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

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

85. House of Lords in MacNiven v. Westmoreland Investments Limited (2003) 1 AC 311 examined the scope of Ramsay principle approach and held that it was one of purposive construction. In fact, Ramsay's case and case of F Duke of Westminister were reconciled by Lord Hoffmann in MacNiven. Lord Hoffmann clarified stating as follows

· 'if the legal position is that tax is imposed by reference to a legally designed con6ept, such as stamp duty payable on a document which constitute conveyance or sale, the court cannot ·. · G tax a transaction which uses no Sl!Ch document on the ground that it achieves the same economic effect. On the other. hand, the legal position is that the tax is imposed by reference to a commercial concept, then to have regard fo the business "substance" of the matter is not to· ignore the legal position but to give. effect to it."

VODAFONE INTERNATIONAL HOLDINGS B.V. v. 727 UNION OF INDIA & ANR. [K.S. RADHAKRISHNAN, J.]

86. In other words, Lord Hoffmann reiterated that tax statutes must be interpreted "in a purposive manner to achieve the intention of the Legislature". Ramsay and Dawson are said to be examples of these fundamental principles.

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

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

..· 89. On the sarneday, House of Lords had.an occasion to consider the Ramsay approach in Inland Revenue Commissioner v. Scottish Provident Institution {2004 [1]WLR · 3172). The question involved in Scottish Provident Institution H

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

A was whether there was "a debt contract for the purpose of Section 150A(1) of the Finance Act, 1994." House of Lords upheld the Ramsay principle and considered the series of transaction as a composite transaction and held that the composite transaction created no entitlement to securities and B that there was, thus, no qualifying contract. The line drawn by House of Lords between Mawson and Scottish Provident Institution in holding that in one case there was a composite transaction to which statute applied, while in the other there was not. c 90. Lord Hoffmann later in an article "Tax Avoidance" reported in (2005) BTR 197 commented on the judgment in BMBF as follows:

"the primacy of the construction of the particular taxing provision and the illegitimacy of the rules of general application has been reaffirmed by the recent decision of the House in "BMBF". Indeed, it may be said that this case has killed off Ramsay doctrine as a special theory of revenue law and subsumed it within the general theory of the interpretation of statutes".

Above discussion would indicate that a clear-cut distinction between tax avoidance and tax evasion is still to emerge in England and in the absence of any legislative guidelines, there bound to be uncertainty, but to say that the principle of Duke of Westminster has been exorcised in England is too tall a statement and not seen accepted even in England. House of Lords in McGuckian and MacNiven, it may be noted, has emphasised that the Ramsay approach as a principle of statutory interpretation rather than an over-arching anti avoidance doctrine imposed upon tax laws. Ramsay approach ultimately concerned with the statutory interpretation of a tax avoidance scheme and the principles laid down in Duke of Westminster, it cannot be said, has been given a complete go by Ramsay, Dawson or other judgments of the House of H Lords.

VODAFONE INTERNATIONAL HOLDINGS B.V. v. 729 UNION OF INDIA & ANR. [K.S. RADHAKRISHNAN, J.] PART-Ill A INDO-MAURITIUS TREATY - AZADI BACHAO ANDOLAfi

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

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

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

A of the company paying the dividends and (b) 15% of the gross amount of the dividends in all other cases.

93Copy pinpoint93. CBDT issued Circular No. 682 dated 30.03.1994 clarifying that capital gains derived by a resident of Mauritius 8 by alienation of shares of an Indian company shall be taxable only in Mauritius according to Mauritius Tax Law. In the year 2000, the R.,venue authorities sought to deny the treaty benefits to some Mauritius resident companies pointing out that the beneficial ownership in those companies was outside Mauritius C and thus the foremost purpose of investing in India via Mauritius was tax avoidance. Tax authorities took the stand that Mauritius was merely being used as a conduit and thus sought to deny the treaty benefits despite the absence of a limitation of benefits (LOB) clause in the Treaty. CBDT then issued Circular No. 789 dated 13.04.2000 stating that the Mauritius Tax Residency 0 Certificate (TRC) issued by the Mauritius Tax Office was a sufficient evidence of tax response of that company in Mauritius and that such companies were entitled to claim treaty benefits.

94Copy pinpoint94. Writ Petitions in public interest were filed before the E Delhi High Court challenging the constitutional validity of the above mentioned circulars. Delhi High Court quashed Circular No. 789 stating that inasmuch as the circular directs the Income Tax authorities to accept as a certificate of residence issued by the authorities of Mauritius as sufficient evidence as regards the status of resident and beneficial ownership, was ultra vires the powers of CBDT. The Court also held that the Income Tax Office was entitled to lift the corporate veil in India to see whether a company was a resident of Mauritius or not and . whether the company was paying income tax in Mauritius or not. The. Court also held thatthe "Treaty Shopping" by which the resident of a third country takes advantage of the provisions ·of the agreement was illegal and necessarily to be forbidden. Union of India preferred appeal against the judgment of the Delhi High Court, before this Court. This Court in Azadi Bachao H

VODAFONE INTERNATIONAL HOLDINGS B.V. v. 731 UNION OF INDIA & ANR. [K.S. RADHAKRISHNAN, J.] Ando/an allowed the appeal and Circular No. 789 was A declared valid.

Limitation of Benefit Clause (LOB)

95Copy pinpoint95. India Mauritius Treaty does not contair1 any Limitation of Benefit (LOB) clause, similar to the Inda-US Treaty, wherein B Article 24 stipulates that benefits will be available if 50% of the shares of a company are owned directly or indirectly by one or more individual residents of a controlling state. LOB clause also finds a place in India-Singapore OTA. Inda Mauritius · Treaty does not restrict the benefit to companies whose C shareholders are non-citizens/residents of Mauritius; or where the beneficial interes.t is owned by non-citizens/residents of Mauritius, in the event where there is no justification in prohibiting the residents of a third nation from incorporating companies in Mauritius and deriving benefit under the treaty. D No presumption can be drawn that the Union of India or the Tax Department is unaware that the quantum of both FD/ and Fil do not originate from Mauritius but from other global investors situate outside Mauritius. Maurtius, it is well known is incapable of bringing FDI worth millions of dollars into India. E If the Union of India and Tax Department insist that the investment would directly come from Mauritius and Mauritius alone then the Inda-Mauritius treaty would be dead letter.

96Copy pinpoint96. Mr. Aspi Chinoy, learned senior counsel contended that in the absence of LOB Clause in the India Mauritius Treaty, the scope of the treaty would be positive from Mauritius Special Purpose Vehicles (SPVs) created specifically to route investments into India, meets with our approval. We acknowledge that on a subsequent sale/transfer/disinvestment of shares by the Mauritian company, after a reasonable time, the sale proceeds would be received by the Mauritius Company as the registered holder/owner of such shares, such benefits could be sent back to the Foreign Principal/100% shareholder of Mauritius company either by way of a declaration of special H

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

A dividend by Mauritius company and/or by way of repayment of loans received by the Mauritius company from the Foreign Principal/shareholder for the purpose of making the investment. Mr. Chinoy is right in his contention that apart from OTAA, which provides for tax exemption in the case of capital gains received B by a Mauritius company/shareholder at the time of disinvestmenVexit and the fact that Mauritius does not levy tax on dividends declared and paid by a Mauritius company/ subsidiary to its Foreign Shareholders/Principal, there is no other reason for this quantum of funds to be invested from/ c through Mauritius.

97Copy pinpoint97. We are, therefore, of the view that in the absence of LOB Clause and the presence of Circular No. 789 of 2000 and TRC certificate, on the residence and beneficial interest! ownership, tax department cannot at the time of ;:;ale! 0 disinvestment/exit from such FD/, deny benefits to such Mauritius companies of the Treaty by stating that FD/ was only routed through a Mauritius company, by a company/principal resident in a third country; or the Mauritius company had E received all its funds from a foreign principal/company; or the Mauritius subsidiary is controlled/managed by the Foreign Principal; or the Mauritius company had no assets or business other than holding the investmenVshares in the Indian company; or the Foreign Principal/100% shareholder of Mauritius F company had played a dominant role in deciding the time and price of the disinvestmenVsale/transfer; or the sale proceeds received by the Mauritius company had ultimately been paid over by it to the Foreign Principal/ its 100% shareholder either by way of Special Dividend or by way of repayment of loans received; or the real owner/beneficial owner of the shares was G the foreign Principal Company. Setting up of a WOS Mauritius subsidiary/SPV by Principals/genuine substantial long term FOi in India from/through Mauritius, pursuant to the OTAA and Circular No. 789 can never be considered to be set up for tax evasion. H

VODAFONE INTERNATIONAL HOLDINGS B.V. v. 733 UNION OF INDIA & ANR. [K.S. RADHAKRISHNAN, J.] TRC whether conclusive A

98Copy pinpoint98. LOB and look through provisions cannot be read into a tax treaty but the question may arise as to whether the TRC is so conclusive that the Tax Department cannot pierce the veil and look at the substance of the transaction. OTAA and Circular B No. 789 dated 13.4.2000, in our view, would not preclude the Income Tax Department from denying the tax treaty benefits, if it is established, on facts, that the Mauritius company has been interposed as the owner of the shares in India, at the time of disposal of the shares to a third party, solely with a view to C avoid tax without any commercial substance. Tax Department, in such a situation, notwithstanding the fact that the Mauritian company is required to be treated as the beneficial owner of the shares under Circular No. 789 and the Treaty is entitled to look at the entire transaction of sale as a whole and if it is 0 established that the Mauritian company has been interposed as a device, it is open to the Tax Department to discard the device and take into consideration the real transaction between the parties • and the transaction may be subjected to tax. In other words, TRC does not prevent enquiry into a tax fraud, E for example, where an OCB is used by an Indian resident for round-tripping or any other illegal activities, nothing prevents the Revenue from looking into special agreements, contracts or arrangements made or effected by Indian resident or the role of the OCB in the entire transaction. F

99Copy pinpoint99. No court will recognise sham transaction or a co/ourable device or adoption of a dubious method to evade tax, but to say that the Inda-Mauritian Treaty will recognise FD/ and Fil only if it originates from Mauritius, not the investors from third countries, incorporating company in Mauritius, is G pitching it too high, especially when statistics reveals that for the last decade the FD/ in India was US$ 178 billion and, of this, 42% i.e. US$ 74.56 billion was through Mauritian route. Presently, it is known, Fil in India is Rs.450,000 crores, out of which Rs. 70,000 crores is from Mauritius. Facts, therefore, H

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

A clearly show that almost the entire FDI and Fii made in India from Mauritius under DTAA does not originate from that country, but has been made by Mauritius Companies I SPV, which are owned by companies/individuals of third countries providing funds for making FDI by such companies/individuals not from B Mauritius, but from third countries.

100Copy pinpoint100. Mauritius, and India, it is known, has also signed a Memorandum of Understanding (MOU) laying down the rules for information, exchange between the two countries which provides for the two signatory authorities to assist each other in the. detection of fraudulent market practices, including the insider dealing and market manipulation in the areas of securities transactions and derivative dealings. The object and purpose of the MOU is to track down transactions tainted by fraud and financial crime, not to target the bona fide legitimate transactions. Mauritius has also enacted stringent "Know Your Clients" (KYC) regulations and Anti-Money Laundering laws which seek to avoid abusive use of treaty.

101Copy pinpoint101. Viewed in the above perspective, we also find no reason to import the "abuse of rights doctrine" (abus de droit) to India. The above doctrine was seen applied by the Swiss Court in A Holding Aps. (8 ITRL), unlike Courts following Common Law. That was a case where a Danish company was interposed to hold all the shares in a Swiss Company and there was a clear finding of fact that it was interposed for the sole purpose of benefiting from the Swiss-Denmark DTA which had the effect of reducing a normal 35% withholding tax on dividend out of Switzerland down to 0%. Court in that case held that the only reason for the existence of the Danish company was to benefit from the zero withholding tax under the tax treaty. On facts also, the above case will not apply to the case in hand.

102Copy pinpoint102. Cayman Islands, it was contended, was a tax heaven and CGP was a shell company, hence, they have to be looked at with suspicion. We may, therefore, briefly examine what those

VODAFONE INTERNATIONAL HOLDINGS B.V. v. 735 UNION OF INDIA & ANR. (K.S. RADHAKRISHNAN, J.] expressions mean and how they are understood in the corporate world.

TAX HAVENS, TREATY SHOPPING AND SHELL COMPANIES

103Copy pinpoint103. Tax Havens" is not seen defined or mentioned in the 8 Tax Laws of this country Corporate world gives different meanings to that expression, so also the Tax Department. The term "tax havens" is sometime described as a State with nil or moderate level of taxation and/or liberal tax incentives for undertaking specific activities such as exporting. The C expression "tax haven" is also sometime used as a "secrecy jurisdiction. The term "Shell Companies" finds no definition in the tax laws and the term is used in its pejorative sense, namely as a company which exits only on paper, but in reality, they are investment companies. Meaning of the expression Treaty D Shopping' was elaborately dealt with in Azadi Bachao Ando/an and hence not repeated.

104Copy pinpoint104. Tax Justice Network Project (U.K.), however, in its report published in September, 2005, stated as follows: E

"The role played by tax havens in encouraging and profiteering from tax· avoidance, tax evasion and capital flight from developed and developing countries is a scandal of gigantic proportions". F The project recorded that one per cent of the world's population holds more than 57% of total global worth and that approximately US $ 255 billion annually was involved in using offshore havens to escape taxation, an amount which would more than plug the financing gap to achieve the Millennium G Development Goal of reducing the world poverty by 50% by

2015. ("Tax Us If You Can" September 2005, 78 available at http:/www.taxjustice.net). Necessity of proper legislation for charging t:iose types of transactions have already been emphasised by us. H

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

A Round Tripping

105Copy pinpoint105. India is considered to be the most attractive investment destinations and, it is known, has received $37.763 billion in FDI and $29.048 billion in Fii investment in the year 8 to March 31, 2010. FDI inflows it is reported were of$ 22.958 billion between April 2010 and January, 2011 and Fii investment were $ 31. 031 billions. Reports are afloat that million of rupees go out of the country only to be returned as FDI or Fii. Round Tripping can take many formats like under-invoicing C and over-invoicing of exports and imports. Round Tripping involves getting the money out of India, say Mauritius, and then come to India like FDI or Fii. Art. 4 of the lndo-Mauritius DTAA defines a 'resident' to mean any person, who under the laws of the contracting State is liable to taxation therein by reason of his domicile, residence, place of business or any other 0 similar criteria. An Indian Company, with the idea of tax evasion can also incorporate a company off-shore, say in a Tax Haven, and then create a WOS in Mauritius and after obtaining a TRC may invest in India. Large amounts, therefore, can be routed E back to India using TRC as a defence, but once it is established that such an investment is black money or capital that is hidden, it is nothing but circular movement of capital known as Round Tripping; then TRC can be ignored, since the transaction is fraudulent and against national interest.

106Copy pinpoint106. Facts stated above are food for thought to the legislature and adequate legislative measures have to be taken to plug the loopholes, all the same, a genuine corporate structure set up for purely commercial purpose and indulging in genuine investment be recognized. However, if the fraud is detected by the Court of Law, it can pierce the corporate structure since fraud unravels everything, even a statuto,.Y provision, if it is a stumbling block, because legislature never intents to guard fraud. Certainly, in our view, TRC certificate though can be accepted as a conclusive evidence for accepting status of residents as well as beneficial ownership

VODAFONE INTERNATIONAL HOLDINGS B.V. v. 737 UNION OF INDIA & ANR. [K.S. RADHAKRISHNAN, J.] for applying the tax treaty, it can be ignored if the treaty is abused for the fraudulent purpose of evasion of tax.

McDowell - WHETHER CALLS FOR RECONSDIERATION:

107Copy pinpoint107. McDowell has emphatically spoken on the principle B. of Tax Planning. Justice Ranganath Mishra, on his and on behalf of three other Judges, after referring to the observations of Justice S.C. Shah in CIT v. A. Raman and Co. (1968) 1 SCC 10, CIT v. B. M. Kharwar (1969) 1 SCR 651, the judgments in Bank of Chettinad Ltd. v. CIT (1940) 8 ITR 522 (PC), Jiyajeerao Cotton Mills Ltd. v. Commissioner of Income Tax C and Excess Profits Tax, Bombay AIR 1959 SC 270; CIT v. Vadilal Lallubhai (1973) 3 SCC 17 and the views expressed by Viscount Simon in Latif/a v. /RC. 26 TC 107 : (1943) AC 377 stated as follows: D "Tax planning may be legitimate provided it is within the framework of law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that is honourable to avoid the payment of tax by resorting to dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges."

108Copy pinpoint108. Justice Shah in Raman (supra) has stated that avoidance of tax liability by so arranging the commercial affairs that charge of tax is distributed is not prohibited and a tax payer may resort to a device to divert the income before it accrues or arises to him and the effectiveness of the device depends not upon considerations of morality, but on the operation of the Income Tax Act. Justice Shah made the same observation in G B.N. Kharwar (supra) as well and after quoting a passage from the judgment of the Privy Council stated as follows :-

"The Taxing authority is entitled and is indeed bound to determine the true legal relation resulting from a transaction. If the parties have chosen to conceal by a H

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

A device the legal relation, it is open to the taxing authorities to unravel the device and to determine the true character of the relationship. But the legal effect of a transaction cannot be displaced by probing into the "substance of the transaction". B In Jiyajeerao (supra) also, this Court made the following observation:

"Every person is entitled so to arrange his affairs as to avoid taxation, but the arrangement must be real and C genuine and not a sham or make-believe."

109Copy pinpoint109. In Vadi/al Lalubhai (supra) this Court re-affirmed the principle of strict interpretation of the charging provisions and also affirmed the decision of the Gujarat High Court in D Sankarfal Balabhai v. /TO (1975) 100 ITR 97 (Guj.), which had drawn a distinction between the legitimate avoidance and tax evasion. Lalita's case (supra) dealing with a tax avoidance scheme, has also expressly affirmed the principle that genuine arrangements would be permissible and may result in an E assessee escaping tax.

110Copy pinpoint110. Justice Chinnappa Reddy starts his concurring judgment in McDowell as follows:

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

(emphasis supplied)

G Justice Reddy has, the above quoted portion shows, entirely agreed with Justice Mishra and has stated that he is only supplementing what Justice Mishra has spoken on tax avoidance. Justice Reddy, while agreeing with Justice Mishra and the other three judges, has opined that in the very country of its birth, the principle of Westminster has been given a

VODAFONE INTERNATIONAL HOLDINGS B.V. v. 739 UNION OF INDIA & ANR. [K.S. RADHAKRISHNAN, J.] decent burial and in that country where the phrase "tax avoidance" originated the judicial attitude towards tax avoidance has changed and the Courts are now concerning themselves not merely with the genuineness of a transaction, but with the intended effect of it for fiscal purposes. Justice Reddy also opined that no one can get away with the tax 8 avoidance project with the mere statement that there is nothing illegal about it. Justice Reddy has also opined that the ghost of Westminster (in the words of Lord Roskill) has been exorcised in England. In our view, what transpired in England is not the ratio of McDowell and cannot be and remains C merely an opinion or view.

111Copy pinpoint111. Confusion arose (see Paragraph 46 of the judgment) when Justice Mishra has stated after referring to the concept of tax planning as follows: D "On this aspect, one of us Chinnappa Reddy, J. has proposed a separate and detailed opinion with which we agree."

112Copy pinpoint112. Justice Reddy, we have already indicated, himself has stated that he is entirely agreeing with Justice Mishra and has only supplemented what Justice Mishra has stated on Tax Avoidance, therefore, we have go by what Justice Mishra has spoken on tax avoidance.

113Copy pinpoint113. Justice Reddy has depreciated the practice of setting up of Tax Avoidance Projects, in our view, rightly because the same is/was the situation in England and Ramsay and other judgments had depreciated the Tax Avoidance Schemes.

114Copy pinpoint114. In our view, the ratio of the judgment is what is spoken by Justice Mishra for himself and on behalf of three other judges, on which Justice Reddy has agreed. Justice Reddy has clearly stated that he is only supplementing what Justice Mishra has said on Tax avoidance. H

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

115Copy pinpoint115. Justice Reddy has endorsed the view of Lord Roskill that the ghost of Westminster had been exorcised in England and that one should not allow its head rear over India. If one scans through the various judgments of the House of Lords in England, which we have already done, one thing is clear that it B has been a cornerstone of law, that a tax payer is enabled to arrange his affairs so as to reduce the liability of tax and the fact that the motive for a transaction is to avoid tax does not invalidate it unless a particular enactment so provides (Westminster Principle). Needless to say if the arrangement is c to be effective, it is essential that the transaction has some economic or commercial substance. Lord Roskill's view is not seen as the correct view so also Justice Reddy's, for the reasons we have already explained in earlier part of this judgment.

116Copy pinpoint116. A five Judges Bench judgment of this Court in Mathuram Agrawal v. State of Madhya Pradesh (1999) 8 SCC 667, after referring to the judgment in 8.C. Kharwar(supra) as, well as the opinion expressed by Lord Roskill on Duke of Westminster stated that the subject is not to be taxed by inference or analogy, but only by the plain words of a statute applicable to the facts and circumstances of each case.

117Copy pinpoint117. Revenue cannot tax a subject without a statute to support and in the course we also acknowledge that eve!}' tax payer is entitled to arrange his affairs so that his taxes shall be as low as possible and that he is not bound to choose that pattern which will replenish the treasuf}'.Revenue's stand that the ratio laid down in McDowell is contrary to what has been laid down in Azadi Bachao Ando/an, in our view, is unsustainable and, therefore, calls for no reconsideration by a larger branch. PART-IV

CGP AND ITS INTERPOSITION H

VODAFONE INTERNATIONAL HOLDINGS B.V. v. 741 UNION OF INDIA & ANR. [K.S. RADHAKRISHNAN, J.]

118Copy pinpoint118. CGP's interposition in the HTIL Corporate structure and its disposition, by way of transfer, for exit, was for a commercial or business purpose or with an ulterior motive for evading tax, is the next question. Parties, it is trite, are free to choose whatever lawful arrangement which will suit their business and commercial purpose, but the true nature of the transaction can be ascertained only by looking into the legal arrangement actually entered into and carried out. lndisputedly, that the contracts have to be read holistically to arrive at a conclusion as to the real nature of a transaction. Revenue's stand was that the CGP share was a mode or mechanism to achieve a transfer of control, so that the tax be imposed on the transfer of control not on transfer of the CGP share. Revenue's stand, relying upon Dawson test, was that CGP's interposition in the Hutchison structure was an arrangement to deceive the Revenue with the object of hiding or rejecting the tax liability which otherwise would incur.

119Copy pinpoint119. Revenue contends that the entire corporate structure be looked at as on artificial tax avoidance scheme wherein CGP was introduced into the structure at the last moment, especially when another route was available for HTIL to transfer its controlling interest in HEL to Vodafone. Further it was pointed out that the original idea of the parties was to sell shares in HEL directly but at the last moment the parties changed their mind and adopted a different route since HTIL F wanted to declare a special dividend out of US $ 11 million for payment and the same would not have been possible if they had adopted Mauritian route.

120Copy pinpoint120. Petitioner pointed out that if the motive of HTIL was only to save tax it had the option to sell the shares of Indian G companies directly held Mauritius entities, especially when there is no LOB clause in India-Mauritius Treaty. Further, it was pointed out that if the Mauritius companies had sold the shares of HEL, then Mauritius compariies would have continued to be H

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

A the subsidiary of HTIL, their account could have been consolidated in the hands of HTIL and HTIL would have accounted for the accounts exactly the same way that it had accounted for the accounts in HTIL BVl/nominated payee. Had HTIL adopted the Mauritius route, then it would have been B cumbersome to sell the shares of a host of Mauritian companies.

121Copy pinpoint121. CGP was incorporated in the year 1998 and the same became part of the Hutchison Corporate structure in the c year 2005. Facts would clearly indicate that the CGP held shares in Array and Hutchison Teleservices (India) Holdings Limited (MS), both incorporated in Mauritius. HTIL, after acquiring the share of CGP (Cl) in the year 1994 which constituted approximately 42% direct interest in HEL, had put in place various FWAs, SHAs for arranging its affairs so that it 0 can also have interest in the functioning of HEL along with Indian partners.

122Copy pinpoint122. Self centred operations in India were with 3GSPL an Indian company which held options through various FWAs E entered into with Indian partners. One of the tests to examine the genuineness of the structure is the "timing test" that is timing of the incorporation of the entities or transfer of shares etc. Structures created for genuine business reasons are those which are generally created or acquired at the time when F investment is made, at the time where further investments are being made at the time of consolidation etc. 1

123Copy pinpoint123. HTIL preferred CGP route rather than adopting any other method (why ?) for which we have to examine whether G HTIL has got any justification for adopting this route, for sound commercial reasons or purely for evasion of tax. In international investments, corporate. structures are designed to enable a smooth transition which can be by way of divestment or dilution. Once entry into the structure is honourable, exits from the structure can also be honourable.

VODAFONE INTERNATIONAL HOLDINGS B.V. v. 743 UNION OF !NOIA & ANR. [K.S. RADHAKRISHNAN, J.)

124Copy pinpoint124. HTIL structure was created over a period of time and this was consolidated in 2004 to provide a working model by which HTIL could make best use of its investments and exercise control over and strategically influence the affairs of HEL. HTIL in its commercial wisdom noticed the disadvantage of preferring Array, which would have created problems for HTIL. B Hutchison Teleservices (India) Mauritius had a subsidiary, namely 3GSPL which carried on the call centre business in India and the transfer of CGP share would give control over 3GSPL, an indirect subsidiary which was incorporated in the year 1999. It would also obviate problems arising on account of call and c put options arrangements and voting rights enjoyed by 3GSPL. If Array was transferred, the disadvantage was that HTIL had to deal with call and put options of 3GSPL. In the above circumstances, HTIL in their commercial wisdom thought of transferring CGP share rather than going for any other 0 alternatives. Further 3GSPL was also a party to various agreements between itself and the companies of AS, AG and IDFC Group. If Array had been transferred the disadvantage would be that the same would result in hiving off the call centre business from 3GSPL. Consolidation operations of HEL were E evidently done in the year 2005 not for tax purposes but for commercial reasons and the contention that CGP was inserted at a very late stage in order to bring a pre tax entity or to create a transaction that would avoid tax, cannot be accepted.

125Copy pinpoint125. The Revenue has no case that HTIL structure was a F device or an artifice, but all along the contention was that CGP was interposed at the last moment and applying the Dawson test, it was contended that such an artificially interposed device be ignored, and applying Ramsay test of purposive interpretation, the transaction be taxed for gain. CGP, it may G be noted, was already part of the HTIL's Corporate Structure and the decision taken to sell CGP (Share) so as to exit from the Indian Telecom Sector was not the fall out of a tax exploitation scheme, but a genuine commercial decision taking H

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

A into consideration the best interest of the investors and the corporate entity.

126Copy pinpoint126. Principle of Fiscal nullity was applied by Vinelott, J. in favour of the assessee in Dawson, where the judge rejected B the contention of the Crown that the transaction was hit by the Ramsay principle, holding that a transaction cannot be disregarded and treated as fiscal nullity if it has enduring legal consequerces. Principle was again explained by Lord Brightman stating that the Ramsay test would apply not only where the steps are pre-contracted, but also they are pre- C ordained, if there is no contractual right and in all likelihood the · steps would follow. On Fiscal nullity, Lord Brightman again explained that there should be a pre-ordained series of transactions and there should be steps inserted that have no commercial purpose and the inserted steps are to be disregarded for fiscal purpose and, in such situations, Court must then look at the end result, precisely how the end result will be taxed will depend on terms of the taxing statute sought to be applied. Sale of CGP share, for exiting from the Indian Telecommunication Sector, in our view, cannot be considered as pre-ordained transaction, with no commercial purpose, other than tax avoidance. Sale of CGP share, in our view, was a genuine business transaction, not a fraudulent or dubious method to avoid capital gains tax.

F SITUS OF CGP

127Copy pinpoint127. Situs of CGP share stands where, is the next question. Law on situs of share has already been discussed by us in the earlier part of the judgment. Situs of shares situates G at the place where the company is incorporated and/ or the place where the share can be dealt with by way of transfer. CGP share is registered in Cayman Island and materials placed before us would indicate that Cayman Island law, unlike other laws does not recognise the multiplicity of registers. Section H 184 of the Cayman Island Act provides that the company may

VODAFONE INTERNATIONAL HOLDINGS B.V. v. 745 UNION OF INDIA & ANR. [K.S. RADHAKRISHNAN, J.] be exempt if it gives to the Registrar, a declaration that A "operation of an exempted company will be conducted mainly outside the Island". Section 193 of the Cayman Island Act expressly recognises that even exempted companies may, to a limited extent trade within the Islands. Section 193 permits activities by way of trading which are incidental of off shore B operations also all rights to enter into the contract etc. The facts in this case as well as the provisions of the Caymen Island Act would clearly indicate that the CGP (Cl) share situates in Caymen Island. The legal principle on which situs of an asset, such as share of the company is determined, is well settled. C Reference may be made to the judgments in Brassard v. Smith [1925] AC 371, London and South American Investment Trust v. British Tobacco Co. (Australia) [1927] 1 Ch. 107. Erie Beach Co. v. Attorney-General for Ontario, 1930 AC 161 PC 10, R. v. Williams [1942] AC 541. Situs of CGP share, therefore, situates in Cayman Islands and on transfer in Cayman Islands would not shift to India.

PART-V

128Copy pinpoint128. Sale of CGP, on facts, we have found was not the fall out of an artificial tax avoidance scheme or an artificial device, pre-ordained, or pre-conceived with the sole object of tax avoidance, but was a genuine commercial decision to exit from the Indian Telecom Sector. F

129Copy pinpoint129. HTIL had the following controlling interest in HEL before its exit from the Indian Telecom Sector:-

1. HTIL held its direct equity interest in HEL amounting approximately to 42% through eight Mauritius companies. G

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

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

A result of which HTIL obtained indirect equity interest of 7.24% in HEL.

3. HTIL held in Indian Company Omega Holdings, an Indian Co., interest to the extent of 45.79% of share capital through HTIM which held shareholding of 5.11% in HEL, resulting in holding of2.34% interest in the Indian Company HEL.

HTIL could, therefore, exercise its control over HEL, through the voting rights of its indirect subsidiary Array (Mauritius) which in turn controlled 42% shares through Mauritian Subsidiaries in HEL. Mauritian subsidiaries controlled 42% voting rights in HEL and HTIL could not however exercise voting rights as stated above, in HEL directly but only through indirect subsidiary CGP(M) which in turn held equity interest in Tll, an Indian D company which held equity interest in HEL. HTIL likewise through an indirect subsidiary HTl(M), which held equity interest in Omega an Indian company which held equity interest in HEL, could exercise only indirect voting rights in HEL.

130Copy pinpoint130. HTIL, by holding CGP share, got control over its WOS Hutchison Tele Services (India) Holdings Ltd (MS). HTSH(MS) was having control over its WOS 3GSPL, an Indian company which exercised voting rights in HEL. HTIL, therefore, by holding CGP share, had 52% equity interest, direct 42% and F approximately 10% (pro rata) indirect in HEL and not 67% as contended by the Revenue.

131Copy pinpoint131. HTIL had 15% interest in HEL by virtue of FWAs, SHAs Call and Put Option Agreements and Subscription Agreements and not controlling interest as such in HEL. HTIL, G by virtue of those agreements, had the following interests:-

(i) Rights (and Options) by providing finance and guarantee to Asim Ghosh Group of companies to exercise control over Tll and indirectly over HEL H through Tll Shareholders Agreement and the

VODAFONE INTERNATIONAL HOLDINGS B.V. v. 747 UNION OF INDIA & ANR. [K.S. RADHAKRISHNAN, J.] Centrino Framework Agreement dated 1.3.2006; A

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

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

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

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

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

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

(viii) Interest in the form of Preference share capital in JKF and Tll to the extent of US$ 167 .5 million and USO 337 million respectively. These two H

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

A companies hold 19.54% equity in HEL.

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

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

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

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

(xiii) Right to exercise control over the management and affairs of the business of the Indian company HEL (Management Rights); D (xiv) Right to take part in all the investment, management and financial decisions of the Indian company HEL;

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

Revenue's stand before us was that the SPA on a commercial construction brought about an extinguishment of HTIL's rights F of management and control over HEL, resulting in transfer of capital asset in India. Further, it was pointed out that the assets, rights and entitlements are property rights pertaining to HTIL and its subsidiaries and the transfer of CGP share would have no effect on the Telecom operations in India, but for the transfer · G of the above assets, rights and entitlements. SPA and other agreements, if examined, as a whole, according to the Revenue, leads to the conclusion that the substance of the transaction was the transfer of various property rights of HTIL in HEL to Vodafone attracting capital gains tax in India. Further, H it was point2d out that moment CGP share was transferred off-

VODAFONE INTERNATIONAL HOLDINGS B.V. v. 749 UNION OF INDIA & ANR. [K.S. RADHAKRISHNAN, J.] shore, HTIL's right of control over HEL and its subsidiaries stood extinguished, thus leading to income indirectly earned, outside India through the medium of sale of the CGP share. All these issues have to be examined without forgetting the fact that we are dealing with a taxing statute and the Revenue has to bring home all its contentions within the four corners of taxing statute and not on assumptions and presumptions.

132Copy pinpoint132. Vodafone on acquisition of CGP share got controlling interest of 42% over HELNEL through voting rights through eight Mauritian subsidiaries, the same was the position of HTIL as well. On acquiring CGP share, CGP has become a direct subsidiary of Vodafone, but both are legally independent entities. Vodafone does not own any assets of CGP. Management and the business of CGP vests on the Board of Directors of CGP but of course, Vodafone. could appoint or remove members of the Board of Directors of CGP. On acquisition of CGP from HTIL , Array became an indirect subsidiary of Vodafone. Array is also a separate legal entity managed by its own Board of Directors. Share of CGP situates in Cayman Islands and that of Array in Mauritius. Mauritian E entities which hold 42% shares in HEL became the direct and indirect subsidiaries of Array, on Vodafone purchasing the CGP share. Voting rights, controlling rights, right to manage etc., of Mauritian Companies vested in those companies. HTIL has never sold nor Vodafone purchased any shares of either Array or the Mauritian subsidiaries, but only CGP, the share of which situates in Cayman Islands. By purchasing the CGP share its situs will not shift either to Mauritius or to India, a legal issue, already explained by us. Array being a WOS of CGP, CGP may appoint or remove any of iis directors, if it wishes by a resolution in the general body of the subsidiary, but CGP, Array and all Mauritian entities are separate legal entities and have de-centralised management and each of the Mauritian subsidiaries has its own management personnels.

133Copy pinpoint133. Vodafone on purchase of CGP share got controlling H

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

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

134Copy pinpoint134. Vodafone could exercise only indirect voting rights in G VEL through its indirect subsidiary CGP(M) which held equity interests in Tll, an Indian Company, which held equity interests in VEL. Similarly, Vodafone could exercise only indirect voting rights through HTl(M) which held equity interests in Omega, an H Indian Company which in turn held equity interests in HEL. On

VODAFONE INTERNATIONAL HOLDINGS B.V. v. 751 UNION OF INDIA & ANR. [K.S. RADHAKRISHNAN, J.] transfer of CGP share, Vodafone gets controlling interest in its indirect subsidiaries which are situated in Mauritius which have equity interests in Tll and Omega, Indian Companies which are independent legal entities. Controlling interest, which stood transferred to Vodafone from HTIL accompany the CGP share and cannot be dissected so as to be treated as transfer of controlling interest of Mauritian entities and then that of Indian entities and ultimately that of HEL. Situs of CGP share, therefore, determines the transferability of the share and/or interest which flows out of that share including controlling interest. Ownership of shares, as already explained by us, c carries other valuable rights like, right to receive dividend, right to transmit the shares, right to vote, right to act as per one's wish, or to vote in a particular manner etc; and on transfer of shares those rights also sail along with them. D

135Copy pinpoint135. Vodafone, on purchase of CGP share got all those rights, and the price paid by Vodafone is for all those rights, in other words, control premium paid, not over and above the CGP share, but is the integral part of the price of the share. On transfer of CGP share situated in Cayman Islands, the entire E rights, which accompany stood transferred not in India, but offshore and the facts reveal that the offshore holdings and arrangements made by HTIL and Vodafone were for sound commercial and legitimate tax planning, not with the motive of evading tax. F

136Copy pinpoint136. Vodafone, on purchase of CGP share also got control over its WOS, HTSH(M) which is having control over its WOS, 3GSPL, an Indian Company which exercised voting rights in HEL. 3GSPL, was incorporated on 16.03.99 and run call centre business in India. The advantage of transferring share of CGP G rather than Array was that it would obviate the problems arising on account of the call and Q..!J! agreements and voting rights enjoyed by 3GSPL. 3GSPL was also a party to various agreements between itself and Companies of AS, AG and IDFC Gr0ups. AS , AG & IDFC have agreed to retain their H

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

A shareholdings with full control including voting rights and dividend rights. In fact, on 02.03.2007 AG wrote to HEL confirming that his indirect equity or beneficial interest in HEL worked out to be as 4.68% and it was stated, he was the beneficiary of full dividend rights attached to his shares and B he had received credit supporl and primarily the liability for re-payment was of his company. Further, it was also pointed out that he was the exclusive beneficial owner of his shares in his companies, enjoying full and exclusive rights to vote and participate in any benefits accruing to those shares. On c 05.03.2007 AS also wrote to the Government on the same lines.

137Copy pinpoint137. Vodafone, on acquisition of CGP, is in a position to replace the directors of holding company of 3GSPL so as to get control over 3GSPL. 3GSPL has call option as well as the 0 obligation of the put option. Rights and obligations which flow out of call and put options have already been explained by us in the earlier part of the judgment. Ca// and put options are contractual rights and do not sound in property and hence they E cannot be, in the absence of a statutory stipulation, considered as capital assets. Even assuming so, they are in favour of 3GSPL and continue to be so even after entry of Vodafone.

138Copy pinpoint138. We have extensively dealt with the terms of the various FWAs, SHAs and Term Sheets and in none of those F Agreements HTIL or Vodafone figure as parties. SHAs between Mauritian entities (which were shareholders of the Indian operating Companies) and other shareholders in some of the other operating companies in India held shares in HEL related to the management of the subsidiaries of AS, AG and G IDFC and did not relate to the management of the affairs of HEL and HTIL was not a party to those agreements, and hence there was no question of assigning or relinquishing any right to Vodafone.

139Copy pinpoint139. IDFC FWA of August 2006 also conferred upon 3

VODAFONE INTERNATIONAL HOLDINGS B.V. v. 753 UNION OF INDIA & ANR [K.S. RADHAKRISHNAN, J.]

GSPL only call option rights and a right to nominate a buyer if A investors decided to exit as long as the buyer paid a fair market value. June 2007 Agreement became necessary because the composition of Indian investors changed with some Indian investors going out and other Indian investors coming in. On June 2007, changes took place within the Group of Indian B investors, in that SSKI and IDFC went out leaving IDF alone as the Indian investor. Parties decided to keep June 2007 transaction to effectuate their intention within the broad contours of June 2006 FWA On 06.06.2007 FWA has also retained the rights and options in favour of 3GSPL but conferred no rights C on Vodafone and Vodafone was only a confirming party to that Agreement. Call and put options, we have already mentioned, were the subject matter of three FWAs viz., Centrino, N.D. Callus, IDFC and in Centrino and N.D. Callus FWAs, neither HTIL was a party, nor was Vodafone. HTIL was only a D confirming party in IDFC FWA, so also Vodafone. Since HTIL, and later Vodafone were not parties to those SHAs and FWAs, we fail to see how they are bound by the terms and conditions contained therein, so also the rights and obligations that flow out of them. HTIL and Vodafone have, of course, had the interest to see the SHAs and FWAs, be put in proper place but that interest cannot be termed as property rights, attracting capital gains tax.

140Copy pinpoint140. We have dealt with the legal effect of exercising call option, put option, tag along rights, ROFR, subscription rights and so on and all those rights and obligations we have indicated fall within the realm of contract between various shareholders and interested parties and in any view, are not binding on HTIL or Vodafone. Rights (and options) by providing finance and guarantee to AG Group of Companies to exercise control over Tll and indirectly over HEL through Tll SHA and Centrino FWA dated 01.03.2006 were only contractual rights, as also the revised SHAs and FWAs entered into on the basis of SPA Rights (and options) by providing finance and guarantee to AS H

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

A Group of Companies to exercise control over Tll and indirectly over HEL through various Tll SHAs and N.D. Callus FWA dated 01.03.2006 were also contractual rights, and continue to be so on entry of Vodafone.

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

142Copy pinpoint142. SPA, through the transfer of CGP, indirectly conferred the benefit of put option from the transferee of CGP share to be enjoyed in the same manner as they were enjoyed by the transferor and the revised set of 2007 agreements were exactly between the parties that is the beneficiary of the put options remained with the downstream company 3 GSPL and the counter-party of the put option remained with AG/AS Group Companies.

143Copy pinpoint143. Fresh set of agreements of 2007 as already referred to were entered into between IDFC, AG, AS, 3 GSPL and Vodafone andin fact, those agreements were irrelevant for the transfer of CGP share. FWAs with AG and AS did not constitute transaction documents or give rise to a transfer of an asset, so also the IDFC FWA. All those FWAs contain some adjustments with regard to certain existing rights, however, the options, the extent of rights in relation to options, the price etc. all continue to remain in place as they stood. Even if they had not been so entered into, all those agreements would have remained in place because they were in favour of 3GSPL, H subsidiary of CGP.

VODAFONE INTERNATIONAL HOLDINGS B.V. v. 755 UNION OF INDIA & ANR. [K.S. RADHAKRISHNAN, J.]

144Copy pinpoint144. The High Court has reiterated the common law principle that the controlling interest is an incident of the ownership of the share of the company, something which flows out of holding of shares and, therefore, not an identifiable or distinct capital asset independent of the holding of shares, but at the same time speaks of change in the controlling interest of VEL, without there being any transfer of shares of VEL. Further, the High Court failed to note on transfer of CGP share, there was only transfer of certain off-shore loan transactions which is unconnected with underlying controlling interest in the Indian Operating Companies. The other rights, interests and c entitlements continue to remain with Indian Operating Companies and there is nothing to show they stood transferred in Jaw.

145Copy pinpoint145. The High Court has ignored the vital fact that as far D as the put options are concerned there were pre-existing agreements between the beneficiaries and counter parties and fresh agreements were also on similar lines. Further, the High Court has ignored the fact that Term Sheet Agreement with Essar had nothing to do with the transfer of CGP, which was a E separate transaction which came about on account of independent settlement between Essar and Hutch Group, for a separate consideration, unrelated to the consideration of CGP share. The High Court committed an error in holding that there were some rights vested in HTIL under SHA dated F 5.7.2003 which is also an agreement, conferring no right to any party and accordingly none could.have been transferred. The High Court has also committed an error in holding that some rights vested with HTIL under the agreement dated 01.08.2006, in fact, that agreement conferred right on Hutichison G Telecommunication (India) Ltd., which is a Mauritian Company and not HTIL, the vendor of SPA. The High court has also ignored the vital fact that FIPB had elaborately examined the nature of call and put option agreement rights and found no right in presenti has been transferred to Vodafone and that as and H

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

A when rights are to be transferred by AG and AS Group Companies, it would specifically require Government permission since such a sale would attract capital gains, and may be independently taxable. We may now examine whether the following rights and entitlements would also amount to capital assets attracting capital gains tax on transfer of CGP share.

Debts/Loans through Intermediaries

146Copy pinpoint146. SPA contained provisions for assignment of loans either at Mauritius or Cayman Islands and all loans were assigned at the face value. Clause 2.2 of the SPA stipulated that HTIL shall procure the assignment of and purchaser agrees to accept an assignment of loans free from encumbrances together with all rights attaching or accruing to them at completion. Loans were defined in the SPA to mean, all inter- D company loans owing by CGP and Array to a vendor group company including accrued or unpaid interest, if any, on the completion date. HTIL warranted and undertook that, as on completion, loans set out in Part IV of Schedule 1 shall be the only indebtedness owing by the Wider group company to any member of the vendor group. Vendor was obliged to procure that the loans set out in Part IV of Schedule 1 shall not be repaid on or before completion and further, that any loan in addition to those identified will be non-interest bearing. Clause 7.4 of the SPA stipulated that any loans in addition to those identified in Part IV of Schedule 1 of the SPA would be non-interest bearing and on terms equivalent to the terms of those loans identified in Part IV of Schedule 1 of the SPA. The sum of such indebtedness comprised of:

G (a) US$ 672,361,225 (Loan 1) - reflected in a Loan Agreement (effective date of loan: 31 December 2006; date of Loan Agreement: 28 April 2007);

(b) HK$ 377,859,382.40 (Loan 2) - reflected in a Loan Agreement (effective date of Loan 31st December H 2006; date of Loan Agreement: 28 April 2007) [(i)

VODAFONE INTERNATIONAL HOLDINGS B.V. v. 757 UNION OF !NOIA & ANR. [K.S. RADHAKRISHNAN, J.] + (ii): US$ 1,050,220,607.40] A

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

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

147Copy pinpoint147. CGP had acknowledged indebtedness of HTI BVI Finance Limited in the sum of US$161,064,952.84 as at the date of completion. The sum of such indebtedness was comprised of:

(a) US$ 132,092,447.14, reflected in a Loan Agreement (effective date of loan: 31 December 2006; date of Loan Agreement: 28 April 2007) F (b) US$ 28,972,505.70, reflected in a Loan Agreement (effective date of loan: 14 February 2007; date of Loan Agreement: 15 February 2007).

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

148Copy pinpoint148. In respect of Array Loan No. 3 i.e. US$

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

A 231, 111,427.41, the right that was being assigned was not the right under a Loan Agreement, but the right to receive payment from Array pursuant to the terms of a Receiveable Novation Agreement dated 28.04.2007 between Array, HTIL and HTI BVI Finance Limited. Under the terms of the Receiveable Novation B Agreement, HTIL's obligation to repay the loan was novated from HTI BVI Finance to Array, the consideration for this novation was US$ 231, 111,427.41 payable by Array to HTI BVI Finance Limited. It was this right to receive the amount from Array that was assigned to VHI BV under the relevant Loan C Assignment. It was envisaged that, between signing and completion of the agreement, there would be a further loan up to US$ 29.7 million between CGP (as borrower) from a Vendor Group Company (vide Clause 6.4 of the SPA) and the identity of the lender has not been identified in the SPA The details of o the loan were ultimately as follows: Borrower Lender Amount of Loan Date of Effective date Agreement of Agreement CGP HTI (BVI) US$28,972,505.70 15 February 14 February E Finance 2007 2007 Limited

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

149Copy pinpoint149. Agreements referred to above including the provisions for assignments in the SPA, indicate that all loan G agreements and assignments of loans took place outside India at face value and, hence, there is no question of transfer of any capital assets out of those transactions in India, attracting capital gains tax.

VODAFONE INTERNATIONAL HOLDINGS B.V. v. 759 UNION OF INDIA & ANR. [K.S. RADHAKRISHNAN, J.] Preference Shares: A

150Copy pinpoint150. Vodafone while determining bid price had taken into consideration, inter alia, its ownership of redeemable preference shares in Tll and JFK. Right to preference shares or rights thereto cannot be termed as transfer in terms of 8 Section 2(47) of the Act. Any agreement with Tll, Indian partners contemplated fresh investment, by subscribing to the preference shares were redeemable only by accumulated profit or by issue of fresh capital anci hence any issue of fresh capital cannot be equated to the continuation of old preference shares or transfer c thereof.

NON COMPETE AGREEMENT

151Copy pinpoint151. SPA contains a Non Compete Agreement which is a pure Contractual Agreement, a negative covenant, the D purpose of which is only to see that the transferee does not immediately start a compete business. At times an agreement provides that a particular amount to be paid towards non- compete undertaking, in sale consideration, which may be assessable as business income under Section 28(va) of the E IT Act, which has nothing to do with the transfer of controlling interest. However, a non-compete agreement as an adjunct to a share transfer, which is not for any consideration, cannot give rise to a taxable income. In our view, a non-compete agreement entered into outside India would not give rise to a taxable event F in India. An agreement for a non-compete clause was executed offshore and, by no principle of law, can be termed as "property" so as to come within the meaning of capital gains taxable in India in the absence of any legislation. G HUTCH BRANO

152Copy pinpoint152. HTIL did not have any direct interest in the brand. The facts would indicate that brand/Intellectual Property Right were held by Hutchison Group Company based in Luxemburg. SPA H

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

A only assured Vodafone that they would not have to overnight cease the use of the Hutch brand name, which might have resulted in a disruption of operations in India. The bare license to use a brand free of charge, is not itself a "property" and, in any view, if the right to property is created for the first time and B that too free of charge, it cannot give rise to a chargeable income. Under the SPA, a limited window of license was given and it was expressly made free of charge and, therefore, the assurance given by HTIL to Vodafone that the brand name would not cease overnight, cannot be described as "property" c rights so as to consider it as a capital asset chargeable to tax in India.

ORACLE LICENSE:

153Copy pinpoint153. Oracle License was an accounting license, the benefit of which was extended till such time VEL replaced it with its own accounting package. There is nothing to show that this accounting package, which is a software, was transferred to Vodafone. In any view, this license cannot be termed as a capital asset since it has never been transferred to the petitioner.

154Copy pinpoint154. We, therefore, conclude that on transfer of CGP share, HTIL had transferred only 42% equity interest it had in HEL and approximately 10% (pro-rata) to Vodafone, the transfer was off- F shore, money was paid off-shore, parties were no-residents and hence there was no transfer of a capital asset situated in India. Loan agreements extended by virtue of transfer of CGP share were also off-shore and hence cannot be termed to be a transfer of asset situated in India. Rights and entitlements G referred to also, in our view, cannot be termed as capital assets, attracting capital gains tax and even after transfer of CGP share, all those rights and entitlements remained as such, by virtue of various FWAs, SHAs, in which neither HTIL nor Vodafone was a party. H

VODAFONE INTERNATIONAL HOLDINGS B.V. v. 761 UNION OF INDIA & ANR. [K.S. RADHAKRISHNAN, J.]

155Copy pinpoint155. Revenue, however, wanted to bring in all those rights A and entitlements within the ambit of Section 9(1 )(i) on a liberal construction of that Section applying the principle of purposive interpretation and hence we may examine the scope of Section 9. B PART VI

SECTION 9 AND ITS APPLICATION

156Copy pinpoint156. Shri Nariman, submitted that this Court should give a purposive construction to Section 9(1) of the Income Tax Act C when read along with Section 5(2) of the Act. Referring extensively to the various provisions of the Income Tax Act, 1922, and also Section 9(1)(i), Shri Nariman contended that the expression "transfer" in Section 2(47) read with Section 9 has to be understood as an inclusive definition comprising of D both direct and indirect transfers so as to expand the scope of Section 9 of the Act. Shri Nariman also submitted that the object of Section 9 would be defeated if one gives undue weightage to the term "situate in India", which is intended to tax a non-resident who has a source in India. Shri Nariman E contended that the effect of SPA is not only to effect the transfer of a solitary share, but transfer of rights and entitlements which falls within the expression "capital asset" defined in Section 2(14) meaning property of any kind held by the assessee. Further, it was stated that the word "property" is also an F expression of widest amplitude and would include anything capable of being raised including beneficial interest. Further, it was also pointed out that the SPA extinguishes all the rights of HTIL in HEL and such extinguishment would fall under Section 2(47) of the Income Tax Act and hence, a capital asset. G

157Copy pinpoint157. Shri Harish Salve, learned senior counsel appearing for the petitioner, submitted that Section 9(1 )(i) of the Income Tax Act deals with taxation on income "deemed to accrue or arise" in India through the transfer of a capital asset situated in H

762 SUPREME COURT REPORTS [201;'.] 1 S.C.R.

A India and stressed that the source of income lies where the transaction is effected and not where the economic interest lies and pointed out that there is a distinction between a legal right and a contractual right. Referring to the definition of "transfer" in Section 2(47) of the Income Tax Act which provides for extinguishment, it was submitted, that the same is attracted for transfer of a legal right. Placing reliance on the judgment of this Court in Commissioner of Income Tax v. Grace Collins and Others, 248 ITR 323, learned senior counsel submitted that SPA has not relinquished any right of HTIL giving rise to capital gains tax in India.

158Copy pinpoint158. Mr. S.P. Chenoy, senior counsel, on our request, argued at length, on the scope and object of Section 9 of the Income Tax Act. Learned senior counsel submitted that the first four clauses/parts of Section 9(1 )(i) deal with taxability of 0 revenue receipts, income arising through or from holding an asset in India, income arising from the transfer of an asset situated in India. Mr. Cheney submitted that only the last limb of Section 9(1 )(i) deals with the transfer of a capital asset situated in India and can be taxed as a capital receipt. Learned senior counsel submitted to apply Section 9(1)(i) the capital asset must situate in India and cannot by a process of interpretation or construction extend the meaning of that section to cover indirect transfers of capital assets/properties situated in India. Learned senior counsel pointed out that there are cases, where the assets/shares situate in India are not transferred, but where the shares of foreign company holding/ owning such shares are transferred.

159Copy pinpoint159. Shri Mohan Parasaran, Additional Solicitor General, G submitted that on a close analysis of the language employed in Section 9 and the various expressions used therein, would self-evidently demonstrate that Section 9 seeks to capture income arising directly or indirectly from direct or indirect transfer. Shri Parasaran submitted, if a holding company H

VODAFONE INTERNATIONAL HOLDINGS B.V. v. 763 UNION OF INDIA & ANR. [K.S. RADHAKRISHNAN, J.] incorporated offshore through a maze of subsidiaries, which are investment companies incorporated in various jurisdictions indirectly contacts a company in India and seeks to divest its interest, by the sale of shares or stocks, which are held by one of its upstream subsidiaries located in a foreign country to another foreign company and the foreign company step into the shoes of the holding company, then Section 9 would get attracted. Learned counsel submitted that it would be a case of indirect transfer and a case of income accruing indirectly in India and consequent to the sale of a share outside India, there would be a transfer or divestment or extinguishment of holding c company's rights and interests, resulting in transfer of capital asset situated in India.

160Copy pinpoint160. Section 9 of the Income Tax Act deals with the incomes which shall be deemed to accrue or arise in India. D Under the general theory of nexus relevant for examining the territorial operation of the legislation, two principles that are generally accepted for imposition of tax are: (a) Source and (b) Residence. Section 5 of the Income Tax Act specifies the principle on which tax can be levied. Section 5(1) prescribes E "residence' as a primary basis for imposition of tax and makes the global income of the resident liable to tax. Section 5(2) is the source based rule in relation to residents and is confined to: income that has been received in India; and income that has accrued or arisen in India or income that is deemed to accrue F or arise in India. In the case of Resident in India, the total income, according to the residential status is as under:

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

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

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

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

In the case of Resident but not Ordinarily Resident in India, the principle is as follows: B (a) Any income which is received or deemed to be received in India in the relevant previous year by or on behalf of such person;

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

(c) Any income which accrues or arises to him outside India during the relevant previous year, if it is derived from a business controlled in or a profession set up in India. D In the case of Non-Resident, income from whatsoever source derived forms part of the total income. It is as follows:

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

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

161Copy pinpoint161. Section 9 of the Income Tax Act extends its provisions to certain incomes which are deemed to accrue or arise in India. Four kinds of income which otherwise may not fall in Section 9, would be deemed to accrue or arise in India, which are (a) G a business connection in India; (b) a property in India; (c) an establishment or source in India; and (d) transfer of a capital asset in India.

VODAFONE INTERNATIONAL HOLDINGS B.V. v. 765 UNION OF INDIA & A~JR. [K.S. RADHAKRISHNAN, J.] Income deemed to accrue or arise in India A

Section 9

(1) The following incomes shall be deemed to accrue or arise in India :- B (i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through orfrom any asset or source of income in India, or through the transfer of a capitai c asset situate in India.

[Explanation 1] - For the purposes of this clause -

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

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

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

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

(2) a firm which does not have any partner who is H

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

A a citizen of India who is resident in India; or

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

162Copy pinpoint162. The meaning that we have to give to the expressions 8 "either directly or indirectly'', "transfer", "capital asset" and "situated in India" is of prime importance so as to get a proper insight on the scope and ambit of Section 9(1 )(i) of the Income Tax Act. The word "transfer" has been defined in Section 2(47) of the Income Tax Act. The relevant portion of the same is as under:

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

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

(ii) the extinguishment of any rights therein; or

(iii) the compulsory acquisition thereof under any law; or E (iv) in a case where the asset is converted by the owner thereof into, or is treated by him as, stock- in-trade of a business carried on by him, such conversion or treatment; or xxx xxx xxx xxx xxx xxi.' The term "capital asset" is also defined under Section 2(14) of the Income Tax Act, the relevant portion of which reads as follows:

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

VODAFONE INTERNATIONAL HOLDINGS B.V. v. 767 UNION OF INDIA & ANR. [K.S. RADHAKRISHr~AN, J] (i) any stock-in-trade, consumable stores or raw A materials held for the purposes of his business or profession;

163Copy pinpoint163. The meaning of the words "either directly or indirectly", when read textually and contextually, would indicate that they govern the words those precede them, namely the words "all income accruing or arising". The section provides that all income accruing or arising, whether directly or indirectly, would fall within the category of income that is deemed to accrue or arise in India. Resultantly, it is only where factually it is established that there. is either a business connection in India, or a property in India, or an asset or source in India or a capital asset in India, the transfer of which has taken place, the further question arises whether there is any income deeming to accrue in India from those situations. In relation to the expression "through or from a business connection in India", it must be established in \he first instance that (a) there is a non-resident; E (b) who has a business connection in India; and (c) income arises from this business connection.

164Copy pinpoint164. Same is the situation in the case of income that "arises through or from a property in India", i.e. (a) there must be, in the first instance, a property situated in India; and (b) income must arise from such property. Similarly, in the case of "transfer of a capital asset in India", the following test has to be applied: (a) there must be a capital asset situated in India, (b) the capital asset has to be transferred, and (c) the transfer of this asset must yield a gain. The word 'situate', means to set, place, locate. The words "situate in India" were added in Section 9(1 )(i) of the Income Tax Act pursuant to the recommendations of the 12th Law Commission dated 26.9.1958. H

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

165Copy pinpoint165. Section 9 on a plain reading would show, it refers to a property that yields an income and that property should have the situs in India and it is the income that arises through or from that property which is taxable. Section 9, therefore, covers only income arising from a transfer of a capital asset situated in B India and it does not purport to cover income arising from the indirect transfer of capital asset in India.

SOURCE

166Copy pinpoint166. Revenue placed reliance on "Source Test" to contend C that the transaction had a deep connection with India, i.e. ultimately to transfer control over HEL and hence the source of the gain to HTIL was India.

167Copy pinpoint167. Source in relation to an income has been construed o to be where the transaction of sale takes place and not where the item of value, which was the subject of the transaction, was acquired or derived from. HTIL and Vodafone are off-shore companies and since the sale took place outside India, applying the source test, the source is also outside India, unless E legislation ropes in such transactions.

168Copy pinpoint168. Substantial territorial nexus between the income and the territory which seeks to tax that income, is of prime importance to levy tax. Expression used in Section 9(1 )(i) is F "source of income in India" which implies that income arises from that source and there is no question of income arising indirectly from a source in India. Expression used is "source of income in India" and not "from a source in India". Section 9 contains a "deeming provision" and in interpreting a provision creating a legal fiction, the Court is to ascertain for what G purpose the fiction is created, but in construing the fiction it is not to be extended beyond the purpose for which it is created, or beyond the language of section by which it is created. [See C.J. T. Bombay City II v. Shakuntala (1962) 2 SCR 871, Mancheri Puthusseri Ahmed v. Kuthiravattam Estate Receiver H

VODAFONE INTERNATIONAL HOLDINGS B.V. v. 769 UNION OF INDIA & ANR. [K.S. RADHAKRISHNAN, J.] (1996) 6 sec 185]. A

169Copy pinpoint169. Power to impose tax is essentially a legislative function which finds in its expression Article 265 of the Constitution of India. Article 265 states that no tax shall be levied except by authority of law. Further, it is also well settled B that the subject is not to be taxed without clear words for that purpose; and also that every Act of Parliament must be read according to the natural construction of its words. Viscount Simon quoted with approval a passage from Rowlatt, J. expressing the principle in the following words: c "In a taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption a!i) to tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used. [Cape Brandy D Syndicate v. IRC (1921) 1 KB 64, P. 71 (Rowlatt,J.)]"

170Copy pinpoint170. In Ransom (Inspector of Tax) v. Higgs 1974 3 All ER 949 (HL), Lord Simon stated that it may seem hard that a cunningly advised tax-payer should be able to avoid what E appears to be his equitable share of the general fiscal burden and cast it on the shoulders of his fellow citizens. But for the Courts to try to stretch the law to meet hard cases (whether the hardship appears to bear on the individual tax-payer or on the general body of tax-payers as represented by the F Inland Revenue) is not merely to make bad law but to run the risk of subverting the rule of law itself. The proper course in construing revenue Acts is to give a fair and reasonable construction to their language without leaning to one side or the other but keeping in mind that no tax can be imposed without G words clearly showing an intention to lay the burden and that equitable construction of the words is not permissible [Ormond Investment Co. v. Betts (1928) All ER Rep 709 (HL)], a principle entrenched in our jurisprudence as well. In Mathuram Aggarwal (supra), this Court relied on the judgment H

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

A in Duke of Westminster and opined that the charging section has to be strictly construed. An invitation to purposively construe Section 9 applying look through provision without legislative sanction, would be contrary to the ratio of Mathuram Aggarwal.

8 171. Section 9(1)(i) covers only income arising or accruing directly or indirectly or through the transfer of a capital asset situated in India. Section 9(1)(i) cannot by a process of "interpretation" or "construction" be extended to cover "indirect transfers" of capital assets/property situate in India. c 172. On transfer of shares of a foreign company to a non- resident off-shore, there is no transfer of shares of the Indian Company, though held by the foreign company, in such a case it cannot be contended that the transfer of shares of the foreign holding company, results in an extinguishment of the foreign company control of the Indian company and it also does not constitute an extinguishment and transfer of an asset situate in India. Transfer of the foreign holding company's share off-shore, cannot result in an extinguishment of the holding company right of control of the Indian company nor can it be stated that the same constitutes extinguishment and transfer of an asset/ management and control of property situated in India.

173. The Legislature wherever wanted to tax income which arises indirectly from the assets, the same has been specifically provided so. For example, reference may be made to Section 64 of the Indian Income Tax Act, which says that in computing the total income of an individual, there shall be included all such income as arises directly or indirectly: to the son's wife, of such individual, from assets transferred directly or indirectly on and after 1.6. 73 to the son's wife by such individual otherwise than for adequate consideration. The same was noticed by this Court in CIT v. Kothari (CM), (1964) 2 SCR

531. Similar expression like "from asset transfered directly or indirectly", we find in Sections 64(7) and (8) as well. On a H comparison of Section 64 and Section 9( 1)(i) what is

VODAFONE INTERNATIONAL HOLDINGS B.V. v. 771 UNION OF INDIA & ANR. [K.S. RADHAKRISHNAN, J.] discernible is that the Legislature has not chosen to extend A Section 9(1 )(i) to "indirect transfers". Wherever "indirect transfers" are intended to be covered, the Legislature has expressly provided so. The words "either directly or indirectly", textually or contextually, cannot be construed to govern the words that follow, but must govern the words that precede them, namely the words "all income accruing or arising". The words "directly or indirectly" occurring in Section 9, therefore, relate to the relationship and connection between a non-resident assessee and the income and these words cannot and do not govern the relationship between the transaction that gave rise tci income and the territory that seeks to tax the income. In other words, when an assessee is sought to be taxed in relation to an income, it must be on the basis that it arises to that assessee directly or it may arise to the assessee indirectly. In other words, for imposing tax, it must be shown that there is specific nexus between earning of the income and the territory which seeks to lay tax on that income. Reference may also be made to the judgment of this Court in lshikawajma-Harima Heavy Industries Ltd. v. Director of Income Tax, Mumbai (2007) 3 sec 481 and CIT v. R.O. Aggarwal (1965) 1 SCR E 660.

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

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

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

A 176. Section 9(1 )(i), therefore, in our considered opinion, will not apply to the transaction in question or on the rights and entitlements, stated to have transferred, as a fall out of the sale of CGP share, since the Revenue has failed to establish both the tests, Resident Test as well the Source Test. B

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

C SECTION 195 AND OFFSHORE TRANSACTIONS

178. Section 195 provides that any person responsible for making any payment to a non-resident which is chargeable to tax must deduct from such payment, the income tax at source. D Revenue contended that if a non-resident enters into a transaction giving rise to income chargeable to tax in India, the necessary nexus of such non-resident with India is establishlild and the machinary provisions governing the collection of taxes in respect of such chargeable income will spring into operation. E Further, it is also the stand of the Revenue that the person, who is a non-resident, and not having a physical presence can be said to have a presence in India for the purpose of Section 195, if he owns or holds assets in India or is liable to pay income tax in India. Further, it is also the stand of the Revenue that once F chargeability is established, no further requirements of nexus needs to be satisfied for attracting Section 195.

179. Vodafone had "presence" in India, according to the Revenue at the time of the transaction biiaause it was a Joint G Venture (JV) Partner and held 10% equity interest in Bharti Airtel Limited, a listed company in India. Further, out of that 10%, 5.61 % shares were held directly by Vodafone itself. Vodafone had also a right to vote as a shareholder of Bharati Airtel Limited and the right to appoint two directors on the Board H of Directors of Bharti Airtel Limited. Consequently, it was stated

VODAFONE INTERNATIONAL HOLDINGS B.V. v. 773 UNION OF INDIA & ANR. [K.S. RADHAKRISHNAN, J.]

that Vodafone had a presence by reason of being a JV Partner A in HEL on completion of HEL's acquisition. Vodafone had also entered into Term Sheet Agreement with Essar Group on 15.03.2007 to regulate the affairs of VEL which was restatea by a fresh Term Sheet Agreement dated 24.08.2007, entered into with Essar Group and formed a JV Partnership in India. B Further, Vodafone itself applied for IFPB approval and was granted such approval on 07.05.2007. On perusal of the approval, according to the Revenue, it would be clear that Vodafone had a presence in India on the date on which it made the payment because of the approval to the transaction C accorded by FIPB. Further, it was also pointed out that, in fact, Vodafone had presence in India, since by mid 1990, it had entered into a JV arrangement with RPG Group in the year 1994-95 providing cellular services in Madras, Madhya Pradesh circles. After parting with its stake in RPG Group, in •D the year 2003, Vodafone in October, 2005 became a 10% JV Partner in HEL. Further, it was pointed out that, in any view, Vodafone could be treated as a representative assessee of HTIL and hence, notice under Section 163 was validly issued to Vodafone. E

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

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

A 181. Vodafone group of companies was a JV Partner in Bharti Airtel Limited which has absolutely no connection whatsoever with the present transaction. The mere fact that the Vodafone group of companies had entered into some transactions with another company cannot be treated as its B presence in a totally unconnected transaction.

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

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

Provided that in the case of interest payable by the Government or a public sector bank within the meaning of clause (230) of section 10 or a public financial institution within the me~ning of that clause, deduction of tax shall be made only at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode: Provided further that no such deduction shall be made in respect of any dividends referred to in section 115-0. Explanation: For the purposes of this section, where any interest or other sum as aforesaid is credited to any account, whether called "Interest payable account" or H "Suspense account" or by any other name, in the books

VODAFONE INTERNATIONAL HOLDINGS 8.V. v. 775 UNION OF INDIA & ANR. [K.S. RADHAKRISHNAN, J] of account of the person liable to pay such income, such A crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly."

Section 195 finds a place in Chapter XVII of the Income Tax 8 Act which deals with collection and recovery of tax. Requirement to deduct tax is not limited to deduction and payment of tax. It requires compliance with a host of statutory requirements like Section 203 which casts an obligation on the assessee to issue a certificate for the tax deducted, obligation to file return under Section 200(3), obligation to obtain "tax deduction and collection number" under Section 203A etc. Tax deduction provisions enables the Revenue to collect taxes in advance before the final assessment, which is essentially meant to make tax collection easier. The Income Tax Act also provides penalties for failure to deduct tax at source. If a person fails to deduct tax, then under Section 201 of the Act, he can be treated as an assessee in default. Section 271 C stipulates a penalty on the amount of tax which has not been deducted. Penalty of jail sentence can also be imposed under Section

2768. Therefore, failure to deduct tax at source under Section E 195 may attract various penal provisions.

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

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

A 184. A literal construction of the words "a;iy person responsible for paying" as including non-residents would lead to absurd consequences. A reading of Sections 191A, 1948, 194C, 1940, 194E, 1941, 194J read with Sections 115BBA, 1941, 194J would show that the intention of the Parliament was B first to apply Section 195 only to the residents who have a tax presence in India. It is all the more so, since the person responsible has to comply with various statutory requirements such as compliance of Sections 200(3), 203 and 203A.

C 185. The expression "any person", in our view, looking at the context in which Section 195 has been placed, would mean any person who is a resident in India. This view is also supported, if we look at similar situations in other countries, when tax was sought to be imposed on non-residents. One of the earliest rulings which paved thlil way for many, was the 0 decision in Ex Parte Blain; In re Sawers (1879) LR 12 ChD 522 at 52fil, wherein the Court stated that "if a foreigner remain abroad, if he has never come into this country at all, it seems impossible to imagine that the English Legislature could ever have intended to make such a person subject to particular English Legislation." In Clark (Inspector of Taxes) v. Oceanic Contractors Inc. (1983) 1 ALL ER 133, the House of Lords had to consider the question whether chargeability has ipso facto sufficient nexus to attract TDS provisions. A TDS provision for payment made outside England was not given extra territorial application based on the principle of statutory interpretation. Lord Scarman, Lord Wilberforce and Lord Roskill held so on behalf of the majority and Lord Edmond Daviell and Lord Lowry in dissent. Lord Scarman said : G "unless the Gontrary is expressly enacted or so plainly implied as to make it the duty of an English court to give effect to it, United Kingdom Legislation is applicable only to British subjects or to foreigners who by coming into this country, whether for a long or short time, have made H themselves during that time subject to English jurisdiction."

VODAFONE INTERNATIONAL HOLDINGS B.V. v. 777 UNION OF INDIA & ANR. [K.S. RADHAKRISHNAN, J.] The above principle was followed in Agassi v. Robinson A [2006] 1 WLR 2126.