreme Court  in  United States v.  Bestfoods  

524 US 51 (1998) explained that it is a general principle of  

corporate law and legal systems that a parent corporation is  

not liable for the acts of its subsidiary, but the Court went on  

to explain that corporate veil can be pierced and the parent  

company can be held liable for the conduct of its subsidiary,  

if  the  corporal  form  is  misused  to  accomplish  certain  

wrongful purposes, when the parent company is directly a  

participant  in  the  wrong  complained  of.   Mere  ownership,  

parental  control,  management  etc.  of  a  subsidiary  is  not  

sufficient  to pierce the  status of  their  relationship  and,  to  

hold parent company liable.   In Adams v. Cape Industries  

Plc.  (1991) 1 All  ER 929, the Court of Appeal  emphasized  

that  it  is  appropriate  to  pierce  the  corporate  veil  where  

special circumstances exist indicating that it is mere façade  

concealing true facts.    

61. Courts, however, will not allow the separate corporate  

entities to be used as a means to carry out fraud or to evade  

tax.  Parent company of a WOS, is not responsible, legally for  

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the unlawful activities of the subsidiary save in exceptional  

circumstances, such as a company is a sham or the agent of  

the  shareholder,  the  parent  company  is  regarded  as  a  

shareholder.   Multi-National  Companies,  by  setting  up  

complex vertical  pyramid like structures,  would be able  to  

distance themselves and separate the parent from operating  

companies, thereby protecting the multi-national companies  

from legal liabilities.   

SHAREHOLDERS’ AGREEMENT

62. hareholders’ Agreement ( for short SHA) is essentially a  

contract  between  some  or  all  other  shareholders  in  a  

company, the purpose of which is to confer rights and impose  

obligations over and above those provided by the Company  

Law.   SHA is  a private  contract  between the shareholders  

compared to Articles of Association of the Company, which is  

a  public  document.    Being  a  private  document  it  binds  

parties thereof and not the other remaining shareholders in  

the  company.   Advantage  of  SHA  is  that  it  gives  greater  

flexibility,  unlike  Articles  of  Association.   It  also  makes  

provisions  for  resolution  of  any  dispute  between  the  

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shareholders and also how the future capital contributions  

have  to  be  made.    Provisions  of  the  SHA  may  also  go  

contrary to the provisions of the Articles of Association, in  

that event, naturally provisions of the Articles of Association  

would govern and not the provisions made in the SHA.   

63. The  nature  of  SHA was  considered  by  a  two  Judges  

Bench  of  this  Court  in  V.  B.  Rangaraj  v.  V.  B.  

Gopalakrishnan and Ors. (1992) 1 SCC 160. In that case,  

an agreement  was entered into  between shareholders  of  a  

private  company  wherein  a  restriction  was  imposed  on  a  

living member of the company to transfer his shares only to a  

member of his own branch of the family,  such restrictions  

were,  however,  not  envisaged  or  provided  for  within  the  

Articles of Association.  This Court has taken the view that  

provisions  of  the  Shareholders’  Agreement  imposing  

restrictions even when consistent with Company legislation,  

are to be authorized only when they are incorporated in the  

Articles  of  Association,  a  view we  do not  subscribe.   This  

Court in  Gherulal Parekh v. Mahadeo Das Maiya (1959)  

SCR  Supp  (2)  406  held  that  freedom  of  contract  can  be  

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restricted by law only in cases where it is for some good for  

the community.   Companies Act 1956 or the FERA 1973,  

RBI Regulation or the I.T. Act do not explicitly or impliedly  

forbid shareholders of a company to enter into agreements as  

to how they should exercise voting rights attached to their  

shares.   

64. Shareholders can enter into any agreement in the best  

interest  of  the  company,  but  the  only  thing  is  that  the  

provisions in the SHA shall not go contrary to the Articles of  

Association.  The essential purpose of the SHA is to make  

provisions for  proper and effective  internal  management of  

the  company.   It  can  visualize  the  best  interest  of  the  

company on diverse issues and can also find different ways  

not only for the best interest of the shareholders, but also for  

the company as a whole.   In S. P. Jain v. Kalinga Cables  

Ltd.   (1965) 2 SCR 720, this Court held that agreements  

between non-members and members of the Company will not  

bind the company, but there is nothing unlawful in entering  

into  agreement  for  transferring  of  shares.   Of  course,  the  

manner in which such agreements are to be enforced in the  

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case  of  breach  is  given  in  the  general  law  between  the  

company and the shareholders.   A breach of SHA which does  

not  breach the  Articles  of  Association  is  a  valid  corporate  

action  but,  as  we  have  already  indicated,  the  parties  

aggrieved can get remedies under the general law of the land  

for any breach of that agreement.   

65. SHA  also  provides  for  matters  such  as  restriction  of  

transfer of shares i.e. Right of First Refusal (ROFR), Right of  

First Offer (ROFO), Drag-Along Rights (DARs) and Tag-Along  

Rights (TARs),  Pre-emption Rights,  Call  option,  Put option,  

Subscription  option  etc.   SHA  in  a  characteristic  Joint  

Venture Enterprise may regulate its affairs on the basis of  

various provisions enumerated above, because Joint Venture  

enterprise may deal with matters regulating the ownership  

and  voting  rights  of  shares  in  the  company,  control  and  

manage  the  affairs  of  the  company,  and  also  may  make  

provisions  for  resolution  of  disputes  between  the  

shareholders.  Many of the above mentioned provisions find a  

place  in  SHAs,  FWAs,  Term  Sheet  Agreement  etc.  in  the  

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present  case,  hence,  we  may  refer  to  some  of  those  

provisions.

(a) Right of First Refusal (ROFR): ROFR  permits  its  

holders to claim the transfer of the subject of the right with a  

unilateral  declaration  of  intent  which  can  either  be  

contractual or legal.   No statutory recognition has been given  

to that right either in the Indian Company Law or the Income  

Tax Laws.  Some foreign jurisdictions have made provisions  

regulating  those  rights  by  statutes.   Generally,  ROFR  is  

contractual and determined in an agreement.  ROFR clauses  

have contractual restrictions that give the holders the option  

to enter into commercial transactions with the owner on the  

basis of some specific terms before the owner may enter into  

the transactions with a third party.   Shareholders’ right to  

transfer the shares is not totally prevented, yet a shareholder  

is  obliged  to  offer  the  shares  first  to  the  existing  

shareholders.   Consequently,  the  other  shareholders  will  

have  the  privilege  over  the  third  parties  with  regard  to  

purchase of shares.

(b) Tag Along Rights  (TARs):   TARs,  a  facet  of  ROFR,  

often refer to the power of a minority shareholder to sell their  

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shares  to  the  prospective  buyer  at  the  same price  as  any  

other shareholder would propose to sell.  In other words, if  

one  shareholder  wants  to  sell,  he  can  do  so  only  if  the  

purchaser  agrees to purchase the other shareholders,  who  

wish to sell at the same price.    TAR often finds a place in  

the  SHA  which  protects  the  interest  of  the  minority  

shareholders.    

(c) Subscription Option:   Subscription option gives the  

beneficiary a right to demand issuance of allotment of shares  

of  the  target  company.    It  is  for  that  reason  that  a  

subscription  right  is  normally  accompanied  by  ancillary  

provisions including an Exit clause where, if dilution crosses  

a particular level, the counter parties are given some kind of  

Exit option.    

(d) Call Option: Call option is an arrangement often seen  

in Merger and Acquisition projects, especially when they aim  

at  foreign investment.   A  Call  option is  given to  a  foreign  

buyer by agreement so that the foreign buyer is able to enjoy  

the  permitted  minimum  equity  interests  of  the  target  

company.   Call option is always granted as a right not an  

obligation,  which  can  be  exercised  upon  satisfaction  of  

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certain conditions and/or within certain period agreed by the  

grantor and grantee.    The buyer of Call option pays for the  

right,  without  the  obligation  to  buy  some  underlying  

instrument from the writer  of  the option contract  at  a set  

future date and at the strike price.     Call option is where the  

beneficiary  of  the  action has a right  to  compel  a counter-

party to transfer his shares at a pre-determined or price fixed  

in accordance with the pre-determined maxim or even fair  

market value which results in a simple transfer of shares.

(e) Put Option:     A put option represents the right, but  

not the requirement to sell a set number of shares of stock,  

which one do not yet own, at a pre-determined strike price,  

before the option reaches the expiration date.   A put option  

is purchased with the belief that the underlying stock price  

will drop well before the strike price, at which point one may  

choose to exercise the option.   

(f) Cash  and  Cashless  Options:  Cash  and  Cashless  

options  are  related  arrangement  to  call  and  put  options  

creating a route by which the investors could carry out their  

investment, in the event of an appreciation in the value of  

shares.   

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66. SHA, therefore, regulate the ownership and voting rights  

of  shares  in  the  company  including  ROFR,  TARs,  DARs,  

Preemption Rights, Call Options, Put Options, Subscription  

Option etc. in relation to any shares issued by the company,  

restriction of transfer of shares or granting securities interest  

over shares, provision for minority protection, lock-down or  

for  the  interest  of  the  shareholders  and  the  company.  

Provisions referred to above, which find place in a SHA, may  

regulate  the  rights  between  the  parties  which  are  purely  

contractual  and those rights  will  have  efficacy only  in the  

course of ownership of shares by the parties.  

SHARES,  VOTING  RIGHTS  AND  CONTROLLING  INTERESTS:

67. Shares  of  any  member  in  a  company  is  a  moveable  

property and can be transferred in the manner provided by  

the  Articles  of  Association  of  the  company.   Stocks  and  

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shares are specifically included in the definition of the Sale of  

Goods Act, 1930.  A share represents a bundle of rights like  

right  to  (1)  elect  directors,  (2)  vote  on  resolution  of  the  

company, (3) enjoy the profits of the company if and when  

dividend is declared or distributed, (4) share in the surplus, if  

any, on liquidation.

68. Share  is  a  right  to  a  specified  amount  of  the  share  

capital  of  a  company  carrying  out  certain  rights  and  

liabilities,  in other words,  shares are bundles of intangible  

rights against the company.  Shares are to be regarded as  

situate in the country in which it is incorporated and register  

is  kept.   Shares  are  transferable  like  any  other  moveable  

property  under  the  Companies  Act  and  the  Transfer  of  

Property Act.   Restriction of Transfer of Shares is valid, if  

contained  in  the  Articles  of  Association  of  the  company.  

Shares are, therefore, presumed to be freely transferable and  

restrictions  on  their  transfer  are  to  be  construed  strictly.  

Transfer of shares may result in a host of consequences.    

Voting Rights:

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69. Voting rights vest in persons who names appear in the  

Register of Members.  Right to vote cannot be decoupled from  

the share and an agreement to exercise voting rights  in a  

desired manner, does not take away the right of vote, in fact,  

it is the shareholders’ right.  Voting rights cannot be denied  

by a company by its articles or otherwise to holders of shares  

below a minimum number such as only shareholders holding  

five or more shares are entitled to vote and so on, subject to  

certain limitations.    

70. Rights and obligations flowing from voting rights have  

been the subject matter of several decisions of this Court.   In  

Chiranjit Lal Chowdhuri v. Union of India  (1950) 1 SCR  

869 at 909 : AIR 1951 SC 41, with regard to exercise of the  

right to vote, this Court held that the right to vote for the  

election of  directors,  the right  to pass resolutions and the  

right to present a petition for winding up are personal rights  

flowing  from  the  ownership  of  the  share  and  cannot  be  

themselves and apart from the share be acquired or disposed  

of  or  taken  possession  of.   In  Dwarkadas  Shrinivas  of  

Bombay  v.  Sholapur  Spinning  &  Weaving  Company  

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(1954) SCR 674 at 726 : AIR 1954 SC 119, this Court noticed  

the principle laid down in Chiranjit Lal Chowdhuri (supra).  

71. Voting arrangements in SHAs or pooling agreements are  

not “property”.  Contracts that provide for voting in favour of  

or  against  a  resolution  or  acting  in  support  of  another  

shareholder create only “contractual obligations”.  A contract  

that  creates  contractual  rights  thereby,  the  owner  of  the  

share (and the owner of the right to vote) agrees to vote in a  

particular manner does not decouple the right to vote from  

the  share  and  assign  it  to  another.    A  contract  that  is  

entered  into  to  provide  voting  in  favour  of  or  against  the  

resolution or acting in support of another shareholder, as we  

have already noted, creates contractual obligation.   Entering  

into any such contract constitutes an assertion (and not an  

assignment)  of  the  right  to  vote  for  the  reason  that  by  

entering into the contract: (a) the owner of the share asserts  

that he has a right to vote; (b) he agrees that he is free to vote  

as per his will; and (c) he contractually agrees that he will  

vote  in  a  particular  manner.   Once  the  owner  of  a  share  

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agrees to vote in a particular manner, that itself would not  

determine as a property.

Controlling Interest:  

72. Shares, we have already indicated, represent congeries  

of  rights  and controlling  interest  is  an incident  of  holding  

majority shares.   Control of a company vests in the voting  

powers  of  its  shareholders.    Shareholders  holding  a  

controlling interest can determine the nature of the business,  

its management, enter into contract, borrow money, buy, sell  

or merge the company.   Shares in a company may be subject  

to  premiums  or  discounts  depending  upon  whether  they  

represent controlling or minority interest.  Control, of course,  

confers value but the question as to whether one will pay a  

premium for controlling interest depends upon whether the  

potential  buyer  believes one  can enhance  the value of  the  

company.

73. The House of Lords in  IRC v. V.T. Bibby & Sons  

(1946)  14  ITR  (Supp)  7  at  9-10,  after  examining  the  

meaning of the expressions “control” and “interest”, held  

that controlling interest did not depend upon the extent  

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to  which  they  had  the  power  of  controlling  votes.  

Principle  that  emerges  is  that  where  shares  in  large  

numbers  are  transferred,  which  result  in  shifting  of  

“controlling  interest”,  it  cannot  be  considered  as  two  

separate  transactions  namely  transfer  of  shares  and  

transfer  of  controlling  interest.    Controlling  interest  

forms an inalienable part of the share itself and the same  

cannot be traded separately unless otherwise provided by  

the Statute.  Of course, the Indian Company Law does  

not  explicitly  throw  light  on  whether  control  or  

controlling interest is a part of or inextricably linked with  

a share of a company or otherwise, so also the Income  

Tax Act.  In the impugned judgment, the High Court has  

taken the stand that controlling interest and shares are  

distinct assets.    

74. Control,  in  our  view,  is  an  interest  arising  from  

holding  a  particular  number  of  shares  and  the  same  

cannot be separately acquired or transferred.  Each share  

represents a vote in the management of the company and  

such  a  vote  can  be  utilized  to  control  the  company.  

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Controlling  interest,  therefore,  is  not  an identifiable  or  

distinct  capital  asset  independent  of  holding of  shares  

and the nature of the transaction has to be ascertained  

from  the  terms  of  the  contract  and  the  surrounding  

circumstances.  Controlling  interest  is  inherently  

contractual right and not property right and cannot be  

considered as transfer  of  property and hence a capital  

asset  unless  the  Statute  stipulates  otherwise.  

Acquisition  of  shares  may  carry  the  acquisition  of  

controlling  interest,  which  is  purely  a  commercial  

concept and tax is levied on the transaction, not on its  

effect.    

A. LIFTING THE VEIL – TAX LAWS   

75. Lifting the corporate veil doctrine is readily applied in  

the cases coming within the Company Law , Law of Contract,  

Law  of  Taxation.   Once  the  transaction  is  shown  to  be  

fraudulent, sham, circuitous or a device designed to defeat  

the  interests  of  the  shareholders,  investors,  parties  to  the  

contract and also for tax evasion, the Court can always lift  

the  corporate  veil  and  examine  the  substance  of  the  

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transaction.  This Court in Commissioner of Income Tax  v.   

Sri Meenakshi Mills Ltd., Madurai, AIR 1967 SC 819 held  

that the Court is entitled to lift the veil of the corporate entity  

and  pay  regard  to  the  economic  realities  behind  the  legal  

façade meaning that the court has the power to disregard the  

corporate  entity  if  it  is  used  for  tax  evasion.   In  Life  

Insurance Corporation of India v.  Escorts Limited and  

Others (1986) 1 SCC 264, this Court held that the corporate  

veil may be lifted where a statute itself contemplates lifting of  

the  veil  or  fraud  or  improper  conduct  intended  to  be  

prevented or  a taxing statute or a beneficial statute is sought  

to be evaded or where associated companies are inextricably  

as to be, in reality part of one concern.  Lifting the Corporate  

Veil  doctrine was also applied in  Juggilal Kampalpat  v.   

Commissioner of Income Tax, U.P. , 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,  practised by the  

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managed company and the assessee firm for the purpose of  

evading income tax, both at the hands of the payer and the  

payee.  

76.  Lifting  the  corporate  veil  doctrine  can,  therefore,  be  

applied in tax matters even in the absence of any statutory  

authorisation 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  

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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.”

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Lord  Atkin,  however,  dissented  and  stated  that  “the  

substance of the transaction was that what was being paid  

was remuneration.”   

The principles which have emerged from that judgment  

are as follows:

(1) A  legislation  is  to  receive  a  strict  or  literal  interpretation;

(2) An arrangement is to be  looked at not in by  its economic or commercial substance but by  its legal form; and

(3) An arrangement is effective for tax purposes  even if it  has no business purpose and has  been entered into to avoid tax.

The House of Lords, during 1980’s, it seems, began to attach  

a “purposive interpretation approach” and gradually began  

to give emphasis on “economic substance doctrine”  as a  

question of  statutory  interpretation.   In  a  most  celebrated  

case in Ramsay (supra), the House of Lords considered this  

question  again.   That  was  a  case  whereby  the  taxpayer  

entered  into  a  circular  series  of  transactions  designed  to  

produce a loss for tax purposes, but which together produced  

no commercial result.  Viewed that transaction as a whole,  

the  series  of  transactions  was  self-canceling,  the  taxpayer  

was in precisely the same commercial position at the end as  

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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:

(1) A  taxpayer  was  only  to  be  taxed  if  the  Legislation  clearly  indicated  that  this  was  the case;

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(2) A  taxpayer  was  entitled  to  manage  his  or  her affairs so as to reduce tax;

(3) Even  if  the  purpose  or  object  of  a  transaction  was  to  avoid  tax  this  did  not  invalidate  a  transaction  unless  an  anti- avoidance provision applied; and

(4) If  a  document  or  transaction was genuine  and not a sham in the traditional sense, the  Court  had  to  adhere  to  the  form  of  the  transaction following the Duke Westminster  concept.

77. In  Ramsay (supra)  it  may  be  noted,  the  taxpayer  

produced a profit that was liable to capital gains tax, but a  

readymade claim was set up to create an allowable loss that  

was purchased by the taxpayer with the intention of avoiding  

the  capital  gains  tax.   Basically,  the  House  of  Lords,  

cautioned that the technique of tax avoidance might progress  

and technically improve and 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.

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78. Ramsay was followed by the House of Lords in another  

decision in  IRC v. Burmah Oil Co Ltd. (1982) 54 TC 200.  

This case was also concerned with a self-cancelling series of  

transactions.   Lord  Diplock,  in  that  case,  confirmed  the  

judicial  view that  a  development  of  the  jurisprudence was  

taking place, stating that 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  

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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”.     

79. 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  

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operating company for £152,000 to be satisfied by the issue  

of  shares  of  Greenjacket  and  (ii)  an  agreement  for  

Greenjacket to sell the shares in the operating company to  

Wood Bastow for £152,000.   

80. The  High  Court  and  the  Court  of  Appeal  ruled  that  

Ramsay principle applied only where steps forming part of  

the scheme were self-cancelling and they considered that it  

did  not  allow  share  exchange  and  sale  agreements  to  be  

distributed  as  steps  in  the  scheme,  because  they  had  an  

enduring legal effect.  The House of Lords, however, held that  

steps inserted in a  preordained series of transactions with  

no commercial purpose other than tax avoidance should be  

disregarded  for  tax  purposes,  notwithstanding  that  the  

inserted  step  (i.e.  the  introduction  of  Greenjacket)  had  a  

business effect.   Lord Brightman stated  that  inserted step  

had no business purpose apart from the deferment of tax,  

although it had a business effect.    

81. Even though in  Dawson, the House of Lords seems to  

strike down the transaction by the taxpayer for the purpose  

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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 favour 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  

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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.

81. 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  

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partnership that had acquired the right to produce the film  

“Escape to Victory”.   75% of the cost of making the film was  

financed by way of a non-recourse loan from the production  

company,  the  company claimed the  benefit  of  depreciation  

allowances  based  upon  the  full  amount  of  the  production  

cost.    The House of Lords disallowed the claim, but allowed  

depreciation  calculated  on  25% of  the  cost  for  which  the  

limited partnership was at risk.   House of Lords examined  

the transaction as a whole and concluded that the limited  

partnership  had  only  ‘incurred  capital  expenditure  on  the  

provision of machinery or plant’ of 25% and no more.

83. Lord Goff explained the meaning of “unacceptable tax  

avoidance” in  Ensign Tankers and held that unacceptable  

tax  avoidance  typically  involves  the  creation  of  complex  

artificial structures by which, as though by the wave of a  

magic wand, the taxpayer conjures out of the air a loss, or a  

gain, or expenditure, or whatever it may be, which otherwise  

would  never  have  existed.   This,  of  course,  led  to  further  

debate  as  to  what  is  “unacceptable  tax  avoidance”  and  

“acceptable tax avoidance”.   

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84. House  of  Lords,  later  in  Inland  Revenue  

Commissioner v. McGuckian (1997) BTC 346 said that the  

substance of a transaction may be considered if it is a tax  

avoidance scheme.  Lord Steyn observed as follows:

“While Lord Tomlin's observations in the Duke  of Westminster case [1936] A.C. 1 still point to a  material  consideration,  namely  the  general  liberty  of  the  citizen  to  arrange  his  financial  affairs as he thinks fit, they have ceased to be  canonical  as  to  the  consequence  of  a  tax  avoidance scheme.”

McGuckian was  associated  with  a  tax  avoidance  scheme.  

The 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.   

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85. 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.”   

86. 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.   

87. 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  

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an examination of the commercial nature of the transaction,  

rather, it requires a consideration of the legal effect of what  

was done.

88.  MacNiven approach has been reaffirmed by the House  

of Lord in Barclays Mercantile Business Finance Limited  

v. Mawson (2005) AC 685 (HL).  In Mawson, BGE, an Irish  

Company had applied for a pipeline and it sold the pipeline  

to (BMBF) taxpayer for ₤ 91.3 Million.  BMBF later leased  

the  pipeline  back  to  BGE  which  granted  a  sub-lease  

onwards to its UK subsidiary.  BGE immediately deposited  

the sale  proceeds as Barclays had no access to it  for  31  

years.   Parties  had nothing to loose  with the transaction  

designed to produce substantial tax deduction in UK and no  

other economic consequence of any significance.  Revenue  

denied  BMBF’s  deduction  for  depreciation  because  the  

series  of  transactions  amounted  to  a  single  composite  

transaction  that  did  not  fall  within  Section  24(1)  of  the  

Capital  Cost  Allowance  Act,  1990.   House of  Lords,  in  a  

unanimous decision held in favour of the tax payer and held  

as  follows  ”driving  principle  in  Ramsay’s  line  of  cases  

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continues  to  involve  a  general  rule  of  statutory  

interpretation  and unblinked  approach  to  the  analysis  of  

facts.   The  ultimate  question  is  whether  the  relevant  

statutory provisions, construed purposively, were intended  

to apply to a transaction,  viewed realistically.

89. On the same day, House of Lords had an occasion to  

consider  the  Ramsay  approach  in  Inland  Revenue  

Commissioner  v. Scottish Provident Institution (2004 [1]  

WLR 3172).  The question involved in  Scottish Provident  

Institution was whether there was “a debt contract for the  

purpose  of  Section  150A(1)  of  the  Finance  Act,  1994.”  

House of Lords upheld the Ramsay principle and considered  

the  series  of  transaction  as  a  composite  transaction  and  

held that the composite transaction created no entitlement  

to  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.

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90. 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 even in England.  

House of Lords in  McGuckian   and  MacNiven, it may be  

noted,  has  emphasised  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    

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been given  a  complete  go  by    Ramsay,  Dawson   or  other    

judgments of the House of Lords.   

PART-III

INDO-MAURITIUS TREATY – AZADI BACHAO ANDOLAN

91. 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  

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examine  the  scope  of  the  India-Mauritius  Treaty  and  its  

follow-up.   

92. India-Mauritius Treaty was executed on 1.4.1983 and  

notified on 16.12.1983.  Article 13 of the Treaty deals with  

the taxability  of  capital  gains.     Article  13(4)  covers  the  

taxability of capital gains arising from the sale/transfer of  

shares and stipulates that “Gains derived by a resident of a  

Contracting State from the alienation of any property other  

than  those  mentioned  in  paragraphs  1,  2  and  3  of  that  

Article, shall be taxable only in that State”.  Article 10 of the  

Treaty deals with the taxability of Dividends.   Article 10(1)  

specifies  that  “Dividends  paid  by  a  company  which  is  a  

resident  of  a  Contracting  State  to  a  resident  of  other  

contracting State, may be taxed in that other State”.  Article  

10(2) stipulates that “such dividend may also be taxed in  

the  Contracting  State  of  which  the  company  paying  the  

dividends is a resident but if the recipient was the beneficial  

owner of the dividends, the tax should not exceed; (a) 5% of  

the  gross  amount  of  the  dividends if  the  recipient  of  the  

dividends holds at least 10% of the capital of the company  

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paying the dividends and (b) 15% of the gross amount of the  

dividends in all other cases.   

93. 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.   

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94. 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)

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95. India Mauritius Treaty does not contain any Limitation  

of  Benefit  (LOB)  clause,  similar  to  the  Indo-US  Treaty,  

wherein Article 24 stipulates that benefits will be available if  

50%  of  the  shares  of  a  company  are  owned  directly  or  

indirectly  by  one  or  more  individual  residents  of  a  

controlling state.  LOB clause also finds a place in India-

Singapore DTA.  Indo Mauritius Treaty does not restrict the  

benefit  to  companies  whose  shareholders  are  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  

presumption can be drawn that the Union of India or the  

Tax Department is unaware that the quantum of both FDI  

and  FII  do  not  originate  from  Mauritius  but  from  other  

global investors situate outside Mauritius.  Maurtius, it is  

well known is incapable of bringing FDI worth millions of  

dollars into India.  If the Union of India and Tax Department  

insist  that  the  investment  would  directly  come  from  

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Mauritius  and  Mauritius  alone  then  the  Indo-Mauritius  

treaty would be dead letter.

96. Mr.  Aspi  Chinoy,  learned  senior  counsel  contended  

that in the absence of LOB Clause in the India Mauritius  

Treaty,  the  scope  of  the  treaty  would  be  positive  from  

Mauritius  Special  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  

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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.   

97. 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  

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company had played a dominant role in deciding the time  

and  price  of  the  disinvestment/sale/transfer;  or  the  sale  

proceeds received by the Mauritius company had ultimately  

been  paid  over  by  it  to  the  Foreign  Principal/  its  100%  

shareholder either by way of Special Dividend or by way of  

repayment  of  loans  received;  or  the  real  owner/beneficial  

owner  of  the  shares  was  the  foreign  Principal  Company.  

Setting  up  of  a  WOS  Mauritius  subsidiary/SPV  by  

Principals/genuine  substantial  long  term  FDI  in  India  

from/through  Mauritius,  pursuant  to  the  DTAA  and  

Circular No. 789 can never be considered to be set up for  

tax evasion.

TRC whether conclusive

98. LOB and look through provisions cannot be read into  

a tax treaty but the question may arise as to whether the  

TRC is so conclusive that the Tax Department cannot pierce  

the  veil  and  look  at the substance  of  the  transaction.  

DTAA and Circular No. 789 dated 13.4.2000, in our view,  

would  not  preclude  the  Income  Tax  Department  from  

denying the tax treaty benefits, if it is established, on facts,  

that  the  Mauritius  company  has  been  interposed  as  the  

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owner of the shares in India, at the time of disposal of the  

shares  to  a  third  party,  solely  with  a  view  to  avoid  tax  

without  any  commercial  substance.  Tax  Department,  in  

such  a  situation,  notwithstanding  the  fact  that  the  

Mauritian  company  is  required  to  be  treated  as  the  

beneficial owner of the shares under Circular No. 789 and  

the Treaty is entitled to look at the entire transaction of sale  

as  a  whole  and  if  it  is  established  that  the  Mauritian  

company has been interposed as a device, it is open to the  

Tax  Department  to  discard  the  device  and  take  into  

consideration the real transaction between the parties , and  

the 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 resident  or  the  

role of the OCB in the entire transaction.   

99. No  court  will  recognise  sham  transaction  or  a  

colourable device or adoption of a dubious method to evade  

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tax, but to say that the Indo-Mauritian Treaty will recognise  

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.  

100. 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,  

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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.   

101.   Viewed  in  the  above  perspective,  we  also  find  no  

reason to import the “abuse of rights doctrine” (abus de  

droit) to India.  The above doctrine was seen applied by the  

Swiss  Court  in  A  Holding  Aps.  (8  ITRL),  unlike  Courts  

following Common Law.  That was a case where a Danish  

company was interposed to hold all the shares in a Swiss  

Company and there was a clear finding of fact that it was  

interposed for the sole purpose of benefiting from the Swiss-

Denmark DTA which had the effect of reducing a normal  

35% withholding tax on dividend out of Switzerland down to  

0%.   Court in that case held that the only reason for the  

existence of the Danish company was to benefit  from the  

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zero withholding tax under the tax treaty.  On facts also, the  

above case will not apply to the case in hand.    

102. Cayman Islands, it was contended, was a tax heaven  

and CGP was  a  shell  company,  hence,  they  have  to  be  

looked  at  with  suspicion.   We  may,  therefore,  briefly  

examine what those expressions mean and understood in  

the corporate world.

TAX  HAVENS,  TREATY  SHOPPING  AND  SHELL  COMPANIES

103.   Tax Havens” is not seen defined or mentioned in the  

Tax  Laws  of  this  country  Corporate  world  gives  different  

meanings to  that  expression,  so also the  Tax Department.  

The term “tax havens” is sometime described as a State with  

nil or moderate level of taxation and/or liberal tax incentives  

for  undertaking  specific  activities  such as  exporting.   The  

expression “tax haven” is also sometime used as a “secrecy  

jurisdiction.   The term “Shell Companies” finds no definition  

in 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.   

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104.   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 emphasised by us.  

Round Tripping

105.   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,  

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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.  Art. 4 of the Indo-Mauritius DTAA defines a ‘resident’  

to mean any person, who under the laws of the contracting  

State is liable to taxation therein by reason of his domicile,  

residence,  place of  business or any other  similar  criteria.  

An Indian Company, with the idea of tax evasion can also  

incorporate a company off-shore, say in a Tax Haven, and  

then create a WOS in Mauritius and after obtaining a TRC  

may  invest  in  India.   Large  amounts,  therefore,  can  be  

routed back to India using TRC as a defence, but once it is  

established  that  such  an  investment  is  black  money or  

capital that is hidden, it is nothing but circular movement of  

capital known as Round Tripping; then TRC can be ignored,  

since  the  transaction  is  fraudulent  and  against  national  

interest.

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106.   Facts  stated  above  are  food  for  thought  to  the  

legislature  and  adequate  legislative  measures  have  to  be  

taken  to  plug  the  loopholes,  all  the  same,  a  genuine  

corporate structure set up for purely commercial  purpose  

and  indulging  in  genuine  investment  be  recognized.  

However, if the fraud is detected by the Court of Law, it can  

pierce  the  corporate  structure  since  fraud  unravels  

everything, even a statutory provision, if it is a stumbling  

block,  because  legislature  never  intents  to  guard  fraud.  

Certainly,  in  our  view,  TRC  certificate  though  can  be  

accepted as  a  conclusive  evidence  for  accepting  status of  

residents as well  as beneficial  ownership for  applying the  

tax treaty, it can be ignored if the treaty is abused for the  

fraudulent purpose of evasion of tax.

McDowell - WHETHER CALLS FOR RECONSDIERATION:

107.    McDowell has emphatically spoken on the principle  

of Tax Planning.  Justice Ranganath Mishra, on his and on  

behalf  of  three  other  Judges,  after  referring  to  the  

observations of Justice S.C. Shah in CIT v. A. Raman and  

Co. (1968) 1 SCC 10, CIT v. B. M. Kharwar (1969) 1 SCR  

205

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 AIR 1959 SC 270; CIT v. Vadilal Lallubhai (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.  Colourable devices  cannot be part of tax planning and it is wrong to  encourage  or  entertain  the  belief  that  is  honourable  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.”

108.   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 :-

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“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  make-believe.”

109.    In  Vadilal Lalubhai  (supra) this Court re-affirmed  

the  principle  of  strict  interpretation  of  the  charging  

provisions  and  also  affirmed  the  decision  of  the  Gujarat  

High Court in Sankarlal Balabhai v. ITO (1975) 100 ITR  

97  (Guj.),  which  had  drawn  a  distinction  between  the  

legitimate avoidance and tax evasion.  Lalita’s case (supra)  

dealing  with  a  tax  avoidance  scheme,  has  also  expressly  

affirmed the principle that genuine arrangements would be  

permissible and may result in an assessee escaping tax.   

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110.   Justice  Chinnappa  Reddy  starts  his  concurring  

judgment in McDowell as follows:

“While  I  entirely  agree with  my  brother  Ranganath Mishra, J. in the judgment proposed  to  be  delivered  by  me,  I  wish  to  add  a  few  paragraphs, particularly  to  supplement what he  has  said  on  the  “fashionable”  topic  of  tax  avoidance.”

(emphasis supplied)

Justice Reddy has, the above quoted portion shows, entirely  

agreed with Justice Mishra and has stated that he is only  

supplementing what  Justice  Mishra  has  spoken  on  tax  

avoidance.   Justice  Reddy,  while  agreeing  with  Justice  

Mishra and the other three judges, has opined that in the  

very country of its birth, the principle of Westminster has  

been given a decent burial and in that country where the  

phrase  “tax  avoidance”  originated  the  judicial  attitude  

towards tax avoidance has changed and the Courts are now  

concerning themselves not merely with the genuineness of a  

transaction,  but  with  the  intended  effect  of  it  for  fiscal  

purposes.  Justice Reddy also opined that no one can get  

away  with  the  tax  avoidance  project with  the  mere  

statement  that  there  is  nothing  illegal  about  it.  Justice  

Reddy has also opined that the ghost of Westminster (in the  

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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.   

111.   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.”

112.   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.   

113.   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.   

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114.   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.  

115.   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  

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the correct view so also Justice Reddy’s, for the reasons we  

have already explained in earlier part of this judgment.

116.    A  five  Judges  Bench  judgment  of  this  Court  in  

Mathuram Agrawal v. State of Madhya Pradesh (1999) 8  

SCC 667, after referring to the judgment in  B.C. Kharwar  

(supra) as well as the opinion expressed by Lord Roskill on  

Duke of Westminster stated that the subject is not to be  

taxed by inference or analogy, but only by the plain words of  

a statute applicable to the facts and circumstances of each  

case.

117.   Revenue cannot tax a subject without a statute to  

support and in the course we also acknowledge that every  

tax payer is entitled to arrange his affairs so that his taxes  

shall  be  as low as possible  and that  he  is  not  bound to  

choose  that  pattern  which  will  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.

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PART-IV

CGP AND ITS INTERPOSITION

118.    CGP’s interposition in the HTIL Corporate structure  

and its disposition, by way of transfer, for exit, was for a  

commercial or business purpose or with an ulterior motive  

for evading tax, is the next question.    Parties, it is trite, are  

free to choose whatever lawful arrangement which will suit  

their business and commercial purpose, but the true nature  

of the transaction can be ascertained only by looking into  

the legal arrangement actually entered into and carried out.  

Indisputedly, that the contracts have to be read holistically  

to  arrive  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.

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119.   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.   

120.    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  

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would have  accounted for  the  accounts  exactly  the  same  

way  that  it  had  accounted  for  the  accounts  in  HTIL  

BVI/nominated  payee.   Had  HTIL  adopted  the  Mauritius  

route,  then  it  would  have  been  cumbersome  to  sell  the  

shares of a host of Mauritian companies.  

121.   CGP was incorporated in the year 1998 and the same  

became part of the Hutchison Corporate structure in the year  

2005. Facts would clearly indicate that the CGP held shares  

in Array and Hutchison Teleservices (India) Holdings Limited  

(MS), both incorporated in Mauritius.  HTIL, after acquiring  

the  share  of  CGP (CI)  in the  year  1994 which constituted  

approximately 42% direct interest in HEL, had put in place  

various FWAs, SHAs for arranging its affairs so that it can  

also have interest in the functioning of HEL along with Indian  

partners.  

122.    Self centred operations in India were with 3GSPL an  

Indian company which held options through various FWAs  

entered  into  with  Indian  partners.   One  of  the  tests  to  

examine the genuineness of the structure is the “timing test”  

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that is timing of the incorporation of the entities or transfer  

of  shares  etc.   Structures  created  for  genuine  business  

reasons are those which are generally created or acquired at  

the time when investment is made, at the time where further  

investments are being made at the time of consolidation etc.

123.   HTIL preferred CGP route rather than adopting any  

other method (why ?) for which we have to examine  whether  

HTIL  has  got  any  justification  for  adopting  this  route,  for  

sound commercial reasons or purely for evasion of tax.  In  

international investments, corporate structures are designed  

to  enable  a  smooth  transition  which  can  be  by  way  of  

divestment  or  dilution.  Once  entry  into  the  structure  is  

honourable,  exits from the structure can also be honourable.  

124.   HTIL structure was created over a period of time and  

this was consolidated in 2004 to provide a working model by  

which  HTIL  could  make  best  use  of  its  investments  and  

exercise control over and strategically influence the affairs of  

HEL.   HTIL  in  its  commercial  wisdom  noticed  the  

disadvantage of preferring Array, which would have created  

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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.   

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125.    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.   

126.   Principle of Fiscal nullity was applied by Vinelott, J.  

in  favour  of  the  assessee  in  Dawson,  where  the  judge  

rejected the contention of the Crown that the transaction was  

hit  by  the  Ramsay principle,  holding  that  a  transaction  

cannot be disregarded and treated as fiscal nullity if it has  

enduring legal consequences.  Principle was again explained  

by Lord Brightman stating that the Ramsay test would apply  

not only where the steps are  pre-contracted, but also they  

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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 pre-ordained transaction, with  

no commercial purpose, other than tax avoidance.  Sale of  

CGP share, in our view, was a genuine business transaction,  

not a fraudulent or dubious method  to avoid capital gains  

tax.

SITUS OF CGP

127.   Situs of CGP share stands where, is the next question.  

Law on situs of share has already been discussed by us in  

the earlier part of the judgment.  Situs of shares situates at  

the  place  where  the  company is  incorporated  and/ or  the  

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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  recognise  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 recognises 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 situs 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 Co. (Australia) [1927] 1 Ch. 107.  Erie Beach Co.  

v. Attorney-General for Ontario, 1930 AC 161 PC 10, R. v.  

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Williams [1942]  AC  541. Situs  of  CGP  share,  therefore,  

situates  in  Cayman  Islands  and  on  transfer  in  Cayman  

Islands would not shift to India.

PART-V

128.    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.

129.    HTIL had the following controlling interest in HEL before  

its exit from the Indian Telecom Sector:-

1. HTIL  held  its  direct  equity  interest in  HEL  amounting  approximately  to  42%  through  eight Mauritius companies.

2. HTIL indirect subsidiary CGP(M) held 37.25%  of equity interest in TII, an Indian Company,  which in turn held 12.96% equity interest in  HEL.   CGP(M),  as  a  result  of  its  37.25%  interest  in  TII  had  an   interest  in  several  downstream companies which held interest in  HEL,  as  a  result  of  which  HTIL  obtained  indirect equity interest of 7.24% in HEL.

3. HTIL  held  in  Indian  Company  Omega  Holdings, an Indian Co., interest to the extent  of  45.79%  of  share  capital  through  HTIM  which  held  shareholding  of  5.11%  in  HEL,  

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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

.  130.  HTIL, by holding CGP share, got control over its WOS  

Hutchison Tele Services (India) Holdings Ltd (MS).  HTSH(MS)  

was having control over its WOS 3GSPL,  an Indian company  

which  exercised  voting  rights  in  HEL.   HTIL,  therefore,  by  

holding CGP share, had 52% equity interest, direct 42% and  

approximately 10% (pro rata) indirect in HEL and not 67% as  

contended by the Revenue.    

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131.   HTIL had 15% interest in HEL by virtue of FWAs, SHAs  

Call and Put Option Agreements and Subscription Agreements  

and not controlling interest as such in HEL.   HTIL, by virtue  

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  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 of the 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;

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(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;

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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.

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132.   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 subsidiaries,  but only CGP, the share of which  

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situates in Cayman Islands.  By purchasing the CGP share  

its situs 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-centralised management and each of  

the  Mauritian  subsidiaries  has  its  own  management  

personnels.   

133.    Vodafone on purchase of CGP share got controlling  

interest  in  the  Mauritian  Companies  and  the  incident  of  

transfer  of  CGP  share  cannot  be  considered  to  be  two  

distinct and separate transactions, one shifting of the share  

and another shifting of the controlling interest.  Transfer of  

CGP share  automatically  results  in  host  of  consequences  

including transfer of controlling interest and that controlling  

interest  as  such  cannot  be  dissected  from  CGP  share  

without legislative intervention. Controlling interest of CGP  

over Array is an incident of holding majority shares and the  

control  of  Company  vests  in  the  voting  power  of  its  

shareholders.   Mauritian  entities  being  a  WOS  of  Array,  

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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 totalling to 42%  

and that does not mean that the situs of CGP share has  

shifted to India for the purpose of charging capital gains tax.

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134.   Vodafone could exercise only indirect voting rights in  

VEL  through  its  indirect  subsidiary  CGP(M)  which  held  

equity  interests  in  TII,  an  Indian  Company,  which  held  

equity interests in VEL.    Similarly, Vodafone could exercise  

only indirect voting rights through HTI(M) which held equity  

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.  Situs 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  

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manner etc; and on transfer of shares those rights also sail  

along with them.

135.    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.

136.   Vodafone, on purchase of CGP share also got control  

over  its  WOS,  HTSH(M)  which  is  having  control  over  its  

WOS, 3GSPL, an Indian Company which exercised voting  

rights in HEL.  3GSPL, was incorporated on 16.03.99 and  

run  call  centre  business  in  India.   The  advantage  of  

transferring  share  of  CGP  rather  than  Array  was  that  it  

would obviate the problems arising on account of the  call  

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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.

137.   Vodafone, on acquisition of CGP, is in a position to  

replace the directors of holding company of 3GSPL so as to  

get control over 3GSPL.  3GSPL has call option as well as  

the  obligation  of  the  put  option.   Rights  and  obligations  

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which flow out of call  and put options have already been  

explained by us in the earlier part of the judgment.  Call  

and put options are contractual rights and do not sound in  

property  and  hence  they  cannot  be,  in  the  absence  of  a  

statutory  stipulation,  considered  as  capital  assets.   Even  

assuming so, they are in favour of 3GSPL and continue to  

be so even after entry of Vodafone.    

138.     We  have  extensively  dealt  with  the  terms of  the  

various FWAs, SHAs and Term Sheets and in none of those  

Agreements  HTIL  or  Vodafone  figure  as  parties.  SHAs  

between 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.   

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139.    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  

favour 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  

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contained therein,  so also the rights and obligations that  

flow out of them.  HTIL and Vodafone have, of course, had  

the interest to see the SHAs and FWAs, be put in proper  

place but that interest cannot be termed as property rights,  

attracting capital gains tax.  

140.    We have dealt with the legal effect of exercising call  

option,  put  option,  tag  along  rights,  ROFR,  subscription  

rights  and so on and all  those  rights  and obligations we  

have  indicated  fall  within  the  realm  of  contract  between  

various shareholders and interested parties and in any view,  

are not binding on HTIL or Vodafone.  Rights (and options)  

by  providing  finance  and  guarantee  to  AG  Group  of  

Companies to exercise control over TII and indirectly over  

HEL through TII SHA and Centrino FWA dated 01.03.2006  

were only contractual rights, as also the revised SHAs and  

FWAs entered into on the basis of SPA.  Rights (and options)  

by  providing  finance  and  guarantee  to  AS  Group  of  

Companies to exercise control over TII and indirectly over  

HEL through various TII SHAs and N.D. Callus FWA dated  

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01.03.2006 were also contractual rights, and continue to be  

so on entry of Vodafone.     

141.    Controlling right over TII through TII SHAs in the  

form of right to appoint two Directors with veto power to  

promote  its  interest  in  HEL  and  thereby  held  beneficial  

interest  in  12.30% of  share  capital  in  the  HEL  are  also  

contractual rights.  Finance to SMMS to acquire shares in  

ITNL (ultimately Omega) with right to acquire share capital  

of Omega were also contractual rights between the parties.  

On  transfer  of  CGP  share  to  Vodafone  corresponding  

rearrangement were made in the SHAs and FWAs and Term  

Sheet Agreements in which Vodafone was not a party.

142.    SPA,  through  the  transfer  of  CGP,  indirectly  

conferred the benefit  of  put option from the transferee of  

CGP share to be enjoyed in the same manner as they were  

enjoyed  by  the  transferor  and  the  revised  set  of  2007  

agreements  were  exactly  between  the  parties  that  is  the  

beneficiary  of  the  put  options  remained  with  the  

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downstream company 3 GSPL and the counter-party of the  

put option remained with AG/AS Group Companies.   

143.  Fresh set of agreements of 2007 as already referred to  

were  entered  into  between  IDFC,  AG,  AS,  3  GSPL  and  

Vodafone andin 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 favour of 3GSPL, subsidiary of CGP.

144.    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  

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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.    

145.    The High Court has ignored the vital fact that as far  

as  the  put  options  are  concerned  there  were  pre-existing  

agreements between the  beneficiaries  and counter  parties  

and fresh agreements were also on similar lines.   Further,  

the  High  Court  has  ignored  the  fact  that  Term  Sheet  

Agreement with Essar had nothing to do with the transfer of  

CGP, which was a separate transaction which came about  

on account of independent settlement between Essar and  

Hutch Group, for a separate consideration, unrelated to the  

consideration of CGP share.  The High Court committed an  

error in holding that there were some rights vested in HTIL  

under  SHA  dated  5.7.2003  which  is  also  an  agreement,  

conferring no right to any party and accordingly none could  

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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  

presenti has been transferred to Vodafone and that as and  

when  rights  are  to  be  transferred  by  AG  and  AS  Group  

Companies,  it  would  specifically  require  Government  

permission since such a sale  would attract  capital  gains,  

and may be independently taxable.  We may now examine  

whether  the  following  rights  and  entitlements  would  also  

amount  to  capital  assets  attracting  capital  gains  tax  on  

transfer of CGP share.

Debts/Loans through Intermediaries

146.    SPA contained  provisions  for  assignment  of  loans  

either  at  Mauritius  or  Cayman Islands and all  loans  were  

assigned at the face value.   Clause 2.2 of the SPA stipulated  

that  HTIL  shall  procure  the  assignment  of  and  purchaser  

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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);

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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.

147.     CGP had  acknowledged  indebtedness  of  HTI  BVI  

Finance Limited in the sum of US$161,064,952.84 as at the  

date  of  completion.  The  sum  of  such  indebtedness  was  

comprised of:

a) US$  132,092,447.14,  reflected  in  a  Loan  Agreement  (effective  date  of  loan:  31  December 2006; date of Loan Agreement: 28  April 2007)

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b) US$  28,972,505.70,  reflected  in  a  Loan  Agreement (effective date of loan: 14 February  2007; date of Loan Agreement: 15 February  2007).

HTI BVI Finance Limited Limited, CGP and the Purchaser  

entered  into  the  Deed  of  Assignment  on  08.05.2007  

pertaining to the CGP indebtedness.

148.    In  respect  of  Array  Loan  No.  3  i.e.  US$  

231,111,427.41, the right that was being assigned was not  

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  

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million  between  CGP  (as  borrower)  from  a  Vendor  Group  

Company (vide Clause 6.4 of the SPA) and the identity of the  

lender has not been identified in the SPA.  The details of the  

loan were ultimately as follows:

Borrower Lender Amount of Loan Date  of  

Agreement  

Effective date  

of Agreement CGP HTI  (BVI)  

Finance  Limited

US$28,972,505.70 15  February  2007

14  February  2007

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.

149.    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.

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Preference Shares:

150.     Vodafone while determining bid price had taken into  

consideration,  inter  alia¸ 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

151.    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,  

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which may be assessable as business income under Section  

28(va) of the IT Act, which has nothing to do with the transfer  

of controlling interest.  However, a non-compete agreement  

as  an  adjunct  to  a  share  transfer,  which  is  not  for  any  

consideration, cannot give rise to a taxable income.  In our  

view,  a  non-compete  agreement  entered into  outside  India  

would  not  give  rise  to  a  taxable  event  in  India.     An  

agreement for a non-compete clause was executed offshore  

and, by no principle of law, can be termed as “property” so as  

to come within the meaning of capital gains taxable in India  

in the absence of any legislation.

HUTCH BRAND

152.    HTIL did not have any direct interest in the brand.  

The  facts  would  indicate  that  brand/Intellectual  Property  

Right  were  held  by  Hutchison  Group  Company  based  in  

Luxemburg.  SPA only assured Vodafone that they would not  

have to overnight cease the use of the Hutch brand name,  

which might have resulted in a disruption of operations in  

India.   The bare license to use a brand free of charge, is not  

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itself a “property” and, in any view, if the right to property is  

created for the first time and that too free of charge, it cannot  

give rise to a chargeable income.  Under the SPA, a limited  

window of license was given and it was expressly made free of  

charge  and,  therefore,  the  assurance  given  by  HTIL  to  

Vodafone that the brand name would not cease overnight,  

cannot be described as “property” rights so as to consider it  

as a capital asset chargeable  to tax in India.

ORACLE LICENSE:

153.    Oracle License was an accounting license, the benefit  

of which was extended till such time VEL replaced it with its  

own accounting package.  There is nothing to show that this  

accounting package, which is a software, was transferred to  

Vodafone.  In any view, this license cannot be termed as a  

capital  asset  since  it  has  never  been  transferred  to  the  

petitioner.    

154.   We, therefore, conclude that on transfer of CGP share,  

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-

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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.

155.    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

156.    Shri Nariman, submitted that this Court should give  

a purposive construction to Section 9(1) of the Income Tax  

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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.

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157.    Shri Harish Salve, learned senior counsel appearing  

for  the  petitioner,  submitted  that  Section  9(1)(i)  of  the  

Income Tax Act deals with taxation on income “deemed to  

accrue or arise” in India through the transfer of a capital  

asset  situated  in  India  and  stressed  that  the  source  of  

income lies where the transaction is effected and not where  

the economic interest lies and pointed out that there is a  

distinction  between a  legal  right  and a  contractual  right.  

Referring to the definition of “transfer” in Section 2(47) of  

the Income Tax Act which provides for extinguishment, it  

was submitted, that the same is attracted for transfer of a  

legal right.   Placing reliance on the judgment of this Court  

in  Commissioner of Income Tax v.   Grace Collins and  

Others, 248 ITR 323, learned senior counsel submitted that  

SPA has not relinquished any right of HTIL giving rise to  

capital gains tax in India.

158.     Mr. S.P. Chenoy, senior counsel, on our request,  

argued at length, on the scope and object of Section 9 of the  

Income Tax Act.  Learned senior counsel submitted that the  

first four clauses/parts of Section 9(1)(i) deal with taxability  

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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.  

159.    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  

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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.

160.    Section  9  of  the  Income  Tax  Act  deals  with  the  

incomes which shall be deemed to accrue or arise in India.  

Under the general theory of nexus relevant for examining the  

territorial operation of the legislation, two principles that are  

generally accepted for imposition of tax are: (a) Source and  

(b) Residence. Section 5 of the Income Tax Act specifies the  

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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:

(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;

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(b)Any  income  which  accrues  or  arises  or  is  deemed to accrue or arise in India to him during  the relevant previous year; and

(c) Any  income  which  accrues  or  arises  to  him  outside India during the relevant previous year,  if it is derived from a business controlled in or a  profession set up in India.   

In the case of Non-Resident, income from whatsoever source  

derived forms part of the total income.  It is as follows:

(a)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

(b)Any  income  which  accrues  or  arises  or  is  deemed to accrue or arise to him in India during  the relevant previous year.   

161.    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  

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(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 orfrom 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

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(2) a  firm which does not  have  any  partner who is a citizen of India  who is  resident in India; or (3) a company which does not have  any  shareholder  who  is  a  citizen  of  India or who is resident in India.”

162.   The meaning that we have to give to the expressions  

“either directly or indirectly”,  “transfer”, “capital asset” and  

“situated  in  India”  is  of  prime  importance  so  as  to  get  a  

proper insight on the scope and ambit of Section 9(1)(i) of the  

Income Tax Act.   The word “transfer”  has been defined in  

Section 2(47) of the Income Tax Act.  The relevant portion of  

the same is as under:

“2(47) “Transfer”,  in relation to a capital  asset, includes.-

(i) the  sale,  exchange  or  relinquishment  of the asset; or

(ii) the  extinguishment  of  any  rights  therein; or  

(iii) the  compulsory  acquisition  thereof  under any law; or

(iv) in a case where the asset is converted  by the owner thereof into, or is treated  by him as, stock-in-trade of a business  carried on by him, such conversion or  treatment; or

xxx xxx xxx xxx xxx xxx”

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The term “capital asset” is also defined under Section 2(14) of  

the Income Tax Act, the relevant portion of which reads as  

follows:

“2(14) “Capital asset” means property of any  kind  held  by  an  assessee,  whether  or  not  connected with the business or profession, but  does not include-

(i)     any stock-in-trade, consumable stores or  raw materials held for the purposes of his  business or profession;

xxx xxx xxx xxx xxx xxx”

163.    The  meaning  of  the  words  “either  directly  or  

indirectly”,  when  read  textually  and  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  

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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.

164.     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.    

165.     Section 9 on a plain reading would show, it refers to  

a property that yields an income and that property should  

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have  the  situs  in  India  and  it  is  the  income  that  arises  

through or from that property which is taxable.   Section 9,  

therefore,  covers  only  income  arising  from a  transfer  of  a  

capital  asset  situated  in  India  and  it  does  not  purport  to  

cover  income  arising  from  the  indirect  transfer  of  capital  

asset in India.   

SOURCE

166. Revenue  placed  reliance  on  “Source  Test”  to  

contend  that  the  transaction  had  a  deep  connection  with  

India, i.e. ultimately to transfer control over HEL and hence  

the source of the gain to  HTIL was India.   

167.  Source  in  relation  to  an  income  has  been  

construed to be where the transaction of sale takes place and  

not where the item of value, which was the subject of the  

transaction,  was  acquired  or  derived  from.   HTIL  and  

Vodafone  are  off-shore  companies  and since  the  sale  took  

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place outside India, applying the source test, the source is  

also  outside  India,  unless  legislation  ropes  in  such  

transactions.  

168.    Substantial territorial nexus between the income and  

the  territory  which  seeks  to  tax  that  income,  is  of  prime  

importance to levy tax.  Expression used in Section 9(1)(i) is  

“source of income in India” which implies that income arises  

from that source and there is no question of income arising  

indirectly  from  a  source  in  India.    Expression  used  is  

“source of income in India” and not “from a source in India”.  

Section 9 contains a “deeming provision” and in interpreting  

a provision creating a legal fiction, the Court is to ascertain  

for what purpose the fiction is created, but in construing the  

fiction it is not to be extended beyond the purpose for which  

it is created, or beyond the language of section by which it is  

created.  [See C.I.T. Bombay City II v. Shakuntala (1962) 2  

SCR 871,  Mancheri Puthusseri Ahmed v. Kuthiravattam  

Estate Receiver (1996) 6 SCC 185].   

169.   Power  to  impose  tax  is  essentially  a  legislative  

function  which  finds  in  its  expression  Article  265  of  the  

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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.)]”

170.  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  

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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 clearly showing an intention to lay the burden  

and  that  equitable  construction  of  the  words  is  not  

permissible [Ormond Investment Co. v. Betts (1928) All ER  

Rep 709 (HL)], a principle entrenched in our jurisprudence as  

well.  In  Mathuram Aggarwal  (supra), this Court relied on  

the judgment in Duke of Westminster and opined that the  

charging section has to be strictly construed.  An invitation  

to  purposively  construe  Section  9  applying  look  through  

provision without legislative sanction, would be contrary to  

the ratio of Mathuram Aggarwal.

171.    Section 9(1)(i) covers only income arising or accruing  

directly or indirectly or through the transfer of a capital asset  

situated  in  India.    Section  9(1)(i)  cannot  by  a  process  of  

“interpretation”  or  “construction”  be  extended  to  cover  

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“indirect  transfers”  of  capital  assets/property  situate  in  

India.

172.     On transfer of shares of a foreign company to a non-

resident  off-shore,  there  is  no  transfer  of  shares  of  the  

Indian Company, though held by the foreign company, in  

such  a  case  it  cannot  be  contended  that  the  transfer  of  

shares  of  the  foreign  holding  company,  results  in  an  

extinguishment of the foreign company control of the Indian  

company and it also does not constitute an extinguishment  

and transfer of an asset situate in India.  Transfer of the  

foreign holding company’s share off-shore, cannot result in  

an extinguishment of the holding company right of control  

of the Indian company nor can it be stated that the same  

constitutes  extinguishment  and  transfer  of  an  asset/  

management and control of property situated in India.

173.    The Legislature wherever wanted to tax income which  

arises  indirectly  from  the  assets,  the  same  has  been  

specifically provided so.  For example, reference may be made  

to Section 64 of the Indian Income Tax Act, which says that  

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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),  

(1964)  2  SCR  531.   Similar  expression  like  “from  asset  

transfered 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  

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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 (2007)  3 SCC 481 and  CIT v. R.D.  

Aggarwal (1965) 1 SCR 660.

174.   Section 9 has no “look through provision” and such a  

provision  cannot  be  brought  through  construction  or  

interpretation of a word ‘through’ in Section 9.  In any view,  

“look through provision” will not shift the situs of an asset  

from one country to another.  Shifting of situs can be done  

only  by  express  legislation.   Federal  Commission  of  

Taxation v. Lamesa Holdings BV (LN) – (1998) 157 A.L.R.   

290 gives an insight as to how “look through” provisions are  

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enacted.  Section 9, in our view, has no inbuilt “look through  

mechanism”.    

175.      Capital gains are chargeable under Section 45 and  

their computation is to be in accordance with the provisions  

that  follow  Section  45  and  there  is  no  notion  of  indirect  

transfer in Section 45.   

176.        Section 9(1)(i), therefore, in our considered opinion,  

will not apply to the transaction in question or on the rights  

and entitlements, stated to have transferred, as a fall out of  

the  sale  of  CGP  share,  since  the  Revenue  has  failed  to  

establish both the  tests,  Resident  Test  as  well  the  Source  

Test.

177.    Vodafone, whether, could be proceeded against under  

Section  195(1)  for  not  deducting  tax  at  source  and,  

alternatively, under Section 163 of the Income Tax Act as a  

representative assessee, is the next issue.

SECTION 195 AND OFFSHORE TRANSACTIONS

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178.   Section 195 provides that any person responsible for  

making any payment to a non-resident which is chargeable  

to tax must deduct from such payment, the income tax at  

source. Revenue contended that if a non-resident enters into  

a transaction giving rise to income chargeable to tax in India,  

the  necessary  nexus  of  such  non-resident  with  India  is  

established  and  the  machinary  provisions  governing  the  

collection of taxes in respect of such chargeable income will  

spring into operation.  Further,  it  is also the stand of  the  

Revenue  that  the  person,  who  is  a  non-resident,  and  not  

having a physical presence can be said to have a presence in  

India for  the  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.    

179.   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  

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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,  

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Vodafone in October, 2005 became a 10% JV Partner in HEL.  

Further, it was pointed out that, in any view, Vodafone could  

be treated as a representative assessee of HTIL and hence,  

notice under Section 163 was validly issued to Vodafone.

180.     Vodafone has taken up a specific  stand that “tax  

presence” has to be viewed in the context of the transaction  

that is subject to tax and not with reference to an entirely  

unrelated matter.   Investment made by Vodafone group in  

Bharti Airtel would not make all entities of Vodafone group of  

companies subject to the Indian Law and jurisdiction of the  

Taxing  Authorities.    “Presence”,  it  was  pointed  out,  be  

considered in  the  context  of  the  transaction and not  in  a  

manner  that  brings  a  non-resident  assessee  under  

jurisdiction 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.   

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181.      Vodafone group of companies was a JV Partner in  

Bharti  Airtel  Limited  which  has  absolutely  no  connection  

whatsoever with the present transaction.  The mere fact that  

the  Vodafone  group  of  companies  had  entered  into  some  

transactions with another company cannot be treated as its  

presence in a totally unconnected transaction.   

182.     To examine the rival stand taken up by Vodafone and  

the  Revenue,  on  the  interpretation  of  Section  195(1)  it  is  

necessary to examine the scope and ambit of Section 195(1)  

of the Income Tax Act and other related provisions.  For easy  

reference,  we  may  extract  Section  195(1)  which  reads  as  

follows:

“Section 195. OTHER SUMS.-  (1)  Any person  responsible  for  paying  to  a  non-resident,  not  being a company, or to a foreign company, any  interest or any other sum chargeable under the  provisions  of  this  Act  (not  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  

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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 115-O.

 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  

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for failure to deduct tax at source.   If a person fails to deduct  

tax, then under Section 201 of the Act, he can be treated as  

an assessee in default.  Section 271C stipulates a penalty on  

the amount of tax which has not been deducted.  Penalty of  

jail  sentence  can  also  be  imposed  under  Section  276B.  

Therefore, failure to deduct tax at source under Section 195  

may attract various penal provisions.   

183.     Article 246 of the Constitution gives Parliament the  

authority  to  make  laws  which  are  extra-territorial  in  

application.    Article 245(2)  says that no law made by the  

Parliament shall be deemed to be invalid on the 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.  

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184.    A  literal  construction  of  the  words  “any  person  

responsible for paying” as including non-residents would lead  

to absurd consequences.  A reading of Sections 191A, 194B,  

194C, 194D, 194E, 194I, 194J read with Sections 115BBA,  

194I, 194J would show that the intention of the Parliament  

was first to apply Section 195 only to the residents who have  

a tax presence in India.  It is all the more so, since the person  

responsible  has  to  comply  with  various  statutory  

requirements such as compliance of Sections 200(3), 203 and  

203A.     

185.    The expression “any person”, in our view, looking at  

the  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  

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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.    

186.    This Court in CIT v. Eli Lilly and Company (India)  

P. Ltd.  (2009) 15 SCC 1 had occasion to consider the scope  

of Sections 192, 195 etc.  That was a case where Eli  Lilly  

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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.    

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187.    In  the  instant  case,  indisputedly,  CGP  share  was  

transferred offshore.  Both the companies were incorporated  

not  in  India  but  offshore.  Both  the  companies  have  no  

income or fiscal assets in India, leave aside the question of  

transferring, those fiscal assets in India.  Tax presence has to  

be viewed in the context of transaction in question and not  

with reference to an entirely unrelated transaction.  Section  

195, in our view, would apply only if payments made from a  

resident to another non-resident and not between two non-

residents 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

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CONCLUSION:

188.    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.

 …………………………J. (K.S. Radhakrishnan)

New Delhi  January 20, 2012

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