MANU/SC/0051/2012

Equivalent Citation: [2012]341ITR1(SC), JT2012(1)SC410, 2012(1)SCALE530, (2012)6SCC613

UJ Judis English
IN THE SUPREME COURT OF INDIA

Civil Appeal No. 733 of 2012 (Arising out of S.L.P. (C) No. 26529 of 2010)

Decided On: 20.01.2012

Vodafone International Holdings B.V.

Vs.
Union of India (UOI) and Ors.

Hon'ble Judges/Coram:
S.H. Kapadia, C.J.I., K.S. Panicker Radhakrishnan and Swatanter Kumar, JJ.

Counsels:
For Appearing Parties: Mohan Parasaran, ASG, Aspi Chinoy, Percy Pardiwala, K.V. Vishwanathan
, Sr. Advs., Anuradha Dutt, Fereshte D. Sethna, Vijay Lakshmi Menon, Ekta Kapil, Anish Kapur,
Pawan Sharma, Kuber Dewan, Shwetha Bidhuri, Priti Yadav, Pratyush Miglani, Gayatri Goswami,
Kamaldeep Dayal, Rook Ray, Jaiveer Shergill, Anadi Chopra, Kripa Pandit, Pavitra Kacholia, D.L.
Chidananda, G.C. Srivastava, Girish Dave, Gaurav Dhingra, Ritin Rai, Nakul Dewan, Arijit Prasad
, C.S. Bhardwaj, B.V. Balaram Das, D.S. Mahra, Jayant Mehta, Mamta Tiwari, Sangeeta Mandal,
Swati Sinha, Abhishek Kaushik, Rishabh Jain, N.B. Paonam, Zoheb Hossain, Advs. for Fox
Mandal and Co. and Sumita Hazarika (N/P), Adv.

Subject: Direct Taxation

Catch Words

Mentioned IN

Acts/Rules/Orders:
Constitution Of India - Article 10, Constitution Of India - Article 10(1), Constitution Of India - Article
10(2), Constitution Of India - Article 13, Constitution Of India - Article 13(4), Constitution Of India -
Article 24, Constitution Of India - Article 245(2), Constitution Of India - Article 246, Constitution Of
India - Article 265, Constitution Of India - Article 4; Income Tax Act, 1961 - Section 10, Income Tax
Act, 1961 - Section 115BBA, Income Tax Act, 1961 - Section 115O, Income Tax Act, 1961 -
Section 133(6), Income Tax Act, 1961 - Section 160(1), Income Tax Act, 1961 - Section 160(1)(i),
Income Tax Act, 1961 - Section 161, Income Tax Act, 1961 - Section 161(1), Income Tax Act,

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1961 - Section 163, Income Tax Act, 1961 - Section 163(1), Income Tax Act, 1961 - Section
163(1)(a) , Income Tax Act, 1961 - Section 163(1)(c), Income Tax Act, 1961 - Section 191, Income
Tax Act, 1961 - Section 192, Income Tax Act, 1961 - Section 194B, Income Tax Act, 1961 -
Section 194C, Income Tax Act, 1961 - Section 194D, Income Tax Act, 1961 - Section 194E,
Income Tax Act, 1961 - Section 194J, Income Tax Act, 1961 - Section 195, Income Tax Act, 1961
- Section 195(1), Income Tax Act, 1961 - Section 195(2), Income Tax Act, 1961 - Section 197,
Income Tax Act, 1961 - Section 2 (47), Income Tax Act, 1961 - Section 2(14), Income Tax Act,
1961 - Section 2(47), Income Tax Act, 1961 - Section 200(3), Income Tax Act, 1961 - Section 201,
Income Tax Act, 1961 - Section 201(1), Income Tax Act, 1961 - Section 201(1A), Income Tax Act,
1961 - Section 203, Income Tax Act, 1961 - Section 203A, Income Tax Act, 1961 - Section 271C,
Income Tax Act, 1961 - Section 276B, Income Tax Act, 1961 - Section 28(va), Income Tax Act,
1961 - Section 3, Income Tax Act, 1961 - Section 4, Income Tax Act, 1961 - Section 45, Income
Tax Act, 1961 - Section 5, Income Tax Act, 1961 - Section 5(1), Income Tax Act, 1961 - Section
5(2), Income Tax Act, 1961 - Section 5(2)(b), Income Tax Act, 1961 - Section 64, Income Tax Act,
1961 - Section 64(7), Income Tax Act, 1961 - Section 9, Income Tax Act, 1961 - Section 9(1),
Income Tax Act, 1961 - Section 9(1)(i)

Relevant Section:
Income Tax Act, 1961 - Section 195, Income Tax Act, 1961 - Section 163, Income Tax Act, 1961 -
Section 45, Income Tax Act, 1961 - Section 9(1)(i), Income Tax Act, 1961 - Section 5(2)(b)

Cases Referred:
Adams v. Cape Industries Plc. (1991) 1 All ER 929; Agassi v. Robinson (2006) 1 WLR 2126;
Bacha F. Guzdar v. CIT MANU/SC/0072/1954 : AIR 1955 SC 74; Bank of Chettinad Ltd. v. CIT
(1940) 8 ITR 522 (PC); Brassard v. Smith (1925) AC 371; C.I.T. Bombay City II v. Shakuntala
MANU/SC/0175/1961 : (1962) 2 SCR 871; C.I.T. West Bengal v. National and Grindlays Bank Ltd.
MANU/WB/0014/1969 : (1969) 72 ITR 121 Cal.; Assam Consolidated Tea Estates v. Income Tax
Officer 'A' Ward MANU/WB/0122/1969 : (1971) 81 ITR 699 Cal.; Cape Brandy Syndicate v. IRC
(1921) 1 KB 64; Carew and Company Ltd. v. Union of India MANU/SC/0551/1975 : (1975) 2 SCC
791; Carrasco Investments Ltd. v. Special Director, Enforcement (1994) 79 Comp Case 631 (Del);
Chiranjit Lal Chowdhuri v. Union of India MANU/SC/0009/1950 : (1950) 1 SCR 869 : AIR 1951 SC
41; CIT (Central), Calcutta v. Mugneeram Bangur and Company (Land Deptt.),
MANU/SC/0162/1965 : (1965) 57 ITR 299 (SC); CIT v. A. Raman and Company (1968) 1 SCC 10
; CIT v. B.M. Kharwar MANU/SC/0231/1968 : (1969) 1 SCR 651; CIT v. Eli Lilly and Company
(India) P. Ltd. MANU/SC/0487/2009 : (2009) 15 SCC 1; CIT v. Grace Collis MANU/SC/0130/2001
: (2001) 3 SCC 430 : 248 ITR 323; CIT v. Kothari (CM) MANU/SC/0100/1963 : (1964) 2 SCR 531;
CIT v. National Insurance Company MANU/WB/0160/1977 : (1978) 113 ITR 37(Cal.); CIT v. R.D.
Aggarwal MANU/SC/0137/1964 : (1965) 1 SCR 660; CIT v. Vadilal Lallubhai
MANU/SC/0293/1972 : (1973) 3 SCC 17; Clark (Inspector of Taxes) v. Oceanic Contractors Inc.
(1983) 1 ALL ER 133; Commissioner of Income Tax v. Sri Meenakshi Mills Ltd., Madurai
MANU/SC/0138/1966 : AIR 1967 SC 819; Craven (Inspector of Taxes) v. White (Stephen) (1988)
3 All. E.R. 495; Dwarkadas Shrinivas of Bombay v. Sholapur Spinning and Weaving Company

2020-08-28 Source: www.bdlex.com Md. Nazrul Islam Khan

MANU/SC/0019/1953 : (1954) SCR 674 : AIR 1954 SC 119; Erie Beach Company v. Attorney
General for Ontario 1930 AC 161 PC 10; Federal Commission of Taxation v. Lamesa Holdings BV
(LN) - (1998) 157 A.L.R. 290; Floor v. Davis (1978) 2 All ER 1079: (1978) Ch 295; Furniss
(Inspector of Taxes) v. Dawson (1984) 1 All E.R. 530; Gherulal Parekh v. Mahadeo Das Maiya
MANU/SC/0024/1959 : (1959) Supp (2) SCR 406; Gramophone and Typewriter Ltd. v. Stanley
(1908-10) All ER Rep 833; Barclays Mercantile Business Finance Limited v. Mawson (2005) AC
685 (HL); Ensign Tankers (Leasing) Ltd. v. Stokes (1992) 1 AC 655; IRC v. V.T. Bibby and Sons
(1946) 14 ITR (Supp) 7 9-10; MacNiven v. Westmoreland Investments Limited (2003) 1 AC 311;
Salomon v. Salomon (1897) A.C. 22; Inland Revenue Commissioner v. McGuckian (1997) BTC
346; Inland Revenue Commissioner v. Scottish Provident Institution 2004 (1) WLR 3172; IRC v.
Burmah Oil Co Ltd. (1982) 54 TC 200; IRC v. Duke of Westminster (1936) AC 1 (HL); IRC v.
Plummer (1979) 3 All ER 775; Ishikawajma-Harima Heavy Industries Ltd. v. Director of Income
Tax, Mumbai MANU/SC/0528/2007 : (2007) 3 SCC 481; Jiyajeerao Cotton Mills Ltd. v.
Commissioner of Income Tax and Excess Profits Tax, Bombay MANU/SC/0074/1958 : AIR 1959
SC 270; Juggilal Kampalpat v. Commissioner of Income Tax, U.P. MANU/SC/0091/1968 : AIR
1969 SC 932 : (1969) 1 SCR 988; Laxmi Insurance Company Pvt. Ltd. v. CIT
MANU/DE/0146/1970 : (1971) 80 ITR 575 (Delhi); Life Insurance Corporation of India v. Escorts
Limited and Ors. MANU/SC/0015/1985 : (1986) 1 SCC 264; London and South American
Investment Trust v. British Tobacco Company (Australia) (1927) 1 Ch. 107; Lord MacMillan in IRC
v. Crossman (1936) 1 All ER 762; Mancheri Puthusseri Ahmed v. Kuthiravattam Estate Receiver
MANU/SC/1238/1996 : (1996) 6 SCC 185; Mathuram Agrawal v. State of Madhya Pradesh
MANU/SC/0692/1999 : (1999) 8 SCC 667; McDowell and Company Limited v. Commercial Tax
Officer MANU/SC/0154/1985 : (1985) 3 SCC 230; Ormond Investment Company v. Betts (1928)
All ER Rep 709 (HL); R. v. Williams (1942) AC 541; Ransom (Inspector of Tax) v. Higgs 1974 3 All
ER 949 (HL); S.P. Jain v. Kalinga Cables Ltd. MANU/SC/0368/1965 : (1965) 2 SCR 720;
Sankarlal Balabhai v. ITO MANU/GJ/0030/1974 : (1975) 100 ITR 97 (Guj.); Seth Pushalal
Mansinghka (P) Ltd. v. CIT MANU/SC/0401/1967 : (1967) 66 ITR 159 (SC); Smt. Maharani
Ushadevi v. CIT MANU/MP/0122/1981 : 131 ITR 445 (MP); The Commissioners of Inland
Revenue v. His Grace the Duke of Westminster 1935 All E.R. 259; Union of India v. Azadi Bachao
Andolan and Anr. MANU/SC/1219/2003 : (2004) 10 SCC 1; United States v. Bestfoods (1998) 524
US 51 ; V.B. Rangaraj v. V.B. Gopalakrishnan and Ors. MANU/SC/0076/1992 : (1992) 1 SCC 160;
Venkatesh (minor) v. CIT MANU/TN/0417/1999 : 243 ITR 367 (Mad); Viscount Simon in Latilla v.
IRC. 26 TC 107: (1943) AC 377; W.T. Ramsay Ltd. v. Inland Revenue Commissioners (1981) 1 All
E.R. 865 : (1982) AC 300 (HL); In Re: Sawers (1879) LR 12 ChD 522

Supreme Court Status:

Judgment challenged vide Review Petition (C) No. 458 of 2012 dated 20.03.2012
MANU/SC/0219/2012

Cases Overruled / Reversed:

Vodafone International Holdings B . V . vs . Union of India (MANU/MH/1040/2010)

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Prior History / High Court Status:
From the Judgment and Order dated 08.09.2010 of the High Court of Bombay in WP No. 1325 of
2010 (MANU/MH/1040/2010)

Disposition:
In Favour of Assessee

Citing Reference:

Discussed
29

Mentioned
37

Case Note:
S.H. Kapadia, C.J.I. and Swatanter Kumar, J.

Direct Taxation - Capital gains - Revenue had sought to tax the capital gainsarising from
the sale of the share capital of CGP on the basis that CGP, whilstnot a tax resident in India,
holds the underlying Indian assets - Whether thedecision rendered in Union of India v.
Azadi Bachao Andolan needs to beoverruled insofar as it departs from McDowell and Co.
Ltd. v. CTO principle forthe (a) Para 46 of McDowell judgment has been missed which reads
as, "on thisaspect Chinnappa Reddy, J. Has proposed a separate opinion with which
weagree" (i.e. Westminster principle is dead) and (b) That, Azadi Bachao failed toread paras
41-45 and 46 of McDowell in entirety.

Held, the majority judgment in McDowell held that "tax planning may be legitimateprovided
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 toencourage the belief
that it is honourable to avoid payment of tax by resorting todubious methods". It is the
obligation of every citizen to pay the taxes withoutresorting to subterfuges. The above
observations should be read with para 46where the majority holds "on this aspect one of
us, Chinnappa Reddy, J. hasproposed 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 totax evasion through the use of colourable devices and by resorting to
dubiousmethods and subterfuges. Thus, it cannot be said that all tax planning
isillegal/illegitimate/impermissible. Moreover, Reddy, J. himself stated that he agreeswith
the majority. In the judgment of Reddy, J. there were repeated references toschemes and
devices in contradistinction to "legitimate avoidance of tax liability"(paras 7-10, 17 & 18).

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Although Chinnappa Reddy, J. made a number of observationsregarding the need to depart
from the "Westminster" and tax avoidance, thesewere clearly only in the context of artificial
and colourable devices. It was heldthat while reading McDowell, in cases of treaty
shopping and/or tax avoidance,there was no conflict between McDowell and Azadi Bachao
or between McDowelland Mathuram Agrawal.

Direct Taxation - Determination of conclusive effect of a relationship betweenHolding

Company and Subsidiary Company.

Held, it was held as generally accepted that the group parent company is involvedin giving
principal guidance to group companies by providing general policyguidelines to group
subsidiaries. However, the fact that a parent company exercisesshareholder's influence on
its subsidiaries does not generally imply that thesubsidiaries are to be deemed residents of
the State in which the parent companyresides. Further, if a company is a parent company,
that company's executivedirector(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 theautonomy of the subsidiary's executive directors. Such a restriction,
which is theinevitable consequences of any group structure, is generally accepted, both
incorporate and tax laws. However, where the subsidiary's executive
directors'competences are transferred to other persons/bodies or where the
subsidiary'sexecutive directors' decision making has become fully subordinate to the
HoldingCompany with the consequence that the subsidiary's executive directors are
nomore than puppets then the turning point in respect of the subsidiary's place
ofresidence comes about. Similarly, if an actual controlling Non-Resident Enterprise(NRE)
makes an indirect transfer through "abuse of organisation form/legal formand without
reasonable business purpose" which results in tax avoidance oravoidance of withholding
tax, then the Revenue may disregard the form of thearrangement or the impugned action
through use of Non-Resident HoldingCompany, recharacterise the equity transfer
according to its economic substanceand impose the tax on the actual controlling Non-
Resident Enterprise. Thus, whethera transaction is used principally as a colourable device
for the distribution ofearnings, 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).

The common law jurisdictions do invariably impose taxation against a corporationbased on

the legal principle that the corporation is "a person" that is separatefrom its members. It is
the decision of the House of Lords in Salomon v. Salomonthat opened the door to the

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formation of a corporate group. If a "one man"corporation could be incorporated, then it
would follow that one corporation couldbe 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 internationaltaxation, for foreign investors to invest in Indian companies through
an interposedforeign holding or operating company, such as Cayman Islands or
Mauritiusbased company for both tax and business purposes. In doing so, foreign
investorsare able to avoid the lengthy approval and registration processes required for
adirect transfer (i.e. without a foreign holding or operating company) of an equityinterest in
a foreign invested Indian company. However, taxation of such HoldingStructures very often
gives rise to issues such as double taxation, tax deferralsand tax avoidance. In this case,
we are concerned with the concept of GAAR. Inthis case, we are not concerned with treaty
shopping but with the anti-avoidancerules. The concept of GAAR is not new to India since
India already has a judicialanti-avoidance rule, like some other jurisdictions. Lack of clarity
and absence ofappropriate provisions in the statute and/or in the treaty regarding the
circumstancesin which judicial anti-avoidance rules would apply has generated litigation
inIndia. Holding Structures are recognized in corporate as well as tax laws. SpecialPurpose
Vehicles (SPVs) and Holding Companies have a place in legal structuresin India, be it in
company law, takeover code under SEBI or even under the incometax law. When it comes
to taxation of a Holding Structure, at the threshold, theburden is on the Revenue to allege
and establish abuse, in the sense of tax avoidancein the creation and/or use of such
structure(s). In the application of a judicialanti-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 ofthe facts and circumstances surrounding the transaction that the
impugnedtransaction is a sham or tax avoidant. To give an example, if a structure is
usedfor 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 fiscalnullity. Similarly, in a
case where the Revenue finds that in a Holding Structurean entity which has no
commercial/business substance has been interposed onlyto avoid tax then in such cases
applying the test of fiscal nullity it would be opento the Revenue to discard such
interpositioning of that entity. However, this hasto be done at the threshold. In this
connection, we may reiterate the "look at"principle enunciated in Ramsay in which it was
held that the Revenue or theCourt must look at a document or a transaction in a context to
which it properlybelongs to. It is the task of the Revenue/Court to ascertain the legal nature
of thetransaction and while doing so it has to look at the entire transaction as a wholeand
not to adopt a dissecting approach.

The Revenue cannot start with the question as to whether the impugned transactionis a tax
deferment/saving device but that it should apply the "look at" test toascertain its true legal
nature (Craven v. White which further observed that genuinestrategic tax planning has not
been abandoned by any decision of the EnglishCourts till date).

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Applying the above tests, every strategic foreign direct investment coming to India,as an
investment destination, should be seen in a holistic manner. While doingso, the
Revenue/Courts should keep in mind the following factors: the concept ofparticipation in
investment, the duration of time during which the Holding Structureexists; the period of
business operations in India; the generation of taxable revenuesin India; the timing of the
exit; the continuity of business on such exit. The onuswill be on the Revenue to identify the
scheme and its dominant purpose. Thecorporate business purpose of a transaction is
evidence of the fact that the impugnedtransaction is not undertaken as a colourable or
artificial device. The stronger theevidence of a device, the stronger the corporate business
purpose must exist toovercome the evidence of a device.

Direct Taxation - Whether the approach of the High Court (acquisition of CGPshare with
"other rights and entitlements") was correct?

Held, it was stated that the subject matter of the transaction has to be viewed froma
commercial and realistic perspective. The present case concerns an offshoretransaction
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 takevarious forms. Accordingly, tax
consequences will vary. The tax consequences ofa share sale would be different from the
tax consequences of an asset sale. Aslump sale would involve tax consequences which
could be different from the taxconsequences of sale of assets on itemised basis. "Control"
is a mixed question oflaw and fact. Ownership of shares may, in certain situations, result in
theassumption of an interest which has the character of a controlling interest in
themanagement of the company. A controlling interest is an incident of ownership ofshares
in a company, something which flows out of the holding of shares. Acontrolling interest is,
therefore, not an identifiable or distinct capital assetindependent of the holding of shares.

The control of a company resides in the voting power of its shareholders andshares
represent an interest of a shareholder which is made up of various rightscontained in the
contract embedded in the Articles of Association. The right of ashareholder may assume
the character of a controlling interest where the extent ofthe shareholding enables the
shareholder to control the management. Shares, andthe rights which emanate from them,
flow together and cannot be dissected. In thefelicitous phrase of Lord MacMillan in IRC v.
Crossman, shares in a companyconsist of a "congeries of rights and liabilities" which is a
creature of the CompaniesActs and the Memorandum and Articles of Association of the
company.

Thus, control and management is a facet of the holding of shares. Applying theabove
principles governing shares and the rights of the shareholders to the factsof this case, this
case concerns a straightforward share sale. VIH acquired Upstreamshares with the
intention that the congeries of rights, flowing from the CGP share,would give VIH an

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indirect control over the three genres of companies. If onelooks at the chart indicating the
Ownership Structure, one finds that the acquisitionof the CGP share gave VIH an indirect
control over the tier I Mauritius companieswhich owned shares in HEL totalling to 42.34 per
cent; CGP India (Ms), which inturn held shares in TII and Omega and which on a pro rata
basis (the FDI principle),totalled up to 9.62 per cent in HEL and an indirect control over
Hutchison TeleServices (India) Holdings Ltd. (Ms), which in turn owned shares in GSPL,
whichheld call and put options. Although the High Court has analysed the
transactionaldocuments in detail, it has missed out this aspect of the case. It has failed to
noticethat till date options have remained un-encashed with GSPL. Therefore, even if itbe
assumed that the options under the Framework Agreements 2006 could beconsidered to be
property rights, there has been no transfer or assignment ofoptions by GSPL till today.
Even if it be assumed that the High Court was right inholding that the options constituted
capital assets even then Section 9(1)(i) wasnot applicable as these options have not been
transferred till date. Call and putoptions were not transferred vide SPA dated 11th
February, 2007 or under anyother document whatsoever. Moreover, if, on principle, the
High Court acceptsthat the transfer of the CGP share did not lead to the transfer of a capital
asset inIndia, even if it resulted in a transfer of indirect control over 42.34 per cent (52
percent) of shares in HEL, then surely the transfer of indirect control over GSPLwhich held
options (contractual rights), would not make the transfer of the CGPshare taxable in India.
Acquisition of the CGP share which gave VIH an indirectcontrol over three genres of
companies evidences a straightforward share sale andnot an asset sale. There is another
fallacy in the impugned judgment. On examinationof the impugned judgment, we find a
serious error committed by the High Courtin appreciating the case of VIH before FIPB. On
19th March, 2007, FIPB sought aclarification from VIH of the circumstances in which VIH
agreed to pay US$ 11.08bn for acquiring 67 per cent of HEL when actual acquisition was of
51.96 per cent.

In its response dated 19th March, 2007, VIH stated that it had agreed to acquirefrom HTIL
for US$ 11.08 bn, interest in HEL which included a 52 per cent equityshareholding.
According to VIH, the price also included a control premium, use ofHutch brand in India, a
non-compete agreement, loan obligations and an entitlementto acquire, subject to the
Indian FDI rules, a further 15 per cent indirect interest inHEL. According to the said letter,
the above elements together equated to 67 percent of the economic value of HEL. This
sentence has been misconstrued by theHigh Court to say that the above elements equated
to 67 per cent of the equitycapital (See para 124). 67 per cent of the economic value of HEL
is not 67 per cent of the equity capital. If VIH would have acquired 67 per cent of the equity
capital,as held by the High Court, the entire investment would have had breached theFDI
norms which had imposed a sectoral cap of 74 per cent . In this connection, itmay further
be stated that Essar had 33 per cent stakes in HEL out of which 22per cent was held by
Essar Mauritius.

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Thus, VIH did not acquire 67 per cent of the equity capital of HEL, as held by theHigh Court.
This problem has arisen also because of the reason that this casedeals with share sale and
not asset sale. This case does not involve sale of assetson itemised basis. The High Court
ought to have applied the look at test in whichthe 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 characterof the transaction test", confusion arises if a dissecting approach
of examiningeach individual asset is adopted. As stated, CGP was treated in the
Hutchisonstructure as an investment vehicle. As a general rule, in a case where a
transactioninvolves transfer of shares lock, stock and barrel, such a transaction cannot
bebroken up into separate individual components, assets or rights such as right tovote,
right to participate in company meetings, management rights, controllingrights, control
premium, brand licences and so on as shares constitute a bundle ofrights. Further, the
High Court failed to examine the nature of the following items,namely, noncompete
agreement, control premium, call and put options, consultancysupport, customer base,
brand licences etc. On facts, the High Court, in the presentcase, ought to have examined
the entire transaction holistically. VIH has rightlycontended that the transaction in question
should be looked at as an entire package.The items mentioned hereinabove, like, control
premium, non-compete agreement,consultancy support, customer base, brand licences,
operating licences etc. wereall an integral part of the Holding Subsidiary Structure which
existed for almost13 years, generating huge revenues, as indicated above. Merely because
at thetime of exit capital gains tax becomes not payable or exigible to tax would notmake
the entire "share sale" (investment) a sham or a tax avoidant. The HighCourt failed to
appreciate that the payment of US$ 11.08 bn was for purchase ofthe entire investment
made by HTIL in India. The payment was for the entirepackage. The parties to the
transaction have not agreed upon a separate price forthe 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 ofsuch payments for each of the above items. The essential
character of the transactionas an alienation cannot be altered by the form of the
consideration, the payment ofthe consideration in installments or on the basis that the
payment is related to acontingency ("options", in this case), particularly when the
transaction does notcontemplate such a split up. Where the parties have agreed for a lump
sumconsideration without placing separate values for each of the above items whichgo to
make up the entire investment in participation, merely because certain valuesare indicated
in the correspondence with FIPB which had raised the query, wouldnot mean that the
parties had agreed for the price payable for each of the aboveitems. The transaction
remained a contract of outright sale of the entire investmentfor a lump sum consideration
(see: Commentary on Model Tax Convention onIncome and Capital dated 28th January,
2003 as also the judgment of this Court inthe case of CIT (Central), Calcutta v. Mugneeram
Bangur and Company (Land Deptt.).Thus, it is necessary to "look at" the entire Ownership

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Structure set up by Hutchison as a single consolidated bargain and interpret the
transactional documents, whileexamining the Offshore Transaction of the nature involved
in this case, in thatlight.

Direct Taxation - Whether Section 9 of the Income Tax Act, 1961 is a "lookthrough"
provision as submitted on behalf of the Revenue?

Held, Section 9(1)(i) gathers in one place various types of income and directs thatincome
falling under each of the sub clauses shall be deemed to accrue or arise inIndia. Broadly
there are four items of income. The income dealt with in each subclause is distinct and
independent of the other and the requirements to bringincome within each sub-clause, are
separately noted. Hence, it is not necessarythat income falling in one category under any
one of the sub-clauses should alsosatisfy 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, theconcerned provision is last sub-clause of Section 9(1)(i) which refers to
incomearising from "transfer of a capital asset situate in India". Thus, charge on
capitalgains arises on transfer of a capital asset situate in India during the previousyear.
The said sub-clause consists of three elements, namely, transfer, existence ofa capital
asset, and situation of such asset in India. All three elements shouldexist in order to make
the last sub-clause applicable. Therefore, if such a transferdoes not exist in the previous
year no charge is attracted. Further, Section 45enacts that such income shall be deemed to
be the income of the previous year inwhich transfer took place. Consequently, there is no
room for doubt that suchtransfer should exist during the previous year in order to attract
the said subclause. The fiction created by Section 9(1)(i) applies to the assessment of
income ofnon residents. In the case of a resident, it is immaterial whether the place
ofaccrual of income is within India or outside India, since, in either event, he isliable 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 totax. In other words, if any
income accrues or arises to a non resident, directly orindirectly, outside India is fictionally
deemed to accrue or arise in India if suchincome accrues or arises as a sequel to the
transfer of a capital asset situate inIndia. Once the factum of such transfer is established
by the Department, then theincome of the non-resident arising or accruing from such
transfer is made liable tobe taxed by reason of Section 5(2)(b) of the Act. This fiction comes
into play onlywhen the income is not charged to tax on the basis of receipt in India, as
receipt ofincome in India by itself attracts tax whether the recipient is a resident or
nonresident.

This fiction is brought in by the legislature to avoid any possible argument on thepart of
the non-resident vendor that profit accrued or arose outside India by reasonof the contract
to sell having been executed outside India. Thus, income accruingor arising to a non-
resident outside India on transfer of a capital asset situate inIndia is fictionally deemed to

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accrue or arise in India, which income is madeliable to be taxed by reason of Section
5(2)(b) of the Act. This is the main purposebehind enactment of Section 9(1)(i) of the Act.
Necessity is to give effect to thelanguage of the section when it is unambiguous and
admits of no doubt regardingits interpretation, particularly when a legal fiction is
embedded in that section. Alegal fiction has a limited scope. A legal fiction cannot be
expanded by givingpurposive interpretation particularly if the result of such interpretation
is to transformthe 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 contendedon behalf
of the Revenue is that under Section 9(1)(i) it can "look through" thetransfer of shares of a
foreign company holding shares in an Indian company andtreat the transfer of shares of
the foreign company as equivalent to the transfer ofthe shares of the Indian company on
the premise that Section 9(1)(i) covers directand indirect transfers of capital assets. For the
above reasons, Section 9(1)(i) cannotby a process of interpretation be extended to cover
indirect transfers of capitalassets/property situate in India. To do so, would amount to
changing the contentand ambit of Section 9(1)(i). Section 9(1)(i) cannot be re-written. The
legislaturehas not used the words indirect transfer in Section 9(1)(i). If the word indirect
isread into Section 9(1)(i), it would render the express statutory requirement of the4th sub-
clause in Section 9(1)(i) nugatory. This is because Section 9(1)(i) applies totransfers of a
capital asset situate in India. This is one of the elements in the 4thsub-clause of Section
9(1)(i) and if indirect transfer of a capital asset is read intoSection 9(1)(i) then the words
capital asset situate in India would be renderednugatory. 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 tocompute 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
directlyor indirectly. Thus, the words directly or indirectly in Section 9(1)(i) go with
theincome and not with the transfer of a capital asset (property). Lastly, it may
bementioned that the Direct Tax Code (DTC) Bill, 2010 proposes to tax income fromtransfer
of shares of a foreign company by a non-resident, where at any timeduring 12 months
preceding the transfer, the fair market value of the assets inIndia, owned directly or
indirectly, by the company, represents at least 50 per centof the fair market value of all
assets owned by the company. Thus, the DTC Bill, 2010proposes taxation of offshore share
transactions. This proposal indicates in a waythat indirect transfers are not covered by the
existing Section 9(1)(i) of the Act. Infact, the DTC Bill, 2009 expressly stated that income
accruing even from indirecttransfer 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 indirectcannot 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
beexpressly provided for in the statute or in the treaty. Similarly, limitation of benefitshas
to be expressly provided for in the treaty. Such clauses cannot be read into theSection by
interpretation. For the foregoing reasons, Section 9(1)(i) held to be asnot a "look through"
provision.

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Direct Taxation - Issue of Situs of the CGP Share - Determination thereof.

Held, according to the Revenue, under the Companies Law of Cayman Islands, anexempted
company was not entitled to conduct business in the Cayman Islands.CGP was an
"exempted company". According to the Revenue, since CGP was amere 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", thatis to say, India. That, since CGP as
an exempted company conducts no businesseither in the Cayman Islands or elsewhere
and since its sole purpose is to holdshares in a subsidiary company situated outside the
Cayman Islands, the situs ofthe CGP share, in the present case, existed "where the
underlying assets stoodsituated" (India). No merits in the arguments were found to be
present. Be that asit may, under the Indian Companies Act, 1956, the situs of the shares
would bewhere 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 wasrecorded in
the Cayman Islands, where the register of members of the CGP ismaintained. This
assertion was neither rebutted in the impugned order of theDepartment dated 31st May,
2010 nor traversed in the pleadings filed by the Revenuenor controverted in the current
proceedings. In the circumstances, it the argumentsof the Revenue that the situs of the
CGP share was situated in the place (India)where the underlying assets stood situated held
to be not acceptable.

K.S. Radhakrishnan, J.

Direct Taxation - Correctness of decision as laid down in the Azadi Bachaocase.

Held, Justice Chinnappa Reddy had started his concurring judgment in McDowellby
mentioning that, "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 taxavoidance." The quoted
portion showed that he entirely agreed with Justice Mishraand has stated that he is only
supplementing what Justice Mishra has spoken ontax avoidance. Justice Reddy, while
agreeing with Justice Mishra and the otherthree judges, has opined that in the very country
of its birth, the principle ofWestminster has been given a decent burial and in that country
where the phrase"tax avoidance" originated the judicial attitude towards tax avoidance has
changedand the Courts are now concerning themselves not merely with the genuinenessof
a transaction, but with the intended effect of it for fiscal purposes. Justice Reddyalso
opined that no one can get away with the tax avoidance project with the merestatement that
there is nothing illegal about it. Justice Reddy has also opined thatthe ghost of
Westminster (in the words of Lord Roskill) has been exercised inEngland. What transpired
in England is not the ratio of McDowell and cannot beand remains merely an opinion or

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view.

The confusion had arose (see Paragraph 46 of the judgment) when Justice Mishrahas
stated after referring to the concept of tax planning as, "On this aspect, one ofus
Chinnappa Reddy, J. Has proposed a separate and detailed opinion with whichwe agree."
Since, Justice Reddy, himself has stated that he is entirely agreeingwith Justice Mishra and
has only supplemented what Justice Mishra has statedon Tax Avoidance, therefore, one
has to go by what Justice Mishra has spoken ontax avoidance. Justice Reddy has
depreciated the practice of setting up of TaxAvoidance Projects rightly because the same
is/was the situation in England andRamsay and other judgments had depreciated the Tax
Avoidance Schemes. Theratio of the judgment is what is spoken by Justice Mishra for
himself and onbehalf of three other judges, on which Justice Reddy has agreed. Justice
Reddy hasclearly stated that he is only supplementing what Justice Mishra has said on
Taxavoidance. Justice Reddy has endorsed the view of Lord Roskill that the ghost
ofWestminster had been exorcised in England and that one should not allow itshead rear
over India. If one scans through the various judgments of the House ofLords in England,
one thing is clear that it has been a cornerstone of law, that atax payer is enabled to
arrange his affairs so as to reduce the liability of tax andthe fact that the motive for a
transaction is to avoid tax does not invalidate itunless a particular enactment so provides
(Westminster Principle). Needless tosay if the arrangement is to be effective, it is essential
that the transaction hassome economic or commercial substance. Lord Roskill's view is
not seen as the correct view so also Justice Reddy's. A five Judges Bench judgment of this
Court inMathuram Agrawal v. State of Madhya Pradesh after referring to the judgment in
B.C.Kharwar as well as the opinion expressed by Lord Roskill on Duke of
Westminsterstated that the subject is not to be taxed by inference or analogy, but only by
theplain words of a statute applicable to the facts and circumstances of each case.Revenue
cannot tax a subject without a statute to support and in the course wealso acknowledge
that every tax payer is entitled to arrange his affairs so that histaxes shall be as low as
possible and that he is not bound to choose that patternwhich will replenish the treasury.
Revenue's stand that the ratio laid down inMcDowell is contrary to what has been laid down
in Azadi Bachao Andolan,accordingly held to be unsustainable and, therefore, called for no
reconsiderationby a larger branch.

Direct Taxation - Determination of conclusive effect of a relationship betweenHolding

Company and Subsidiary Company.

Held, the subsidiary companies are the integral part of corporate structure. Activitiesof the
companies over the years have grown enormously of its incorporation andoutside and their
structures have become more complex. Multi National Companieshaving large volume of
business nationally or internationally will have to dependupon their subsidiary companies
in the national and international level for betterreturns for the investors and for the growth

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of the company. When a holdingcompany owns all of the voting stock of another company,
the company is said tobe a WOS of the parent company. Holding companies and their
subsidiaries cancreate pyramids, whereby subsidiary owns a controlling interest in
anothercompany, thus becoming its parent company. Legal relationship between a
holdingcompany and WOS is that they are two distinct legal persons and the
holdingcompany does not own the assets of the subsidiary and, in law, the managementof
the business of the subsidiary also vests in its Board of Directors. In Bacha F.Guzdar v.
CIT, it was held that shareholders' only rights is to get dividend if andwhen the company
declares it, to participate in the liquidation proceeds and tovote at the shareholders'
meeting.

Holding company, if the subsidiary is a WOS, may appoint or remove any directorif it so
desires by a resolution in the General Body Meeting of the subsidiary.Holding companies
and subsidiaries can be considered as single economic entityand consolidated balance
sheet is the accounting relationship between the holdingcompany and subsidiary
company, which shows the status of the entire businessenterprises. Shares of stock in the
subsidiary company are held as assets on thebooks of the parent company and can be
issued as collateral for additional debtfinancing. Holding company and subsidiary
company are, however, consideredas separate legal entities, and subsidiary are allowed
decentralised management.Each subsidiary can reform its own management personnel and
holding companymay also provide expert, efficient and competent services for the benefit
of thesubsidiaries.

The U.S. Supreme Court in United States v. Bestfoods had explained that it is ageneral
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., the Court of Appeal
emphasized that it is appropriate to pierce the corporate veil where special circumstances
exist indicating that it is mere faade concealing true facts. Courts,however, will not allow
the separate corporate entities to be used as a means tocarry out fraud or to evade tax.
Parent company of a WOS, is not responsible,legally for the unlawful activities of the
subsidiary save in exceptionalcircumstances, such as a company is a sham or the agent of
the shareholder, theparent company is regarded as a shareholder. Multi-National
Companies, by settingup complex vertical pyramid like structures, would be able to
distance themselvesand separate the parent from operating companies, thereby protecting
the multinationalcompanies from legal liabilities.

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Direct Taxation - Whether the approach of the High Court (acquisition of CGPshare with
"other rights and entitlements") was correct?

Held, the High Court has reiterated the common law principle that the controllinginterest is
an incident of the ownership of the share of the company, somethingwhich flows out of
holding of shares and, therefore, not an identifiable or distinctcapital asset independent of
the holding of shares, but at the same time speaks ofchange in the controlling interest of
VEL, without there being any transfer ofshares 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 unconnectedwith underlying controlling interest in the Indian Operating
Companies. The otherrights, interests and entitlements continue to remain with Indian
OperatingCompanies and there is nothing to show they stood transferred in law.

The High Court has ignored the vital fact that as far as the put options are concernedthere
were pre-existing agreements between the beneficiaries and counter partiesand fresh
agreements were also on similar lines. Further, the High Court hasignored the fact that
Term Sheet Agreement with Essar had nothing to do with thetransfer of CGP, which was a
separate transaction which came about on accountof independent settlement between
Essar and Hutch Group, for a separateconsideration, unrelated to the consideration of CGP
share. The High Courtcommitted an error in holding that there were some rights vested in
HTIL underSHA dated 5th July, 2003 which is also an agreement, conferring no right to
anyparty and accordingly none could have been transferred. The High Court hadalso
committed an error in holding that some rights vested with HTIL under theagreement dated
1st August, 2006, in fact, that agreement conferred right onHutichison Telecommunication
(India) Ltd., which is a Mauritian Company andnot HTIL, the vendor of SPA. The High Court
has also ignored the vital fact thatFIPB had elaborately examined the nature of call and put
option agreement rightsand found no right in presenti has been transferred to Vodafone
and that as andwhen rights are to be transferred by AG and AS Group Companies, it
wouldspecifically require Government permission since such a sale would attract
capitalgains, and may be independently taxable.

Direct Taxation - Whether Section 9 of the Income Tax Act, 1961 is a "lookthrough"
provision as submitted on behalf of the Revenue?

Held, Section 9(1)(i) covers only income arising or accruing directly or indirectlyor through
the transfer of a capital asset situated in India. Section 9(1)(i) cannotby a process of
"interpretation" or "construction" be extended to cover "indirect transfers" of capital
assets/property situate in India. On transfer of shares of aforeign company to a non-
resident off-shore, there is no transfer of shares of theIndian Company, though held by the
foreign company, in such a case it cannot becontended that the transfer of shares of the
foreign holding company, results in anextinguishment of the foreign company control of

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the Indian company and it alsodoes 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 anextinguishment of the holding company right of control of the Indian
companynor can it be stated that the same constitutes extinguishment and transfer of
anasset/ management and control of property situated in India. The Legislaturewherever
wanted to tax income which arises indirectly from the assets, the samehas been
specifically provided so. For example, reference may be made to Section 64of the Indian
Income Tax Act, which says that in computing the total income of anindividual, 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 indirectlyon and after 1st June, 1973 to the
son's wife by such individual otherwise than foradequate consideration. The same was
noticed by this Court in CIT v. Kothari(CM). Similar expression like "from asset transferred
directly or indirectly", isavailable in Sections 64(7) and (8) as well. On a comparison of
Section 64 andSection 9(1)(i) what is discernible is that the Legislature has not chosen to
extendSection 9(1)(i) to "indirect transfers". Wherever "indirect transfers" are intendedto be
covered, the Legislature has expressly provided so. The words "either directlyor
indirectly", textually or contextually, cannot be construed to govern the wordsthat follow,
but must govern the words that precede them, namely the words "allincome accruing or
arising". The words "directly or indirectly" occurring in Section9, therefore, relate to the
relationship and connection between a non-resident assesseeand the income and these
words cannot and do not govern the relationship betweenthe transaction that gave rise to
income and the territory that seeks to tax theincome. In other words, when an assessee is
sought to be taxed in relation to anincome, it must be on the basis that it arises to that
assessee directly or it mayarise to the assessee indirectly. In other words, for imposing tax,
it must be shownthat there is specific nexus between earning of the income and the
territory whichseeks to lay tax on that income. Reference may also be made to the
judgment ofthis Court in Ishikawajma-Harima Heavy Industries Ltd. v. Director of Income
Tax,Mumbai and CIT v. R.D. Aggarwal. Section 9 has no "look through provision" andsuch
a provision cannot be brought through construction or interpretation of aword 'through' in
Section 9. In any view, "look through provision" will not shiftthe situs of an asset from one
country to another. Shifting of situs can be doneonly by express legislation. Federal
Commission of Taxation v. Lamesa Holdings BV(LN) gives an insight as to how "look
through" provisions are enacted. Section 9,thus, has no inbuilt "look through mechanism".

Direct Taxation - Issue of Situs of the CGP Share - Determination thereof.

Held, situs of shares situates at the place where the company is incorporatedand/ or the
place where the share can be dealt with by way of transfer. CGP shareis registered in
Cayman Island and materials placed before us would indicate thatCayman 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 exemptif it gives to the Registrar, a

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declaration that "operation of an exempted companywill be conducted mainly outside the
Island". Section 193 of the Cayman IslandAct expressly recognises that even exempted
companies may, to a limited extent trade within the Islands. Section 193 permits activities
by way of trading whichare 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
wouldclearly indicate that the CGP (CI) share situates in Caymen Island. The legalprinciple
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,London and South
American Investment Trust v. British Tobacco Co. (Australia). ErieBeach Co. v. Attorney-
General for Ontario, R. v. Williams [1942] AC 541. Situs of CGPshare, therefore, situates in
Cayman Islands and on transfer in Cayman Islandswould not shift to India.

Direct Taxation - Shareholders' Agreement - Meaning and scope vis-a-visthe view taken in
the case of V. B. Rangaraj v. V. B. Gopalakrishnan and Ors.

Held, Shareholders' Agreement (SHA) is essentially a contract between some orall other
shareholders in a company, the purpose of which is to confer rights andimpose obligations
over and above those provided by the Company Law. SHA isa private contract between the
shareholders compared to Articles of Associationof the Company, which is a public
document. Being a private document it bindsparties thereof and not the other remaining
shareholders in the company. Advantageof SHA is that it gives greater flexibility, unlike
Articles of Association. It alsomakes provisions for resolution of any dispute between the
shareholders and alsohow the future capital contributions have to be made. Provisions of
the SHA mayalso go contrary to the provisions of the Articles of Association, in that
event,naturally provisions of the Articles of Association would govern and not
theprovisions made in the SHA.

The nature of SHA was considered by a two Judges Bench of the Apex Court inV. B.
Rangaraj v. V. B. Gopalakrishnan and Ors. In that case, an agreement wasentered into
between shareholders of a private company wherein a restriction wasimposed on a living
member of the company to transfer his shares only to amember of his own branch of the
family, such restrictions were, however, notenvisaged or provided for within the Articles of
Association. This Court has takenthe view that provisions of the Shareholders' Agreement
imposing restrictionseven when consistent with Company legislation, are to be authorised
only whenthey are incorporated in the Articles of Association, a view we do not
subscribe.This Court in Gherulal Parekh v. Mahadeo Das Maiya held that freedom of
contractcan be restricted by law only in cases where it is for some good for the
community.Companies Act 1956 or the FERA 1973, RBI Regulation or the I.T. Act do
notexplicitly or impliedly forbid shareholders of a company to enter into agreementsas to
how they should exercise voting rights attached to their shares. Shareholderscan enter into
any agreement in the best interest of the company, but the onlything is that the provisions

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in the SHA shall not go contrary to the Articles ofAssociation. The essential purpose of the
SHA is to make provisions for properand effective internal management of the company. It
can visualise the best interestof the company on diverse issues and can also find different
ways not only for thebest interest of the shareholders, but also for the company as a whole.
In S. P. Jainv. Kalinga Cables Ltd., the Apex Court held that agreements between non-
membersand members of the Company will not bind the company, but there is
nothingunlawful in entering into agreement for transferring of shares. Of course, the
mannerin which such agreements are to be enforced in the case of breach is given in
thegeneral 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 wehave already
indicated, the parties aggrieved can get remedies under the generallaw of the land for any
breach of that agreement.

Case Category:
DIRECT TAXES MATTERS - CAPITAL GAINS

Referred Notifications:
MANU/CBDT/0004/2000, MANU/CBDT/0007/1994

Industry: Telecom

JUDGMENT

S.H. Kapadia, C.J.I

1. Leave granted.

Introduction

2. This matter concerns a tax dispute involving the Vodafone Group with the Indian Tax Authorities
[hereinafter referred to for short as "the Revenue"], in relation to the acquisition by Vodafone
International Holdings BV [for short "VIH"], a company resident for tax purposes in the
Netherlands, of the entire share capital of CGP Investments (Holdings) Ltd. [for short "CGP"], a
company resident for tax purposes in the Cayman Islands ["CI" for short] vide transaction dated
11.02.2007, whose stated aim, according to the Revenue, was "acquisition of 67% controlling
interest in HEL", being a company resident for tax purposes in India which is disputed by the
Appellant saying that VIH agreed to acquire companies which in turn controlled a 67% interest, but
not controlling interest, in Hutchison Essar Limited ("HEL" for short). According to the Appellant,
CGP held indirectly through other companies 52% shareholding interest in HEL as well as Options
to acquire a further 15% shareholding interest in HEL, subject to relaxation of FDI Norms. In short,
the Revenue seeks to tax the capital gains arising from the sale of the share capital of CGP on the
basis that CGP, whilst not a tax resident in India, holds the underlying Indian assets.

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Facts

A. Evolution of the Hutchison structure and the Transaction

3. The Hutchison Group, Hong Kong (HK) first invested into the telecom business in India in 1992
when the said Group invested in an Indian joint venture vehicle by the name Hutchison Max
Telecom Limited (HMTL) - later renamed as HEL.

4. On 12.01.1998, CGP stood incorporated in Cayman Islands, with limited liability, as an "
exempted company", its sole shareholder being Hutchison Telecommunications Limited, Hong
Kong ["HTL" for short], which in September, 2004 stood transferred to HTI (BVI) Holdings Limited
["HTIHL (BVI)" for short] vide Board Resolution dated 17.09.2004. HTIHL (BVI) was the buyer of
the CGP Share. HTIHL (BVI) was a wholly owned subsidiary (indirect) of Hutchison
Telecommunications International Limited (CI) ["HTIL" for short].

5. In March, 2004, HTIL stood incorporated and listed on Hong Kong and New York Stock
Exchanges in September, 2004.

6. In February, 2005, consolidation of HMTL (later on HEL) got effected. Consequently, all
operating companies below HEL got held by one holding company, i.e., HMTL/HEL. This was with
the approval of RBI and FIPB. The ownership of the said holding company, i.e., HMTL/HEL was
consolidated into the tier I companies all based in Mauritius. Telecom Investments India Private
Limited ["TII" for short], IndusInd Telecom Network Ltd. ["ITNL" for short] and Usha Martin
Telematics Limited ["UMTL" for short] were the other shareholders, other than Hutchison and
Essar, in HMTL/HEL. They were Indian tier I companies above HMTL/HEL. The consolidation was
first mooted as early as July, 2003.

7. On 28.10.2005, VIH agreed to acquire 5.61% shareholding in Bharti Televentures Ltd. (now
Bharti Airtel Ltd.). On the same day, Vodafone Mauritius Limited (subsidiary of VIH) agreed to
acquire 4.39% shareholding in Bharti Enterprises Pvt. Ltd. which indirectly held shares in Bharti
Televentures Ltd. (now Bharti Airtel Ltd.).

8. On 3.11.2005, Press Note 5 was issued by the Government of India enhancing the FDI ceiling
from 49% to 74% in telecom sector. Under this Press Note, proportionate foreign component held
in any Indian company was also to be counted towards the ceiling of 74%.

9. On 1.03.2006, TII Framework and Shareholders Agreements stood executed under which the
shareholding of HEL was restructured through "TII", an Indian company, in which Analjit Singh
(AS) and Asim Ghosh (AG), acquired shares through their Group companies, with the credit
support provided by HTIL. In consideration of the credit support, parties entered into Framework
Agreements under which a Call Option was given to 3 Global Services Private Limited ["GSPL" for

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short], a subsidiary of HTIL, to buy from Goldspot Mercantile Company Private Limited ["Goldspot"
for short] (an AG company) and Scorpios Beverages Private Limited ["Scorpios" for short] (an AS
company) their entire shareholding in TII. Additionally, a Subscription Right was also provided
allowing GSPL a right to subscribe to the shares of Centrino Trading Company Private Limited
["Centrino" for short] and ND Callus Info Services Private Limited ["NDC" for short]. GSPL was an
Indian company under a Mauritius subsidiary of CGP which stood indirectly held by HTIL. These
agreements also contained clauses which imposed restrictions to transfer downstream interests,
termination rights, subject to objection from any party, etc.

10. The shareholding of HEL again underwent a change on 7.08.2006 through execution of 2006
IDFC Framework Agreement with the Hinduja Group exiting and its shareholding being acquired
by SMMS Investments Private Limited ["SMMS" for short], an Indian company. Hereto, the
investors (as described in the Framework Agreement) were prepared to invest in ITNL provided
that HTIL and GSPL procured financial assistance for them and in consideration whereof GSPL
would have Call Option to buy entire equity shares of SMMS. Hereto, in the Framework
Agreement there were provisions imposing restrictions on Share Transfer, Change of Control etc.
On 17.08.2006, a Shareholders Agreement stood executed which dealt with governance of ITNL.

11. On 22.12.2006, an Open Offer was made by Vodafone Group Plc. on behalf of Vodafone
Group to Hutchison Whampoa Ltd., a non-binding bid for US $11.055 bn being the enterprise
value for HTIL's 67% interest in HEL.

12. On 22.12.2006, a press release was issued by HTIL in Hong Kong and New York Stock
Exchanges that it had been approached by various potentially interested parties regarding a
possible sale of "its equity interests" (not controlling interest ) in HEL. That, till date no agreement
stood entered into by HTIL with any party.

13. On 25.12.2006, an offer comes from Essar Group to purchase HTIL's 66.99% shareholding at
the highest offer price received by HTIL. Essar further stated that any sale by HTIL would require
its consent as it claimed to be a co-promoter of HEL.

14. On 31.01.2007, a meeting of the Board of Directors of VIH was held approving the submission
of a binding offer for 67% of HTIL's interest at 100% enterprise value of US $17.5 bn by way of
acquisition by VIH of one share (which was the entire shareholding) in CGP, an indirect Cayman
Islands subsidiary of HTIL. The said approval was subject to:

(i) reaching an agreement with Bharti that allowed VIH to make a bid on Hutch; and

(ii) entering into an appropriate partnership arrangement to satisfy FDI Rules in India.

15. On 6.02.2007, HTIL calls for a binding offer from Vodafone Group for its aggregate interests in
66.98% of the issued share capital of HEL controlled by companies owned, directly or indirectly,

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by HTIL together with inter-related loans.

16. On 9.02.2007, Vodafone Group makes a revised offer on behalf of VIH to HTIL. The said
revised offer was of US $10.708 bn for 66.98% interest [at the enterprise value of US $18.250 bn]
and for US $1.084 bn loans given by the Hutch Group. The offer further confirmed that in
consultation with HTIL, the consideration payable may be reduced to take account of the various
amounts which would be payable directly to certain existing legal local partners in order to
extinguish HTIL's previous obligations to them. The offer further confirmed that VIH had come to
arrangements with HTIL's existing local partners [AG, AS and Infrastructure Development Finance
Company Limited (IDFC)] to maintain the local Indian shareholdings in accordance with the
Indian FDI requirements. The offer also expressed VIH's willingness to offer Essar the same
financial terms in HEL which stood offered to HTIL.

17. On the same day, i.e., 9.02.2007, Bharti conveys its no objection to the proposal made by
Vodafone Group to purchase a direct or indirect interest in HEL from the Hutchison Group and/ or
Essar Group.

18. On 10.02.2007, a re-revised offer was submitted by Vodafone valuing HEL at an enterprise
value of US $18.80 bn and offering US $11.076 bn for HTIL's interest in HEL.

19. On 11.02.2007, a Tax Due Diligence Report was submitted by Ernst & Young. The relevant
observation from the said Report reads as follows:

The target structure now also includes a Cayman company, CGP Investments (Holdings) Limited,
CGP Investments (Holdings) Limited was not originally within the target group. After our due
diligence had commenced the seller proposed that CGP Investments (Holdings) Limited should be
added to the target group and made available certain limited information about the company.
Although we have reviewed this information, it is not sufficient for us to be able to comment on any
tax risks associated with the company.
20. On 11.02.2007, UBS Limited (Financial Advisors to VIH) submitted a financial report setting
out the methodology for valuation of HTIL's 67% effective interest in HEL through the acquisition
of 100% of CGP.

21. On 11.02.2007, VIH and HTIL entered into an Agreement for Sale and Purchase of Share and
Loans ("SPA" for short), under which HTIL agreed to procure the sale of the entire share capital of
CGP which it held through HTIHL (BVI) for VIH. Further, HTIL also agreed to procure the
assignment of Loans owed by CGP and Array Holdings Limited ["Array" for short] (a 100%
subsidiary of CGP) to HTI (BVI) Finance Ltd. (a direct subsidiary of HTIL). As part of its
obligations, HTIL undertook to procure that each Wider Group Company would not terminate or
modify any rights under any of its Framework Agreements or exercise any of their Options under
any such agreement. HTIL also provided several warranties to VIH as set out in Schedule 4 to
SPA which included that HTIL was the sole beneficial owner of CGP share.

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22. On 11.02.2007, a Side Letter was sent by HTIL to VIH inter alias stating that out of the
purchase consideration, up to US $80 million could be paid to some of its existing partners. By the
said Side Letter, HTIL agreed to procure that Hutchison Telecommunications (India) Ltd. (Ms)
["HTIL Mauritius" for short], Omega Telecom Holdings Private Limited ["Omega" for short] and
GSPL would enter into IDFC Transaction Agreement prior to the completion of the acquisition
pursuant to SPA, which completion ultimately took place on 8.05.2007.

23. On 12.02.2007, Vodafone makes public announcement to Securities and Exchange

Commission ["SEC" for short], Washington and on London Stock Exchange which contained two
assertions saying that Vodafone had agreed to acquire a controlling interest in HEL via its
subsidiary VIH and, second, that Vodafone had agreed to acquire companies that control a 67%
interest in HEL.

24. On the same day, HTIL makes an announcement on HK Stock Exchange stating that it had
agreed to sell its entire direct and indirect equity and loan interests held through subsidiaries, in
HEL to VIH.

25. On 20.02.2007, VIH applied for approval to FIPB. This application was made pursuant to
Press Note 1 which applied to the acquisition of an indirect interest in HEL by VIH from HTIL. It
was stated that "CGP owns directly and indirectly through its subsidiaries an aggregate of 42.34%
of the issued share capital of HEL and a further indirect interests in 9.62% of the issued share
capital of HEL". That, the transaction would result in VIH acquiring an indirect controlling interest
of 51.96% in HEL, a company competing with Bharti, hence, approval of FIPB became necessary.
It is to be noted that on 20.02.2007, VIH held 5.61% stake (directly) in Bharti.

26. On the same day, i.e., 20.02.2007, in compliance of Clause 5.2 of SPA, an Offer Letter was
issued by Vodafone Group Plc on behalf of VIH to Essar for purchase of its entire shareholding
(33%) in HEL.

27. On 2.03.2007, AG wrote to HEL, confirming that he, through his 100% Indian companies,
owned 23.97% of a joint venture company-TII, which in turn owned 19.54% of HEL and,
accordingly, his indirect interest in HEL worked out to 4.68%. That, he had full and unrestricted
voting rights in companies owned by him. That, he had received credit support for his investments,
but primary liability was with his companies.

28. A similar letter was addressed by AS on 5.03.2007 to FIPB. It may be noted that in January,
2006, post dilution of FDI cap, HTIL had to shed its stake to comply with 26% local shareholding
guideline. Consequently, AS acquired 7.577% of HEL through his companies.

29. On 6.03.2007, Essar objects with FIPB to HTIL's proposed sale saying that HEL is a joint
venture Indian company between Essar and Hutchison Group since May, 2000. That, Bharti is

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also an Indian company in the "same field" as HEL. Bharti was a direct competitor of HEL in India.
According to Essar, the effect of the transaction between HTIL and VIH would be that Vodafone
with an indirect controlling interest in HEL and in Bharti violated Press Note 1, particularly, absent
consent from Essar. However, vide letter dated 14.03.2007, Essar gave its consent to the sale.
Accordingly, its objection stood withdrawn.

30. On 14.03.2007, FIPB wrote to HEL seeking clarification regarding a statement by HTIL before
US SEC stating that HTIL Group would continue to hold an aggregate interest of 42.34% of HEL
and an additional indirect interest through JVCs [TII and Omega] being non-wholly owned
subsidiaries of HTIL which held an aggregate of 19.54% of HEL, which added up to 61.88%,
whereas in the communication to FIPB dated 6.03.2007, the direct and indirect FDI held by HTIL
was stated to be 51.96%.

31. By letter of the same date from HEL to FIPB, it was pointed out that HTIL was a company
listed on NY SE. Accordingly, it had to file Statements in accordance with US SECTION That,
under US GAAP, HTIL had to consolidate the assets and liabilities of companies even though not
majority owned or controlled by HTIL, because of a US accounting standard that required HTIL to
consolidate an entity whereby HTIL had "risk or reward". Therefore, this accounting consolidation
required that even though HTIL held no shares nor management rights still they had to be
computed in the computation of the holding in terms of the Listing Norms. It is the said accounting
consolidation which led to the reporting of additional 19.54% in HEL, which leads to combined
holding of 61.88%. On the other hand, under Indian GAAP, the interest as of March, 2006 was
42.34% + 7.28% (rounded up to 49.62%). After the additional purchase of 2.34% from Hindujas in
August 2006, the aggregate HTIL direct and indirect FDI stood at 51.96%. In short, due to the
difference in the US GAAP and the Indian GAAP the Declarations varied. The combined holding
for US GAAP purposes was 61.88% whereas for Indian GAAP purposes it was 51.96%. Thus,
according to HEL, the Indian GAAP number reflected the true equity ownership and control
position.

32. By letter dated 9.03.2007, addressed by FIPB to HEL, several queries were raised. One of the
questions FIPB had asked was "as to which entity was entitled to appoint the directors to the
Board of Directors of HEL on behalf of TIIL which owns 19.54% of HEL" In answer, vide letter
dated 14.03.2007, HEL informed FIPB that under the Articles of HEL the directors were appointed
by its shareholders in accordance with the provisions of the Indian company law. However, in
practice the directors of HEL have been appointed pro rata to their respective shareholdings which
resulted in 4 directors being appointed from the Essar Group, 6 directors from HTIL Group and 2
directors from TII. In practice, the directors appointed by TII to the Board of HEL were AS and AG.
One more clarification was sought by FIPB from HEL on the credit support received by AG for his
investment in HEL. In answer to the said query, HEL submitted that the credit support for AG
Group in respect of 4.68% stake in HEL through the Asim Ghosh investment entities, was a
standby letter of credit issued by Rabobank Hong Kong in favor of Rabo India Finance Pvt. Ltd.
which in turn has made a Rupee loan facility available to Centrino, one of the companies in AG

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Group.

33. By letter dated 14.03.2007 addressed by VIH to FIPB, it stood confirmed that VIH's effective
shareholding in HEL would be 51.96%. That, following completion of the acquisition HTIL's
shares in HEL the ownership of HEL was to be as follows:

(i) VIH would own 42% direct interest in HEL through its acquisition of 100% CGP (CI).

(ii) Through CGP (CI), VIH would also own 37.25% in TII which in turn owns 19.54% in HEL and
38% (45.79%) in Omega which in turn owns 5.11% in HEL (i.e. pro-rata route).

(iii) These investments combined would give VIH a controlling interest of 52% in HEL.

(iv) In addition, HTIL's existing Indian partners AG, AS and IDFC (i.e. SMMS), who between them
held a 15% interest in HEL (i.e. option route), agreed to retain their shareholdings with full control,
including voting rights and dividend rights. In other words, none of the Indian partners exited and,
consequently, there was no change of control.

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

34. On 15.03.2007, a Settlement Agreement was signed between HTIL and Essar Group. Under
the said Agreement, HTIL agreed to pay US $415 mn to Essar for the following:

(a) acceptance of the SPA;

(b) for waiving rights or claims in respect of management and conduct of affairs of HEL;

(c) for giving up Right of First Refusal (RoFR), Tag Along Rights (TARs) and shareholders rights
under Agreement dated 2.05.2000; and

(d) for giving up its objections before FIPB.

35. Vide Settlement Agreement, HTIL agreed to dispose of its direct and indirect equity, loan and
other interests and rights, in and related to HEL, to VIH. These other rights and interests have
been enumerated in the Order of the Revenue dated 31.05.2010 as follows:

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

2. Right to do telecom business in India

3. Right to jointly own and avail the telecom licenses in India

4. Right to use the Hutch brand in India

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5. Right to appoint/remove directors from the Board of HEL and its subsidiaries

6. Right to exercise control over the management and affairs of the business of HEL (Management
Rights)

7. Right to take part in all the investment, management and financial decisions of HEL

8. Right over the assigned loans and advances utilized for the business in India

9. Right of subscribing at par value in certain Indian companies

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

11. Right to control premium

12. Right to non-compete against HTIL within the territory of India

13. Right to consultancy support in the use of Oracle license for the Indian business

14. Other intangible rights (right of customer base, goodwill etc.)

36. On 15.03.2007, a Term Sheet Agreement between VIH and Essar Teleholdings Limited, an
Indian company which held 11% in HEL, and Essar Communications Limited, a Mauritius
company which held 22% in HEL, was entered into for regulating the affairs of HEL and the
relationship of the shareholders of HEL. In the recitals, it was stated that VIH had agreed to
acquire the entire indirect shareholding of HTIL in HEL, including all rights, contractual or
otherwise, to acquire directly or indirectly shares in HEL owned by others which shares shall, for
the purpose of the Term Sheet, be considered to be part of the holding acquired by VIH. The Term
Sheet governed the relationship between Essar and VIH as shareholders of HEL including VIH's
right as a shareholder of HEL:

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

(b) nominee of Vodafone had to be there to constitute the quorum for the Board of Directors;

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

(d) should Vodafone Group shareholder sell its shares in HEL to an outsider, Essar had a TAR in
respect of Essar's shareholding in HEL.

37. On 15.03.2007, a Put Option Agreement was signed between VIH and Essar Group requiring
VIH to buy from Essar Group Shareholders all the Option Shares held by them.

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38. By letter dated 17.03.2007, HTIL confirmed in writing to AS that it had no beneficial, or legal or
any other right in AS's TII interest or HEL interest.

39. On 19.03.2007, a letter was addressed by FIPB to VIH asking VIH to clarify as to under what
circumstances VIH agreed to pay US $11.08 bn for acquiring 67% of HEL when the actual
acquisition is only 51.96%. This query presupposes that even according to FIPB the actual
acquisition was only 51.96% (52% approx.).

40. On the same day, VIH replied that VIH has agreed to acquire from HTIL, interests in HEL
which included 52% equity shareholding for US $11.08 bn. That, the price included a control
premium, use and rights to the Hutch Brand in India, a non-compete agreement with the Hutch
Group, the value of non-voting non-convertible preference shares, various loans obligations and
the entitlement to acquire a further 15% indirect interest in HEL as set out in the letter dated
14.03.2007 addressed to FIPB (see page 6117 of SLP Vol. 26). According to the said letter dated
19.03.2007, all the above elements together equated to 67% of the economic value of HEL.

41. Vide Agreement dated 21.03.2007, VIH diluted its stake in Bharti by 5.61%.

42. In reply to the queries raised by FIPB regarding break up of valuation, VIH confirmed as
follows:

Various assets and liabilities of CGP included its rights and entitlements, including subscription
rights, call options to acquire in future a further 62.75% of TII, call options to acquire in future a
further 54.21% of Omega which together would give a further 15.03% proportionate indirect equity
ownership of HEL, control premium, use and rights to Hutch brand in India and a non-compete
agreement with HTIL. No individual price was assigned to any of the above items. That, under
IFRS, consolidation included TII and Omega and, consequently, the accounts under IFRS showed
the total shareholding in HEL as 67% (approx.). Thus, arrangements relating to Options stood
valued as assets of CGP. In global basis valuation, assets of CGP consisted of: its downstream
holdings, intangibles and arrangement relating to Options, i.e. Bundle of Rights acquired by VIH.
This reply was in the letter dated 27.03.2007 in which it was further stated that HTIL had
conducted an auction for sale of its interests in HEL in which HTIL had asked each bidder to name
its price with reference to the enterprise value of HEL. As a consequence of the transaction,
Vodafone will effectively step into the shoes of HTIL including all the rights in respect of its Indian
investments that HTIL enjoyed. Lastly, the Indian joint venture partners would remain invested in
HEL as the transaction did not involve the Indian investors selling any of their respective stakes.
43. On 5.04.2007, HEL wrote to the Joint Director of Income Tax (International Taxation) stating
that HEL had no tax liabilities accruing out of the subject transaction.

44. Pursuant to the resolution passed by the Board of Directors of CGP on 30.04.2007, it was
decided that on acquisition loans owed by CGP to HTI (BVI) Finance Ltd. would be assigned to

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VIH; the existing Directors of CGP would resign; Erik de Rijk would become the only Director of
CGP. A similar resolution was passed on the same day by the Board of Directors of Array.

45. On 7.05.2007, FIPB gave its approval to the transaction, subject to compliance with the
applicable laws and Regulations in India.

46. On 8.05.2007, consequent upon the Board Resolutions passed by CGP and its downstream
companies, the following steps were taken:

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

(ii) appointment of new directors of Vodafone Group;

(iii) resolutions passed by TII, Jaykay Finholding (India) Private Limited, UMT Investments Ltd.,
UMTL, Omega (Indian incorporated holding companies) accepting the resignation of HTIL's
nominee directors and appointing VIH's nominee directors;

(iv) same steps were taken by HEL and its subsidiaries;

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

(vi) computation of net amount payable by VIH to HTIL including retention of a certain amount out
of US $11.08 bn paid on 8.05.2007 towards expenses to operationalize the Option Agreements
and adjustments for breach (if any) of warranties, etc.;

(vii) assignment of loans given by HTI (BVI) Finance Ltd. to CGP and Array in favor of VIH;

(viii) cancellation of share certificate of HTIHL (BVI) and entering the name of VIH in the Register
of Members of CGP;

(ix) execution of Tax Deed of Covenant indemnifying VIH in respect of tax or transfer pricing
liabilities payable by Wider Group (CGP, GSPL, Mauritius holding companies, Indian operating
companies).

(x) a Business Transfer Agreement between GSPL and a subsidiary of HWP Investments
Holdings (India) Ltd. (Ms) for sale of Call Centre earlier owned by GSPL;

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

47. On 5.06.2007, under the Omega Agreement, it was agreed that in view of the SPA there would
be a consequent change of control in HTIL Mauritius, which holds 45.79% in Omega, and that
India Development Fund ("IDF" for short), IDFC and SSKI Corporate Finance Private Limited
("SSKI" for short) would, instead of exercising Put Option and Cashless Option under 2006 IDFC

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Framework Agreement, exercise the same in pursuance of Omega Agreement. That, under the
Omega Agreement, GSPL waived its right to exercise the Call Option under the 2006 IDFC
Framework Agreement.

48. On 6.06.2007, a Framework Agreement was entered into among IDF, IDFC, SMMS, IDFC PE,
HTIL Mauritius, GSPL, Omega and VIH by which GSPL had a Call Option to buy the entire equity
shares of SMMS. Consequently, on 7.06.2007, a Shareholders Agreement was executed by which
the shareholding pattern of Omega changed with SMMS having 61.6% and HTIL Mauritius having
38.4%.

49. On 27.06.2007, HTIL declared a special dividend of HK $6.75 per share, on account of the
gains made by sale of HTIL's entire interest in HEL.

50. On 5.07.2007, a Framework Agreement was entered into among AG, AG Mercantile
Company Private Limited, Plustech Mercantile Company (P) Ltd ["Plustech" for short], GSPL,
Nadal Trading Company Private Limited ["Nadal" for short] and VIH. Under Clause 4.4, GSPL had
an unconditional right to purchase all shares of AG in AG Mercantile Company Pvt. Ltd. at any
time and in consideration for such call option, GSPL agreed to pay to AG an amount of US $6.3
mn annually.

51. On the same day, i.e., 5.07.2007, a Framework Agreement was entered into among AS, his
wife, Scorpios, MVH, GSPL, NDC and VIH. Under Clause 4.4 GSPL had an unconditional right to
purchase all shares of AS and his wife held in Scorpios at any time and in consideration for the
call option GSPL agreed to pay AS and his wife an amount of US$ 10.2 mn per annum.

52. On 5.07.2007, TII Shareholders Agreement was entered into among Nadal, NDC, CGP India
Investments Limited ["CGP India" for short], TII and VIH to regulate the affairs of TII. Under Clause
3.1, NDC had 38.78% shareholding in TII, CGP India had 37.85% and Nadal had 23.57%.

53. It is not necessary to go into the earlier round of litigation. Suffice it to state that on 31.05.2010,
an Order was passed by the Department under Sections 201(1) and 201(1A) of the Income Tax
Act, 1961 ["the Act" for short] declaring that Indian Tax Authorities had jurisdiction to tax the
transaction against which VIH filed Writ Petition No. 1325 of 2010 before the Bombay High Court
which was dismissed on 8.09.2010 vide the impugned judgment [reported in
MANU/MH/1040/2010 : 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.

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55. To sum up, CGP held 42.34% in HEL through 100% wholly owned subsidiaries [Mauritius
companies], 9.62% indirectly through TII and Omega [i.e. pro rata route], and 15.03% through
GSPL route.

56. To explain the GSPL route briefly, it may be mentioned that on 11.02.2007 AG Group of
companies held 23.97% in TII, AS Group of companies held 38.78% in TII whereas SMMS held
54.21% in Omega. Consequently, holding of AG in HEL through TII stood at 4.68% whereas
holding of AS in HEL through TII stood at 7.577% and holding of SMMS in HEL through Omega
stood at 2.77%, which adds up to 15.03% in HEL. These holdings of AG, AS and SMMS came
under the Option Route. In this connection, it may be mentioned that GSPL is an Indian company
indirectly owned by CGP. It held Call Options and Subscription Options to be exercised in future
under circumstances spelt out in TII and IDFC Framework Agreements (keeping in mind the
sectoral cap of 74%).

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

57. Before us, it was contended on behalf of the Revenue that Union of India v. Azadi Bachao
Andolan MANU/SC/1219/2003 : (2004) 10 SCC 1 needs to be overruled insofar as it departs from
McDowell and Company Ltd. v. CTO MANU/SC/0154/1985 : (1985) 3 SCC 230 principle for the
following: i) Para 46 of McDowell judgment has been missed which reads as under: "on this

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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 MANU/SC/0692/1999 : (1999) 8 SCC 667, in which
Westminster principle was quoted which has not been noticed by Azadi Bachao.

Our Analysis

58. Before coming to Indo-Mauritius DTAA, we need to clear the doubts raised on behalf of the
Revenue regarding the correctness of Azadi Bachao (supra) for the simple reason that certain
tests laid down in the judgments of the English Courts subsequent to The Commissioners of
Inland Revenue v. His Grace the Duke of Westminster 1935 All E.R. 259 and W.T. Ramsay
Ltd. v. Inland Revenue Commissioners (1981) 1 All E.R. 865 help us to understand the scope of
Indo- Mauritius DTAA. It needs to be clarified, that, McDowell dealt with two aspects. First,
regarding validity of the Circular(s) issued by CBDT concerning Indo-Mauritius DTAA. Second, on
concept of tax avoidance/evasion. Before us, arguments were advanced on behalf of the Revenue
only regarding the second aspect.

59. The Westminster principle states that, "given that a document or transaction is genuine, the
court cannot go behind it to some supposed underlying substance". The said principle has been
reiterated in subsequent English Courts Judgments as "the cardinal principle".

60. Ramsay was a case of sale-lease back transaction in which gain was sought to be
counteracted, so as to avoid tax, by establishing an allowable loss. The method chosen was to
buy from a company a readymade scheme, whose object was to create a neutral situation. The
decreasing asset was to be sold so as to create an artificial loss and the increasing asset was to
yield a gain which would be exempt from tax. The Crown challenged the whole scheme saying
that it was an artificial scheme and, therefore, fiscally in-effective. It was held that Westminster did
not compel the court to look at a document or a transaction, isolated from the context to which it
properly belonged. It is the task of the Court to ascertain the legal nature of the transaction and
while doing so it has to look at the entire transaction as a whole and not to adopt a dissecting
approach. In the present case, the Revenue has adopted a dissecting approach at the Department
level.

61. Ramsay did not discard Westminster but read it in the proper context by which "device" which
was colorable in nature had to be ignored as fiscal nullity. Thus, Ramsay lays down the
principle of statutory interpretation rather than an over-arching anti-avoidance doctrine
imposed upon tax laws.

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62. Furniss (Inspector of Taxes) v. Dawson (1984) 1 All E.R. 530 dealt with the case of
interpositioning of a company to evade tax. On facts, it was held that the inserted step had no
business purpose, except deferment of tax although it had a business effect. Dawson went beyond
Ramsay. It reconstructed the transaction not on some fancied principle that anything done to defer
the tax be ignored but on the premise that the inserted transaction did not constitute "disposal"
under the relevant Finance Act. Thus, Dawson is an extension of Ramsay principle.

63. After Dawson, which empowered the Revenue to restructure the transaction in certain
circumstances, the Revenue started rejecting every case of strategic investment/tax planning
undertaken years before the event saying that the insertion of the entity was effected with the sole
intention of tax avoidance. In Craven (Inspector of Taxes) v. White (Stephen) (1988) 3 All. E.R.
495 it was held that the Revenue cannot start with the question as to whether the transaction was
a tax deferment/saving device but that the Revenue should apply the look at test to ascertain its
true legal nature. It observed that genuine strategic planning had not been abandoned.

64. The majority judgment in McDowell held that "tax planning may be legitimate provided it is
within the framework of law" (para 45). In the latter part of para 45, it held that "colorable device
cannot be a part of tax planning and it is wrong to encourage the belief that it is honorable to avoid
payment of tax by resorting to dubious methods". It is the obligation of every citizen to pay the
taxes without resorting to subterfuges. The above observations should be read with para 46 where
the majority holds "on this aspect one of us, Chinnappa Reddy, J. has proposed a separate
opinion with which we agree". The words "this aspect" express the majority's agreement with the
judgment of Reddy, J. only in relation to tax evasion through the use of colorable devices and by
resorting to dubious methods and subterfuges. Thus, it cannot be said that all tax planning is
illegal/illegitimate/impermissible. Moreover, Reddy, J. himself says that he agrees with the
majority. In the judgment of Reddy, J. there are repeated references to schemes and devices in
contradistinction to "legitimate avoidance of tax liability" (paras 7-10, 17 & 18). In our view,
although Chinnappa Reddy, J. makes a number of observations regarding the need to depart from
the "Westminster" and tax avoidance - these are clearly only in the context of artificial and
colorable devices. Reading McDowell, in the manner indicated hereinabove, in cases of treaty
shopping and/or tax avoidance, there is no conflict between McDowell and Azadi Bachao or
between McDowell and Mathuram Agrawal.

International Tax Aspects of Holding Structures

65. In the thirteenth century, Pope Innocent IV espoused the theory of the legal fiction by saying
that corporate bodies could not be ex-communicated because they only exist in abstract. This
enunciation is the foundation of the separate entity principle.

66. The approach of both the corporate and tax laws, particularly in the matter of corporate
taxation, generally is founded on the abovementioned separate entity principle, i.e., treat a
company as a separate person. The Indian Income Tax Act, 1961, in the matter of corporate

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taxation, is founded on the principle of the independence of companies and other entities subject
to income-tax. Companies and other entities are viewed as economic entities with legal
independence vis-a-vis their shareholders/participants. It is fairly well accepted that a subsidiary
and its parent are totally distinct tax payers. Consequently, the entities subject to income-tax are
taxed on profits derived by them on standalone basis, irrespective of their actual degree of
economic independence and regardless of whether profits are reserved or distributed to the
shareholders/ participants. Furthermore, shareholders/participants, that are subject to (personal or
corporate) income-tax, are generally taxed on profits derived in consideration of their
shareholding/participations, such as capital gains. Now a days, it is fairly well settled that for tax
treaty purposes a subsidiary and its parent are also totally separate and distinct tax payers.

67. It is generally accepted that the group parent company is involved in giving principal guidance
to group companies by providing general policy guidelines to group subsidiaries. However, the fact
that a parent company exercises shareholder's influence on its subsidiaries does not generally
imply that the subsidiaries are to be deemed residents of the State in which the parent company
resides. Further, if a company is a parent company, that company's executive director(s) should
lead the group and the company's shareholder's influence will generally be employed to that end.
This obviously implies a restriction on the autonomy of the subsidiary's executive directors. Such a
restriction, which is the inevitable consequences of any group structure, is generally accepted,
both in corporate and tax laws. However, where the subsidiary's executive directors' competences
are transferred to other persons/bodies or where the subsidiary's executive directors' decision
making has become fully subordinate to the Holding Company with the consequence that the
subsidiary's executive directors are no more than puppets then the turning point in respect of the
subsidiary's place of residence comes about. Similarly, if an actual controlling Non-Resident
Enterprise (NRE) makes an indirect transfer through "abuse of organization form/legal form and
without reasonable business purpose" which results in tax avoidance or avoidance of withholding
tax, then the Revenue may disregard the form of the arrangement or the impugned action through
use of Non-Resident Holding Company, re-characterize the equity transfer according to its
economic substance and impose the tax on the actual controlling Non-Resident Enterprise. Thus,
whether a transaction is used principally as a colorable device for the distribution of earnings,
profits and gains, is determined by a review of all the facts and circumstances surrounding the
transaction. It is in the above cases that the principle of lifting the corporate veil or the doctrine of
substance over form or the concept of beneficial ownership or the concept of alter ego arises.
There are many circumstances, apart from the one given above, where separate existence of
different companies, that are part of the same group, will be totally or partly ignored as a device or
a conduit (in the pejorative sense).

68. The common law jurisdictions do invariably impose taxation against a corporation based on
the legal principle that the corporation is "a person" that is separate from its members. It is the
decision of the House of Lords in Salomon v. Salomon (1897) A.C. 22 that opened the door to
the formation of a corporate group. If a "one man" corporation could be incorporated, then it would
follow that one corporation could be a subsidiary of another. This legal principle is the basis of

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Holding Structures. It is a common practice in international law, which is the basis of international
taxation, for foreign investors to invest in Indian companies through an interposed foreign holding
or operating company, such as Cayman Islands or Mauritius based company for both tax and
business purposes. In doing so, foreign investors are able to avoid the lengthy approval and
registration processes required for a direct transfer (i.e., without a foreign holding or operating
company) of an equity interest in a foreign invested Indian company. However, taxation of such
Holding Structures very often gives rise to issues such as double taxation, tax deferrals and tax
avoidance. In this case, we are concerned with the concept of GAAR. In this case, we are not
concerned with treaty-shopping but with the anti-avoidance rules. The concept of GAAR is not new
to India since India already has a judicial anti-avoidance rule, like some other jurisdictions. Lack of
clarity and absence of appropriate provisions in the statute and/or in the treaty regarding the
circumstances in which judicial anti-avoidance rules would apply has generated litigation in India.
Holding Structures are recognized in corporate as well as tax laws. Special Purpose Vehicles
(SPVs) and Holding Companies have a place in legal structures in India, be it in company law,
takeover code under SEBI or even under the income tax law. When it comes to taxation of a
Holding Structure, at the threshold, the burden is on the Revenue to allege and establish abuse, in
the sense of tax avoidance in the creation and/or use of such structure(s). In the application of a
judicial anti-avoidance rule, the Revenue may invoke the "substance over form" principle or
"piercing the corporate veil" test only after it is able to establish on the basis of the facts and
circumstances surrounding the transaction that the impugned transaction is a sham or tax
avoidant. To give an example, if a structure is used for circular trading or round tripping or to pay
bribes then such transactions, though having a legal form, should be discarded by applying the
test of fiscal nullity. Similarly, in a case where the Revenue finds that in a Holding Structure an
entity which has no commercial/business substance has been interposed only to avoid tax then in
such cases applying the test of fiscal nullity it would be open to the Revenue to discard such inter-
positioning of that entity. However, this has to be done at the threshold. In this connection, we may
reiterate the "look at" principle enunciated in Ramsay (supra) in which it was held that the
Revenue or

the Court must look at a document or a transaction in a context to which it properly belongs to.
It is the task of the Revenue/Court to ascertain the legal nature of the transaction and while doing
so it has to look at the entire transaction as a whole and not to adopt a dissecting approach. The
Revenue cannot start with the question as to whether the impugned transaction is a tax
deferment/saving device but that it should apply the "look at" test to ascertain its true legal nature
[See Craven v. White (supra) which further observed that genuine strategic tax planning has not
been abandoned by any decision of the English Courts till date]. Applying the above tests, we are
of the view that every strategic foreign direct investment coming to India, as an investment
destination, should be seen in a holistic manner. While doing so, the Revenue/Courts should keep
in mind the following factors: the concept of participation in investment, the duration of time during
which the Holding Structure exists; the period of business operations in India; the generation of
taxable revenues in India; the timing of the exit; the continuity of business on such exit. In short,

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the onus will be on the Revenue to identify the scheme and its dominant purpose. The corporate
business purpose of a transaction is evidence of the fact that the impugned transaction is not
undertaken as a colorable or artificial device. The stronger the evidence of a device, the stronger
the corporate business purpose must exist to overcome the evidence of a device.

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

69. According to the Revenue, if its primary argument (namely, that HTIL has, under the SPA,
directly extinguished its property rights in HEL and its subsidiaries) fails, even then in any event,
income from the sale of CGP share would nonetheless fall within Section 9 of the Income Tax Act,
1961 as that Section provides for a "look through". In this connection, it was submitted that the
word "through" in Section 9 inter alias means "in consequence of". It was, therefore, argued that if
transfer of a capital asset situate in India happens "in consequence of" something which has taken
place overseas (including transfer of a capital asset), then all income derived even indirectly from
such transfer, even though abroad, becomes taxable in India. That, even if control over HEL were
to get transferred in consequence of transfer of the CGP Share outside India, it would yet be
covered by Section 9.

70. We find no merit in the above submission of the Revenue. At the outset, we quote herein
below the following Sections of the Income Tax Act, 1961:

Scope of total income.

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

(a)is received or is deemed to be received in India in such year by or on behalf of such person; or

(b)accrues or arises or is deemed to accrue or arise to him in India during such year.

Income deemed to accrue or arise in India.

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

(i)all income accruing or arising, whether directly or indirectly, through or from any business
connection in India, or through or from any property in India, or through or from any asset or
source of income in India, or through the transfer of a capital asset situate in India.
71. Section 9(1)(i) gathers in one place various types of income and directs that income falling
under each of the sub-clauses shall be deemed to accrue or arise in India. Broadly there are four
items of income. The income dealt with in each sub-clause is distinct and independent of the other
and the requirements to bring income within each sub-clause, are separately noted. Hence, it is
not necessary that income falling in one category under any one of the sub-clauses should also

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satisfy the requirements of the other sub-clauses to bring it within the expression "income deemed
to accrue or arise in India" in Section 9(1)(i). In this case, we are concerned with the last sub-
clause of Section 9(1)(i) which refers to income arising from "transfer of a capital asset situate in
India". Thus, charge on capital gains arises on transfer of a capital asset situate in India during the
previous year. The said sub-clause consists of three elements, namely, transfer, existence of a
capital asset, and situation of such asset in India. All three elements should exist in order to make
the last sub-clause applicable. Therefore, if such a transfer does not exist in the previous year no
charge is attracted. Further, Section 45 enacts that such income shall be deemed to be the
income of the previous year in which transfer took place. Consequently, there is no room for doubt
that such transfer should exist during the previous year in order to attract the said sub-clause. The
fiction created by Section 9(1)(i) applies to the assessment of income of non-residents. In the case
of a resident, it is immaterial whether the place of accrual of income is within India or outside India,
since, in either event, he is liable to be charged to tax on such income. But, in the case of a non-
resident, unless the place of accrual of income is within India, he cannot be subjected to tax. In
other words, if any income accrues or arises to a non-resident, directly or indirectly, outside India
is fictionally deemed to accrue or arise in India if such income accrues or arises as a sequel to the
transfer of a capital asset situate in India. Once the factum of such transfer is established by the
Department, then the income of the non-resident arising or accruing from such transfer is made
liable to be taxed by reason of Section 5(2)(b) of the Act. This fiction comes into play only when
the income is not charged to tax on the basis of receipt in India, as receipt of income in India by
itself attracts tax whether the recipient is a resident or non-resident. This fiction is brought in by the
legislature to avoid any possible argument on the part of the non-resident vendor that profit
accrued or arose outside India by reason of the contract to sell having been executed outside
India. Thus, income accruing or arising to a non-resident outside India on transfer of a capital
asset situate in India is fictionally deemed to accrue or arise in India, which income is made liable
to be taxed by reason of Section 5(2)(b) of the Act. This is the main purpose behind enactment of
Section 9(1)(i) of the Act. We have to give effect to the language of the section when it is
unambiguous and admits of no doubt regarding its interpretation, particularly when a legal fiction is
embedded in that section. A legal fiction has a limited scope. A legal fiction cannot be expanded
by giving purposive interpretation particularly if the result of such interpretation is to transform the
concept of chargeability which is also there in Section 9(1)(i), particularly when one reads Section
9(1)(i) with Section 5(2)(b) of the Act. What is contended on behalf of the Revenue is that 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

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capital asset situate in India. This is one of the elements in the 4th sub-clause of Section 9(1)(i)
and if indirect transfer of a capital asset is read into Section 9(1)(i) then the words capital asset
situate in India would be rendered nugatory. Similarly, the words underlying asset do not find place
in Section 9(1)(i). Further, "transfer" should be of an asset in respect of which it is possible to
compute a capital gain in accordance with the provisions of the Act. Moreover, even Section
163(1)(c) is wide enough to cover the income whether received directly or indirectly. Thus, the
words directly or indirectly in Section 9(1)(i) go with the income and not with the transfer of a
capital asset (property). Lastly, it may be mentioned that the Direct Tax Code (DTC) Bill, 2010
proposes to tax income from transfer of shares of a foreign company by a non-resident, where at
any time during 12 months preceding the transfer, the fair market value of the assets in India,
owned directly or indirectly, by the company, represents at least 50% of the fair market value of all
assets owned by the company. Thus, the DTC Bill, 2010 proposes taxation of offshore share
transactions. This proposal indicates in a way that indirect transfers are not covered by the
existing Section 9(1)(i) of the Act. In fact, the DTC Bill, 2009 expressly stated that income accruing
even from indirect transfer of a capital asset situate in India would be deemed to accrue in India.
These proposals, therefore, show that in the existing Section 9(1)(i) the word indirect cannot be
read on the basis of purposive construction.

The question of providing "look through" in the statute or in the treaty is a matter of policy. It is to
be expressly provided for in the statute or in the treaty. Similarly, limitation of benefits has to be
expressly provided for in the treaty. Such clauses cannot be read into the Section by
interpretation. For the foregoing reasons, we hold that Section 9(1)(i) is not a "look through"
provision.

Transfer of HTIL's property rights by Extinguishment?

72. The primary argument advanced on behalf of the Revenue was that the SPA, commercially
construed, evidences a transfer of HTIL's property rights by their extinguishment. That, HTIL had,
under the SPA, directly extinguished its rights of control and management, which are property
rights, over HEL and its subsidiaries and, consequent upon such extinguishment, there was a
transfer of capital asset situated in India. In support, the following features of the SPA were
highlighted: (i) the right of HTIL to direct a downstream subsidiary as to the manner in which it
should vote. According to the Revenue, this right was a property right and not a contractual right. It
vested in HTIL as HTIL was a parent company, i.e., a 100% shareholder of the subsidiary; (ii)
According to the Revenue, the 2006 Shareholders/ Framework Agreements had to be continued
upon transfer of control of HEL to VIH so that VIH could step into the shoes of HTIL. According to
the Revenue, such continuance was ensured by payment of money to AS and AG by VIH failing
which AS and AG could have walked out of those agreements which would have jeopardized
VIH's control over 15% of the shares of HEL and, consequently, the stake of HTIL in TII would
have stood reduced to minority; (iii) Termination of IDFC Framework Agreement of 2006 and its
substitution by a fresh Framework Agreement dated 5.06.2007, as warranted by SPA; (iv)
Termination of Term Sheet Agreement dated 5.07.2003. According to the Revenue, that Term

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Sheet Agreement was given effect to by Clause 5.2 of the SPA which gave Essar the right to Tag
Along with HTIL and exit from HEL. That, by a specific Settlement Agreement dated 15.03.2007
between HTIL and Essar, the said Term Sheet Agreement dated 5.07.2003 stood terminated.
This, according to the Revenue, was necessary because the Term Sheet bound the parties; (v)
the SPA ignores legal entities interposed between HTIL and HEL enabling HTIL to directly
nominate the Directors on the Board of HEL; (vi) Qua management rights, even if the legal owners
of HEL's shares (Mauritius entities) could have been directed to vote by HTIL in a particular
manner or to nominate a person as a Director, such rights existed dehors the CGP share; (vii)
Vide Clause 6.2 of the SPA, HTIL was required to exercise voting rights in the specified situations
on the diktat of VIH ignoring the legal owner of CGP share [HTIHL (BVI)]. Thus, according to the
Revenue, HTIL ignored its subsidiaries and was exercising the voting rights qua the CGP and the
HEL shares directly, ignoring all the intermediate subsidiaries which are 100% held and which are
non-operational. According to the Revenue, extinguishment took place dehors the CGP share. It
took place by virtue of various clauses of SPA as HTIL itself disregarded the corporate structure it
had set up; (viii) As a holder of 100% shares of downstream subsidiaries, HTIL possessed de
facto control over such subsidiaries. Such de facto control was the subject matter of the SPA.

73. At the outset, we need to reiterate that in this case we are concerned with the sale of shares
and not with the sale of assets, item-wise. The facts of this case show sale of the entire
investment made by HTIL, through a Top company, viz. CGP, in the Hutchison Structure. In this
case we need to apply the "look at" test. In the impugned judgment, the High Court has rightly
observed that the arguments advanced on behalf of the Department vacillated. The reason for
such vacillation was adoption of "dissecting approach" by the Department in the course of its
arguments. Ramsay (supra) enunciated the look at test. According to that test, the task of the
Revenue is to ascertain the legal nature of the transaction and, while doing so, it has to look at the
entire transaction holistically and not to adopt a dissecting approach. One more aspect needs to
be reiterated. There is a conceptual difference between preordained transaction which is created
for tax avoidance purposes, on the one hand, and a transaction which evidences investment to
participate in India. In order to find out whether a given transaction evidences a preordained
transaction in the sense indicated above or investment to participate, one has to take into account
the factors enumerated hereinabove, namely, duration of time during which the holding structure
existed, the period of business operations in India, generation of taxable revenue in India during
the period of business operations in India, the timing of the exit, the continuity of business on such
exit, etc. Applying these tests to the facts of the present case, we find that the Hutchison structure
has been in place since 1994. It operated during the period 1994 to 11.02.2007. It has paid
income tax ranging from `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 avoidant. It cannot be said that HTIL or VIH was a "fly by night" operator/ short time

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investor. If one applies the look at test discussed hereinabove, without invoking the dissecting
approach, then, in our view, extinguishment took place because of the transfer of the CGP share
and not by virtue of various clauses of SPA. In a case like the present one, where the structure
has existed for a considerable length of time generating taxable revenues right from 1994 and
where the court is satisfied that the transaction satisfies all the parameters of "participation in
investment" then in such a case the court need not go into the questions such as de facto control
V. legal control, legal rights v. practical rights, etc.

74. Be that as it may, did HTIL possess a legal right to appoint directors onto the board of HEL
and as such had some "property right" in HEL? If not, the question of such a right getting
"extinguished" will not arise. A legal right is an enforceable right. Enforceable by a legal process.
The question is what is the nature of the "control" that a parent company has over its subsidiary. It
is not suggested that a parent company never has control over the subsidiary. For example, in a
proper case of "lifting of corporate veil", it would be proper to say that the parent company and the
subsidiary form one entity. But barring such cases, the legal position of any company incorporated
abroad is that its powers, functions and responsibilities are governed by the law of its
incorporation. No multinational company can operate in a foreign jurisdiction save by operating
independently as a "good local citizen". A company is a separate legal persona and the fact that
all its shares are owned by one person or by the parent company has nothing to do with its
separate legal existence. If the owned company is wound up, the liquidator, and not its parent
company, would get hold of the assets of the subsidiary. In none of the authorities have the assets
of the subsidiary been held to be those of the parent unless it is acting as an agent. Thus, even
though a subsidiary may normally comply with the request of a parent company it is not just a
puppet of the parent company. The difference is between having power or having a persuasive
position. Though it may be advantageous for parent and subsidiary companies to work as a group,
each subsidiary will look to see whether there are separate commercial interests which should be
guarded. When there is a parent company with subsidiaries, is it or is it not the law that the parent
company has the "power" over the subsidiary. It depends on the facts of each case. For instance,
take the case of a one-man company, where only one man is the shareholder perhaps holding
99% of the shares, his wife holding 1%. In those circumstances, his control over the company may
be so complete that it is his alter ego. But, in case of multinationals it is important to realize that
their subsidiaries have a great deal of autonomy in the country concerned except where
subsidiaries are created or used as a sham. of course, in many cases the courts do lift up a corner
of the veil but that does not mean that they alter the legal position between the companies. The
directors of the subsidiary under their Articles are the managers of the companies. If new directors
are appointed even at the request of the parent company and even if such directors were
removable by the parent company, such directors of the subsidiary will owe their duty to their
companies (subsidiaries). They are not to be dictated by the parent company if it is not in the
interests of those companies (subsidiaries). The fact that the parent company exercises
shareholder's influence on its subsidiaries cannot obliterate the decision-making power or
authority of its (subsidiary's) directors. They cannot be reduced to be puppets. The decisive

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criteria is whether the parent company's management has such steering interference with the
subsidiary's core activities that subsidiary can no longer be regarded to perform those activities on
the authority of its own executive directors.

75. Before dealing with the submissions advanced on behalf of the Revenue, we need to
appreciate the reason for execution of the SPA. Exit is an important right of an investor in every
strategic investment. The present case concerns transfer of investment in entirety. As stated
above, exit coupled with continuity of business is one of the important tell-tale circumstance which
indicates the commercial/business substance of the transaction. Thus, the need for SPA arose to
re-adjust the outstanding loans between the companies; to provide for standstill arrangements in
the interregnum between the date of signing of the SPA on 11.02.2007 and its completion on
8.05.2007; to provide for a seamless transfer and to provide for fundamental terms of price,
indemnities, warranties etc. As regards the right of HTIL to direct a downstream subsidiary as to
the manner in which it should vote is concerned, the legal position is well settled, namely, that
even though a subsidiary may normally comply with the request of a parent company, it is not just
a puppet of the parent company. The difference is between having the power and having a
persuasive position. A great deal depends on the facts of each case. Further, as stated above, a
company is a separate legal persona, and the fact that all the shares are owned by one person or
a company has nothing to do with the existence of a separate company. Therefore, though it may
be advantageous for a parent and subsidiary companies to work as a group, each subsidiary has
to protect its own separate commercial interests. In our view, on the facts and circumstances of
this case, the right of HTIL, if at all it is a right, to direct a downstream subsidiary as to the manner
in which it should vote would fall in the category of a persuasive position/influence rather than
having a power over the subsidiary. In this connection the following facts are relevant.

76. Under the Hutchison structure, the business was carried on by the Indian companies under the
control of their Board of Directors, though HTIL, as the Group holding company of a set of
companies, which controlled 42% plus 10% (pro rata) shares, did influence or was in a position to
persuade the working of such Board of Directors of the Indian companies. In this connection, we
need to have a relook at the ownership structure. It is not in dispute that 15% out of 67% stakes in
HEL was held by AS, AG and IDFC companies. That was one of the main reasons for entering
into separate Shareholders and Framework Agreements in 2006, when Hutchison structure
existed, with AS, AG and IDFC. HTIL was not a party to the agreements with AS and AG, though it
was a party to the agreement with IDFC. That, the ownership structure of Hutchison clearly shows
that AS, AG and SMMS (IDFC) group of companies, being Indian companies, possessed 15%
control in HEL. Similarly, the term sheet with Essar dated 5.07.2003 gave Essar the RoFR and
Right to Tag Along with HTIL and exit from HEL. Thus, if one keeps in mind the Hutchison
structure in its entirety, HTIL as a Group holding company could have only persuaded its
downstream companies to vote in a given manner as HTIL had no power nor authority under the
said structure to direct any of its downstream companies to vote in a manner as directed by it
(HTIL). Facts of this case show that both the parent and the subsidiary companies worked as a
group since 1994. That, as a practice, the subsidiaries did comply with the arrangement suggested

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by the Group holding company in the matter of voting, failing which the smooth working of HEL
generating huge revenues was not possible. In this case, we are concerned with the expression
"capital asset" in the income tax law. Applying the test of enforceability, influence/ persuasion
cannot be construed as a right in the legal sense. One more aspect needs to be highlighted. The
concept of "de facto" control, which existed in the Hutchison structure, conveys a state of being in
control without any legal right to such state. This aspect is important while construing the words
"capital asset" under the income tax law. As stated earlier, enforceability is an important aspect of
a legal right. Applying these tests, on the facts of this case and that too in the light of the
ownership structure of Hutchison, we hold that HTIL, as a Group holding company, had no legal
right to direct its downstream companies in the matter of voting, nomination of directors and
management rights. As regards continuance of the 2006 Shareholders/Framework Agreements by
SPA is concerned, one needs to keep in mind two relevant concepts, viz., participative and
protective rights. As stated, this is a case of HTIL exercising its exit right under the holding
structure and continuance of the telecom business operations in India by VIH by acquisition of
shares. In the Hutchison structure, exit was also provided for Essar, Centrino, NDC and SMMS
through exercise of Put Option/TARs, subject to sectoral cap being relaxed in future. These exit
rights in Essar, Centrino, NDC and SMMS (IDFC) indicate that these companies were
independent companies. Essar was a partner in HEL whereas Centrino, NDC and SMMS
controlled 15% of shares of HEL (minority). A minority investor has what is called as a
"participative" right, which is a subset of "protective rights". These participative rights, given to a
minority shareholder, enable the minority to overcome the presumption of consolidation of
operations or assets by the controlling shareholder. These participative rights in certain instances
restrict the powers of the shareholder with majority voting interest to control the operations or
assets of the investee. At the same time, even the minority is entitled to exit. This "exit right"
comes under "protective rights". On examination of the Hutchison structure in its entirety, we find
that both, participative and protective rights, were provided for in the Shareholders/ Framework
Agreements of 2006 in favor of Centrino, NDC and SMMS which enabled them to participate,
directly or indirectly, in the operations of HEL. Even without the execution of SPA, such rights
existed in the above agreements. Therefore, it would not be correct to say that such rights flowed
from the SPA. One more aspect needs to be mentioned. The Framework Agreements define
"change of control with respect to a shareholder" inter alias as substitution of limited or unlimited
liability company, whether directly or indirectly, to direct the policies/ management of the
respective shareholders, viz., Centrino, NDC, Omega. Thus, even without the SPA, upon
substitution of VIH in place of HTIL, on acquisition of CGP share, transition could have taken
place. It is important to note that "transition" is a wide concept. It is impossible for the acquirer to
visualize all events that may take place between the date of execution of the SPA and completion
of acquisition. Therefore, we have a provision for standstill in the SPA and so also the provision for
transition. But, from that, it does not follow that without SPA, transition could not ensue. Therefore,
in the SPA, we find provisions concerning Vendor's Obligations in relation to the conduct of
business of HEL between the date of execution of SPA and the closing date, protection of
investment during the said period, agreement not to amend, terminate, vary or waive any rights

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under the Framework/ Shareholders Agreements during the said period, provisions regarding
running of business during the said period, assignment of loans, consequence of imposition of
prohibition by way of injunction from any court, payment to be made by VIH to HTIL, giving of
warranties by the Vendor, use of Hutch Brand, etc. The next point raised by the Revenue
concerns termination of IDFC Framework Agreement of 2006 and its substitution by a fresh
Framework Agreement dated 5.06.2007 in terms of the SPA. The submission of the Revenue
before us was that the said Agreement dated 5.06.2007 (which is executed after the completion of
acquisition by VIH on 8.05.2007) was necessary to assign the benefits of the earlier agreements of
2006 to VIH. This is not correct. The shareholders of ITNL (renamed as Omega) were Array
through HTIL Mauritius and SMMS (an Indian company). The original investors through SMMS
(IDFC), an infrastructure holding company, held 54.21% of the share capital of Omega; that, under
the 2006 Framework Agreement, the original investors were given Put Option by GSPL [an Indian
company under Hutchison Teleservices (India) Holdings Limited (Ms)] requiring GSPL to buy the
equity share capital of SMMS; that on completion of acquisition on 8.05.2007 there was a change
in control of HTIL Mauritius which held 45.79% in Omega and that changes also took place on
5.06.2007 within the group of original investors with the exit of IDFC and SSKI. In view of the said
changes in the parties, a revised Framework Agreement was executed on 6.06.2007, which again
had call and put option. Under the said Agreement dated 6.06.2007, the Investors once again
agreed to grant call option to GSPL to buy the shares of SMMS and to enter into a Shareholders
Agreement to regulate the affairs of Omega. It is important to note that even in the fresh
agreement the call option remained with GSPL and that the said Agreement did not confer any
rights on VIH. One more aspect needs to be mentioned. The conferment of call options on GSPL
under the Framework Agreements of 2006 also had a linkage with intra-group loans. CGP was an
Investment vehicle. It is through the acquisition of CGP that VIH had indirectly acquired the rights
and obligations of GSPL in the Centrino and NDC Framework Agreements of 2006 [see the report
of KPMG dated 18.10.2010] and not through execution of the SPA. Lastly, as stated above, apart
from providing for "standstill", an SPA has to provide for transition and all possible future
eventualities. In the present case, the change in the investors, after completion of acquisition on
8.05.2007, under which SSKI and IDFC exited leaving behind IDF alone was a situation which was
required to be addressed by execution of a fresh Framework Agreement under which the call
option remained with GSPL. Therefore, the June, 2007 Agreements relied upon by the Revenue
merely reiterated the rights of GSPL which rights existed even in the Hutchison structure as it
stood in 2006. It was next contended that the 2003 Term Sheet with Essar was given effect to by
Clause 5.2 of the SPA which gave Essar the Right to Tag Along with HTIL and exit from HEL.
That, the Term Sheet of 5.07.2003 had legal effect because by a specific settlement dated
15.03.2007 between HTIL and Essar, the said Term Sheet stood terminated which was necessary
because the Term Sheet bound the parties in the first place. We find no merit in the above
arguments of the Revenue. The 2003 Term Sheet was between HTIL, Essar and UMTL. Disputes
arose between Essar and HTIL. Essar asserted RoFR rights when bids were received by HTIL,
which dispute ultimately came to be settled on 15.03.2007, that is after the SPA dated 11.02.2007.
The SPA did not create any rights. The RoFR/TARs existed in the Hutchison structure. Thus, even

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without SPA, within the Hutchison structure these rights existed. Moreover, the very object of the
SPA is to cover the situations which may arise during the transition and those which are capable
of being anticipated and dealt with. Essar had 33% stakes in HEL. As stated, the Hutchison
structure required the parent and the subsidiary to work together as a group. The said structure
required the Indian partners to be kept in the loop. Disputes on existence of RoFR/ TARs had to
be settled. They were settled on 15.03.2007. The rights and obligations created under the SPA
had to be preserved. In any event, preservation of such rights with a view to continue business in
India is not extinguishment.

77. For the above reasons, we hold that under the HTIL structure, as it existed in 1994, HTIL
occupied only a persuasive position/influence over the downstream companies qua manner of
voting, nomination of directors and management rights. That, the minority shareholders/investors
had participative and protective rights (including RoFR/TARs, call and put options which provided
for exit) which flowed from the CGP share. That, the entire investment was sold to the VIH through
the investment vehicle (CGP). Consequently, there was no extinguishment of rights as alleged by
the Revenue.

Role of CGP in the transaction

78. The main contention of the Revenue was that CGP stood inserted at a late stage in the
transaction in order to bring in a tax-free entity (or to create a transaction to avoid tax) and thereby
avoid capital gains. That, in December, 2006, HTIL explored the possibility of the sale of shares of
the Mauritius entities and found that such transaction would be taxable as HTIL under that
proposal had to be the prime mover behind any agreement with VIH - prime mover in the sense of
being both a seller of shares and the recipient of the sale proceeds there from. Consequently,
HTIL moved upwards in the Hutchison structure and devised an artificial tax avoidance scheme of
selling the CGP share when in fact what HTIL wanted was to sell its property rights in HEL. This,
according to the Revenue, was the reason for the CGP share being interposed in the transaction.
We find no merit in these arguments.

79. When a business gets big enough, it does two things. First, it reconfigures itself into a
corporate group by dividing itself into a multitude of commonly owned subsidiaries. Second, it
causes various entities in the said group to guarantee each other's debts. A typical large business
corporation consists of sub-incorporates. Such division is legal. It is recognized by company law,
laws of taxation, takeover codes etc. On top is a parent or a holding company. The parent is the
public face of the business. The parent is the only group member that normally discloses financial
results. Below the parent company are the subsidiaries which hold operational assets of the
business and which often have their own subordinate entities that can extend layers. If large firms
are not divided into subsidiaries, creditors would have to monitor the enterprise in its entirety.
Subsidiaries reduce the amount of information that creditors need to gather. Subsidiaries also
promote the benefits of specialization. Subsidiaries permit creditors to lend against only specified
divisions of the firm. These are the efficiencies inbuilt in a holding structure. Subsidiaries are often

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created for tax or regulatory reasons. They at times come into existence from mergers and
acquisitions. As group members, subsidiaries work together to make the same or complementary
goods and services and hence they are subject to the same market supply and demand
conditions. They are financially inter-linked. One such linkage is the intra-group loans and
guarantees. Parent entities own equity stakes in their subsidiaries. Consequently, on many
occasions, the parent suffers a loss whenever the rest of the group experiences a downturn. Such
grouping is based on the principle of internal correlation. Courts have evolved doctrines like
piercing the corporate veil, substance over form etc. enabling taxation of underlying assets in
cases of fraud, sham, tax avoidant, etc. However, genuine strategic tax planning is not ruled out.

80. CGP was incorporated in 1998 in Cayman Islands. It was in the Hutchison structure from
1998. The transaction in the present case was of divestment and, therefore, the transaction of sale
was structured at an appropriate tier, so that the buyer really acquired the same degree of control
as was hitherto exercised by HTIL. VIH agreed to acquire companies and the companies it
acquired controlled 67% interest in HEL. CGP was an investment vehicle. As stated above, it is
through the acquisition of CGP that VIH proposed to indirectly acquire the rights and obligations of
GSPL in the Centrino and NDC Framework Agreements. The report of Ernst & Young dated
11.02.2007 inter alias states that when they were asked to conduct due diligence by VIH, it was in
relation to Array and its subsidiaries. The said report evidences that at the negotiation stage,
parties had in mind the transfer of an upstream company rather than the transfer of HEL directly.
The transfer of Array had the advantage of transferring control over the entire shareholding held
by downstream Mauritius companies (tier I companies), other than GSPL. On the other hand, the
advantage of transferring the CGP share enabled VIH to indirectly acquire the rights and
obligations of GSPL (Indian company) in the Centrino and NDC Framework agreements. This was
the reason for VIH to go by the CGP route. One of the arguments of the Revenue before us was
that the Mauritius route was not available to HTIL for the reason indicated above. In this
connection, it was urged that the legal owner of HEL (Indian company) was not HTIL. Under the
transaction, HTIL alone was the seller of the shares. VIH wanted to enter into an agreement only
with HTIL so that if something goes wrong, VIH could look solely to HTIL being the group holding
company (parent company). Further, funds were pumped into HEL by HTIL. These funds were to
be received back in the shape of a capital gain which could then be used to declare a special
dividend to the shareholders of HTIL. We find no merit in this argument. Firstly, the tier I (Mauritius
companies) were the indirect subsidiaries of HTIL who could have influenced the former to sell the
shares of Indian companies in which event the gains would have arisen to the Mauritius
companies, who are not liable to pay capital gains tax under the Indo-Mauritius DTAA. That,
nothing prevented the Mauritius companies from declaring dividend on gains made on the sale of
shares. There is no tax on dividends in Mauritius. Thus, the Mauritius route was available but it
was not opted for because that route would not have brought in the control over GSPL. Secondly,
if the Mauritius companies had sold the shares of HEL, then the Mauritius companies would have
continued to be the subsidiaries of HTIL, their accounts would have been consolidated in the
hands of HTIL and HTIL would have accounted for the gains in exactly the same way as it has

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accounted for the gains in the hands of HTIHL (CI) which was the nominated payee. Thus, in our
view, two routes were available, namely, the CGP route and the Mauritius route. It was open to the
parties to opt for any one of the two routes. Thirdly, as stated above, in the present case, the SPA
was entered into inter alias for a smooth transition of business on divestment by HTIL. As stated,
transfer of the CGP share enabled VIH to indirectly acquire the rights and obligations of GSPL in
the Centrino and NDC Framework Agreements. Apart from the said rights and obligations under
the Framework Agreements, GSPL also had a call centre business. VIH intended to take over
from HTIL the telecom business. It had no intention to acquire the business of call centre.
Moreover, the FDI norms applicable to the telecom business in India were different and distinct
from the FDI norms applicable to the call centre business. Consequently, in order to avoid legal
and regulatory objections from Government of India, the call centre business stood hived off. In
our view, this step was an integral part of transition of business under SPA.

81. On the role of CGP in the transaction, two documents are required to be referred to. One is the
Report of the KPMG dated 18.10.2010 in which it is stated that through the acquisition of CGP,
VIH had indirectly acquired the rights and obligations of GSPL in the Centrino and NDC
Framework Agreements. That, the said two agreements were put in place with a view to provide
AG and AS with downside protection while preserving upside value in the growth of HEL. The
second document is the Annual Report 2007 of HTIL. Under the caption "Overview", the Report
observes that on 11.02.2007, HTIL entered into an agreement to sell its entire interests in CGP, a
company which held through various subsidiaries, the direct and indirect equity and loan interests
in HEL (renamed VEL) and its subsidiaries to VIH for a cash consideration of HK $86.6 bn. As a
result of the said Transaction, the net debt of the Group which stood at HK $37,369 mn as on
31.12.2006 became a net cash balance of HK $25,591 mn as on 31.12.2007. This supports the
fact that the sole purpose of CGP was not only to hold shares in subsidiary companies but also to
enable a smooth transition of business, which is the basis of the SPA. Therefore, it cannot be said
that the intervened entity (CGP) had no business or commercial purpose.

82. Before concluding, one more aspect needs to be addressed. It concerns sites of the CGP
share. According to the Revenue, under the Companies Law of Cayman Islands, an exempted
company was not entitled to conduct business in the Cayman Islands. CGP was an "exempted
company". According to the Revenue, since CGP was a mere holding company and since it could
not conduct business in Cayman Islands, the sites of the CGP share existed where the "underlying
assets are situated", that is to say, India. That, since CGP as an exempted company conducts no
business either in the Cayman Islands or elsewhere and since its sole purpose is to hold shares in
a subsidiary company situated outside the Cayman Islands, the sites of the CGP share, in the
present case, existed "where the underlying assets stood situated" (India). We find no merit in
these arguments. At the outset, we do not wish to pronounce authoritatively on the Companies
Law of Cayman Islands. Be that as it may, under the Indian Companies Act, 1956, the sites of the
shares would be where the company is incorporated and where its shares can be transferred. In
the present case, it has been asserted by VIH that the transfer of the CGP share was recorded in
the Cayman Islands, where the register of members of the CGP is maintained. This assertion has

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neither been rebutted in the impugned order of the Department dated 31.05.2010 nor traversed in
the pleadings filed by the Revenue nor controverted before us. In the circumstances, we are not
inclined to accept the arguments of the Revenue that the sites of the CGP share was situated in
the place (India) where the underlying assets stood situated.

Did VIH acquire 67% controlling interest in HEL (and not 42%/ 52% as sought to be propounded)?

83. According to the Revenue, the entire case of VIH was that it had acquired only 42% (or,
accounting for FIPB Regulations, 52%) is belied by Clause 5.2 of the Shareholders Agreement. In
this connection, it was urged that 15% in HEL was held by AS/ AG/ IDFC because of the FDI cap
of 74% and, consequently, vide Clause 5.2 of the Shareholders Agreement between these entities
and HTIL downstream subsidiaries, AS/AG/IDFC were all reigned in by having to vote only in
accordance with HTIL's dictates as HTIL had funded the purchase by these gentlemen of the HEL
shares through financing of loans. Further, in the Term Sheet dated 15.03.2007, that is, between
VIH and Essar, VIH had a right to nominate 8 directors (i.e. 67% of 12) and Essar had a right to
nominate 4 directors which, according to the Revenue, evidences that VIH had acquired 67%
interest in HEL and not 42%/52%, as sought to be propounded by it. According to the Revenue,
right from 22.12.2006 onwards when HTIL made its first public announcement, HTIL on
innumerable occasions represented its direct and indirect "equity interest" in HEL to be 67% - the
direct interest being 42.34% and indirect interest in the sense of shareholding belonging to Indian
partners under its control, as 25%. Further, according to the Revenue, the purchase price paid by
VIH was based on an enterprise value of 67% of the share capital of HEL; this would never have
been so if VIH was to buy only 42.34% of the share capital of HEL and that nobody would pay US
$2.5 bn extra without control over 25% in HEL. We find no merit in the above submissions. At the
outset, it may be stated that the expression "control" is a mixed question of law and fact. The basic
argument of the Revenue is based on the equation of "equity interest" with the word "control". On
perusal of Hutchison structure, we find that HTIL had, through its 100% wholly owned subsidiaries,
invested in 42.34% of HEL (i.e. direct interest). Similarly, HTIL had invested through its non-100%
wholly owned subsidiaries in 9.62% of HEL (through the pro rata route). Thus, in the sense of
shareholding, one can say that HTIL had an effective shareholding (direct and indirect interest) of
51.96% (approx. 52%) in HEL. On the basis of the shareholding test, HTIL could be said to have a
52% control over HEL. By the same test, it could be equally said that the balance 15% stakes in
HEL remained with AS, AG and IDFC (Indian partners) who had through their respective group
companies invested 15% in HEL through TII and Omega and, consequently, HTIL had no control
over 15% stakes in HEL. At this stage, we may state that under the Hutchison structure shares of
Plustech in the AG Group, shares of Scorpios in the AS Group and shares of SMMS came under
the options held by GSPL. Pending exercise, options are not management rights. At the highest,
options could be treated as potential shares and till exercised they cannot provide right to vote or
management or control. In the present case, till date GSPL has not exercised its rights under the
Framework Agreement 2006 because of the sectoral cap of 74% which in turn restricts the right to
vote. Therefore, the transaction in the present case provides for a triggering event, viz. relaxation
of the sectoral cap. Till such date, HTIL/VIH cannot be said to have a control over 15% stakes in

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HEL. It is for this reason that even FIPB gave its approval to the transaction by saying that VIH
was acquiring or has acquired effective shareholding of 51.96% in HEL.

84. As regards the Term Sheet dated 15.03.2007, it may be stated that the said Term Sheet was
entered into between VIH and Essar. It was executed after 11.02.2007 when SPA was executed.
In the Term Sheet, it has been recited that the parties have agreed to enter into the Term Sheet in
order to regulate the affairs of HEL and in order to regulate the relationship of shareholders of
HEL. It is also stated in the Term Sheet that VIH and Essar shall have to nominate directors on the
Board of Directors of HEL in proportion to the aggregate beneficial shareholding held by members
of the respective groups. That, initially VIH shall be entitled to nominate 8 directors and Essar shall
be entitled to nominate 4 directors out of a total Board of Directors of HEL (numbering 12). We
must understand the background of this Term Sheet. Firstly, as stated the Term Sheet was
entered into in order to regulate the affairs of HEL and to regulate the relationship of the
shareholders of HEL. It was necessary to enter into such an agreement for smooth running of the
business post acquisition. Secondly, we find from the letter addressed by HEL to FIPB dated
14.03.2007 that Articles of Association of HEL did not grant any specific person or entity a right to
appoint directors. The said directors were appointed by the shareholders of HEL in accordance
with the provisions of the Indian Company Law. The letter further states that in practice the
directors were appointed pro rata to their respective shareholdings which resulted in 4 directors
being appointed from Essar group, 6 directors being appointed by HTIL and 2 directors were
appointed by TII. One such director was AS, the other director was AG. This was the practice even
before the Term Sheet. The Term Sheet continues this practice by guaranteeing or assuring Essar
that 4 directors would be appointed from its Group. The above facts indicate that the object of the
SPA was to continue the "practice" concerning nomination of directors on the Board of Directors of
HEL which in law is different from a right or power to control and manage and which practice was
given to keep the business going, post acquisition. Under the Company Law, the management
control vests in the Board of Directors and not with the shareholders of the company. Therefore,
neither from Clause 5.2 of the Shareholders Agreement nor from the Term Sheet dated
15.03.2007, one could say that VIH had acquired 67% controlling interest in HEL.

85. As regards the question as to why VIH should pay consideration to HTIL based on an
enterprise value of 67% of the share capital of HEL is concerned, it is important to note that
valuation cannot be the basis of taxation. The basis of taxation is profits or income or receipt. In
this case, we are not concerned with tax on income/ profit arising from business operations but
with tax on transfer of rights (capital asset) and gains arising there from. In the latter case, we
have to see the conditions on which the tax becomes payable under the Income Tax Act.
Valuation may be a science, not law. In valuation, to arrive at the value one has to take into
consideration the business realities, like the business model, the duration of its operations,
concepts such as cash flow, the discounting factors, assets and liabilities, intangibles, etc. In the
present case, VIH paid US $11.08 bn for 67% of the enterprise value of HEL plus its downstream
companies having operational licenses. It bought an upstream company with the intention that
rights flowing from the CGP share would enable it to gain control over the cluster of Indian

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operations or operating companies which owned telecom licenses, business assets, etc. VIH
agreed to acquire companies which in turn controlled a 67% interest in HEL and its subsidiaries.
Valuation is a matter of opinion. When the entire business or investment is sold, for valuation
purposes, one may take into account the economic interest or realities. Risks as a discounting
factor are also to be taken into consideration apart from loans, receivables, options, RoFR/ TAR,
etc. In this case, Enterprise Value is made up of two parts, namely, the value of HEL, the value of
CGP and the companies between CGP and HEL. In the present case, the Revenue cannot invoke
Section 9 of the Income Tax Act on the value of the underlying asset or consequence of acquiring
a share of CGP. In the present case, the Valuation done was on the basis of enterprise value. The
price paid as a percentage of the enterprise value had to be 67% not because the figure of 67%
was available in present to VIH, but on account of the fact that the competing Indian bidders would
have had de facto access to the entire 67%, as they were not subject to the limitation of sectoral
cap, and, therefore, would have immediately encashed the call options. The question still remains
as to from where did this figure/ expression of 67% of equity interest come? The expression
"equity interest" came from US GAAP. In this connection, we have examined the Notes to the
Accounts annexed to the Annual Report 2006 of HTIL. According to Note 1, the ordinary shares of
HTIL stood listed on the Hong Kong Stock Exchange as well as on the New York Stock Exchange.
In Note No. 36, a list of principal subsidiaries of HTIL as on 31.12.2006 has been attached. This
list shows the names of HEL (India) and some of its subsidiaries. In the said Annual Report, there
is an annexure to the said Notes to the Accounts under the caption "Information for US Investors".
It refers to Variable Interest Entities (VIEs). According to the Annual Report, the Vodafone Group
consisting of HTIL and its subsidiaries conducted its operations inter alias in India through entities
in which HTIL did not have the voting control. Since HTIL was listed on New York Stock
Exchange, it had to follow for accounting and disclosure the rules prescribed by US GAAP. Now,
in the present case, HTIL as a listed company was required to make disclosures of potential risk
involved in the investment under the Hutchison structure. HTIL had furnished Letters of Credit to
Rabo Bank which in turn had funded AS and AG, who in turn had agreed to place the shares of
Plustech and Scorpios under Options held by GSPL. Thus, giving of the Letters of Credit and
placing the shares of Plustech and Scorpios under Options were required to be disclosed to the
US investors under the US GAAP, unlike Indian GAAP. Thus, the difference between the 52%
figure (control) and 67% (equity interest) arose on account of the difference in computation under
the Indian and US GAAP.

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

86. Applying the "nature and character of the transaction" test, the High Court came to the
conclusion that the transfer of the CGP share was not adequate in itself to achieve the object of
consummating the transaction between HTIL and VIH. That, intrinsic to the transaction was a
transfer of other "rights and entitlements" which rights and entitlements constituted in themselves
"capital assets" within the meaning of Section 2(14) of the Income Tax Act, 1961. According to the
High Court, VIH acquired the CGP share with other rights and entitlements whereas, according to
the Appellant, whatever VIH obtained was through the CGP share (for short "High Court

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Approach").

87. At the outset, it needs to be mentioned that the Revenue has adopted the abovementioned
High Court Approach as an alternative contention.

88. We have to view the subject matter of the transaction, in this case, from a commercial and
realistic perspective. The present case concerns an offshore transaction involving a structured
investment. This case concerns "a share sale" and not an asset sale. It concerns sale of an entire
investment. A "sale" may take various forms. Accordingly, tax consequences will vary. The tax
consequences of a share sale would be different from the tax consequences of an asset sale. A
slump sale would involve tax consequences which could be different from the tax consequences of
sale of assets on itemized basis. "Control" is a mixed question of law and fact. Ownership of
shares may, in certain situations, result in the assumption of an interest which has the character of
a controlling interest in the management of the company. A controlling interest is an incident of
ownership of shares in a company, something which flows out of the holding of shares. A
controlling interest is, therefore, not an identifiable or distinct capital asset independent of the
holding of shares. The control of a company resides in the voting power of its shareholders and
shares represent an interest of a shareholder which is made up of various rights contained in the
contract embedded in the Articles of Association. The right of a shareholder may assume the
character of a controlling interest where the extent of the shareholding enables the shareholder to
control the management. Shares, and the rights which emanate from them, flow together and
cannot be dissected. In the felicitous phrase of Lord MacMillan in IRC v. Crossman (1936) 1 All
ER 762, shares in a company consist of a "congeries of rights and liabilities" which are a creature
of the Companies Acts and the Memorandum and Articles of Association of the company. Thus,
control and management is a facet of the holding of shares. Applying the above principles
governing shares and the rights of the shareholders to the facts of this case, we find that this case
concerns a straightforward share sale. VIH acquired Upstream shares with the intention that the
congeries of rights, flowing from the CGP share, would give VIH an indirect control over the three
genres of companies. If one looks at the chart indicating the Ownership Structure, one finds that
the acquisition of the CGP share gave VIH an indirect control over the tier I Mauritius companies
which owned shares in HEL totaling to 42.34%; CGP India (Ms), which in turn held shares in TII
and Omega and which on a pro rata basis (the FDI principle), totaled up to 9.62% in HEL and an
indirect control over Hutchison Tele-Services (India) Holdings Ltd. (Ms), which in turn owned
shares in GSPL, which held call and put options. Although the High Court has analyzed the
transactional documents in detail, it has missed out this aspect of the case. It has failed to notice
that till date options have remained un-encashed with GSPL. Therefore, even if it be assumed that
the options under the Framework Agreements 2006 could be considered to be property rights,
there has been no transfer or assignment of options by GSPL till today. Even if it be assumed that
the High Court was right in holding that the options constituted capital assets even then Section
9(1)(i) was not applicable as these options have not been transferred till date. Call and put options
were not transferred vide SPA dated 11.02.2007 or under any other document whatsoever.
Moreover, if, on principle, the High Court accepts that the transfer of the CGP share did not lead to

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the transfer of a capital asset in India, even if it resulted in a transfer of indirect control over
42.34% (52%) of shares in HEL, then surely the transfer of indirect control over GSPL which held
options (contractual rights), would not make the transfer of the CGP share taxable in India.
Acquisition of the CGP share which gave VIH an indirect control over three genres of companies
evidences a straightforward share sale and not an asset sale. There is another fallacy in the
impugned judgment. On examination of the impugned judgment, we find a serious error committed
by the High Court in appreciating the case of VIH before FIPB. On 19.03.2007, FIPB sought a
clarification from VIH of the circumstances in which VIH agreed to pay US$ 11.08 bn for acquiring
67% of HEL when actual acquisition was of 51.96%. In its response dated 19.03.2007, VIH stated
that it had agreed to acquire from HTIL for US$ 11.08 bn, interest in HEL which included a 52%
equity shareholding. According to VIH, the price also included a control premium, use of Hutch
brand in India, a non-compete agreement, loan obligations and an entitlement to acquire, subject
to the Indian FDI rules, a further 15% indirect interest in HEL. According to the said letter, the
above elements together equated to 67% of the economic value of HEL. This sentence has been
misconstrued by the High Court to say that the above elements equated to 67% of the equity
capital (See para 124). 67% of the economic value of HEL is not 67% of the equity capital. If VIH
would have acquired 67% of the equity capital, as held by the High Court, the entire investment
would have had breached the FDI norms which had imposed a sectoral cap of 74%. In this
connection, it may further be stated that Essar had 33% stakes in HEL out of which 22% was held
by Essar Mauritius. Thus, VIH did not acquire 67% of the equity capital of HEL, as held by the
High Court. This problem has arisen also because of the reason that this case deals with share
sale and not asset sale. This case does not involve sale of assets on itemized basis. The High
Court ought to have applied the look at test in which the entire Hutchison structure, as it existed,
ought to have been looked at holistically. This case concerns investment into India by a holding
company (parent company), HTIL through a maze of subsidiaries. When one applies the "nature
and character of the transaction test", confusion arises if a dissecting approach of examining each
individual asset is adopted. As stated, CGP was treated in the Hutchison structure as an
investment vehicle. As a general rule, in a case where a transaction involves transfer of shares
lock, stock and barrel, such a transaction cannot be broken up into separate individual
components, assets or rights such as right to vote, right to participate in company meetings,
management rights, controlling rights, control premium, brand licenses and so on as shares
constitute a bundle of rights. [See Charanjit Lal v. Union of India MANU/SC/0009/1950 : AIR
1951 SC 41, Venkatesh (minor) v. CIT MANU/TN/0417/1999 : 243 ITR 367 (Mad) and Smt.
Maharani Ushadevi v. CIT MANU/MP/0122/1981 : 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 licenses etc. On facts,
we are of the view that the High Court, in the present case, ought to have examined the entire
transaction holistically. VIH has rightly contended that the transaction in question should be looked
at as an entire package. The items mentioned hereinabove, like, control premium, non-compete
agreement, consultancy support, customer base, brand licenses, operating licenses etc. were all
an integral part of the Holding Subsidiary Structure which existed for almost 13 years, generating

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huge revenues, as indicated above. Merely because at the time of exit capital gains tax becomes
not payable or eligible to tax would not make the entire "share sale" (investment) a sham or a tax
avoidant. The High Court has failed to appreciate that the payment of US$ 11.08 bn was for
purchase of the entire investment made by HTIL in India. The payment was for the entire package.
The parties to the transaction have not agreed upon a separate price for the CGP share and for
what the High Court calls as "other rights and entitlements" (including options, right to non-
compete, control premium, customer base etc.). Thus, it was not open to the Revenue to split the
payment and consider a part of such payments for each of the above items. The essential
character of the transaction as an alienation cannot be altered by the form of the consideration,
the payment of the consideration in installments or on the basis that the payment is related to a
contingency ('options', in this case), particularly when the transaction does not contemplate such a
split up. Where the parties have agreed for a lump sum consideration without placing separate
values for each of the above items which go to make up the entire investment in participation,
merely because certain values are indicated in the correspondence with FIPB which had raised
the query, would not mean that the parties had agreed for the price payable for each of the above
items. The transaction remained a contract of outright sale of the entire investment for a lump sum
consideration [see: Commentary on Model Tax Convention on Income and Capital dated
28.01.2003 as also the judgment of this Court in the case of CIT (Central), Calcutta v.
Mugneeram Bangur and Company (Land Deptt.), MANU/SC/0162/1965 : (1965) 57 ITR 299
(SC)]. Thus, we need to "look at" the entire Ownership Structure set up by Hutchison as a single
consolidated bargain and interpret the transactional documents, while examining the Offshore
Transaction of the nature involved in this case, in that light.

Scope and applicability of Sections 195 and 163 of Income Tax Act

89. Section 195 casts an obligation on the payer to deduct tax at source ("TAS" for short) from
payments made to non-residents which payments are chargeable to tax. Such payment(s) must
have an element of income embedded in it which is chargeable to tax in India. If the sum paid or
credited by the payer is not chargeable to tax then no obligation to deduct the tax would arise.
Shareholding in companies incorporated outside India (CGP) is property located outside India.
Where such shares become subject matter of offshore transfer between two non-residents, there
is no liability for capital gains tax. In such a case, question of deduction of TAS would not arise. If
in law the responsibility for payment is on a non-resident, the fact that the payment was made,
under the instructions of the non-resident, to its Agent/Nominee in India or its PE/Branch Office will
not absolve the payer of his liability 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 there from the TAS
unless such payer is himself liable to pay income-tax thereon as an Agent of the payee. Section
201 says that if such person fails to so deduct TAS he shall be deemed to be an Assessee-in-
default in respect of the deductible amount of tax (Section 201). Liability to deduct tax is different
from "assessment" under the Act. Thus, the person on whom the obligation to deduct TAS is cast
is not the person who has earned the income. Assessment has to be done after liability to deduct
TAS has arisen. The object of Section 195 is to ensure that tax due from non-resident persons is

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secured at the earliest point of time so that there is no difficulty in collection of tax subsequently at
the time of regular assessment. The present case concerns the transaction of "outright sale"
between two non-residents of a capital asset (share) outside India. Further, the said transaction
was entered into on principal to principal basis. Therefore, no liability to deduct TAS arose.
Further, in the case of transfer of the Structure in its entirety, one has to look at it holistically as
one Single Consolidated Bargain which took place between two foreign companies outside India
for which a lump sum price was paid of US$ 11.08 bn. Under the transaction, there was no split up
of payment of US$ 11.08 bn. It is the Revenue which has split the consolidated payment and it is
the Revenue which wants to assign a value to the rights to control premium, right to non-compete,
right to consultancy support etc. For FDI purposes, the FIPB had asked VIH for the basis of fixing
the price of US$ 11.08 bn. But here also, there was no split up of lump sum payment, asset-wise
as claimed by the Revenue. There was no assignment of price for each right, considered by the
Revenue to be a "capital asset" in the transaction. In the absence of PE, profits were not
attributable to Indian operations. Moreover, tax presence has to be viewed in the context of the
transaction that is subjected to tax and not with reference to an entirely unrelated matter. The
investment made by Vodafone Group companies in Bharti did not make all entities of that Group
subject to the Indian Income Tax Act, 1961 and the jurisdiction of the tax authorities. Tax presence
must be construed in the context, and in a manner that brings the non-resident Assessee under
the jurisdiction of the Indian tax authorities. Lastly, in the present case, the Revenue has failed to
establish any connection with Section 9(1)(i). Under the circumstances, Section 195 is not
applicable. Alternatively, the Revenue contended before us that VIH can be proceeded against as
"representative Assessee" 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 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

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Assessee. For the reasons given above, there is no necessity of examining the written
submissions advanced on behalf of VIH by Dr. Abhishek Manu Singhvi on Sections 191 and 201.

Summary of Findings

90. Applying the look at test in order to ascertain the true nature and character of the transaction,
we hold, that the Offshore Transaction herein is a bonafide structured FDI investment into India
which fell outside India's territorial tax jurisdiction, hence not taxable. The said Offshore
Transaction evidences participative investment and not a sham or tax avoidant preordained
transaction. The said Offshore Transaction was between HTIL (a Cayman Islands company) and
VIH (a company incorporated in Netherlands). The subject matter of the Transaction was the
transfer of the CGP (a company incorporated in Cayman Islands). Consequently, the Indian Tax
Authority had no territorial tax jurisdiction to tax the said Offshore Transaction.

Conclusion

91. FDI flows towards location with a strong governance infrastructure which includes enactment
of laws and how well the legal system works. Certainty is integral to rule of law. Certainty and
stability form the basic foundation of any fiscal system. Tax policy certainty is crucial for taxpayers
(including foreign investors) to make rational economic choices in the most efficient manner. Legal
doctrines like "Limitation of Benefits" and "look through" are matters of policy. It is for the
Government of the day to have them incorporated in the Treaties and in the laws so as to avoid
conflicting views. Investors should know where they stand. It also helps the tax administration in
enforcing the provisions of the taxing laws. As stated above, the Hutchison structure has existed
since 1994. According to the details submitted on behalf of the Appellant, we find that from 2002-
03 to 2010-11 the Group has contributed an amount of `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 the date of payment.
The Registry is directed to return the Bank Guarantee given by the Appellant within four weeks.

K.S. Panicker Radhakrishnan, J.

93. The question involved in this case is of considerable public importance, especially on Foreign
Direct Investment (FDI), which is indispensable for a growing economy like India. Foreign

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investments in India are generally routed through Offshore Finance Centers (OFC) also through
the countries with whom India has entered into treaties. Overseas investments in Joint Ventures
(JV) and Wholly Owned Subsidiaries (WOS) have been recognized as important avenues of global
business in India. Potential users of off-shore finance are: international companies, individuals,
investors and Ors. and capital flows through FDI, Portfolio Debt Investment and Foreign Portfolio
Equity Investment and so on. Demand for off-shore facilities has considerably increased owing to
high growth rates of cross-border investments and a number of rich global investors have come
forward to use high technology and communication infrastructures. Removal of barriers to cross-
border trade, the liberalization of financial markets and new communication technologies have had
positive effects on global economic growth and India has also been greatly benefited.

94. Several international organizations like UN, FATF, OECD, Council of Europe and the
European Union offer finance, one way or the other, for setting up companies all over the world.
Many countries have entered into treaties with several offshore companies for cross-border
investments for mutual benefits. India has also entered into treaties with several countries for
bilateral trade which has been statutorily recognized in this country. United Nations Conference on
Trade and Development (UNCTAD) Report on World Investment prospects survey 2009-11 states
that India would continue to remain among the top five attractive destinations for foreign investors
during the next two years.

95. Merger, Amalgamation, Acquisition, Joint Venture, Takeovers and Slump-sale of assets are
few methods of cross-border re-organizations. Under the FDI Scheme, investment can be made
by availing the benefit of treaties, or through tax havens by non-residents in the share/convertible
debentures/ preference shares of an Indian company but the question which looms large is
whether our Company Law, Tax Laws and Regulatory Laws have been updated so that there can
be greater scrutiny of non-resident enterprises, ranging from foreign contractors and service
providers, to finance investors. Case in hand is an eye-opener of what we lack in our regulatory
laws and what measures we have to take to meet the various unprecedented situations, that too
without sacrificing national interest. Certainty in law in dealing with such cross-border investment
issues is of prime importance, which has been felt by many countries around the world and some
have taken adequate regulatory measures so that investors can arrange their affairs fruitfully and
effectively. Steps taken by various countries to meet such situations may also guide us, a brief
reference of which is being made in the later part of this judgment.

96. We are, in the present case, concerned with a matter relating to cross-border investment and
the legal issues emanate from that. Facts have been elaborately dealt with by the High Court in
the impugned judgment and also in the leading judgment of Lord Chief Justice, but reference to
few facts is necessary to address and answer the core issues raised. On all major issues, I fully
concur with the views expressed by the Lord Chief Justice in his erudite and scholarly judgment.

97. Part-I of this judgment deals with the facts, Part-II deals with the general principles, Part-III
deals with Indo-Mauritian Treaty, judgments in Union of India v. Azadi Bachao Andolan and

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Anr. MANU/SC/1219/2003 : (2004) 10 SCC 1 and McDowell and Company Limited v.
Commercial Tax Officer MANU/SC/0154/1985 : (1985) 3 SCC 230, Part-IV deals with CGP
Interposition, sites etc, Part-V deals with controlling interest of HTIL/Vodafone and other rights and
entitlements, Part-VI deals with the scope of Section 9, Part-VII deals with Section 195 and other
allied provisions and Part-VIII is the conclusions.

Part - I

98. Hutchison Whampoa is a multi-sectional, multi-jurisdictional entity which consolidates on a

group basis telecom operations in various countries. Hutchison Group of Companies (Hong Kong)
had acquired interest in the Indian telecom business in the year 1992, when the group invested in
Hutchison Max Telecom Limited (HTML) (later known a Hutchison Essar Limited (HEL), which
acquired a cellular license in Mumbai circle in the year 1994 and commenced its operation in the
year 1995. Hutchison Group, with the commercial purpose of consolidating its interest in various
countries, incorporated CGP Investments Holding Limited (for short "CGP") in Cayman Islands as
a WOS on 12.01.1998 as an Exempted Company for offshore investments. CGP held shares in
two subsidiary companies, namely Array Holdings Limited (for short Array) and Hutchison
Teleservices (India) Holding Ltd. [for short HTIH(M)] both incorporated in Mauritius. CGP(India)
Investment (for short CGPM) was incorporated in Mauritius in December 1997 for the purpose of
investing in Telecom Investment (India) Pvt. Limited (for short TII), an Indian Company. CGPM
acquired interests in four Mauritian Companies and entered into a Shareholders' Agreement
(SHA) on 02.05.2000 with Essar Teleholdings Limited (ETH), CGPM, Mobilvest, CCII (Mauritius)
Inc. and few others, to regulate shareholders' right inter se. Agreement highlighted the share
holding pattern of each composition of Board of Directors, quorum, restriction on transfer of
ownership of shares, Right of First Refusal (ROFR), Tag Along Rights (TARs) etc.

99. HTIL, a part of Hutchison Whampoa Group, incorporated in Cayman Islands in the year 2004
was listed in Hong Kong (HK) and New York (NY) Stock Exchanges. In the year 2005, as
contemplated in the Term Sheet Agreement dated 05.07.2003, HTIL consolidated its Indian
business operations through six companies in a single holding company HMTL, later renamed as
Hutchison Essar Ltd. (HEL). On 03.11.2005, Press Note 5 of 2005 series was issued by the
Government of India enhancing the FDI ceiling from 49% to 74% in the Telecom Sector. On
28.10.2005, Vodafone International Holding BV (VIHBV) (Netherlands) had agreed to acquire
5.61% of shareholding in Bharati Tele Ventures Limited (Bharati Airtel Limited) and on the same
day Vodafone Mauritius Limited (Subsidiary of VIHBV) had agreed to acquire 4.39% shareholding
in Bharati Enterprises Pvt. Ltd. (renamed Bharati Infotel Ltd.), which indirectly held shares in
Bharati Airtel Ltd.

100. HEL shareholding was then restructured through TII and an SHA was executed on
01.03.2006 between Centrino Trading Company Pvt. Ltd. (Centrino), an Asim Ghosh (Group) [for
short (AG)], ND Callus Info Services Pvt. Ltd. (for short NDC), an Analjit Singh (Group) [for short
(AS)], Telecom Investment India Pvt. Ltd. [for short (TII)], and CGP India (M). Further, two

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Framework Agreements (FWAs) were also entered into with respect to the restructuring. Credit
facilities were given to the companies controlled by AG and AS. FWAs called, Centrino FWA and
N.D. FWA were executed on 01.03.2006. HTIL stood as a guarantor for Centrino, for an amount of
` 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.

101. Following the credit support given by HTIL to AG and AS so as to enable them to acquire
shares in TII, parties entered into separate agreements with 3 Global Services Pvt. Ltd. (India) [for
short 3GSPL], a WOS of HTIL. FWAs also contained call option in favor of 3GSPL, a right to
purchase from Gold Spot (an AG company) and Scorpios (an AS company) their entire
shareholding in TII held through Plustech (an AG company) and MVH (an AS company)
respectively. Subscription right was also provided allowing 3GSPL a right to subscribe 97.5% and
97% of the equity share capital respectively at a pre-determined rate equal to the face value of the
shares of Centrino and NDC respectively exercisable within a period of 10 years from the date of
the agreements. Agreements also restricted AG companies and AS companies from transferring
any downstream interests leading to the shareholding in TII.

102. HEL shareholding again underwent change with Hinduja Group exiting and its shareholding
being acquired by an Indian company called SMMS Investments Private Limited (SMMS). SMMS
was also a joint venture company formed by India Development Fund (IDF) acting through IDFC
Private Equity Company (IDFCPE), Infrastructure Development Finance Company Limited (IDFC)
and SSKI Corporate Finance Pvt. Ltd. (SSKI) all the three companies were incorporated in India.
Pursuant thereto, a FWA was entered into on 07.08.2006 between IDF (through IDFCPE), IDFC,
SSKI, SMMS, HTIL (M), 3GSPL, Indus Ind Telecom Holding Pvt. Ltd. (ITNL) (later named as
Omega Telecom Holding Pvt. Ltd. (Omega) and HTIL. 3GSPL, by that Agreement, had a call
option and a right to purchase the entire equity shares of SMMS at a pre-determined price equal to
` 661,250,000 plus 15% compound interest. A SHA was also entered into on 17.08.2006 by
SMMS, HTIL (M), HTIL(CI) and ITNL to regulate affairs of ITNL. Agreement referred to the
presence of at least one of the directors nominated by HTIL in the Board of Directors of Omega.
HTIL was only a confirming party to this Agreement since it was the parent company.

103. HTIL issued a press release on 22.12.2006 in the HK and NY Stock Exchanges announcing
that it had been approached by various potentially interested parties regarding a possible sale of
"its equity interest" in HEL in the Telecom Sector in India. HTIL had adopted those measures after
procuring all assignments of loans, facilitating FWAs, SHAs, transferring Hutch Branch,
transferring Oracle License

104. Vodafone Group Plc. came to know of the possible exit of Hutch from Indian telecom
business and on behalf of Vodafone Group made a non-binding offer on 22.12.06, for a sum of
US$ 11.055 million in cash for HTIL's shareholdings in HEL. The offer was valued at an
"enterprise value" of US$ 16.5 billion. Vodafone then appointed on 02.01.2007 Ernst and Young
LLP to conduct due diligence, and a Non-Disclosure (Confidentiality) Agreement dated 02.01.2007

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was entered into between HTIL and Vodafone. On 09.02.2007 Vodafone Group Plc. wrote a letter
to HTIL making a "revised and binding offer" on behalf of a member of Vodafone Group
(Vodafone) for HTIL's shareholdings in HEL together with interrelated company loans. Bharati
Infotel Pvt. Limited on 09.02.2007 expressed its 'no objection' to the Chairman, Vodafone
Mauritius Limited regarding proposed acquisition by Vodafone group of direct and / indirect
interest in HEL from Hutchison or Essar group. Bharati Airtel also sent a similar letter to Vodafone.

105. Vodafone Group Plc. on 10.02.2007 made a final binding offer of US$ 11.076 billion "in cash
over HTIL's interest", based on an enterprise value of US$ 18.800 billion of HEL. Ernst and Young
LLP, U.K. on 11.02.2007 issued due diligence report in relation to operating companies in India
namely HEL and subsidiaries and also the Mauritian and Cayman Island Companies. Report
noticed that CGP(CI) was not within the target group and was later included at the instance of
HTIL. On 11.02.2007, UBS Limited, U.K. issued fairness opinion in relation to the transaction for
acquisition by Vodafone from HTIL of a 67% effective interest in HEL through the acquisition of
100% interest in CGP and granting an option by Vodafone to Indian Continent Investment Ltd.
over a 5.6% stake in Bharati Airtel Limited. Bharati Infotel and Bharati Airtel conveyed their no-
objection to the Vodafone purchasing direct or indirect interest in HEL.

106. Vodafone and HTIL then entered into a Share and Purchase Agreement (SPA) on
11.02.2007 where under HTIL had agreed to procure the transfer of share capital of CGP by
HTIBVI, free from all encumbrances and together with all rights attaching or accruing together with
assignments of loan interest. HTIL on 11.02.2007 issued a side letter to Vodafone inter alias
stating that, out of the purchase consideration, up to US$80 million could be paid to some of its
Indian Partners. HTIL had also undertaken that Hutchison Telecommunication (India) Ltd. (HTM),
Omega and 3GSPL, would enter into an agreed form "IDFC Transaction Agreement" as soon as
practicable. On 11.02.2007, HTIL also sent a disclosure letter to Vodafone in terms of Clause 9.4
of SPA - Vendor warranties relating to consents and approvals, wider group companies, material
contracts, permits, litigation, arbitration and governmental proceedings to limit HTIL liability.

107. Vodafone on 12.02.2007 made a public announcement to the Securities and Exchange
Commission, Washington (SEC), London Stock Exchange and HK Stock Exchange stating that it
had agreed to acquire a Controlling Interest in HEL for a cash consideration of US$ 11.1 billion.
HTIL Chairman sent a letter to the Vice-Chairman of Essar Group on 14.02.2007 along with a
copy of Press announcement made by HTIL, setting out the principal terms of the intended sale of
HTIL of its equity and loans in HEL, by way of sale of CGP share and loan assignment to VIHBV.

108. Vodafone on 20.02.2007 filed an application with Foreign Investment Promotion Board (FIPB)
requesting it to take note of and grant approval under Press note No. 1 to the indirect acquisition
by Vodafone of 51.96% stake in HEL through an overseas acquisition of the entire share capital of
CGP from HTIL. HTIL made an announcement on HK Stock Exchange regarding the intended use
of proceeds from sale of HTIL's interest in HEL viz., declaring a special dividend of HK$ 6.75 per
share, HK$ 13.9 billion to reduce debt and the remainder to be invested in telecommunication

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business, both for expansion and towards working capital and general policies. Reference was
also made to the sale share and sale loans as being the entire issued share capital of CGP and
the loans owned by CGP/Array to an indirect WOS. AG on 02.03.2007 sent a letter to HEL
confirming that he was the exclusive beneficial owner of his shares and was having full control
over related voting rights. Further, it was also stated that AG had received credit support, but
primary liability was with Companies. AS also sent a letter on 05.03.2007 to FIPB confirming that
he was the exclusive beneficial owner of his shares and also of the credit support received.

109. Essar had filed objections with the FIPB on 06.03.2007 to HTIL's proposed sale and on
14.03.2007, Essar withdrew its objections.

110. FIPB on 14.03.2007 sent a letter to HEL pointing out that in filing of HTIL before the U.S.
SEC in Form 6K in the month of March 2006, it had been stated that HTIL Group would continue
to hold an aggregate interest of 42.34% of HEL and an additional indirect interest through JV
companies being non-wholly owned subsidiaries of HTIL which hold an aggregate of 19.54% of
HEL and, hence, the combined holding of HTIL Group would then be 61.88%. Reference was also
made to the communication dated 06.03.2007 sent to the FIPB wherein it was stated that the
direct and indirect FDI by HTIL would be 51.96% and, hence, was asked to clarify that
discrepancy. Similar letter dated 14.03.2007 was also received by Vodafone. On 14.03.2007, HEL
wrote to FIPB stating that the discrepancy was because of the difference in U.S. GAAP and Indian
GAAP declarations and that the combined holding for U.S. GAAP purposes was 61.88% and for
Indian GAAP purposes was 51.98%. It was pointed out that Indian GAAP number accurately
reflected the true equity ownership and control position. On 14.03.2007 itself, HEL wrote to FIPB
confirming that 7.577% stake in HEL was held legally and beneficially by AS and his wife and
4.78% stake in HEL was held legally and beneficially by AG. Further, it was also pointed out that
2.77% stake in HEL through Omega and S.M.M.S. was legally and beneficially owned by IDFC
Limited, IDFC Private Equity Limited and SSKI Corporate Finance Limited. Further, it was also
pointed out that Articles of Association of HEL did not give any person or entity any right to appoint
directors, however, in practice six directors were from HTIL, four from Essar, two from TII and TII
had appointed AG & AS. On credit support agreement, it was pointed out that no permission of
any regulatory authority was required.

111. Vodafone also wrote to FIPB on 14.03.2007 confirming that VIHBV's effective shareholding in
HEL would be 51.96% i.e. Vodafone would own 42% direct interest in HEL through its acquisition
of 100% of CGP Investments (Holdings) Limited (CGPIL) and through CGPIL Vodafone would
also own 37% in TII which in turn owned 20% in HEL and 38% in Omega which in turn owned 5%
in HEL. It was pointed out that both TII and Omega were Indian companies and those investments
combined would give Vodafone a controlling interest of 52% in HEL. Further, it was pointed out
that HTIL's Indian partners AG, AS, IDFC who between them held a 15% interest in HEL on
aggregate had agreed to retain their shareholding with full control including voting rights and
dividend rights.

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112. HTIL, Essar Teleholding Limited (ETL), Essar Communication Limited (ECL), Essar Tele
Investments Limited (ETIL), Essar Communications (India) Limited (ECIL) signed a settlement
agreement on 15.03.2007 regarding Essar Group's support for completion of the proposed
transaction and covenant not to sue any Hutchison Group Company etc., in lieu of payment by
HTIL of US$ 373.5 million after completion and a further US$ 41.5 million after second anniversary
of completion. In that agreement, HTIL had agreed to dispose of its direct and indirect equity, loan
and other interests and rights in and related to HEL, to Vodafone pursuant to the SPA. HTIL had
also agreed to pay US$ 415 million to Essar in return of its acceptance of the SPA between HTIL
and Vodafone. On 15.03.2007 a Deed of Waiver was entered into between Vodafone and HTIL,
whereby Vodafone had waived some of the warranties set out in paragraphs 7.1(a) and 7.1(b) of
Schedule 4 of the SPA and covenanted that till payment of HTIL under Clause 6.1 (a) of the
Settlement Agreement of 30.05.2007, Vodafone should not bring any claim or action. On
15.03.2007 a circular was issued by HTIL including the report of Somerley Limited on the
Settlement Agreement between HTIL and Essar Group.

113. VIHBVI, Essar Tele Holdings Limited (ETH) and ECL entered into a Term Sheet Agreement
on 15.03.2007 for regulating the affairs of HEL and the relationship of its shareholders including
setting out VIHBVI's right as a shareholder of HEL to nominate eight persons out of twelve to the
board of directors, requiring Vodafone to nominate director to constitute a quorum for board
meetings and get ROFR over shares owned by Essar in HEL. Term Sheet also stated that Essar
had a TAR in respect of Essar's shareholding in HEL, should any Vodafone Group shareholding
sell its share or part thereof in HEL to a person not in a Vodafone Group entity. VIHBV and
Vodafone Group Plc.(as guarantor of VIHBV) had entered into a 'Put Option' Agreement on
15.03.2007 with ETH, ECL (Mauritius), requiring VIHBV to purchase from Essar Group
shareholders' all the option shares held by them.

114. The Joint Director of Income Tax (International Taxation), in the meanwhile, issued a notice
dated 15.03.2007 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.

115. HTIL, on 17.3.2007, wrote to AS confirming that HTIL has no beneficial or legal or other rights
in AS's TII interest or HEL interest. Vodafone received a letter dated 19.3.2007 from FIPB seeking
clarifications on the circumstances under which Vodafone had agreed to pay consideration of US$
11.08 billion for acquiring 67% of HEL when the actual acquisition was only 51.96% as per the
application. Vodafone on 19.03.2007 wrote to FIPB stating that it had agreed to acquire from HTIL
interest in HEL which included 52% equity shareholding for US$ 11.08 billion which price included
control premium, use and rights to Hutch brand in India, a non-compete group, value of non-
voting, non-convertible various loans obligations and entitlement and to acquire further 15%
indirect interest in HEL, subject to Indian foreign investment rules, which together equated to
about 67% of the economic value of HEL.

116. VIHBVI and Indian continent Investors Limited (ICIL) had entered into an SHA on 21.03.2007

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whereby VIHBVI had to sell 106.470.268 shares in Bharati Airtel to ICIL for a cash consideration of
US$ 1,626,930.881 (which was later amended on 09.05.2007)

117. HEL on 22.3.2007 replied to the letter of 15.03.2007, issued by the Joint Director of Income
Tax (International Taxation) furnishing requisite information relating to HEL clarifying that it was
neither a party to the transaction nor would there be any transfer of shares of HEL.

118. HEL received a letter dated 23.3.2007 from the Additional Director Income Tax (International
Taxation) intimating that both Vodafone and Hutchison Telecom Group announcements/press
releases/declarations had revealed that HTIL had made substantive gains and consequently HEL
was requested to impress upon HTIL/Hutchison Telecom Group to discharge their liability on
gains, before they ceased operations in India. HEL attention was also drawn to Sections 195,
195(2) and 197 of the Act and stated that under Section 195 obligations were both on the payer
and the payee.

119. Vodafone, in the meanwhile, wrote to FIPB on 27.03.2007 confirming that in determining the
bid price of US$ 11.09 billion it had taken into account various assets and liabilities of CGP
including:

(a) its 51.96% direct and indirect equity ownership of Hutch Essar;

(b) Its ownership of redeemable preference shares in TII and JKF;

(c) Assumption of liabilities of various subsidiaries of CGP amounting to approximately US$630

million;

(d) subject to Indian Foreign Investment Rules, its rights and entitlements, including subscription
rights at par value and call options to acquire in future a further 62.75% of TII and call options to
acquire a further 54.21% of Omega Telecom Holdings Pvt. Ltd, which together would give
Vodafone a further 15.03% proportionate indirect equity ownership of Hutch Essar, various
intangible features such as control premium, use and rights of Hutch branch in India, non compete
agreement with HTIL.

HEL on 5.4.2007 wrote to the Joint director of Income Tax stating that it has no liabilities accruing
out of the transaction, also the department has no locus stand to invoke Section 195 in relation to
non-resident entities regarding any purported tax obligations. On 09.04.2007 HTIL submitted
FWAs, SHAs, Loan Agreement, Share-pledge Agreements, Guarantees, Hypothecations, Press
Announcements, Regulatory filing etc., charts of TII and Omega Shareholding, note on terms of
agreement relating to acquisition by AS, AG and IDFC, presentation by Goldman Sachs on fair
market valuation and confirmation by Vodafone, factors leading to acquisition by AG and AS and
rationale for put/call options etc.

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120. Vodafone on 09.04.2007 sent a letter to FIPB confirming that valuation of N.D. Callus,
Centrino, would occur as per Goldman Sach's presentation in Schedule 5 to HTIL's letter of
09.04.2007 with a minimum value of US$ 266.25 million and US$164.51 million for the equity in
N.D. Callus and Centrino respectively, which would form the basis of the future partnership with
AS & AG. Vodafone also wrote a letter to FIPB setting out details of Vodafone Group's interest
worldwide. On 30.04.07 a resolution was passed by the Board of Directors of CGP pertaining to
loan agreement, resignation and appointment of directors, transfer of shares; all to take effect on
completion of SPA. Resolution also accorded approval of entering into a Deed of Assignment in
respect of loans owed to HTI(BVI) Finance Limited in the sums of US$ 132,092,447.14 and US$
28,972,505.70. Further resolution also accorded approval to the resignations of certain persons as
Directors of the Company, to take effect on completion of SPA. Further, approval was also
accorded to the appointment of Erik de Rjik as a sole director of CGP. Resolution also accorded
approval to the transfer of CGP from HTI BVI to Vodafone. On 30.04.2007 a board of resolution
was passed by the directors of Array for the assignment of loans and resignation of existing
directors and appointment of new directors namely Erik de Rjik and two others. On 30.04.2007,
the board of directors of HTI BVI approved the transfer documentation in relation to CGP share
capital in pursuance of SPA and due execution thereof. On 04.05.2007 HTI BVI delivered the
share transfer documentation to the lawyers in Caymen Islands to hold those along with a
resolution passed by the board of directors of HTI BVI to facilitate delivery of instruments of
transfer to Vodafone at closing of the transaction.

121. Vodafone on 07.05.2007 received a letter from FIPB conveying its approval to the transaction
subject to compliance of observation of applicable laws and Regulations in India. On 08.05.2007 a
sum of US$10,854,229,859.05 was paid by Vodafone towards consideration for acquisition of
share capital of CGP. On 08.05.2007 Vodafone's name was entered in the register of members of
CGP kept in Caymen Islands and the share certificate No. 002 of HTI BVI relating to CGP share
capital was cancelled. On the same day a Tax Deed of Covenant was entered into between HTIL
and Vodafone in pursuance of SPA indemnifying Vodafone in respect of taxation or transfer
pricing liabilities payable or suffered by wider group companies (as defined by SPA i.e., CGP, 3
GSPL, Mauritian holding and Indian Companies) on or before completion, including reasonable
costs associated with any tax demand.

122. HTIL also sent a side letter to SPA on 08.05.2007 to Vodafone highlighting the termination of
the brand licenses and brand support service agreements between HTIL and 3GSPL and the
Indian Operating Companies and stated that the net amount to be paid by Vodafone to HTIL would
be US$ 10,854,229,859.05 and that Vodafone would retain US$ 351.8 million towards expenses
incurred to operationalize the option agreements with AS and AG, out of the total consideration of
US$11,076,000,000. On 08.05.2007 loan assignment between HTI BVI Finance Limited, Array
and Vodafone of Array debt in a sum of US$ 231,111,427.41 was effected, whereby rights and
benefits of HTI BVI Finance Limited to receive repayment was assigned in favor of Vodafone as
part of the transaction contemplated vide SPA. On the same day loan assignment between HTI
BVI Finance Limited, CGP and Vodafone, of CGP debt in the sum of US$ 28,972,505.70 was

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effected, whereby rights and benefits of HTI BVI Finance Limited to receive the repayment was
assigned in favor of Vodafone as part of the transactions contemplated vide SPA. On 08.05.2007,
business transfer agreement between 3GSPL and Hutchison Whampoa Properties (India) Limited,
a WOS of HWP Investments Holdings (India) Limited, Mauritius, for the sale of business to 3GSPL
of maintaining and operating a call centre as a going concern on slump-sale-basis for a composite
price of ` 640 million. On 08.05.2007, as already stated, a Deed of Retention was executed
between HTIL and Vodafone where under HTIL had agreed that out of the total consideration
payable in terms of Clause 8.10(b) of the SPA, Vodafone would be entitled to retain US$ 351.8
million by way of HTIL's contribution towards acquisition cost of options i.e., stake of AS & AG. On
08.05.2007 Vodafone paid US$ 10,854,229,859.05 to HTIL.

123. Vodafone on 18.05.2007 sent a letter to FIPB confirming that VIHBV had no existing joint
venture or technology transfer/trade mark agreement in the same field as HEL except with Bharati
as disclosed and since 20.02.2007 a member of Bharati Group had exercised the option to acquire
a further 5.6% interest from Vodafone such that Vodafone's direct and indirect stake in Bharati
Airtel would be reduced to 4.39%.

124. An agreement (Omega Agreement) dated 05.06.2007 was entered into between IDF, IDFC,
IDFC Private Equity Fund II (IDFCPE), SMMS, HT India, 3GSPL, Omega, SSKI and VIHBV. Due
to that Agreement IDF, IDFC and SSKI would instead of exercising the 'Put option' and 'cashless
option' under 2006 IDFC FWA could exercise the same in pursuance of the present Agreement.
Further, 3GSPL had waived its right to exercise the 'call option' pursuant to 2006 IDFC FWA. On
06.06.2007 a FWA was entered into between IDF, IDFC, IDFCPE, SMMS, HT India, 3GSPL,
Omega and VIHBV. By that Agreement 3GSPL had a 'call option' to purchase the equity shares of
SMMS. On 07.06.2007 a SHA was entered into between SMMS, HTIL(M), Omega and VIHBV to
regulate the affairs of Omega. On 07.06.2007 a Termination Agreement was entered into between
IDF, IDFC, SMMS, HTIL, 3GSPL, Omega and HTL terminating the 2006 IDFC FWA and the SHA
and waiving their respective rights and claims under those Agreements. On 27.06.2007 HTIL in
their 2007 interim report declared a dividend of HK$ 6.75 per share on account of the gains made
by the sale of its entire interest in HEL. On 04.07.2007 fresh certificates of incorporation was
issued by the Registrar of Companies in relation to Indian operating companies whereby the word
"Hutchison" was substituted with word "Vodafone".

125. On 05.07.2007, a FWA was entered into between AG, AG Mercantile Pvt. Limited, Plustech
Mercantile Company Pvt. Ltd, 3GSPL, Nadal Trading Company Pvt. Ltd and Vodafone as a
confirming party. In consideration for the unconditional 'call option', 3GSPL agreed to pay AG an
amount of US$ 6.3 million annually. On the same day a FWA was signed by AS and Neetu AS,
Scorpio Beverages Pvt. Ltd.(SBP), M.V. Healthcare Services Pvt. Ltd, 3GSPL, N.D. Callus Info
Services Pvt. Ltd and Vodafone, as a confirming party. In consideration for the 'call option' 3GSPL
agreed to pay AS & Mrs. Neetu AS an amount of US$ 10.02 million annually. TII SHA was entered
into on 05.07.2007 between Nadal, NDC, CGP (India), TII and VIHBV to regulate the affairs of TII.
On 05.07.2007 Vodafone entered into a Consultancy Agreement with AS. Under that Agreement,

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AS was to be paid an amount of US$ 1,050,000 per annum and a one time payment of US$
1,30,00,000 was made to AS.

126. Vodafone sent a letter to FIPB on 27.07.2007 enclosing undertakings of AS, AG and their
companies as well as SMMS Group to the effect that they would not transfer the shares to any
foreign entity without requisite approvals.

127. The Income Tax Department on 06.08.2007 issued a notice to VEL 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 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.

128. Vodafone then filed Writ Petition No. 1325 of 2010 before the Bombay High Court on
07.06.2010 challenging the order dated 31.05.2010 issued by the Income Tax Department on
various grounds including the jurisdiction of the Tax Department to impose capital gains tax to
overseas transactions. The Assistant Director of Income Tax had issued a letter on 04.06.2010
granting an opportunity to Vodafone to address the Department on the question of quantification of
liability 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 Petition on 08.09.2010 against which the present SLP has been filed.

129. The High Court upheld the jurisdiction of the Revenue to impose capital gains tax on
Vodafone as a representative Assessee after holding that the transaction between the parties
attracted capital gains in India. Court came to the following conclusions:

(a) Transactions between HTIL and Vodafone were fulfilled not merely by transferring a single
share of CGP in Cayman Islands, but the commercial and business understanding between the
parties postulated that what was being transferred from HTIL to VIHBV was the "controlling

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interest" in HEL in India, which is an identifiable capital asset independent of CGP share.

(b) HTIL had put into place during the period when it was in the control of HEL a complex structure
including the financing of Indian companies which in turn had holdings directly or indirectly in HEL
and hence got controlling interest in HEL.

(c) Vodafone on purchase of CGP got indirect interest in HEL, controlling right in certain indirect
holding companies in HEL, controlling rights through shareholder agreements which included the
right to appoint directors in certain indirect holding companies in HEL, interest in the form of
preference share capital in indirect holding companies of HEL, rights to use Hutch brand in India,
non-compete agreement with Hutch brand in India etc., which all constitute capital asset as per
Section 2(14) of the I.T. Act.

(d) The price paid by Vodafone to HTIL of US$ 11.08 billion factored in as part of the consideration
of those diverse rights and entitlements and many of those entitlements are relatable to the
transfer of CGP share and that the transactional documents are merely incidental or consequential
to the transfer of CGP share but recognized independently the rights and entitlements of HTIL in
relation to Indian business which are being transferred to VIHBV.

(e) High Court held that the transfer of CGP share was not adequate in itself to achieve the object
of consummating the transaction between HTIL and VIHBV and the rights and entitlements
followed would amount to capital gains.

(f) The Court also held that where an asset or source of income is situated in India, the income of
which accrues or arises directly or indirectly through or from it shall be treated as income which is
deemed to accrue or arise in India, hence, chargeable 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
and, 126 hence, the proceedings initiated under Section 201 for failure to withhold tax by
Vodafone cannot be held to lack jurisdiction.

130. Shri Harish Salve, learned senior counsel appearing for Vodafone explained in detail how
Hutchison Corporate Structure was built up and the purpose, object and relevance of such vertical
Transnational Structures in the international context. Learned Senior counsel submitted that
complex structures are designed not for avoiding tax but for good commercial reasons and Indian
legal structure and foreign exchange laws recognize Overseas Corporate Bodies (OCB). Learned
senior counsel also submitted that such Transnational Structures also contain exit option to the

2020-08-28 Source: www.bdlex.com Md. Nazrul Islam Khan

investors. Senior counsel also pointed out that where regulatory provisions mandate investment
into corporate structure such structures cannot be disregarded for tax purposes by lifting the
corporate veil especially when there is no motive to avoid tax. Shri Salve also submitted that
Hutchison corporate structure was not designed to avoid tax and the transaction was not a
colorable device to achieve that purpose. Senior counsel also submitted that source of income lies
where the transaction is effected and not where the underlying asset is situated or economic
interest lies. Reference was made to judgment in Seth Pushalal Mansinghka (P) Ltd. v. CIT
MANU/SC/0401/1967 : (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 MANU/WB/0122/1969 : (1971) 81 ITR 699 Cal. and C.I.T. West Bengal v.
National and Grindlays Bank Ltd. MANU/WB/0014/1969 : (1969) 72 ITR 121 Cal. Learned
senior counsel also pointed out that when a transaction is between two foreign entities and not
with an Indian entity, source of income cannot be traced back to India and nexus cannot be used
to tax under Section 9. Further, it was also pointed out that language in Section 9 does not contain
"look through provisions" and even the words "indirectly" or "through" appearing in Section 9
would not make a transaction of a non-resident taxable in India unless there is a transfer of capital
asset situated in India. Learned Senior counsel also submitted that the Income Tax Department
has committed an error in proceeding on a "moving theory of nexus" on the basis that economic
interest and underlying asset are situated in India. It was pointed out that there cannot be transfer
of controlling interest in a Company independent from transfer of shares and under the provisions
of the Company Law. Acquisition of shares in a Company entitles the Board a right of "control"
over the Company. Learned Senior Counsel also pointed out the right to vote, right to appoint
Board of Directors, and other management rights are incidental to the ownership of shares and
there is no change of control in the eye of law but only in commercial terms. Mr. Salve emphasized
that, in absence of the specific legislation, such transactions should not be taxed. On the sites of
shares, learned senior counsel pointed out that the sites is determined depending upon the place
where the asset is situated. Learned senior counsel also pointed out that on transfer of CGP,
Vodafone got control over HEL and merely because Vodafone has presence or chargeable
income in India, it cannot be inferred that it can be taxed in some other transactions. Further, it
was also pointed out that there was no transfer of any capital asset from HTIL to Vodafone
pursuant to Option Agreements, FWAs, executed by the various Indian subsidiaries. Learned
Senior Counsel also pointed out that the definition of "transfer" 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 MANU/SC/0130/2001 : (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 recognized corporate structure time and the stage of the transaction are
very important and not the motive to save the tax. Reference was also made to several judgments
of the English Courts viz, IRC v. Duke of Westminster (1936) AC 1 (HL), W.T. Ramsay v. IRC

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(1982) AC 300 (HL), Craven v. White (1988) 3 All ER 495, Furniss v. Dawson (1984) 1 All ER
530 etc. Reference was also made to the judgment of this Court in McDowell, Azadi Bachao
Andolan cases (supra) and few other judgments. Learned senior counsel point out that Azadi
Bachao Andolan broadly reflects Indian jurisprudence and that generally Indian courts used to
follow the principles laid down by English Courts on the issue of tax avoidance and tax evasion.
Learned Senior counsel also submitted that Tax Residency Certificate (for short TRC) issued by
the Mauritian authorities has to be respected and in the absence of any Limitation on Benefit (LOB
Clause), the benefit of the Indo-Mauritian Treaty is available to third parties who invest in India
through Mauritius route.

131. Mr. Salve also argued on the extra territorial applicability of Section 195 and submitted that
the same cannot be enforced on a non-resident without a presence in India. Counsel also pointed
out that the words "any person" in Section 195 should be construed to apply to payers who have a
presence in India or else enforcement would be impossible and such a provision should be read
down in case of payments not having any nexus with India. Senior counsel also submitted that the
withholding tax provisions under Section 195 of the Indian Income Tax Act, do not apply to
offshore entities making off-shore payments and the said Section could be triggered only if it can
be established that the payment under consideration is of a "sum chargeable" under the Income
Tax Act (for short Income Tax Act). Senior counsel therefore contended that the findings of the
Tax Authorities that pursuant to the transaction the benefit of telecom license stood transferred to
Vodafone is misconceived and that under the telecom policy of India a telecom license can be
held only by an Indian Company and there is no transfer direct or indirect of any license to
Vodafone.

132. Mr. R.F. Nariman, Learned Solicitor General appearing for the Income Tax Department
submitted that the sale of CGP share was nothing but an artificial avoidance scheme and CGP
was fished out of the HTIL legal structure as an artificial tax avoidance contrivance. Shri Nariman
pointed out that CGP share has been interposed at the last minute to artificially remove HTIL from
the Indian telecom business. Reference was made to the Due Diligence Report of Ernst and
Young which stated that target structure later included CGP which was not there originally.
Further, it was also pointed out that HTIL extinguished its rights in HEL and put Vodafone in its
place and CGP was merely an interloper. Shri Nariman also pointed out that as per Settlement
Agreement, HTIL sold direct and indirect equity holdings, loans, other interests and rights relating
to HEL which clearly reveal something other than CGP share was sold and those transactions
were exposed by the SPA. Learned Solicitor General also referred extensively the provisions of
SPA and submitted that the legal owner of CGP is HTIBVI Holdings Ltd., a British Virgin Islands
Company which was excluded from the Agreement with an oblique tax motive.

133. Mr. Nariman also submitted the sites of CGP can only be in India as the entire business
purpose of holding that share was to assume control in Indian telecom operations, the same was
managed through Board of Directors controlled by HTIL. The controlling interest expressed by
HTIL would amount to property rights and hence taxable in India. Reference was made to

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judgments of the Calcutta High Court in CIT v. National Insurance Company
MANU/WB/0160/1977 : (1978) 113 ITR 37(Cal.) and Laxmi Insurance Company Pvt. Ltd. v. CIT
MANU/DE/0146/1970 : (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 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 facade.

134. Learned Counsels, on either side, in support of their respective contentions, referred to
several judgments of this Court, foreign Courts, international expert opinions, authoritative articles
written by eminent authors etc. Before examining the same, let us first examine the legal status of
a corporate structure, its usefulness in cross-border transactions and other legal and commercial
principles in use in such transactions, which are germane to our case.

Part - II

CORPORATE STRUCTURE/ GENERAL PRINCIPLES (National and International)

135. Corporate structure is primarily created for business and commercial purposes and multi-
national companies who make offshore investments always aim at better returns to the
shareholders and the progress of their companies. Corporation created for such purposes are
legal entities distinct from its members and are capable of enjoying rights and of being subject to
duties which are not the same as those enjoyed or borne by its members. Multi-national
companies, for corporate governance, may develop corporate structures, affiliate subsidiaries,
joint ventures for operational efficiency, tax avoidance, mitigate risks etc. On incorporation, the
corporate property belongs to the company and members have no direct proprietary rights to it but
merely to their "shares" in the undertaking and these shares constitute items of property which are

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freely transferable in the absence of any express provision to the contrary.

136. Corporate structure created for genuine business purposes are those which are generally
created or acquired: at the time when investment is being made; or further investments are being
made; or the time when the Group is undergoing financial or other overall restructuring; or when
operations, such as consolidation, are carried out, to clean-defused or over-diversified. Sound
commercial reasons like hedging business risk, hedging political risk, mobility of investment, ability
to raise loans from diverse investments, often underlie creation of such structures. In transnational
investments, the use of a tax neutral and investor-friendly countries to establish SPV is motivated
by the need to create a tax efficient structure to eliminate double taxation wherever possible and
also plan their activities attracting no or lesser tax so as to give maximum benefit to the investors.
Certain countries are exempted from capital gain, certain countries are partially exempted and, in
certain countries, there is nil tax on capital gains. Such factors may go in creating a corporate
structure and also restructuring.

137. Corporate structure may also have an exit route, especially when investment is overseas. For
purely commercial reasons, a foreign group may wind up its activities overseas for better returns,
due to disputes between partners, unfavorable fiscal policies, uncertain political situations,
strengthen fiscal loans and its application, threat to its investment, insecurity, weak and time
consuming judicial system etc., all can be contributing factors that may drive its exit or
restructuring. Clearly, there is a fundamental difference in transnational investment made
overseas and domestic investment. Domestic investments are made in the home country and
meant to stay as it were, but when the trans-national investment is made overseas away from the
natural residence of the investing company, provisions are usually made for exit route to facilitate
an exit as and when necessary for good business and commercial reasons, which is generally
foreign to judicial review.

138. Revenue/Courts can always examine whether those corporate structures are genuine and set
up legally for a sound and veritable commercial purpose. Burden is entirely on the Revenue to
show that the incorporation, consolidation, restructuring etc. has been effected to achieve a
fraudulent, dishonest purpose, so as to defeat the law.

CORPORATE GOVERNANCE

139. Corporate governance has been a subject of considerable interest in the corporate world.
The Organization for Economic cooperation and Development (OECD) defines corporate
governance as follows:

Corporate governance is a system by which business corporations are directed and controlled.
The corporate governance structure specifies the distribution of rights and responsibilities among
different participants in the corporation and other stake holders and spells out rules and
procedures for making decisions on corporate affairs. By doing this, it also provides a structure

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through which the company objectives are set and the means of attaining those objectives and
monitoring performance.
The Ministry of Corporate Affairs to the Government of India, has issued several press notes for
information of such global companies, which will indicate that Indian corporate Law has also
accepted the corporate structure consisting of holding companies and several subsidiary
companies. A holding company which owns enough voting stock in a subsidiary can control
management and operation by influencing or electing its Board of Directors. The holding company
can also maintain group accounts which is to give members of the holding company a picture of
the financial position of the holding company and its subsidiaries. The form and content of holding
company or subsidiary company's own balance sheet and profit and loss account are the same as
if they were independent companies except that a holding company's accounts an aggregated
value of shares it holds in its subsidiaries and in related companies and aggregated amount of
loss made by it to its subsidiaries and to related companies and their other indebtedness to it must
be shown separately from other assets etc.

140. Corporate governors can also misuse their office, using fraudulent means for unlawful gain,
they may also manipulate their records, enter into dubious transactions for tax evasion. Burden is
always on the Revenue to expose and prove such transactions are fraudulent by applying look at
principle.

OVERSEAS COMPANIES and FDI

141. Overseas companies are companies incorporated outside India and neither the Companies
Act nor the Income Tax Act enacted in India has any control over those companies established
overseas and they are governed by the laws in the countries where they are established. From
country to country laws governing incorporation, management, control, taxation etc. may change.
Many developed and wealthy Nations may park their capital in such off-shore companies to carry
on business operations in other countries in the world. Many countries give facilities for
establishing companies in their jurisdiction with minimum control and maximum freedom.
Competition is also there among various countries for setting up such offshore companies in their
jurisdiction. Demand for offshore facilities has considerably increased, in recent times, owing to
high growth rates of cross-border investments and to the increased number of rich investors who
are prepared to use high technology and communication infrastructures to go offshore. Removal of
barriers to cross- border trade, the liberalization of communication technologies have had positive
effects on the developing countries including India.

142. Investment under foreign Direct Investment Scheme (FDI scheme), investment by Foreign
Institutional Investors (FIIs) under the Portfolio Investment Scheme, investment by NRIs/OBCs
under the Portfolio Investment Scheme and sale of shares by NRIs/OBCs on non-repatriation
basis; Purchase and sale of securities other than shares and convertible debentures of an Indian
company by a non-resident are common. Press Notes are announced by the Ministry of
Commerce and Industry and the Ministry issued Press Note no. 2, 2009 and Press Note 3, 2009,

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which deals with calculation of foreign investment in downstream entities and requirement of
ownership or control in sectoral cap companies. Many of the offshore companies use the facilities
of Offshore Financial Centers situate in Mauritius, Cayman Islands etc. Many of these offshore
holdings and arrangements are undertaken for sound commercial and legitimate tax planning
reasons, without any intent to conceal income or assets from the home country tax jurisdiction and
India has always encouraged such arrangements, unless it is fraudulent or fictitious.

143. Moving offshore or using an OFC does not necessarily lead to the conclusion that they
involve in the activities of tax evasion or other criminal activities. The multi-national companies are
attracted to offshore financial centers mainly due to the reason of providing attractive facilities for
the investment. Many corporate conglomerates employ a large number of holding companies and
often high-risk assets are parked in separate companies so as to avoid legal and technical risks to
the main group. Instances are also there when individuals form offshore vehicles to engage in
risky investments, through the use of derivatives trading etc. Many of such companies do, of
course, involve in manipulation of the market, money laundering and also indulge in corrupt
activities like round tripping, parking black money or offering, accepting etc., advantage or
prospect thereof.

144. OECD (Organization for Economic Co-operation and Development) in the year 1998 issued a
report called "Harmful Tax Competition: An Emerging Global Issue". The report advocated doing
away with tax havens and offshore financial canters, like the Cayman Islands, on the basis that
their low tax regimes provide them with an unfair advantage in the global marketplace and are
thus harmful to the economics of more developed countries. OECD threatened to place the
Cayman Islands and other tax havens on a "black list" and impose sanctions against them.

145. OECD's blacklist was avoided by Cayman Islands in May 2000 by committing itself to a string
of reforms to improve transparency, remove discriminatory practices and began to exchange
information with OECD. Often, complaints have been raised stating that these centers are utilized
for manipulating market, to launder money, to finance terrorism, indulge in corruption etc. All the
same, it is stated that OFCs have an important role in the international economy, offering
advantages for multi-national companies and individuals for investments and also for legitimate
financial planning and risk management. It is often said that insufficient legislation in the countries
where they operate gives opportunities for money laundering, tax evasion etc. and, hence, it is
imperative that that Indian Parliament would address all these issues with utmost urgency.

Need for Legislation:

146. Tax avoidance is a problem faced by almost all countries following civil and common law
systems and all share the common broad aim, that is to combat it. Many countries are taking
various legislative measures to increase the scrutiny of transactions conducted by non-resident
enterprises. Australia has both general and specific anti-avoidance rule (GAAR) in its Income Tax
Legislations. In Australia, GAAR is in Part IVA of the Income Tax Assessment Act, 1936, which is

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intended to provide an effective measure against tax avoidance arrangements. South Africa has
also taken initiative in combating impermissible tax avoidance or tax shelters. Countries like China,
Japan etc. have also taken remedial measures.

147. Direct Tax Code Bill (DTC) 2010, proposed in India, envisages creation of an economically
efficient, effective direct tax system, proposing GAAR. GAAR intends to prevent tax avoidance,
what is inequitable and undesirable. Clause 5(4)(g) provides that the income from transfer, outside
India of a share in a foreign company shall be deemed to arise in if the FMV of assets India owned
by the foreign company is at least 50% of its total assets. Necessity to take effective legislative
measures has been felt in this country, but we always lag behind because our priorities are
different. Lack of proper regulatory laws, leads to uncertainty and passing inconsistent orders by
Courts, Tribunals and other forums, putting Revenue and tax payers at bay.

HOLDING COMPANY and SUBSIDIARY COMPANY

148. Companies Act in India and all over the world have statutorily recognized subsidiary company
as a separate legal entity. Section 2(47) of the Indian Companies Act 1956 defines "subsidiary
company" or "subsidiary", a subsidiary company within the meaning of Section 4 of the Act. For
the purpose of Indian Companies Act, a company shall be subject to the provisions of Sub-Section
3 of Section 4, be deemed to be subsidiary of another, subject to certain conditions, which
includes holding of share capital in excess of 50% controlling the composition of Board of
Directors and gaining status of subsidiary with respect to third company by holding company's
subsidization of third company. A holding company is one which owns sufficient shares in the
subsidiary company to determine who shall be its directors and how its affairs shall be conducted.
Position in India and elsewhere is that the holding company controls a number of subsidiaries and
respective businesses of companies within the group and manage and integrate as whole as
though they are merely departments of one large undertaking owned by the holding company. But,
the business of a subsidiary is not the business of the holding company (See Gramophone and
Typewriter Ltd. v. Stanley (1908-10) All ER Rep 833 at 837).

149. Subsidiary companies are, therefore, the integral part of corporate structure. Activities of the
companies over the years have grown enormously of its incorporation and outside and their
structures have become more complex. Multi National Companies having large volume of
business nationally or internationally will have to depend upon their subsidiary companies in the
national and international level for better returns for the investors and for the growth of the
company. When a holding company owns all of the voting stock of another company, the company
is said to be a WOS of the parent company. Holding companies and their subsidiaries can create
pyramids, whereby subsidiary owns a controlling interest in another company, thus becoming its
parent company.

150. Legal relationship between a holding company and WOS is that they are two distinct legal
persons and the holding company does not own the assets of the subsidiary and, in law, the

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management of the business of the subsidiary also vests in its Board of Directors. In Bacha F.
Guzdar v. CIT MANU/SC/0072/1954 : 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 shareholders' meeting. Refer also to Carew and Company Ltd. v.
Union of India MANU/SC/0551/1975 : (1975) 2 SCC 791 and Carrasco Investments Ltd. v.
Special Director, Enforcement (1994) 79 Comp Case 631 (Del).

151. Holding company, of course, if the subsidiary is a WOS, may appoint or remove any director
if it so desires by a resolution in the General Body Meeting of the subsidiary. Holding companies
and subsidiaries can be considered as single economic entity and consolidated balance sheet is
the accounting relationship between the holding company and subsidiary company, which shows
the status of the entire business enterprises. Shares of stock in the subsidiary company are held
as assets on the books of the parent company and can be issued as collateral for additional debt
financing. Holding company and subsidiary company are, however, considered as separate legal
entities, and subsidiary are allowed decentralized management. Each subsidiary can reform its
own management personnel and holding company may also provide expert, efficient and
competent services for the benefit of the subsidiaries.

152. U.S. Supreme Court in United States v. Bestfoods 524 US 51 (1998) explained that it is a
general principle of corporate law and legal systems that a parent corporation is not liable for the
acts of its subsidiary, but the Court went on to explain that corporate veil can be pierced and the
parent company can be held liable for the conduct of its subsidiary, if the corporal form is misused
to accomplish certain wrongful purposes, when the parent company is directly a participant in the
wrong complained of. Mere ownership, parental control, management etc. of a subsidiary is not
sufficient to pierce the status of their relationship and, to hold parent company liable. In Adams v.
Cape Industries Plc. (1991) 1 All ER 929, the Court of Appeal emphasized that it is appropriate to
pierce the corporate veil where special circumstances exist indicating that it is mere facade
concealing true facts.

153. Courts, however, will not allow the separate corporate entities to be used as a means to carry
out fraud or to evade tax. Parent company of a WOS, is not responsible, legally for the unlawful
activities of the subsidiary save in exceptional circumstances, such as a company is a sham or the
agent of the shareholder, the parent company is regarded as a shareholder. Multi-National
Companies, by setting up complex vertical pyramid like structures, would be able to distance
themselves and separate the parent from operating companies, thereby protecting the multi-
national companies from legal liabilities.

SHAREHOLDERS' AGREEMENT

154. shareholders' Agreement ( for short SHA) is essentially a contract between some or all other
shareholders in a company, the purpose of which is to confer rights and impose obligations over
and above those provided by the Company Law. SHA is a private contract between the

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shareholders compared to Articles of Association of the Company, which is a public document.
Being a private document it binds parties thereof and not the other remaining Advantage of SHA is
that it gives greater flexibility, unlike Articles of Association. It also makes provisions for resolution
of any dispute between the shareholders and also how the future capital contributions have to be
made. Provisions of the SHA may also go contrary to the provisions of the Articles of Association,
in that event, naturally provisions of the Articles of Association would govern and not the
provisions made in the SHA.

155. The nature of SHA was considered by a two Judges Bench of this Court in V.B. Rangaraj v.
V.B. Gopalakrishnan and Ors. MANU/SC/0076/1992 : (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) (2) SCR Supp 406 held
that freedom of contract can be restricted by law only in cases where it is for some good for the
community. Companies Act 1956 or the FERA 1973, RBI Regulation or the I.T. Act do not
explicitly or impliedly forbid shareholders of a company to enter into agreements as to how they
should exercise voting rights attached to their shares.

156. Shareholders can enter into any agreement in the best interest of the company, but the only
thing is that the provisions in Association. The essential purpose of the SHA is to make provisions
for proper and effective internal management of the company. It can visualize the best interest of
the company on diverse issues and can also find different ways not only for the best interest of the
shareholders, but also for the company as a whole. In S.P. Jain v. Kalinga Cables Ltd.
MANU/SC/0368/1965 : (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 case of breach is given in the general law between the company and the
shareholders. A breach of SHA which does not breach the Articles of Association is a valid
corporate action but, as we have already indicated, the parties aggrieved can get remedies under
the general law of the land for any breach of that agreement.

157. SHA also provides for matters such as restriction of transfer of shares i.e. Right of First
Refusal (ROFR), Right of First Offer (ROFO), Drag-Along Rights (DARs) and Tag-Along Rights
(TARs), Pre-emption Rights, Call option, Put option, Subscription option etc. SHA in a
characteristic Joint Venture Enterprise may regulate its affairs on the basis of various provisions
enumerated above, because Joint Venture enterprise may deal with matters regulating the
ownership and voting rights of shares in the company, control and manage the affairs of the
company, and also may make provisions for resolution of disputes between the shareholders.

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Many of the above mentioned provisions find a place in SHAs, FWAs, Term Sheet Agreement etc.
in the present case, hence, we may refer to some of those provisions.

(a) Right of First Refusal (ROFR): ROFR permits its holders to claim the transfer of the subject of
the right with a unilateral declaration of intent which can either be contractual or legal. No statutory
recognition has been given to that right either in the Indian Company Law or the Income Tax
Laws. Some foreign jurisdictions have made provisions regulating those rights by statutes.
Generally, ROFR is contractual and determined in an agreement. ROFR clauses have contractual
restrictions that give the holders the option to enter into commercial transactions with the owner on
the basis of some specific terms before the owner may enter into the transactions with a third
party. Shareholders' right to transfer the shares is not totally prevented, yet a shareholder is
obliged to offer the shares first to the existing shareholders. Consequently, the other shareholders
will have the privilege over the third parties with regard to purchase of shares.

(b) Tag Along Rights (TARs): TARs, a facet of ROFR, often refer to the power of a minority
shareholder to sell their shares to the prospective buyer at the same price as any other
shareholder would propose to sell. In other words, if one shareholder wants to sell, he can do so
only if the purchaser agrees to purchase the other shareholders, who wish to sell at the same
price. TAR often finds a place in the SHA which protects the interest of the minority shareholders.

(c) Subscription Option: Subscription option gives the beneficiary a right to demand issuance of
allotment of shares of the target company. It is for that reason that a subscription right is normally
accompanied by ancillary provisions including an Exit clause where, if dilution crosses a particular
level, the counter parties are given some kind of Exit option.

(d) Call Option: Call option is an arrangement often seen in Merger and Acquisition projects,
especially when they aim at foreign investment. A Call option is given to a foreign buyer by
agreement so that the foreign buyer is able to enjoy the permitted minimum equity interests of the
target company. Call option is always granted as a right not an obligation, which can be exercised
upon satisfaction of certain conditions and/or within certain period agreed by the grantor and
grantee. The buyer of Call option pays for the right, without the obligation to buy some underlying
instrument from the writer of the option contract at a set future date and at the strike price. Call
option is where the beneficiary of the action has a right to compel a counter-party to transfer his
shares at a pre-determined or price fixed in accordance with the pre-determined maxim or even
fair market value which results in a simple transfer of shares.

(e) Put Option: A put option represents the right, but not the requirement to sell a set number of
shares of stock, which one do not yet own, at a pre-determined strike price, before the option
reaches the expiration date. A put option is purchased with the belief that the underlying stock
price will drop well before the strike price, at which point one may choose to exercise the option.

(f) Cash and Cashless Options: Cash and Cashless options are related arrangement to call and

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put options creating a route by which the investors could carry out their investment, in the event of
an appreciation in the value of shares.

158. SHA, therefore, regulate the ownership and voting rights of shares in the company including
ROFR, TARs, DARs, Preemption Rights, Call Options, Put Options, Subscription Option etc. in
relation to any shares issued by the company, restriction of transfer of shares or granting
securities interest over shares, provision for minority protection, lock-down or for the interest of the
shareholders and the company. Provisions referred to above, which find place in a SHA, may
regulate the rights between the parties which are purely contractual and those rights will have
efficacy only in the course of ownership of shares by the parties.

SHARES, VOTING RIGHTS and CONTROLLING INTERESTS:

159. Shares of any member in a company is a moveable property and can be transferred in the
manner provided by the Articles of Association of the company. Stocks and shares are specifically
included in the definition of the Sale of Goods Act, 1930. A share represents a bundle of rights like
right to (1) elect directors, (2) vote on resolution of the company, (3) enjoy the profits of the
company if and when dividend is declared or distributed, (4) share in the surplus, if any, on
liquidation.

160. Share is a right to a specified amount of the share capital of a company carrying out certain
rights and liabilities, in other words, shares are bundles of intangible rights against the company.
Shares are to be regarded as situate in the country in which it is incorporated and register is kept.
Shares are transferable like any other moveable property under the Companies Act and the
Transfer of Property Act. Restriction of Transfer of Shares is valid, if contained in the Articles of
Association of the company. Shares are, therefore, presumed to be freely transferable and
restrictions on their transfer are to be construed strictly. Transfer of shares may result in a host of
consequences.

Voting Rights:

161. Voting rights vest in persons who names appear in the Register of Members. Right to vote
cannot be decoupled from the share and an agreement to exercise voting rights in a desired
manner, does not take away the right of vote, in fact, it is the shareholders' right. Voting rights
cannot be denied by a company by its articles or otherwise to holders of shares below a minimum
number such as only shareholders holding five or more shares are entitled to vote and so on,
subject to certain limitations.

162. Rights and obligations flowing from voting rights have been the subject matter of several
decisions of this Court. In Chiranjit Lal Chowdhuri v. Union of India MANU/SC/0009/1950 :
(1950) 1 SCR 869 909 : 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

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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 and Weaving Company
MANU/SC/0019/1953 : (1954) SCR 674 726 : AIR 1954 SC 119, this Court noticed the principle
laid down in Chiranjit Lal Chowdhuri (supra).

163. Voting arrangements in SHAs or pooling agreements are not "property". Contracts that
provide for voting in favor of or against a resolution or acting in support of another shareholder
create only "contractual obligations". A contract that creates contractual rights thereby, the owner
of the share (and the owner of the right to vote) agrees to vote in a particular manner does not
decouple the right to vote from the share and assign it to another. A contract that is entered into to
provide voting in favor of or against the resolution or acting in support of another shareholder, as
we have already noted, creates contractual obligation. Entering into any such contract constitutes
an assertion (and not an assignment) of the right to vote for the reason that by entering into the
contract: (a) the owner of the share asserts that he has a right to vote; (b) he agrees that he is free
to vote as per his will; and (c) he contractually agrees that he will vote in a particular manner.
Once the owner of a share agrees to vote in a particular manner, that itself would not determine as
a property.

Controlling Interest:

164. Shares, we have already indicated, represent congeries of rights and controlling interest is an
incident of holding majority shares. Control of a company vests in the voting powers of its
shareholders. Shareholders holding a controlling interest can determine the nature of the
business, its management, enter into contract, borrow money, buy, sell or merge the company.
Shares in a company may be subject to premiums or discounts depending upon whether they
represent controlling or minority interest. Control, of course, confers value but the question as to
whether one will pay a premium for controlling interest depends upon whether the potential buyer
believes one can enhance the value of the company.

165. The House of Lords in IRC v. V.T. Bibby and Sons (1946) 14 ITR (Supp) 7 9-10, after
examining the meaning of the expressions "control" and "interest", held that controlling interest did
not depend upon the extent to which they had the power of controlling votes. Principle that
emerges is that where shares in large numbers are transferred, which result in shifting of
"controlling interest", it cannot be considered as two separate transactions namely transfer of
shares and transfer of controlling interest. Controlling interest forms an inalienable part of the
share itself and the same cannot be traded separately unless otherwise provided by the Statute.
Of course, the Indian Company Law does not explicitly throw light on whether control or controlling
interest is a part of or inextricably linked with a share of a company or otherwise, so also the
Income Tax Act. In the impugned judgment, the High Court has taken the stand that controlling
interest and shares are distinct assets.

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166. Control, in our view, is an interest arising from holding a particular number of shares and the
same cannot be separately acquired or transferred. Each share represents a vote in the
management of the company and such a vote can be utilized to control the company. Controlling
interest, therefore, is not an identifiable or distinct capital asset independent of holding of shares
and the nature of the transaction has to be ascertained from the contract and the surrounding
circumstances. Controlling interest is inherently contractual right and not property right and cannot
be considered as transfer of property and hence a capital asset unless the Statute stipulates
otherwise. Acquisition of shares may carry the acquisition of controlling interest, which is purely a
commercial concept and tax is levied on the transaction, not on its effect.

A. LIFTING THE VEIL - TAX LAWS

167. Lifting the corporate veil doctrine is readily applied in the cases coming within the Company
Law, Law of Contract, Law of Taxation. Once the transaction is shown to be fraudulent, sham,
circuitous or a device designed to defeat the interests of the shareholders, investors, parties to the
contract and also for tax evasion, the Court can always lift the corporate veil and examine the
substance of the transaction. This Court in Commissioner of Income Tax v. Sri Meenakshi Mills
Ltd., Madurai MANU/SC/0138/1966 : 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 facade 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 Ors. MANU/SC/0015/1985 : (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. MANU/SC/0091/1968 : AIR 1969 SC 932 :
(1969) 1 SCR 988, wherein this Court noticed that the Assessee firm sought to avoid tax on the
amount of compensation received for the loss of office by claiming that it was capital gain and it
was found that the termination of the contract of managing agency was a collusive transaction.
Court held that it was a collusive device, practiced by the managed company and the Assessee
firm for the purpose of evading income tax, both at the hands of the payer and the payee.

168. Lifting the corporate veil doctrine can, therefore, be applied in tax matters even in the
absence of any statutory authorization to that effect. Principle is also being applied in cases of
holding company - subsidiary relationship- where in spite of being separate legal personalities, if
the facts reveal that they indulge in dubious methods for tax evasion.

(B) Tax Avoidance and Tax Evasion:

Tax avoidance and tax evasion are two expressions which find no definition either in the Indian
Companies Act, 1956 or the Income Tax Act, 1961. But the expressions are being used in different
contexts by our Courts as well as the Courts in England and various other countries, when a

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subject is sought to be taxed. One of the earliest decisions which came up before the House of
Lords in England demanding tax on a transaction by the Crown is Duke of Westminster (supra). In
that case, Duke of Westminster had made an arrangement that he would pay his gardener an
annuity, in which case, a tax deduction could be claimed. Wages of household services were not
deductible expenses in computing the taxable income, therefore, Duke of Westminster was
advised by the tax experts that if such an agreement was employed, Duke would get tax
exemption. Under the Tax Legislation then in force, if it was shown as gardener's wages, then the
wages paid would not be deductible. Inland Revenue contended that the form of the transaction
was not acceptable to it and the Duke was taxed on the substance of the transaction, which was
that payment of annuity was treated as a payment of salary or wages. Crown's claim of substance
doctrine was, however, rejected by the House of Lords. Lord Tomlin's celebrated words are
quoted below:

Every man is entitled if he can to order his affairs so that the tax attaching under the appropriate
Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure this result,
then, however unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may
be of his ingenuity, he cannot be compelled to pay an increased tax. This so called doctrine of 'the
substance' seems to me to be nothing more than an attempt to make a man pay notwithstanding
that he has so ordered his affairs that the amount of tax sought from him is not legally claimable.
Lord Atkin, however, dissented and stated that "the substance of the transaction was that what
was being paid was remuneration."

The principles which have emerged from that judgment are as follows:

(1) A legislation is to receive a strict or literal interpretation;

(2) An arrangement is to be looked at not in by its economic or commercial substance but by its
legal form; and

(3) An arrangement is effective for tax purposes even if it has no business purpose and has been
entered into to avoid tax.

The House of Lords, during 1980's, it seems, began to attach a "purposive interpretation
approach" and gradually began to give emphasis on "economic substance doctrine" as a question
of statutory interpretation. In a most celebrated case in Ramsay (supra), the House of Lords
considered this question again. That was a case whereby the taxpayer entered into a circular
series of transactions designed to produce a loss for tax purposes, but which together produced
no commercial result. Viewed that transaction as a whole, the series of transactions was self-
cancelling, the taxpayer was in precisely the same commercial position at the end as at the
beginning of the series of transactions. House of Lords ruled that, notwithstanding the rule in Duke
of Westminster's case, the series of transactions should be disregarded for tax purposes and the
manufactured loss, therefore, was not available to the taxpayer. Lord Wilberforce opined as

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follows:

While obliging the court to accept documents or transactions, found to be genuine, as such, it
does not compel the court to look at a document or a transaction in blinkers, isolated from any
context to which it properly belongs. If it can be seen that a document or transaction was intended
to have effect as part of a nexus or series of transactions, or as an ingredient of a wider
transaction intended as a whole, there is nothing in the doctrine to prevent it being so regarded; to
do so in not to prefer form to substance, or substance to form. It is the task of the court to
ascertain the legal nature of any transaction to which it is sought to attach a tax or a tax
consequence and if that emerges from a series or combination of transactions intended to operate
as such, it is that series or combination which may be regarded.

(Emphasis supplied)

House of Lords, therefore, made the following important remarks concerning what action the Court
should consider in cases that involve tax avoidance:

(a) A taxpayer was only to be taxed if the Legislation clearly indicated that this was the case;

(b) A taxpayer was entitled to manage his or her affairs so as to reduce tax;

(c) Even if the purpose or object of a transaction was to avoid tax this did not invalidate a
transaction unless an anti-avoidance provision applied; and

(d) If a document or transaction was genuine and not a sham in the traditional sense, the Court
had to adhere to the form of the transaction following the Duke Westminster concept.

169. In Ramsay (supra) it may be noted, the taxpayer produced a profit that was liable to capital
gains tax, but a readymade claim was set up to create an allowable loss that was purchased by
the taxpayer with the intention of avoiding the capital gains tax. Basically, the House of Lords,
cautioned that the technique of tax avoidance might progress and technically improve and Courts
are not obliged to be at a standstill. In other words, the view expressed was that that a subject
could be taxed only if there was a clear intendment and the intendment has to be ascertained on
clear principles and the Courts would not approach the issue on a mere literal interpretation.
Ramsay was, therefore, seen as a new approach to artificial tax avoidance scheme.

170. Ramsay was followed by the House of Lords in another decision in IRC v. Burmah Oil Co
Ltd. (1982) 54 TC 200. This case was also concerned with a self-cancelling series of transactions.
Lord Diplock, in that case, confirmed the judicial view that a development of the jurisprudence was
taking place, stating that Ramsay case marked a significant change in the approach adopted by
the House of Lords to a pre-ordained series of transactions. Ramay and Burmah cases, it may be
noted, were against self-cancelling artificial tax schemes which were widespread in England in

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1970's. Rather than striking down the self-cancelling transactions, of course, few of the speeches
of Law Lords gave the impression that the tax effectiveness of a scheme should be judged by
reference to its commercial substance rather than its legal form. On this, of course, there was
some conflict with the principle laid down in Duke of Westminster. Duke of Westminster was
concerned with the "single tax avoidance step". During 1970's, the Courts in England had to deal
with several pre-planned avoidance schemes containing a number of steps. In fact, earlier in IRC
v. Plummer (1979) 3 All ER 775, Lord Wilberforce commented about a scheme stating that the
same was carried out with "almost military precision" which required the court to look at the
scheme as a whole. The scheme in question was a "circular annuity" plan, in which a charity made
a capital payment to the taxpayer in consideration of his covenant to make annual payments of
income over five years. The House of Lords held that the scheme was valid. Basically, the
Ramsay was dealing with "readymade schemes".

171. The House of Lords, however, had to deal with a non self-cancelling tax avoidance scheme in
Dawson (supra). Dawsons, in that case, held shares in two operating companies which agreed in
principle in September 1971 to sell their entire shareholding to Wood Bastow Holdings Ltd. Acting
on advice, to escape capital gains tax, Dawsons decided not to sell directly to Wood Bastow,
rather arranged to exchange their shares for shares in an investment company to be incorporated
in the Isle of Man. Greenjacket Investments Ltd. was then incorporated in the Isle of Man on
16.12.1971 and two arrangements were finalized (i) Greenjacket would purchase Dawsons shares
in the operating company for 152,000 to be satisfied by the issue of shares of Greenjacket and (ii)
an agreement for Greenjacket to sell the shares in the operating company to Wood Bastow for
152,000.

172. The High Court and the Court of Appeal ruled that Ramsay principle applied only where steps
forming part of the scheme were self-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.

173. Even though in Dawson, the House of Lords seems to strike down the transaction by the
taxpayer for the purpose of tax avoidance, House of Lords in Craven (supra) clarified the position
further. In that case, the taxpayers exchanged their shares in a trading company (Q Ltd) for shares
in an Isle of Man holding company (M Ltd), in anticipation of a potential sale or merger of the
business. Taxpayers, in the meanwhile, had abandoned negotiations with one interested party,
and later concluded a sale of Q Ltd's shares with another. M Ltd subsequently loaned the entire
sale proceeds to the taxpayers, who appealed against assessments to capital gains tax. The
House of Lords held in favor of the taxpayers, dismissing the crown's appeal by a majority of three
to two. House of Lords noticed that when the share exchange took place, there was no certainty

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that the shares in Q Ltd would be sold. Lord Oliver, speaking for the majority, opined that Ramsay,
Burmah and Dawson did not produce any legal principle that would nullify any transaction that has
no intention besides tax avoidance and opined as follows:

My Lords, for my part I find myself unable to accept that Dawson either established or can properly
be used to support a general proposition that any transaction which is effected for avoiding tax on
a contemplated subsequent transaction and is therefore planned, is for that reason, necessarily to
be treated as one with that subsequent transaction and as having no independent effect.
Craven made it clear that: (1) Strategic tax planning undertaken for months or possible years
before the event (of-sale) in anticipation of which it was effected; (2) A series of transactions
undertaken at the time of disposal/sale, including an intermediate transaction interposed into
having no independent life, could under Ramsay principle be looked at and treated as a composite
whole transaction to which the fiscal results of the single composite whole are to be applied, i.e.
that an intermediate transfer which was, at the time when it was effected, so closely
interconnected with the ultimate disposition, could properly be described as not, in itself, a real
transaction at all, but merely an element in some different and larger whole without independent
effect.

174. Later, House of Lords in Ensign Tankers (Leasing) Ltd. v. Stokes (1992) 1 AC 655 made a
review of the various tax avoidance cases from Floor v. Davis(1978) 2 All ER 1079: (1978) Ch
295 to Craven (supra). In Ensign Tankers, a company became a partner of a limited partnership
that had acquired the right to produce the film "Escape to Victory". 75% of the cost of making the
film was financed by way of a non-recourse loan from the production company, the company
claimed the benefit of depreciation allowances based upon the full amount of the production cost.
The House of Lords disallowed the claim, but allowed depreciation calculated on 25% of the cost
for which the limited partnership was at risk. House of Lords examined the transaction as a whole
and concluded that the limited partnership had only 'incurred capital expenditure on the provision
of machinery or plant' of 25% and no more.

175. Lord Goff explained the meaning of "unacceptable tax avoidance" in Ensign Tankers and
held that unacceptable tax avoidance typically involves the creation of complex artificial structures
by which, as though by the wave of a magic wand, the taxpayer conjures out of the air a loss, or a
gain, or expenditure, or whatever it may be, which otherwise would never have existed. This, of
course, led to further debate as to what is "unacceptable tax avoidance" and "acceptable tax
avoidance".

176. House of Lords, later in Inland Revenue Commissioner v. McGuckian (1997) BTC 346
said that the substance of a transaction may be considered if it is a tax avoidance scheme. Lord
Steyn observed as follows:

While Lord Tomlin's observations in the Duke of Westminster case [1936] A.C. 1 still point to a
material consideration, namely the general liberty of the citizen to arrange his financial affairs as

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he thinks fit, they have ceased to be canonical as to the consequence of a tax avoidance scheme.
McGuckian was associated with a tax avoidance scheme. The intention of the scheme was to
convert the income from shares by way of dividend to a capital receipt. Schemes' intention was to
make a capital receipt in addition to a tax dividend. Mc.Guckian had affirmed the fiscal nullity
doctrine from the approach of United Kingdom towards tax penalties which emerged from tax
avoidance schemes. The analysis of the transaction was under the principles laid down in Duke of
Westminster, since the entire transaction was not a tax avoidance scheme.

177. House of Lords in MacNiven v. Westmoreland Investments Limited (2003) 1 AC 311

examined the scope of Ramsay principle approach and held that it was one of purposive
construction. In fact, Ramsay's case and case of Duke of Westminister were reconciled by Lord
Hoffmann in MacNiven. Lord Hoffmann clarified stating as follows

if the legal position is that tax is imposed by reference to a legally designed concept, such as
stamp duty payable on a document which constitute conveyance or sale, the court cannot tax a
transaction which uses no such document on the ground that it achieves the same economic
effect. On the other hand, the legal position is that the tax is imposed by reference to a commercial
concept, then to have regard to the business "substance" of the matter is not to ignore the legal
position but to give effect to it.
178. In other words, Lord Hoffmann reiterated that tax statutes must be interpreted "in a purposive
manner to achieve the intention of the Legislature". Ramsay and Dawson are said to be examples
of these fundamental principles.

179. Lord Hoffmann, therefore, stated that when Parliament intended to give a legal meaning to a
statutory term or phrase, then Ramsay approach does not require or permit an examination of the
commercial nature of the transaction, rather, it requires a consideration of the legal effect of what
was done.

180. MacNiven approach has been reaffirmed by the House of Lord in Barclays Mercantile
Business Finance Limited v. Mawson (2005) AC 685 (HL). In Mawson, BGE, an Irish Company
had applied for a pipeline and it sold the pipeline to (BMBF) taxpayer for 91.3 Million. BMBF later
leased the pipeline back to BGE which granted a sub-lease onwards to its UK subsidiary. BGE
immediately deposited the sale proceeds as Barclays had no access to it for 31 years. Parties had
nothing to loose with the transaction designed to produce substantial tax deduction in UK and no
other economic consequence of any significance. Revenue denied BMBF's deduction for
depreciation because the series of transactions amounted to a single composite transaction that
did not fall within Section 24(1) of the Capital Cost Allowance Act, 1990. House of Lords, in a
unanimous decision held in favor of the tax payer and held as follows "driving principle in
Ramsay's line of cases continues to involve a general rule of statutory interpretation and unblinked
approach to the analysis of facts. The ultimate question is whether the relevant statutory
provisions, construed purposively, were intended to apply to a transaction, viewed realistically.

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181. On the same day, House of Lords had an occasion to consider the Ramsay approach in
Inland Revenue Commissioner v. Scottish Provident Institution 2004 (1) WLR 3172. The
question involved in Scottish Provident Institution was whether there was "a debt contract for the
purpose of Section 150A(1) of the Finance Act, 1994." House of Lords upheld the Ramsay
principle and considered the series of transaction as a composite transaction and held that the
composite transaction created no entitlement to securities and that there was, thus, no qualifying
contract. The line drawn by House of Lords between Mawson and Scottish Provident Institution in
holding that in one case there was a composite transaction to which statute applied, while in the
other there was not.

182. Lord Hoffmann later in an article "Tax Avoidance" reported in (2005) BTR 197 commented on
the judgment in BMBF as follows:

the primacy of the construction of the particular taxing provision and the illegitimacy of the rules of
general application has been reaffirmed by the recent decision of the House in "BMBF". Indeed, it
may be said that this case has killed off Ramsay doctrine as a special theory of revenue law and
subsumed it within the general theory of the interpretation of statutes.
Above discussion would indicate that a clear-cut distinction between tax avoidance and tax
evasion is still to emerge in England and in the absence of any legislative guidelines, there bound
to be uncertainty, but to say that the principle of Duke of Westminster has been exorcised in
England is too tall a statement and not seen accepted. House of Lords in McGuckian and
MacNiven, it may be noted, has emphasized that the Ramsay approach as a principle of statutory
interpretation rather than an over-arching anti avoidance doctrine imposed upon tax laws. Ramsay
approach ultimately concerned with the statutory interpretation of a tax avoidance scheme and the
principles laid down in Duke of Westminster, it cannot be said, has been given a complete go by
Ramsay, Dawson or other judgments of the House o f Lords.

PART-III

INDO-MAURITIUS TREATY - AZADI BACHAO ANDOLAN

183. The Constitution Bench of this Court in McDowell (supra) examined at length the concept of
tax evasion and tax avoidance in the light of the principles laid down by the House of Lords in
several judgments like Duke of Westminster, Ramsay, Dawson etc. The scope of Indo-Mauritius
Double Tax Avoidance Agreement (in short DTAA)], Circular No. 682 dated 30.3.1994 and
Circular No. 789 dated 13.4.2000 issued by CBDT, later came up for consideration before a two
Judges Bench of this Court in Azadi Bachao Andolan. Learned Judges made some observations
with regard to the opinion expressed by Justice Chinnappa Reddy in a Constitution Bench
judgment of this Court in McDowell, which created some confusion with regard to the
understanding of the Constitution Bench judgment, which needs clarification. Let us, however, first
examine the scope of the India-Mauritius Treaty and its follow-up.

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184. India-Mauritius Treaty was executed on 1.4.1983 and notified on 16.12.1983. Article 13 of the
Treaty deals with the taxability of capital gains. Article 13(4) covers the taxability of capital gains
arising from the sale/transfer of shares and stipulates that "Gains derived by a resident of a
Contracting State from the alienation of any property other than those mentioned in paragraphs 1,
2 and 3 of that Article, shall be taxable only in that State". Article 10 of the Treaty deals with the
taxability of Dividends. Article 10(1) specifies that "Dividends paid by a company which is a
resident of a Contracting State to a resident of other contracting State, may be taxed in that other
State". Article 10(2) stipulates that "such dividend may also be taxed in the Contracting State of
which the company paying the dividends is a resident but if the recipient was the beneficial owner
of the dividends, the tax should not exceed; (a) 5% of the gross amount of the dividends if the
recipient of the dividends holds at least 10% of the capital of the company paying the dividends
and (b) 15% of the gross amount of the dividends in all other cases.

185. CBDT issued Circular No. 682 dated 30.03.1994 clarifying that capital gains derived by a
resident of Mauritius by alienation of shares of an Indian company shall be taxable only in
Mauritius according to Mauritius Tax Law. In the year 2000, the Revenue authorities sought to
deny the treaty benefits to some Mauritius resident companies pointing out that the beneficial
ownership in those companies was outside Mauritius and thus the foremost purpose of investing in
India via Mauritius was tax avoidance. Tax authorities took the stand that Mauritius was merely
being used as a conduit and thus sought to deny the treaty benefits despite the absence of a
limitation of benefits (LOB) clause in the Treaty. CBDT then issued Circular No. 789 dated
13.04.2000 stating that the Mauritius Tax Residency Certificate (TRC) issued by the Mauritius Tax
Office was a sufficient evidence of tax response of that company in Mauritius and that such
companies were entitled to claim treaty benefits.

186. Writ Petitions in public interest were filed before the Delhi High Court challenging the
constitutional validity of the above mentioned circulars. Delhi High Court quashed Circular No. 789
stating that inasmuch as the circular directs the Income Tax authorities to accept as a certificate of
residence issued by the authorities of Mauritius as sufficient evidence as regards the status of
resident and beneficial ownership, was ultra vires the powers of CBDT. The Court also held that
the Income Tax Office was entitled to lift the corporate veil in India to see whether a company was
a resident of Mauritius or not and whether the company was paying income tax in Mauritius or not.
The Court also held that the "Treaty Shopping" by which the resident of a third country takes
advantage of the provisions of the agreement was illegal and necessarily to be forbidden. Union of
India preferred appeal against the judgment of the Delhi High Court, before this Court. This Court
in Azadi Bachao Andolan allowed the appeal and Circular No. 789 was declared valid.

Limitation of Benefit Clause (LOB)

187. India Mauritius Treaty does not contain any Limitation of Benefit (LOB) clause, similar to the
Indo-US Treaty, wherein Article 24 stipulates that benefits will be available if 50% of the shares of
a company are owned directly or indirectly by one or more individual residents of a controlling

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state. LOB clause also finds a place in India-Singapore DTA. Indo Mauritius Treaty does not
restrict the benefit to companies whose shareholders are non-citizens/residents of Mauritius, or
where the beneficial interest is owned by non-citizens/residents of Mauritius, in the event where
there is no justification in prohibiting the residents of a third nation from incorporating companies in
Mauritius and deriving benefit under the treaty. No Tax Department is unaware that the quantum
of both FDI and FII do not originate from Mauritius but from other global investors situate outside
Mauritius. Maurtius, it is well known is incapable of bringing FDI worth millions of dollars into India.
If the Union of India and Tax Department insist that the investment would directly come from
Mauritius and Mauritius alone then the Indo-Mauritius treaty would be dead letter.

188. Mr. Aspi Chinoy, learned senior counsel contended that in the absence of LOB Clause in the
India Mauritius Treaty, the scope of the treaty would be positive from Mauritius Special Purpose
Vehicles (SPVs) created specifically to route investments into India, meets with our approval. We
acknowledge that on a subsequent sale/transfer/disinvestment of shares by the Mauritian
company, after a reasonable time, the sale proceeds would be received by the Mauritius Company
as the registered holder/owner of such shares, such benefits could be sent back to the Foreign
Principal/100% shareholder of Mauritius company either by way of a declaration of special
dividend by Mauritius company and/or by way of repayment of loans received by the Mauritius
company from the Foreign Principal/ shareholder for the purpose of making the investment. Mr.
Chinoy is right in his contention that apart from DTAA, which provides for tax exemption in the
case of capital gains received by a Mauritius company/shareholder at the time of
disinvestment/exit and the fact that Mauritius does not levy tax on dividends declared and paid by
a Mauritius company/subsidiary to its Foreign Shareholders/Principal, there is no other reason for
this quantum of funds to be invested from/through Mauritius.

189. We are, therefore, of the view that in the absence of LOB Clause and the presence of
Circular No. 789 of 2000 and TRC certificate, on the residence and beneficial interest/ownership,
tax department cannot at the time of sale/disinvestment/exit from such FDI, deny benefits to such
Mauritius companies of the Treaty by stating that FDI was only routed through a Mauritius
company, by a company/principal resident in a third country; or the Mauritius company had
received all its funds from a foreign principal/company; or the Mauritius subsidiary is
controlled/managed by the Foreign Principal; or the Mauritius company had no assets or business
other than holding the investment/shares in the Indian company; or the Foreign Principal/100%
shareholder of Mauritius company had played a dominant role in deciding the time and price of the
disinvestment/sale/transfer; or the sale proceeds received by the Mauritius company had
ultimately been paid over by it to the Foreign Principal/ its 100% shareholder either by way of
Special Dividend or by way of repayment of loans received; or the real owner/beneficial owner of
the shares was the foreign Principal Company. Setting up of a WOS Mauritius subsidiary/SPV by
Principals/genuine substantial long term FDI in India from/through Mauritius, pursuant to the DTAA
and Circular No. 789 can never be considered to be set up for tax evasion.

TRC whether conclusive

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190. LOB and look through provisions cannot be read into a tax treaty but the question may arise
as to whether the TRC is so conclusive that the Tax Department cannot pierce the veil and look at
the substance of the transaction. DTAA and Circular No. 789 dated 13.4.2000, in our view, would
not preclude the Income Tax Department from denying the tax treaty benefits, if it is established,
on facts, that the Mauritius company has been interposed as the owner of the shares in India, at
the time of disposal of the shares to a third party, solely with a view to avoid tax without any
commercial substance. Tax Department, in such a situation, notwithstanding the fact that the
Mauritian company is required to be treated as the beneficial owner of the shares under to look at
the entire transaction of sale as a whole and if it is established that the Mauritian company has
been interposed as a device, it is open to the Tax Department to discard the device and take into
consideration the real transaction between the parties, and the transaction may be subjected to
tax. In other words, TRC does not prevent enquiry into a tax fraud, for example, where an OCB is
used by an Indian resident for round-tripping or any other illegal activities, nothing prevents the
Revenue from looking into special agreements, contracts or arrangements made or effected by
Indian the OCB in the entire transaction.

191. No court will recognize sham transaction or a colorable device or adoption of a dubious
method to evade tax, but to say that the Indo-Mauritian Treaty will recognize FDI and FII only if it
originates from Mauritius, not the investors from third countries, incorporating company in
Mauritius, is pitching it too high, especially when statistics reveals that for the last decade the FDI
in India was US$ 178 billion and, of this, 42% i.e. US$ 74.56 billion was through Mauritian route.
Presently, it is known, FII in India is Rs. 450,000 crores, out of which Rs. 70,000 crores is from
Mauritius. Facts, therefore, clearly show that almost the entire FDI and FII made in India from
Mauritius under DTAA does not originate from that country, but has been made by Mauritius
Companies / SPV, which are owned by companies/individuals of third countries providing funds for
making FDI by such companies/individuals not from Mauritius, but from third countries.

192. Mauritius, and India, it is known, has also signed a Memorandum of Understanding (MOU)
laying down the rules for information, exchange between the two countries which provides for the
two signatory authorities to assist each other in the detection of fraudulent market practices,
including the insider dealing and market manipulation in the areas of securities transactions and
derivative dealings. The object and purpose of the MOU is to track down transactions tainted by
fraud and financial crime, not to target the bona fide legitimate transactions. Mauritius has also
enacted stringent "Know Your Clients" (KYC) Regulations and Anti-Money Laundering laws which
seek to avoid abusive use of treaty.

193. Viewed in the above perspective, we also find no reason to import the "abuse of rights
doctrine" (abus de droit) to India. The above doctrine was seen applied by the Swiss Court in A
Holding Aps. (8 ITRL), unlike Courts following Common Law. That was a case where a Danish
company was interposed to hold all the shares in a Swiss Company and there was a clear finding
of fact that it was interposed for the sole purpose of benefiting from the Swiss-Denmark DTA

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which had the effect of reducing a normal 35% withholding tax on dividend out of Switzerland
down to 0%. Court in that case held that the only reason for the existence of the Danish company
was to benefit from the zero withholding tax under the tax treaty. On facts also, the above case will
not apply to the case in hand.

194. Cayman Islands, it was contended, was a tax heaven and CGP was a shell company, hence,
they have to be looked at with suspicion. We may, therefore, briefly examine what those
expressions mean and how they are understood in the corporate world.

TAX HAVENS, TREATY SHOPPING and SHELL COMPANIES

195. Tax Havens" is not seen defined or mentioned in the Tax Laws of this country Corporate
world gives different meanings to that expression, so also the Tax Department. The term "tax
havens" is sometime described as a State with nil or moderate level of taxation and/or liberal tax
incentives for undertaking specific activities such as exporting. The expression "tax haven" is also
sometime used as a "secrecy jurisdiction. The term "Shell Companies" finds no definition in the tax
laws and the term is used in its pejorative sense, namely as a company which exits only on paper,
but in reality, they are investment companies. Meaning of the expression 'Treaty Shopping' was
elaborately dealt with in Azadi Bachao Andolan and hence not repeated.

196. Tax Justice Network Project (U.K.), however, in its report published in September, 2005,
stated as follows:

The role played by tax havens in encouraging and profiteering from tax avoidance, tax evasion
and capital flight from developed and developing countries is a scandal of gigantic proportions.
The project recorded that one per cent of the world's population holds more than 57% of total
global worth and that approximately US $ 255 billion annually was involved in using offshore
havens to escape taxation, an amount which would more than plug the financing gap to achieve
the Millennium Development Goal of reducing the world poverty by 50% by 2015. ("Tax Us If You
Can" September 2005, 78 available at http:/www.taxjustice.net). Necessity of proper legislation for
charging those types of transactions have already been emphasized by us.

Round Tripping

197. India is considered to be the most attractive investment destinations and, it is known, has
received $37.763 billion in FDI and $29.048 billion in FII investment in the year to March 31, 2010.
FDI inflows it is reported were of $ 22.958 billion between April 2010 and January, 2011 and FII
investment were $ 31.031 billions. Reports are afloat that million of rupees go out of the country
only to be returned as FDI or FII. Round Tripping can take many formats like under-invoicing and
over-invoicing of exports and imports. Round Tripping involves getting the money out of India, say
Mauritius, and then come to India like FDI or FII. Article 4 of the Indo-Mauritius DTAA defines a
'resident' to mean any person, who under the laws of the contracting State is liable to taxation

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therein by reason of his domicile, residence, place of business or any other similar criteria. An
Indian Company, with the idea of tax evasion can also incorporate a company off-shore, say in a
Tax Haven, and then create a WOS in Mauritius and after obtaining a TRC may invest in India.
Large amounts, therefore, can be routed back to India using TRC as a defense, but once it is
established that such an investment is black money or capital that is hidden, it is nothing but
circular movement of capital known as Round Tripping; then TRC can be ignored, since the
transaction is fraudulent and against national interest.

198. Facts stated above are food for thought to the legislature and adequate legislative measures
have to be taken to plug the loopholes, all the same, a genuine corporate structure set up for
purely commercial purpose and indulging in genuine investment be recognized. However, if the
fraud is detected by the Court of Law, it can pierce the corporate structure since fraud unravels
everything, even a statutory provision, if it is a stumbling block, because legislature never intents
to guard fraud. Certainly, in our view, TRC certificate though can be accepted as a conclusive
evidence for accepting status of residents as well as beneficial ownership for applying the tax
treaty, it can be ignored if the treaty is abused for the fraudulent purpose of evasion of tax.

McDowell - WHETHER CALLS FOR RECONSDIERATION:

199. McDowell has emphatically spoken on the principle of Tax Planning. Justice Ranganath
Mishra, on his and on behalf of three other Judges, after referring to the observations of Justice
S.C. Shah in CIT v. A. Raman and Company (1968) 1 SCC 10, CIT v. B.M. Kharwar
MANU/SC/0231/1968 : (1969) 1 SCR 651, the judgments in Bank of Chettinad Ltd. v. CIT (1940)
8 ITR 522 (PC), Jiyajeerao Cotton Mills Ltd. v. Commissioner of Income Tax and Excess
Profits Tax, Bombay MANU/SC/0074/1958 : AIR 1959 SC 270; CIT v. Vadilal Lallubhai
MANU/SC/0293/1972 : (1973) 3 SCC 17 and the views expressed by Viscount Simon in Latilla v.
IRC. 26 TC 107 : (1943) AC 377 stated as follows:

Tax planning may be legitimate provided it is within the framework of law. Colorable devices
cannot be part of tax planning and it is wrong to encourage or entertain the belief that is honorable
to avoid the payment of tax by resorting to dubious methods. It is the obligation of every citizen to
pay the taxes honestly without resorting to subterfuges.
200. Justice Shah in Raman (supra) has stated that avoidance of tax liability by so arranging the
commercial affairs that charge of tax is distributed is not prohibited and a tax payer may resort to a
device to divert the income before it accrues or arises to him and the effectiveness of the device
depends not upon considerations of morality, but on the operation of the Income Tax Act. Justice
Shah made the same observation in B.N. Kharwar (supra) as well and after quoting a passage
from the judgment of the Privy Council stated as follows:

The Taxing authority is entitled and is indeed bound to determine the true legal relation resulting
from a transaction. If the parties have chosen to conceal by a device the legal relation, it is open to
the taxing authorities to unravel the device and to determine the true character of the relationship.

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But the legal effect of a transaction cannot be displaced by probing into the "substance of the
transaction".
In Jiyajeerao (supra) also, this Court made the following observation:

Every person is entitled so to arrange his affairs as to avoid taxation, but the arrangement must be
real and genuine and not a sham or makebelieve.
201. In Vadilal Lalubhai (supra) this Court re-affirmed the principle of strict interpretation of the
charging provisions and also affirmed the decision of the Gujarat High Court in Sankarlal
Balabhai v. ITO MANU/GJ/0030/1974 : (1975) 100 ITR 97 (Guj.), which had drawn a distinction
between the legitimate avoidance and tax evasion. Lalita's case (supra) dealing with a tax
avoidance scheme, has also expressly affirmed the principle that genuine arrangements would be
permissible and may result in an Assessee escaping tax.

202. Justice Chinnappa Reddy starts his concurring judgment in McDowell as follows:

While I entirely agree with my brother Ranganath Mishra, J. in the judgment proposed to be
delivered by me, I wish to add a few paragraphs, particularly to supplement what he has said on
the "fashionable" topic of tax avoidance.

(Emphasis supplied)

Justice Reddy has, the above quoted portion shows, entirely agreed with Justice Mishra and has
stated that he is only supplementing what Justice Mishra has spoken on tax avoidance. Justice
Reddy, while agreeing with Justice Mishra and the other three judges, has opined that in the very
country of its birth, the principle of Westminster has been given a decent burial and in that country
where the phrase "tax avoidance" originated the judicial attitude towards tax avoidance has
changed and the Courts are now concerning themselves not merely with the genuineness of a
transaction, but with the intended effect of it for fiscal purposes. Justice Reddy also opined that no
one can get away with the tax avoidance project with the mere statement that there is nothing
illegal about it. Justice Reddy has also opined that the ghost of Westminster (in the words of Lord
Roskill) has been exorcised in England. In our view, what transpired in England is not the ratio of
McDowell and cannot be and remains merely an opinion or view.

203. Confusion arose (see Paragraph 46 of the judgment) when Justice Mishra has stated after
referring to the concept of tax planning as follows:

On this aspect, one of us Chinnappa Reddy, J. has proposed a separate and detailed opinion with
which we agree.
204. Justice Reddy, we have already indicated, himself has stated that he is entirely agreeing with
Justice Mishra and has only supplemented what Justice Mishra has stated on Tax Avoidance,
therefore, we have go by what Justice Mishra has spoken on tax avoidance.

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205. Justice Reddy has depreciated the practice of setting up of Tax Avoidance Projects, in our
view, rightly because the same is/was the situation in England and Ramsay and other judgments
had depreciated the Tax Avoidance Schemes.

206. In our view, the ratio of the judgment is what is spoken by Justice Mishra for himself and on
behalf of three other judges, on which Justice Reddy has agreed. Justice Reddy has clearly stated
that he is only supplementing what Justice Mishra has said on Tax avoidance.

207. Justice Reddy has endorsed the view of Lord Roskill that the ghost of Westminster had been
exorcised in England and that one should not allow its head rear over India. If one scans through
the various judgments of the House of Lords in England, which we have already done, one thing is
clear that it has been a cornerstone of law, that a tax payer is enabled to arrange his affairs so as
to reduce the liability of tax and the fact that the motive for a transaction is to avoid tax does not
invalidate it unless a particular enactment so provides (Westminster Principle). Needless to say if
the arrangement is to be effective, it is essential that the transaction has some economic or
commercial substance. Lord Roskill's view is not seen as the correct view so also Justice Reddy's,
for the reasons we have already explained in earlier part of this judgment.

208. A five Judges Bench judgment of this Court in Mathuram Agrawal v. State of Madhya
Pradesh MANU/SC/0692/1999 : (1999) 8 SCC 667, after referring to the judgment in B.C.
Kharwar (supra) as well as the opinion expressed by Lord Roskill on Duke of Westminster stated
that the subject is not to be taxed by inference or analogy, but only by the plain words of a statute
applicable to the facts and circumstances of each case. 117. Revenue cannot tax a subject
without a statute to support and in the course we also acknowledge that every tax payer is entitled
to arrange his affairs so that his taxes shall be as low as possible and that he is not bound to
choose that pattern which will replenish the treasury. Revenue's stand that the ratio laid down in
McDowell is contrary to what has been laid down in Azadi Bachao Andolan, in our view, is
unsustainable and, therefore, calls for no reconsideration by a larger branch.

PART-IV

CGP and ITS INTERPOSITION

209. CGP's interposition in the HTIL Corporate structure and its disposition, by way of transfer, for
exit, was for a commercial or business purpose or with an ulterior motive for evading tax, is the
next question. Parties, it is trite, are free to choose whatever lawful arrangement which will suit
their business and commercial purpose, but the true nature of the transaction can be ascertained
only by looking into the legal arrangement actually entered into and Indisputedly, that the contracts
have to be read holistically to arrive at a conclusion as to the real nature of a transaction.
Revenue's stand was that the CGP share was a mode or mechanism to achieve a transfer of
control, so that the tax be imposed on the transfer of control not on transfer of the CGP share.
Revenue's stand, relying upon Dawson test, was that CGP's interposition in the Hutchison

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structure was an arrangement to deceive the Revenue with the object of hiding or rejecting the tax
liability which otherwise would incur.

210. Revenue contends that the entire corporate structure be looked at as on artificial tax
avoidance scheme wherein CGP was introduced into the structure at the last moment, especially
when another route was available for HTIL to transfer its controlling interest in HEL to Vodafone.
Further it was pointed out that the original idea of the parties was to sell shares in HEL directly but
at the last moment the parties changed their mind and adopted a different route since HTIL
wanted to declare a special dividend out of US $ 11 million for payment and the same would not
have been possible if they had adopted Mauritian route.

211. Petitioner pointed out that if the motive of HTIL was only to save tax it had the option to sell
the shares of Indian companies directly held Mauritius entities, especially when there is no LOB
clause in India-Mauritius Treaty. Further, it was pointed out that if the Mauritius companies had
sold the shares of HEL, then Mauritius companies would have continued to be the subsidiary of
HTIL, their account could have been consolidated in the hands of HTIL and HTIL would have
accounted for the accounts exactly the same way that it had accounted for the accounts in HTIL
BVI/nominated payee. Had HTIL adopted the Mauritius route, then it would have been
cumbersome to sell the shares of a host of Mauritian companies.

212. CGP was incorporated in the year 1998 and the same became part of the Hutchison
Corporate structure in the year 2005. Facts would clearly indicate that the CGP held shares in
Array and Hutchison Teleservices (India) Holdings Limited (MS), both incorporated in Mauritius.
HTIL, after acquiring the share of CGP (CI) in the year 1994 which constituted approximately 42%
direct interest in HEL, had put in place various FWAs, SHAs for arranging its affairs so that it can
also have interest in the functioning of HEL along with Indian partners.

213. Self centered operations in India were with 3GSPL an Indian company which held options
through various FWAs entered into with Indian partners. One of the tests to examine the
genuineness of the structure is the "timing test" that is timing of the incorporation of the entities or
transfer of shares etc. Structures created for genuine business reasons are those which are
generally created or investment is made, at the time where further investments are being made at
the time of consolidation etc.

214. HTIL preferred CGP route rather than adopting any other method (why ?) for which we have
to examine whether HTIL has got any justification for adopting this route, for sound commercial
reasons or purely for evasion of tax. In international investments, corporate structures are
designed to enable a smooth transition which can be by way of divestment or dilution. Once entry
into the structure is honorable, exits from the structure can also be honorable.

215. HTIL structure was created over a period of time and this was consolidated in 2004 to provide
a working model by which HTIL could make best use of its investments and exercise control over

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and strategically influence the affairs of HEL. HTIL in its commercial wisdom noticed the
disadvantage of preferring Array, which would have created problems for HTIL. Hutchison
Teleservices (India) Mauritius had a subsidiary, namely 3GSPL which carried on the call centre
business in India and the transfer of CGP share would give control over 3GSPL, an indirect
subsidiary which was incorporated in the year 1999. It would also obviate problems arising on
account of call and put options arrangements and voting rights enjoyed by 3GSPL. If Array was
transferred, the disadvantage was that HTIL had to deal with call and put options of 3GSPL. In the
above circumstances, HTIL in their commercial wisdom thought of transferring CGP share rather
than going for any other alternatives. Further 3GSPL was also a party to various agreements
between itself and the companies of AS, AG and IDFC Group. If Array had been transferred the
disadvantage would be that the same would result in hiving off the call centre business from
3GSPL. Consolidation operations of HEL were evidently done in the year 2005 not for tax
purposes but for commercial reasons and the contention that CGP was inserted at a very late
stage in order to bring a pre tax entity or to create a transaction that would avoid tax, cannot be
accepted.

216. The Revenue has no case that HTIL structure was a device or an artifice, but all along the
contention was that CGP was interposed at the last moment and applying the Dawson test, it was
contended that such an artificially interposed device be ignored, and applying Ramsay test of
purposive interpretation, the transaction be taxed for gain. CGP, it may be noted, was already part
of the HTIL's Corporate Structure and the decision taken to sell CGP (Share) so as to exit from the
Indian Telecom Sector was not the fall out of a tax exploitation scheme, but a genuine commercial
decision taking into consideration the best interest of the investors and the corporate entity.

217. Principle of Fiscal nullity was applied by Vinelott, J. in favor of the Assessee in Dawson,
where the judge rejected the contention of the Crown that the transaction was hit by the Ramsay
principle, holding that a transaction cannot be disregarded and treated as fiscal nullity if it has
enduring legal consequences. Principle was again explained by Lord Brightman stating that the
Ramsay test would apply not only where the steps are pre-contracted, but also they are pre-
ordained, if there is no contractual right and in all likelihood the steps would follow. On Fiscal
nullity, Lord Brightman again explained that there should be a pre-ordained series of transactions
and there should be steps inserted that have no commercial purpose and the inserted steps are to
be disregarded for fiscal purpose and, in such situations, Court must then look at the end result,
precisely how the end result will be taxed will depend on terms of the taxing statute sought to be
applied. Sale of CGP share, for exiting from the Indian Telecommunication Sector, in our view,
cannot be considered as other than tax avoidance. Sale of CGP share, in our view, was a genuine
business transaction, not a fraudulent or dubious method to avoid capital gains tax.

SITUS of CGP

218. Sites of CGP share stands where, is the next question. Law on sites of share has already
been discussed by us in the earlier part of the judgment. Sites of shares situates at the place

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where the company is incorporated and/ or the place where the share can be dealt with by way of
transfer. CGP share is registered in Cayman Island and materials placed before us would indicate
that Cayman Island law, unlike other laws does not recognize the multiplicity of registers. Section
184 of the Cayman Island Act provides that the company may be exempt if it gives to the
Registrar, a declaration that "operation of an exempted company will be conducted mainly outside
the Island". Section 193 of the Cayman Island Act expressly recognizes that even exempted
companies may, to a limited extent trade within the Islands. Section 193 permits activities by way
of trading which are incidental of off shore operations also all rights to enter into the contract etc.
The facts in this case as well as the provisions of the Caymen Island Act would clearly indicate
that the CGP (CI) share situates in Caymen Island. The legal principle on which sites of an asset,
such as share of the company is determined, is well settled. Reference may be made to the
judgments in Brassard v. Smith (1925) AC 371, London and South American Investment
Trust v. British Tobacco Company (Australia) (1927) 1 Ch. 107. Erie Beach Company v.
Attorney General for Ontario 1930 AC 161 PC 10, R. v. Williams (1942) AC 541. Sites of CGP
share, therefore, situates in Cayman Islands and on transfer in Cayman Islands would not shift to
India.

PART-V

219. Sale of CGP, on facts, we have found was not the fall out of an artificial tax avoidance
scheme or an artificial device, pre-ordained, or pre-conceived with the sole object of tax
avoidance, but was a genuine commercial decision to exit from the Indian Telecom Sector.

220. HTIL had the following controlling interest in HEL before its exit from the Indian Telecom
Sector:

(i) HTIL held its direct equity interest in HEL amounting approximately to 42% through eight
Mauritius companies.

(ii) HTIL indirect subsidiary CGP(M) held 37.25% of equity interest in TII, an Indian Company,
which in turn held 12.96% equity interest in HEL. CGP(M), as a result of its 37.25% interest in TII
had an interest in several downstream companies which held interest in HEL, as a result of which
HTIL obtained indirect equity interest of 7.24% in HEL.

(iii) HTIL held in Indian Company Omega Holdings, an Indian Company, interest to the extent of
45.79% of share capital through HTIM which held shareholding of 5.11% in HEL, resulting in
holding of 2.34% interest in the Indian Company HEL.

HTIL could, therefore, exercise its control over HEL, through the voting rights of its indirect
subsidiary Array (Mauritius) which in turn controlled 42% shares through Mauritian Subsidiaries in
HEL. Mauritian subsidiaries controlled 42% voting rights in HEL and HTIL could not however
exercise voting rights as stated above, in HEL directly but only through indirect subsidiary CGP(M)

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which in turn held equity interest in TII, an Indian company which held equity interest in HEL. HTIL
likewise through an indirect subsidiary HTI(M), which held equity interest in Omega an Indian
company which held equity interest in HEL, could exercise only indirect voting rights in HEL

221. HTIL, by holding CGP share, got control over its WOS Hutchison Tele Services (India)
Holdings Ltd (MS). HTSH(MS) was having control over its WOS 3GSPL, an Indian company which
exercised voting rights in HEL. HTIL, therefore, by holding CGP approximately 10% (pro rata)
indirect in HEL and not 67% as contended by the Revenue.

222. HTIL had 15% interest in HEL by virtue of FWAs, SHAs Call and Put Option Agreements and
Subscription Agreements and not controlling interest as such in HEL. HTIL, by virtue of those
agreements, had the following interests:

(i) Rights (and Options) by providing finance and guarantee to Asim Ghosh Group of companies to
exercise control over TII and indirectly over HEL through TII Shareholders Agreement and the
Centrino Framework Agreement dated 1.3.2006;

(ii) Rights (and Options) by providing finance and guarantee to Analjit Singh Group of companies
to 206 exercise control over TII and indirectly over HEL through various TII shareholders
agreements and the N.D. Callus Framework Agreement dated 1.3.2006.

(iii) Controlling rights over TII through the TII Shareholder's Agreement in the form of rights to
appoint two directors with veto power to promote its interest in HEL and thereby hold beneficial
interest in 12.30% of the share capital in HEL.

(iv) Finance to SMMS to acquire shares in ITNL (formerly Omega) with right to acquire the share
capital of Omega in future.

(v) Rights over ITNL through the ITNL Shareholder's Agreement, in the form of right to appoint two
directors with veto power to promote its interests in HEL and thereby it held beneficial interest in
2.77% of the share capital of the Indian company HEL;

(vi) Interest in the form of loan of US$231 million to HTI (BVI) which was assigned to Array
Holdings Ltd.;

(vii) Interest in the form of loan of US$ 952 million through HTI (BVI) utilized for purchasing shares
in the Indian company HEL by the 8 Mauritius companies;

(viii) Interest in the form of Preference share capital in JKF and TII to the extent of US$ 167.5
million and USD 337 million respectively. These two companies hold 19.54% equity in HEL.

(ix) Right to do telecom business in India through joint venture;

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(x) Right to avail of the telecom licenses in India and right to do business in India;

(xi) Right to use the Hutch brand in India;

(xii) Right to appoint/remove directors in the board of the Indian company HEL and its other Indian
subsidiaries;

(xiii) Right to exercise control over the management and affairs of the business of the Indian
company HEL (Management Rights);

(xiv) Right to take part in all the investment, management and financial decisions of the Indian
company HEL;

(xv) Right to control premium;

(xvi) Right to consultancy support in the use of Oracle license for the Indian business;

Revenue's stand before us was that the SPA on a commercial construction brought about an
extinguishment of HTIL's rights of management and control over HEL, resulting in transfer of
capital asset in India. Further, it was pointed out that the assets, rights and entitlements are
property rights pertaining to HTIL and its subsidiaries and the transfer of CGP share would have
no effect on the Telecom operations in India, but for the transfer of the above assets, rights and
entitlements. SPA and other agreements, if examined, as a whole, according to the Revenue,
leads to the conclusion that the substance of the transaction was the transfer of various property
rights of HTIL in HEL to Vodafone attracting capital gains tax in India. Further, it was pointed out
that moment CGP share was transferred off-shore, HTIL's right of control over HEL and its
subsidiaries stood extinguished, thus leading to income indirectly earned, outside India through
the medium of sale of the CGP share. All these issues have to be examined without forgetting the
fact that we are dealing with a taxing statute and the Revenue has to bring home all its contentions
within the four corners of taxing statute and not on assumptions and presumptions.

223. Vodafone on acquisition of CGP share got controlling interest of 42% over HEL/VEL through
voting rights through eight Mauritian subsidiaries, the same was the position of HTIL as well. On
acquiring CGP share, CGP has become a direct subsidiary of Vodafone, but both are legally
independent entities. Vodafone does not own any assets of CGP. Management and the business
of CGP vests on the Board of Directors of CGP but of course, Vodafone could appoint or remove
members of the Board of Directors of CGP. On acquisition of CGP from HTIL, Array became an
indirect subsidiary of Vodafone. Array is also a separate legal entity managed by its own Board of
Directors. Share of CGP situates in Cayman Islands and that of Array in Mauritius. Mauritian
entities which hold 42% shares in HEL became the direct and indirect subsidiaries of Array, on
Vodafone purchasing the CGP share. Voting rights, controlling rights, right to manage etc., of
Mauritian Companies vested in those companies. HTIL has never sold nor Vodafone purchased

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any shares of either Array or the Mauritian of which situates in Cayman Islands. By purchasing the
CGP share its sites will not shift either to Mauritius or to India, a legal issue, already explained by
us. Array being a WOS of CGP, CGP may appoint or remove any of its directors, if it wishes by a
resolution in the general body of the subsidiary, but CGP, Array and all Mauritian entities are
separate legal entities and have de-centralized management and each of the Mauritian
subsidiaries has its own management personnels.

224. Vodafone on purchase of CGP share got controlling interest in the Mauritian Companies and
the incident of transfer of CGP share cannot be considered to be two distinct and separate
transactions, one shifting of the share and another shifting of the controlling interest. Transfer of
CGP share automatically results in host of consequences including transfer of controlling interest
and that controlling interest as such cannot be dissected from CGP share without legislative
intervention. Controlling interest of CGP over Array is an incident of holding majority shares and
the control of Company vests in the voting power of its shareholders. Mauritian entities being a
WOS of Array, Array as a holding Company can influence the shareholders of various Mauritian
Companies. Holding Companies like CGP, Array, may exercise control over the subsidiaries,
whether a WOS or otherwise by influencing the voting rights, nomination of members of the Board
of Directors and so on. On transfer of shares of the holding Company, the controlling interest may
also pass on to the purchaser along with the shares. Controlling interest might have percolated
down the line to the operating companies but that controlling interest is inherently contractual and
not a property right unless otherwise provided for in the statue. Acquisition of shares, may carry
the acquisition of controlling interest which is purely a commercial concept and the tax can be
levied only on the transaction and not on its effect. Consequently, on transfer of CGP share to
Vodafone, Vodafone got control over eight Mauritian Companies which owned shares in VEL
totaling to 42% and that does not mean that the sites of CGP share has shifted to India for the
purpose of charging capital gains tax.

225. Vodafone could exercise only indirect voting rights in VEL through its indirect subsidiary
CGP(M) which held equity interests in TII, an Indian Company, which held equity interests in VEL.
Similarly, Vodafone could exercise only indirect voting rights through HTI(M) which held equity
interests in Omega, an Indian Company which in turn held equity interests in HEL. On transfer of
CGP share, Vodafone gets controlling interest in its indirect subsidiaries which are situated in
Mauritius which have equity interests in TII and Omega, Indian Companies which are independent
legal entities. Controlling interest, which stood transferred to Vodafone from HTIL accompany the
CGP share and cannot be dissected so as to be treated as transfer of controlling interest of
Mauritian entities and then that of Indian entities and ultimately that of HEL. Sites of CGP share,
therefore, determines the transferability of the share and/or interest which flows out of that share
including controlling interest. Ownership of shares, as already explained by us, carries other
valuable rights like, right to receive dividend, right to transmit the shares, right to vote, right to act
as per one's wish, or to vote in a particular manner etc; and on transfer of shares those rights also
sail along with them.

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226. Vodafone, on purchase of CGP share got all those rights, and the price paid by Vodafone is
for all those rights, in other words, control premium paid, not over and above the CGP share, but is
the integral part of the price of the share. On transfer of CGP share situated in Cayman Islands,
the entire rights, which accompany stood transferred not in India, but offshore and the facts reveal
that the offshore holdings and arrangements made by HTIL and Vodafone were for sound
commercial and legitimate tax planning, not with the motive of evading tax.

227. Vodafone, on purchase of CGP share also got control over its WOS, HTSH(M) which is
having control over its WOS, 3GSPL, an Indian Company which exercised voting rights in HEL.
3GSPL, was incorporated on 16.03.99 and run call centre business in India. The advantage of
transferring share of CGP rather than Array was that it would obviate the problems arising on
account of the call and put agreements and voting rights enjoyed by 3GSPL. 3GSPL was also a
party to various agreements between itself and Companies of AS, AG and IDFC Groups. AS, AG
& IDFC have agreed to retain their shareholdings with full control including voting rights and
dividend rights. In fact, on 02.03.2007 AG wrote to HEL confirming that his indirect equity or
beneficial interest in HEL worked out to be as 4.68% and it was stated, he was the beneficiary of
full dividend rights attached to his shares and he had received credit support and primarily the
liability for re-payment was of his company. Further, it was also pointed out that he was the
exclusive beneficial owner of his shares in his companies, enjoying full and exclusive rights to vote
and participate in any benefits accruing to those shares. On 05.03.2007 AS also wrote to the
Government on the same lines.

228. Vodafone, on acquisition of CGP, is in a position to replace the directors of holding company
of 3GSPL so as to get control over 3GSPL. 3GSPL has call option as well as the obligation of the
put option. Rights and obligations which flow out of call and put options have already been
explained by us in the earlier part of the judgment. Call and put options are contractual rights and
do not sound in property and hence they cannot be, in the absence of a statutory stipulation,
considered as capital assets. Even assuming so, they are in favor of 3GSPL and continue to be so
even after entry of Vodafone.

229. We have extensively dealt with the terms of the various FWAs, SHAs and Term Sheets and
in none of those Agreements HTIL or Vodafone figure as parties. SHAs between Mauritian entities
(which were shareholders of the Indian operating Companies) and other shareholders in some of
the other operating companies in India held shares in HEL related to the management of the
subsidiaries of AS, AG and IDFC and did not relate to the management of the affairs of HEL and
HTIL was not a party to those agreements, and hence there was no question of assigning or
relinquishing any right to Vodafone.

230. IDFC FWA of August 2006 also conferred upon 3 GSPL only call option rights and a right to
nominate a buyer if investors decided to exit as long as the buyer paid a fair market value. June
2007 Agreement became necessary because the composition of Indian investors changed with
some Indian investors going out and other Indian investors coming in. On June 2007, changes

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took place within the Group of Indian investors, in that SSKI and IDFC went out leaving IDF alone
as the Indian investor. Parties decided to keep June 2007 transaction to effectuate their intention
within the broad contours of June 2006 FWA. On 06.06.2007 FWA has also retained the rights
and options in favor of 3GSPL but conferred no rights on Vodafone and Vodafone was only a
confirming party to that Agreement. Call and put options, we have already mentioned, were the
subject matter of three FWAs viz., Centrino, N.D. Callus, IDFC and in Centrino and N.D. Callus
FWAs, neither HTIL was a party, nor was Vodafone. HTIL was only a confirming party in IDFC
FWA, so also Vodafone. Since HTIL, and later Vodafone were not parties to those SHAs and
FWAs, we fail to see how they are bound by the terms and conditions contained therein, so also
the rights and obligations that flow out of them. HTIL and Vodafone have, of course, had the
interest to see the SHAs and FWAs, be put in proper place but that interest cannot be termed as
property rights, attracting capital gains tax.

231. We have dealt with the legal effect of exercising call option, put option, tag along rights,
ROFR, subscription rights and so on and all those rights and obligations we have indicated fall
within the realm of contract between various shareholders and interested parties and in any view,
are not binding on HTIL or Vodafone. Rights (and options) by providing finance and guarantee to
AG Group of Companies to exercise control over TII and indirectly over HEL through TII SHA and
Centrino FWA dated 01.03.2006 were only contractual rights, as also the revised SHAs and FWAs
entered into on the basis of SPA. Rights (and options) by providing finance and guarantee to AS
Group of Companies to exercise control over TII and indirectly over HEL through various TII SHAs
and N.D. Callus FWA dated 01.03.2006 were also contractual rights, and continue to be so on
entry of Vodafone.

232. Controlling right over TII through TII SHAs in the form of right to appoint two Directors with
veto power to promote its interest in HEL and thereby held beneficial interest in 12.30% of share
capital in the HEL are also contractual rights. Finance to SMMS to acquire shares in ITNL
(ultimately Omega) with right to acquire share capital of Omega were also contractual rights
between the parties. On transfer of CGP share to Vodafone corresponding rearrangement were
made in the SHAs and FWAs and Term Sheet Agreements in which Vodafone was not a party.

233. SPA, through the transfer of CGP, indirectly conferred the benefit of put option from the
transferee of CGP share to be enjoyed in the same manner as they were enjoyed by the transferor
and the revised set of 2007 agreements were exactly between the parties that is the beneficiary of
the put options remained with the downstream company 3 GSPL and the counter-party of the put
option remained with AG/AS Group Companies.

234. Fresh set of agreements of 2007 as already referred to were entered into between IDFC, AG,
AS, 3 GSPL and Vodafone and in fact, those agreements were irrelevant for the transfer of CGP
share. FWAs with AG and AS did not constitute transaction documents or give rise to a transfer of
an asset, so also the IDFC FWA. All those FWAs contain some adjustments with regard to certain
existing rights, however, the options, the extent of rights in relation to options, the price etc. all

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continue to remain in place as they stood. Even if they had not been so entered into, all those
agreements would have remained in place because they were in favor of 3GSPL, subsidiary of
CGP.

235. The High Court has reiterated the common law principle that the controlling interest is an
incident of the ownership of the share of the company, something which flows out of holding of
shares and, therefore, not an identifiable or distinct capital asset independent of the holding of
shares, but at the same time speaks of change in the controlling interest of VEL, without there
being any transfer of shares of VEL. Further, the High Court failed to note on transfer of CGP
share, there was only transfer of certain off-shore loan transactions which is unconnected with
underlying controlling interest in the Indian Operating Companies. The other rights, interests and
entitlements continue to remain with Indian Operating Companies and there is nothing to show
they stood transferred in law.

236. The High Court has ignored the vital fact that as far as the put options are concerned there
were pre-existing agreements between the beneficiaries and counter parties and fresh
agreements were also on similar lines. Further, the High Court has ignored the fact that Term
Sheet Agreement with Essar had nothing to do with the transfer of CGP, which was a separate
transaction which came about on account of independent settlement between Essar and Hutch
Group, for a separate consideration, unrelated to the consideration of CGP share. The High Court
committed an error in holding that there were some rights vested in HTIL under SHA dated
5.7.2003 which is also an agreement, conferring no right to any party and accordingly none could
have been transferred. The High Court has also committed an error in holding that some rights
vested with HTIL under the agreement dated 01.08.2006, in fact, that agreement conferred right
on Hutichison Telecommunication (India) Ltd., which is a Mauritian Company and not HTIL, the
vendor of SPA. The High court has also ignored the vital fact that FIPB had elaborately examined
the nature of call and put option agreement rights and found no right in present has been
transferred to Vodafone and that as and when rights are to be transferred by AG and AS Group
Companies, it would specifically require Government permission since such a sale would attract
capital gains, and may be independently taxable. We may now examine whether the following
rights and entitlements would also amount to capital assets attracting capital gains tax on transfer
of CGP share.

Debts/Loans through Intermediaries

237. SPA contained provisions for assignment of loans either at Mauritius or Cayman Islands and
all loans were assigned at the face value. Clause 2.2 of the SPA stipulated that HTIL shall procure
the assignment of and purchaser agrees to accept an assignment of loans free from
encumbrances together with all rights attaching or accruing to them at completion. Loans were
defined in the SPA to mean, all inter-company loans owing by CGP and Array to a vendor group
company including accrued or unpaid interest, if any, on the completion date. HTIL warranted and
undertook that, as on completion, loans set out in Part IV of Schedule 1 shall be the only

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indebtedness owing by the Wider group company to any member of the vendor group. Vendor
was obliged to procure that the loans set out in Part IV of Schedule 1 shall not be repaid on or
before completion and further, that any loan in addition to those identified will be non-interest
bearing. Clause 7.4 of the SPA stipulated that any loans in addition to those identified in Part IV of
Schedule 1 of the SPA would be non-interest bearing and on terms equivalent to the terms of
those loans identified in Part IV of Schedule 1 of the SPA. The sum of such indebtedness
comprised of:

a) US$ 672,361,225 (Loan 1) - reflected in a Loan Agreement (effective date of loan: 31

December 2006; date of Loan Agreement: 28 April 2007);

b) HK$ 377,859,382.40 (Loan 2) - reflected in a Loan Agreement (effective date of Loan 31st
December 2006; date of Loan Agreement: 28 April 2007) [(i) + (ii): US$ 1,050,220,607.40]

c) US$ 231,111,427.41 (Loan 3) - reflected in a Receivable Novation Agreement i.e. HTM owed
HTI BVI Finance such sum, which Array undertook to repay in pursuance of an inter-group loan
restructuring, which was captured in such Receivable Novation Agreement dated 28 April 2007.

HTI BVI Finance Limited, Array and Vodafone entered into a Deed of Assignment on 08.05.2007
pertaining to the Array indebtedness. On transfer of CGP shares, Array became a subsidiary of
VIHBV. The price was calculated on a gross asset basis (enterprise value of underlying assets),
the intra group loans would have to be assigned at face value, since nothing was payable by
VIHBV for the loans as they had already paid for the gross assets.

238. CGP had acknowledged indebtedness of HTI BVI Finance Limited in the sum of
US$161,064,952.84 as at the date of completion. The sum of such indebtedness was comprised
of:

a) US$ 132,092,447.14, reflected in a Loan Agreement (effective date of loan: 31 December 2006;
date of Loan Agreement: 28 April 2007)

b) US$ 28,972,505.70, reflected in a Loan Agreement (effective date of loan: 14 February 2007;
date of Loan Agreement: 15 February 2007).

HTI BVI Finance Limited, CGP and the Purchaser entered into the Deed of Assignment on
08.05.2007 pertaining to the CGP indebtedness.

239. In respect of Array Loan No. 3 i.e. US$ 231,111,427.41, the right that was being assigned
was not the right under a Loan Agreement, but the right to receive payment from Array pursuant to
the terms of a Receiveable Novation Agreement dated 28.04.2007 between Array, HTIL and HTI
BVI Finance Limited. Under the terms of the Receiveable Novation Agreement, HTIL's obligation
to repay the loan was novated from HTI BVI Finance to Array, the consideration for this novation

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was US$ 231,111,427.41 payable by Array to HTI BVI Finance Limited. It was this right to receive
the amount from Array that was assigned to VHI BV under the relevant Loan Assignment. It was
envisaged that, between signing and completion of the agreement, there would be a further loan
up to US$ 29.7 million between CGP (as borrower) from a Vendor Group Company (vide Clause
6.4 of the SPA) and the identity of the lender has not been identified in the SPA. The details of the
loan were ultimately as follows:

Borrower Lender Amount of Loan Date of Agreement Effective date of

Agreement

CGP HTI (BVI) FinanceUS$28,972,505.70 15 February 2007 14 February 2007

Limited

Array and CGP stood outside of obligation to repay an aggregate US$ 1,442,396.987.61 to HTI
BVI Finance Limited and VHIBV became the creditor of Array and CGP in the place and stepped
off a HTI BVI Finance Limited on 8.5.2007 when VHIBV stepped into the shoes of HTI BVI
Finance Limited.

240. Agreements referred to above including the provisions for assignments in the SPA, indicate
that all loan agreements and assignments of loans took place outside India at face value and,
hence, there is no question of transfer of any capital assets out of those transactions in India,
attracting capital gains tax.

Preference Shares:

241. Vodafone while determining bid price had taken into consideration, inter alias, its ownership
of redeemable preference shares in TII and JFK. Right to preference shares or rights thereto
cannot be termed as transfer in terms of Section 2(47) of the Act. Any agreement with TII, Indian
partners contemplated fresh investment, by subscribing to the preference shares were
redeemable only by accumulated profit or by issue of fresh capital and hence any issue of fresh
capital cannot be equated to the continuation of old preference shares or transfer thereof.

NON COMPETE AGREEMENT

242. SPA contains a Non Compete Agreement which is a pure Contractual Agreement, a negative
covenant, the purpose of which is only to see that the transferee does not immediately start a
compete business. At times an agreement provides that a particular amount to be paid towards
non-compete undertaking, in sale consideration, which may be assessable as business income
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-

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compete clause was executed offshore and, by no principle of law, can be termed as "property" so
as to come within the meaning of capital gains taxable in India in the absence of any legislation.

HUTCH BRAND

243. HTIL did not have any direct interest in the brand. The facts would indicate that
brand/Intellectual Property Right were held by Hutchison Group Company based in Luxemburg.
SPA only assured Vodafone that they would not have to overnight cease the use of the Hutch
brand name, which might have resulted in a disruption of operations in India. The bare license to
use a brand free of charge, is not itself a "property" and, in any view, if the right to property is
created for the first time and that too free of charge, it cannot give rise to a chargeable income.
Under the SPA, a limited window of license was given and it was expressly made free of charge
and, therefore, the assurance given by HTIL to Vodafone that the brand name would not cease
overnight, cannot be described as "property" rights so as to consider it as a capital asset
chargeable to tax in India.

ORACLE LICENSE:

244. Oracle License was an accounting license, the benefit of which was extended till such time
VEL replaced it with its own accounting package. There is nothing to show that this accounting
package, which is a software, was transferred to Vodafone. In any view, this license cannot be
termed as a capital asset since it has never been transferred to the Petitioner.

245. We, therefore, conclude that on transfer of CGP share, HTIL had transferred only 42% equity
interest it had in HEL and approximately 10% (pro-rata) to Vodafone, the transfer was off-shore,
money was paid off-shore, parties were no-residents and hence there was no transfer of a capital
asset situated in India. Loan agreements extended by virtue of transfer of CGP share were also
off-shore and hence cannot be termed to be a transfer of asset situated in India. Rights and
entitlements referred to also, in our view, cannot be termed as capital assets, attracting capital
gains tax and even after transfer of CGP share, all those rights and entitlements remained as
such, by virtue of various FWAs, SHAs, in which neither HTIL nor Vodafone was a party.

246. Revenue, however, wanted to bring in all those rights and entitlements within the ambit of
Section 9(1)(i) on a liberal construction of that Section applying the principle of purposive
interpretation and hence we may examine the scope of Section 9.

PART VI

SECTION 9 and ITS APPLICATION

247. Shri Nariman, submitted that this Court should give a purposive construction to Section 9(1)
of the Income Tax Act when read along with Section 5(2) of the Act. Referring extensively to the

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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.

248. Shri Harish Salve, learned senior counsel appearing for the Petitioner, submitted that Section
9(1)(i) of the Income Tax Act deals with taxation on income "deemed to accrue or arise" in India
through the transfer of a capital asset situated in India and stressed that the source of income lies
where the transaction is effected and not where the economic interest lies and pointed out that
there is a distinction between a legal right and a contractual right. Referring to the definition of
"transfer" in Section 2 (47) of the Income Tax Act which provides for extinguishment, it was
submitted, that the same is attracted for transfer of a legal right. Placing reliance on the judgment
of this Court in Commissioner of Income Tax v. Grace Collins and Ors. MANU/SC/0130/2001 :
248 ITR 323, learned senior counsel submitted that SPA has not relinquished any right of HTIL
giving rise to capital gains tax in India.

249. Mr. S.P. Chenoy, senior counsel, on our request, argued at length, on the scope and object
of Section 9 of the Income Tax Act. Learned senior counsel submitted that the first four
clauses/parts of Section 9(1)(i) deal with taxability of revenue receipts, income arising through or
from holding an asset in India, income arising from the transfer of an asset situated in India. Mr.
Chenoy submitted that only the last limb of Section 9(1)(i) deals with the transfer of a capital asset
situated in India and can be taxed as a capital receipt. Learned senior counsel submitted to apply
Section 9(1)(i) the capital asset must situate in India and cannot by a process of interpretation or
construction extend the meaning of that section to cover indirect transfers of capital
assets/properties situated in India. Learned senior counsel pointed out that there are cases, where
the assets/shares situate in India are not transferred, but where the shares of foreign company
holding/owning such shares are transferred.

250. Shri Mohan Parasaran, Additional Solicitor General, submitted that on a close analysis of the
language employed in Section 9 and the various expressions used therein, would self-evidently
demonstrate that Section 9 seeks to capture income arising directly or indirectly from direct or
indirect transfer. Shri Parasaran submitted, if a holding company incorporated offshore through a
maze of subsidiaries, which are investment companies incorporated in various jurisdictions
indirectly contacts a company in India and seeks to divest its interest, by the sale of shares or

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stocks, which are held by one of its upstream subsidiaries located in a foreign country to another
foreign company and the foreign company step into the shoes of the holding company, then
Section 9 would get attracted. Learned Counsel submitted that it would be a case of indirect
transfer and a case of income accruing indirectly in India and consequent to the sale of a share
outside India, there would be a transfer or divestment or extinguishment of holding company's
rights and interests, resulting in transfer of capital asset situated in India.

251. Section 9 of the Income Tax Act deals with the incomes which shall be deemed to accrue or
arise in India. Under the general theory of nexus relevant for examining the territorial operation of
the legislation, two principles that are generally accepted for imposition of tax are: (a) Source and
(b) Residence. Section 5 of the Income Tax Act specifies the principle on which tax can be levied.
Section 5(1) prescribes "residence" as a primary basis for imposition of tax and makes the global
income of the resident liable to tax. Section 5(2) is the source based rule in relation to residents
and is confined to: income that has been received in India; and income that has accrued or arisen
in India or income that is deemed to accrue or arise in India. In the case of Resident in India, the
total income, according to the residential status is as under:

(a)Any income which is received or deemed to be received in India in the relevant previous year
by or on behalf of such person;

(b)Any income which accrues or arises or is deemed to accrue or arise in India during the relevant
previous year; and

(c) Any income which accrues or arises outside India during the relevant previous year.

In the case of Resident but not Ordinarily Resident in India, the principle is as follows:

(i) Any income which is received or deemed to be received in India in the relevant previous year by
or on behalf of such person;

(ii) Any income which accrues or arises or is deemed to accrue or arise in India to him during the
relevant previous year; and

(iii) Any income which accrues or arises to him outside India during the relevant previous year, if it
is derived from a business controlled in or a profession set up in India.

In the case of Non-Resident, income from whatsoever source derived forms part of the total
income. It is as follows:

Any income which is received or is deemed to be received in India during the relevant previous
year by or on behalf of such person; and

Any income which accrues or arises or is deemed to accrue or arise to him in India during the

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relevant previous year.

252. Section 9 of the Income Tax Act extends its provisions to certain incomes which are deemed
to accrue or arise in India. Four kinds of income which otherwise may not fall in Section 9, would
be deemed to accrue or arise in India, which are (a) a business connection in India; (b) a property
in India; (c) an establishment or source in India; and (d) transfer of a capital asset in India.

Income deemed to accrue or arise in India

Section 9

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

(i) all income accruing or arising, whether directly or indirectly, through or from any business
connection in India, or through or from any property in India, or through or from any asset or
source of income in India, or through the transfer of a capital asset situate in India.
[Explanation 1] - For the purposes of this clause -

(a) in the case of a business of which all the operations are not carried out in India, the income of
the business deemed under this clause to accrue or arise in India shall be only such part of the
income as is reasonably attributable to the operations carried out in India;

(b) in the case of a non-resident, no income shall be deemed to accrue or arise in India to him
through or from operations which are confined to the purchase of goods in India for the purpose of
export;

(c) in the case of a non-resident, being a person engaged in the business of running a news
agency or of publishing newspapers, magazines or journals, no income shall be deemed to accrue
or arise in India to him through or from activities which are confined to the collection of news and
views in India for transmission out of India;]

(a) in the case of a non-resident, being -

(1) an individual who is not a citizen of India; or

(2) a firm which does not have any partner who is a citizen of India who is resident in India; or

(3) a company which does not have any shareholder who is a citizen of India or who is resident in
India.

253. The meaning that we have to give to the expressions "either directly or indirectly", "transfer",
"capital asset" and "situated in India" is of prime importance so as to get a proper insight on the
scope and ambit of Section 9(1)(i) of the Income Tax Act. The word "transfer" has been defined in

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Section 2(47) of the Income Tax Act. The relevant portion of the same is as under:

2(47) "Transfer", in relation to a capital asset, includes.-

(i) the sale, exchange or relinquishment of the asset; or

(ii) the extinguishment of any rights therein; or

(iii) the compulsory acquisition thereof under any law; or

(iv) in a case where the asset is converted by the owner thereof into, or is treated by him as,
stocking-trade of a business carried on by him, such conversion or treatment; or

xxx xxx xxx

xxx xxx xxx

The term "capital asset" is also defined under Section 2(14) of the Income Tax Act, the relevant
portion of which reads as follows:

2(14) "Capital asset" means property of any kind held by an Assessee, whether or not connected
with the business or profession, but does not include-

1. any stock-in-trade, consumable stores or raw materials held for the purposes of his business or
profession;

xxx xxx xxx

xxx xxx xxx

254. The meaning of the words "either directly or indirectly", when read textually and contextually,
would indicate that they govern the words those precede them, namely the words "all income
accruing or arising". The section provides that all income accruing or arising, whether directly or
indirectly, would fall within the category of income that is deemed to accrue or arise in India.
Resultantly, it is only where factually it is established that there is either a business connection in
India, or a property in India, or an asset or source in India or a capital asset in India, the transfer of
which has taken place, the further question arises whether there is any income deeming to accrue
in India from those situations. In relation to the expression "through or from a business connection
in India", it must be established in the first instance that (a) there is a non-resident; (b) who has a
business connection in India; and (c) income arises from this business connection.

255. Same is the situation in the case of income that "arises through or from a property in India",
i.e. (a) there must be, in the first instance, a property situated in India; and (b) income must arise

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from such property. Similarly, in the case of "transfer of a capital asset in India", the following test
has to be applied: (a) there must be a capital asset situated in India, (b) the capital asset has to be
transferred, and (c) the transfer of this asset must yield a gain. The word 'situate', means to set,
place, locate. The words "situate in India" were added in Section 9(1)(i) of the Income Tax Act
pursuant to the recommendations of the 12th Law Commission dated 26.9.1958.

256. Section 9 on a plain reading would show, it refers to a property that yields an income and that
property should have the sites in India and it is the income that arises through or from that
property which is taxable. Section 9, therefore, covers only income arising from a transfer of a
capital asset situated in India and it does not purport to cover income arising from the indirect
transfer of capital asset in India.

SOURCE

257. Revenue placed reliance on "Source Test" to contend that the transaction had a deep
connection with India, i.e. ultimately to transfer control over HEL and hence the source of the gain
to HTIL was India.

258. Source in relation to an income has been construed to be where the transaction of sale takes
place and not where the item of value, which was the subject of the transaction, was acquired or
derived from. HTIL and Vodafone are offshore companies and since the sale took place outside
India, applying the source test, the source is also outside India, unless legislation ropes in such
transactions.

259. Substantial territorial nexus between the income and the territory which seeks to tax that
income, is of prime importance to levy tax. Expression used in Section 9(1)(i) is "source of income
in India" which implies that income arises from that source and there is no question of income
arising indirectly from a source in India. Expression used is "source of income in India" and not
"from a source in India". Section 9 contains a "deeming provision" and in interpreting a provision
creating a legal fiction, the Court is to ascertain for what purpose the fiction is created, but in
construing the fiction it is not to be extended beyond the purpose for which it is created, or beyond
the language of section by which it is created. [See C.I.T. Bombay City II v. Shakuntala (1962) 2
SCR 871, Mancheri Puthusseri Ahmed v. Kuthiravattam Estate Receiver
MANU/SC/1238/1996 : (1996) 6 SCC 185].

260. Power to impose tax is essentially a legislative function which finds in its expression Article
265 of the Constitution of India. Article 265 states that no tax shall be levied except by authority of
law. Further, it is also well settled that the subject is not to be taxed without clear words for that
purpose; and also that every Act of Parliament must be read according to the natural construction
of its words. Viscount Simon quoted with approval a passage from Rowlatt, J. expressing the
principle in the following words:

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In a taxing Act one has to look merely at what is clearly said. There is no room for any intendment.
There is no equity about a tax. There is no presumption as to tax. Nothing is to be read in, nothing
is to be implied. One can only look fairly at the language used. [Cape Brandy Syndicate v. IRC
(1921) 1 KB 64, P. 71 (Rowlatt, J.)]
261. In Ransom (Inspector of Tax) v. Higgs 1974 3 All ER 949 (HL), Lord Simon stated that it
may seem hard that a cunningly advised tax-payer should be able to avoid what appears to be his
equitable share of the general fiscal burden and cast it on the shoulders of his fellow citizens. But
for the Courts to try to stretch the law to meet hard cases (whether the hardship appears to bear
on the individual tax-payer or on the general body of tax-payers as represented by the Inland
Revenue) is not merely to make bad law but to run the risk of subverting the rule of law itself. The
proper course in construing revenue Acts is to give a fair and reasonable construction to their
language without leaning to one side or the other but keeping in mind that no tax can be imposed
without words and that equitable construction of the words is not permissible [Ormond
Investment Company v. Betts (1928) All ER Rep 709 (HL)], a principle entrenched in our
jurisprudence as well. In Mathuram Aggarwal (supra), this Court relied on the judgment in Duke of
Westminster and opined that the charging section has to be strictly construed. An invitation to
purposively construe Section 9 applying look through provision without legislative sanction, would
be contrary to the ratio of Mathuram Aggarwal.

262. Section 9(1)(i) covers only income arising or accruing directly or indirectly or through the
transfer of a capital asset situated in India. Section 9(1)(i) cannot by a process of "interpretation"
or "construction" be extended to cover "indirect transfers" of capital assets/property situate in
India.

263. On transfer of shares of a foreign company to a nonresident off-shore, there is no transfer of

shares of the Indian Company, though held by the foreign company, in such a case it cannot be
contended that the transfer of shares of the foreign holding company, results in an extinguishment
of the foreign company control of the does not situate in India. Transfer of the foreign holding
company's share off-shore, cannot result in an extinguishment of the holding company right of
control of the Indian company nor can it be stated that the same constitutes extinguishment and
transfer of an asset/ management and control of property situated in India.

264. The Legislature wherever wanted to tax income which arises indirectly from the assets, the
same has been specifically provided so. For example, reference may be made to Section 64 of the
Indian Income Tax Act, which says that in computing the total income of an individual, there shall
be included all such income as arises directly or indirectly: to the son's wife, of such individual,
from assets transferred directly or indirectly on and after 1.6.73 to the son's wife by such individual
otherwise than for adequate consideration. The same was noticed by this Court in CIT v. Kothari
(CM), MANU/SC/0100/1963 : (1964) 2 SCR 531. Similar expression like "from asset transferred
directly or indirectly", we find in Sections 64(7) and (8) as well. On a comparison of Section 64 and
Section 9(1)(i) what is discernible is that the Legislature has not chosen to extend Section 9(1)(i)
to "indirect transfers". Wherever "indirect transfers" are intended to be covered, the Legislature

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has expressly provided so. The words "either directly or indirectly", textually or contextually,
cannot be construed to govern the words that follow, but must govern the words that precede
them, namely the words "all income accruing or arising". The words "directly or indirectly"
occurring in Section 9, therefore, relate to the relationship and connection between a non-resident
Assessee and the income and these words cannot and do not govern the relationship between the
transaction that gave rise to income and the territory that seeks to tax the income. In other words,
when an Assessee is sought to be taxed in relation to an income, it must be on the basis that it
arises to that Assessee directly or it may arise to the Assessee indirectly. In other words, for
imposing tax, it must be shown that there is specific nexus between earning of the income and the
territory which seeks to lay tax on that income. Reference may also be made to the judgment of
this Court in Ishikawajma-Harima Heavy Industries Ltd. v. Director of Income Tax, Mumbai
MANU/SC/0528/2007 : (2007) 3 SCC 481 and CIT v. R.D. Aggarwal MANU/SC/0137/1964 :
(1965) 1 SCR 660.

265. Section 9 has no "look through provision" and such a provision cannot be brought through
construction or interpretation of a word 'through' in Section 9. In any view, "look through provision"
will not shift the sites of an asset from one country to another. Shifting of only by express
legislation. Federal Commission of Taxation v. Lamesa Holdings BV (LN) - (1998) 157 A.L.R.
290 gives an insight as to how "look through" provisions are enacted. Section 9, in our view, has
no inbuilt "look through mechanism".

266. Capital gains are chargeable under Section 45 and their computation is to be in accordance
with the provisions that follow Section 45 and there is no notion of indirect transfer in Section 45.

267. Section 9(1)(i), therefore, in our considered opinion, will not apply to the transaction in
question or on the rights and entitlements, stated to have transferred, as a fall out of the sale of
CGP share, since the Revenue has failed to establish both the tests, Resident Test as well the
Source Test.

268. Vodafone, whether, could be proceeded against under Section 195(1) for not deducting tax at
source and, alternatively, under Section 163 of the Income Tax Act as a representative Assessee,
is the next issue.

SECTION 195 and OFFSHORE TRANSACTIONS

269. Section 195 provides that any person responsible for making any payment to a non-resident
which is chargeable to tax must deduct from such payment, the income tax at source. Revenue
contended that if a non-resident enters into a transaction giving rise to income chargeable to tax in
India, the necessary nexus of such non-resident with India is established and the machinery
provisions governing the collection of taxes in respect of such chargeable income will spring into
operation. Further, it is also the stand of the Revenue that the person, who is a non-resident, and
not having a physical presence can be said to have a presence in India for the purpose of Section

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195, if he owns or holds assets in India or is liable to pay income tax in India. Further, it is also the
stand of the Revenue that once chargeability is established, no further requirements of nexus
needs to be satisfied for attracting Section 195.

270. Vodafone had "presence" in India, according to the Revenue at the time of the transaction
because it was a Joint Venture (JV) Partner and held 10% equity interest in Bharti Airtel Limited, a
listed company in India. Further, out of that 10%, 5.61% shares were held directly by Vodafone
itself. Vodafone had also a right to vote as a shareholder of Bharati Airtel Limited and the right to
appoint two directors on the Board of Directors of Bharti Airtel Limited. Consequently, it was stated
that Vodafone had a presence by reason of being a JV Partner in HEL on completion of HEL's
acquisition. Vodafone had also entered into Term Sheet Agreement with Essar Group on
15.03.2007 to regulate the affairs of VEL which was restated by a fresh Term Sheet Agreement
dated 24.08.2007, entered into with Essar Group and formed a JV Partnership in India. Further,
Vodafone itself applied for IFPB approval and was granted such approval on 07.05.2007. On
perusal of the approval, according to the Revenue, it would be clear that Vodafone had a presence
in India on the date on which it made the payment because of the approval to the transaction
accorded by FIPB. Further, it was also pointed out that, in fact, Vodafone had presence in India,
since by mid 1990, it had entered into a JV arrangement with RPG Group in the year 1994-95
providing cellular services in Madras, Madhya Pradesh circles. After parting with its stake in RPG
Group, in the year 2003, Vodafone in October, 2005 became a 10% JV Partner in HEL. Further, it
was pointed out that, in any view, Vodafone could be treated as a representative Assessee of
HTIL and hence, notice under Section 163 was validly issued to Vodafone.

271. Vodafone has taken up a specific stand that "tax presence" has to be viewed in the context of
the transaction that is subject to tax and not with reference to an entirely unrelated matter.
Investment made by Vodafone group in Bharti Airtel would not make all entities of Vodafone group
of companies subject to the Indian Law and jurisdiction of the Taxing Authorities. "Presence", it
was pointed out, be considered in the context of the transaction and not in a manner that brings a
non-resident Assessee under jurisdiction of Indian Tax Authorities. Further, it was stated that a
"tax presence" might arise where a foreign company, on account of its business in India, becomes
a resident in India through a permanent establishment or the transaction relates to the permanent
establishment.

272. Vodafone group of companies was a JV Partner in Bharti Airtel Limited which has absolutely
no connection whatsoever with the present transaction. The mere fact that the Vodafone group of
companies had entered into some transactions with another company cannot be treated as its
presence in a totally unconnected transaction.

273. To examine the rival stand taken up by Vodafone and the Revenue, on the interpretation of
Section 195(1) it is necessary to examine the scope and ambit of Section 195(1) of the Income
Tax Act and other related provisions. For easy reference, we may extract Section 195(1) which
reads as follows:

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Section 195. OTHER SUMS.- (1) Any person responsible for paying to a non-resident, not being a
company, or to a foreign company, any interest or any other sum chargeable under the provisions
of this Act (not being income chargeable under the head "Salaries" shall, at the time of credit of
such income to the account of the payee or at the time of payment thereof in cash or by the issue
of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the
rates in force:

Provided that in the case of interest payable by the Government or a public sector bank within the
meaning of Clause (23D) of Section 10 or a public financial institution within the meaning of that
clause, deduction of tax shall be made only at the time of payment thereof in cash or by the issue
of a cheque or draft or by any other mode:

Provided further that no such deduction shall be made in respect of any dividends referred to in
Section 115O.

Explanation: For the purposes of this section, where any interest or other sum as aforesaid is
credited to any account, whether called "Interest payable account" or "Suspense account" or by
any other name, in the books of account of the person liable to pay such income, such crediting
shall be deemed to be credit of such income to the account of the payee and the provisions of this
section shall apply accordingly.

Section 195 finds a place in Chapter XVII of the Income Tax Act which deals with collection and
recovery of tax. Requirement to deduct tax is not limited to deduction and payment of tax. It
requires compliance with a host of statutory requirements like Section 203 which casts an
obligation on the Assessee to issue a certificate for the tax deducted, obligation to file return under
Section 200(3), obligation to obtain "tax deduction and collection number" under Section 203A etc.
Tax deduction provisions enables the Revenue to collect taxes in advance before the final
assessment, which is essentially meant to make tax collection easier. The Income Tax Act also
provides penalties for failure to deduct tax at source. If a person fails to deduct tax, then under
Section 201 of the Act, he can be treated as an Assessee in default. Section 271C stipulates a
penalty on the amount of tax which has not been deducted. Penalty of jail sentence can also be
imposed under Section 276B. Therefore, failure to deduct tax at source under Section 195 may
attract various penal provisions.

274. Article 246 of the Constitution gives Parliament the authority to make laws which are extra-
territorial in application. Article 245(2) says that no law made by the Parliament shall be deemed to
be invalid on the ground that it would have extra territorial operation. Now the question is whether
Section 195 has got extra territorial operations. It is trite that laws made by a country are intended
to be applicable to its own territory, but that presumption is not universal unless it is shown that the
intention was to make the law applicable extra territorially. We have to examine whether the
presumption of territoriality holds good so far as Section 195 of the Income Tax Act is concerned

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and is there any reason to depart from that presumption.

275. A literal construction of the words "any person responsible for paying" as including non-
residents would lead to absurd consequences. A reading of Sections 191A, 194B, 194C, 194D,
194E, 194I, 194J read with Sections 115BBA, 194I, 194J would show that the intention of the
Parliament was first to apply Section 195 only to the residents who have a tax presence in India. It
is all the more so, since the person responsible has to comply with various statutory requirements
such as compliance of Sections 200(3), 203 and 203A.

276. The expression "any person", in our view, looking at the context in which Section 195 has
been placed, would mean any person who is a resident in India. This view is also supported, if we
look at similar situations in other countries, when tax was sought to be imposed on non-residents.
One of the earliest rulings which paved the way for many, was the decision in Ex Parte Blain; In re
Sawers (1879) LR 12 ChD 522 at 526, wherein the Court stated that "if a foreigner remain abroad,
if he has never come into this country at all, it seems impossible to imagine that the English
Legislature could ever have intended to make such a person subject to particular English
Legislation." In Clark (Inspector of Taxes) v. Oceanic Contractors Inc. (1983) 1 ALL ER 133,
the House of Lords had to consider the question whether chargeability has ipso facto sufficient
nexus to attract TDS provisions. A TDS provision for payment made outside England was not
given extra territorial application based on the principle of statutory interpretation. Lord Scarman,
Lord Wilberforce and Lord Roskill held so on behalf of the majority and Lord Edmond Davies and
Lord Lowry in dissent. Lord Scarman said:

unless the contrary is expressly enacted or so plainly implied as to make it the duty of an English
court to give effect to it, United Kingdom Legislation is applicable only to British subjects or to
foreigners who by coming into this country, whether for a long or short time, have made
themselves during that time subject to English jurisdiction.
The above principle was followed in Agassi v. Robinson (2006) 1 WLR 2126.

277. This Court in CIT v. Eli Lilly and Company (India) P. Ltd. MANU/SC/0487/2009 : (2009) 15
SCC 1 had occasion to consider the scope of Sections 192, 195 etc. That was a case where Eli
Lilly Netherlands seconded expatriates to work in India for an India-incorporated joint venture (JV)
between Eli Lilly Netherlands and another Indian Company. The expatriates rendered services
only to the JV and received a portion of their salary from the JV. The JV withheld taxes on the
salary actually paid in India. However, the salary costs paid by Eli Lilly Netherlands were not borne
by the JV and that portion of the income was not subject to withholding tax by Eli Lilly or the
overseas entity. In that case, this Court held that the chargeability under Section 9 would
constitute sufficient nexus on the basis of which any payment made to non- residents as salaries
would come under the scanner of Section 192. But the Court had no occasion to consider a
situation where salaries were paid by non-residents to another non- resident. Eli Lilly was a part of
the JV and services were rendered in India for the JV. In our view, the ruling in that case is of no
assistance to the facts of the present case since, here, both parties were non-residents and

2020-08-28 Source: www.bdlex.com Md. Nazrul Islam Khan

payment was also made offshore, unlike the facts in Eli Lilly where the services were rendered in
India and received a portion of their salary from JV situated in India.

278. In the instant case, indisputedly, CGP share was transferred offshore. Both the companies
were incorporated not in India but offshore. Both the companies have no income or fiscal assets in
India, leave aside the question of transferring, those fiscal assets in India. Tax presence has to be
viewed in the context of transaction in question and not with reference to an entirely unrelated
transaction. Section 195, in our view, would apply only if payments made from a resident to
another non-resident and not between two nonresidents situated outside India. In the present
case, the transaction was between two non-resident entities through a contract executed outside
India. Consideration was also passed outside India. That transaction has no nexus with the
underlying assets in India. In order to establish a nexus, the legal nature of the transaction has to
be examined and not the indirect transfer of rights and entitlements in India. Consequently,
Vodafone is not legally obliged to respond to Section 163 notice which relates to the treatment of a
purchaser of an asset as a representative Assessee.

PART-VIII

CONCLUSION:

279. I, therefore, find it difficult to agree with the conclusions arrived at by the High Court that the
sale of CGP share by HTIL to Vodafone would amount to transfer of a capital asset within the
meaning of Section 2(14) of the Indian Income Tax Act and the rights and entitlements flow from
FWAs, SHAs, Term Sheet, loan assignments, brand license etc. form integral part of CGP share
attracting capital gains tax. Consequently, the demand of nearly Rs. 12,000 crores by way of
capital gains tax, in my view, would amount to imposing capital punishment for capital investment
since it lacks authority of law and, therefore, stands quashed and I also concur with all the other
directions given in the judgment delivered by the Lord Chief Justice.

280. For the above reasons, we set aside the impugned judgment of the Bombay High Court
dated 8.09.2010 in Writ Petition No. 1325 of 2010. Accordingly, the Civil Appeal stands allowed
with no order as to costs. The Department is hereby directed to return the sum of Rs. 2,500
crores, which came to be deposited by the Appellant in terms of our interim order, with interest at
the rate of 4% per annum within two months from today. The interest shall be calculated from the
date of withdrawal by the Department from the Registry of the Supreme Court up to the date of
payment. The Registry is directed to return the Bank Guarantee given by the Appellant within four
weeks.

281. No orders are required to be passed on intervention applications.

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2020-08-28 Source: www.bdlex.com Md. Nazrul Islam Khan