High Court Of Bombay
Vodafone International Holdings B.V. vs. Union Of India & Anr.
Section 5(2), 9(1)(i), 195, 201(1), 201(1A)
Dr. D.Y. Chandrachud & J.P. Devadhar, JJ.
Writ Petn. No. 1325 of 2010
8th September, 2010
Counsel Appeared :
Harish Salve, Dr. Abhishek Singhvi & Arvind Datar with Ms. Anuradha Dutt, Ms. Fereshte Sethna, Kuber Dewan, Ms. Shweta Bindhuri, Gaurav Chauhan, Shardul Sin Gayatri Goswami, Kamaldeep Dayal, Rahul Chugh, Jaiveer Shergill, Sameer Singh & Rook Ray, for the Petitioner : Mohan Parasaran, G.C. Srivastava & B.M. Chat Girish Dave, Zoheb Hussain, D.L. Chaidananda, Suresh Kumar & P.S. Sahadevan, for the Respondents
JUDGMENT
DR. D.Y. CHANDRACHUD, J. :
The facts : Hutchison’s business interest in India :
Vodafone International Holdings B.V., Netherlands (VIH BV) is a company controlled by the Vodafone Group Plc. U.K. In 1992 the Hutchison Group of Hong Kong acq telecommunications industry in India, through a joint venture vehicle, Hutchison Max Telecom Ltd. (renamed Hutchison Essar Ltd.—HEL in August, 2005). Betwee acquired interests in twenty-three mobile telecommunication circles in India. HEL is an Indian company in which shares were acquired by the Hutchison Group of com arrangement of holding and subsidiary companies. The moiety of shares of all the operational companies (Indian entities) which were under Hutchison control, direct by Mauritius based companies recognized as Overseas Corporate Bodies with tax residency certificates, or through other entities in which Hutchison interests (shareh exercised direct or indirect control) were held by a Mauritian company. Ownership structure :
2. In order to facilitate an understanding of the key issues in this case, we reproduce below an ownership structure chart : Payee Transfer of share Hutchison Tele-Services (India) Holdings Ltd. MS 3 Global Services (P) Ltd. I Options Agreements Call Centre Business (Demerged to HWL) Trans Crystal Ltd. MS Al-Amin Investments Ltd. MS 8.356% 4.646% Hutchison Essar Ltd. (subsequently renamed Vodafone Essar Ltd.) I Hutchison Goldspot Scorpios Telecommunications Mercantile Co. Beverages (P) International (Cayman) (P) Ltd. I Ltd. I Holdings Ltd. Nominated payee CI Options Options Agreement Agreement (Counterparty) (Counterparty) Amber International Holdings Plustech MV Healthcare Inc. BVI Mercantile Co. Services (P) (P) Ltd. I Ltd. I Options Options Agreement Agreement (Counterparty) (Counterparty) HTI (BVI) Holdings Ltd. BVI Centrino ND Callus Info Trading Co. Services Transferor (P) Ltd. I (P) Ltd. I CGP Investments (Holdings) Ltd. CI Target Array Holdings Ltd. MS Original Target CGP India Investments Ltd. MS Euro Pacific Securities Ltd. MS Prime Mobilvest MS CCII Telecom Asian Hutch Metals (Mauritius)Investments Telecommu-Telecommu Ltd. MS Inc . MS India (P) Ltd. nications (India) L I Investments (Mauritius) Ltd. MS Jaykay Omega T Finholding Holdings (India) (P) Ltd. I UMT Investments Ltd. I Usha Martin Telematics Ltd. I
0.7663% 1.5325% 9.5837% 2.5522% 12.9583% 6.0672% Essar Spacetel Ltd. (Jammu & Kashmir, Himachal Pradesh, Madhya Pradesh, Bihar, Hutchison Essar Mobile Hutchison Telecom Hutchison Fascel Orissa, Assam & other NE States including Sikkim, Arunachal Pradesh, Nagaland, Services Ltd. (Delhi) I East Ltd. (Kolkata) I Essar Cellular (Gujarat) I Meghalaya, Manipur, Mizoram and Tripura) @ I Ltd. (Maharashtra, 50.815% Tamil Nadu, Kerala) I 100% Hutchison Essar South Ltd. Aircel Digilink India [Chennai, Andhra Pradesh, Ltd. [Rajasthan, Karnataka, Punjab, Uttar Haryana, Uttar Pradesh (West) West Bengal ] Pradesh (East)] I I
3. Hutchison held call options over companies controlled by Asim Ghosh and Analjit Singh as also over SMMS Investments (P) Ltd. aggregating to approx. 15 per cent The benefit of these options enured in favour of a corporate entity called 3 Global Services Private Ltd., a company registered under the Companies Act, 1956.
4. The licence for Mumbai Circle was awarded in November, 1994 by the Department of Telecommunications (DoT) to Hutchison Max Telecom Ltd. (HMTL). 50 per HMTL was held by an Indian company, Max Telecom Venture, 49 per cent by Hutchison Telecommunications (India) Ltd. Mauritius (HTM) and 1 per cent by an company of HTM, at the material time, was Hutchison Telecommunications (India) Ltd. Cayman Islands (HTC). HTC, in turn, was a joint venture of the Hutchiso Distacom India Co. Ltd., BVI (40 per cent). Distacom left the joint venture in 2004. Subsequently, a number of investments were made through other companies : In 1998, MTV sold a 40 per cent stake in HMTL to Telecom Investments India Ltd. (TII). In 2004, Essar (Mauritius) purchased the 40 per cent stake of Distacom in HTC who then transferred the shares to HTI BVI Holdings Ltd. HTM transferred 19.6 p HMTL to the Essar Group. In 2006, Kotak Group sold its 51 per cent stake in TII to ND Callus Info Services (P) Ltd., a company controlled by Analjit Singh. Simultaneously, Centrino Tradin to 23.97 per cent stake in TII. In 2006, the Hinduja Group, which held a 5.11 per cent stake in HEL, sold its stake to Hutchison Group.
5. On 12th Jan., 1998 CGP Investments (Holdings) Ltd. (CGP) was incorporated in Cayman Islands by the Hutchison Group. HTL Hong Kong was the sole shareholde 2004, it came to be transferred to/acquired by HTI BVI.
6. Hutchison entered into the Delhi Telecom Circle in December, 1999, the Kolkata Circle in July, 2000 and the
Gujarat Circle in September, 2000. Licences for the awarded by DoT in 1994, 1997 and 1995 respectively.
7. In 2004, Hutchison Telecommunication International Ltd., Cayman Islands (HTIL) was incorporated and listed on the Hong Kong and New York Stock Exchanges companies held interests in the mobile telecommunications business in several countries including India.
8. In 2005, HMTL (which later became HEL and is now VEL) completed a process of consolidation. Shares of several operating companies were transferred by diverse in consideration for which HMTL issued its own shares to these holding companies. Approval of the Foreign Investment Promotion Board of the Union Governm November, 2004 and of the RBI in December, 2004.
9. On 28th Oct., 2005 VIH BV agreed to acquire 5.61 per cent of the shareholding in Bharti Televentures Ltd. (now Bharti Airtel Ltd.). Framework Agreements : On 1st March, 2006, Framework Agreements were entered into by Asim Ghosh and Analjit Singh. One agreement was between Asim Gosh, Goldspot Mercantile Mercantile Co. (P) Ltd., 3 Global Services (P) Ltd. (3GSPL) and Centrino Trading Co. (P) Ltd. Centrino Trading acquired shares in TII. Plustech held 100 per cent share 100 per cent shares in Plustech. Goldspot was controlled by Asim Ghosh. 3GSPL’s holding company was Hutchison TeleServices (India) Holdings Ltd., Mauritius, holding company with a 100 per cent shareholding of Hutchison TeleServices (India) Holdings Ltd. 3GSPL (a Hutchison company) agreed to procure credit support in order to enable Centrino to subscribe to 23.97 per cent shares in TII (which holds directly and HEL). In consideration for this, the agreement conferred upon it a right : to subscribe to equity in Centrino. to purchase equity of Plustech. (3GSPL Call Option), Goldspot had, in turn, an option to require 3GSPL to purchase equity shares of Plustech (Goldspot Put Option). The transfer price/fair market value of the Plustech s in terms of a comprehensive mechanism agreed to between the parties, set out in Sch. 2. There was a similar Framework Agreement between Analjit Singh, Scorpios Beverages (P) Ltd. (held 100 per cent by Mr./Mrs. Analjit Singh), MV Healthcare Ser cent by Scorpios) and ND Callus Info Services (P) Ltd. (held 100 per cent by MV Healthcare). In consideration of 3GSPL procuring financial assistance for ND Callus to subscribe to 38.78 per cent shares in TII (which holds directly and indirectly 19.54 granted 3GSPL : a right to subscribe to equity in ND Callus and/or purchase equity of MV Healthcare. 3GSPL granted Scorpios Beverages an option to require 3GSPL to purchase equity shares of MV Healthcare. The transfer price/fair market value of the MV He determined in terms of Sch. 2, which set out a mechanism somewhat at variance with the mechanism in the other Framework Agreement.
14. Similarly on 7th Aug., 2006, a Framework Agreement was executed between IDFC Pvt. Equity Co. Ltd., Hutchison Telecommunications (India) Ltd., 3GSPL, Indu HTIL and other companies. Hutchison exits : In December, 2006, HTIL issued a press statement, stating that it had been approached by various potentially interested parties regarding a possible sale of its e Essar Limited (HEL), the company’s mobile operations in India. On 22nd Dec., 2006, Vodafone Group Plc made a non-binding offer for a sum of US $ 11.055 billion, in cash, for HTIL’s shareholdings in HEL. The letter stated valued at an enterprise value of US $ 16.5 billion. The offer to HTIL of US $ 11.055 billion was for its 67 per cent interest in Hutch Essar.On 9th Feb., 2007, Vodafone Group Plc submitted a revised and binding offer to HTIL on behalf of Vodafone International Holdings BV for HTIL’s shareholdings related company loans. The offer was US $ 10.708 billion on the basis of an enterprise value of US $ 18.250 billion. Bharti Infotel (P) Ltd. by a letter dt. 9th Feb., 2007 furnished its no objection to the proposed transaction.
On 10th Feb., 2007, Vodafone Group Plc made a final binding offer of US $ 11.076 billion, based on an enterprise value of US $ 18.800 billion of HEL. Sale Purchase Agreement :
On 11th Feb., 2007, a Sale Purchase Agreement (SPA) was entered into between the petitioner and HTIL under which HTIL agreed to procure and transfer to the share capital of CGP, by HTI BVI free from all encumbrances together with all rights attaching or accruing, and together with assignment of loan interests. This was fo HTIL and Vodafone of 12th Feb., 2007, the latter stating that it had agreed to acquire a controlling interest in HEL via its subsidiary VIH BV.
On 20th Feb., 2007, Vodafone Group Plc on behalf of VIH BV addressed a letter to Essar Teleholdings Ltd. for purchase of Essar’s entire shareholding in HEL (‘Tag Application to FIPB :
On 20th Feb., 2007, VIH BV, filed an application with the Foreign Investment Promotion Board (FIPB) of the Union Ministry of Finance stating thus : Vodafone Group acquired a direct and indirect investment in Bharti Airtel Ltd.
The petitioner held 5.61 per cent stake directly in Bharti Airtel. Vodafone Mauritius held an indirect interest of 4.39 per cent in Bharti Airtel through Bharti Infotel (P) Ltd. and Bharti Telecom Ltd.
The petitioner intended to acquire the share capital of CGP indirectly from HTIL. CGP owns directly and indirectly through its subsidiaries an aggregate of 42.34 p capital of HEL. This was an overseas transaction between two overseas companies, which requires noting, and does not require approval of FIPB.
The petitioner will acquire an indirect controlling interest of 51.96 per cent in HEL, a company competing in the same field with Bharti, attracting press note 1. The consent of Bharti has been secured.
The petitioner requested the FIPB to take note and grant approval under press note 1 to the indirect acquisition of a 51.96 per cent stake in HEL through an overs share capital of CGP from HTIL. On 22nd Feb., 2007, HTIL made an announcement on the Hong Kong Stock Exchange stating that it intended to use the proceeds from the sale of its interest in dividend of HK $ 6.75 per share, utilising HK $ 13.9 billion to reduce debt and the remainder for investment in telecommunications businesses. On 28th Feb., 2007, FIPB addressed a letter to HEL, seeking complete details from HEL regarding direct and indirect foreign holdings in HEL; details of India ownership details of entities of Asim Ghosh and Analjit Singh and the nature of arrangement of beneficial ownership. On 2nd March, 2007, Asim Ghosh addressed a letter to HEL confirming that he through his companies, owned 23.97 per cent of Telecom Investments India (P) Ltd., which in turn owned 19.54 per cent of HEL held indirect equity of 4.68 per cent, had full control over related voting rights, is his own beneficiary, has received credit support, but the primary liability is with his companies.
26. On 5th March, 2007, Analjit Singh addressed a communication to FIPB confirming that— he is the founder and chairman of Hutchison Max Telecom, now HEL. In 1998, Max divested 41 per cent stake and balance 10 per cent in 2005.
In January, 2006, an acquisition was made of 7.577 per cent in HEL through Scorpios, etc. This is post—FDI norms altering the sectoral cap for foreign direct investm per cent, when Hutch had to shed some equity.
Voting rights legally and beneficially were owned by him. Structure was filed with FIPB in April, 2006 and filed with DoT on 27th April, 2006. FIPB confirmed the structure on 1st Aug., 2006.
27. On 6th March, 2007, Essar Teleholdings Ltd. filed an objection with FIPB in relation to the proposed transaction for purchase of a controlling interest by th purchase of overseas holding companies belonging to the Hutchison Group, on the ground that HEL and Bharti Airtel are competing ventures in the same field and the result in both companies having a common foreign partner, which could jeopardise the interests of HEL/Essar.
28. On 14th March, 2007, FIPB addressed a letter to HEL seeking the following clarification : “In filing of HTIL before the US SEC in form 6K for the month of March, 2006, it has been stated inter alia that the HTIL Group will continue to hold an aggregate i Hutchison Essar and an additional indirect interest through JV companies being non-wholly owned subsidiaries of HTIL which hold an aggregate of 19.54 per cent o combined holding of HTIL group would be 61.88 per cent. However, in the communication dt. 6th March, 2007 sent to FIPB, the direct and indirect FDI by HTIL is s This may kindly be clarified.”
29. A similar letter was addressed to the petitioner. In reply HEL by its letter addressed to FIPB on 14th March, 2007 clarified that : “…In summary, it is because of this difference in the US GAAP and Indian GAAP declarations that the combined holding for US GAAP purposes was 61.88 per cent an is now 51.98 per cent. The Indian GAAP number reflects accurately the true equity ownership and control position”.
30. The petitioner by its clarification to FIPB dt. 14th March, 2007 stated that its effective shareholding in HEL will be 51.96 per cent and consisted as follows : Vodafone will own a 42 per cent direct interest in HEL through its acquisition of 100 per cent of CGP Investments (Holdings) Ltd. Through CGP Vodafone will also own 37 per cent in Telecom Investments India (P) Ltd. (‘TII’) which in turn owns 20 per cent in HEL and 38 per cent in Omega (‘Omega’), which in turn owns 5 per cent in HEL. Both TIL and Omega are Indian companies. These investments combined give Vodafone a controlling interest of 52 per cent in HEL. • In addition, HTIL’s existing Indian partners Asim Ghosh, Analjit Singh and IDFC who between them hold a 15 per cent interest in HEL have agreed to retain their sh including voting rights and dividend rights.
31. On 15th March, 2007, a settlement was arrived at between HTIL and a set of companies belonging to the Essar Group by which in lieu of the payment by immediately and a further US $ 41.5 million, subsequently, Essar indicated its support to the proposed transaction. Notice under s. 133(6) : On 15th March, 2007, the Jt. Director of IT (International Taxation) issued a notice under s. 133(6) of the IT Act, 1961 to HEL seeking information regarding Hutchison group, Hong Kong in HEL to Vodafone Group Plc, including in relation to the Shareholders Agreements and details of the transaction for acquisition of the sh On 19th March, 2007, FIPB addressed a letter to the petitioner asking it to clarify under what circumstances Vodafone had agreed to pay a consideration of US $ 1 per cent of HEL when the actual acquisition is only of 51.96 per cent, according to the application. On 19th March, 2007, the petitioner addressed a letter to FIPB stating that it had agreed to acquire from HTIL, interests in HEL which include a 52 per cent eq 11.08 billion and that the price included a control premium, use and rights to the Hutch brand in India, a non-compete agreement with the Hutch group, value of preference shares, various loan obligations and an entitlement to acquire a further 15 per cent indirect interest in HEL, subject to Indian foreign investment rules, w per cent of the economic value of HEL.
On 22nd March, 2007, HEL replied to the notice of 15th March, 2007 of the Jt. Director of IT (International Taxation) and furnished information relating to HEL. HEL stated that it is not in a position to provide any response, since it is neither a party to the transaction nor will there be any transfer of shares of HEL.
On 22nd March, 2007, FIPB addressed a letter to the petitioner seeking a break-up of the valuation attached to each of the items mentioned in the petitioner’s together with supporting documents and regulatory filings.
On 23rd March, 2007, the Addl. Director of IT (International Taxation), Range 2, Mumbai, issued a letter to HEL intimating that both Vodafone Group Plc an announcements evidenced that HTIL had made substantial gains. HEL was consequently requested to impress upon HTIL/Hutchison Telecom group to discharge tax li cease operations in India. Additionally, the attention of HEL was drawn to ss. 195 and 197 of the Act. The letter seemed to proceed on the basis that the shares of H hence HEL would be in a position to get the requisite information. On 27th March, 2007, the petitioner addressed a letter to FIPB confirming that it had taken into account : (i) The various assets and liabilities of CGPC including (i) (a) its 51.96 per cent direct and indirect equity ownership of Hutch Essar; (b) its ownership of non-voting, n preference shares in Telecom Investments India (P) Ltd. (TII) and Jaykay Finholding (India) (P) Ltd.; (c) assumption of liabilities in various subsidiaries of CGP amou 630 million; and (d) subject to Indian foreign investment rules, its rights and entitlements, including subscription rights at par value and call options to acquire in th cent of TII, and call options to acquire in the future a further 54.21 per cent of Omega Telecom Holdings (P) Ltd. (Omega) which together would give the petition proportionate indirect equity ownership of Hutch Essar; and (ii) Various other intangible factors such as control premium, use and rights to the Hutch brand in India and a non-compete agreement with HTIL. It also confirmed that in determining the bid price, there was no individual price placed on any of these items. The approach was to look at a total package, represent and to assess the total value.
On 5th April, 2007, HEL clarified to the Director of IT (International Taxation) that HEL had no tax liabilities accruing out of the transaction and that it did not obligations under s. 195 in relation to non-resident entities regarding any purported tax obligations.
On 5th April, 2007, FIPB in a letter to the petitioner sought details of Vodafone Group’s projects/joint ventures/subsidiaries/branches/business interest collaboratio On 9th April, 2007, HTIL filed the agreements pertaining to its transactions with FIPB. FIPB approval :
On 7th May, 2007, FIPB conveyed its approval of the transaction to the petitioner subject to compliance with and observance of all the applicable laws and regula was also subject to the condition of compliance with the sectoral cap on 74 per cent of foreign direct investment in the telecom sector.
On 8th May, 2007, the petitioner paid a sum of US $ 10,854,229,859.05 as consideration for the transaction to HTI CHL in terms of the instructions of HTIL dt. 19 Following this, the share certificate of CGPC was delivered up in Cayman Islands and the name of the petitioner was entered in the Register of Members of CGP.
On 8th May, 2007, a tax deed of covenant was entered into between HTIL and the petitioner, in pursuance of the SPA indemnifying the petitioner in respect of liabilities payable or suffered by the wider group companies as defined by the SPA (i.e. CGP, 3GSPL, the Mauritian holding companies and the Indian operatin completion, including any reasonable costs associated with any tax demand. Separately loan assignments were entered into inter alia by the petitioner and HTI (BVI) Finance Ltd., by which the rights of the latter to receive loan repay petitioner as part of the transactions contemplated under the SPA. Notice under ss. 163, 201(1), 201(1A) :
On 6th Aug., 2007, a notice to show-cause was issued to VEL under s. 163 of the IT Act, 1961 to explain why it should not be treated as a representative ass notice was challenged by VEL in a writ petition under Art. 226 of the Constitution before this Court. On 19th Sept., 2007, the Asstt. Director of IT (International Taxation), issued a notice to the petitioner under ss. 201(1) and 201(1A) to show cause as to why it assessee-in-default for failure to withhold tax. On 3rd Dec., 2008, a Division Bench of this Court dismissed the petition [judgment reported as Vodafone International Holdings B.V. vs. Union of India & Anr. (2 (2008) 16 DTR (Bom) 185—Ed.] declining to exercise its jurisdiction under Art. 226 in a challenge to the show-cause notice. Directions of the Supreme Court : In a SLP filed before the Supreme Court, by an order dt. 23rd Jan., 2009, the second respondent was directed to determine the jurisdictional challenge raised passed by the Supreme Court reserved the right of the petitioner to challenge the decision of the second respondent on the preliminary issue, if determined agains Court leaving all questions of law open. Thereafter, a second notice to show cause was issued to the petitioner under s. 201 on 30th Oct., 2009 to which the petitione 2010. On 31st May, 2010 the impugned order was passed by the second respondent under s. 201 upholding jurisdiction. On 31st May, 2010, a notice to show cause was issued under s. 163 to the petitioner to show cause as to why it should not be treated as an agent/representative Contentions : A. The petitioner : Briefly Stated, the case of the petitioner is that if any of the shares held by the Mauritian companies were sold in India, there would be no capital gains tax pay convention on avoidance of double taxation between Mauritius and India. Hence, on a transfer of shares of HEL which are admittedly an asset situated in India, there gain tax chargeable in India. However, as the transaction in the present case was that the share of an upstream overseas company which was in a position to exerc company was sold, the Revenue has sought to impose capital gains tax on the ground that the transfer resulted in consequential transfer of control over an Indian ent capital gain which is taxable in India.
The petitioner contends that CGP (the subsidiary whose share was transfered to it) through its down stream subsidiary, directly or indirectly controlled equity inte the share resulted in the petitioner acquiring control over CGP and its down stream subsidiaries including, ultimately HEL and its down stream operating companies. down stream companies, commercial arrangements common to such a transaction were put in place. The transaction represents a transfer of a capital asset viz., arising to the transferor or to any other person out of this transfer is not taxable in India because the asset is not situated in India. Hence, there was no sum charge obligation to deduct tax under s. 195 did not, as a result, arise. The submissions can now be summarised. (1) The case of the Department has vacillated : (i) The notice to show-cause suggested that the transaction was sham and colourable. The impugned order procee holding companies are permissible and the transaction was not by itself a sham, the holding companies had no commercial operations. The transfer of the CGP sh 66.9848 per cent interest in HEL. However, in the course of submissions the ASG, developed a new case that the transfer of the CGP share resulted only in a transfer HEL and the balance must necessarily have been transferred through some device. The ASG had urged that the shares held by companies controlled by Analjit S beneficially held by HTIL. The Revenue cannot be permitted to challenge FIPB’s acceptance to the contrary in collateral proceedings. The Department, when it decides order, cannot assign an entirely new set of reasons; (2) The parties to the transaction understood the expression “equity interest” to be (i) The transfer of direct and indirect control of 42.34 per cent of the equity capita pro rata control over TII and SMMS which is mandated by the policy of the Government of India which provides a cap on foreign investments in telecommunications the ‘put’ options. The revised case of the Department is fallacious; (3) Sec. 5(1) legislates with respect to nexus based on residence while s. 5(2) is based on nexus relatable to source. As regards nexus arising from source, tax can b (i) is received in India; (ii) which accrues and arises in India; and (iii) which is deemed to accrue or arise in India. For income to arise or accrue in India, there must in India. In the present case, there is no income that accrues or arises in India since the right to receive the money was outside India under a contract entered into was made outside India; (4) In s. 9, Parliament has specifically limited gains arising out of transfers of capital assets to an asset situate in India. The share of CGP is situated outside India. can be transferred. A share represents a bundle of rights and the transfer of a share results in a transfer of all the underlying rights. However, in law, what is tra individual rights. There is a distinction in law between shareholders and a company and a shareholder has no right in the assets of the company. Hence, the content transfer of control over the business in India constitutes a transfer of an asset in India is without any foundation; (5) By legislation several countries have made “lookthrough” provisions by which a tax is imposed on gains arising out of a transfer of shares outside the country i control over a company which holds substantial immovable property in the country. This is an area of legislative intervention. In India, Parliament has amended the chapter on transfer pricing to deal with cross- border transactions. However, s. 9 has not been amended. A lookthrough provision cannot be introduced by judicial inter (6) The SPA represents an arm’s length commercial transaction which was entered into between the two large foreign corporations. It is not the case of the Revenue or colourable. If the shares of an Indian company which are held by companies resident in Mauritius were transferred to the petitioner directly and without interv company, there would be no liability to capital gains tax because it would be fully covered by the Indo-Mauritius Tax Treaty. The Department would not in law b corporation resident in Mauritius in view of the judgment of the Supreme Court in Union of India & Anr. vs. Azadi Bachao Andolan & Anr. (2003) 184 CTR (SC) 450 The SPA dispels any notion that there was anything more than the transfer of the CGP share for consideration. The other clauses relate to consequential changes tha stream effect of the transfer of the CGPC share; (7) As regards the Framework Agreements, it has been submitted that (i) The Framework Agreements dt.
1st March, 2006 relating to Asim Ghosh and Analjit Sin rights upon 3GSPL. Neither of those agreements confers any right upon HTIL; (ii) The Framework Agreement of 7th Aug., 2006 relating to TII confers option shareholder’s agreement dt. 5th July 2003, nor of 1st Aug., 2006 confers any right upon HTIL; (8) In any case, the theory that because there are some contracts which are related to the contract of sale, and since the former contracts have nexus with India, the nexus with India is neither supportable in principle nor on authority. The tax relates to gains arising out of a transfer of a capital asset situated in India, not a capital has some nexus with India. Parliament has deliberately used the words “situate in India” in relation to capital assets. Where the asset is situated outside India and asset takes place, the location of the asset does not notionally shift to India because the agreement pursuant to which it is transferred has also led to certain rela nexus with India; (9) The contention of the Department that the right to use the Hutch brand during the transition period which was royalty free brings about the transfer of some cap the consideration paid for the shares relates, is misconceived. The Hutch brand was to be withdrawn from India and all that the agreement permitted was, use durin charge. Where a controlling interest in shares is sold, it is usual to incorporate transitory arrangements without specific consideration. The value of the transfer of t the sale price of the shares and the gain made by the seller is a capital gain, in the jurisdiction where the property is situated. Independent values are not assigned to (10) The suggestion of the Revenue that the benefit of the telecom licence stood transferred is misconceived. Under the telecom policy, a telecom licence can only b and there was no transfer direct or indirect of any licence. The telecom policy, however, permits FDI in telecom companies which may be routed through investment a the condition under the telecom licence imposing restriction on the transfer of shares in companies holding licences was first amended in 2001 to reduce it to a lock-the date of the licence. In 2005, it was further amended and presently only a reporting requirement has been made; (11) There is no legal requirement of obtaining permission of the FIPB for a transfer of shares. The shares in telecom companies can be bought and sold and the only requirement. The petitioner was required to obtain a formal permission under press note1 as would any other buyer if he had a joint venture in the same field in India companies in India. The need to obtain permission by the petitioner, asserted by the Revenue, does not shift the situs of the share in India. The proceedings before t were held on whether HEL had permitted excessive FDI by virtue of the beneficial interest in the shares held by Analjit Singh and Asim Ghosh Group of companies in After a thorough enquiry, this suggestion was negated and an undertaking secured that as and when they do transfer the shares, they would seek FIPB permission case of the Revenue that there was some transfer in praesenti; (12) For the purpose of taxation, the corporate veil can be lifted only where a tax fraud is being perpetrated; (13) Sec. 195 is inapplicable to offshore entities making offshore payments. Sec. 195 has to be read consistent with the established principles of conflict of laws and harmoniously with the proposition that Parliament does not enact law that ha unless expressly so stated. The statutory duty under s. 195 cast on the payer is accompanied by a duty under s. 200 to pay the tax and is visited with penal conseq consequences which operate against a person who is not an assessee can arise only where the person concerned has some nexus with India. A person who has no r either temporary or permanent does not incur an obligation under s. 195. A foreign entity which has no presence in India, not even a branch office, cannot be su deduct and pay tax. It is the recipient who is a potential assessee because he has received a sum chargeable. This by itself does not create a nexus with the payer wh under the Act, nor has a presence of any kind in India. Moreover, s. 198 which deems tax deducted and paid to be income received by the payee and s. 199 which d payment of tax on behalf of the person from whom such a tax is deducted, would not operate outside India in transactions such as the present. Payment of tax in discharge of the obligation to pay consideration under the agreement outside India. Hence, even assuming that it is held that some part of the income may be taxa fact that— (a) The petitioner has no presence in India; (b) The transaction wasconsummated outside India; (c) The transaction related to transfer of a share outside India, contracted to be delivered outside India and the transfer of which was registered outside India; (d) The governing law of the contract pursuant to which it was transferred was English law; (e) Payment was made from a bank account outside India to a bank account outside India, there is no question of deduction of tax on such payments. (14) In order that there should be an enforceable obligation under s. 195 against the payer, it must be established that the payment is of a sum chargeable under words “sum chargeable under the provisions of this Act”. Hence, where a demand is made of tax against a person on the ground that there was a failure to deduct ta such a person to challenge the demand on the ground that the condition precedent—of there being a sum chargeable under the Act—is absent and the demand is there is a sum chargeable under the Act, then obviously two options would be to pay the tax on the gross amount or to seek and deduct tax under sub-ss. (2) and (3) chargeable, it is not mandatory for the payer to seek a determination under s. 195(2). In a case such as the present, where the payment has no element which co
India and the payer does not withhold any tax and the Department thereafter makes a demand of tax which allegedly should have been withheld under s. 195, it is o that his action was justified on the ground that there was no sum chargeable under the provisions of the Act. Such an issue if raised has to be decided and not only on (2) Submissions of the Union of India :
54. The core submission on behalf of the Union of India and the respondents is that the SPA and other transaction documents establish that the subject-matter of t the transfer of one share of CGP situated in Cayman Islands as contended by the petitioner. The transaction constitutes a transfer of the composite rights of HT divestment of HTIL rights which paved the way for the petitioner to step into the shoes of HTIL. The transaction in question, it is urged, has a sufficient territ chargeable to tax under the IT Act, 1961. Hence, the finding of the AO that he has jurisdiction, is not perverse or arbitrary and would not warrant interference under The submissions may now be summarised : (i) The decision of the Revenue is based on an interpretation of the agreements in question which would render the submission of the petitioner on “form versus submission of the Department can be justified on the basis of the form of the transaction as reflected in the transaction documents; (ii) There is a distinction between proceedings for the deduction of tax and regular assessment proceedings where larger issues have to be investigated. The jurisdict be confined to the obligation of the petitioner under s. 195 to deduct tax. In the absence of HTIL—the deductee—a full determination of facts which lie within its spec fair and proper. Nonetheless, the Revenue has placed its submissions before this Court in order to assist the determination as to whether the transaction was chargea 9; (iii) The essential question is whether HTIL had a source of income traceable to India or a capital asset in India which it transferred. HTIL received income from the interests in HEL which cannot be disputed. The income has been appropriated by HTIL by declaring a “transaction special dividend” of HK $ 6.75 to its shareholders in out of the “profits from discontinued operations”. This is evident from the interim and final annual reports of HTIL, for the year ending 2007 prepared in complianc Reporting Standard 5 (HKFRS5). HKFRS5 introduced the concept of a disposal group and a discontinued operation; (iv) The subject-matter of the transaction between HTIL and the petitioner was a transfer of 67 per cent in HEL. The acquisition of one CGP share is only one of means nexus of the transaction with India is evident from the nature of HTIL’s rights in HEL which were : (i) A direct and indirect interest of 51.96 per cent in the equity of HEL through its wholly-owned subsidiaries; (ii) Indirect interest in the equity of HEL of
15.03 per cent through call options in the companies held by Analjit Singh, Asim Ghosh and IDFC; (iii) Right to do business through telecom licence granted to the special purpose vehicle promoted by HTIL and Essar as promoter and joint venture partner; (iv) Acquisition and devolution of Hutch brand; (v) Management rights over HEL flowing through term sheets and shareholder agreements; and (vi) Debt/loans through intermediaries for infusion as equity or debt in HEL. (v) Besides procuring the sale of one share belonging to CGP, HTIL had necessarily to adopt several steps to consummate the transaction of transferring all its rights included (i) Procuring assignment of loans; (ii) Facilitating Framework Agreements; (iii) Transferring management rights in HEL; (iv) Transferring the Hutch brand; licence etc. All these were independent of the transfer of the CGP share. The consideration paid by the petitioner to HTIL was for a package of composite rights and CGP share.
(vi) The acquisition of the shareholding in CGP did not transfer in itself all the rights and interests which flow to the petitioner from the transaction. The petitioner rights including effective control and management of the joint venture in India as a result of which it stepped into the shoes of HTIL. This arose as a consequence of distinct and independent contracts which have no co-relation with the acquisition of CGP equity. Though neither the petitioner nor its predecessor-in-interest, HTIL ar VEL), they are able to secure control over the Indian corporate entity only by reason of their entering into contractual obligations as evidenced from the term sheet ag venture partners. The first term sheet agreement of 5th July, 2003 inter alia between Essar Teleholdings Ltd. and HTIL contemplated that the operating companie transferring their shares to an Indian holding company (Holdco). Holdco became HMTL and was renamed as HEL. As a result of such agreements, HTIL secured signif long as it continued to hold at least 40 per cent of the issued share capital of HEL. All major decisions called “Reserved decisions” were to be at the absolute discretion
(vii) Accounting Standard 24 of the ICAI recognizes that control may be obtained directly or indirectly through a subsidiary from the ownership of more than hal enterprise or by control of the composition of the board of directors. Sec. 211(3A) of the Companies Act requires accounts to comply with Accounting Standards. A controlling interest in a company can be obtained by indepe shareholding;
(viii) The right to take vital decisions with reference to the management of the joint venture was legally vested in the petitioner as a result of stand-alone co acquisition of CGP share and was oriented towards the India specific joint venture. These rights have enured independent of the CGP share as would be evident from 24th Aug., 2007;
(ix) In order to appreciate the terms of and the impact of the SPA, the circumstances which transpired prior to and subsequent to its execution are relevant. The nam a transaction which is the source of receipt or the characterization of the receipt is not conclusive and the true nature and character has to be ascertained from the the light of surrounding circumstances; (x) Several valuable rights which are property rights and capital assets stand relinquished in favour of the petitioner by reason of the agreements which form part o and not merely by the simple transfer of one CGP share. These rights are property and constitute an asset of a capital nature which is situated in India. But for these a have been able to effectively transfer to the petitioner, controlling interest in the joint venture to the extent of 66.9828 per cent in HEL; (xi) An analysis of the SPA shows that cl. 2 is expressly subject to the condition provided in cl. 4.1. By cl. 4.2(a), the purchaser had the responsibility to use all reaso FIPB approval. The transaction is subject to the consent and approval of the Indian regulatory authority, FIPB. The fulfillment of the condition precedes the vesting of the parities under the contract and if FIPB approval is not obtained, HTIL was permitted to terminate the agreement. The approval of FIPB would not have been req only the transfer of one CGP share. HTIL entered into a settlement with the Essar Group on 15th March, 2007, in order to obtain its support in the completion of SPA. to give notice to Essar and to purchase the tag along rights of Essar Teleholdings Ltd. as a minority shareholder of HEL. The petitioner made an offer on
20th Feb., cent of Essar interest in HEL for US $ 5.7687 billion. Vodafone and Essar Group entered into a term sheet agreement on 15th March, 2007 to regulate the affairs between shareholders of HEL. The petitioner would have operational control of HEL while Essar would have rights consistent with its shareholding, including a proporti The term sheet agreement was restated in August, 2007 after the approval of FIPB was received. On
15th March, 2007, Essar, HTIL and Vodafone entered into Vodafone waived certain warranties given by the seller in the SPA. All this was unnecessary if the transaction related to only one share of CGP; (xii) Vodafone and Vodafone Group Plc as guarantor of Vodafone, entered into a Put Option agreement on 15th March, 2007 with Essar Teleholdings Ltd., India an requiring Vodafone to purchase from Essar Group all of the option shares held by them at a price payable at the first Put Option shares of US $ 5 billion. For the s Group acquired from Essar Group, an irrevocable right to purchase such number of shares as the Essar Group may determine, subject to a minimum aggregate fair m and upto a maximum of US $ 5 billion. This shows that the transaction under the SPA involved a succession by Vodafone of HTIL’s joint venture interest in India and share of CGP; (xiii) In cl.
8 of the SPA, HTIL assumed the responsibility to ensure execution of the terms of the transaction documents by the Indian entities and persons. Claise 9 that in the event of breach, the agreement would be treated as requiring HTIL to procure the delivery of 66.9848 per cent of the issued share capital of HEL to Vodafo to have transferred that proportion of the share capital of HEL. Clause 10.4 requires the replacement of the Oracle licence in favour of HEL and so that the c terminated as a result of the SPA. Clause 14.1 embodied a non- compete clause restraining the vendor from carrying on any competing business in India. The ex coterminous with the rights conferred on HTIL under its non-compete agreement with Hutchison Whampoa Ltd. in 2004 at the time of restructuring of the Hutchison G (xiv) The transaction between HTIL and VIH BV took into consideration the following : (i) The interest held in HEL through eight Mauritius companies characterized as a direct interest aggregating to 42.34 per cent; (ii) Interest held in the Indian company TII (to the extent of 37.25 per cent of share capital through CGPM) which held shareholding of 19.54 per cent in HEL, resulting interest in the Indian company HEL; (iii) Interest held in the Indian company Omega Holdings (to the extent of 45.79 per cent of share capital through HTIM), which held shareholding of 5.11 per cent in 2.34 per cent interest in the Indian company HEL; (iv) Rights (and options) by providing finance and guarantee to Asim Ghosh Group of companies to exercise control over TII and indirectly over HEL through TII shar Centrino Framework Agreement dt. 1st March, 2006; (v) Rights (and options) by providing finance and guarantee to Analjit Singh Group of companies to exercise control over TII and indirectly over HEL through various T and the ND Callus Framework Agreement dt. 1st March, 2006; (vi) Controlling rights over TII through the TII shareholder’s agreement, in the form of right to appoint two directors with veto power to promote its interests in HEL interest in 12.30 per cent of the share capital of the Indian company HEL; (vii) Finance to SMMS to acquire shares in ITNL (formerly Omega) with right to acquire the share capital of Omega in future; (viii) Controlling rights over ITNL through the ITNL shareholders agreement, in the form of right to appoint two directors with veto power to promote its interests beneficial interest in 2.77 per cent of the share capital of the Indian company HEL; (ix) Interest in the form of loan of USD 231 million to HTI (BVI) which was assigned to Array Holdings Ltd.; (x) Interest in the form of loan of USD 952 million through HTI (BVI) utilized for purchasing shares in the Indian company HEL by the 8 Mauritius companies; (xi) Interest in the form of preference share capital in JKF and TII to the extent of USD 167.5 million and USD 337 million respectively. These two companies hold 19 Right to do
telecom business in India through joint venture; (xii) Right to avail of the telecom licenses in India and right to do business in India; (xiii) Right to use the Hutch brand in India; (xiv) Right to appoint/remove directors in the board of the Indian company HEL and its other Indian subsidiaries; (xv) Right to exercise control over the management and affairs of the business of the Indian company HEL (management rights); (xvi) Right to take part in all the investment, management and financial decisions of the Indian company HEL; (xvii) Right to control premium; (xviii) Right to consultancy support in the use of Oracle license for the Indian business;
The rights enumerated above are subject-matter of transfer between HTIL and Vodafone and are enumerated in cls. 6.1(ix), 6.2(b), 6.4, 8.8, 8.9, 10.1, 10.4, 10.5 an paid by Vodafone was for the acquisition of all the above enumerated composite rights which it held in HEL. It is not for the mere transfer of a CPG share.
(xv) HTIL’s interest in HEL arose by way of indirect equity shareholding, option agreements, finance agreements, shareholders’ agreements etc., the aggregate of interest of 66.9848 per cent in HEL. All these varied interests did not emerge only from one share of CGP and could not have been conveyed by the transfer of only its direct equity interest in HEL amounting to 42.34 per cent through eight Mauritian companies. HTIL exercised management control on account of the collective shar and on account of shareholders’ agreements, term sheet agreements and other arrangements negotiated with the joint venture partners. HTIL’s indirect subsidiary equity interest in TII, an Indian company which in turn, held a 12.96 per cent equity interest in HEL. CGPM, as a result of its 37.25 per cent interest in TII had an inte companies which in turn, held interests in HEL, as a result of which HTIL obtained an indirect equity interest of 7.24 per cent in HEL. HTIL had a further 15 per cent option agreements, Framework Agreements and shareholders agreements of Asim Ghosh, Analjit Singh and IDFC and credit arrangement with their companies. All the go with one share of CGP. The significance of the Framework Agreements with the Analjit Singh Group companies, Asim Ghosh Group companies and IDFC Group Services (P) Ltd. (GSPL), an indirect subsidiary of HTIL held certain subscription rights and call options to subscribe to and to acquire the shares of Indian companies Analjit Singh and IDFC, which held investments in TII which in turn held shares in HEL. These rights arose under the— 1. ND Callus Framework Agreement dt. 1st March, 2006. 2. Centrino Framework Agreement dt. 1st March, 2006. 3. IDFC Framework Agreement dt. 7th Aug., 2006. 4. TII shareholders’ agreement dt. 1st March, 2006. 5. ITNL (Omega) shareholders’ agreement dt. 7th Aug., 2006.
The subscription rights and call options were granted to 3 Global Services (P) Ltd. (3GSPL) in consideration of 3GSPL procuring credit support to finance the acqu and ITNL by the said Indian companies. Through these agreements, HTIL had indirect control and substantial influence over HEL which was characterized as 15 per cent economic interest over HEL.
(xvi) These subscription rights and option rights were acquired under the Framework Agreements and could be exercised subject to their terms and conditions. These accrued under independent agreements. One of the terms and conditions was that the agreement could be terminated on the occurrence of an event of default. A ch as an event of default. Hence, a transfer of the CGP share to Vodafone would not enable Vodafone to exercise rights under these agreements unless it acquired t separate agreements with the Indian companies. Vodafone entered into similar agreements with the Indian companies to assure rights in its favour.
(xvii) Under s. 9(1), the deeming fiction is of a wide amplitude and all kinds of income derived by a non-resident from whatever source are brought within the ambit o s. 9(1) provides that income is deemed to accrue or arise in India whether directly or indirectly inter alia through or from (a) a business connection in India; (b) pro in India; (d) any source of income in India; or (e) through the transfer of a capital asset situated in India. The common thread is that the income should have suffi nexus with India. Unlike the OECD Group of countries, India has a wide net of source based taxation to preserve its tax base. It is for this reason that s. 9 is comparison with the OECD system of taxation will not be appropriate.
(xviii) HEL is situated in India and its business of telecommunications was carried out entirely in India with relevant licences and regulatory clearances granted under a transfer of controlling interest in HEL from one non-resident to another non-resident. The business of HEL is based on property located within India. The gains re transfer of the CGP share, the value of which was determined on the basis of the enterprise value of HEL being property situated in India and other valuable r agreement are chargeable to tax in India. The gains are deemed to arise once the subject-matter of the transaction constitutes a capital asset and its location is in I expression “capital asset” in wide terms to mean property of any kind held by assessee. This will include rights and interests which are capable of being owned and t the word “transfer” in s. 2(47) is wide enough to comprehend any method of transfer. The entire enterprise value attributed to HEL, was only on account of the fruits HTIL in India, goodwill/brand value generated by HTIL for the Hutch brand in India, the telecom licences granted in India, customer base in India and the prospect expansion of business in India. Further, all obligations cast upon the parties as per the transaction documents, were performed in India, including FIPB approval, opt agreements, shareholder agreements, Framework Agreements with TII and Omega, divestment of petitioners interest in Bharti Airtel Ltd., settlement agreement wit Further, the non-compete condition was enforceable only in India and the loan/debt agreement/ assignment to the petitioner, was in respect of funds utilized in income from the transaction accrues or arises in India and is chargeable to tax under the first limb of s. 5(2)(b) of the Act.
(xix) The words “accrue” or “arise” indicate some origin or source of income and have to be determined on the cumulative effect of the facts in each case. They hav place where such income is derived and what must be considered is the originating source of the gains, profits or income. The entire income which is derived by HTIL arose or accrued in India. The transaction in the present case, involves a transfer of a bundle of interests in various entities and it would be simplistic to assume tha only a share of a company in Cayman Islands and that all the other rights were incidental to the transfer.
(xx) The acquisition of an interest in a joint venture does amount to the acquisition of a capital asset. The acquisition of a bundle of interests amounted to acquisitio could transfer its controlling interest in HEL only upon extinguishing its rights in the Indian company. A divestment of its right, title or interest necessarily preceded d interest. The divestment by HTIL of its interests would result in an enduring benefit to VIH BV, resulting in the acquisition of a capital asset in India. HTIL relinqu interest in HEL so as to fall within the ambit of the expression “transfer” as defined in s. 2(47). The object of the transfer was to enable the VIH BV to acquire a co thereby a right to manage HEL. In the present case a debt was also assigned in favour of the petitioner.
(xxi) In the present case, VIH BV disregarded the Indian corporate personality of the intermediary companies in the transfer of the asset and in the appropriation transfer of an asset is not determinative of the nature of the asset. Shares in themselves may be an asset but in many cases like the present, they may be merely a m some other assets. In the present case, the subject-matter of transfer is not just the shares of the Cayman Islands company but assets situated in India. The particu alter or determine the situs, nature or character of the asset. (xxii) The expression “person” in s. 195 is not restricted to a person resident in India and the provision can be applied also to a non-resident. The provisions of a sta for collection of tax have to be construed according to the ordinary rules of construction and to make the charge effective. The legislature has deliberately not qualifie restrictive terms and it would be impermissible to do so by interpretation. Even though the revenue laws of one country are not enforceable in another, this do themselves will not be enforced by the Courts of one country against a resident of another country. While the enforcement of the law cannot be contemplated nonetheless be enforced by the Courts of the enacting State to the degree that is permissible with the machinery available.
(xxiii) In the present case, the transfer was not incidentally or marginally related to India. It has been admitted that the price paid to HTIL by the petitioner was base the Indian asset. The fact of the change of ownership of the Indian asset is evident from the permission required, sought and obtained of the FIPB under the telecom further the business interest of the petitioner and the transaction resulted in the introduction of the Vodafone brand. The transaction has a substantial nexus which w being cast upon the petitioner to deduct tax under s. 195.
(xxiv) Sec. 195 applies to all payments which wholly or partly represent a sum chargeable to tax. Once the income is chargeable, the nexus will exist both with regard
(xxv) A deduction of tax at source is only a tentative deduction and does not cause any prejudice to the person who is responsible to deduct the tax from the mon caused to the deductor or to the deductee. The obligation to deduct tax under s. 195 is activated once the payment being made has the character of income fo payment which has a character of income as defined in s. 2(24) will be income chargeable to tax for purpose of s. 195 and tax must be deducted. Once the payment the hands of the payee, the payer has a duty to deduct tax and the deductor is not concerned whether on regular assessment, the Department will find the income c provision has adequate safeguards. If a deductor is unsure whether the particular payment is deductible he can under sub-s. (2) of s. 195 seek a clarification. The ob extinguished merely because the payment is made by a nonresident to another non-resident outside in India. If the amount paid has nexus with India, it is the duty o tax or to approach the Department and seek a clarification on whether the deduction should be made.
55. The submission can now be considered. Structuring business for tax planning : Indian law recognises that an assessee, who engages in legitimate business activity and organizes business around accepted legal structures is entitled to plan h that would reduce the incidence of tax. An assessee who does so, does not tread upon a moral dilemma or risk a legal invalidation. There is a recognition in our law forms of activity can legitimately be arranged by those who transact business to plan for tax implications. So long as the legal structures that are put into place and are utilized have been utilized bona fide for a business purpose, fiscal law—absent statutory provisions to the contrary—does not permit an enquiry into the mo investigation into the underlying economic interest. But a transaction which is sham or, what the law describes as a colourable device, stands on an entirely differe which is sham is one in which though parties employ a legal form, it is in reality a different transaction; one which in reality does not give rise to the legal rights and its ostensible nature. A sham is ostensible but not real and borders on a fraudulent employment of legal form or structure in aid of collateral ends. Absent a case of a fraudulent or colourable, the law respects instruments and structures adopted by business entities within the framework of law in the pursuit of legitimate forms of character of the transaction will not be disregarded in pursuit of substance. So long as parties have not chosen to conceal the nature of their legal relationship by a d contrary or something at divergence with the legal character assumed by them, the law respects their autonomy. Over six decades ago, in 1940, the Privy Council in Bank of Chettinad Ltd. vs. CIT (1940) 8 ITR 522 (PC), observed thus : “Their Lordships think it necessary once more, to protest against the suggestion that in revenue cases, ‘the substance of a matter’ may be regarded as disting position.” In 1967, the Supreme Court in CIT vs. Motors & General Stores (P) Ltd. (1967) 66 ITR 692 (SC), held that “in the absence of any suggestion of bad faith or fraud, t taxing statute has to be applied in accordance with the legal rights of the parties to the transaction.” The Supreme Court held that when the transaction is embod parties, the liability to tax depends upon the meaning of the language used in accordance with the ordinary rules of construction. In 1999, a Constitution Benc Mathuram Agrawal vs. State of Madhya Pradesh (1999) 8 SCC 667, dealt with the issue in the following observations :
“The intention of the legislature in a taxation statute is to be gathered from the language of the provisions particularly where the language is plain and unambiguo possible to assume any intention or governing purpose of the statute more than what is stated in the plain language. It is not the economic results sought to be obtain which is relevant in interpreting a fiscal statute. Equally impermissible is an interpretation which does not follow from the plain, unambiguous language of the statute or substituted so as to give a meaning to the statute which will serve the spirit and intention of the legislature.”
58. The principle of law is that in interpreting fiscal legislation, the Court is guided by the plain language and the words used. The Court would not ignore a legal relat business transaction in search of substance over form or in pursuit of the underlying economic interest. This, however, does not preclude the legislature from legis areas of the law, legislation may adopt a look through provision which mandates a rigorous scrutiny to trace subjects and sources. This is a legislative function. Court to themselves to create legislative policy or to legislate by interpretation for that does not lie within the realm of judicial power. In matters involving the interpreta legislation, Courts follow interpretative techniques which promote certainty in the application of law. Certainty requires Courts to don a traditional, if even con precedent, maintaining interpretational discipline and recognising that it lies within the realm of legislative policy to alter settled legal doctrine. The need for certainty economic matters by two other considerations which are of significance. The first is the perceived lack of expertise on the part of Courts to make the complex dec monetary policy in a seamless world of technology and finance. The second is the constitutional deference to the executive in drawing a balance in matters invol policy, based on the fact that it is the executive which is accountable in a society based on democratic governance, to Parliament and ultimately the people. Question should lie in safeguarding the revenue on the one hand and encouraging foreign direct investment on the other involve policy choices. Judicial doctrine which is Constitution to be isolated from the rough and tumble of democratic accountability to electoral colleges must, therefore, be structured so as not to intrude upon th which lies within the domain of Parliament. Azadi Bachao : On 1st April, 1983 the Governments of India and Mauritius entered into a Convention on the Avoidance of Double Taxation. The object of the Convention was to a prevent fiscal evasion of taxes on income and capital gains and to encourage mutual trade and investment. Article 13 of the convention enunciated rules for taxatio provided that gains derived by the alienation of shares by a resident of a Contracting State shall be taxable only in that State. Capital gains derived by a resident of M shares were taxable only in Mauritius. Article 4 defined the expression “resident of a Contracting State” to be a person who under the laws of that State is liable to ta his domicile, residence, place of management or a criterion of a similar nature. By a circular dt. 30th March, 1994 [(1994) 118 CTR (St) 1], CBDT in exercise of powe 1961 clarified that capital gains derived by any resident of Mauritius on the alienation of shares of an Indian company shall be taxable only in Mauritius according country and would not be liable to tax in India. Notwithstanding this, the IT authorities issued notices to show cause in 2000 to Foreign Institutional Investors (FIIs) not be taxed for profits and dividends which accrued to them in India. The basis of the notices was that the recipients were shell companies incorporated in Mauritiu investment of funds in India. Moreover, it was alleged that those companies were controlled and managed from countries other than India and Mauritius and not by to derive the benefits of the convention. Confronted by a withdrawal of funds by FIIs, CBDT issued a circular on 13th April, 2000 clarifying that such entities inco Mauritius would be considered as residents of Mauritius in accordance with the convention and that when a certificate of residence is issued by Mauritian autho sufficient evidence for accepting the status of residence and beneficial ownership for applying the convention. This was to also apply to income from capital gains accordingly such entities resident in Mauritius would not be taxable in India on income from capital gains arising in India on the sale of shares.
The circular issued by the CBDT was quashed by the Delhi High Court, in public interest petitions, on the ground inter alia that the circular was ultra vires the po it directed IT authorities to accept a certificate of residence issued by the authorities in Mauritius as sufficient evidence of the residential status of such an entity. Th the ITO was entitled to lift the corporate veil to determine as to whether a company was actually resident in Mauritius and to find out whether the corporate veil payment of tax. The Delhi High Court faulted the circular on the ground that the power of the AO to pass orders holding that such entities had only a “paper existen economic impact” had been taken away. The judgment of the Delhi High Court was challenged by the Union of India before the Supreme Court.
The Supreme Court held that s. 90 of the IT Act, 1961, enabled the Central Government to enter into an agreement with the Government of any foreign State in double taxation and once such an agreement was entered into the provisions of the Act would apply only to the extent to which they were more beneficial to Government was empowered to make provisions necessary for implementing the agreement. The Supreme Court held that the circular was within the purview of s. 90 was inconsistent with the provisions of the Act in relation to assessees covered by the convention.
Before the Supreme Court, the respondents criticized the act of incorporation of FIIs under Mauritian law as sham and a device actuated by improper motives. T to the dictum of Lo
[Citation : 329 ITR 126]
