Vodafone International Holdings B.V. v. Union of India & Anr.

REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO.733 OF 2012
(arising out of S.L.P. (C) No. 26529 of 2010)
Vodafone International Holdings B.V. … Appellant(s)
versus
Union of India & Anr. …Respondent(s)
J U D G M E N T
S.H. KAPADIA, CJI
1. Leave granted.
Introduction
2. This matter concerns a tax dispute involving the
Vodafone Group with the Indian Tax Authorities [hereinafter
referred to for short as “the Revenue”], in relation to the
acquisition by Vodafone International Holdings BV [for short
“VIH”], a company resident for tax purposes in the
Netherlands, of the entire share capital of CGP Investments

(Holdings) Ltd. [for short “CGP”], a company resident for tax
purposes in the Cayman Islands [“CI” for short] vide
transaction dated 11.02.2007, whose stated aim, according
to the Revenue, was “acquisition of 67% controlling interest
in HEL”, being a company resident for tax purposes in India
which is disputed by the appellant saying that VIH agreed to
acquire companies which in turn controlled a 67% interest,
but not controlling interest, in Hutchison Essar Limited
(“HEL” for short). According to the appellant, CGP held
indirectly through other companies 52% shareholding
interest in HEL as well as Options to acquire a further 15%
shareholding interest in HEL, subject to relaxation of FDI
Norms. In short, the Revenue seeks to tax the capital gains
arising from the sale of the share capital of CGP on the
basis that CGP, whilst not a tax resident in India, holds the
underlying Indian assets.
Facts
A. Evolution of the Hutchison structure and the
Transaction
3. The Hutchison Group, Hong Kong (HK) first invested
into the telecom business in India in 1992 when the said

Group invested in an Indian joint venture vehicle by the
name Hutchison Max Telecom Limited (HMTL) – later
renamed as HEL.
4. On 12.01.1998, CGP stood incorporated in Cayman
Islands, with limited liability, as an “exempted company”,
its sole shareholder being Hutchison Telecommunications
Limited, Hong Kong [“HTL” for short], which in September,
2004 stood transferred to HTI (BVI) Holdings Limited
[“HTIHL (BVI)” for short] vide Board Resolution dated
17.09.2004. HTIHL (BVI) was the buyer of the CGP Share.
HTIHL (BVI) was a wholly owned subsidiary (indirect) of
Hutchison Telecommunications International Limited (CI)
[“HTIL” for short].
5. In March, 2004, HTIL stood incorporated and listed on
Hong Kong and New York Stock Exchanges in September,
2004.
6. In February, 2005, consolidation of HMTL (later on
HEL) got effected. Consequently, all operating companies
below HEL got held by one holding company, i.e.,
HMTL/HEL. This was with the approval of RBI and FIPB.
The ownership of the said holding company, i.e.,

HMTL/HEL was consolidated into the tier I companies all
based in Mauritius. Telecom Investments India Private
Limited [“TII” for short], IndusInd Telecom Network Ltd.
[“ITNL” for short] and Usha Martin Telematics Limited
[“UMTL” for short] were the other shareholders, other than
Hutchison and Essar, in HMTL/HEL. They were Indian tier
I companies above HMTL/HEL. The consolidation was first
mooted as early as July, 2003.
7. On 28.10.2005, VIH agreed to acquire 5.61%
shareholding in Bharti Televentures Ltd. (now Bharti Airtel
Ltd.). On the same day, Vodafone Mauritius Limited
(subsidiary of VIH) agreed to acquire 4.39% shareholding in
Bharti Enterprises Pvt. Ltd. which indirectly held shares in
Bharti Televentures Ltd. (now Bharti Airtel Ltd.).
8. On 3.11.2005, Press Note 5 was issued by the
74% in telecom sector. Under this Press Note, proportionate
foreign component held in any Indian company was also to
be counted towards the ceiling of 74%.
9. On 1.03.2006, TII Framework and Shareholders
Agreements stood executed under which the shareholding of

HEL was restructured through “TII”, an Indian company, in
which Analjit Singh (AS) and Asim Ghosh (AG), acquired
shares through their Group companies, with the credit
support provided by HTIL. In consideration of the credit
support, parties entered into Framework Agreements under
which a Call Option was given to 3 Global Services Private
Limited [“GSPL” for short], a subsidiary of HTIL, to buy from
Goldspot Mercantile Company Private Limited [“Goldspot”
for short] (an AG company) and Scorpios Beverages Private
Limited [“Scorpios” for short] (an AS company) their entire
shareholding in TII. Additionally, a Subscription Right was
also provided allowing GSPL a right to subscribe to the
shares of Centrino Trading Company Private Limited
[“Centrino” for short] and ND Callus Info Services Private
Limited [“NDC” for short]. GSPL was an Indian company
under a Mauritius subsidiary of CGP which stood indirectly
held by HTIL. These agreements also contained clauses
which imposed restrictions to transfer downstream
interests, termination rights, subject to objection from any
party, etc.

10. The shareholding of HEL again underwent a change on
7.08.2006 through execution of 2006 IDFC Framework
Agreement with the Hinduja Group exiting and its
shareholding being acquired by SMMS Investments Private
Limited [“SMMS” for short], an Indian company. Hereto, the
investors (as described in the Framework Agreement) were
prepared to invest in ITNL provided that HTIL and GSPL
procured financial assistance for them and in consideration
whereof GSPL would have Call Option to buy entire equity
shares of SMMS. Hereto, in the Framework Agreement
there were provisions imposing restrictions on Share
Transfer, Change of Control etc. On 17.08.2006, a
Shareholders Agreement stood executed which dealt with
governance of ITNL.
11. On 22.12.2006, an Open Offer was made by Vodafone
Group Plc. on behalf of Vodafone Group to Hutchison
Whampoa Ltd., a non-binding bid for US $11.055 bn being
the enterprise value for HTIL’s 67% interest in HEL.
12. On 22.12.2006, a press release was issued by HTIL in
Hong Kong and New York Stock Exchanges that it had been
approached by various potentially interested parties

regarding a possible sale of “its equity interests” (not
controlling interest ) in HEL. That, till date no agreement
stood entered into by HTIL with any party.
13. On 25.12.2006, an offer comes from Essar Group to
purchase HTIL’s 66.99% shareholding at the highest offer
price received by HTIL. Essar further stated that any sale
by HTIL would require its consent as it claimed to be a co-
promoter of HEL.
14. On 31.01.2007, a meeting of the Board of Directors of
VIH was held approving the submission of a binding offer
for 67% of HTIL’s interest at 100% enterprise value of US
$17.5 bn by way of acquisition by VIH of one share (which
was the entire shareholding) in CGP, an indirect Cayman
Islands subsidiary of HTIL. The said approval was subject
to:
(i) reaching an agreement with Bharti that allowed VIH
to make a bid on Hutch; and
(ii) entering into an appropriate partnership
arrangement to satisfy FDI Rules in India.

15. On 6.02.2007, HTIL calls for a binding offer from
Vodafone Group for its aggregate interests in 66.98% of the
issued share capital of HEL controlled by companies owned,
directly or indirectly, by HTIL together with inter-related
loans.
16. On 9.02.2007, Vodafone Group makes a revised offer
on behalf of VIH to HTIL. The said revised offer was of US
$10.708 bn for 66.98% interest [at the enterprise value of
US $18.250 bn] and for US $1.084 bn loans given by the
Hutch Group. The offer further confirmed that in
consultation with HTIL, the consideration payable may be
reduced to take account of the various amounts which
would be payable directly to certain existing legal local
partners in order to extinguish HTIL’s previous obligations
to them. The offer further confirmed that VIH had come to
arrangements with HTIL’s existing local partners [AG, AS
and Infrastructure Development Finance Company Limited
(IDFC)] to maintain the local Indian shareholdings in
accordance with the Indian FDI requirements. The offer
also expressed VIH’s willingness to offer Essar the same
financial terms in HEL which stood offered to HTIL.

17. On the same day, i.e., 9.02.2007, Bharti conveys its no
objection to the proposal made by Vodafone Group to
purchase a direct or indirect interest in HEL from the
Hutchison Group and/ or Essar Group.
18. On 10.02.2007, a re-revised offer was submitted by
Vodafone valuing HEL at an enterprise value of US $18.80
bn and offering US $11.076 bn for HTIL’s interest in HEL.
19. On 11.02.2007, a Tax Due Diligence Report was
submitted by Ernst & Young. The relevant observation from
the said Report reads as follows:
“The target structure now also includes a
Cayman company, CGP Investments (Holdings)
Limited, CGP Investments (Holdings) Limited
was not originally within the target group. After
our due diligence had commenced the seller
proposed that CGP Investments (Holdings)
Limited should be added to the target group and
made available certain limited information
about the company. Although we have reviewed
this information, it is not sufficient for us to be
able to comment on any tax risks associated
with the company.”
20. On 11.02.2007, UBS Limited (Financial Advisors to
VIH) submitted a financial report setting out the
methodology for valuation of HTIL’s 67% effective interest in
HEL through the acquisition of 100% of CGP.

21. On 11.02.2007, VIH and HTIL entered into an
Agreement for Sale and Purchase of Share and Loans (“SPA”
for short), under which HTIL agreed to procure the sale of
the entire share capital of CGP which it held through HTIHL
(BVI) for VIH. Further, HTIL also agreed to procure the
assignment of Loans owed by CGP and Array Holdings
Limited [“Array” for short] (a 100% subsidiary of CGP) to HTI
(BVI) Finance Ltd. (a direct subsidiary of HTIL). As part of
its obligations, HTIL undertook to procure that each Wider
Group Company would not terminate or modify any rights
under any of its Framework Agreements or exercise any of
their Options under any such agreement. HTIL also
provided several warranties to VIH as set out in Schedule 4
to SPA which included that HTIL was the sole beneficial
owner of CGP share.
22. On 11.02.2007, a Side Letter was sent by HTIL to VIH
inter alia stating that out of the purchase consideration, up
to US $80 million could be paid to some of its existing
partners. By the said Side Letter, HTIL agreed to procure
that Hutchison Telecommunications (India) Ltd. (Ms) [“HTIL
Mauritius” for short], Omega Telecom Holdings Private

Limited [“Omega” for short] and GSPL would enter into IDFC
Transaction Agreement prior to the completion of the
acquisition pursuant to SPA, which completion ultimately
took place on 8.05.2007.
23. On 12.02.2007, Vodafone makes public announcement
to Securities and Exchange Commission [“SEC” for short],
Washington and on London Stock Exchange which
contained two assertions saying that Vodafone had agreed
to acquire a controlling interest in HEL via its subsidiary
VIH and, second, that Vodafone had agreed to acquire
companies that control a 67% interest in HEL.
24. On the same day, HTIL makes an announcement on
HK Stock Exchange stating that it had agreed to sell its
entire direct and indirect equity and loan interests held
through subsidiaries, in HEL to VIH.
25. On 20.02.2007, VIH applied for approval to FIPB. This
application was made pursuant to Press Note 1 which
applied to the acquisition of an indirect interest in HEL by
VIH from HTIL. It was stated that “CGP owns directly and
indirectly through its subsidiaries an aggregate of 42.34% of
the issued share capital of HEL and a further indirect

interests in 9.62% of the issued share capital of HEL”.
That, the transaction would result in VIH acquiring an
indirect controlling interest of 51.96% in HEL, a company
competing with Bharti, hence, approval of FIPB became
necessary. It is to be noted that on 20.02.2007, VIH held
5.61% stake (directly) in Bharti.
26. On the same day, i.e., 20.02.2007, in compliance of
Clause 5.2 of SPA, an Offer Letter was issued by Vodafone
Group Plc on behalf of VIH to Essar for purchase of its
entire shareholding (33%) in HEL.
27. On 2.03.2007, AG wrote to HEL, confirming that he,
through his 100% Indian companies, owned 23.97% of a
joint venture company-TII, which in turn owned 19.54% of
HEL and, accordingly, his indirect interest in HEL worked
out to 4.68%. That, he had full and unrestricted voting
rights in companies owned by him. That, he had received
credit support for his investments, but primary liability was
with his companies.
28. A similar letter was addressed by AS on 5.03.2007 to
FIPB. It may be noted that in January, 2006, post dilution
of FDI cap, HTIL had to shed its stake to comply with 26%

local shareholding guideline. Consequently, AS acquired
7.577% of HEL through his companies.
29. On 6.03.2007, Essar objects with FIPB to HTIL’s
proposed sale saying that HEL is a joint venture Indian
company between Essar and Hutchison Group since May,
2000. That, Bharti is also an Indian company in the “same
field” as HEL. Bharti was a direct competitor of HEL in
India. According to Essar, the effect of the transaction
between HTIL and VIH would be that Vodafone with an
indirect controlling interest in HEL and in Bharti violated
Press Note 1, particularly, absent consent from Essar.
However, vide letter dated 14.03.2007, Essar gave its
consent to the sale. Accordingly, its objection stood
withdrawn.
30. On 14.03.2007, FIPB wrote to HEL seeking
clarification regarding a statement by HTIL before US SEC
stating that HTIL Group would continue to hold an
aggregate interest of 42.34% of HEL and an additional
indirect interest through JVCs [TII and Omega] being non-
wholly owned subsidiaries of HTIL which held an aggregate
of 19.54% of HEL, which added up to 61.88%, whereas in

the communication to FIPB dated 6.03.2007, the direct and
indirect FDI held by HTIL was stated to be 51.96%.
31. By letter of the same date from HEL to FIPB, it was
pointed out that HTIL was a company listed on NY SE.
Accordingly, it had to file Statements in accordance with US
SEC. That, under US GAAP, HTIL had to consolidate the
assets and liabilities of companies even though not majority
owned or controlled by HTIL, because of a US accounting
standard that required HTIL to consolidate an entity
whereby HTIL had “risk or reward”. Therefore, this
accounting consolidation required that even though HTIL
held no shares nor management rights still they had to be
computed in the computation of the holding in terms of the
Listing Norms. It is the said accounting consolidation which
led to the reporting of additional 19.54% in HEL, which
leads to combined holding of 61.88%. On the other hand,
under Indian GAAP, the interest as of March, 2006 was
42.34% + 7.28% (rounded up to 49.62%). After the
additional purchase of 2.34% from Hindujas in August
2006, the aggregate HTIL direct and indirect FDI stood at
51.96%. In short, due to the difference in the US GAAP and

the Indian GAAP the Declarations varied. The combined
holding for US GAAP purposes was 61.88% whereas for
Indian GAAP purposes it was 51.96%. Thus, according to
HEL, the Indian GAAP number reflected the true equity
ownership and control position.
32. By letter dated 9.03.2007, addressed by FIPB to HEL,
several queries were raised. One of the questions FIPB had
asked was “as to which entity was entitled to appoint the
directors to the Board of Directors of HEL on behalf of TIIL
which owns 19.54% of HEL?” In answer, vide letter dated
14.03.2007, HEL informed FIPB that under the Articles of
HEL the directors were appointed by its shareholders in
accordance with the provisions of the Indian company law.
However, in practice the directors of HEL have been
appointed pro rata to their respective shareholdings which
resulted in 4 directors being appointed from the Essar
Group, 6 directors from HTIL Group and 2 directors from
TII. In practice, the directors appointed by TII to the Board
of HEL were AS and AG. One more clarification was sought
by FIPB from HEL on the credit support received by AG for
his investment in HEL. In answer to the said query, HEL

submitted that the credit support for AG Group in respect of
4.68% stake in HEL through the Asim Ghosh investment
entities, was a standby letter of credit issued by Rabobank
Hong Kong in favour of Rabo India Finance Pvt. Ltd. which
in turn has made a Rupee loan facility available to Centrino,
one of the companies in AG Group.
33. By letter dated 14.03.2007 addressed by VIH to FIPB,
it stood confirmed that VIH’s effective shareholding in
HEL would be 51.96%. That, following completion of the
acquisition HTIL’s shares in HEL the ownership of HEL was
to be as follows :
(i) VIH would own 42% direct interest in HEL
through its acquisition of 100% CGP (CI).
(ii) Through CGP (CI), VIH would also own 37.25% in
TII which in turn owns 19.54% in HEL and 38%
(45.79%) in Omega which in turn owns 5.11% in
HEL (i.e. pro-rata route).
(iii) These investments combined would give VIH a
controlling interest of 52% in HEL.

(iv) In addition, HTIL’s existing Indian partners AG,
AS and IDFC (i.e. SMMS), who between them held
a 15% interest in HEL (i.e. option route), agreed
to retain their shareholdings with full control,
including voting rights and dividend rights. In
other words, none of the Indian partners exited
and, consequently, there was no change of
control.
(v) The Essar Group would continue to own 33% of
HEL.
34. On 15.03.2007, a Settlement Agreement was signed
between HTIL and Essar Group. Under the said Agreement,
HTIL agreed to pay US $415 mn to Essar for the following:
(a)acceptance of the SPA;
(b)for waiving rights or claims in respect of
management and conduct of affairs of HEL;
(c) for giving up Right of First Refusal (RoFR), Tag Along
Rights (TARs) and shareholders rights under
Agreement dated 2.05.2000; and
(d)for giving up its objections before FIPB.

35. Vide Settlement Agreement, HTIL agreed to dispose of
its direct and indirect equity, loan and other interests and
rights, in and related to HEL, to VIH. These other rights
and interests have been enumerated in the Order of the
Revenue dated 31.05.2010 as follows :
1. Right to equity interest (direct and indirect) in
HEL.
2. Right to do telecom business in India
3. Right to jointly own and avail the telecom licences
in India
4. Right to use the Hutch brand in India
5. Right to appoint/remove directors from the Board
of HEL and its subsidiaries
6. Right to exercise control over the management
and affairs of the business of HEL (Management
Rights)
7. Right to take part in all the investment,
management and financial decisions of HEL
8. Right over the assigned loans and advances
utilized for the business in India

9. Right of subscribing at par value in certain Indian
companies
10. Right to exercise call option at the price agreed in
Indian companies
11. Right to control premium
12. Right to non-compete against HTIL within the
territory of India
13. Right to consultancy support in the use of Oracle
license for the Indian business
14. Other intangible rights (right of customer base,
goodwill etc.)
36. On 15.03.2007, a Term Sheet Agreement between VIH
and Essar Teleholdings Limited, an Indian company which
held 11% in HEL, and Essar Communications Limited, a
Mauritius company which held 22% in HEL, was entered
into for regulating the affairs of HEL and the relationship of
the shareholders of HEL. In the recitals, it was stated that
VIH had agreed to acquire the entire indirect shareholding
of HTIL in HEL, including all rights, contractual or
otherwise, to acquire directly or indirectly shares in HEL

owned by others which shares shall, for the purpose of the
Term Sheet, be considered to be part of the holding acquired
by VIH. The Term Sheet governed the relationship between
Essar and VIH as shareholders of HEL including VIH’s right
as a shareholder of HEL:
(a)to nominate 8 directors out of 12 to the Board of
Directors;
(b)nominee of Vodafone had to be there to constitute
the quorum for the Board of Directors;
(c) to get a RoFR over the shares held by Essar in HEL;
(d)should Vodafone Group shareholder sell its shares
in HEL to an outsider, Essar had a TAR in respect of
Essar’s shareholding in HEL.
37. On 15.03.2007, a Put Option Agreement was signed
between VIH and Essar Group requiring VIH to buy from
Essar Group Shareholders all the Option Shares held by
them.

38. By letter dated 17.03.2007, HTIL confirmed in writing
to AS that it had no beneficial, or legal or any other right in
AS’s TII interest or HEL interest.
39. On 19.03.2007, a letter was addressed by FIPB to VIH
asking VIH to clarify as to under what circumstances VIH
agreed to pay US $11.08 bn for acquiring 67% of HEL when
the actual acquisition is only 51.96%. This query
presupposes that even according to FIPB the actual
acquisition was only 51.96% (52% approx.).
40. On the same day, VIH replied that VIH has agreed to
acquire from HTIL, interests in HEL which included 52%
equity shareholding for US $11.08 bn. That, the price
included a control premium, use and rights to the Hutch
Brand in India, a non-compete agreement with the Hutch
Group, the value of non-voting non-convertible preference
shares, various loans obligations and the entitlement to
acquire a further 15% indirect interest in HEL as set out in
the letter dated 14.03.2007 addressed to FIPB (see page
6117 of SLP Vol. 26). According to the said letter dated
19.03.2007, all the above elements together equated to 67%
of the economic value of HEL.

41. Vide Agreement dated 21.03.2007, VIH diluted its
stake in Bharti by 5.61%.
42. In reply to the queries raised by FIPB regarding break
up of valuation, VIH confirmed as follows:
Various assets and liabilities of CGP included its rights
and entitlements, including subscription rights, call options
to acquire in future a further 62.75% of TII, call options to
acquire in future a further 54.21% of Omega which together
would give a further 15.03% proportionate indirect equity
ownership of HEL, control premium, use and rights to
Hutch brand in India and a non-compete agreement with
HTIL. No individual price was assigned to any of the above
items. That, under IFRS, consolidation included TII and
Omega and, consequently, the accounts under IFRS showed
the total shareholding in HEL as 67% (approx.). Thus,
arrangements relating to Options stood valued as assets of
CGP. In global basis valuation, assets of CGP consisted of:
its downstream holdings, intangibles and arrangement
relating to Options, i.e. Bundle of Rights acquired by VIH.
This reply was in the letter dated 27.03.2007 in which it
was further stated that HTIL had conducted an auction for

sale of its interests in HEL in which HTIL had asked each
bidder to name its price with reference to the enterprise
value of HEL. As a consequence of the transaction,
Vodafone will effectively step into the shoes of HTIL
including all the rights in respect of its Indian investments
that HTIL enjoyed. Lastly, the Indian joint venture partners
would remain invested in HEL as the transaction did not
involve the Indian investors selling any of their respective
stakes.
43. On 5.04.2007, HEL wrote to the Joint Director of
Income Tax (International Taxation) stating that HEL had no
tax liabilities accruing out of the subject transaction.
44. Pursuant to the resolution passed by the Board of
Directors of CGP on 30.04.2007, it was decided that on
acquisition loans owed by CGP to HTI (BVI) Finance Ltd.
would be assigned to VIH; the existing Directors of CGP
would resign; Erik de Rijk would become the only Director
of CGP. A similar resolution was passed on the same day
by the Board of Directors of Array.

45. On 7.05.2007, FIPB gave its approval to the
transaction, subject to compliance with the applicable laws
and regulations in India.
46. On 8.05.2007, consequent upon the Board Resolutions
passed by CGP and its downstream companies, the
following steps were taken:
(i) resignation of all the directors of Hutch Group;
(ii) appointment of new directors of Vodafone Group;
(iii) resolutions passed by TII, Jaykay Finholding
(India) Private Limited, UMT Investments Ltd.,
UMTL, Omega (Indian incorporated holding
companies) accepting the resignation of HTIL’s
nominee directors and appointing VIH’s nominee
directors;
(iv) same steps were taken by HEL and its
subsidiaries;
(v) sending of a Side Letter by HTIL to VIH relating to
completion mechanics;
(vi) computation of net amount payable by VIH to
HTIL including retention of a certain amount out

of US $11.08 bn paid on 8.05.2007 towards
expenses to operationalize the Option Agreements
and adjustments for breach (if any) of warranties,
etc.;
(vii) assignment of loans given by HTI (BVI) Finance
Ltd. to CGP and Array in favour of VIH;
(viii) cancellation of share certificate of HTIHL (BVI)
and entering the name of VIH in the Register of
Members of CGP;
(ix) execution of Tax Deed of Covenant indemnifying
VIH in respect of tax or transfer pricing liabilities
payable by Wider Group (CGP, GSPL, Mauritius
holding companies, Indian operating companies).
(x) a Business Transfer Agreement between GSPL
and a subsidiary of HWP Investments Holdings
(India) Ltd. (Ms) for sale of Call Centre earlier
owned by GSPL;
(xi) payment of US $10.85 bn by VIH to HTIL (CI).

47. On 5.06.2007, under the Omega Agreement, it was
agreed that in view of the SPA there would be a consequent
change of control in HTIL Mauritius, which holds 45.79% in
Omega, and that India Development Fund (“IDF” for short),
IDFC and SSKI Corporate Finance Private Limited (“SSKI”
for short) would, instead of exercising Put Option and
Cashless Option under 2006 IDFC Framework Agreement,
exercise the same in pursuance of Omega Agreement. That,
under the Omega Agreement, GSPL waived its right to
exercise the Call Option under the 2006 IDFC Framework
Agreement.
48. On 6.06.2007, a Framework Agreement was entered
into among IDF, IDFC, SMMS, IDFC PE, HTIL Mauritius,
GSPL, Omega and VIH by which GSPL had a Call Option to
buy the entire equity shares of SMMS. Consequently, on
7.06.2007, a Shareholders Agreement was executed by
which the shareholding pattern of Omega changed with
SMMS having 61.6% and HTIL Mauritius having 38.4%.

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

50. On 5.07.2007, a Framework Agreement was entered
into among AG, AG Mercantile Company Private Limited,
Plustech Mercantile Co. (P) Ltd [“Plustech” for short], GSPL,
Nadal Trading Company Private Limited [“Nadal” for short]
and VIH. Under clause 4.4, GSPL had an unconditional
right to purchase all shares of AG in AG Mercantile
Company Pvt. Ltd. at any time and in consideration for such
call option, GSPL agreed to pay to AG an amount of US
$6.3 mn annually.
51. On the same day, i.e., 5.07.2007, a Framework
Agreement was entered into among AS, his wife, Scorpios,
MVH, GSPL, NDC and VIH. Under clause 4.4 GSPL had an
unconditional right to purchase all shares of AS and his
wife held in Scorpios at any time and in consideration for
the call option GSPL agreed to pay AS and his wife an
amount of US$ 10.2 mn per annum.

52. On 5.07.2007, TII Shareholders Agreement was
entered into among Nadal, NDC, CGP India Investments
Limited [“CGP India” for short], TII and VIH to regulate the
affairs of TII. Under clause 3.1, NDC had 38.78%
shareholding in TII, CGP India had 37.85% and Nadal had
23.57%.
53. It is not necessary to go into the earlier round of
litigation. Suffice it to state that on 31.05.2010, an Order
was passed by the Department under Sections 201(1) and
201(1A) of the Income Tax Act, 1961 [“the Act” for short]
declaring that Indian Tax Authorities had jurisdiction to tax
the transaction against which VIH filed Writ Petition No.
1325 of 2010 before the Bombay High Court which was
dismissed on 8.09.2010 vide the impugned judgment
[reported in 329 ITR 126], hence, this Civil Appeal.
B. Ownership Structure
54. In order to understand the above issue, we reproduce
below the Ownership Structure Chart as on 11.02.2007.
The Chart speaks for itself.



55. To sum up, CGP held 42.34% in HEL through 100%
wholly owned subsidiaries [Mauritius companies], 9.62%
indirectly through TII and Omega [i.e. pro rata route], and
15.03% through GSPL route.
56. To explain the GSPL route briefly, it may be mentioned
that on 11.02.2007 AG Group of companies held 23.97% in
TII, AS Group of companies held 38.78% in TII whereas
SMMS held 54.21% in Omega. Consequently, holding of AG
in HEL through TII stood at 4.68% whereas holding of AS in
HEL through TII stood at 7.577% and holding of SMMS in
HEL through Omega stood at 2.77%, which adds up to
15.03% in HEL. These holdings of AG, AS and SMMS came
under the Option Route. In this connection, it may be
mentioned that GSPL is an Indian company indirectly
owned by CGP. It held Call Options and Subscription
Options to be exercised in future under circumstances spelt
out in TII and IDFC Framework Agreements (keeping in
mind the sectoral cap of 74%).

Correctness of Azadi Bachao case - Re: Tax
Avoidance/Evasion
57. Before us, it was contended on behalf of the Revenue
that Union of India v. Azadi Bachao Andolan (2004) 10
SCC 1 needs to be overruled insofar as it departs from
McDowell and Co. Ltd. v. CTO (1985) 3 SCC 230 principle
for the following : i) Para 46 of McDowell judgment has
been missed which reads as under: “on this aspect
Chinnappa Reddy, J. has proposed a separate opinion with
which we agree”. [i.e. Westminster principle is dead].
ii) That, Azadi Bachao failed to read paras 41-45 and 46 of
McDowell in entirety. If so read, the only conclusion one
could draw is that four learned judges speaking through
Misra, J. agreed with the observations of Chinnappa Reddy,
J. as to how in certain circumstances tax avoidance should
be brought within the tax net. iii) That, subsequent to
McDowell, another matter came before the Constitution
Bench of five Judges in Mathuram Agrawal v. State of
Madhya Pradesh (1999) 8 SCC 667, in which Westminster
principle was quoted which has not been noticed by Azadi
Bachao.

Our Analysis
58. Before coming to Indo-Mauritius DTAA, we need to
clear the doubts raised on behalf of the Revenue regarding
the correctness of Azadi Bachao (supra) for the simple
reason that certain tests laid down in the judgments of the
English Courts subsequent to The Commissioners of
Inland Revenue v. His Grace the Duke of Westminster
1935 All E.R. 259 and W.T. Ramsay Ltd. v. Inland
Revenue Commissioners (1981) 1 All E.R. 865 help us to
understand the scope of Indo-Mauritius DTAA. It needs to
be clarified, that, McDowell dealt with two aspects. First,
regarding validity of the Circular(s) issued by CBDT
concerning Indo-Mauritius DTAA. Second, on concept of
tax avoidance/evasion. Before us, arguments were
advanced on behalf of the Revenue only regarding the
second aspect.
59. The Westminster principle states that, “given that a
document or transaction is genuine, the court cannot go
behind it to some supposed underlying substance”. The
said principle has been reiterated in subsequent English
Courts Judgments as “the cardinal principle”.

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

rather than an over-arching anti-avoidance doctrine
imposed upon tax laws.
62. Furniss (Inspector of Taxes) v. Dawson (1984) 1 All
E.R. 530 dealt with the case of interpositioning of a
company to evade tax. On facts, it was held that the
inserted step had no business purpose, except deferment of
tax although it had a business effect. Dawson went beyond
Ramsay. It reconstructed the transaction not on some
fancied principle that anything done to defer the tax be
ignored but on the premise that the inserted transaction did
not constitute “disposal” under the relevant Finance Act.
Thus, Dawson is an extension of Ramsay principle.
63. After Dawson, which empowered the Revenue to
restructure the transaction in certain circumstances, the
Revenue started rejecting every case of strategic
investment/tax planning undertaken years before the event
saying that the insertion of the entity was effected with the
sole intention of tax avoidance. In Craven (Inspector of
Taxes) v. White (Stephen) (1988) 3 All. E.R. 495 it was
held that the Revenue cannot start with the question as to
whether the transaction was a tax deferment/saving device

but that the Revenue should apply the look at test to
ascertain its true legal nature. It observed that genuine
strategic planning had not been abandoned.
64. The majority judgment in McDowell held that “tax
planning may be legitimate provided it is within the
framework of law” (para 45). In the latter part of para 45, it
held that “colourable device cannot be a part of tax planning
and it is wrong to encourage the belief that it is honourable
to avoid payment of tax by resorting to dubious methods”. It
is the obligation of every citizen to pay the taxes without
resorting to subterfuges. The above observations should be
read with para 46 where the majority holds “on this aspect
one of us, Chinnappa Reddy, J. has proposed a separate
opinion with which we agree”. The words “this aspect”
express the majority’s agreement with the judgment of
Reddy, J. only in relation to tax evasion through the use of
colourable devices and by resorting to dubious methods and
subterfuges. Thus, it cannot be said that all tax planning is
illegal/illegitimate/impermissible. Moreover, Reddy, J.
himself says that he agrees with the majority. In the
judgment of Reddy, J. there are repeated references to

schemes and devices in contradistinction to “legitimate
avoidance of tax liability” (paras 7-10, 17 & 18). In our
view, although Chinnappa Reddy, J. makes a number of
observations regarding the need to depart from the
“Westminster” and tax avoidance – these are clearly only in
the context of artificial and colourable devices. Reading
McDowell, in the manner indicated hereinabove, in cases of
treaty shopping and/or tax avoidance, there is no conflict
between McDowell and Azadi Bachao or between
McDowell and Mathuram Agrawal.
International Tax Aspects of Holding Structures
65. In the thirteenth century, Pope Innocent IV espoused
the theory of the legal fiction by saying that corporate bodies
could not be ex-communicated because they only exist in
abstract. This enunciation is the foundation of the
separate entity principle.
66. The approach of both the corporate and tax laws,
particularly in the matter of corporate taxation, generally is
founded on the abovementioned separate entity principle,
i.e., treat a company as a separate person. The Indian
Income Tax Act, 1961, in the matter of corporate taxation, is
founded on the principle of the independence of companies

and other entities subject to income-tax. Companies and
other entities are viewed as economic entities with legal
independence vis-a-vis their shareholders/participants. It is
fairly well accepted that a subsidiary and its parent are
totally distinct tax payers. Consequently, the entities
subject to income-tax are taxed on profits derived by them
on standalone basis, irrespective of their actual degree of
economic independence and regardless of whether profits
are reserved or distributed to the shareholders/
participants. Furthermore, shareholders/ participants, that
are subject to (personal or corporate) income-tax, are
generally taxed on profits derived in consideration of their
shareholding/participations, such as capital gains. Now a
days, it is fairly well settled that for tax treaty purposes a
subsidiary and its parent are also totally separate and
distinct tax payers.
67. It is generally accepted that the group parent company
is involved in giving principal guidance to group companies
by providing general policy guidelines to group subsidiaries.
However, the fact that a parent company exercises
shareholder’s influence on its subsidiaries does not

generally imply that the subsidiaries are to be deemed
residents of the State in which the parent company resides.
Further, if a company is a parent company, that company’s
executive director(s) should lead the group and the
company’s shareholder’s influence will generally be
employed to that end. This obviously implies a restriction on
the autonomy of the subsidiary’s executive directors. Such
a restriction, which is the inevitable consequences of any
group structure, is generally accepted, both in corporate
and tax laws. However, where the subsidiary’s executive
directors’ competences are transferred to other
persons/bodies or where the subsidiary’s executive
directors’ decision making has become fully subordinate to
the Holding Company with the consequence that the
subsidiary’s executive directors are no more than puppets
then the turning point in respect of the subsidiary’s place of
residence comes about. Similarly, if an actual controlling
Non-Resident Enterprise (NRE) makes an indirect transfer
through “abuse of organisation form/legal form and without
reasonable business purpose” which results in tax
avoidance or avoidance of withholding tax, then the

Revenue may disregard the form of the arrangement or the
impugned action through use of Non-Resident Holding
Company, re-characterize the equity transfer according to
its economic substance and impose the tax on the actual
controlling Non-Resident Enterprise. Thus, whether a
transaction is used principally as a colourable device for the
distribution of earnings, profits and gains, is determined by
a review of all the facts and circumstances surrounding the
transaction. It is in the above cases that the principle of
lifting the corporate veil or the doctrine of substance over
form or the concept of beneficial ownership or the concept of
alter ego arises. There are many circumstances, apart from
the one given above, where separate existence of different
companies, that are part of the same group, will be totally or
partly ignored as a device or a conduit (in the pejorative
sense).
68. The common law jurisdictions do invariably impose
taxation against a corporation based on the legal principle
that the corporation is “a person” that is separate from its
members. It is the decision of the House of Lords in
Salomon v. Salomon (1897) A.C. 22 that opened the door

to the formation of a corporate group. If a “one man”
corporation could be incorporated, then it would follow that
one corporation could be a subsidiary of another. This legal
principle is the basis of Holding Structures. It is a
common practice in international law, which is the basis of
international taxation, for foreign investors to invest in
Indian companies through an interposed foreign holding or
operating company, such as Cayman Islands or Mauritius
based company for both tax and business purposes. In
doing so, foreign investors are able to avoid the lengthy
approval and registration processes required for a direct
transfer (i.e., without a foreign holding or operating
company) of an equity interest in a foreign invested Indian
company. However, taxation of such Holding Structures
very often gives rise to issues such as double taxation, tax
deferrals and tax avoidance. In this case, we are concerned
with the concept of GAAR. In this case, we are not
concerned with treaty-shopping but with the anti-avoidance
rules. The concept of GAAR is not new to India since India
already has a judicial anti-avoidance rule, like some other
jurisdictions. Lack of clarity and absence of appropriate

provisions in the statute and/or in the treaty regarding the
circumstances in which judicial anti-avoidance rules would
apply has generated litigation in India. Holding Structures
are recognized in corporate as well as tax laws. Special
Purpose Vehicles (SPVs) and Holding Companies have a
place in legal structures in India, be it in company law,
takeover code under SEBI or even under the income tax law.
When it comes to taxation of a Holding Structure, at the
threshold, the burden is on the Revenue to allege and
establish abuse, in the sense of tax avoidance in the
creation and/or use of such structure(s). In the application
of a judicial anti-avoidance rule, the Revenue may invoke
the “substance over form” principle or “piercing the
corporate veil” test only after it is able to establish on the
basis of the facts and circumstances surrounding the
transaction that the impugned transaction is a sham or tax
avoidant. To give an example, if a structure is used for
circular trading or round tripping or to pay bribes then such
transactions, though having a legal form, should be
discarded by applying the test of fiscal nullity. Similarly, in
a case where the Revenue finds that in a Holding Structure

an entity which has no commercial/business substance has
been interposed only to avoid tax then in such cases
applying the test of fiscal nullity it would be open to the
Revenue to discard such inter-positioning of that entity.
However, this has to be done at the threshold. In this
connection, we may reiterate the “look at” principle
enunciated in Ramsay (supra) in which it was held that the
Revenue or the Court must look at a document or a
transaction in a context to which it properly belongs to. It is
the task of the Revenue/Court to ascertain the legal nature
of the transaction and while doing so it has to look at the
entire transaction as a whole and not to adopt a dissecting
approach. The Revenue cannot start with the question as to
whether the impugned transaction is a tax
deferment/saving device but that it should apply the “look
at” test to ascertain its true legal nature [See Craven v.
White (supra) which further observed that genuine strategic
tax planning has not been abandoned by any decision of the
English Courts till date]. Applying the above tests, we are of
the view that every strategic foreign direct investment
coming to India, as an investment destination, should be

seen in a holistic manner. While doing so, the
Revenue/Courts should keep in mind the following factors:
the concept of participation in investment, the duration of
time during which the Holding Structure exists; the period
of business operations in India; the generation of taxable
revenues in India; the timing of the exit; the continuity of
business on such exit. In short, the onus will be on the
Revenue to identify the scheme and its dominant purpose.
The corporate business purpose of a transaction is evidence
of the fact that the impugned transaction is not undertaken
as a colourable or artificial device. The stronger the
evidence of a device, the stronger the corporate business
purpose must exist to overcome the evidence of a device.
Whether Section 9 is a “look through” provision as
submitted on behalf of the Revenue?
69. According to the Revenue, if its primary argument
(namely, that HTIL has, under the SPA, directly
extinguished its property rights in HEL and its subsidiaries)
fails, even then in any event, income from the sale of CGP
share would nonetheless fall within Section 9 of the Income
Tax Act, 1961 as that Section provides for a “look through”.
In this connection, it was submitted that the word “through”

in Section 9 inter alia means “in consequence of”. It was,
therefore, argued that if transfer of a capital asset situate in
India happens “in consequence of” something which has
taken place overseas (including transfer of a capital asset),
then all income derived even indirectly from such transfer,
even though abroad, becomes taxable in India. That, even if
control over HEL were to get transferred in consequence of
transfer of the CGP Share outside India, it would yet be
covered by Section 9.
70. We find no merit in the above submission of the
Revenue. At the outset, we quote hereinbelow the following
Sections of the Income Tax Act, 1961:
Scope of total income.
5. (2) Subject to the provisions of this Act,
the total income of any previous year of a
person who is a non-resident includes all
income from whatever source derived which
—
(a)is received or is deemed to be
received in India in such year by or
on behalf of such person ; or
(b)accrues or arises or is deemed to
accrue or arise to him in India during
such year.
Income deemed to accrue or arise in
India.
9. (1) The following incomes shall be
deemed to accrue or arise in India :—

(i)all income accruing or arising,
whether directly or indirectly,
through or from any business
connection in India, or through or
from any property in India, or
through or from any asset or source
of income in India, or through the
transfer of a capital asset situate in
India.
71. Section 9(1)(i) gathers in one place various types of
income and directs that income falling under each of the
sub-clauses shall be deemed to accrue or arise in India.
Broadly there are four items of income. The income dealt
with in each sub-clause is distinct and independent of the
other and the requirements to bring income within each
sub-clause, are separately noted. Hence, it is not necessary
that income falling in one category under any one of the
sub-clauses should also satisfy the requirements of the
other sub-clauses to bring it within the expression “income
deemed to accrue or arise in India” in Section 9(1)(i). In this
case, we are concerned with the last sub-clause of Section
9(1)(i) which refers to income arising from “transfer of a
capital asset situate in India”. Thus, charge on capital
gains arises on transfer of a capital asset situate in India
during the previous year. The said sub-clause consists of

three elements, namely, transfer, existence of a capital
asset, and situation of such asset in India. All three
elements should exist in order to make the last sub-clause
applicable. Therefore, if such a transfer does not exist in
the previous year no charge is attracted. Further, Section
45 enacts that such income shall be deemed to be the
income of the previous year in which transfer took place.
Consequently, there is no room for doubt that such transfer
should exist during the previous year in order to attract the
said sub-clause. The fiction created by Section 9(1)(i)
applies to the assessment of income of non-residents. In
the case of a resident, it is immaterial whether the place of
accrual of income is within India or outside India, since, in
either event, he is liable to be charged to tax on such
income. But, in the case of a non-resident, unless the place
of accrual of income is within India, he cannot be subjected
to tax. In other words, if any income accrues or arises to a
non-resident, directly or indirectly, outside India is
fictionally deemed to accrue or arise in India if such income
accrues or arises as a sequel to the transfer of a capital
asset situate in India. Once the factum of such transfer is

established by the Department, then the income of the non-
resident arising or accruing from such transfer is made
liable to be taxed by reason of Section 5(2)(b) of the Act.
This fiction comes into play only when the income is not
charged to tax on the basis of receipt in India, as receipt of
income in India by itself attracts tax whether the recipient is
a resident or non-resident. This fiction is brought in by the
legislature to avoid any possible argument on the part of the
non-resident vendor that profit accrued or arose outside
India by reason of the contract to sell having been executed
outside India. Thus, income accruing or arising to a non-
resident outside India on transfer of a capital asset situate
in India is fictionally deemed to accrue or arise in India,
which income is made liable to be taxed by reason of
Section 5(2)(b) of the Act. This is the main purpose behind
enactment of Section 9(1)(i) of the Act. We have to give
effect to the language of the section when it is unambiguous
and admits of no doubt regarding its interpretation,
particularly when a legal fiction is embedded in that
section. A legal fiction has a limited scope. A legal fiction
cannot be expanded by giving purposive interpretation

particularly if the result of such interpretation is to
transform the concept of chargeability which is also there in
Section 9(1)(i), particularly when one reads Section 9(1)(i)
with Section 5(2)(b) of the Act. What is contended on behalf
of the Revenue is that under Section 9(1)(i) it can “look
through” the transfer of shares of a foreign company
holding shares in an Indian company and treat the transfer
of shares of the foreign company as equivalent to the
transfer of the shares of the Indian company on the
premise that Section 9(1)(i) covers direct and indirect
transfers of capital assets. For the above reasons, Section
9(1)(i) cannot by a process of interpretation be extended to
cover indirect transfers of capital assets/property situate
in India. To do so, would amount to changing the content
and ambit of Section 9(1)(i). We cannot re-write Section
9(1)(i). The legislature has not used the words indirect
transfer in Section 9(1)(i). If the word indirect is read into
Section 9(1)(i), it would render the express statutory
requirement of the 4th sub-clause in Section 9(1)(i) nugatory.
This is because Section 9(1)(i) applies to transfers of a
capital asset situate in India. This is one of the elements in

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

the DTC Bill, 2009 expressly stated that income accruing
even from indirect transfer of a capital asset situate in
India would be deemed to accrue in India. These proposals,
therefore, show that in the existing Section 9(1)(i) the word
indirect cannot be read on the basis of purposive
construction. The question of providing “look through” in
the statute or in the treaty is a matter of policy. It is to be
expressly provided for in the statute or in the treaty.
Similarly, limitation of benefits has to be expressly
provided for in the treaty. Such clauses cannot be read into
the Section by interpretation. For the foregoing reasons, we
hold that Section 9(1)(i) is not a “look through” provision.
Transfer of HTIL’s property rights by Extinguishment?
72. The primary argument advanced on behalf of the
Revenue was that the SPA, commercially construed,
evidences a transfer of HTIL’s property rights by their
extinguishment. That, HTIL had, under the SPA, directly
extinguished its rights of control and management, which
are property rights, over HEL and its subsidiaries and,
consequent upon such extinguishment, there was a transfer
of capital asset situated in India. In support, the following

features of the SPA were highlighted: (i) the right of HTIL to
direct a downstream subsidiary as to the manner in which it
should vote. According to the Revenue, this right was a
property right and not a contractual right. It vested in HTIL
as HTIL was a parent company, i.e., a 100% shareholder of
the subsidiary; (ii) According to the Revenue, the 2006
Shareholders/ Framework Agreements had to be continued
upon transfer of control of HEL to VIH so that VIH could
step into the shoes of HTIL. According to the Revenue, such
continuance was ensured by payment of money to AS and
AG by VIH failing which AS and AG could have walked out
of those agreements which would have jeopardized VIH’s
control over 15% of the shares of HEL and, consequently,
the stake of HTIL in TII would have stood reduced to
minority; (iii) Termination of IDFC Framework Agreement of
2006 and its substitution by a fresh Framework Agreement
dated 5.06.2007, as warranted by SPA; (iv) Termination of
Term Sheet Agreement dated 5.07.2003. According to the
Revenue, that Term Sheet Agreement was given effect to by
clause 5.2 of the SPA which gave Essar the right to Tag
Along with HTIL and exit from HEL. That, by a specific

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

holder of 100% shares of downstream subsidiaries, HTIL
possessed de facto control over such subsidiaries. Such
de facto control was the subject matter of the SPA.
73. At the outset, we need to reiterate that in this case we
are concerned with the sale of shares and not with the sale
of assets, item-wise. The facts of this case show sale of the
entire investment made by HTIL, through a Top company,
viz. CGP, in the Hutchison Structure. In this case we need
to apply the “look at” test. In the impugned judgment, the
High Court has rightly observed that the arguments
advanced on behalf of the Department vacillated. The
reason for such vacillation was adoption of “dissecting
approach” by the Department in the course of its
arguments. Ramsay (supra) enunciated the look at test.
According to that test, the task of the Revenue is to
ascertain the legal nature of the transaction and, while
doing so, it has to look at the entire transaction holistically
and not to adopt a dissecting approach. One more aspect
needs to be reiterated. There is a conceptual difference
between preordained transaction which is created for tax
avoidance purposes, on the one hand, and a transaction

which evidences investment to participate in India. In
order to find out whether a given transaction evidences a
preordained transaction in the sense indicated above or
investment to participate, one has to take into account
the factors enumerated hereinabove, namely, duration of
time during which the holding structure existed, the period
of business operations in India, generation of taxable
revenue in India during the period of business operations in
India, the timing of the exit, the continuity of business on
such exit, etc. Applying these tests to the facts of the
present case, we find that the Hutchison structure has been
in place since 1994. It operated during the period 1994 to
11.02.2007. It has paid income tax ranging from `3 crore to
`250 crore per annum during the period 2002-03 to 2006-
07. Even after 11.02.2007, taxes are being paid by VIH
ranging from `394 crore to `962 crore per annum during the
period 2007-08 to 2010-11 (these figures are apart from
indirect taxes which also run in crores). Moreover, the SPA
indicates “continuity” of the telecom business on the exit of
its predecessor, namely, HTIL. Thus, it cannot be said that
the structure was created or used as a sham or tax

avoidant. It cannot be said that HTIL or VIH was a “fly by
night” operator/ short time investor. If one applies the look
at test discussed hereinabove, without invoking the
dissecting approach, then, in our view, extinguishment took
place because of the transfer of the CGP share and not by
virtue of various clauses of SPA. In a case like the present
one, where the structure has existed for a considerable
length of time generating taxable revenues right from 1994
and where the court is satisfied that the transaction
satisfies all the parameters of “participation in investment”
then in such a case the court need not go into the questions
such as de facto control vs. legal control, legal rights vs.
practical rights, etc.
74. Be that as it may, did HTIL possess a legal right to
appoint directors onto the board of HEL and as such had
some “property right” in HEL? If not, the question of such a
right getting “extinguished” will not arise. A legal right is an
enforceable right. Enforceable by a legal process. The
question is what is the nature of the “control” that a parent
company has over its subsidiary. It is not suggested that a
parent company never has control over the subsidiary. For

example, in a proper case of “lifting of corporate veil”, it
would be proper to say that the parent company and the
subsidiary form one entity. But barring such cases, the
legal position of any company incorporated abroad is that
its powers, functions and responsibilities are governed by
the law of its incorporation. No multinational company can
operate in a foreign jurisdiction save by operating
independently as a “good local citizen”. A company is a
separate legal persona and the fact that all its shares are
owned by one person or by the parent company has nothing
to do with its separate legal existence. If the owned
company is wound up, the liquidator, and not its parent
company, would get hold of the assets of the subsidiary. In
none of the authorities have the assets of the subsidiary
been held to be those of the parent unless it is acting as an
agent. Thus, even though a subsidiary may normally
comply with the request of a parent company it is not just a
puppet of the parent company. The difference is between
having power or having a persuasive position. Though it
may be advantageous for parent and subsidiary companies
to work as a group, each subsidiary will look to see whether

there are separate commercial interests which should be
guarded. When there is a parent company with
subsidiaries, is it or is it not the law that the parent
company has the “power” over the subsidiary. It depends
on the facts of each case. For instance, take the case of a
one-man company, where only one man is the shareholder
perhaps holding 99% of the shares, his wife holding 1%. In
those circumstances, his control over the company may be
so complete that it is his alter ego. But, in case of
multinationals it is important to realise that their
subsidiaries have a great deal of autonomy in the country
concerned except where subsidiaries are created or used as
a sham. Of course, in many cases the courts do lift up a
corner of the veil but that does not mean that they alter the
legal position between the companies. The directors of the
subsidiary under their Articles are the managers of the
companies. If new directors are appointed even at the
request of the parent company and even if such directors
were removable by the parent company, such directors of
the subsidiary will owe their duty to their companies
(subsidiaries). They are not to be dictated by the parent

company if it is not in the interests of those companies
(subsidiaries). The fact that the parent company exercises
shareholder’s influence on its subsidiaries cannot obliterate
the decision-making power or authority of its (subsidiary’s)
directors. They cannot be reduced to be puppets. The
decisive criteria is whether the parent company’s
management has such steering interference with the
subsidiary’s core activities that subsidiary can no longer be
regarded to perform those activities on the authority of its
own executive directors.
75. Before dealing with the submissions advanced on
behalf of the Revenue, we need to appreciate the reason for
execution of the SPA. Exit is an important right of an
investor in every strategic investment. The present case
concerns transfer of investment in entirety. As stated
above, exit coupled with continuity of business is one of the
important tell-tale circumstance which indicates the
commercial/business substance of the transaction. Thus,
the need for SPA arose to re-adjust the outstanding loans
between the companies; to provide for standstill
arrangements in the interregnum between the date of

signing of the SPA on 11.02.2007 and its completion on
8.05.2007; to provide for a seamless transfer and to provide
for fundamental terms of price, indemnities, warranties etc.
As regards the right of HTIL to direct a downstream
subsidiary as to the manner in which it should vote is
concerned, the legal position is well settled, namely, that
even though a subsidiary may normally comply with the
request of a parent company, it is not just a puppet of the
parent company. The difference is between having the
power and having a persuasive position. A great deal
depends on the facts of each case. Further, as stated above,
a company is a separate legal persona, and the fact that all
the shares are owned by one person or a company has
nothing to do with the existence of a separate company.
Therefore, though it may be advantageous for a parent and
subsidiary companies to work as a group, each subsidiary
has to protect its own separate commercial interests. In our
view, on the facts and circumstances of this case, the right
of HTIL, if at all it is a right, to direct a downstream
subsidiary as to the manner in which it should vote would
fall in the category of a persuasive position/influence rather

than having a power over the subsidiary. In this connection
the following facts are relevant.
76. Under the Hutchison structure, the business was
carried on by the Indian companies under the control of
their Board of Directors, though HTIL, as the Group holding
company of a set of companies, which controlled 42% plus
10% (pro rata) shares, did influence or was in a position to
persuade the working of such Board of Directors of the
Indian companies. In this connection, we need to have a
relook at the ownership structure. It is not in dispute that
15% out of 67% stakes in HEL was held by AS, AG and
IDFC companies. That was one of the main reasons for
entering into separate Shareholders and Framework
Agreements in 2006, when Hutchison structure existed,
with AS, AG and IDFC. HTIL was not a party to the
agreements with AS and AG, though it was a party to the
agreement with IDFC. That, the ownership structure of
Hutchison clearly shows that AS, AG and SMMS (IDFC)
group of companies, being Indian companies, possessed
15% control in HEL. Similarly, the term sheet with Essar
dated 5.07.2003 gave Essar the RoFR and Right to Tag

Along with HTIL and exit from HEL. Thus, if one keeps in
mind the Hutchison structure in its entirety, HTIL as a
Group holding company could have only persuaded its
downstream companies to vote in a given manner as HTIL
had no power nor authority under the said structure to
direct any of its downstream companies to vote in a manner
as directed by it (HTIL). Facts of this case show that both
the parent and the subsidiary companies worked as a group
since 1994. That, as a practice, the subsidiaries did comply
with the arrangement suggested by the Group holding
company in the matter of voting, failing which the smooth
working of HEL generating huge revenues was not possible.
In this case, we are concerned with the expression “capital
asset” in the income tax law. Applying the test of
enforceability, influence/ persuasion cannot be construed
as a right in the legal sense. One more aspect needs to be
highlighted. The concept of “de facto” control, which existed
in the Hutchison structure, conveys a state of being in
control without any legal right to such state. This aspect is
important while construing the words “capital asset” under
the income tax law. As stated earlier, enforceability is an

important aspect of a legal right. Applying these tests, on
the facts of this case and that too in the light of the
ownership structure of Hutchison, we hold that HTIL, as a
Group holding company, had no legal right to direct its
downstream companies in the matter of voting, nomination
of directors and management rights. As regards
continuance of the 2006 Shareholders/Framework
Agreements by SPA is concerned, one needs to keep in mind
two relevant concepts, viz., participative and protective
rights. As stated, this is a case of HTIL exercising its exit
right under the holding structure and continuance of the
telecom business operations in India by VIH by acquisition
of shares. In the Hutchison structure, exit was also
provided for Essar, Centrino, NDC and SMMS through
exercise of Put Option/TARs, subject to sectoral cap being
relaxed in future. These exit rights in Essar, Centrino, NDC
and SMMS (IDFC) indicate that these companies were
independent companies. Essar was a partner in HEL
whereas Centrino, NDC and SMMS controlled 15% of shares
of HEL (minority). A minority investor has what is called
as a “participative” right, which is a subset of

“protective rights”. These participative rights, given to a
minority shareholder, enable the minority to overcome the
presumption of consolidation of operations or assets by the
controlling shareholder. These participative rights in
certain instances restrict the powers of the shareholder with
majority voting interest to control the operations or assets of
the investee. At the same time, even the minority is entitled
to exit. This “exit right” comes under “protective rights”.
On examination of the Hutchison structure in its entirety,
we find that both, participative and protective rights, were
provided for in the Shareholders/ Framework Agreements of
2006 in favour of Centrino, NDC and SMMS which enabled
them to participate, directly or indirectly, in the operations
of HEL. Even without the execution of SPA, such rights
existed in the above agreements. Therefore, it would not be
correct to say that such rights flowed from the SPA. One
more aspect needs to be mentioned. The Framework
Agreements define “change of control with respect to a
shareholder” inter alia as substitution of limited or
unlimited liability company, whether directly or indirectly,
to direct the policies/ management of the respective

shareholders, viz., Centrino, NDC, Omega. Thus, even
without the SPA, upon substitution of VIH in place of HTIL,
on acquisition of CGP share, transition could have taken
place. It is important to note that “transition” is a wide
concept. It is impossible for the acquirer to visualize all
events that may take place between the date of execution of
the SPA and completion of acquisition. Therefore, we have a
provision for standstill in the SPA and so also the provision
for transition. But, from that, it does not follow that
without SPA, transition could not ensue. Therefore, in the
SPA, we find provisions concerning Vendor’s Obligations in
relation to the conduct of business of HEL between the date
of execution of SPA and the closing date, protection of
investment during the said period, agreement not to amend,
terminate, vary or waive any rights under the Framework/
Shareholders Agreements during the said period, provisions
regarding running of business during the said period,
assignment of loans, consequence of imposition of
prohibition by way of injunction from any court, payment to
be made by VIH to HTIL, giving of warranties by the Vendor,
use of Hutch Brand, etc. The next point raised by the

Revenue concerns termination of IDFC Framework
Agreement of 2006 and its substitution by a fresh
Framework Agreement dated 5.06.2007 in terms of the SPA.
The submission of the Revenue before us was that the said
Agreement dated 5.06.2007 (which is executed after the
completion of acquisition by VIH on 8.05.2007) was
necessary to assign the benefits of the earlier agreements of
2006 to VIH. This is not correct. The shareholders of ITNL
(renamed as Omega) were Array through HTIL Mauritius
and SMMS (an Indian company). The original investors
through SMMS (IDFC), an infrastructure holding company,
held 54.21% of the share capital of Omega; that, under the
2006 Framework Agreement, the original investors were
given Put Option by GSPL [an Indian company under
Hutchison Teleservices (India) Holdings Limited (Ms)]
requiring GSPL to buy the equity share capital of SMMS;
that on completion of acquisition on 8.05.2007 there was a
change in control of HTIL Mauritius which held 45.79% in
Omega and that changes also took place on 5.06.2007
within the group of original investors with the exit of IDFC
and SSKI. In view of the said changes in the parties, a

revised Framework Agreement was executed on 6.06.2007,
which again had call and put option. Under the said
Agreement dated 6.06.2007, the Investors once again agreed
to grant call option to GSPL to buy the shares of SMMS and
to enter into a Shareholders Agreement to regulate the
affairs of Omega. It is important to note that even in the
fresh agreement the call option remained with GSPL and
that the said Agreement did not confer any rights on VIH.
One more aspect needs to be mentioned. The conferment of
call options on GSPL under the Framework Agreements of
2006 also had a linkage with intra-group loans. CGP was an
Investment vehicle. It is through the acquisition of CGP that
VIH had indirectly acquired the rights and obligations of
GSPL in the Centrino and NDC Framework Agreements of
2006 [see the report of KPMG dated 18.10.2010] and not
through execution of the SPA. Lastly, as stated above, apart
from providing for “standstill”, an SPA has to provide for
transition and all possible future eventualities. In the
present case, the change in the investors, after completion
of acquisition on 8.05.2007, under which SSKI and IDFC
exited leaving behind IDF alone was a situation which was

required to be addressed by execution of a fresh Framework
Agreement under which the call option remained with GSPL.
Therefore, the June, 2007 Agreements relied upon by the
Revenue merely reiterated the rights of GSPL which rights
existed even in the Hutchison structure as it stood in 2006.
It was next contended that the 2003 Term Sheet with Essar
was given effect to by clause 5.2 of the SPA which gave
Essar the Right to Tag Along with HTIL and exit from HEL.
That, the Term Sheet of 5.07.2003 had legal effect because
by a specific settlement dated 15.03.2007 between HTIL and
Essar, the said Term Sheet stood terminated which was
necessary because the Term Sheet bound the parties in the
first place. We find no merit in the above arguments of the
Revenue. The 2003 Term Sheet was between HTIL, Essar
and UMTL. Disputes arose between Essar and HTIL. Essar
asserted RoFR rights when bids were received by HTIL,
which dispute ultimately came to be settled on 15.03.2007,
that is after the SPA dated 11.02.2007. The SPA did not
create any rights. The RoFR/TARs existed in the Hutchison
structure. Thus, even without SPA, within the Hutchison
structure these rights existed. Moreover, the very object of

the SPA is to cover the situations which may arise during
the transition and those which are capable of being
anticipated and dealt with. Essar had 33% stakes in HEL.
As stated, the Hutchison structure required the parent and
the subsidiary to work together as a group. The said
structure required the Indian partners to be kept in the
loop. Disputes on existence of RoFR/ TARs had to be
settled. They were settled on 15.03.2007. The rights and
obligations created under the SPA had to be preserved. In
any event, preservation of such rights with a view to
continue business in India is not extinguishment.
77. For the above reasons, we hold that under the HTIL
structure, as it existed in 1994, HTIL occupied only a
persuasive position/influence over the downstream
companies qua manner of voting, nomination of directors
and management rights. That, the minority
shareholders/investors had participative and protective
rights (including RoFR/TARs, call and put options which
provided for exit) which flowed from the CGP share. That,
the entire investment was sold to the VIH through the

investment vehicle (CGP). Consequently, there was no
extinguishment of rights as alleged by the Revenue.
Role of CGP in the transaction
78. The main contention of the Revenue was that CGP
stood inserted at a late stage in the transaction in order to
bring in a tax-free entity (or to create a transaction to avoid
tax) and thereby avoid capital gains. That, in December,
2006, HTIL explored the possibility of the sale of shares of
the Mauritius entities and found that such transaction
would be taxable as HTIL under that proposal had to be the
prime mover behind any agreement with VIH – prime mover
in the sense of being both a seller of shares and the
recipient of the sale proceeds therefrom. Consequently,
HTIL moved upwards in the Hutchison structure and
devised an artificial tax avoidance scheme of selling the CGP
share when in fact what HTIL wanted was to sell its
property rights in HEL. This, according to the Revenue, was
the reason for the CGP share being interposed in the
transaction. We find no merit in these arguments.
79. When a business gets big enough, it does two things.
First, it reconfigures itself into a corporate group by dividing

itself into a multitude of commonly owned subsidiaries.
Second, it causes various entities in the said group to
guarantee each other’s debts. A typical large business
corporation consists of sub-incorporates. Such division is
legal. It is recognized by company law, laws of taxation,
takeover codes etc. On top is a parent or a holding
company. The parent is the public face of the business.
The parent is the only group member that normally
discloses financial results. Below the parent company are
the subsidiaries which hold operational assets of the
business and which often have their own subordinate
entities that can extend layers. If large firms are not divided
into subsidiaries, creditors would have to monitor the
enterprise in its entirety. Subsidiaries reduce the amount of
information that creditors need to gather. Subsidiaries also
promote the benefits of specialization. Subsidiaries permit
creditors to lend against only specified divisions of the firm.
These are the efficiencies inbuilt in a holding structure.
Subsidiaries are often created for tax or regulatory reasons.
They at times come into existence from mergers and
acquisitions. As group members, subsidiaries work together

to make the same or complementary goods and services and
hence they are subject to the same market supply and
demand conditions. They are financially inter-linked. One
such linkage is the intra-group loans and guarantees.
Parent entities own equity stakes in their subsidiaries.
Consequently, on many occasions, the parent suffers a loss
whenever the rest of the group experiences a downturn.
Such grouping is based on the principle of internal
correlation. Courts have evolved doctrines like piercing the
corporate veil, substance over form etc. enabling taxation of
underlying assets in cases of fraud, sham, tax avoidant, etc.
However, genuine strategic tax planning is not ruled out.
80. CGP was incorporated in 1998 in Cayman Islands. It
was in the Hutchison structure from 1998. The transaction
in the present case was of divestment and, therefore, the
transaction of sale was structured at an appropriate tier, so
that the buyer really acquired the same degree of control as
was hitherto exercised by HTIL. VIH agreed to acquire
companies and the companies it acquired controlled 67%
interest in HEL. CGP was an investment vehicle. As stated
above, it is through the acquisition of CGP that VIH

proposed to indirectly acquire the rights and obligations of
GSPL in the Centrino and NDC Framework Agreements.
The report of Ernst & Young dated 11.02.2007 inter alia
states that when they were asked to conduct due diligence
by VIH, it was in relation to Array and its subsidiaries. The
said report evidences that at the negotiation stage, parties
had in mind the transfer of an upstream company rather
than the transfer of HEL directly. The transfer of Array had
the advantage of transferring control over the entire
shareholding held by downstream Mauritius companies (tier
I companies), other than GSPL. On the other hand, the
advantage of transferring the CGP share enabled VIH to
indirectly acquire the rights and obligations of GSPL (Indian
company) in the Centrino and NDC Framework agreements.
This was the reason for VIH to go by the CGP route. One of
the arguments of the Revenue before us was that the
Mauritius route was not available to HTIL for the reason
indicated above. In this connection, it was urged that the
legal owner of HEL (Indian company) was not HTIL. Under
the transaction, HTIL alone was the seller of the shares.
VIH wanted to enter into an agreement only with HTIL so

that if something goes wrong, VIH could look solely to HTIL
being the group holding company (parent company).
Further, funds were pumped into HEL by HTIL. These
funds were to be received back in the shape of a capital gain
which could then be used to declare a special dividend to
the shareholders of HTIL. We find no merit in this
argument. Firstly, the tier I (Mauritius companies) were the
indirect subsidiaries of HTIL who could have influenced the
former to sell the shares of Indian companies in which event
the gains would have arisen to the Mauritius companies,
who are not liable to pay capital gains tax under the Indo-
Mauritius DTAA. That, nothing prevented the Mauritius
companies from declaring dividend on gains made on the
sale of shares. There is no tax on dividends in Mauritius.
Thus, the Mauritius route was available but it was not
opted for because that route would not have brought in the
control over GSPL. Secondly, if the Mauritius companies
had sold the shares of HEL, then the Mauritius companies
would have continued to be the subsidiaries of HTIL, their
accounts would have been consolidated in the hands of
HTIL and HTIL would have accounted for the gains in

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

81. On the role of CGP in the transaction, two documents
are required to be referred to. One is the Report of the
KPMG dated 18.10.2010 in which it is stated that through
the acquisition of CGP, VIH had indirectly acquired the
rights and obligations of GSPL in the Centrino and NDC
Framework Agreements. That, the said two agreements
were put in place with a view to provide AG and AS with
downside protection while preserving upside value in the
growth of HEL. The second document is the Annual Report
2007 of HTIL. Under the caption “Overview”, the Report
observes that on 11.02.2007, HTIL entered into an
agreement to sell its entire interests in CGP, a company
which held through various subsidiaries, the direct and
indirect equity and loan interests in HEL (renamed VEL)
and its subsidiaries to VIH for a cash consideration of HK
$86.6 bn. As a result of the said Transaction, the net debt
of the Group which stood at HK $37,369 mn as on
31.12.2006 became a net cash balance of HK $25,591 mn
as on 31.12.2007. This supports the fact that the sole
purpose of CGP was not only to hold shares in subsidiary
companies but also to enable a smooth transition of

business, which is the basis of the SPA. Therefore, it
cannot be said that the intervened entity (CGP) had no
business or commercial purpose.
82. Before concluding, one more aspect needs to be
addressed. It concerns situs of the CGP share. According
to the Revenue, under the Companies Law of Cayman
Islands, an exempted company was not entitled to conduct
business in the Cayman Islands. CGP was an “exempted
company”. According to the Revenue, since CGP was a
mere holding company and since it could not conduct
business in Cayman Islands, the situs of the CGP share
existed where the “underlying assets are situated”, that is to
say, India. That, since CGP as an exempted company
conducts no business either in the Cayman Islands or
elsewhere and since its sole purpose is to hold shares in a
subsidiary company situated outside the Cayman Islands,
the situs of the CGP share, in the present case, existed
“where the underlying assets stood situated” (India). We
find no merit in these arguments. At the outset, we do not
wish to pronounce authoritatively on the Companies Law of
Cayman Islands. Be that as it may, under the Indian

Companies Act, 1956, the situs of the shares would be
where the company is incorporated and where its shares
can be transferred. In the present case, it has been
asserted by VIH that the transfer of the CGP share was
recorded in the Cayman Islands, where the register of
members of the CGP is maintained. This assertion has
neither been rebutted in the impugned order of the
Department dated 31.05.2010 nor traversed in the
pleadings filed by the Revenue nor controverted before us.
In the circumstances, we are not inclined to accept the
arguments of the Revenue that the situs of the CGP share
was situated in the place (India) where the underlying
assets stood situated.
Did VIH acquire 67% controlling interest in HEL (and
not 42%/ 52% as sought to be propounded)?

83. According to the Revenue, the entire case of VIH was
that it had acquired only 42% (or, accounting for FIPB
regulations, 52%) is belied by clause 5.2 of the Shareholders
Agreement. In this connection, it was urged that 15% in
HEL was held by AS/ AG/ IDFC because of the FDI cap of
74% and, consequently, vide clause 5.2 of the Shareholders
Agreement between these entities and HTIL downstream

subsidiaries, AS/AG/IDFC were all reigned in by having to
vote only in accordance with HTIL’s dictates as HTIL had
funded the purchase by these gentlemen of the HEL shares
through financing of loans. Further, in the Term Sheet
dated 15.03.2007, that is, between VIH and Essar, VIH had
a right to nominate 8 directors (i.e. 67% of 12) and Essar
had a right to nominate 4 directors which, according to the
Revenue, evidences that VIH had acquired 67% interest in
HEL and not 42%/52%, as sought to be propounded by it.
According to the Revenue, right from 22.12.2006 onwards
when HTIL made its first public announcement, HTIL on
innumerable occasions represented its direct and indirect
“equity interest” in HEL to be 67% - the direct interest being
42.34% and indirect interest in the sense of shareholding
belonging to Indian partners under its control, as 25%.
Further, according to the Revenue, the purchase price paid
by VIH was based on an enterprise value of 67% of the
share capital of HEL; this would never have been so if VIH
was to buy only 42.34% of the share capital of HEL and that
nobody would pay US $2.5 bn extra without control over
25% in HEL. We find no merit in the above submissions.

At the outset, it may be stated that the expression
“control” is a mixed question of law and fact. The basic
argument of the Revenue is based on the equation of “equity
interest” with the word “control”. On perusal of Hutchison
structure, we find that HTIL had, through its 100% wholly
owned subsidiaries, invested in 42.34% of HEL (i.e. direct
interest). Similarly, HTIL had invested through its non-
100% wholly owned subsidiaries in 9.62% of HEL (through
the pro rata route). Thus, in the sense of shareholding, one
can say that HTIL had an effective shareholding (direct
and indirect interest) of 51.96% (approx. 52%) in HEL. On
the basis of the shareholding test, HTIL could be said to
have a 52% control over HEL. By the same test, it could be
equally said that the balance 15% stakes in HEL remained
with AS, AG and IDFC (Indian partners) who had through
their respective group companies invested 15% in HEL
through TII and Omega and, consequently, HTIL had no
control over 15% stakes in HEL. At this stage, we may state
that under the Hutchison structure shares of Plustech in
the AG Group, shares of Scorpios in the AS Group and
shares of SMMS came under the options held by GSPL.

Pending exercise, options are not management rights. At
the highest, options could be treated as potential shares
and till exercised they cannot provide right to vote or
management or control. In the present case, till date GSPL
has not exercised its rights under the Framework
Agreement 2006 because of the sectoral cap of 74% which
in turn restricts the right to vote. Therefore, the transaction
in the present case provides for a triggering event, viz.
relaxation of the sectoral cap. Till such date, HTIL/VIH
cannot be said to have a control over 15% stakes in HEL. It
is for this reason that even FIPB gave its approval to the
transaction by saying that VIH was acquiring or has
acquired effective shareholding of 51.96% in HEL.
84. As regards the Term Sheet dated 15.03.2007, it may be
stated that the said Term Sheet was entered into between
VIH and Essar. It was executed after 11.02.2007 when SPA
was executed. In the Term Sheet, it has been recited that
the parties have agreed to enter into the Term Sheet in order
to regulate the affairs of HEL and in order to regulate the
relationship of shareholders of HEL. It is also stated in the
Term Sheet that VIH and Essar shall have to nominate

directors on the Board of Directors of HEL in proportion to
the aggregate beneficial shareholding held by members of
the respective groups. That, initially VIH shall be entitled to
nominate 8 directors and Essar shall be entitled to
nominate 4 directors out of a total Board of Directors of HEL
(numbering 12). We must understand the background of
this Term Sheet. Firstly, as stated the Term Sheet was
entered into in order to regulate the affairs of HEL and to
regulate the relationship of the shareholders of HEL. It was
necessary to enter into such an agreement for smooth
running of the business post acquisition. Secondly, we find
from the letter addressed by HEL to FIPB dated 14.03.2007
that Articles of Association of HEL did not grant any specific
person or entity a right to appoint directors. The said
directors were appointed by the shareholders of HEL in
accordance with the provisions of the Indian Company Law.
The letter further states that in practice the directors were
appointed pro rata to their respective shareholdings which
resulted in 4 directors being appointed from Essar group, 6
directors being appointed by HTIL and 2 directors were
appointed by TII. One such director was AS, the other

director was AG. This was the practice even before the
Term Sheet. The Term Sheet continues this practice by
guaranteeing or assuring Essar that 4 directors would be
appointed from its Group. The above facts indicate that the
object of the SPA was to continue the “practice” concerning
nomination of directors on the Board of Directors of HEL
which in law is different from a right or power to control and
manage and which practice was given to keep the business
going, post acquisition. Under the Company Law, the
management control vests in the Board of Directors and not
with the shareholders of the company. Therefore, neither
from Clause 5.2 of the Shareholders Agreement nor from the
Term Sheet dated 15.03.2007, one could say that VIH had
acquired 67% controlling interest in HEL.
85. As regards the question as to why VIH should pay
consideration to HTIL based on an enterprise value of 67%
of the share capital of HEL is concerned, it is important to
note that valuation cannot be the basis of taxation. The
basis of taxation is profits or income or receipt. In this case,
we are not concerned with tax on income/ profit arising
from business operations but with tax on transfer of rights

(capital asset) and gains arising therefrom. In the latter
case, we have to see the conditions on which the tax
becomes payable under the Income Tax Act. Valuation may
be a science, not law. In valuation, to arrive at the value
one has to take into consideration the business realities,
like the business model, the duration of its operations,
concepts such as cash flow, the discounting factors, assets
and liabilities, intangibles, etc. In the present case, VIH
paid US $11.08 bn for 67% of the enterprise value of HEL
plus its downstream companies having operational licences.
It bought an upstream company with the intention that
rights flowing from the CGP share would enable it to gain
control over the cluster of Indian operations or operating
companies which owned telecom licences, business assets,
etc. VIH agreed to acquire companies which in turn
controlled a 67% interest in HEL and its subsidiaries.
Valuation is a matter of opinion. When the entire business
or investment is sold, for valuation purposes, one may take
into account the economic interest or realities. Risks as a
discounting factor are also to be taken into consideration
apart from loans, receivables, options, RoFR/ TAR, etc. In

this case, Enterprise Value is made up of two parts, namely,
the value of HEL, the value of CGP and the companies
between CGP and HEL. In the present case, the Revenue
cannot invoke Section 9 of the Income Tax Act on the value
of the underlying asset or consequence of acquiring a share
of CGP. In the present case, the Valuation done was on the
basis of enterprise value. The price paid as a percentage of
the enterprise value had to be 67% not because the figure of
67% was available in praesenti to VIH, but on account of the
fact that the competing Indian bidders would have had de
facto access to the entire 67%, as they were not subject to
the limitation of sectoral cap, and, therefore, would have
immediately encashed the call options. The question still
remains as to from where did this figure/ expression of 67%
of equity interest come? The expression “equity interest”
came from US GAAP. In this connection, we have examined
the Notes to the Accounts annexed to the Annual Report
2006 of HTIL. According to Note 1, the ordinary shares of
HTIL stood listed on the Hong Kong Stock Exchange as well
as on the New York Stock Exchange. In Note No. 36, a list
of principal subsidiaries of HTIL as on 31.12.2006 has been

attached. This list shows the names of HEL (India) and
some of its subsidiaries. In the said Annual Report, there is
an annexure to the said Notes to the Accounts under the
caption “Information for US Investors”. It refers to Variable
Interest Entities (VIEs). According to the Annual Report, the
Vodafone Group consisting of HTIL and its subsidiaries
conducted its operations inter alia in India through entities
in which HTIL did not have the voting control. Since HTIL
was listed on New York Stock Exchange, it had to follow for
accounting and disclosure the rules prescribed by US GAAP.
Now, in the present case, HTIL as a listed company was
required to make disclosures of potential risk involved in
the investment under the Hutchison structure. HTIL had
furnished Letters of Credit to Rabo Bank which in turn had
funded AS and AG, who in turn had agreed to place the
shares of Plustech and Scorpios under Options held by
GSPL. Thus, giving of the Letters of Credit and placing the
shares of Plustech and Scorpios under Options were
required to be disclosed to the US investors under the US
GAAP, unlike Indian GAAP. Thus, the difference between
the 52% figure (control) and 67% (equity interest) arose on

account of the difference in computation under the Indian
and US GAAP.
Approach of the High Court (acquisition of CGP share
with “other rights and entitlements”)

86. Applying the “nature and character of the transaction”
test, the High Court came to the conclusion that the
transfer of the CGP share was not adequate in itself to
achieve the object of consummating the transaction between
HTIL and VIH. That, intrinsic to the transaction was a
transfer of other “rights and entitlements” which rights
and entitlements constituted in themselves “capital assets”
within the meaning of Section 2(14) of the Income Tax Act,
1961. According to the High Court, VIH acquired the CGP
share with other rights and entitlements whereas, according
to the appellant, whatever VIH obtained was through the
CGP share (for short “High Court Approach”).
87. At the outset, it needs to be mentioned that the
Revenue has adopted the abovementioned High Court
Approach as an alternative contention.

88. We have to view the subject matter of the transaction,
in this case, from a commercial and realistic perspective.
The present case concerns an offshore transaction involving
a structured investment. This case concerns “a share sale”
and not an asset sale. It concerns sale of an entire
investment. A “sale” may take various forms. Accordingly,
tax consequences will vary. The tax consequences of a
share sale would be different from the tax consequences of
an asset sale. A slump sale would involve tax
consequences which could be different from the tax
consequences of sale of assets on itemized basis. “Control”
is a mixed question of law and fact. Ownership of shares
may, in certain situations, result in the assumption of an
interest which has the character of a controlling interest
in the management of the company. A controlling interest is
an incident of ownership of shares in a company, something
which flows out of the holding of shares. A controlling
interest is, therefore, not an identifiable or distinct capital
asset independent of the holding of shares. The control of a
company resides in the voting power of its shareholders and
shares represent an interest of a shareholder which is made

up of various rights contained in the contract embedded in
the Articles of Association. The right of a shareholder may
assume the character of a controlling interest where the
extent of the shareholding enables the shareholder to
control the management. Shares, and the rights which
emanate from them, flow together and cannot be dissected.
In the felicitous phrase of Lord MacMillan in IRC v.
Crossman [1936] 1 All ER 762, shares in a company consist
of a “congeries of rights and liabilities” which are a creature
of the Companies Acts and the Memorandum and Articles of
Association of the company. Thus, control and
management is a facet of the holding of shares. Applying
the above principles governing shares and the rights of the
shareholders to the facts of this case, we find that this case
concerns a straightforward share sale. VIH acquired
Upstream shares with the intention that the congeries of
rights, flowing from the CGP share, would give VIH an
indirect control over the three genres of companies. If one
looks at the chart indicating the Ownership Structure, one
finds that the acquisition of the CGP share gave VIH an
indirect control over the tier I Mauritius companies which

owned shares in HEL totalling to 42.34%; CGP India (Ms),
which in turn held shares in TII and Omega and which on a
pro rata basis (the FDI principle), totalled up to 9.62% in
HEL and an indirect control over Hutchison Tele-Services
(India) Holdings Ltd. (Ms), which in turn owned shares in
GSPL, which held call and put options. Although the High
Court has analysed the transactional documents in detail, it
has missed out this aspect of the case. It has failed to
notice that till date options have remained un-encashed
with GSPL. Therefore, even if it be assumed that the
options under the Framework Agreements 2006 could be
considered to be property rights, there has been no transfer
or assignment of options by GSPL till today. Even if it be
assumed that the High Court was right in holding that the
options constituted capital assets even then Section 9(1)(i)
was not applicable as these options have not been
transferred till date. Call and put options were not
transferred vide SPA dated 11.02.2007 or under any other
document whatsoever. Moreover, if, on principle, the High
Court accepts that the transfer of the CGP share did not
lead to the transfer of a capital asset in India, even if it

resulted in a transfer of indirect control over 42.34% (52%)
of shares in HEL, then surely the transfer of indirect control
over GSPL which held options (contractual rights), would
not make the transfer of the CGP share taxable in India.
Acquisition of the CGP share which gave VIH an indirect
control over three genres of companies evidences a
straightforward share sale and not an asset sale. There is
another fallacy in the impugned judgment. On examination
of the impugned judgment, we find a serious error
committed by the High Court in appreciating the case of VIH
before FIPB. On 19.03.2007, FIPB sought a clarification
from VIH of the circumstances in which VIH agreed to pay
US$ 11.08 bn for acquiring 67% of HEL when actual
acquisition was of 51.96%. In its response dated
19.03.2007, VIH stated that it had agreed to acquire from
HTIL for US$ 11.08 bn, interest in HEL which included a
52% equity shareholding. According to VIH, the price also
included a control premium, use of Hutch brand in India, a
non-compete agreement, loan obligations and an
entitlement to acquire, subject to the Indian FDI rules, a
further 15% indirect interest in HEL. According to the said

letter, the above elements together equated to 67% of the
economic value of HEL. This sentence has been
misconstrued by the High Court to say that the above
elements equated to 67% of the equity capital (See para
124). 67% of the economic value of HEL is not 67% of the
equity capital. If VIH would have acquired 67% of the
equity capital, as held by the High Court, the entire
investment would have had breached the FDI norms which
had imposed a sectoral cap of 74%. In this connection, it
may further be stated that Essar had 33% stakes in HEL
out of which 22% was held by Essar Mauritius. Thus, VIH
did not acquire 67% of the equity capital of HEL, as held by
the High Court. This problem has arisen also because of
the reason that this case deals with share sale and not
asset sale. This case does not involve sale of assets on
itemized basis. The High Court ought to have applied the
look at test in which the entire Hutchison structure, as it
existed, ought to have been looked at holistically. This case
concerns investment into India by a holding company
(parent company), HTIL through a maze of subsidiaries.
When one applies the “nature and character of the

transaction test”, confusion arises if a dissecting approach
of examining each individual asset is adopted. As stated,
CGP was treated in the Hutchison structure as an
investment vehicle. As a general rule, in a case where a
transaction involves transfer of shares lock, stock and
barrel, such a transaction cannot be broken up into
separate individual components, assets or rights such as
right to vote, right to participate in company meetings,
management rights, controlling rights, control premium,
brand licences and so on as shares constitute a bundle of
rights. [See Charanjit Lal v. Union of India AIR 1951 SC
41, Venkatesh (minor) v. CIT 243 ITR 367 (Mad) and Smt.
Maharani Ushadevi v. CIT 131 ITR 445 (MP)] Further, the
High Court has failed to examine the nature of the following
items, namely, non-compete agreement, control premium,
call and put options, consultancy support, customer base,
brand licences etc. On facts, we are of the view that the
High Court, in the present case, ought to have examined the
entire transaction holistically. VIH has rightly contended
that the transaction in question should be looked at as an
entire package. The items mentioned hereinabove, like,

control premium, non-compete agreement, consultancy
support, customer base, brand licences, operating licences
etc. were all an integral part of the Holding Subsidiary
Structure which existed for almost 13 years, generating
huge revenues, as indicated above. Merely because at the
time of exit capital gains tax becomes not payable or exigible
to tax would not make the entire “share sale” (investment)
a sham or a tax avoidant. The High Court has failed to
appreciate that the payment of US$ 11.08 bn was for
purchase of the entire investment made by HTIL in India.
The payment was for the entire package. The parties to the
transaction have not agreed upon a separate price for the
CGP share and for what the High Court calls as “other
rights and entitlements” (including options, right to non-
compete, control premium, customer base etc.). Thus, it was
not open to the Revenue to split the payment and consider a
part of such payments for each of the above items. The
essential character of the transaction as an alienation
cannot be altered by the form of the consideration, the
payment of the consideration in instalments or on the basis
that the payment is related to a contingency (‘options’, in

this case), particularly when the transaction does not
contemplate such a split up. Where the parties have agreed
for a lump sum consideration without placing separate
values for each of the above items which go to make up the
entire investment in participation, merely because certain
values are indicated in the correspondence with FIPB which
had raised the query, would not mean that the parties had
agreed for the price payable for each of the above items. The
transaction remained a contract of outright sale of the entire
investment for a lump sum consideration [see: Commentary
on Model Tax Convention on Income and Capital dated
28.01.2003 as also the judgment of this Court in the case of
CIT (Central), Calcutta v. Mugneeram Bangur and
Company (Land Deptt.), (1965) 57 ITR 299 (SC)]. Thus, we
need to “look at” the entire Ownership Structure set up by
Hutchison as a single consolidated bargain and interpret
the transactional documents, while examining the Offshore
Transaction of the nature involved in this case, in that light.

Scope and applicability of Sections 195 and 163 of IT
Act
89. Section 195 casts an obligation on the payer to deduct
tax at source (“TAS” for short) from payments made to non-
residents which payments are chargeable to tax. Such
payment(s) must have an element of income embedded in it
which is chargeable to tax in India. If the sum paid or
credited by the payer is not chargeable to tax then no
obligation to deduct the tax would arise. Shareholding in
companies incorporated outside India (CGP) is property
located outside India. Where such shares become subject
matter of offshore transfer between two non-residents, there
is no liability for capital gains tax. In such a case, question
of deduction of TAS would not arise. If in law the
responsibility for payment is on a non-resident, the fact that
the payment was made, under the instructions of the non-
resident, to its Agent/Nominee in India or its PE/Branch
Office will not absolve the payer of his liability under Section
195 to deduct TAS. Section 195(1) casts a duty upon the
payer of any income specified therein to a non-resident to
deduct therefrom the TAS unless such payer is himself
liable to pay income-tax thereon as an Agent of the payee.

Section 201 says that if such person fails to so deduct TAS
he shall be deemed to be an assessee-in-default in respect
of the deductible amount of tax (Section 201). Liability to
deduct tax is different from “assessment” under the Act.
Thus, the person on whom the obligation to deduct TAS is
cast is not the person who has earned the income.
Assessment has to be done after liability to deduct TAS has
arisen. The object of Section 195 is to ensure that tax due
from non-resident persons is secured at the earliest point of
time so that there is no difficulty in collection of tax
subsequently at the time of regular assessment. The
present case concerns the transaction of “outright sale”
between two non-residents of a capital asset (share) outside
India. Further, the said transaction was entered into on
principal to principal basis. Therefore, no liability to deduct
TAS arose. Further, in the case of transfer of the Structure
in its entirety, one has to look at it holistically as one Single
Consolidated Bargain which took place between two foreign
companies outside India for which a lump sum price was
paid of US$ 11.08 bn. Under the transaction, there was no
split up of payment of US$ 11.08 bn. It is the Revenue

which has split the consolidated payment and it is the
Revenue which wants to assign a value to the rights to
control premium, right to non-compete, right to consultancy
support etc. For FDI purposes, the FIPB had asked VIH for
the basis of fixing the price of US$ 11.08 bn. But here also,
there was no split up of lump sum payment, asset-wise as
claimed by the Revenue. There was no assignment of price
for each right, considered by the Revenue to be a “capital
asset” in the transaction. In the absence of PE, profits were
not attributable to Indian operations. Moreover, tax
presence has to be viewed in the context of the transaction
that is subjected to tax and not with reference to an entirely
unrelated matter. The investment made by Vodafone Group
companies in Bharti did not make all entities of that Group
subject to the Indian Income Tax Act, 1961 and the
jurisdiction of the tax authorities. Tax presence must be
construed in the context, and in a manner that brings the
non-resident assessee under the jurisdiction of the Indian
tax authorities. Lastly, in the present case, the Revenue
has failed to establish any connection with Section 9(1)(i).
Under the circumstances, Section 195 is not applicable.

Alternatively, the Revenue contended before us that VIH can
be proceeded against as “representative assessee” under
Section 163 of the Act. Section 163 does not relate to
deduction of tax. It relates to treatment of a purchaser of
an asset as a representative assessee. A conjoint reading
of Section 160(1)(i), Section 161(1) and Section 163 of the
Act shows that, under given circumstances, certain persons
can be treated as “representative assessee” on behalf of
non-resident specified in Section 9(1). This would include
an agent of non-resident and also who is treated as an
agent under Section 163 of the Act which in turn deals with
special cases where a person can be regarded as an agent.
Once a person comes within any of the clauses of Section
163(1), such a person would be the “Agent” of the non-
resident for the purposes of the Act. However, merely
because a person is an agent or is to be treated as an agent,
would not lead to an automatic conclusion that he becomes
liable to pay taxes on behalf of the non-resident. It would
only mean that he is to be treated as a “representative
assessee”. Section 161 of the Act makes a “representative
assessee” liable only “as regards the income in respect of

which he is a representative assessee” (See: Section 161).
Section 161 of the Act makes a representative assessee
liable only if the eventualities stipulated in Section 161 are
satisfied. This is the scope of Sections 9(1)(i), 160(1), 161(1)
read with Sections 163(1) (a) to (d). In the present case, the
Department has invoked Section 163(1)(c). Both Sections
163(1)(c) and Section 9(1)(i) state that income should be
deemed to accrue or arise in India. Both these Sections
have to be read together. On facts of this case, we hold that
Section 163(1)(c) is not attracted as there is no transfer of a
capital asset situated in India. Thus, Section 163(1)(c) is
not attracted. Consequently, VIH cannot be proceeded
against even under Section 163 of the Act as a
representative assessee. For the reasons given above, there
is no necessity of examining the written submissions
advanced on behalf of VIH by Dr. Abhishek Manu Singhvi
on Sections 191 and 201.
Summary of Findings
90. Applying the look at test in order to ascertain the true
nature and character of the transaction, we hold, that the
Offshore Transaction herein is a bonafide structured FDI

investment into India which fell outside India’s territorial
tax jurisdiction, hence not taxable. The said Offshore
Transaction evidences participative investment and not a
sham or tax avoidant preordained transaction. The said
Offshore Transaction was between HTIL (a Cayman Islands
company) and VIH (a company incorporated in
Netherlands). The subject matter of the Transaction was
the transfer of the CGP (a company incorporated in Cayman
Islands). Consequently, the Indian Tax Authority had no
territorial tax jurisdiction to tax the said Offshore
Transaction.
Conclusion
91. FDI flows towards location with a strong governance
infrastructure which includes enactment of laws and how
well the legal system works. Certainty is integral to rule of
law. Certainty and stability form the basic foundation of
any fiscal system. Tax policy certainty is crucial for
taxpayers (including foreign investors) to make rational
economic choices in the most efficient manner. Legal
doctrines like “Limitation of Benefits” and “look

through” are matters of policy. It is for the Government of
the day to have them incorporated in the Treaties and in the
laws so as to avoid conflicting views. Investors should know
where they stand. It also helps the tax administration in
enforcing the provisions of the taxing laws. As stated above,
the Hutchison structure has existed since 1994. According
to the details submitted on behalf of the appellant, we find
that from 2002-03 to 2010-11 the Group has contributed
an amount of `20,242 crores towards direct and indirect
taxes on its business operations in India.
Order
92. For the above reasons, we set aside the impugned
judgment of the Bombay High Court dated 8.09.2010 in
Writ Petition No. 1325 of 2010. Accordingly, the Civil
Appeal stands allowed with no order as to costs. The
Department is hereby directed to return the sum of `2,500
crores, which came to be deposited by the appellant in
terms of our interim order, with interest at the rate of 4%
per annum within two months from today. The interest
shall be calculated from the date of withdrawal by the
Department from the Registry of the Supreme Court up to

the date of payment. The Registry is directed to return the
Bank Guarantee given by the appellant within four weeks.
…..……………………….......CJI
(S. H. Kapadia)
.........…………………………..J.
(Swatanter Kumar)
New Delhi;
January 20, 2012

REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO.733 OF 2012
(Arising out of SLP (C)) No.26529 of 2010)
Vodafone International Holdings B.V. … Appellant(s)
Vs.
Union of India and Anr. … Respondent(s)
J U D G M E N T
K.S. Radhakrishnan, J.

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

FDI, Portfolio Debt Investment and Foreign Portfolio Equity
Investment and so on. Demand for off-shore facilities has
considerably increased owing to high growth rates of cross-
border investments and a number of rich global investors
have come forward to use high technology and
communication infrastructures. Removal of barriers to
cross-border trade, the liberalisation of financial markets
and new communication technologies have had positive
effects on global economic growth and India has also been
greatly benefited.

2. Several international organisations like UN, FATF,
OECD, Council of Europe and the European Union offer
finance, one way or the other, for setting up companies all
over the world. Many countries have entered into treaties
with several offshore companies for cross-border
investments for mutual benefits. India has also entered into
treaties with several countries for bilateral trade which has
been statutorily recognised in this country. United Nations
Conference on Trade and Development (UNCTAD) Report on
World Investment prospects survey 2009-11 states that

India would continue to remain among the top five attractive
destinations for foreign investors during the next two years.
3. Merger, Amalgamation, Acquisition, Joint Venture,
Takeovers and Slump-sale of assets are few methods of
cross-border re-organisations. Under the FDI Scheme,
investment can be made by availing the benefit of treaties,
or through tax havens by non-residents in the
share/convertible debentures/preference shares of an
Indian company but the question which looms large is
whether our Company Law, Tax Laws and Regulatory Laws
have been updated so that there can be greater scrutiny of
non-resident enterprises, ranging from foreign contractors
and service providers, to finance investors. Case in hand is
an eye-opener of what we lack in our regulatory laws and
what measures we have to take to meet the various
unprecedented situations, that too without sacrificing
national interest. Certainty in law in dealing with such
cross-border investment issues is of prime importance,
which has been felt by many countries around the world
and some have taken adequate regulatory measures so that
investors can arrange their affairs fruitfully and effectively.

Steps taken by various countries to meet such situations
may also guide us, a brief reference of which is being made
in the later part of this judgment.
4. We are, in the present case, concerned with a matter
relating to cross-border investment and the legal issues
emanate from that. Facts have been elaborately dealt with
by the High Court in the impugned judgment and also in
the leading judgment of Lord Chief Justice, but reference to
few facts is necessary to address and answer the core issues
raised. On all major issues, I fully concur with the views
expressed by the Lord Chief Justice in his erudite and
scholarly judgment.
5. Part-I of this judgment deals with the facts, Part-II
deals with the general principles, Part-III deals with Indo-
Mauritian Treaty, judgments in Union of India v. Azadi
Bachao Andolan and Another (2004) 10 SCC 1 and
McDowell and Company Limited v. Commercial Tax
Officer (1985) 3 SCC 230, Part-IV deals with CGP
Interposition, situs etc, Part-V deals with controlling interest

of HTIL/Vodafone and other rights and entitlements, Part-VI
deals with the scope of Section 9, Part-VII deals with Section
195 and other allied provisions and Part-VIII is the
conclusions.
Part – I
6. Hutchison Whampoa is a multi-sectional, multi-
jurisdictional entity which consolidates on a group basis
telecom operations in various countries. Hutchison Group
of Companies (Hong Kong) had acquired interest in the
Indian telecom business in the year 1992, when the group
invested in Hutchison Max Telecom Limited (HTML) (later
known a Hutchison Essar Limited (HEL), which acquired a
cellular license in Mumbai circle in the year 1994 and
commenced its operation in the year 1995. Hutchison
Group, with the commercial purpose of consolidating its
interest in various countries, incorporated CGP Investments
Holding Limited (for short “CGP”) in Cayman Islands as a
WOS on 12.01.1998 as an Exempted Company for offshore
investments. CGP held shares in two subsidiary companies,
namely Array Holdings Limited (for short Array) and
Hutchison Teleservices (India) Holding Ltd. [for short

HTIH(M)] both incorporated in Mauritius. CGP(India)
Investment (for short CGPM) was incorporated in Mauritius
in December 1997 for the purpose of investing in Telecom
Investment (India) Pvt. Limited (for short TII), an Indian
Company. CGPM acquired interests in four Mauritian
Companies and entered into a Shareholders’ Agreement
(SHA) on 02.05.2000 with Essar Teleholdings Limited (ETH),
CGPM, Mobilvest, CCII (Mauritius) Inc. and few others, to
regulate shareholders’ right inter se. Agreement highlighted
the share holding pattern of each composition of Board of
Directors, quorum, restriction on transfer of ownership of
shares, Right of First Refusal (ROFR), Tag Along Rights
(TARs) etc.
7. HTIL, a part of Hutchison Whampoa Group,
incorporated in Cayman Islands in the year 2004 was listed
in Hong Kong (HK) and New York (NY) Stock Exchanges. In
the year 2005, as contemplated in the Term Sheet
Agreement dated 05.07.2003, HTIL consolidated its Indian
business operations through six companies in a single
holding company HMTL, later renamed as Hutchison Essar

Ltd. (HEL). On 03.11.2005, Press Note 5 of 2005 series was
issued by the Government of India enhancing the FDI
ceiling from 49% to 74% in the Telecom Sector. On
28.10.2005, Vodafone International Holding BV (VIHBV)
(Netherlands) had agreed to acquire 5.61% of shareholding
in Bharati Tele Ventures Limited (Bharati Airtel Limited)
and on the same day Vodafone Mauritius Limited
(Subsidiary of VIHBV) had agreed to acquire 4.39%
shareholding in Bharati Enterprises Pvt. Ltd. (renamed
Bharati Infotel Ltd.), which indirectly held shares in Bharati
Airtel Ltd.
8. HEL shareholding was then restructured through TII
and an SHA was executed on 01.03.2006 between Centrino
Trading Company Pvt. Ltd. (Centrino), an Asim Ghosh
(Group) [for short (AG)], ND Callus Info Services Pvt. Ltd.
(for short NDC), an Analjit Singh (Group) [for short (AS)],
Telecom Investment India Pvt.Ltd. [for short (TII)], and CGP
India (M). Further, two Framework Agreements (FWAs) were
also entered into with respect to the restructuring. Credit
facilities were given to the companies controlled by AG and

AS. FWAs called, Centrino FWA and N.D. FWA were
executed on 01.03.2006. HTIL stood as a guarantor for
Centrino, for an amount of ` 4,898 billion advanced by
Rabo Bank. HTIL had also stood as a guarantor for ND
Callus, for an award of ` 7.924 billion advanced by Rabo
Bank.
9. Following the credit support given by HTIL to AG and
AS so as to enable them to acquire shares in TII, parties
entered into separate agreements with 3 Global Services Pvt.
Ltd. (India) [for short 3GSPL], a WOS of HTIL. FWAs also
contained call option in favour of 3GSPL, a right to
purchase from Gold Spot (an AG company) and Scorpios (an
AS company) their entire shareholding in TII held through
Plustech (an AG company) and MVH (an AS company)
respectively. Subscription right was also provided allowing
3GSPL a right to subscribe 97.5% and 97% of the equity
share capital respectively at a pre-determined rate equal to
the face value of the shares of Centrino and NDC
respectively exercisable within a period of 10 years from the
date of the agreements. Agreements also restricted AG

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

referred to the presence of at least one of the directors
nominated by HTIL in the Board of Directors of Omega.
HTIL was only a confirming party to this Agreement since
it was the parent company.
11. HTIL issued a press release on 22.12.2006 in the HK
and NY Stock Exchanges announcing that it had been
approached by various potentially interested parties
regarding a possible sale of “its equity interest” in HEL in
the Telecom Sector in India. HTIL had adopted those
measures after procuring all assignments of loans,
facilitating FWAs, SHAs, transferring Hutch Branch,
transferring Oracle License etc.
12. Vodafone Group Plc. came to know of the possible exit
of Hutch from Indian telecom business and on behalf of
Vodafone Group made a non-binding offer on 22.12.06, for a
sum of US$ 11.055 million in cash for HTIL’s shareholdings
in HEL. The offer was valued at an “enterprise value” of
US$ 16.5 billion. Vodafone then appointed on 02.01.2007
Ernst and Young LLP to conduct due diligence, and a Non-

Disclosure (Confidentiality) Agreement dated 02.01.2007 was
entered into between HTIL and Vodafone. On 09.02.2007
Vodafone Group Plc. wrote a letter to HTIL making a “revised
and binding offer” on behalf of a member of Vodafone Group
(Vodafone) for HTIL’s shareholdings in HEL together with
interrelated company loans. Bharati Infotel Pvt. Limited on
09.02.2007 expressed its ‘no objection’ to the Chairman,
Vodafone Mauritius Limited regarding proposed acquisition
by Vodafone group of direct and / indirect interest in HEL
from Hutchison or Essar group. Bharati Airtel also sent a
similar letter to Vodafone.
13. Vodafone Group Plc. on 10.02.2007 made a final
binding offer of US$ 11.076 billion “in cash over HTIL’s
interest”, based on an enterprise value of US$ 18.800 billion
of HEL. Ernst and Young LLP, U.K. on 11.02.2007 issued
due diligence report in relation to operating companies in
India namely HEL and subsidiaries and also the Mauritian
and Cayman Island Companies. Report noticed that CGP(CI)
was not within the target group and was later included at the
instance of HTIL. On 11.02.2007, UBS Limited, U.K. issued

fairness opinion in relation to the transaction for acquisition
by Vodafone from HTIL of a 67% effective interest in HEL
through the acquisition of 100% interest in CGP and granting
an option by Vodafone to Indian Continent Investment Ltd.
over a 5.6% stake in Bharati Airtel Limited. Bharati Infotel
and Bharati Airtel conveyed their no-objection to the
Vodafone purchasing direct or indirect interest in HEL.
14. Vodafone and HTIL then entered into a Share and
Purchase Agreement (SPA) on 11.02.2007 whereunder HTIL
had agreed to procure the transfer of share capital of CGP
by HTIBVI, free from all encumbrances and together with all
rights attaching or accruing together with assignments of
loan interest. HTIL on 11.02.2007 issued a side letter to
Vodafone inter alia stating that, out of the purchase
consideration, up to US$80 million could be paid to some of
its Indian Partners. HTIL had also undertaken that
Hutchison Telecommunication (India) Ltd. (HTM), Omega
and 3GSPL, would enter into an agreed form “IDFC
Transaction Agreement” as soon as practicable. On
11.02.2007, HTIL also sent a disclosure letter to Vodafone

in terms of Clause 9.4 of SPA – Vendor warranties relating
to consents and approvals, wider group companies, material
contracts, permits, litigation, arbitration and governmental
proceedings to limit HTIL liability.
15. Vodafone on 12.02.2007 made a public announcement
to the Securities and Exchange Commission, Washington
(SEC), London Stock Exchange and HK Stock Exchange
stating that it had agreed to acquire a Controlling Interest
in HEL for a cash consideration of US$ 11.1 billion. HTIL
Chairman sent a letter to the Vice-Chairman of Essar
Group on 14.02.2007 along with a copy of Press
announcement made by HTIL, setting out the principal
terms of the intended sale of HTIL of its equity and loans in
HEL, by way of sale of CGP share and loan assignment to
VIHBV.
16. Vodafone on 20.02.2007 filed an application with
Foreign Investment Promotion Board (FIPB) requesting it to
take note of and grant approval under Press note no.1 to
the indirect acquisition by Vodafone of 51.96% stake in HEL

through an overseas acquisition of the entire share capital
of CGP from HTIL. HTIL made an announcement on HK
Stock Exchange regarding the intended use of proceeds
from sale of HTIL’s interest in HEL viz., declaring a special
dividend of HK$ 6.75 per share, HK$ 13.9 billion to reduce
debt and the remainder to be invested in telecommunication
business, both for expansion and towards working capital
and general policies. Reference was also made to the sale
share and sale loans as being the entire issued share
capital of CGP and the loans owned by CGP/Array to an
indirect WOS. AG on 02.03.2007 sent a letter to HEL
confirming that he was the exclusive beneficial owner of his
shares and was having full control over related voting
rights. Further, it was also stated that AG had received
credit support, but primary liability was with his
Companies. AS also sent a letter on 05.03.2007 to FIPB
confirming that he was the exclusive beneficial owner of his
shares and also of the credit support received.

17. Essar had filed objections with the FIPB on
06.03.2007 to HTIL’s proposed sale and on 14.03.2007,
Essar withdrew its objections.
18. FIPB on 14.03.2007 sent a letter to HEL pointing out
that in filing of HTIL before the U.S. SEC in Form 6K in the
month of March 2006, it had been stated that HTIL Group
would continue to hold an aggregate interest of 42.34% of
HEL and an additional indirect interest through JV
companies being non-wholly owned subsidiaries of HTIL
which hold an aggregate of 19.54% of HEL and, hence, the
combined holding of HTIL Group would then be 61.88%.
Reference was also made to the communication dated
06.03.2007 sent to the FIPB wherein it was stated that the
direct and indirect FDI by HTIL would be 51.96% and,
hence, was asked to clarify that discrepancy. Similar letter
dated 14.03.2007 was also received by Vodafone. On
14.03.2007, HEL wrote to FIPB stating that the discrepancy
was because of the difference in U.S. GAAP and Indian
GAAP declarations and that the combined holding for U.S.
GAAP purposes was 61.88% and for Indian GAAP purposes

was 51.98%. It was pointed out that Indian GAAP number
accurately reflected the true equity ownership and control
position. On 14.03.2007 itself, HEL wrote to FIPB
confirming that 7.577% stake in HEL was held legally and
beneficially by AS and his wife and 4.78% stake in HEL was
held legally and beneficially by AG. Further, it was also
pointed out that 2.77% stake in HEL through Omega and
S.M.M.S. was legally and beneficially owned by IDFC
Limited, IDFC Private Equity Limited and SSKI Corporate
Finance Limited. Further, it was also pointed out that
Articles of Association of HEL did not give any person or
entity any right to appoint directors, however, in practice six
directors were from HTIL, four from Essar, two from TII and
TII had appointed AG & AS. On credit support agreement, it
was pointed out that no permission of any regulatory
authority was required.
19. Vodafone also wrote to FIPB on 14.03.2007 confirming
that VIHBV’s effective shareholding in HEL would be
51.96% i.e. Vodafone would own 42% direct interest in HEL
through its acquisition of 100% of CGP Investments
(Holdings) Limited (CGPIL) and through CGPIL Vodafone

would also own 37% in TII which in turn owned 20% in HEL
and 38% in Omega which in turn owned 5% in HEL. It was
pointed out that both TII and Omega were Indian companies
and those investments combined would give Vodafone a
controlling interest of 52% in HEL. Further, it was pointed
out that HTIL’s Indian partners AG, AS, IDFC who between
them held a 15% interest in HEL on aggregate had agreed to
retain their shareholding with full control including voting
rights and dividend rights.
20. HTIL, Essar Teleholding Limited (ETL), Essar
Communication Limited (ECL), Essar Tele Investments
Limited (ETIL), Essar Communications (India) Limited
(ECIL) signed a settlement agreement on 15.03.2007
regarding Essar Group’s support for completion of the
proposed transaction and covenant not to sue any
Hutchison Group Company etc., in lieu of payment by HTIL
of US$ 373.5 million after completion and a further US$
41.5 million after second anniversary of completion. In that
agreement, HTIL had agreed to dispose of its direct and
indirect equity, loan and other interests and rights in and

related to HEL, to Vodafone pursuant to the SPA. HTIL had
also agreed to pay US$ 415 million to Essar in return of its
acceptance of the SPA between HTIL and Vodafone. On
15.03.2007 a Deed of Waiver was entered into between
Vodafone and HTIL, whereby Vodafone had waived some of
the warranties set out in paragraphs 7.1(a) and 7.1(b) of
Schedule 4 of the SPA and covenanted that till payment of
HTIL under Clause 6.1(a) of the Settlement Agreement of
30.05.2007, Vodafone should not bring any claim or action.
On 15.03.2007 a circular was issued by HTIL including the
report of Somerley Limited on the Settlement Agreement
between HTIL and Essar Group.
21. VIHBVI, Essar Tele Holdings Limited (ETH) and ECL
entered into a Term Sheet Agreement on 15.03.2007 for
regulating the affairs of HEL and the relationship of its
shareholders including setting out VIHBVI’s right as a
shareholder of HEL to nominate eight persons out of twelve
to the board of directors, requiring Vodafone to nominate
director to constitute a quorum for board meetings and get
ROFR over shares owned by Essar in HEL. Term Sheet also

stated that Essar had a TAR in respect of Essar’s
shareholding in HEL, should any Vodafone Group
shareholding sell its share or part thereof in HEL to a
person not in a Vodafone Group entity. VIHBV and
Vodafone Group Plc.(as guarantor of VIHBV) had entered
into a ‘Put Option’ Agreement on 15.03.2007 with ETH,
ECL (Mauritius), requiring VIHBV to purchase from Essar
Group shareholders’ all the option shares held by them.
22. The Joint Director of Income Tax (International
Taxation), in the meanwhile, issued a notice dated
15.03.2007 under Section 133(6) of the Income Tax Act
calling for certain information regarding sale of stake of
Hutchison group HK in HEL, to Vodafone Group Plc.
23. HTIL, on 17.3.2007, wrote to AS confirming that HTIL
has no beneficial or legal or other rights in AS’s TII interest
or HEL interest. Vodafone received a letter dated 19.3.2007
from FIPB seeking clarifications on the circumstances
under which Vodafone had agreed to pay consideration of
US$ 11.08 billion for acquiring 67% of HEL when the actual

acquisition was only 51.96% as per the application.
Vodafone on 19.03.2007 wrote to FIPB stating that it had
agreed to acquire from HTIL interest in HEL which included
52% equity shareholding for US$ 11.08 billion which price
included control premium, use and rights to Hutch brand
in India, a non-compete agreement with Hutch group, value
of non-voting, non-convertible preference shares, various
loans obligations and entitlement and to acquire further
15% indirect interest in HEL, subject to Indian foreign
investment rules, which together equated to about 67% of
the economic value of HEL.
24. VIHBVI and Indian continent Investors Limited (ICIL)
had entered into an SHA on 21.03.2007 whereby VIHBVI
had to sell 106.470.268 shares in Bharati Airtel to ICIL for a
cash consideration of US$ 1,626,930.881 (which was later
amended on 09.05.2007)
25. HEL on 22.3.2007 replied to the letter of 15.03.2007,
issued by the Joint Director of Income Tax (International
Taxation) furnishing requisite information relating to HEL

clarifying that it was neither a party to the transaction nor
would there be any transfer of shares of HEL.

26. HEL received a letter dated 23.3.2007 from the
Additional Director Income Tax (International Taxation)
intimating that both Vodafone and Hutchison Telecom
Group announcements/press releases/declarations had
revealed that HTIL had made substantive gains and
consequently HEL was requested to impress upon
HTIL/Hutchison Telecom Group to discharge their liability
on gains, before they ceased operations in India. HEL
attention was also drawn to Sections 195, 195(2) and 197 of
the Act and stated that under Section 195 obligations were
both on the payer and the payee.
27. Vodafone, in the meanwhile, wrote to FIPB on
27.03.2007 confirming that in determining the bid price of
US$ 11.09 billion it had taken into account various assets
and liabilities of CGP including:
(a) its 51.96% direct and indirect equity
ownership of Hutch Essar;


(b) Its ownership of redeemable preference
shares in TII and JKF;
(c) Assumption of liabilities of various
subsidiaries of CGP amounting to approximately
US$630 million;
(d) subject to Indian Foreign Investment Rules,
its rights and entitlements, including
subscription rights at par value and call options
to acquire in future a further 62.75% of TII and
call options to acquire a further 54.21% of Omega
Telecom Holdings Pvt. Ltd, which together would
give Vodafone a further 15.03% proportionate
indirect equity ownership of Hutch Essar, various
intangible features such as control premium, use
and rights of Hutch branch in India, non compete
agreement with HTIL.
HEL on 5.4.2007 wrote to the Joint director of Income Tax
stating that it has no liabilities accruing out of the
transaction, also the department has no locus standi to
invoke Section 195 in relation to non-resident entities
regarding any purported tax obligations. On 09.04.2007
HTIL submitted FWAs, SHAs, Loan Agreement, Share-pledge
Agreements, Guarantees, Hypothecations, Press
Announcements, Regulatory filing etc., charts of TII and
Omega Shareholding, note on terms of agreement relating to
acquisition by AS, AG and IDFC, presentation by Goldman
Sachs on fair market valuation and confirmation by

Vodafone, factors leading to acquisition by AG and AS and
rationale for put/call options etc.
28. Vodafone on 09.04.2007 sent a letter to FIPB
confirming that valuation of N.D. Callus, Centrino, would
occur as per Goldman Sach's presentation in Schedule 5 to
HTIL's letter of 09.04.2007 with a minimum value of US$
266.25 million and US$164.51 million for the equity in N.D.
Callus and Centrino respectively, which would form the
basis of the future partnership with AS & AG. Vodafone
also wrote a letter to FIPB setting out details of Vodafone
Group's interest worldwide. On 30.04.07 a resolution was
passed by the Board of Directors of CGP pertaining to loan
agreement, resignation and appointment of directors,
transfer of shares; all to take effect on completion of SPA.
Resolution also accorded approval of entering into a Deed of
Assignment in respect of loans owed to HTI(BVI) Finance
Limited in the sums of US$ 132,092,447.14 and US$
28,972,505.70. Further resolution also accorded approval
to the resignations of certain persons as Directors of the
Company, to take effect on completion of SPA. Further,

approval was also accorded to the appointment of Erik de
Rjik as a sole director of CGP. Resolution also accorded
approval to the transfer of CGP from HTI BVI to Vodafone.
On 30.04.2007 a board of resolution was passed by the
directors of Array for the assignment of loans and
resignation of existing directors and appointment of new
directors namely Erik de Rjik and two others. On
30.04.2007, the board of directors of HTI BVI approved the
transfer documentation in relation to CGP share capital in
pursuance of SPA and due execution thereof. On
04.05.2007 HTI BVI delivered the share transfer
documentation to the lawyers in Caymen Islands to hold
those along with a resolution passed by the board of
directors of HTI BVI to facilitate delivery of instruments of
transfer to Vodafone at closing of the transaction.
29. Vodafone on 07.05.2007 received a letter from FIPB
conveying its approval to the transaction subject to
compliance of observation of applicable laws and
regulations in India. On 08.05.2007 a sum of
US$10,854,229,859.05 was paid by Vodafone towards

consideration for acquisition of share capital of CGP. On
08.05.2007 Vodafone's name was entered in the register of
members of CGP kept in Caymen Islands and the share
certificate No.002 of HTI BVI relating to CGP share capital
was cancelled. On the same day a Tax Deed of Covenant
was entered into between HTIL and Vodafone in pursuance
of SPA indemnifying Vodafone in respect of taxation or
transfer pricing liabilities payable or suffered by wider group
companies (as defined by SPA i.e., CGP, 3 GSPL, Mauritian
holding and Indian Companies) on or before completion,
including reasonable costs associated with any tax demand.
30. HTIL also sent a side letter to SPA on 08.05.2007 to
Vodafone highlighting the termination of the brand licences
and brand support service agreements between HTIL and
3GSPL and the Indian Operating Companies and stated that
the net amount to be paid by Vodafone to HTIL would be
US$ 10,854,229,859.05 and that Vodafone would retain
US$ 351.8 million towards expenses incurred to
operationalize the option agreements with AS and AG, out of
the total consideration of US$11,076,000,000. On

08.05.2007 loan assignment between HTI BVI Finance
Limited, Array and Vodafone of Array debt in a sum of US$
231,111,427.41 was effected, whereby rights and benefits of
HTI BVI Finance Limited to receive repayment was assigned
in favour of Vodafone as part of the transaction
contemplated vide SPA. On the same day loan assignment
between HTI BVI Finance Limited, CGP and Vodafone, of
CGP debt in the sum of US$ 28,972,505.70 was effected,
whereby rights and benefits of HTI BVI Finance Limited to
receive the repayment was assigned in favour of Vodafone
as part of the transactions contemplated vide SPA. On
08.05.2007, business transfer agreement between 3GSPL
and Hutchison Whampoa Properties (India) Limited, a WOS
of HWP Investments Holdings (India) Limited, Mauritius, for
the sale of business to 3GSPL of maintaining and operating
a call centre as a going concern on slump-sale-basis for a
composite price of ` 640 million. On 08.05.2007, as already
stated, a Deed of Retention was executed between HTIL and
Vodafone whereunder HTIL had agreed that out of the total
consideration payable in terms of Clause 8.10(b) of the SPA,
Vodafone would be entitled to retain US$ 351.8 million by

way of HTIL's contribution towards acquisition cost of
options i.e., stake of AS & AG. On 08.05.2007 Vodafone
paid US$ 10,854,229,859.05 to HTIL.
31. Vodafone on 18.05.2007 sent a letter to FIPB
confirming that VIHBV had no existing joint venture or
technology transfer/trade mark agreement in the same field
as HEL except with Bharati as disclosed and since
20.02.2007 a member of Bharati Group had exercised the
option to acquire a further 5.6% interest from Vodafone
such that Vodafone's direct and indirect stake in Bharati
Airtel would be reduced to 4.39%.
32. An agreement (Omega Agreement) dated 05.06.2007
was entered into between IDF, IDFC, IDFC Private Equity
Fund II (IDFCPE), SMMS, HT India, 3GSPL, Omega, SSKI
and VIHBV. Due to that Agreement IDF, IDFC and SSKI
would instead of exercising the 'Put option’ and 'cashless
option’ under 2006 IDFC FWA could exercise the same in
pursuance of the present Agreement. Further, 3GSPL had
waived its right to exercise the 'call option’ pursuant to

2006 IDFC FWA. On 06.06.2007 a FWA was entered into
between IDF, IDFC, IDFCPE, SMMS, HT India, 3GSPL,
Omega and VIHBV. By that Agreement 3GSPL had a 'call
option’ to purchase the equity shares of SMMS. On
07.06.2007 a SHA was entered into between SMMS,
HTIL(M), Omega and VIHBV to regulate the affairs of
Omega. On 07.06.2007 a Termination Agreement was
entered into between IDF, IDFC, SMMS, HTIL, 3GSPL,
Omega and HTL terminating the 2006 IDFC FWA and the
SHA and waiving their respective rights and claims under
those Agreements. On 27.06.2007 HTIL in their 2007
interim report declared a dividend of HK$ 6.75 per share on
account of the gains made by the sale of its entire interest in
HEL. On 04.07.2007 fresh certificates of incorporation was
issued by the Registrar of Companies in relation to Indian
operating companies whereby the word "Hutchison" was
substituted with word "Vodafone".
33. On 05.07.2007, a FWA was entered into between AG,
AG Mercantile Pvt. Limited, Plustech Mercantile Company
Pvt.Ltd, 3GSPL, Nadal Trading Company Pvt. Ltd and

Vodafone as a confirming party. In consideration for the
unconditional 'call option’, 3GSPL agreed to pay AG an
amount of US$ 6.3 million annually. On the same day a
FWA was signed by AS and Neetu AS, Scorpio Beverages
Pvt. Ltd.(SBP), M.V. Healthcare Services Pvt. Ltd, 3GSPL,
N.D. Callus Info Services Pvt. Ltd and Vodafone, as a
confirming party. In consideration for the 'call option’
3GSPL agreed to pay AS & Mrs. Neetu AS an amount of US$
10.02 million annually. TII SHA was entered into on
05.07.2007 between Nadal, NDC, CGP (India), TII and
VIHBV to regulate the affairs of TII. On 05.07.2007
Vodafone entered into a Consultancy Agreement with AS.
Under that Agreement, AS was to be paid an amount of US$
1,050,000 per annum and a one time payment of US$
1,30,00,000 was made to AS.
34. Vodafone sent a letter to FIPB on 27.07.2007 enclosing
undertakings of AS, AG and their companies as well as
SMMS Group to the effect that they would not transfer the
shares to any foreign entity without requisite approvals.

35. The Income Tax Department on 06.08.2007 issued a
notice to VEL under Section 163 of the Income Tax Act to
show cause why it should not be treated as a representative
assessee of Vodafone. The notice was challenged by VEL in
Writ Petition No.1942 of 2007 before the Bombay High
Court. The Assistant Director of Income Tax (Intl.) Circle
2(2), Mumbai, issued a show cause notice to Vodafone
under Section 201(1) and 201(1A) of the I.T. Act as to why
Vodafone should not be treated a assessee-in-default for
failure to withhold tax. Vodafone then filed a Writ Petition
2550/2007 before the Bombay High Court for setting aside
the notice dated 19.09.2007. Vodafone had also challenged
the constitutional validity of the retrospective amendment
made in 2008 to Section 201 and 191 of the I.T. Act. On
03.12.2008 the High Court dismissed the Writ Petition
No.2550 of 2007 against which Vodafone filed SLP
No.464/2009 before this Court and this Court on
23.01.2009 disposed of the SLP directing the Income Tax
Authorities to determine the jurisdictional challenge raised
by Vodafone as a preliminary issue. On 30.10.2009 a 2nd
show cause notice was issued to Vodafone under Section

201 and 201(1A) by the Income Tax authorities. Vodafone
replied to the show cause notice on 29.01.2010. On
31.05.2010 the Income Tax Department passed an order
under Section 201 and 201(1A) of the I.T. Act upholding the
jurisdiction of the Department to tax the transaction. A
show cause notice was also issued under Section 163(1) of
the I.T. Act to Vodafone as to why it should not be treated
as an agent / representative assessee of HTIL.
36. Vodafone then filed Writ Petition No.1325 of 2010
before the Bombay High Court on 07.06.2010 challenging
the order dated 31.05.2010 issued by the Income Tax
Department on various grounds including the jurisdiction of
the Tax Department to impose capital gains tax to overseas
transactions. The Assistant Director of Income Tax had
issued a letter on 04.06.2010 granting an opportunity to
Vodafone to address the Department on the question of
quantification of liability under Section 201 and 201(1A) of
the Income Tax Act. Notice was also challenged by
Vodafone in the above writ petition by way of an
amendment. The Bombay High Court dismissed the Writ

Petition on 08.09.2010 against which the present SLP has
been filed.
37. The High Court upheld the jurisdiction of the Revenue
to impose capital gains tax on Vodafone as a representative
assessee after holding that the transaction between the
parties attracted capital gains in India. Court came to the
following conclusions:
(a) Transactions between HTIL and Vodafone were
fulfilled not merely by transferring a single
share of CGP in Cayman Islands, but the
commercial and business understanding
between the parties postulated that what was
being transferred from HTIL to VIHBV was the
“controlling interest” in HEL in India, which is
an identifiable capital asset independent of
CGP share.
(b) HTIL had put into place during the period
when it was in the control of HEL a complex
structure including the financing of Indian
companies which in turn had holdings directly
or indirectly in HEL and hence got controlling
interest in HEL.
(c) Vodafone on purchase of CGP got indirect
interest in HEL, controlling right in certain
indirect holding companies in HEL, controlling
rights through shareholder agreements which
included the right to appoint directors in
certain indirect holding companies in HEL,
interest in the form of preference share capital
in indirect holding companies of HEL, rights to
use Hutch brand in India, non-compete

agreement with Hutch brand in India etc.,
which all constitute capital asset as per
Section 2(14) of the I.T. Act.
(d) The price paid by Vodafone to HTIL of US$
11.08 billion factored in as part of the
consideration of those diverse rights and
entitlements and many of those entitlements
are relatable to the transfer of CGP share and
that the transactional documents are merely
incidental or consequential to the transfer of
CGP share but recognized independently the
rights and entitlements of HTIL in relation to
Indian business which are being transferred to
VIHBV.
(e) High Court held that the transfer of CGP share
was not adequate in itself to achieve the object
of consummating the transaction between
HTIL and VIHBV and the rights and
entitlements followed would amount to capital
gains.
(f) The Court also held that where an asset or
source of income is situated in India, the
income of which accrues or arises directly or
indirectly through or from it shall be treated as
income which is deemed to accrue or arise in
India, hence, chargeable under Section 9(1)(i)
or 163 of the I.T. Act.
(g) Court directed the Assessing Officer to do
apportionment of income between the income
that has deemed to accrue or arise as a result
of nexus with India and that which lies
outside. High Court also concluded that the
provisions of Section 195 can apply to a non-
resident provided there is sufficient territorial
connection or nexus between him and India.
(h) Vodafone, it was held, by virtue of its diverse
agreements has nexus with Indian jurisdiction

and, hence, the proceedings initiated under
Section 201 for failure to withhold tax by
Vodafone cannot be held to lack jurisdiction.
38. Shri Harish Salve, learned senior counsel appearing for
Vodafone explained in detail how Hutchison Corporate
Structure was built up and the purpose, object and
relevance of such vertical Transnational Structures in the
international context. Learned Senior counsel submitted
that complex structures are designed not for avoiding tax
but for good commercial reasons and Indian legal structure
and foreign exchange laws recognize Overseas Corporate
Bodies (OCB). Learned senior counsel also submitted that
such Transnational Structures also contain exit option to
the investors. Senior counsel also pointed out that where
regulatory provisions mandate investment into corporate
structure such structures cannot be disregarded for tax
purposes by lifting the corporate veil especially when there
is no motive to avoid tax. Shri Salve also submitted that
Hutchison corporate structure was not designed to avoid tax
and the transaction was not a colourable device to achieve
that purpose. Senior counsel also submitted that source of

income lies where the transaction is effected and not where
the underlying asset is situated or economic interest lies.
Reference was made to judgment in Seth Pushalal
Mansinghka (P) Ltd. v. CIT (1967) 66 ITR 159 (SC).
Learned counsel also pointed out that without any express
legislation, off-shore transaction cannot be taxed in India.
Reference was made to two judgments of the Calcutta High
Court Assam Consolidated Tea Estates v. Income Tax
Officer “A” Ward (1971) 81 ITR 699 Cal. and C.I.T. West
Bengal v. National and Grindlays Bank Ltd. (1969) 72
ITR 121 Cal. Learned senior counsel also pointed out that
when a transaction is between two foreign entities and not
with an Indian entity, source of income cannot be traced
back to India and nexus cannot be used to tax under
Section 9. Further, it was also pointed out that language in
Section 9 does not contain “look through provisions” and
even the words “indirectly” or “through” appearing in
Section 9 would not make a transaction of a non-resident
taxable in India unless there is a transfer of capital asset
situated in India. Learned Senior counsel also submitted
that the Income Tax Department has committed an error in

proceeding on a “moving theory of nexus” on the basis that
economic interest and underlying asset are situated in
India. It was pointed out that there cannot be transfer of
controlling interest in a Company independent from transfer
of shares and under the provisions of the Company Law.
Acquisition of shares in a Company entitles the Board a
right of “control” over the Company. Learned Senior
Counsel also pointed out the right to vote, right to appoint
Board of Directors, and other management rights are
incidental to the ownership of shares and there is no change
of control in the eye of law but only in commercial terms.
Mr. Salve emphasized that, in absence of the specific
legislation, such transactions should not be taxed. On the
situs of shares, learned senior counsel pointed out that the
situs is determined depending upon the place where the
asset is situated. Learned senior counsel also pointed out
that on transfer of CGP, Vodafone got control over HEL and
merely because Vodafone has presence or chargeable
income in India, it cannot be inferred that it can be taxed in
some other transactions. Further, it was also pointed out
that there was no transfer of any capital asset from HTIL to

Vodafone pursuant to Option Agreements, FWAs, executed
by the various Indian subsidiaries. Learned Senior Counsel
also pointed out that the definition of “transfer” under
Section 2(47) which provides for “extinguishment” is
attracted for a transfer of a legal right and not a contractual
right and there was no extinguishment of right by HTIL
which gave rise to capital gains tax in India. Reference was
made to judgment CIT v. Grace Collis (2001) 3 SCC 430.
Learned senior counsel also submitted that the acquisition
of “controlling interest” is a commercial concept and tax is
levied on transaction and not its effect. Learned senior
counsel pointed out that to lift the corporate veil of a legally
recognised corporate structure time and the stage of the
transaction are very important and not the motive to save
the tax. Reference was also made to several judgments of
the English Courts viz, IRC v. Duke of Westminster (1936)
AC 1 (HL), W. T. Ramsay v. IRC (1982) AC 300 (HL),
Craven v. White (1988) 3 All ER 495, Furniss v. Dawson
(1984) 1 All ER 530 etc. Reference was also made to the
judgment of this Court in McDowell, Azadi Bachao
Andolan cases (supra) and few other judgments. Learned

senior counsel point out that Azadi Bachao Andolan broadly
reflects Indian jurisprudence and that generally Indian
courts used to follow the principles laid down by English
Courts on the issue of tax avoidance and tax evasion.
Learned Senior counsel also submitted that Tax Residency
Certificate (for short TRC) issued by the Mauritian
authorities has to be respected and in the absence of any
Limitation on Benefit (LOB Clause), the benefit of the Indo-
Mauritian Treaty is available to third parties who invest in
India through Mauritius route.
39. Mr. Salve also argued on the extra territorial
applicability of Section 195 and submitted that the same
cannot be enforced on a non-resident without a presence in
India. Counsel also pointed out that the words “any person”
in Section 195 should be construed to apply to payers who
have a presence in India or else enforcement would be
impossible and such a provision should be read down in
case of payments not having any nexus with India. Senior
counsel also submitted that the withholding tax provisions
under Section 195 of the Indian Income Tax Act, do not

apply to offshore entities making off-shore payments and
the said Section could be triggered only if it can be
established that the payment under consideration is of a
“sum chargeable” under the Income Tax Act (for short IT
Act). Senior counsel therefore contended that the findings of
the Tax Authorities that pursuant to the transaction the
benefit of telecom licence stood transferred to Vodafone is
misconceived and that under the telecom policy of India a
telecom licence can be held only by an Indian Company and
there is no transfer direct or indirect of any licence to
Vodafone.
40. Mr. R.F. Nariman, Learned Solicitor General appearing
for the Income Tax Department submitted that the sale of
CGP share was nothing but an artificial avoidance scheme
and CGP was fished out of the HTIL legal structure as an
artificial tax avoidance contrivance. Shri Nariman pointed
out that CGP share has been interposed at the last minute
to artificially remove HTIL from the Indian telecom business.
Reference was made to the Due Diligence Report of Ernst
and Young which stated that target structure later included

CGP which was not there originally. Further, it was also
pointed out that HTIL extinguished its rights in HEL and
put Vodafone in its place and CGP was merely an interloper.
Shri Nariman also pointed out that as per Settlement
Agreement, HTIL sold direct and indirect equity holdings,
loans, other interests and rights relating to HEL which
clearly reveal something other than CGP share was sold and
those transactions were exposed by the SPA. Learned
Solicitor General also referred extensively the provisions of
SPA and submitted that the legal owner of CGP is HTIBVI
Holdings Ltd., a British Virgin Islands Company which was
excluded from the Agreement with an oblique tax motive.
41. Mr. Nariman also submitted the situs of CGP can only
be in India as the entire business purpose of holding that
share was to assume control in Indian telecom operations,
the same was managed through Board of Directors
controlled by HTIL. The controlling interest expressed by
HTIL would amount to property rights and hence taxable in
India. Reference was made to judgments of the Calcutta
High Court in CIT v. National Insurance Company (1978)

113 ITR 37(Cal.) and Laxmi Insurance Company Pvt. Ltd.
v. CIT (1971) 80 ITR 575 (Delhi). Further, it was also
pointed out the “call and put” options despite being a
contingent right are capable of being transferred and they
are property rights and not merely contractual rights and
hence would be taxable. Referring to the SPA Shri Nariman
submitted that the transaction can be viewed as
extinguishment of HTILs property rights in India and CGP
share was merely a mode to transfer capital assets in India.
Further, it was also pointed out that the charging Section
should be construed purposively and it contains a look
through provision and that the definition of the transfer in
Section 9(1)(i) is an inclusive definition meant to explain the
scope of that Section and not to limit it. The resignation of
HTIL Directors on the Board of HEL could be termed as
extinguishment and the right to manage a Company
through its Board of Directors is a right to property.
Learned Solicitor General also extensively referred to
Ramsay Doctrine and submitted that if business purpose as
opposed to effect is to artificially avoid tax then that step
should be ignored and the courts should adopt a purposive

construction on the SPA. Considerable reliance was placed
on judgment of this Court in Mc.Dowell and submitted that
the same be followed and not Azadi Bachao Andolan
which has been incorrectly decided. Further, it was also
pointed out that Circular No.789 as regards the
conclusiveness of TRC would apply only to dividend clause
and as regards capital gains, it would still have to satisfy
the twin tests of Article 13(4) of the treaty namely the shares
being “alienated and the gains being derived” by a
Mauritian entity. Learned Solicitor General also submitted
that the Department can make an enquiry into whether
capital gains have been factually and legally assigned to a
Mauritian entity or to third party and whether the Mauritian
Company was a façade.
42. Learned counsels, on either side, in support of their
respective contentions, referred to several judgments of this
Court, foreign Courts, international expert opinions,
authoritative articles written by eminent authors etc.
Before examining the same, let us first examine the legal
status of a corporate structure, its usefulness in cross-

border transactions and other legal and commercial
principles in use in such transactions, which are germane
to our case.
Part – II
CORPORATE STRUCTURE / GENERAL PRINCIPLES
(National and International)
43. Corporate structure is primarily created for business
and commercial purposes and multi-national companies
who make offshore investments always aim at better returns
to the shareholders and the progress of their companies.
Corporation created for such purposes are legal entities
distinct from its members and are capable of enjoying rights
and of being subject to duties which are not the same as
those enjoyed or borne by its members. Multi-national
companies, for corporate governance, may develop corporate
structures, affiliate subsidiaries, joint ventures for
operational efficiency, tax avoidance, mitigate risks etc. On
incorporation, the corporate property belongs to the
company and members have no direct proprietary rights to
it but merely to their “shares” in the undertaking and these
shares constitute items of property which are freely

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

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

46. Revenue/Courts can always examine whether those
corporate structures are genuine and set up legally for a
sound and veritable commercial purpose. Burden is entirely
on the Revenue to show that the incorporation,
consolidation, restructuring etc. has been effected to achieve
a fraudulent, dishonest purpose, so as to defeat the law.
CORPORATE GOVERNANCE
47. Corporate governance has been a subject of
considerable interest in the corporate world. The
Organisation for Economic cooperation and Development
(OECD) defines corporate governance as follows :-
“Corporate governance is a system by which
business corporations are directed and controlled.
The corporate governance structure specifies the
distribution of rights and responsibilities among
different participants in the corporation and other
stake holders and spells out rules and procedures for
making decisions on corporate affairs. By doing this,
it also provides a structure through which the
company objectives are set and the means of
attaining those objectives and monitoring
performance.”
The Ministry of Corporate Affairs to the Government of India,
has issued several press notes for information of such global
companies, which will indicate that Indian corporate Law has

also accepted the corporate structure consisting of holding
companies and several subsidiary companies. A holding
company which owns enough voting stock in a subsidiary
can control management and operation by influencing or
electing its Board of Directors. The holding company can
also maintain group accounts which is to give members of
the holding company a picture of the financial position of the
holding company and its subsidiaries. The form and content
of holding company or subsidiary company’s own balance
sheet and profit and loss account are the same as if they
were independent companies except that a holding
company’s accounts an aggregated value of shares it holds in
its subsidiaries and in related companies and aggregated
amount of loss made by it to its subsidiaries and to related
companies and their other indebtedness to it must be shown
separately from other assets etc.
48. Corporate governors can also misuse their office, using
fraudulent means for unlawful gain, they may also
manipulate their records, enter into dubious transactions for
tax evasion. Burden is always on the Revenue to expose and

prove such transactions are fraudulent by applying look at
principle.
OVERSEAS COMPANIES AND FDI
49. Overseas companies are companies incorporated
outside India and neither the Companies Act nor the Income
Tax Act enacted in India has any control over those
companies established overseas and they are governed by the
laws in the countries where they are established. From
country to country laws governing incorporation,
management, control, taxation etc. may change. Many
developed and wealthy Nations may park their capital in
such off-shore companies to carry on business operations in
other countries in the world. Many countries give facilities
for establishing companies in their jurisdiction with
minimum control and maximum freedom. Competition is
also there among various countries for setting up such
offshore companies in their jurisdiction. Demand for offshore
facilities has considerably increased, in recent times, owing
to high growth rates of cross-border investments and to the
increased number of rich investors who are prepared to use

high technology and communication infrastructures to go
offshore. Removal of barriers to cross-border trade, the
liberalization of financial markets and new communication
technologies have had positive effects on the developing
countries including India.
50. Investment under foreign Direct Investment Scheme
(FDI scheme), investment by Foreign Institutional Investors
(FIIs) under the Portfolio Investment Scheme, investment by
NRIs/OBCs under the Portfolio Investment Scheme and sale
of shares by NRIs/OBCs on non-repatriation basis; Purchase
and sale of securities other than shares and convertible
debentures of an Indian company by a non-resident are
common. Press Notes are announced by the Ministry of
Commerce and Industry and the Ministry issued Press Note
no. 2, 2009 and Press Note 3, 2009, which deals with
calculation of foreign investment in downstream entities and
requirement of ownership or control in sectoral cap
companies. Many of the offshore companies use the
facilities of Offshore Financial Centres situate in Mauritius,
Cayman Islands etc. Many of these offshore holdings and

arrangements are undertaken for sound commercial and
legitimate tax planning reasons, without any intent to
conceal income or assets from the home country tax
jurisdiction and India has always encouraged such
arrangements, unless it is fraudulent or fictitious.
51. Moving offshore or using an OFC does not necessarily
lead to the conclusion that they involve in the activities of
tax evasion or other criminal activities. The multi-national
companies are attracted to offshore financial centres mainly
due to the reason of providing attractive facilities for the
investment. Many corporate conglomerates employ a large
number of holding companies and often high-risk assets are
parked in separate companies so as to avoid legal and
technical risks to the main group. Instances are also there
when individuals form offshore vehicles to engage in risky
investments, through the use of derivatives trading etc.
Many of such companies do, of course, involve in
manipulation of the market, money laundering and also
indulge in corrupt activities like round tripping, parking

black money or offering, accepting etc., directly or indirectly
bribe or any other undue advantage or prospect thereof.
52. OECD (Organisation for Economic Co-operation and
Development) in the year 1998 issued a report called
“Harmful Tax Competition: An Emerging Global Issue”. The
report advocated doing away with tax havens and offshore
financial canters, like the Cayman Islands, on the basis that
their low-tax regimes provide them with an unfair advantage
in the global marketplace and are thus harmful to the
economics of more developed countries. OECD threatened
to place the Cayman Islands and other tax havens on a
“black list” and impose sanctions against them.
53. OECD’s blacklist was avoided by Cayman Islands in
May 2000 by committing itself to a string of reforms to
improve transparency, remove discriminatory practices and
began to exchange information with OECD. Often,
complaints have been raised stating that these centres are
utilized for manipulating market, to launder money, to evade
tax, to finance terrorism, indulge in corruption etc. All the
same, it is stated that OFCs have an important role in the

international economy, offering advantages for multi-national
companies and individuals for investments and also for
legitimate financial planning and risk management. It is
often said that insufficient legislation in the countries where
they operate gives opportunities for money laundering, tax
evasion etc. and, hence, it is imperative that that Indian
Parliament would address all these issues with utmost
urgency.
Need for Legislation:
54. Tax avoidance is a problem faced by almost all
countries following civil and common law systems and all
share the common broad aim, that is to combat it. Many
countries are taking various legislative measures to increase
the scrutiny of transactions conducted by non-resident
enterprises. Australia has both general and specific anti-
avoidance rule (GAAR) in its Income Tax Legislations. In
Australia, GAAR is in Part IVA of the Income Tax Assessment
Act, 1936, which is intended to provide an effective measure
against tax avoidance arrangements. South Africa has also
taken initiative in combating impermissible tax avoidance or

tax shelters. Countries like China, Japan etc. have also
taken remedial measures.
55. Direct Tax Code Bill (DTC) 2010, proposed in India,
envisages creation of an economically efficient, effective direct
tax system, proposing GAAR. GAAR intends to prevent tax
avoidance, what is inequitable and undesirable. Clause
5(4)(g) provides that the income from transfer, outside India
of a share in a foreign company shall be deemed to arise in if
the FMV of assets India owned by the foreign company is at
least 50% of its total assets. Necessity to take effective
legislative measures has been felt in this country, but we
always lag behind because our priorities are different. Lack
of proper regulatory laws, leads to uncertainty and passing
inconsistent orders by Courts, Tribunals and other forums,
putting Revenue and tax payers at bay.
HOLDING COMPANY AND SUBSIDIARY COMPANY
56. Companies Act in India and all over the world have
statutorily recognised subsidiary company as a separate legal
entity. Section 2(47) of the Indian Companies Act 1956
defines “subsidiary company” or “subsidiary”, a subsidiary

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

years have grown enormously of its incorporation and
outside and their structures have become more complex.
Multi National Companies having large volume of business
nationally or internationally will have to depend upon their
subsidiary companies in the national and international level
for better returns for the investors and for the growth of the
company. When a holding company owns all of the voting
stock of another company, the company is said to be a WOS
of the parent company. Holding companies and their
subsidiaries can create pyramids, whereby subsidiary owns a
controlling interest in another company, thus becoming its
parent company.
58. Legal relationship between a holding company and WOS
is that they are two distinct legal persons and the holding
company does not own the assets of the subsidiary and, in
law, the management of the business of the subsidiary also
vests in its Board of Directors. In Bacha F. Guzdar v. CIT
AIR 1955 SC 74, this Court held that shareholders’ only
rights is to get dividend if and when the company declares it,
to participate in the liquidation proceeds and to vote at the

shareholders’ meeting. Refer also to Carew and Company
Ltd. v. Union of India (1975) 2 SCC 791 and Carrasco
Investments Ltd. v. Special Director, Enforcement (1994)
79 Comp Case 631 (Delhi).
59. Holding company, of course, if the subsidiary is a WOS,
may appoint or remove any director if it so desires by a
resolution in the General Body Meeting of the subsidiary.
Holding companies and subsidiaries can be considered as
single economic entity and consolidated balance sheet is the
accounting relationship between the holding company and
subsidiary company, which shows the status of the entire
business enterprises. Shares of stock in the subsidiary
company are held as assets on the books of the parent
company and can be issued as collateral for additional debt
financing. Holding company and subsidiary company are,
however, considered as separate legal entities, and
subsidiary are allowed decentralized management. Each
subsidiary can reform its own management personnel and
holding company may also provide expert, efficient and
competent services for the benefit of the subsidiaries.

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

the unlawful activities of the subsidiary save in exceptional
circumstances, such as a company is a sham or the agent of
the shareholder, the parent company is regarded as a
shareholder. Multi-National Companies, by setting up
complex vertical pyramid like structures, would be able to
distance themselves and separate the parent from operating
companies, thereby protecting the multi-national companies
from legal liabilities.
SHAREHOLDERS’ AGREEMENT
62. hareholders’ Agreement ( for short SHA) is essentially a
contract between some or all other shareholders in a
company, the purpose of which is to confer rights and impose
obligations over and above those provided by the Company
Law. SHA is a private contract between the shareholders
compared to Articles of Association of the Company, which is
a public document. Being a private document it binds
parties thereof and not the other remaining shareholders in
the company. Advantage of SHA is that it gives greater
flexibility, unlike Articles of Association. It also makes
provisions for resolution of any dispute between the

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

restricted by law only in cases where it is for some good for
the community. Companies Act 1956 or the FERA 1973,
RBI Regulation or the I.T. Act do not explicitly or impliedly
forbid shareholders of a company to enter into agreements as
to how they should exercise voting rights attached to their
shares.
64. Shareholders can enter into any agreement in the best
interest of the company, but the only thing is that the
provisions in the SHA shall not go contrary to the Articles of
Association. The essential purpose of the SHA is to make
provisions for proper and effective internal management of
the company. It can visualize the best interest of the
company on diverse issues and can also find different ways
not only for the best interest of the shareholders, but also for
the company as a whole. In S. P. Jain v. Kalinga Cables
Ltd. (1965) 2 SCR 720, this Court held that agreements
between non-members and members of the Company will not
bind the company, but there is nothing unlawful in entering
into agreement for transferring of shares. Of course, the
manner in which such agreements are to be enforced in the

case of breach is given in the general law between the
company and the shareholders. A breach of SHA which does
not breach the Articles of Association is a valid corporate
action but, as we have already indicated, the parties
aggrieved can get remedies under the general law of the land
for any breach of that agreement.
65. SHA also provides for matters such as restriction of
transfer of shares i.e. Right of First Refusal (ROFR), Right of
First Offer (ROFO), Drag-Along Rights (DARs) and Tag-Along
Rights (TARs), Pre-emption Rights, Call option, Put option,
Subscription option etc. SHA in a characteristic Joint
Venture Enterprise may regulate its affairs on the basis of
various provisions enumerated above, because Joint Venture
enterprise may deal with matters regulating the ownership
and voting rights of shares in the company, control and
manage the affairs of the company, and also may make
provisions for resolution of disputes between the
shareholders. Many of the above mentioned provisions find a
place in SHAs, FWAs, Term Sheet Agreement etc. in the

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

shares to the prospective buyer at the same price as any
other shareholder would propose to sell. In other words, if
one shareholder wants to sell, he can do so only if the
purchaser agrees to purchase the other shareholders, who
wish to sell at the same price. TAR often finds a place in
the SHA which protects the interest of the minority
shareholders.
(c) Subscription Option: Subscription option gives the
beneficiary a right to demand issuance of allotment of shares
of the target company. It is for that reason that a
subscription right is normally accompanied by ancillary
provisions including an Exit clause where, if dilution crosses
a particular level, the counter parties are given some kind of
Exit option.
(d) Call Option: Call option is an arrangement often seen
in Merger and Acquisition projects, especially when they aim
at foreign investment. A Call option is given to a foreign
buyer by agreement so that the foreign buyer is able to enjoy
the permitted minimum equity interests of the target
company. Call option is always granted as a right not an
obligation, which can be exercised upon satisfaction of

certain conditions and/or within certain period agreed by the
grantor and grantee. The buyer of Call option pays for the
right, without the obligation to buy some underlying
instrument from the writer of the option contract at a set
future date and at the strike price. Call option is where the
beneficiary of the action has a right to compel a counter-
party to transfer his shares at a pre-determined or price fixed
in accordance with the pre-determined maxim or even fair
market value which results in a simple transfer of shares.
(e) Put Option: A put option represents the right, but
not the requirement to sell a set number of shares of stock,
which one do not yet own, at a pre-determined strike price,
before the option reaches the expiration date. A put option
is purchased with the belief that the underlying stock price
will drop well before the strike price, at which point one may
choose to exercise the option.
(f) Cash and Cashless Options: Cash and Cashless
options are related arrangement to call and put options
creating a route by which the investors could carry out their
investment, in the event of an appreciation in the value of
shares.

66. SHA, therefore, regulate the ownership and voting rights
of shares in the company including ROFR, TARs, DARs,
Preemption Rights, Call Options, Put Options, Subscription
Option etc. in relation to any shares issued by the company,
restriction of transfer of shares or granting securities interest
over shares, provision for minority protection, lock-down or
for the interest of the shareholders and the company.
Provisions referred to above, which find place in a SHA, may
regulate the rights between the parties which are purely
contractual and those rights will have efficacy only in the
course of ownership of shares by the parties.
SHARES, VOTING RIGHTS AND CONTROLLING
INTERESTS:
67. Shares of any member in a company is a moveable
property and can be transferred in the manner provided by
the Articles of Association of the company. Stocks and

shares are specifically included in the definition of the Sale of
Goods Act, 1930. A share represents a bundle of rights like
right to (1) elect directors, (2) vote on resolution of the
company, (3) enjoy the profits of the company if and when
dividend is declared or distributed, (4) share in the surplus, if
any, on liquidation.
68. Share is a right to a specified amount of the share
capital of a company carrying out certain rights and
liabilities, in other words, shares are bundles of intangible
rights against the company. Shares are to be regarded as
situate in the country in which it is incorporated and register
is kept. Shares are transferable like any other moveable
property under the Companies Act and the Transfer of
Property Act. Restriction of Transfer of Shares is valid, if
contained in the Articles of Association of the company.
Shares are, therefore, presumed to be freely transferable and
restrictions on their transfer are to be construed strictly.
Transfer of shares may result in a host of consequences.
Voting Rights:

69. Voting rights vest in persons who names appear in the
Register of Members. Right to vote cannot be decoupled from
the share and an agreement to exercise voting rights in a
desired manner, does not take away the right of vote, in fact,
it is the shareholders’ right. Voting rights cannot be denied
by a company by its articles or otherwise to holders of shares
below a minimum number such as only shareholders holding
five or more shares are entitled to vote and so on, subject to
certain limitations.
70. Rights and obligations flowing from voting rights have
been the subject matter of several decisions of this Court. In
Chiranjit Lal Chowdhuri v. Union of India (1950) 1 SCR
869 at 909 : AIR 1951 SC 41, with regard to exercise of the
right to vote, this Court held that the right to vote for the
election of directors, the right to pass resolutions and the
right to present a petition for winding up are personal rights
flowing from the ownership of the share and cannot be
themselves and apart from the share be acquired or disposed
of or taken possession of. In Dwarkadas Shrinivas of
Bombay v. Sholapur Spinning & Weaving Company

(1954) SCR 674 at 726 : AIR 1954 SC 119, this Court noticed
the principle laid down in Chiranjit Lal Chowdhuri (supra).
71. Voting arrangements in SHAs or pooling agreements are
not “property”. Contracts that provide for voting in favour of
or against a resolution or acting in support of another
shareholder create only “contractual obligations”. A contract
that creates contractual rights thereby, the owner of the
share (and the owner of the right to vote) agrees to vote in a
particular manner does not decouple the right to vote from
the share and assign it to another. A contract that is
entered into to provide voting in favour of or against the
resolution or acting in support of another shareholder, as we
have already noted, creates contractual obligation. Entering
into any such contract constitutes an assertion (and not an
assignment) of the right to vote for the reason that by
entering into the contract: (a) the owner of the share asserts
that he has a right to vote; (b) he agrees that he is free to vote
as per his will; and (c) he contractually agrees that he will
vote in a particular manner. Once the owner of a share

agrees to vote in a particular manner, that itself would not
determine as a property.
Controlling Interest:
72. Shares, we have already indicated, represent congeries
of rights and controlling interest is an incident of holding
majority shares. Control of a company vests in the voting
powers of its shareholders. Shareholders holding a
controlling interest can determine the nature of the business,
its management, enter into contract, borrow money, buy, sell
or merge the company. Shares in a company may be subject
to premiums or discounts depending upon whether they
represent controlling or minority interest. Control, of course,
confers value but the question as to whether one will pay a
premium for controlling interest depends upon whether the
potential buyer believes one can enhance the value of the
company.
73. The House of Lords in IRC v. V.T. Bibby & Sons
(1946) 14 ITR (Supp) 7 at 9-10, after examining the
meaning of the expressions “control” and “interest”, held
that controlling interest did not depend upon the extent

to which they had the power of controlling votes.
Principle that emerges is that where shares in large
numbers are transferred, which result in shifting of
“controlling interest”, it cannot be considered as two
separate transactions namely transfer of shares and
transfer of controlling interest. Controlling interest
forms an inalienable part of the share itself and the same
cannot be traded separately unless otherwise provided by
the Statute. Of course, the Indian Company Law does
not explicitly throw light on whether control or
controlling interest is a part of or inextricably linked with
a share of a company or otherwise, so also the Income
Tax Act. In the impugned judgment, the High Court has
taken the stand that controlling interest and shares are
distinct assets.
74. Control, in our view, is an interest arising from
holding a particular number of shares and the same
cannot be separately acquired or transferred. Each share
represents a vote in the management of the company and
such a vote can be utilized to control the company.

Controlling interest, therefore, is not an identifiable or
distinct capital asset independent of holding of shares
and the nature of the transaction has to be ascertained
from the terms of the contract and the surrounding
circumstances. Controlling interest is inherently
contractual right and not property right and cannot be
considered as transfer of property and hence a capital
asset unless the Statute stipulates otherwise.
Acquisition of shares may carry the acquisition of
controlling interest, which is purely a commercial
concept and tax is levied on the transaction, not on its
effect.
A. LIFTING THE VEIL – TAX LAWS
75. Lifting the corporate veil doctrine is readily applied in
the cases coming within the Company Law , Law of Contract,
Law of Taxation. Once the transaction is shown to be
fraudulent, sham, circuitous or a device designed to defeat
the interests of the shareholders, investors, parties to the
contract and also for tax evasion, the Court can always lift
the corporate veil and examine the substance of the

transaction. This Court in Commissioner of Income Tax v.
Sri Meenakshi Mills Ltd., Madurai, AIR 1967 SC 819 held
that the Court is entitled to lift the veil of the corporate entity
and pay regard to the economic realities behind the legal
façade meaning that the court has the power to disregard the
corporate entity if it is used for tax evasion. In Life
Insurance Corporation of India v. Escorts Limited and
Others (1986) 1 SCC 264, this Court held that the corporate
veil may be lifted where a statute itself contemplates lifting of
the veil or fraud or improper conduct intended to be
prevented or a taxing statute or a beneficial statute is sought
to be evaded or where associated companies are inextricably
as to be, in reality part of one concern. Lifting the Corporate
Veil doctrine was also applied in Juggilal Kampalpat v.
Commissioner of Income Tax, U.P. , AIR 1969 SC 932 :
(1969) 1 SCR 988, wherein this Court noticed that the
assessee firm sought to avoid tax on the amount of
compensation received for the loss of office by claiming that it
was capital gain and it was found that the termination of the
contract of managing agency was a collusive transaction.
Court held that it was a collusive device, practised by the

managed company and the assessee firm for the purpose of
evading income tax, both at the hands of the payer and the
payee.
76. Lifting the corporate veil doctrine can, therefore, be
applied in tax matters even in the absence of any statutory
authorisation to that effect. Principle is also being applied in
cases of holding company – subsidiary relationship- where in
spite of being separate legal personalities, if the facts reveal
that they indulge in dubious methods for tax evasion.
(B) Tax Avoidance and Tax Evasion:
Tax avoidance and tax evasion are two expressions
which find no definition either in the Indian Companies Act,
1956 or the Income Tax Act, 1961. But the expressions are
being used in different contexts by our Courts as well as the
Courts in England and various other countries, when a
subject is sought to be taxed. One of the earliest decisions
which came up before the House of Lords in England
demanding tax on a transaction by the Crown is Duke of
Westminster (supra). In that case, Duke of Westminster had
made an arrangement that he would pay his gardener an

annuity, in which case, a tax deduction could be claimed.
Wages of household services were not deductible expenses in
computing the taxable income, therefore, Duke of
Westminster was advised by the tax experts that if such an
agreement was employed, Duke would get tax exemption.
Under the Tax Legislation then in force, if it was shown as
gardener’s wages, then the wages paid would not be
deductible. Inland Revenue contended that the form of the
transaction was not acceptable to it and the Duke was taxed
on the substance of the transaction, which was that payment
of annuity was treated as a payment of salary or wages.
Crown’s claim of substance doctrine was, however, rejected
by the House of Lords. Lord Tomlin’s celebrated words are
quoted below:
“Every man is entitled if he can to order his
affairs so that the tax attaching under the
appropriate Acts is less than it otherwise would
be. If he succeeds in ordering them so as to
secure this result, then, however unappreciative
the Commissioners of Inland Revenue or his
fellow taxpayers may be of his ingenuity, he
cannot be compelled to pay an increased tax.
This so called doctrine of ‘the substance’ seems to
me to be nothing more than an attempt to make
a man pay notwithstanding that he has so
ordered his affairs that the amount of tax sought
from him is not legally claimable.”

Lord Atkin, however, dissented and stated that “the
substance of the transaction was that what was being paid
was remuneration.”
The principles which have emerged from that judgment
are as follows:
(1) A legislation is to receive a strict or literal
interpretation;
(2) An arrangement is to be looked at not in by
its economic or commercial substance but by
its legal form; and
(3) An arrangement is effective for tax purposes
even if it has no business purpose and has
been entered into to avoid tax.
The House of Lords, during 1980’s, it seems, began to attach
a “purposive interpretation approach” and gradually began
to give emphasis on “economic substance doctrine” as a
question of statutory interpretation. In a most celebrated
case in Ramsay (supra), the House of Lords considered this
question again. That was a case whereby the taxpayer
entered into a circular series of transactions designed to
produce a loss for tax purposes, but which together produced
no commercial result. Viewed that transaction as a whole,
the series of transactions was self-canceling, the taxpayer
was in precisely the same commercial position at the end as

at the beginning of the series of transactions. House of Lords
ruled that, notwithstanding the rule in Duke of
Westminster’s case, the series of transactions should be
disregarded for tax purposes and the manufactured loss,
therefore, was not available to the taxpayer. Lord Wilberforce
opined as follows:
“While obliging the court to accept documents or
transactions, found to be genuine, as such, it
does not compel the court to look at a document
or a transaction in blinkers, isolated from any
context to which it properly belongs. If it can be
seen that a document or transaction was
intended to have effect as part of a nexus or
series of transactions, or as an ingredient of a
wider transaction intended as a whole, there is
nothing in the doctrine to prevent it being so
regarded; to do so in not to prefer form to
substance, or substance to form. It is the task of
the court to ascertain the legal nature of any
transaction to which it is sought to attach a tax
or a tax consequence and if that emerges from a
series or combination of transactions intended to
operate as such, it is that series or combination
which may be regarded.”
(emphasis supplied)
House of Lords, therefore, made the following important
remarks concerning what action the Court should consider in
cases that involve tax avoidance:
(1) A taxpayer was only to be taxed if the
Legislation clearly indicated that this was
the case;

(2) A taxpayer was entitled to manage his or
her affairs so as to reduce tax;
(3) Even if the purpose or object of a
transaction was to avoid tax this did not
invalidate a transaction unless an anti-
avoidance provision applied; and
(4) If a document or transaction was genuine
and not a sham in the traditional sense, the
Court had to adhere to the form of the
transaction following the Duke Westminster
concept.
77. In Ramsay (supra) it may be noted, the taxpayer
produced a profit that was liable to capital gains tax, but a
readymade claim was set up to create an allowable loss that
was purchased by the taxpayer with the intention of avoiding
the capital gains tax. Basically, the House of Lords,
cautioned that the technique of tax avoidance might progress
and technically improve and Courts are not obliged to be at a
standstill. In other words, the view expressed was that
that a subject could be taxed only if there was a clear
intendment and the intendment has to be ascertained on
clear principles and the Courts would not approach the issue
on a mere literal interpretation. Ramsay was, therefore,
seen as a new approach to artificial tax avoidance scheme.

78. Ramsay was followed by the House of Lords in another
decision in IRC v. Burmah Oil Co Ltd. (1982) 54 TC 200.
This case was also concerned with a self-cancelling series of
transactions. Lord Diplock, in that case, confirmed the
judicial view that a development of the jurisprudence was
taking place, stating that Ramsay case marked a significant
change in the approach adopted by the House of Lords to a
pre-ordained series of transactions. Ramay and Burmah
cases, it may be noted, were against self-cancelling artificial
tax schemes which were widespread in England in 1970’s.
Rather than striking down the self-cancelling transactions, of
course, few of the speeches of Law Lords gave the impression
that the tax effectiveness of a scheme should be judged by
reference to its commercial substance rather than its legal
form. On this, of course, there was some conflict with the
principle laid down in Duke of Westminster. Duke of
Westminster was concerned with the “single tax avoidance
step”. During 1970’s, the Courts in England had to deal with
several pre-planned avoidance schemes containing a number
of steps. In fact, earlier in IRC v. Plummer (1979) 3 All ER
775, Lord Wilberforce commented about a scheme stating

that the same was carried out with “almost military
precision” which required the court to look at the scheme as
a whole. The scheme in question was a “circular annuity”
plan, in which a charity made a capital payment to the
taxpayer in consideration of his covenant to make annual
payments of income over five years. The House of Lords held
that the scheme was valid. Basically, the Ramsay was
dealing with “readymade schemes”.
79. The House of Lords, however, had to deal with a non
self-cancelling tax avoidance scheme in Dawson (supra).
Dawsons, in that case, held shares in two operating
companies which agreed in principle in September 1971 to
sell their entire shareholding to Wood Bastow Holdings Ltd.
Acting on advice, to escape capital gains tax, Dawsons
decided not to sell directly to Wood Bastow, rather arranged
to exchange their shares for shares in an investment
company to be incorporated in the Isle of Man. Greenjacket
Investments Ltd. was then incorporated in the Isle of Man on
16.12.1971 and two arrangements were finalized (i)
Greenjacket would purchase Dawsons shares in the

operating company for £152,000 to be satisfied by the issue
of shares of Greenjacket and (ii) an agreement for
Greenjacket to sell the shares in the operating company to
Wood Bastow for £152,000.
80. The High Court and the Court of Appeal ruled that
Ramsay principle applied only where steps forming part of
the scheme were self-cancelling and they considered that it
did not allow share exchange and sale agreements to be
distributed as steps in the scheme, because they had an
enduring legal effect. The House of Lords, however, held that
steps inserted in a preordained series of transactions with
no commercial purpose other than tax avoidance should be
disregarded for tax purposes, notwithstanding that the
inserted step (i.e. the introduction of Greenjacket) had a
business effect. Lord Brightman stated that inserted step
had no business purpose apart from the deferment of tax,
although it had a business effect.
81. Even though in Dawson, the House of Lords seems to
strike down the transaction by the taxpayer for the purpose

of tax avoidance, House of Lords in Craven (supra) clarified
the position further. In that case, the taxpayers exchanged
their shares in a trading company (Q Ltd) for shares in an
Isle of Man holding company (M Ltd), in anticipation of a
potential sale or merger of the business. Taxpayers, in the
meanwhile, had abandoned negotiations with one interested
party, and later concluded a sale of Q Ltd's shares with
another. M Ltd subsequently loaned the entire sale proceeds
to the taxpayers, who appealed against assessments to
capital gains tax. The House of Lords held in favour of the
taxpayers, dismissing the crown's appeal by a majority of
three to two. House of Lords noticed that when the share
exchange took place, there was no certainty that the shares
in Q Ltd would be sold. Lord Oliver, speaking for the
majority, opined that Ramsay, Burmah and Dawson did
not produce any legal principle that would nullify any
transaction that has no intention besides tax avoidance and
opined as follows:
“My Lords, for my part I find myself unable
to accept that Dawson either established or can
properly be used to support a general proposition
that any transaction which is effected for
avoiding tax on a contemplated subsequent

transaction and is therefore planned, is for that
reason, necessarily to be treated as one with that
subsequent transaction and as having no
independent effect.”
Craven made it clear that: (1) Strategic tax planning
undertaken for months or possible years before the event (of-
sale) in anticipation of which it was effected; (2) A series of
transactions undertaken at the time of disposal/sale,
including an intermediate transaction interposed into having
no independent life, could under Ramsay principle be
looked at and treated as a composite whole transaction to
which the fiscal results of the single composite whole are to
be applied, i.e. that an intermediate transfer which was, at
the time when it was effected, so closely interconnected with
the ultimate disposition, could properly be described as not,
in itself, a real transaction at all, but merely an element in
some different and larger whole without independent effect.
81. Later, House of Lords in Ensign Tankers (Leasing)
Ltd. v. Stokes (1992) 1 AC 655 made a review of the various
tax avoidance cases from Floor v. Davis (1978) 2 All ER
1079 : (1978) Ch 295 to Craven (supra). In Ensign
Tankers, a company became a partner of a limited

partnership that had acquired the right to produce the film
“Escape to Victory”. 75% of the cost of making the film was
financed by way of a non-recourse loan from the production
company, the company claimed the benefit of depreciation
allowances based upon the full amount of the production
cost. The House of Lords disallowed the claim, but allowed
depreciation calculated on 25% of the cost for which the
limited partnership was at risk. House of Lords examined
the transaction as a whole and concluded that the limited
partnership had only ‘incurred capital expenditure on the
provision of machinery or plant’ of 25% and no more.
83. Lord Goff explained the meaning of “unacceptable tax
avoidance” in Ensign Tankers and held that unacceptable
tax avoidance typically involves the creation of complex
artificial structures by which, as though by the wave of a
magic wand, the taxpayer conjures out of the air a loss, or a
gain, or expenditure, or whatever it may be, which otherwise
would never have existed. This, of course, led to further
debate as to what is “unacceptable tax avoidance” and
“acceptable tax avoidance”.

84. House of Lords, later in Inland Revenue
Commissioner v. McGuckian (1997) BTC 346 said that the
substance of a transaction may be considered if it is a tax
avoidance scheme. Lord Steyn observed as follows:
“While Lord Tomlin's observations in the Duke
of Westminster case [1936] A.C. 1 still point to a
material consideration, namely the general
liberty of the citizen to arrange his financial
affairs as he thinks fit, they have ceased to be
canonical as to the consequence of a tax
avoidance scheme.”
McGuckian was associated with a tax avoidance scheme.
The intention of the scheme was to convert the income from
shares by way of dividend to a capital receipt. Schemes’
intention was to make a capital receipt in addition to a tax
dividend. Mc.Guckian had affirmed the fiscal nullity
doctrine from the approach of United Kingdom towards tax
penalties which emerged from tax avoidance schemes. The
analysis of the transaction was under the principles laid
down in Duke of Westminster, since the entire transaction
was not a tax avoidance scheme.

85. House of Lords in MacNiven v. Westmoreland
Investments Limited (2003) 1 AC 311 examined the scope
of Ramsay principle approach and held that it was one of
purposive construction. In fact, Ramsay’s case and case of
Duke of Westminister were reconciled by Lord Hoffmann
in MacNiven. Lord Hoffmann clarified stating as follows
‘if the legal position is that tax is imposed by
reference to a legally designed concept, such as
stamp duty payable on a document which
constitute conveyance or sale, the court cannot
tax a transaction which uses no such document
on the ground that it achieves the same economic
effect. On the other hand, the legal position is
that the tax is imposed by reference to a
commercial concept, then to have regard to the
business “substance” of the matter is not to
ignore the legal position but to give effect to it.”
86. In other words, Lord Hoffmann reiterated that tax
statutes must be interpreted “in a purposive manner to
achieve the intention of the Legislature”. Ramsay and
Dawson are said to be examples of these fundamental
principles.
87. Lord Hoffmann, therefore, stated that when Parliament
intended to give a legal meaning to a statutory term or
phrase, then Ramsay approach does not require or permit

an examination of the commercial nature of the transaction,
rather, it requires a consideration of the legal effect of what
was done.
88. MacNiven approach has been reaffirmed by the House
of Lord in Barclays Mercantile Business Finance Limited
v. Mawson (2005) AC 685 (HL). In Mawson, BGE, an Irish
Company had applied for a pipeline and it sold the pipeline
to (BMBF) taxpayer for ₤ 91.3 Million. BMBF later leased
the pipeline back to BGE which granted a sub-lease
onwards to its UK subsidiary. BGE immediately deposited
the sale proceeds as Barclays had no access to it for 31
years. Parties had nothing to loose with the transaction
designed to produce substantial tax deduction in UK and no
other economic consequence of any significance. Revenue
denied BMBF’s deduction for depreciation because the
series of transactions amounted to a single composite
transaction that did not fall within Section 24(1) of the
Capital Cost Allowance Act, 1990. House of Lords, in a
unanimous decision held in favour of the tax payer and held
as follows ”driving principle in Ramsay’s line of cases

continues to involve a general rule of statutory
interpretation and unblinked approach to the analysis of
facts. The ultimate question is whether the relevant
statutory provisions, construed purposively, were intended
to apply to a transaction, viewed realistically.
89. On the same day, House of Lords had an occasion to
consider the Ramsay approach in Inland Revenue
Commissioner v. Scottish Provident Institution (2004 [1]
WLR 3172). The question involved in Scottish Provident
Institution was whether there was “a debt contract for the
purpose of Section 150A(1) of the Finance Act, 1994.”
House of Lords upheld the Ramsay principle and considered
the series of transaction as a composite transaction and
held that the composite transaction created no entitlement
to securities and that there was, thus, no qualifying
contract. The line drawn by House of Lords between
Mawson and Scottish Provident Institution in holding
that in one case there was a composite transaction to which
statute applied, while in the other there was not.

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

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

paying the dividends and (b) 15% of the gross amount of the
dividends in all other cases.
93. CBDT issued Circular No. 682 dated 30.03.1994
clarifying that capital gains derived by a resident of
Mauritius by alienation of shares of an Indian company
shall be taxable only in Mauritius according to Mauritius
Tax Law. In the year 2000, the Revenue authorities sought
to deny the treaty benefits to some Mauritius resident
companies pointing out that the beneficial ownership in
those companies was outside Mauritius and thus the
foremost purpose of investing in India via Mauritius was tax
avoidance. Tax authorities took the stand that Mauritius
was merely being used as a conduit and thus sought to
deny the treaty benefits despite the absence of a limitation
of benefits (LOB) clause in the Treaty. CBDT then issued
Circular No. 789 dated 13.04.2000 stating that the
Mauritius Tax Residency Certificate (TRC) issued by the
Mauritius Tax Office was a sufficient evidence of tax
response of that company in Mauritius and that such
companies were entitled to claim treaty benefits.

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

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

Mauritius and Mauritius alone then the Indo-Mauritius
treaty would be dead letter.
96. Mr. Aspi Chinoy, learned senior counsel contended
that in the absence of LOB Clause in the India Mauritius
Treaty, the scope of the treaty would be positive from
Mauritius Special Purpose Vehicles (SPVs) created
specifically to route investments into India, meets with our
approval. We acknowledge that on a subsequent
sale/transfer/disinvestment of shares by the Mauritian
company, after a reasonable time, the sale proceeds would
be received by the Mauritius Company as the registered
holder/owner of such shares, such benefits could be sent
back to the Foreign Principal/100% shareholder of
Mauritius company either by way of a declaration of special
dividend by Mauritius company and/or by way of
repayment of loans received by the Mauritius company from
the Foreign Principal/shareholder for the purpose of making
the investment. Mr. Chinoy is right in his contention that
apart from DTAA, which provides for tax exemption in the
case of capital gains received by a Mauritius

company/shareholder at the time of disinvestment/exit and
the fact that Mauritius does not levy tax on dividends
declared and paid by a Mauritius company/subsidiary to its
Foreign Shareholders/Principal, there is no other reason for
this quantum of funds to be invested from/through
Mauritius.
97. We are, therefore, of the view that in the absence of
LOB Clause and the presence of Circular No. 789 of 2000
and TRC certificate, on the residence and beneficial
interest/ownership, tax department cannot at the time of
sale/disinvestment/exit from such FDI, deny benefits to
such Mauritius companies of the Treaty by stating that FDI
was only routed through a Mauritius company, by a
company/principal resident in a third country; or the
Mauritius company had received all its funds from a foreign
principal/company; or the Mauritius subsidiary is
controlled/managed by the Foreign Principal; or the
Mauritius company had no assets or business other than
holding the investment/shares in the Indian company; or
the Foreign Principal/100% shareholder of Mauritius

company had played a dominant role in deciding the time
and price of the disinvestment/sale/transfer; or the sale
proceeds received by the Mauritius company had ultimately
been paid over by it to the Foreign Principal/ its 100%
shareholder either by way of Special Dividend or by way of
repayment of loans received; or the real owner/beneficial
owner of the shares was the foreign Principal Company.
Setting up of a WOS Mauritius subsidiary/SPV by
Principals/genuine substantial long term FDI in India
from/through Mauritius, pursuant to the DTAA and
Circular No. 789 can never be considered to be set up for
tax evasion.
TRC whether conclusive
98. LOB and look through provisions cannot be read into
a tax treaty but the question may arise as to whether the
TRC is so conclusive that the Tax Department cannot pierce
the veil and look at the substance of the transaction.
DTAA and Circular No. 789 dated 13.4.2000, in our view,
would not preclude the Income Tax Department from
denying the tax treaty benefits, if it is established, on facts,
that the Mauritius company has been interposed as the

owner of the shares in India, at the time of disposal of the
shares to a third party, solely with a view to avoid tax
without any commercial substance. Tax Department, in
such a situation, notwithstanding the fact that the
Mauritian company is required to be treated as the
beneficial owner of the shares under Circular No. 789 and
the Treaty is entitled to look at the entire transaction of sale
as a whole and if it is established that the Mauritian
company has been interposed as a device, it is open to the
Tax Department to discard the device and take into
consideration the real transaction between the parties , and
the transaction may be subjected to tax. In other words,
TRC does not prevent enquiry into a tax fraud, for example,
where an OCB is used by an Indian resident for round-
tripping or any other illegal activities, nothing prevents the
Revenue from looking into special agreements, contracts or
arrangements made or effected by Indian resident or the
role of the OCB in the entire transaction.
99. No court will recognise sham transaction or a
colourable device or adoption of a dubious method to evade

tax, but to say that the Indo-Mauritian Treaty will recognise
FDI and FII only if it originates from Mauritius, not the
investors from third countries, incorporating company in
Mauritius, is pitching it too high, especially when statistics
reveals that for the last decade the FDI in India was US$
178 billion and, of this, 42% i.e. US$ 74.56 billion was
through Mauritian route. Presently, it is known, FII in India
is Rs.450,000 crores, out of which Rs. 70,000 crores is from
Mauritius. Facts, therefore, clearly show that almost the
entire FDI and FII made in India from Mauritius under
DTAA does not originate from that country, but has been
made by Mauritius Companies / SPV, which are owned by
companies/individuals of third countries providing funds
for making FDI by such companies/individuals not from
Mauritius, but from third countries.
100. Mauritius, and India, it is known, has also signed a
Memorandum of Understanding (MOU) laying down the
rules for information, exchange between the two countries
which provides for the two signatory authorities to assist
each other in the detection of fraudulent market practices,

including the insider dealing and market manipulation in
the areas of securities transactions and derivative dealings.
The object and purpose of the MOU is to track down
transactions tainted by fraud and financial crime, not to
target the bona fide legitimate transactions. Mauritius has
also enacted stringent “Know Your Clients” (KYC)
regulations and Anti-Money Laundering laws which seek to
avoid abusive use of treaty.
101. Viewed in the above perspective, we also find no
reason to import the “abuse of rights doctrine” (abus de
droit) to India. The above doctrine was seen applied by the
Swiss Court in A Holding Aps. (8 ITRL), unlike Courts
following Common Law. That was a case where a Danish
company was interposed to hold all the shares in a Swiss
Company and there was a clear finding of fact that it was
interposed for the sole purpose of benefiting from the Swiss-
Denmark DTA which had the effect of reducing a normal
35% withholding tax on dividend out of Switzerland down to
0%. Court in that case held that the only reason for the
existence of the Danish company was to benefit from the

zero withholding tax under the tax treaty. On facts also, the
above case will not apply to the case in hand.
102. Cayman Islands, it was contended, was a tax heaven
and CGP was a shell company, hence, they have to be
looked at with suspicion. We may, therefore, briefly
examine what those expressions mean and understood in
the corporate world.
TAX HAVENS, TREATY SHOPPING AND SHELL
COMPANIES
103. Tax Havens” is not seen defined or mentioned in the
Tax Laws of this country Corporate world gives different
meanings to that expression, so also the Tax Department.
The term “tax havens” is sometime described as a State with
nil or moderate level of taxation and/or liberal tax incentives
for undertaking specific activities such as exporting. The
expression “tax haven” is also sometime used as a “secrecy
jurisdiction. The term “Shell Companies” finds no definition
in the tax laws and the term is used in its pejorative sense,
namely as a company which exits only on paper, but in
reality, they are investment companies. Meaning of the
expression ‘Treaty Shopping’ was elaborately dealt with in
Azadi Bachao Andolan and hence not repeated.

104. Tax Justice Network Project (U.K.), however, in its
report published in September, 2005, stated as follows:
“The role played by tax havens in
encouraging and profiteering from tax avoidance,
tax evasion and capital flight from developed and
developing countries is a scandal of gigantic
proportions”.
The project recorded that one per cent of the world’s
population holds more than 57% of total global worth and
that approximately US $ 255 billion annually was involved
in using offshore havens to escape taxation, an amount
which would more than plug the financing gap to achieve
the Millennium Development Goal of reducing the world
poverty by 50% by 2015. (“Tax Us If You Can” September
2005, 78 available at http:/www.taxjustice.net). Necessity
of proper legislation for charging those types of transactions
have already been emphasised by us.
Round Tripping
105. India is considered to be the most attractive
investment destinations and, it is known, has received
$37.763 billion in FDI and $29.048 billion in FII investment
in the year to March 31, 2010. FDI inflows it is reported
were of $ 22.958 billion between April 2010 and January,

2011 and FII investment were $ 31.031 billions. Reports
are afloat that million of rupees go out of the country only to
be returned as FDI or FII. Round Tripping can take many
formats like under-invoicing and over-invoicing of exports
and imports. Round Tripping involves getting the money
out of India, say Mauritius, and then come to India like FDI
or FII. Art. 4 of the Indo-Mauritius DTAA defines a ‘resident’
to mean any person, who under the laws of the contracting
State is liable to taxation therein by reason of his domicile,
residence, place of business or any other similar criteria.
An Indian Company, with the idea of tax evasion can also
incorporate a company off-shore, say in a Tax Haven, and
then create a WOS in Mauritius and after obtaining a TRC
may invest in India. Large amounts, therefore, can be
routed back to India using TRC as a defence, but once it is
established that such an investment is black money or
capital that is hidden, it is nothing but circular movement of
capital known as Round Tripping; then TRC can be ignored,
since the transaction is fraudulent and against national
interest.

106. Facts stated above are food for thought to the
legislature and adequate legislative measures have to be
taken to plug the loopholes, all the same, a genuine
corporate structure set up for purely commercial purpose
and indulging in genuine investment be recognized.
However, if the fraud is detected by the Court of Law, it can
pierce the corporate structure since fraud unravels
everything, even a statutory provision, if it is a stumbling
block, because legislature never intents to guard fraud.
Certainly, in our view, TRC certificate though can be
accepted as a conclusive evidence for accepting status of
residents as well as beneficial ownership for applying the
tax treaty, it can be ignored if the treaty is abused for the
fraudulent purpose of evasion of tax.
McDowell - WHETHER CALLS FOR RECONSDIERATION:
107. McDowell has emphatically spoken on the principle
of Tax Planning. Justice Ranganath Mishra, on his and on
behalf of three other Judges, after referring to the
observations of Justice S.C. Shah in CIT v. A. Raman and
Co. (1968) 1 SCC 10, CIT v. B. M. Kharwar (1969) 1 SCR

651, the judgments in Bank of Chettinad Ltd. v. CIT
(1940) 8 ITR 522 (PC), Jiyajeerao Cotton Mills Ltd. v.
Commissioner of Income Tax and Excess Profits Tax,
Bombay AIR 1959 SC 270; CIT v. Vadilal Lallubhai (1973)
3 SCC 17 and the views expressed by Viscount Simon in
Latilla v. IRC. 26 TC 107 : (1943) AC 377 stated as follows:
“Tax planning may be legitimate provided it is
within the framework of law. Colourable devices
cannot be part of tax planning and it is wrong to
encourage or entertain the belief that is
honourable to avoid the payment of tax by
resorting to dubious methods. It is the
obligation of every citizen to pay the taxes
honestly without resorting to subterfuges.”
108. Justice Shah in Raman (supra) has stated that
avoidance of tax liability by so arranging the commercial
affairs that charge of tax is distributed is not prohibited and
a tax payer may resort to a device to divert the income
before it accrues or arises to him and the effectiveness of
the device depends not upon considerations of morality, but
on the operation of the Income Tax Act. Justice Shah made
the same observation in B.N. Kharwar (supra) as well and
after quoting a passage from the judgment of the Privy
Council stated as follows :-

“The Taxing authority is entitled and is
indeed bound to determine the true legal
relation resulting from a transaction. If the
parties have chosen to conceal by a device the
legal relation, it is open to the taxing authorities
to unravel the device and to determine the true
character of the relationship. But the legal
effect of a transaction cannot be displaced by
probing into the “substance of the transaction”.
In Jiyajeerao (supra) also, this Court made the following
observation:
“Every person is entitled so to arrange his
affairs as to avoid taxation, but the arrangement
must be real and genuine and not a sham or
make-believe.”
109. In Vadilal Lalubhai (supra) this Court re-affirmed
the principle of strict interpretation of the charging
provisions and also affirmed the decision of the Gujarat
High Court in Sankarlal Balabhai v. ITO (1975) 100 ITR
97 (Guj.), which had drawn a distinction between the
legitimate avoidance and tax evasion. Lalita’s case (supra)
dealing with a tax avoidance scheme, has also expressly
affirmed the principle that genuine arrangements would be
permissible and may result in an assessee escaping tax.

110. Justice Chinnappa Reddy starts his concurring
judgment in McDowell as follows:
“While I entirely agree with my brother
Ranganath Mishra, J. in the judgment proposed
to be delivered by me, I wish to add a few
paragraphs, particularly to supplement what he
has said on the “fashionable” topic of tax
avoidance.”
(emphasis supplied)
Justice Reddy has, the above quoted portion shows, entirely
agreed with Justice Mishra and has stated that he is only
supplementing what Justice Mishra has spoken on tax
avoidance. Justice Reddy, while agreeing with Justice
Mishra and the other three judges, has opined that in the
very country of its birth, the principle of Westminster has
been given a decent burial and in that country where the
phrase “tax avoidance” originated the judicial attitude
towards tax avoidance has changed and the Courts are now
concerning themselves not merely with the genuineness of a
transaction, but with the intended effect of it for fiscal
purposes. Justice Reddy also opined that no one can get
away with the tax avoidance project with the mere
statement that there is nothing illegal about it. Justice
Reddy has also opined that the ghost of Westminster (in the

words of Lord Roskill) has been exorcised in England. In
our view, what transpired in England is not the ratio of
McDowell and cannot be and remains merely an opinion or
view.
111. Confusion arose (see Paragraph 46 of the judgment)
when Justice Mishra has stated after referring to the
concept of tax planning as follows:
“On this aspect, one of us Chinnappa Reddy, J.
has proposed a separate and detailed opinion
with which we agree.”
112. Justice Reddy, we have already indicated, himself has
stated that he is entirely agreeing with Justice Mishra and
has only supplemented what Justice Mishra has stated on
Tax Avoidance, therefore, we have go by what Justice
Mishra has spoken on tax avoidance.
113. Justice Reddy has depreciated the practice of setting
up of Tax Avoidance Projects, in our view, rightly because
the same is/was the situation in England and Ramsay and
other judgments had depreciated the Tax Avoidance
Schemes.

114. In our view, the ratio of the judgment is what is
spoken by Justice Mishra for himself and on behalf of three
other judges, on which Justice Reddy has agreed. Justice
Reddy has clearly stated that he is only supplementing what
Justice Mishra has said on Tax avoidance.
115. Justice Reddy has endorsed the view of Lord Roskill
that the ghost of Westminster had been exorcised in
England and that one should not allow its head rear over
India. If one scans through the various judgments of the
House of Lords in England, which we have already done,
one thing is clear that it has been a cornerstone of law, that
a tax payer is enabled to arrange his affairs so as to reduce
the liability of tax and the fact that the motive for a
transaction is to avoid tax does not invalidate it unless a
particular enactment so provides (Westminster Principle).
Needless to say if the arrangement is to be effective, it is
essential that the transaction has some economic or
commercial substance. Lord Roskill’s view is not seen as

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

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

119. Revenue contends that the entire corporate structure
be looked at as on artificial tax avoidance scheme wherein
CGP was introduced into the structure at the last moment,
especially when another route was available for HTIL to
transfer its controlling interest in HEL to Vodafone. Further
it was pointed out that the original idea of the parties was to
sell shares in HEL directly but at the last moment the
parties changed their mind and adopted a different route
since HTIL wanted to declare a special dividend out of US $
11 million for payment and the same would not have been
possible if they had adopted Mauritian route.
120. Petitioner pointed out that if the motive of HTIL was
only to save tax it had the option to sell the shares of Indian
companies directly held Mauritius entities, especially when
there is no LOB clause in India-Mauritius Treaty. Further,
it was pointed out that if the Mauritius companies had sold
the shares of HEL, then Mauritius companies would have
continued to be the subsidiary of HTIL, their account could
have been consolidated in the hands of HTIL and HTIL

would have accounted for the accounts exactly the same
way that it had accounted for the accounts in HTIL
BVI/nominated payee. Had HTIL adopted the Mauritius
route, then it would have been cumbersome to sell the
shares of a host of Mauritian companies.

121. CGP was incorporated in the year 1998 and the same
became part of the Hutchison Corporate structure in the year
2005. Facts would clearly indicate that the CGP held shares
in Array and Hutchison Teleservices (India) Holdings Limited
(MS), both incorporated in Mauritius. HTIL, after acquiring
the share of CGP (CI) in the year 1994 which constituted
approximately 42% direct interest in HEL, had put in place
various FWAs, SHAs for arranging its affairs so that it can
also have interest in the functioning of HEL along with Indian
partners.
122. Self centred operations in India were with 3GSPL an
Indian company which held options through various FWAs
entered into with Indian partners. One of the tests to
examine the genuineness of the structure is the “timing test”

that is timing of the incorporation of the entities or transfer
of shares etc. Structures created for genuine business
reasons are those which are generally created or acquired at
the time when investment is made, at the time where further
investments are being made at the time of consolidation etc.
123. HTIL preferred CGP route rather than adopting any
other method (why ?) for which we have to examine whether
HTIL has got any justification for adopting this route, for
sound commercial reasons or purely for evasion of tax. In
international investments, corporate structures are designed
to enable a smooth transition which can be by way of
divestment or dilution. Once entry into the structure is
honourable, exits from the structure can also be honourable.
124. HTIL structure was created over a period of time and
this was consolidated in 2004 to provide a working model by
which HTIL could make best use of its investments and
exercise control over and strategically influence the affairs of
HEL. HTIL in its commercial wisdom noticed the
disadvantage of preferring Array, which would have created

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

125. The Revenue has no case that HTIL structure was a
device or an artifice, but all along the contention was that
CGP was interposed at the last moment and applying the
Dawson test, it was contended that such an artificially
interposed device be ignored, and applying Ramsay test of
purposive interpretation, the transaction be taxed for gain.
CGP, it may be noted, was already part of the HTIL’s
Corporate Structure and the decision taken to sell CGP
(Share) so as to exit from the Indian Telecom Sector was not
the fall out of a tax exploitation scheme, but a genuine
commercial decision taking into consideration the best
interest of the investors and the corporate entity.
126. Principle of Fiscal nullity was applied by Vinelott, J.
in favour of the assessee in Dawson, where the judge
rejected the contention of the Crown that the transaction was
hit by the Ramsay principle, holding that a transaction
cannot be disregarded and treated as fiscal nullity if it has
enduring legal consequences. Principle was again explained
by Lord Brightman stating that the Ramsay test would apply
not only where the steps are pre-contracted, but also they

are pre-ordained, if there is no contractual right and in all
likelihood the steps would follow. On Fiscal nullity, Lord
Brightman again explained that there should be a pre-
ordained series of transactions and there should be steps
inserted that have no commercial purpose and the inserted
steps are to be disregarded for fiscal purpose and, in such
situations, Court must then look at the end result, precisely
how the end result will be taxed will depend on terms of the
taxing statute sought to be applied. Sale of CGP share, for
exiting from the Indian Telecommunication Sector, in our
view, cannot be considered as pre-ordained transaction, with
no commercial purpose, other than tax avoidance. Sale of
CGP share, in our view, was a genuine business transaction,
not a fraudulent or dubious method to avoid capital gains
tax.
SITUS OF CGP
127. Situs of CGP share stands where, is the next question.
Law on situs of share has already been discussed by us in
the earlier part of the judgment. Situs of shares situates at
the place where the company is incorporated and/ or the

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

Williams [1942] AC 541. Situs of CGP share, therefore,
situates in Cayman Islands and on transfer in Cayman
Islands would not shift to India.
PART-V
128. Sale of CGP, on facts, we have found was not the fall
out of an artificial tax avoidance scheme or an artificial device,
pre-ordained, or pre-conceived with the sole object of tax
avoidance, but was a genuine commercial decision to exit from
the Indian Telecom Sector.
129. HTIL had the following controlling interest in HEL before
its exit from the Indian Telecom Sector:-
1. HTIL held its direct equity interest in HEL
amounting approximately to 42% through
eight Mauritius companies.
2. HTIL indirect subsidiary CGP(M) held 37.25%
of equity interest in TII, an Indian Company,
which in turn held 12.96% equity interest in
HEL. CGP(M), as a result of its 37.25%
interest in TII had an interest in several
downstream companies which held interest in
HEL, as a result of which HTIL obtained
indirect equity interest of 7.24% in HEL.
3. HTIL held in Indian Company Omega
Holdings, an Indian Co., interest to the extent
of 45.79% of share capital through HTIM
which held shareholding of 5.11% in HEL,

resulting in holding of 2.34% interest in the
Indian Company HEL.
HTIL could, therefore, exercise its control over HEL, through
the voting rights of its indirect subsidiary Array (Mauritius)
which in turn controlled 42% shares through Mauritian
Subsidiaries in HEL. Mauritian subsidiaries controlled 42%
voting rights in HEL and HTIL could not however exercise
voting rights as stated above, in HEL directly but only through
indirect subsidiary CGP(M) which in turn held equity interest
in TII, an Indian company which held equity interest in HEL.
HTIL likewise through an indirect subsidiary HTI(M), which
held equity interest in Omega an Indian company which held
equity interest in HEL, could exercise only indirect voting
rights in HEL
.
130. HTIL, by holding CGP share, got control over its WOS
Hutchison Tele Services (India) Holdings Ltd (MS). HTSH(MS)
was having control over its WOS 3GSPL, an Indian company
which exercised voting rights in HEL. HTIL, therefore, by
holding CGP share, had 52% equity interest, direct 42% and
approximately 10% (pro rata) indirect in HEL and not 67% as
contended by the Revenue.

131. HTIL had 15% interest in HEL by virtue of FWAs, SHAs
Call and Put Option Agreements and Subscription Agreements
and not controlling interest as such in HEL. HTIL, by virtue
of those agreements, had the following interests:-
(i) Rights (and Options) by providing finance and
guarantee to Asim Ghosh Group of
companies to exercise control over TII and
indirectly over HEL through TII Shareholders
Agreement and the Centrino Framework
Agreement dated 1.3.2006;
(ii) Rights (and Options) by providing finance and
guarantee to Analjit Singh Group of
companies to exercise control over TII and
indirectly over HEL through various TII
shareholders agreements and the N.D. Callus
Framework Agreement dated 1.3.2006.
(iii) Controlling rights over TII through the TII
Shareholder’s Agreement in the form of rights
to appoint two directors with veto power to
promote its interest in HEL and thereby hold
beneficial interest in 12.30% of the share
capital of the in HEL.
(iv) Finance to SMMS to acquire shares in ITNL
(formerly Omega) with right to acquire the
share capital of Omega in future.
(v) Rights over ITNL through the ITNL
Shareholder’s Agreement, in the form of right
to appoint two directors with veto power to
promote its interests in HEL and thereby it
held beneficial interest in 2.77% of the share
capital of the Indian company HEL;

(vi) Interest in the form of loan of US$231 million
to HTI (BVI) which was assigned to Array
Holdings Ltd.;
(vii) Interest in the form of loan of US$ 952
million through HTI (BVI) utilized for
purchasing shares in the Indian company
HEL by the 8 Mauritius companies;
(viii) Interest in the form of Preference share
capital in JKF and TII to the extent of US$
167.5 million and USD 337 million
respectively. These two companies hold
19.54% equity in HEL.
(ix) Right to do telecom business in India through
joint venture;
(x) Right to avail of the telecom licenses in
India and right to do business in India;
(xi) Right to use the Hutch brand in India;
(xii) Right to appoint/remove directors in the
board of the Indian company HEL and its
other Indian subsidiaries;
(xiii) Right to exercise control over the
management and affairs of the business of
the Indian company HEL (Management
Rights);
(xiv) Right to take part in all the investment,
management and financial decisions of the
Indian company HEL;
(xv) Right to control premium;
(xvi) Right to consultancy support in the use of
Oracle license for the Indian business;

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

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

situates in Cayman Islands. By purchasing the CGP share
its situs will not shift either to Mauritius or to India, a legal
issue, already explained by us. Array being a WOS of CGP,
CGP may appoint or remove any of its directors, if it wishes
by a resolution in the general body of the subsidiary, but
CGP, Array and all Mauritian entities are separate legal
entities and have de-centralised management and each of
the Mauritian subsidiaries has its own management
personnels.
133. Vodafone on purchase of CGP share got controlling
interest in the Mauritian Companies and the incident of
transfer of CGP share cannot be considered to be two
distinct and separate transactions, one shifting of the share
and another shifting of the controlling interest. Transfer of
CGP share automatically results in host of consequences
including transfer of controlling interest and that controlling
interest as such cannot be dissected from CGP share
without legislative intervention. Controlling interest of CGP
over Array is an incident of holding majority shares and the
control of Company vests in the voting power of its
shareholders. Mauritian entities being a WOS of Array,

Array as a holding Company can influence the shareholders
of various Mauritian Companies. Holding Companies like
CGP, Array, may exercise control over the subsidiaries,
whether a WOS or otherwise by influencing the voting
rights, nomination of members of the Board of Directors and
so on. On transfer of shares of the holding Company, the
controlling interest may also pass on to the purchaser along
with the shares. Controlling interest might have percolated
down the line to the operating companies but that
controlling interest is inherently contractual and not a
property right unless otherwise provided for in the statue.
Acquisition of shares, may carry the acquisition of
controlling interest which is purely a commercial concept
and the tax can be levied only on the transaction and not
on its effect. Consequently, on transfer of CGP share to
Vodafone, Vodafone got control over eight Mauritian
Companies which owned shares in VEL totalling to 42%
and that does not mean that the situs of CGP share has
shifted to India for the purpose of charging capital gains tax.

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

manner etc; and on transfer of shares those rights also sail
along with them.
135. Vodafone, on purchase of CGP share got all those
rights, and the price paid by Vodafone is for all those rights,
in other words, control premium paid, not over and above
the CGP share, but is the integral part of the price of the
share. On transfer of CGP share situated in Cayman
Islands, the entire rights, which accompany stood
transferred not in India, but offshore and the facts reveal
that the offshore holdings and arrangements made by HTIL
and Vodafone were for sound commercial and legitimate tax
planning, not with the motive of evading tax.
136. Vodafone, on purchase of CGP share also got control
over its WOS, HTSH(M) which is having control over its
WOS, 3GSPL, an Indian Company which exercised voting
rights in HEL. 3GSPL, was incorporated on 16.03.99 and
run call centre business in India. The advantage of
transferring share of CGP rather than Array was that it
would obviate the problems arising on account of the call

and put agreements and voting rights enjoyed by 3GSPL.
3GSPL was also a party to various agreements between
itself and Companies of AS, AG and IDFC Groups. AS , AG
& IDFC have agreed to retain their shareholdings with full
control including voting rights and dividend rights. In fact,
on 02.03.2007 AG wrote to HEL confirming that his indirect
equity or beneficial interest in HEL worked out to be as
4.68% and it was stated, he was the beneficiary of full
dividend rights attached to his shares and he had received
credit support and primarily the liability for re-payment was
of his company. Further, it was also pointed out that he
was the exclusive beneficial owner of his shares in his
companies, enjoying full and exclusive rights to vote and
participate in any benefits accruing to those shares. On
05.03.2007 AS also wrote to the Government on the same
lines.
137. Vodafone, on acquisition of CGP, is in a position to
replace the directors of holding company of 3GSPL so as to
get control over 3GSPL. 3GSPL has call option as well as
the obligation of the put option. Rights and obligations

which flow out of call and put options have already been
explained by us in the earlier part of the judgment. Call
and put options are contractual rights and do not sound in
property and hence they cannot be, in the absence of a
statutory stipulation, considered as capital assets. Even
assuming so, they are in favour of 3GSPL and continue to
be so even after entry of Vodafone.
138. We have extensively dealt with the terms of the
various FWAs, SHAs and Term Sheets and in none of those
Agreements HTIL or Vodafone figure as parties. SHAs
between Mauritian entities (which were shareholders of the
Indian operating Companies) and other shareholders in
some of the other operating companies in India held shares
in HEL related to the management of the subsidiaries of AS,
AG and IDFC and did not relate to the management of the
affairs of HEL and HTIL was not a party to those
agreements, and hence there was no question of assigning
or relinquishing any right to Vodafone.

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

contained therein, so also the rights and obligations that
flow out of them. HTIL and Vodafone have, of course, had
the interest to see the SHAs and FWAs, be put in proper
place but that interest cannot be termed as property rights,
attracting capital gains tax.

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

01.03.2006 were also contractual rights, and continue to be
so on entry of Vodafone.
141. Controlling right over TII through TII SHAs in the
form of right to appoint two Directors with veto power to
promote its interest in HEL and thereby held beneficial
interest in 12.30% of share capital in the HEL are also
contractual rights. Finance to SMMS to acquire shares in
ITNL (ultimately Omega) with right to acquire share capital
of Omega were also contractual rights between the parties.
On transfer of CGP share to Vodafone corresponding
rearrangement were made in the SHAs and FWAs and Term
Sheet Agreements in which Vodafone was not a party.
142. SPA, through the transfer of CGP, indirectly
conferred the benefit of put option from the transferee of
CGP share to be enjoyed in the same manner as they were
enjoyed by the transferor and the revised set of 2007
agreements were exactly between the parties that is the
beneficiary of the put options remained with the

downstream company 3 GSPL and the counter-party of the
put option remained with AG/AS Group Companies.
143. Fresh set of agreements of 2007 as already referred to
were entered into between IDFC, AG, AS, 3 GSPL and
Vodafone andin fact, those agreements were irrelevant for
the transfer of CGP share. FWAs with AG and AS did not
constitute transaction documents or give rise to a transfer
of an asset, so also the IDFC FWA. All those FWAs contain
some adjustments with regard to certain existing rights,
however, the options, the extent of rights in relation to
options, the price etc. all continue to remain in place as
they stood. Even if they had not been so entered into, all
those agreements would have remained in place because
they were in favour of 3GSPL, subsidiary of CGP.
144. The High Court has reiterated the common law
principle that the controlling interest is an incident of the
ownership of the share of the company, something which
flows out of holding of shares and, therefore, not an
identifiable or distinct capital asset independent of the
holding of shares, but at the same time speaks of change in

the controlling interest of VEL, without there being any
transfer of shares of VEL. Further, the High Court failed to
note on transfer of CGP share, there was only transfer of
certain off-shore loan transactions which is unconnected
with underlying controlling interest in the Indian Operating
Companies. The other rights, interests and entitlements
continue to remain with Indian Operating Companies and
there is nothing to show they stood transferred in law.
145. The High Court has ignored the vital fact that as far
as the put options are concerned there were pre-existing
agreements between the beneficiaries and counter parties
and fresh agreements were also on similar lines. Further,
the High Court has ignored the fact that Term Sheet
Agreement with Essar had nothing to do with the transfer of
CGP, which was a separate transaction which came about
on account of independent settlement between Essar and
Hutch Group, for a separate consideration, unrelated to the
consideration of CGP share. The High Court committed an
error in holding that there were some rights vested in HTIL
under SHA dated 5.7.2003 which is also an agreement,
conferring no right to any party and accordingly none could

have been transferred. The High Court has also committed
an error in holding that some rights vested with HTIL under
the agreement dated 01.08.2006, in fact, that agreement
conferred right on Hutichison Telecommunication (India)
Ltd., which is a Mauritian Company and not HTIL, the
vendor of SPA. The High court has also ignored the vital
fact that FIPB had elaborately examined the nature of call
and put option agreement rights and found no right in
presenti has been transferred to Vodafone and that as and
when rights are to be transferred by AG and AS Group
Companies, it would specifically require Government
permission since such a sale would attract capital gains,
and may be independently taxable. We may now examine
whether the following rights and entitlements would also
amount to capital assets attracting capital gains tax on
transfer of CGP share.
Debts/Loans through Intermediaries
146. SPA contained provisions for assignment of loans
either at Mauritius or Cayman Islands and all loans were
assigned at the face value. Clause 2.2 of the SPA stipulated
that HTIL shall procure the assignment of and purchaser

agrees to accept an assignment of loans free from
encumbrances together with all rights attaching or accruing
to them at completion. Loans were defined in the SPA to
mean, all inter-company loans owing by CGP and Array to a
vendor group company including accrued or unpaid interest,
if any, on the completion date. HTIL warranted and
undertook that, as on completion, loans set out in Part IV of
Schedule 1 shall be the only indebtedness owing by the
Wider group company to any member of the vendor group.
Vendor was obliged to procure that the loans set out in Part
IV of Schedule 1 shall not be repaid on or before completion
and further, that any loan in addition to those identified will
be non-interest bearing. Clause 7.4 of the SPA stipulated
that any loans in addition to those identified in Part IV of
Schedule 1 of the SPA would be non-interest bearing and on
terms equivalent to the terms of those loans identified in Part
IV of Schedule 1 of the SPA. The sum of such indebtedness
comprised of:
a) US$ 672,361,225 (Loan 1) – reflected in a
Loan Agreement (effective date of loan: 31
December 2006; date of Loan Agreement: 28
April 2007);

b) HK$ 377,859,382.40 (Loan 2) – reflected in a
Loan Agreement (effective date of Loan 31st
December 2006; date of Loan Agreement: 28
April 2007) [(i) + (ii): US$ 1,050,220,607.40]
c) US$ 231,111,427.41 (Loan 3) – reflected in a
Receivable Novation Agreement i.e. HTM
owed HTI BVI Finance such sum, which
Array undertook to repay in pursuance of an
inter-group loan restructuring, which was
captured in such Receivable Novation
Agreement dated 28 April 2007.
HTI BVI Finance Limited, Array and Vodafone entered into a
Deed of Assignment on 08.05.2007 pertaining to the Array
indebtedness. On transfer of CGP shares, Array became a
subsidiary of VIHBV. The price was calculated on a gross
asset basis (enterprise value of underlying assets), the intra
group loans would have to be assigned at face value, since
nothing was payable by VIHBV for the loans as they had
already paid for the gross assets.
147. CGP had acknowledged indebtedness of HTI BVI
Finance Limited in the sum of US$161,064,952.84 as at the
date of completion. The sum of such indebtedness was
comprised of:
a) US$ 132,092,447.14, reflected in a Loan
Agreement (effective date of loan: 31
December 2006; date of Loan Agreement: 28
April 2007)

b) US$ 28,972,505.70, reflected in a Loan
Agreement (effective date of loan: 14 February
2007; date of Loan Agreement: 15 February
2007).
HTI BVI Finance Limited Limited, CGP and the Purchaser
entered into the Deed of Assignment on 08.05.2007
pertaining to the CGP indebtedness.
148. In respect of Array Loan No. 3 i.e. US$
231,111,427.41, the right that was being assigned was not
the right under a Loan Agreement, but the right to receive
payment from Array pursuant to the terms of a Receiveable
Novation Agreement dated 28.04.2007 between Array, HTIL
and HTI BVI Finance Limited. Under the terms of the
Receiveable Novation Agreement, HTIL’s obligation to repay
the loan was novated from HTI BVI Finance to Array, the
consideration for this novation was US$ 231,111,427.41
payable by Array to HTI BVI Finance Limited. It was this
right to receive the amount from Array that was assigned to
VHI BV under the relevant Loan Assignment. It was
envisaged that, between signing and completion of the
agreement, there would be a further loan up to US$ 29.7

million between CGP (as borrower) from a Vendor Group
Company (vide Clause 6.4 of the SPA) and the identity of the
lender has not been identified in the SPA. The details of the
loan were ultimately as follows:
Borrower Lender Amount of Loan Date of
Agreement
Effective date
of Agreement
CGP HTI (BVI)
Finance
Limited
US$28,972,505.70 15 February
14 February
Array and CGP stood outside of obligation to repay an
aggregate US$ 1,442,396.987.61 to HTI BVI Finance Limited
and VHIBV became the creditor of Array and CGP in the
place and stepped off a HTI BVI Finance Limited on 8.5.2007
when VHIBV stepped into the shoes of HTI BVI Finance
Limited.
149. Agreements referred to above including the provisions
for assignments in the SPA, indicate that all loan agreements
and assignments of loans took place outside India at face
value and, hence, there is no question of transfer of any
capital assets out of those transactions in India, attracting
capital gains tax.

Preference Shares:
150. Vodafone while determining bid price had taken into
consideration, inter alia¸ its ownership of redeemable
preference shares in TII and JFK. Right to preference shares
or rights thereto cannot be termed as transfer in terms of
Section 2(47) of the Act. Any agreement with TII, Indian
partners contemplated fresh investment, by subscribing to
the preference shares were redeemable only by accumulated
profit or by issue of fresh capital and hence any issue of fresh
capital cannot be equated to the continuation of old
preference shares or transfer thereof.
NON COMPETE AGREEMENT
151. SPA contains a Non Compete Agreement which is a
pure Contractual Agreement, a negative covenant, the
purpose of which is only to see that the transferee does not
immediately start a compete business. At times an
agreement provides that a particular amount to be paid
towards non-compete undertaking, in sale consideration,

which may be assessable as business income under Section
28(va) of the IT Act, which has nothing to do with the transfer
of controlling interest. However, a non-compete agreement
as an adjunct to a share transfer, which is not for any
consideration, cannot give rise to a taxable income. In our
view, a non-compete agreement entered into outside India
would not give rise to a taxable event in India. An
agreement for a non-compete clause was executed offshore
and, by no principle of law, can be termed as “property” so as
to come within the meaning of capital gains taxable in India
in the absence of any legislation.
HUTCH BRAND
152. HTIL did not have any direct interest in the brand.
The facts would indicate that brand/Intellectual Property
Right were held by Hutchison Group Company based in
Luxemburg. SPA only assured Vodafone that they would not
have to overnight cease the use of the Hutch brand name,
which might have resulted in a disruption of operations in
India. The bare license to use a brand free of charge, is not

itself a “property” and, in any view, if the right to property is
created for the first time and that too free of charge, it cannot
give rise to a chargeable income. Under the SPA, a limited
window of license was given and it was expressly made free of
charge and, therefore, the assurance given by HTIL to
Vodafone that the brand name would not cease overnight,
cannot be described as “property” rights so as to consider it
as a capital asset chargeable to tax in India.
ORACLE LICENSE:
153. Oracle License was an accounting license, the benefit
of which was extended till such time VEL replaced it with its
own accounting package. There is nothing to show that this
accounting package, which is a software, was transferred to
Vodafone. In any view, this license cannot be termed as a
capital asset since it has never been transferred to the
petitioner.
154. We, therefore, conclude that on transfer of CGP share,
HTIL had transferred only 42% equity interest it had in HEL
and approximately 10% (pro-rata) to Vodafone, the transfer
was off-shore, money was paid off-shore, parties were no-

residents and hence there was no transfer of a capital asset
situated in India. Loan agreements extended by virtue of
transfer of CGP share were also off-shore and hence cannot
be termed to be a transfer of asset situated in India. Rights
and entitlements referred to also, in our view, cannot be
termed as capital assets, attracting capital gains tax and
even after transfer of CGP share, all those rights and
entitlements remained as such, by virtue of various FWAs,
SHAs, in which neither HTIL nor Vodafone was a party.
155. Revenue, however, wanted to bring in all those rights
and entitlements within the ambit of Section 9(1)(i) on a
liberal construction of that Section applying the principle of
purposive interpretation and hence we may examine the
scope of Section 9.
PART VI
SECTION 9 AND ITS APPLICATION
156. Shri Nariman, submitted that this Court should give
a purposive construction to Section 9(1) of the Income Tax

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

157. Shri Harish Salve, learned senior counsel appearing
for the petitioner, submitted that Section 9(1)(i) of the
Income Tax Act deals with taxation on income “deemed to
accrue or arise” in India through the transfer of a capital
asset situated in India and stressed that the source of
income lies where the transaction is effected and not where
the economic interest lies and pointed out that there is a
distinction between a legal right and a contractual right.
Referring to the definition of “transfer” in Section 2(47) of
the Income Tax Act which provides for extinguishment, it
was submitted, that the same is attracted for transfer of a
legal right. Placing reliance on the judgment of this Court
in Commissioner of Income Tax v. Grace Collins and
Others, 248 ITR 323, learned senior counsel submitted that
SPA has not relinquished any right of HTIL giving rise to
capital gains tax in India.
158. Mr. S.P. Chenoy, senior counsel, on our request,
argued at length, on the scope and object of Section 9 of the
Income Tax Act. Learned senior counsel submitted that the
first four clauses/parts of Section 9(1)(i) deal with taxability

of revenue receipts, income arising through or from holding
an asset in India, income arising from the transfer of an
asset situated in India. Mr. Chenoy submitted that only
the last limb of Section 9(1)(i) deals with the transfer of a
capital asset situated in India and can be taxed as a capital
receipt. Learned senior counsel submitted to apply Section
9(1)(i) the capital asset must situate in India and cannot by
a process of interpretation or construction extend the
meaning of that section to cover indirect transfers of capital
assets/properties situated in India. Learned senior counsel
pointed out that there are cases, where the assets/shares
situate in India are not transferred, but where the shares of
foreign company holding/owning such shares are
transferred.
159. Shri Mohan Parasaran, Additional Solicitor General,
submitted that on a close analysis of the language employed
in Section 9 and the various expressions used therein,
would self-evidently demonstrate that Section 9 seeks to
capture income arising directly or indirectly from direct or
indirect transfer. Shri Parasaran submitted, if a holding

company incorporated offshore through a maze of
subsidiaries, which are investment companies incorporated
in various jurisdictions indirectly contacts a company in
India and seeks to divest its interest, by the sale of shares
or stocks, which are held by one of its upstream
subsidiaries located in a foreign country to another foreign
company and the foreign company step into the shoes of the
holding company, then Section 9 would get attracted.
Learned counsel submitted that it would be a case of
indirect transfer and a case of income accruing indirectly in
India and consequent to the sale of a share outside India,
there would be a transfer or divestment or extinguishment
of holding company’s rights and interests, resulting in
transfer of capital asset situated in India.
160. Section 9 of the Income Tax Act deals with the
incomes which shall be deemed to accrue or arise in India.
Under the general theory of nexus relevant for examining the
territorial operation of the legislation, two principles that are
generally accepted for imposition of tax are: (a) Source and
(b) Residence. Section 5 of the Income Tax Act specifies the

principle on which tax can be levied. Section 5(1) prescribes
“residence” as a primary basis for imposition of tax and
makes the global income of the resident liable to tax. Section
5(2) is the source based rule in relation to residents and is
confined to: income that has been received in India; and
income that has accrued or arisen in India or income that is
deemed to accrue or arise in India. In the case of Resident in
India, the total income, according to the residential status is
as under:
(a)Any income which is received or deemed to be
received in India in the relevant previous year
by or on behalf of such person;
(b)Any income which accrues or arises or is
deemed to accrue or arise in India during the
relevant previous year; and
(c) Any income which accrues or arises outside
India during the relevant previous year.
In the case of Resident but not Ordinarily Resident in India,
the principle is as follows:
(a)Any income which is received or deemed to be
received in India in the relevant previous year
by or on behalf of such person;

(b)Any income which accrues or arises or is
deemed to accrue or arise in India to him during
the relevant previous year; and
(c) Any income which accrues or arises to him
outside India during the relevant previous year,
if it is derived from a business controlled in or a
profession set up in India.
In the case of Non-Resident, income from whatsoever source
derived forms part of the total income. It is as follows:
(a)Any income which is received or is deemed to be
received in India during the relevant previous
year by or on behalf of such person; and
(b)Any income which accrues or arises or is
deemed to accrue or arise to him in India during
the relevant previous year.
161. Section 9 of the Income Tax Act extends its provisions
to certain incomes which are deemed to accrue or arise in
India. Four kinds of income which otherwise may not fall in
Section 9, would be deemed to accrue or arise in India, which
are (a) a business connection in India; (b) a property in India;
(c) an establishment or source in India; and (d) transfer of a
capital asset in India.
Income deemed to accrue or arise in India
Section 9

(1) The following incomes shall be deemed to
accrue or arise in India :-
(i) all income accruing or arising, whether
directly or indirectly, through or from
any business connection in India, or
through or from any property in India,
or through orfrom any asset or source
of income in India, or through the
transfer of a capital asset situate in
India.
[Explanation 1] – For the purposes of this
clause –
(a) in the case of a business of which all
the operations are not carried out in India,
the income of the business deemed under
this clause to accrue or arise in India shall
be only such part of the income as is
reasonably attributable to the operations
carried out in India ;
(b) in the case of a non-resident, no
income shall be deemed to accrue or arise in
India to him through or from operations
which are confined to the purchase of goods
in India for the purpose of export;
(c) in the case of a non-resident, being a
person engaged in the business of running a
news agency or of publishing newspapers,
magazines or journals, no income shall be
deemed to accrue or arise in India to him
through or from activities which are
confined to the collection of news and views
in India for transmission out of India;]
(a) in the case of a non-resident, being –
(1) an individual who is not a citizen
of India; or

(2) a firm which does not have any
partner who is a citizen of India who is
resident in India; or
(3) a company which does not have
any shareholder who is a citizen of
India or who is resident in India.”
162. The meaning that we have to give to the expressions
“either directly or indirectly”, “transfer”, “capital asset” and
“situated in India” is of prime importance so as to get a
proper insight on the scope and ambit of Section 9(1)(i) of the
Income Tax Act. The word “transfer” has been defined in
Section 2(47) of the Income Tax Act. The relevant portion of
the same is as under:
“2(47) “Transfer”, in relation to a capital
asset, includes.-
(i) the sale, exchange or relinquishment
of the asset; or
(ii) the extinguishment of any rights
therein; or
(iii) the compulsory acquisition thereof
under any law; or
(iv) in a case where the asset is converted
by the owner thereof into, or is treated
by him as, stock-in-trade of a business
carried on by him, such conversion or
treatment; or
xxx xxx xxx
xxx xxx xxx”

The term “capital asset” is also defined under Section 2(14) of
the Income Tax Act, the relevant portion of which reads as
follows:
“2(14) “Capital asset” means property of any
kind held by an assessee, whether or not
connected with the business or profession, but
does not include-
(i) any stock-in-trade, consumable stores or
raw materials held for the purposes of his
business or profession;
xxx xxx xxx
xxx xxx xxx”
163. The meaning of the words “either directly or
indirectly”, when read textually and contextually, would
indicate that they govern the words those precede them,
namely the words “all income accruing or arising”. The
section provides that all income accruing or arising, whether
directly or indirectly, would fall within the category of income
that is deemed to accrue or arise in India. Resultantly, it is
only where factually it is established that there is either a
business connection in India, or a property in India, or an
asset or source in India or a capital asset in India, the
transfer of which has taken place, the further question arises

whether there is any income deeming to accrue in India from
those situations. In relation to the expression “through or
from a business connection in India”, it must be established
in the first instance that (a) there is a non-resident; (b) who
has a business connection in India; and (c) income arises
from this business connection.
164. Same is the situation in the case of income that
“arises through or from a property in India”, i.e. (a) there
must be, in the first instance, a property situated in India;
and (b) income must arise from such property. Similarly, in
the case of “transfer of a capital asset in India”, the following
test has to be applied: (a) there must be a capital asset
situated in India, (b) the capital asset has to be transferred,
and (c) the transfer of this asset must yield a gain. The word
‘situate’, means to set, place, locate. The words “situate in
India” were added in Section 9(1)(i) of the Income Tax Act
pursuant to the recommendations of the 12th Law
Commission dated 26.9.1958.
165. Section 9 on a plain reading would show, it refers to
a property that yields an income and that property should

have the situs in India and it is the income that arises
through or from that property which is taxable. Section 9,
therefore, covers only income arising from a transfer of a
capital asset situated in India and it does not purport to
cover income arising from the indirect transfer of capital
asset in India.
SOURCE
166. Revenue placed reliance on “Source Test” to
contend that the transaction had a deep connection with
India, i.e. ultimately to transfer control over HEL and hence
the source of the gain to HTIL was India.
167. Source in relation to an income has been
construed to be where the transaction of sale takes place and
not where the item of value, which was the subject of the
transaction, was acquired or derived from. HTIL and
Vodafone are off-shore companies and since the sale took

place outside India, applying the source test, the source is
also outside India, unless legislation ropes in such
transactions.
168. Substantial territorial nexus between the income and
the territory which seeks to tax that income, is of prime
importance to levy tax. Expression used in Section 9(1)(i) is
“source of income in India” which implies that income arises
from that source and there is no question of income arising
indirectly from a source in India. Expression used is
“source of income in India” and not “from a source in India”.
Section 9 contains a “deeming provision” and in interpreting
a provision creating a legal fiction, the Court is to ascertain
for what purpose the fiction is created, but in construing the
fiction it is not to be extended beyond the purpose for which
it is created, or beyond the language of section by which it is
created. [See C.I.T. Bombay City II v. Shakuntala (1962) 2
SCR 871, Mancheri Puthusseri Ahmed v. Kuthiravattam
Estate Receiver (1996) 6 SCC 185].
169. Power to impose tax is essentially a legislative
function which finds in its expression Article 265 of the

Constitution of India. Article 265 states that no tax shall be
levied except by authority of law. Further, it is also well
settled that the subject is not to be taxed without clear
words for that purpose; and also that every Act of
Parliament must be read according to the natural
construction of its words. Viscount Simon quoted with
approval a passage from Rowlatt, J. expressing the principle
in the following words:
“In a taxing Act one has to look merely at what is
clearly said. There is no room for any
intendment. There is no equity about a tax.
There is no presumption as to tax. Nothing is to
be read in, nothing is to be implied. One can
only look fairly at the language used. [Cape
Brandy Syndicate v. IRC (1921) 1 KB 64, P. 71
(Rowlatt,J.)]”
170. In Ransom (Inspector of Tax) v. Higgs 1974 3 All ER
949 (HL), Lord Simon stated that it may seem hard that a
cunningly advised tax-payer should be able to avoid what
appears to be his equitable share of the general fiscal burden
and cast it on the shoulders of his fellow citizens. But for the
Courts to try to stretch the law to meet hard cases (whether
the hardship appears to bear on the individual tax-payer or
on the general body of tax-payers as represented by the

Inland Revenue) is not merely to make bad law but to run the
risk of subverting the rule of law itself. The proper course in
construing revenue Acts is to give a fair and reasonable
construction to their language without leaning to one side or
the other but keeping in mind that no tax can be imposed
without words clearly showing an intention to lay the burden
and that equitable construction of the words is not
permissible [Ormond Investment Co. v. Betts (1928) All ER
Rep 709 (HL)], a principle entrenched in our jurisprudence as
well. In Mathuram Aggarwal (supra), this Court relied on
the judgment in Duke of Westminster and opined that the
charging section has to be strictly construed. An invitation
to purposively construe Section 9 applying look through
provision without legislative sanction, would be contrary to
the ratio of Mathuram Aggarwal.
171. Section 9(1)(i) covers only income arising or accruing
directly or indirectly or through the transfer of a capital asset
situated in India. Section 9(1)(i) cannot by a process of
“interpretation” or “construction” be extended to cover

“indirect transfers” of capital assets/property situate in
India.
172. On transfer of shares of a foreign company to a non-
resident off-shore, there is no transfer of shares of the
Indian Company, though held by the foreign company, in
such a case it cannot be contended that the transfer of
shares of the foreign holding company, results in an
extinguishment of the foreign company control of the Indian
company and it also does not constitute an extinguishment
and transfer of an asset situate in India. Transfer of the
foreign holding company’s share off-shore, cannot result in
an extinguishment of the holding company right of control
of the Indian company nor can it be stated that the same
constitutes extinguishment and transfer of an asset/
management and control of property situated in India.
173. The Legislature wherever wanted to tax income which
arises indirectly from the assets, the same has been
specifically provided so. For example, reference may be made
to Section 64 of the Indian Income Tax Act, which says that

in computing the total income of an individual, there shall be
included all such income as arises directly or indirectly: to
the son’s wife, of such individual, from assets transferred
directly or indirectly on and after 1.6.73 to the son’s wife by
such individual otherwise than for adequate consideration.
The same was noticed by this Court in CIT v. Kothari (CM),
(1964) 2 SCR 531. Similar expression like “from asset
transfered directly or indirectly”, we find in Sections 64(7)
and (8) as well. On a comparison of Section 64 and Section
9(1)(i) what is discernible is that the Legislature has not
chosen to extend Section 9(1)(i) to “indirect transfers”.
Wherever “indirect transfers” are intended to be covered, the
Legislature has expressly provided so. The words “either
directly or indirectly”, textually or contextually, cannot be
construed to govern the words that follow, but must govern
the words that precede them, namely the words “all income
accruing or arising”. The words “directly or indirectly”
occurring in Section 9, therefore, relate to the relationship
and connection between a non-resident assessee and the
income and these words cannot and do not govern the
relationship between the transaction that gave rise to income

and the territory that seeks to tax the income. In other
words, when an assessee is sought to be taxed in relation to
an income, it must be on the basis that it arises to that
assessee directly or it may arise to the assessee indirectly. In
other words, for imposing tax, it must be shown that there is
specific nexus between earning of the income and the
territory which seeks to lay tax on that income. Reference
may also be made to the judgment of this Court in
Ishikawajma-Harima Heavy Industries Ltd. v. Director of
Income Tax, Mumbai (2007) 3 SCC 481 and CIT v. R.D.
Aggarwal (1965) 1 SCR 660.
174. Section 9 has no “look through provision” and such a
provision cannot be brought through construction or
interpretation of a word ‘through’ in Section 9. In any view,
“look through provision” will not shift the situs of an asset
from one country to another. Shifting of situs can be done
only by express legislation. Federal Commission of
Taxation v. Lamesa Holdings BV (LN) – (1998) 157 A.L.R.
290 gives an insight as to how “look through” provisions are

enacted. Section 9, in our view, has no inbuilt “look through
mechanism”.
175. Capital gains are chargeable under Section 45 and
their computation is to be in accordance with the provisions
that follow Section 45 and there is no notion of indirect
transfer in Section 45.
176. Section 9(1)(i), therefore, in our considered opinion,
will not apply to the transaction in question or on the rights
and entitlements, stated to have transferred, as a fall out of
the sale of CGP share, since the Revenue has failed to
establish both the tests, Resident Test as well the Source
Test.
177. Vodafone, whether, could be proceeded against under
Section 195(1) for not deducting tax at source and,
alternatively, under Section 163 of the Income Tax Act as a
representative assessee, is the next issue.
SECTION 195 AND OFFSHORE TRANSACTIONS

178. Section 195 provides that any person responsible for
making any payment to a non-resident which is chargeable
to tax must deduct from such payment, the income tax at
source. Revenue contended that if a non-resident enters into
a transaction giving rise to income chargeable to tax in India,
the necessary nexus of such non-resident with India is
established and the machinary provisions governing the
collection of taxes in respect of such chargeable income will
spring into operation. Further, it is also the stand of the
Revenue that the person, who is a non-resident, and not
having a physical presence can be said to have a presence in
India for the purpose of Section 195, if he owns or holds
assets in India or is liable to pay income tax in India.
Further, it is also the stand of the Revenue that once
chargeability is established, no further requirements of nexus
needs to be satisfied for attracting Section 195.
179. Vodafone had “presence” in India, according to the
Revenue at the time of the transaction because it was a Joint
Venture (JV) Partner and held 10% equity interest in Bharti
Airtel Limited, a listed company in India. Further, out of that

10%, 5.61% shares were held directly by Vodafone itself.
Vodafone had also a right to vote as a shareholder of Bharati
Airtel Limited and the right to appoint two directors on the
Board of Directors of Bharti Airtel Limited. Consequently, it
was stated that Vodafone had a presence by reason of being
a JV Partner in HEL on completion of HEL’s acquisition.
Vodafone had also entered into Term Sheet Agreement with
Essar Group on 15.03.2007 to regulate the affairs of VEL
which was restated by a fresh Term Sheet Agreement dated
24.08.2007, entered into with Essar Group and formed a JV
Partnership in India. Further, Vodafone itself applied for
IFPB approval and was granted such approval on
07.05.2007. On perusal of the approval, according to the
Revenue, it would be clear that Vodafone had a presence in
India on the date on which it made the payment because of
the approval to the transaction accorded by FIPB. Further, it
was also pointed out that, in fact, Vodafone had presence in
India, since by mid 1990, it had entered into a JV
arrangement with RPG Group in the year 1994-95 providing
cellular services in Madras, Madhya Pradesh circles. After
parting with its stake in RPG Group, in the year 2003,

Vodafone in October, 2005 became a 10% JV Partner in HEL.
Further, it was pointed out that, in any view, Vodafone could
be treated as a representative assessee of HTIL and hence,
notice under Section 163 was validly issued to Vodafone.
180. Vodafone has taken up a specific stand that “tax
presence” has to be viewed in the context of the transaction
that is subject to tax and not with reference to an entirely
unrelated matter. Investment made by Vodafone group in
Bharti Airtel would not make all entities of Vodafone group of
companies subject to the Indian Law and jurisdiction of the
Taxing Authorities. “Presence”, it was pointed out, be
considered in the context of the transaction and not in a
manner that brings a non-resident assessee under
jurisdiction of Indian Tax Authorities. Further, it was stated
that a “tax presence” might arise where a foreign company,
on account of its business in India, becomes a resident in
India through a permanent establishment or the transaction
relates to the permanent establishment.

181. Vodafone group of companies was a JV Partner in
Bharti Airtel Limited which has absolutely no connection
whatsoever with the present transaction. The mere fact that
the Vodafone group of companies had entered into some
transactions with another company cannot be treated as its
presence in a totally unconnected transaction.
182. To examine the rival stand taken up by Vodafone and
the Revenue, on the interpretation of Section 195(1) it is
necessary to examine the scope and ambit of Section 195(1)
of the Income Tax Act and other related provisions. For easy
reference, we may extract Section 195(1) which reads as
follows:
“Section 195. OTHER SUMS.- (1) Any person
responsible for paying to a non-resident, not
being a company, or to a foreign company, any
interest or any other sum chargeable under the
provisions of this Act (not being income
chargeable under the head "Salaries" shall, at
the time of credit of such income to the account of
the payee or at the time of payment thereof in
cash or by the issue of a cheque or draft or by
any other mode, whichever is earlier, deduct
income-tax thereon at the rates in force :

Provided that in the case of interest payable by
the Government or a public sector bank within
the meaning of clause (23D) of section 10 or a
public financial institution within the meaning

of that clause, deduction of tax shall be made
only at the time of payment thereof in cash or
by the issue of a cheque or draft or by any other
mode:

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

Explanation: For the purposes of this section,
where any interest or other sum as aforesaid is
credited to any account, whether called "Interest
payable account" or "Suspense account" or by
any other name, in the books of account of the
person liable to pay such income, such crediting
shall be deemed to be credit of such income to
the account of the payee and the provisions of
this section shall apply accordingly.”
Section 195 finds a place in Chapter XVII of the Income Tax
Act which deals with collection and recovery of tax.
Requirement to deduct tax is not limited to deduction and
payment of tax. It requires compliance with a host of
statutory requirements like Section 203 which casts an
obligation on the assessee to issue a certificate for the tax
deducted, obligation to file return under Section 200(3),
obligation to obtain “tax deduction and collection number”
under Section 203A etc. Tax deduction provisions enables
the Revenue to collect taxes in advance before the final
assessment, which is essentially meant to make tax
collection easier. The Income Tax Act also provides penalties

for failure to deduct tax at source. If a person fails to deduct
tax, then under Section 201 of the Act, he can be treated as
an assessee in default. Section 271C stipulates a penalty on
the amount of tax which has not been deducted. Penalty of
jail sentence can also be imposed under Section 276B.
Therefore, failure to deduct tax at source under Section 195
may attract various penal provisions.
183. Article 246 of the Constitution gives Parliament the
authority to make laws which are extra-territorial in
application. Article 245(2) says that no law made by the
Parliament shall be deemed to be invalid on the ground that
it would have extra territorial operation. Now the question is
whether Section 195 has got extra territorial operations. It is
trite that laws made by a country are intended to be
applicable to its own territory, but that presumption is not
universal unless it is shown that the intention was to make
the law applicable extra territorially. We have to examine
whether the presumption of territoriality holds good so far as
Section 195 of the Income Tax Act is concerned and is there
any reason to depart from that presumption.

184. A literal construction of the words “any person
responsible for paying” as including non-residents would lead
to absurd consequences. A reading of Sections 191A, 194B,
194C, 194D, 194E, 194I, 194J read with Sections 115BBA,
194I, 194J would show that the intention of the Parliament
was first to apply Section 195 only to the residents who have
a tax presence in India. It is all the more so, since the person
responsible has to comply with various statutory
requirements such as compliance of Sections 200(3), 203 and
203A.
185. The expression “any person”, in our view, looking at
the context in which Section 195 has been placed, would
mean any person who is a resident in India. This view is also
supported, if we look at similar situations in other countries,
when tax was sought to be imposed on non-residents. One
of the earliest rulings which paved the way for many, was the
decision in Ex Parte Blain; In re Sawers (1879) LR 12
ChD 522 at 526, wherein the Court stated that “if a foreigner
remain abroad, if he has never come into this country at all,
it seems impossible to imagine that the English Legislature

could ever have intended to make such a person subject to
particular English Legislation.” In Clark (Inspector of
Taxes) v. Oceanic Contractors Inc. (1983) 1 ALL ER 133,
the House of Lords had to consider the question whether
chargeability has ipso facto sufficient nexus to attract TDS
provisions. A TDS provision for payment made outside
England was not given extra territorial application based on
the principle of statutory interpretation. Lord Scarman,
Lord Wilberforce and Lord Roskill held so on behalf of the
majority and Lord Edmond Davies and Lord Lowry in dissent.
Lord Scarman said :
“unless the contrary is expressly enacted or so
plainly implied as to make it the duty of an
English court to give effect to it, United Kingdom
Legislation is applicable only to British subjects
or to foreigners who by coming into this
country, whether for a long or short time, have
made themselves during that time subject to
English jurisdiction.”
The above principle was followed in Agassi v.
Robinson [2006] 1 WLR 2126.
186. This Court in CIT v. Eli Lilly and Company (India)
P. Ltd. (2009) 15 SCC 1 had occasion to consider the scope
of Sections 192, 195 etc. That was a case where Eli Lilly

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

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

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

…………………………J.
(K.S. Radhakrishnan)
New Delhi
January 20, 2012