VODAFONE INTERNATIONAL HOLDINGS B.V. v. UNION OF INDIA & ANR.

90Copy pinpoint90. 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. F Conclusion

91Copy pinpoint91. 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 G 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 H

678 SUPREME COURT REPORTS [2012] 1 S.C.R.

A 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, B we find that from 2002-03 to 2010-11 the Group has contributed an amount of Rs. 20,242 crores towards direct and indirect taxes on its business operations in India.

Order

92Copy pinpoint92. 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 ihe Bank Guarantee given by the appellant within four weeks.

K.S. RADHAKRISHNAN, J. 1. The question involved in this case is of considerable public importance, especially on F Foreign Direct Investment (FDI), which is indispensable for a growing economy like India. Foreign investments in India are generally routed through Offshore Finance Centres (OFC) also through the countries with whom India has entered into treaties. Overseas investments in Joint Ventures (JV) and Wholly Owned Subsidiaries (WOS) have been recognised as important G avenues of global business in India. Potential users of off-shore finance are: international companies, individuals, investors and others and capital flows through FDI, Portfolio Debt Investment and Foreign Portfolio Equity Investment and so on. Demand for off-shore facilities has considerably increased owing to high H

VODAFONE INTERNATIONAL HOLDINGS B.V. v. 679 UNION OF !NOIA & ANR. [K.S. RADHAKRISHNAN, J.] growth rates of cross-border invest.ments and a number of rich global investors have come forward to use high technology and communication infrastructures. Removal of barriers to cross- border trade, the liberalisation of financial markets and new communication technologies have had positive effects on global economic growth and India has also been greatly benefited.

2. Several international organisations like UN, FATF, OECD, Council of Europe and the European Union offer finance, one way or the other, for setting up companies all over the world. Many countries have entered into treaties with several offshore companies for cross-border investments for mutual benefits. India has also entered into treaties with several countries for bilateral trade which has been statutorily recognised in this country. United Nations Conference on Trade 0 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.

3. Merger, Amalgamation, Acquisition, Joint Venture, E Takeovers and Slump-sale of assets are few methods of cross- border re-organisations. Under the FOi 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 H

680 SUPREME COURT REPORTS [2012] 1 S.C.R.

A 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. B

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

5. Part-I of this judgment deals with the facts, Part-II deals with the general principles, Part-Ill deals with Inda-Mauritian Treaty, judgments in Union of India v. Azadi Bachao Ando/an and Another (2004) 10 SCC 1 and McDowell and Company Limited v. Commercial Tax Officer (1985) 3 SCC 230, Part- IV deals with CGP Interposition, situs etc, Part-V deals with controlling interest of HTILNodafone 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.

F Part- I

6. Hutchison Whampoa is a multi-sectional, multi- jurisdictional entity which consolidates on a group basis tetecom operations in various countries. Hutchison Group of G 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

VODAFONE INTERNATIONAL HOLDINGS B.V. v. 681 UNION OF INDIA & ANR. [K.S. RADHAKRISHNAN, J.] 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) E Holding Ltd. [for short HTIH(M)] both incorporated in Mauritius. CGP(lndia) Investment (for short CGPM) was incorporated in Mauritius in December 1997 for the purpose of investing in Telecom Investment (India) Pvt. Limited (for short Tll), an Indian Company. CGPM acquired interests in four Mauritian C 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 D Directors, quorum, restriction on transfer of ownership of shares, Right of First Refusal (ROFR), Tag Along Rights (TARs) etc.

7. HTIL, a part of Hutchison Whampoa Group, incorporated in Cayman Islands in the year 2004 was listed in Hong Kong E (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 F Note 5 of 2005 series was issued by the Government of India enhancing the FOi 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 G 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 lnfotel Ltd.), which indirectly held shares in Bharati Airtel Ltd. H

682 SUPREME COURT REPORTS [2012] 1 S.C.R.

A 8. HEL shareholding was then restructured through Tll 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 NOC), an Analjit Singh (Group) [for short (AS)], Telecom B Investment India Pvt.Ltd. [for short (Tll)], and CGP India (M). Further, two Framework Agreements (FWAs) were also entered into with respect to the restructuring. Credit facilities were given to the companies controlled by AG and AS. FWAs called, Centrino FWA and N.D . FWA were executed on C 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.

10. HEL shareholding again underwent change with Hinduja Group exiting and its shareholding being acquired by an Indian company called SMMS Investments Private Limited (SMMS). SMMS was also a joint venture company formed by H India Development Fund (IDF) acting through IDFC Private

VODAFONE INTERNATIONAL HOLDINGS B.V. v. 683 UNION OF INDIA & ANR. [K.S. RADHAKRISHNAN, J.] Equity Company (IDFCPE), Infrastructure Development A 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. B (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 C 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. D

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

12. Vodafone Group Pie. came to know of the possible exit of Hutch from Indian telecom business and on behalf of F 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 G (Confidentiality) Agreement dated 02.01.2007 was entered intt;i between HTIL and Vodafone. On 09.02.2007 Vodafone Group Pie. 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 H

684 SUPREME COURT REPORTS (2012) 1 S.C.R.

A loans. Bharati lnfotel 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 I indirect interest in HEL from Hutchison or Essar group. Bharati Airtel also sent a similar letter to Vodafone. B

13. Vodafone Group Pie. 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 C 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 0 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 lnfotel and Bharati Airtel E conveyed their no-objection to the Vodafone purchasing direct or indirect interest in HEL.

14. Vodafone and HTIL then entered into a Share and Purchase Agreement (SPA) on 11.02.2007 whereunder HTIL had agreed to procure the transfer of share capital of CGP by F HTIBVI, free from all encumbrances and together with all rights attaching or accruing together with assignments of loan interest. HTIL on 11.02.2007 issued a side letter to Vodafone inter alia stating that, out of the purchase consideration, up to US$80 million could be paid to some of its Indian Partners. G 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 co11sents and approvals, wider group companies,

VODAFONE INTERNATIONAL HOLDINGS e.V. v. 685 UNION OF INDIA & ANR. [K.S. RADHAKRISHNAN, J.] material contracts, permits, litigation, arbitration and governmental proceedings to limit HTIL liability.

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

16. Vodafone on 20.02.2007 filed an application with Foreign Investment Promotion Board (FIPB) requesting it to take note of and grant approval under Press note no.1 to the indirect acquisition by Vodafone of 51.96% stake in HEL through an overseas 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 E HK$ 6.75 per share, HK$ 13.9 billion to reduce debt and the remainder to be invested in telecommunication business, both for expansion and towards working capital and general policies. Reference was also made to the sale share and sale loans as being the entire issued share capital of CGP and the loans F owned by CGP/Array to an indirect WOS. AG on 02.03.2007 sent a letter to HEL confirming that he was the exclusive beneficial owner of his shares and was having full control over related voting rights. Further, it was also stated that AG had received credit support, but primary liability was with his G 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.

17. Essar had filed objections with the FIPB on 06.03.2007 H

686 SUPREME COURT REPORTS [2012] 1 S.C.R.

A to HTIL's proposed sale and on 14.03.2007, Essar withdrew its objections.

18. FIPB on 14.03.2007 sent a letter to HEL pointing out that in filing of HTIL before the U.S. SEC in Form 6K in the B 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 addition<1I 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 C 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 FD/ 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 0 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 E 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 F 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 G to appoint directors, however, in practice six directors were from HTIL, four from Essar, two from Tll and Tll had appointed AG & AS. On credit support agreement, it was pointed out that no permission of any regulatory authority was required.

19. Vodafone also wrote to FIPB on 14.03.2007 H confirming that VIHBV's effective shareholding in HEL would

VODAFONE INTERNATIONAL HOLDINGS B.V. v. 687 UNION OF INDIA & ANR. [K.S. RADHAKRISHNAN, J.] be 51.96% i.e. Vodafone would own 42% direct interest in HEL A through its acquisition of 100% of CGP Investments (Holdings) Limited (CGPIL) and through CGPIL Vodafone would also own 37% in Tll which in turn owned 20% in HEL and 38% in Omega which in turn owned 5% in HEL. It was pointed out that both Tll and Omega were Indian companies and those investments B combined would give Vodafone a controlling interest of 52% ir. HEL. Further, it was pointed out that HT/L's Indian partners Ai:>, 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. C

20. HTIL, Essar Teleholding Limited (ETL), Essar Communication Limited (ECL), Essar Tele Investments Limited (ETIL), Essar Communications (India) Limited (ECIL) signed a settlement agreement on 15.03.2007 regarding Essar D 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 E 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 F 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 G 15.03.2007 a circular was issued by HTIL including the report of Somerley Limited on the Settlement Agreement between HTIL and Essar Group.

21. VIHBVI, Essar Tele Holdings Limited (ETH) and ECL entered into a Term Sheet Agreement on 15.03.2007 for H

688 SUPREME COURT REPORTS (2012] 1 S.C.R.

A regulating the affairs of HEL and the relationship of its shareholders including setting out VIHBVl'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 B shares owned by Essar in HEL. Term Sheet also stated that Essar had a TAR in respect of Essa r'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 c entered into a 'Put Option' Agreement on 15.03.2007 with ETH, ECL (Mauritius), requiring VIHBV to purchase from Essar Group shareholders' all the option shares held by them.

22. The Joint Director of Income Tax (International Taxation), in the meanwhile, issued a notice dated 15.03.2007 0 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 Pie.

23. HTIL, on 17.3.2007, wrote to AS confirming that HTIL E has no beneficial or legal or other rights in AS's Tl/ 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 F 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 G non-compete agreement with Hutc/1 group, value of non- voting, non-convertible preference shares, various loans obligations and entitlement and to acquire further 15% indirect interest in HEL, subject to Indian foreign investment rules, which together equated to about 67% of the economic H value of HEL.

VODAFONE INTERNATIONAL HOLDINGS B.V. v. 689 UNION OF INDIA & ANR. [K.S. RADHAKRISHNAN, J.]

24. VIHBVI and Indian continent Investors Limiterl (ICIL) A had entered into an SHA on 21.03.2007 whereby VIHBVI had to sell 106.470.268 shares in Bharati Airtel to ICIL for a cash consideration of US$ 1,626,930.881 (which was later amended on 09.05.2007) B

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

26. HEL received a letter dated 23.3.2007 from the Additional Director Income Tax (International Taxation) intimating that both Vodafone and Hutchison Telecom Group announcements/press releases/declarations had revealed that HTIL had made substantive gains and consequently HEL was D 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. E

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

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

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

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

(d) subject to Indian Foreign Investment Rules, its rights H

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A and entitlements, including subscription rights at par value and call options to acquire in future a further 62. 75% of Tll and call options to acquire a further 54.21% of Omega Telecom Holdings Pvt. Ltd, which together would give Vodafone a further B 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.

C HEL on 5.4.2007 wrote to the Joint director of Income Tax stating that it has no liabilities accruing out of the transaction, also the department has no locus standi to invoke Section 195 in relation to non-resident entities regarding any purported tax obligations. On 09.04.2007 HTIL submitted FWAs, SHAs, Loan Agreement, Share-pledge Agreements, Guarantees, · 0 Hypothecations, Press Announcements, Regulatory filing etc., charts of Tll 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 E and AS and rationale for put/call options etc.

28. Vodafone on 09.04.2007 sent a letter to FIPB confirming I.hat valuation of N.D. Callus, Centrino, would occur as per Goldman Sach's presentation in Schedule 5 to HTIL's F letter of 09.04.2007 with a minimum value of US$ 266.25 million and US$164.51 million for the equity in N.D. Callus and Centrino respectively, which would form the basis of the future partnership with AS & AG. Vodafone also wrote a letter to FIPB setting out details of Vodafone Group's interest worldwide. On G 30.04.07 a resolution was passed by the Board of Directors of CGP pertaining to loan agreement, resignation and appointment of directors, transfer of shares; all to take effect on completion of SPA Resolution also accorded approval of entering into a Deed of Assignment in respect of loans owed to HTl(BVI) Finance Limited in the sums of US$

VODAFONE INTERNATIONAL HOLDINGS B.V. v. 691 UNION OF INDIA & ANR. [K.S. RADHAKRISHNAN, J.] 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 B 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 c documentation in relation to CGP share capital in pursuance of SPA and due execution thereof. On 04.05.2007 HTI BVI delivered the share transfer documentation to the lawyers in Caymen Islands to hold those along with a resolution passed by the board of directors of HTI BVI to facilitate delivery of instruments of transfer to Vodafone at closing of the transaction.

29. Vodafone on 07.05.2007 received a letter from FIPB conveying its approval to the transaction subject to compliance of observation of applicable laws and regulations in India. On 08.05.2007 a sum of US$10,854,229,859.05 was paid by Vodafone towards 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 F 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, G including reasonable costs associated with any tax demand.

30. HTIL also sent a side letter to SPA on 08.05.2007 to Vodafone highlighting the termination of the brand licences and brand support service agreements between HTIL and 3GSPL H

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A 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 B 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 favour of Vodafone as part of the transaction c contemplated vide SPA. On the same day loan assignment between HTI BVI Finance Limited, CGP and Vodafone, of CGP debt in the sum of US$ 28,972,505.70 was effected, whereby rights and benefits of HTI BVI Finance Limited to receive the repayment was assigned in favour of Vodafone as part of the 0 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 c:omposite price of ' 640 million. On 08.05.2007, as already stated, a Deed of Retention was executed between HTIL and Vodafone whereunder HTIL had agreed that out of the total consideration payable in terms of Clause 8.1 O(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 ..:.s & AG. On 08.05.2007 Vodafone paid US$ 10,854,229,859.05 to HTIL.

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

VODAFONE INTERNATIONAL HOLDINGS B.V. v. 693 UNION OF INDIA & ANR [K.S. RADHAKRISHNAN, J.]

32. An agreement (Omega Agreement) dated 05.06.2007 A 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 'Pvt 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 D 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 E Registrar of Companies in relation to Indian operating companies whereby the word "Hutchison" was substituted with word "Vodafone".

33. On 05.07.2007, a FWA was entered into between AG, F 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 G 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. H

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A Tll SHA was entered into on 05.07.2007 between Nadal, NOC, CGP (India), Tll and VIHBV to regulate the affairs of Tll. On 05.07.2007 Vodafone entered into a Consultancy Agreement with AS. Under that Agreement, AS was to be paid an amount of US$ 1,050,000 per annum and a one time payment of US$ B 1,30,00,000 was made to AS.

34. Vodafone sent a letter to Ff PB 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 C shares to any foreign entity without requisite approvals.

35. The Income Tax Department on 06.08.2007 issued a notice to VEL under Section 163 of the Income Tax Act to show cause why it should not be treated as a representative assessee of Vodafone. The notice was chatfenged by VEL in D 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 l.T. Act as to why Vodafone should not be treated a assessee-in-default for failure to withhold tax. E Vodafone then fifed 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 l.T. Act. On 03.12.2008 the High F 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 G 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 l.T. Act upholding the H jurisdiction of the Department to tax the transaction. A show

VODAFONE INTERNATIONAL HOLDINGS B.V. v. 695 UNION OF INDIA & ANR. [K.S. RADHAKRISHNAN, J) cause notice was also issued under Section 163(1) of the 1.T. A Act to Vodafone as to why it should not be treated as an agent I representative assessee of HTIL.

36. Vodafone then filed Writ Petition No.1325 of 2010 before the Bombay High Court on 07.06.2010 challenging the order dated 31.05.2010 issued by the Income Tax Department on various grounds including the jurisdiction of the Tax Department to impose capital gains tax to overseas transactions. The Assistant Director of Income Tax had issued a letter on 04.06.2010 granting an opportunity to Vodafone to address the Department on the question of quantification of liability under Section 201and201(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.

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

(a) Transactions between HTIL and Vodafone were fulfilled not merely by transferring a single share of CGP in Cayman Islands, but the commercial and business understanding between the parties postulated that what was being transferred from HTIL to VIHBV was the "controlling interest" in HEL in India, which is an identifiable capital asset independent of CGP share. G

(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. H

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A (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 B 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 c Section 2(14) of the l.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 D 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 (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 l.T. Act.

(g) Court directed the Assessing Officer to do apportionment of income between the income that H

VODAFONE INTERNATIONAL HOLDINGS B.V. v. 697 UNION OF INDIA & ANR. [K.S. RADHAKRISHNAN, J]

has deemed to accrue or arise as a result of nexus A 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. B

(h) Vodafone, it was held, by virtue of its diverse agreements has nexus with Indian jurisdiction and, hence, the proceedings initiated under Section 201 for failure to withhold tax by Vodafone cannot be c held to lack jurisdiction.

38. Shri Harish Salve, learned senior counsel appearing for Vodafone explained in detail how Hutchison Corporate Structure was built up and the purpose, object and relevance of such vertical Transnational Structures in the international D 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 E Structures also contain exit option to the investors. Senior counsel also pointed out that where regulatory provisions mandate investment into corporate structure such structures cannot be disregarded for tax purposes by lifting the corporate veil especially when there is no motive to avoid tax. Shri Salve F also submitted that Hutchison corporate structure was not designed to avoid tax and the transaction was not a colourable device to achieve that purpose. Senior counsel also submitted that source of income lies where the transaction is effected and not where the underlying asset is situated or economic interest G lies. Reference was made to judgment in Seth Pushalal Mahsinghka (P) Ltd. v. CIT (1967) 66 ITR 159 (SC). Learned counsel also pointed out that without any express legislation, off-shore transaction cannot be taxed in India. Reference was made to two judgments of the Calcutta High Court Assam H

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A . Consolidated Tea Estates v. Income Tax Officer "A" Ward (1971) 81 ITR 699 Cal. and C./. T. West Bengal v. National and Grindlays Bank Ltd. (1969) 72 ITR 121 Cal. Learned senior counsel ai;;o pointed out that when a transaction is between two foreign entities and not with an Indian entity, source of income B 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- e 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 o 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 E 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. F On the situs of shares, learned senior counsel pointed out that the situs is determined depending upon the place where the asset is situated. Learned senior counsel also pointed out that on transfer of CGP, Vodafone got control over HEL and merely because Vodafone has presence or chargeable income in G 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

VODAFONE INTERNATIONAL HOLDINGS B.V. v. 699 UNION OF INDIA & ANR. [K.S. RADHAKRISHNAN, J.] "extinguishment" is attracted for a transfer of a legal right and not a contractual right and there was no extinguishment of right by HTIL which gave rise to capital gains tax in India. Reference was made to judgment CIT v. Grace Collis (2001) 3 SCC 430. Learned senior counsel also submitted that the acquisition of "controlling interest" is a commercial concept and tax is levied on transaction and not its effect. Learned senior counsel pointed out that to lift the corporate veil of a legally recognised corporate structure time and the stage of the transaction are very important and not the motive to save the tax. Reference was also made to several judgments of the English Courts viz, C /RC v. Duke of Westminster (1936) AC 1 (HL), W. T. Ramsay v. !RC (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 Ando/an cases (supra) and few other judgments. D 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 E 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 Inda-Mauritian Treaty is available to third parties who invest in India through Mauritius route. F

39. Mr. Salve also argued on the extra territorial applicability of Section 195 and submitted that the same cannot be enforced on a non-resident without a presence in India. Counsel also pointed out that the words "any person" in Section 195 should be construed to apply to payers who have a G 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- H

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A shore payments and the said Section could be triggered only if it can be established that the payment under consideration is of a "sum chargeable" under the Income Tax Act (for short IT Act). Senior counsel therefore contended that the findings of the Tax Authorities that pursuant to the transaction the benefit B of telecom licence stood transferred to Vodafone is misconceived and that under the telecom policy of India a telecom licence can be held only by an Indian Company and there is no transfer direct or indirect of any licence to Vodafone.

C 40. Mr. R.F. Nariman, Learned Solicitor General appearing for the Income Tax Department submitted that the sale of CGP share was nothing but an artificial avoidance scheme and CGP was fished out of the HTIL legal structure as an artificial tax avoidance contrivance. Shri Nariman pointed out that CGP D 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 E 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 F 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.

G 41. Mr. Nariman also submitted the situs of CGP can only be in India as the entire business purpose of holding that share was to assume control in Indian telecom operations, the same was managed through Board of Directors controlled by HTIL. The controlling interest expressed by HTIL would amount to H property rights and hence taxable in India. Reference was made

VODAFONE INTERNATIONAL HOLDINGS B.V. v. 701 UNION OF INDIA & ANR. [K.S. RADHAKRISHNAN, J.] to judgments of the Calcutta High Court in CIT v. National A Insurance Company (1978) 113 ITR 37(Cal.) and Laxmi Insurance Company Pvt. Ltd. v. CIT(1971) 80 ITR 575 (Delhi). Further, it was also pointed out the "call and put" options despite being a contingent right are capable of being transferred and they are property rights and not merely contractual rights and hence would be taxable. Referring to the SPA Shri Nariman submitted that the transaction can be viewed as extinguishment of HTILs property rights in India and CGP share was merely a mode to transfer capital assets in India. Further, it was also pointed out that the charging Section should be construed purposively and it contains a look through provision and that the definition of the transfer in Section 9(1 )(i) is an inclusive definition meant to explain the scope of that Section and not to limit it. The resignation of HTIL Directors on the Board of HEL could be termed as extinguishment and the right to manage a D 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 Ando/an 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 fac;:ade.

42. Learned counsels, on either side, in support of their H

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A 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 B legal and commercial principles in use in such transactions, which are germane to our case.

Part - II

CORPORATE STRUCTURE I GENERAL PRINCIPLES C (National and International)

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

44. Corporate structure created for genuine business purposes are those which are generally created or acquired: at the time when investment is being made; or further investments are being made; or the time when the Group is undergoing financial or other overall restructuring; or when operations, such as consolidation, are carried out, to clean- H defused or over-diversified. Sound commercial reasons like

VODAFONE INTERNATIONAL HOLDINGS B.V. v. 703 UNION OF INDIA & ANR. [K.S. RADHAKRISHNAN, J.] 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.

45. Corporate structure may also have an exit route, especially when investment is overseas. For purely commercial reasons, a foreign group may wind up its activities overseas for better returns, due to disputes between partners, unfavourable fiscal policies, uncertain political situations, strengthen fiscal loans and its application, threat to its investment, insecurity, weak and time consuming judicial system etc., all can be contributing factors that may drive its exit or restructuring. Clearly, there is a fundamental difference in transnational investment made overseas and domestic investment. Domestic investments are made in the home country and meant to stay as it were, but when the trans-national investment is m2de 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.

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

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A CORPORATE GOVERNANCE

47. Corporate governance has been a subject of considerable interest in the corporate world. The Organisation for Economic cooperation and Development (OECD) defines B 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 c in the corporation and other stake holders and spells out rules and procedures for making decisions on corporate affairs. By doing this, it also provides a structure through which the company objectives are set and the means of attaining those objectives and monitoring performance." D 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.

H 48. Corporate governors can also misuse their office, using

VODAFONE INTERNATIONAL HOLDINGS B.V. v. 705 UNION OF INDIA & ANR. [K.S. RADHAKRISHNAN, J.] fraudulent means for unlawful gain, they may also manipulate A 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 B

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

50. Investment under foreign Direct Investment Scheme (FDI scheme), investment by Foreign Institutional Investors (Flis) under the Portfolio Investment Scheme, investment by NRls/ G OBCs under the Portfolio Investment Scheme and sale of shares by NRls/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 H

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A and the Ministry issued Press Note no. 2, 2009 and Press Note 3, 2009, which deals with calculation of foreign investment in downstream entities and requirement of ownership or control in sectoral cap companies. Many of the offshore companies use the facilities of Offshore Financial Centres situate in B 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 c arrangements, unless it is fraudulent or fictitious.

51. Moving offshore or using an OFC does not necessarily lead to the conclusion that they involve in the activities of tax evasion or other criminal activities. The multi-national companies are attracted to offshore financial centres mainly due to the reason of providing attractive facilities for the investment. Many corporate conglomerates employ a large number of holding companies and often high-risk assets are parked in separate companies so as to avoid legal and technical risks to the main group. Instances are also there when individuals form offshore vehicles to engage in nsky 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., F directly or indirectly bribe or any other undue advantage or prospect thereof.

52. OECD (Organisation for Economic Co-operation and Development) in the year 1998 issued a report called "Harmful G 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

VODAFONE INTERNATIONAL HOLDINGS BV v. 707 UNION OF INDIA & ANR. [K.S. RADHAKRISHNAN, J] Islands and other tax havens on a "black list" and impose sanctions against them.

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

Need for Legislation:

54. Tax avoidance is a problem faced by almost all countries following civil and common law systems and all share the common broad aim, that is to combat it. Many countries are taking various legislative measures to increase the scrutiny of transactions conducted by non-resident enterprises. Australia has both general and specific anti-avoidance rule (GAAR) in its Income Tax Legislations. In Australia, GAAR is in Part IVA of the Income Tax Assessment Act, 1936, which is intended to provide an effective measure against tax avoidance arrangements. South Africa has also taken initiative in combating impermissible tax avoidance or tax shelters. G Countries like China, Japan etc. have also taken remedial measures.

55. Direct Tax Code Bill (OTC) 2010, proposed in India, envisages creation of an economically efficient, effective direct H

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A 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% 8 of its total assets. Necessity to take effective legislative measures has been felt in this country, but we always lag behind because our priorities are different. Lack of proper regulatory laws, leads to uncertainty and passing inconsistent orders by Courts, Tribunals and other forums, putting Revenue and tax payers at bay.

HOLDING COMPANY AND SUBSIDIARY COMPANY

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

VODAFONE INTERNATIONAL HOLDINGS B.V. v. 709 UNION OF !NOIA & ANR. [K.S. RADHAKRISHNAN, J.]

57. Subsidiary companies are, therefore, the integral part of corporate structure. Activities of the companies over the years have grown enormously of its incorporation and outside and their structures have become more complex. Multi National Companies having large volume of business nationally or internationally will have to depend upon their subsidiary companies in the national and international level for better returns for the investors and for the growth of the company. Whe·n 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.

59. Holding company, of course, if the subsidiary is a WOS, may appoint or remove any director if it so desires by a resolution in the General Body Meeting of the subsidiary. Holding companies and subsidiaries can be considered as single economic entity and consolidated balance sheet is the G 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 H

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A 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.

60. U.S. Supreme Court in United States v. Bestfoods 524 US 51 (1998) explained that it is a generaf 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, 0 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 Pie. (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 fa9ade concealing true facts. · 61. Courts, however, will not allow the separate corporate entities to be used as a means to carry out fraud or to evade tax. Parent company of a WOS, is not responsible, legally for the unlawful activities of the subsidiary save in exceptional circumstances, such as a company is a sham or the agent of the shareholder, the parent company is regarded as a shareholder. Multi-National Companies, by setting up complex vertical pyramid like structures, would be able to distance themselves and separate the parent from operating companies, thereby protecting the multi-national companies from legal liabilities. SHAREHOLDERS' AGREEMENT

H 62. hareholders' Agreement ( for short SHA) is, essentially

VODAFONE INTERNATIONAL HOLDINGS B.V. v. 711 UNION OF !NOIA & ANR. [K.S. RADHAKRISHNAN, J.] a contract between some or all other shareholders in a A company, the purpose of which is to confer rights and impose obligations over and above those provided by the Company Law. SHA is a private contract between the shareholders compared to Articles of Association of the Company, which is a public document. Being a private document it binds B parties thereof and not the other remaining shareholders in the company. Advantage of SHA is that it gives greater flexibility, unlike Articles of Association. It also makes provisions for resolution of any dispute between the shareholders and also how the future capital contributions have to be made. Provisions C 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. D

63. The nature of SHA was considered by a two Judges Bench of this Court in V. B. Rangaraj v. V. B. Gopalakrishnan and Ors. (1992) 1 sec 160. In that case, an agreement was entered into between shareholders of a private company wherein a restriction was imposed on a living member of the company to transfer his shares only to a member of his own branch of the family, such restrictions were, however, not envisaged or provided for within the Articles of Association. This Court has taken the view that provisions of the Shareholders' Agreement imposing restrictions even when consistent with Company legislation, are to be authorized only when they are incorporated in the Articles of Association, a view we do not subscribe. This Court in Gherulal Parekh v. Mahadeo Das Maiya (1959) SCR Supp (2) 406 held that freedom of contract can be 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 l.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. H

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A 64. Shareholders can enter into any agreement in the best interest of the company, but the only thing is that the provisions in the SHA shall not go contrary to the Articles of Association. The essential purpose of the SHA is to make provisions for proper and effective internal management of the company. It can visualize the best interest of the company on diverse issues and can also find different ways not only for the best interest of the shareholders, but also for the company as a whole. In S. P. Jain v. Kalinga Cables Ltd. (1965) 2 SCR 720, this Court held that agreements between non-members and members of the Company will not bind the company, but there is nothing unlawful in entering into agreement for transferring of shares. Of course, the manner in which such agreements are to be enforced in the case of breach is given in the general law between the company and the shareholders. o 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.

E 65. SHA also provides for matters such as restriction of transfer of shares i.e. Right of First Refusal (ROFR), Right of First Offer (ROFO), Drag-Along Rights (DARs) and Tag-Along Rights (TARs), Pre-emption Rights, Call option, Put option, Subscription option etc. SHA in a characteristic Joint Venture F 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 G resolution of disputes between the shareholders. 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 IROFRl: ROFR permits its H

VODAFONE INTERNATIONAL HOLDINGS B.V. v. 713 UNION OF INDIA & ANR. [K.S. RADHAKRISHNAN, J.) holders to claim the transfer of the subject of the right with a 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. D · (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 ofter. 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. G (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 H

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A 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 B 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 c 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 0 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 E options are related arrangement to call and put options creating a route by which the investors could carry out their investment, in the event of an appreciation in the value of shares.

66. SHA, 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. H

VODAFONE INTERNATIONAL HOLDINGS B.V. v. 715 UNION OF INDIA & ANR. [K.S. RADHAKRISHNAN, J.] SHARES. VOTING RIGHTS AND CONTROLLING A INTERESTS:

67. Shares of any member in a company is c: moveable property and can be transferred in the manner provided by the Articles of Association of the company. Stocks and shares are B 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. c

68. Share is a right to a specified amount of the share capital of a company carrying out certain rights and liabilities, in other words, shares are bundles of intangible rights against the company. Shares are to be regarded as situate in the country in which it is incorporated and register is kept. Shares D 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 E to be construed strictly. Transfer of shares may result in a host of consequences.

Voting Rights: F

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

70. Rights and obligations flowing from voting rights have H

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A been the subject matter of several decisions of this Court. In Chiranjit Lal Chowdhuri v. Union of India (1950) 1 SCR 869 at 909 : AIR 1951 SC 41, with regard to exercise of the right to vote, this Court held that the right to vote for the election of directors, the right to pass resolutions and the right to present B a petition for winding up are personal rights flowing from the ownership of the share and cannot be themselves and apart from the share be acquired or disposed of or taken possession of. In Dwarkadas Shrinivas of Bombay v. Sholapur Spinning & Weaving Company(1954) SCR 674 at 726: AIR 1954 SC C 119, this Court noticed the principle laid down in Chiranjit Lal Chowdhuri (supra).

71. Voting arrangements in SHAs or pooling agreements are not "property". Contracts that provide for voting in favour of or against a resolution or acting in support of another 0 shareholder create only "contractual obligations". A contract that creates contractual rights thereby, the owner of the share (and the owner of the right to vote) agrees to vote in a particular manner does not decouple the right to vote from the share and assign it to another. A contract that is entered into to provide voting in favour of or against the resolution or acting in support of another shareholder, as we have already noted, creates contractual obligation. Entering into any such contract constitutes an assertion (and not an assignment) of the right to vote for the reason that by entering into the contract: (a) the owner of the share asserts that he has a right to vote; (b) he agrees that he is free to vote as per his will; and (c) he contractually agrees that he will vote in a particular manner. Once the owner of a share agrees to vote in a particular manner, that itself would not determine as a property. G Controlling Interest:

72. Shares, we have already indicated, represent congeries of rights and controlling interest is an incident of H holding majority shares. Control of a company vests in the

VODAFONE INTERNATIONAL HOLDINGS B.V. v. 717 UNION OF INDIA & ANR. [K.S. RADHAKRISHNAN, J.] voting powers of its shareholders. Shareholders holding a 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, B 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. c

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

74. Control, in our view, is an interest arising from holding a particular number of shares and the same cannot be separately acquired or transferred. Each share represents a vote in the management of the company and such a vote can be utilized to control the company. Controlling interest, therefore, is not an identifiable or distinct capital asset independent of holding of shares and the nature of the transaction has to be ascertained from the terms of the contract and the surrounding circumstances. Controlling H

718 SUPREME COURT REPORTS [2012) 1 S.C.R.

A 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 B on the transaction, not on its effect.

A. LIFTING THE VEIL - TAX LAWS

75. Lifting the corporate veil doctrine is readily applied in the cases coming within the Company Law , Law of Contract, C 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 D Commissioner of Income Tax v. Sri Meenakshi Mills Ltd., Madurai, Al R 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 fayade meaning that the court has the power to disregard the corporate entity if it is used for tax evasion. In Life Insurance Corporation of India v. Escorts Limited and Others (1986) 1 SCC 264, this Court held that the corporate veil may be lifted where a statute itself contemplates lifting of the veil or fraud or improper conduct intended to be prevented or a taxing statute or a beneficial statute is sought to be evaded or where associated companies are inextricably as to be, in reality part of one concern. Lifting the Corporate Veil doctrine was also applied in Juggi/a/ Kampa/pat v. Commissioner of Income Tax, U.P. , AIR 1969 SC. 932 : (1969) 1 SCR 988, wherein this Court noticed that the assessee firm sought to avoid tax on the amount of compensation received for the loss of office by claiming that it was capital gain and it was found that the termination of the contract of managing agency was a collusive transaction. Court held that it we>s a collusive device, practised by the managed H

VODAFONE INTERNATIONAL HOLDINGS B.V. v. 719 UNION OF INDIA & ANR. [K.S. RADHAKRISHNAN, J.] company and the assessee firm for the purpose of evading A income tax, both at the hands of the payer and the payee.

76. Lifting the corporate veil doctrine can, therefore, be applied in tax matters even in the absence of any statutory authorisation to that effect. Principle is also being applied in 8 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: c 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 c·ourts as well as the Courts in England and various other countries, when a subject is sought to be taxed. One of the earliest decisions which came up before the House of Lords in England demanding tax on a transaction by the Crown is Duke of Westminster (supra). In that case, Duke of Westminster had made an arrangement that he would pay his gardener an annuity, in which case, a tax deduction could be claimed. Wages of household services were not deductible expenses in computing the taxable income, therefore, Duke of Westminster was advised by the tax experts that if such an agreement was employed, Duke would get tax exemption. Under the Tax Legislation then in force, if it was shown as gardener's wages, then the wages paid would not be deductible. Inland Revenue contended that the form of the transaction was not acceptable to it and the Duke was taxed on the substance of the transaction, which was that payment of annuity was treated as a payment of salary or wages. G 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 ~

720 SUPREME COURT REPORTS [2012] 1 S.C.R.

A 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 B 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."

C 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 iooked 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. F 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 doctn'ne" as a question of statutory interpretation. In a most celebrated case in Ramsay G (supra), the House of Lords considered this question again. That was a case whereby the taxpayer entered into a circular series of transactions designed to produce a loss for tax purposes, but which together produced no commercial result. Viewed that transaction as a whole, the series of transactions was self-canceling, the taxpayer was in precisely the same H

VODAFONE INTERNATIONAL HOLDINGS B.V. v. 721 UNION OF INDIA & ANR. [K.S. RADHAKRISHNAN, J.] commercial position at the end as at the beginning of the series A of transactions. House of Lords ruled that, notwithstanding the rule in Duke of Westminster's case, the series of transactions should be disregarded for tax purposes and the manufactured loss, therefore, was not available to the taxpayer. Lord Wilberforce opined as follows: B

"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." E

(emphasis supplied)

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

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

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

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

722 SUPREME COURT REPORTS [2012) 1 S.C.R.

A (4) If a document.or transaction was genuine and not a sham in the traditional sense, the Court had to adhere to the form of the transaction fqllowing the Duke Westminster concept.

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

78. Ramsay was followed by the House of Lords in another decision in /RC v. Burmah Oil Co Ltd. (1982) 54 TC 200. This E case was also concerned with a self-cancelling series of transactions. Lord Diplock, in that case, confirmed the judicial view that a development of the jurisprudence was taking place, stating that Ramsay case marked a significant change in the approach adopted by the House of Lords to a pre-ordained series of transactions. Ramay and Burmah cases, it may be noted, were against self-cancelling artificial tax schemes which were widespread in England in 1970's. Rather than striking down the self-cancelling transactions, of course, few of the speeches of Law Lords gave the impression that the tax effectiveness of a scheme should be judged by reference to its commercial substance rather than its legal form. On this, of course, there was some conflict with the principle laid down in Duke of Westminster. Duke of Westminster was concerned with the "single tax avoidance step". During 1970's, the Courts H in England had to deal with several pre-planned avoidance

VODAFONE INTERNATIONAL HOLDINGS B.V. v. 723 UNION OF INDIA & ANR. [K.S. RADH.A.KRISHNAN, J.) schemes containing a number of steps. In fact, earlier in /RC A 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 B . taxpayer in consideration of his covenant to make annual payments of income over five years. The House of Lords held that the scheme was valid. Basically, the Ramsay was dealing with "readymade schemes".

79. The House of Lords, however, had to deal with a non c 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, 0 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 E 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. F

80. The High Court and the Court of Appeal ruled that Ramsay principle applied only where steps forming part of the · scheme were self-cancelling and they considered that it did notalloW share exchange and sale agreements to .be distributed as steps in the scheme, because they had an enduring legal ·. G 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 H

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A Brightman stated that inserted step had no business purpose apart from the deferment of tax, although it had a business effect.

81. Even though in Dawson, the House of Lords seems to 8 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 C merger of the business. Taxpayers, in the meanwhile, had abandoned negotiations with one interested party, and later concluded a sale of Q Ltd's shares with another. M Ltd subsequently loaned the entire sale proceeds to the taxpayers, who appealed against assessments to capital gains tax. The House of Lords held in favour of the taxpayers, dismissing the 0 crown's appeal by a majority of three to two. House of Lords noticed that when the share exchange took place, there was no certainty that the shares in Q Ltd would be sold. Lord Oliver, speaking for the majority, opined that Ramsay, Burmah and E 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 F 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." G 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

VODAFONE INTERNATIONAL HOLDINGS B.V. v. 725 UNION OF INDIA & ANR. [K.S. RADHAKRISHNAN, J.] 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.

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

84. House of Lords, later in Inland Revenue H

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. A 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 8 Westminster case [1936] A.G. 1 still point to a material . cons.ideration, namely the gen.era! liberty of the citizen to arrange his financial affairs as he thinks fit, they have ceased to be canonical as to .the ·consequence of a tax avoidance scheme." ··