VODAFONE INTERNATIONAL HOLDINGS B.V.versusUNION OF INDIA & ANR.

                    [2012] 1 S.C.R. 573


      VODAFONE INTERNATIONAL HOLDINGS B.V.                       A
                              v.
                  UNION OF INDIA & ANR.
               (Civil Appeal No. 733 of 2012)

                    JANUARY 20, 2012
                                                                  B
   [S.H. KAPADIA, CJI, K.S. RADHAKRISHNAN AND
             SWATANTER KUMAR, JJ.]

    Income Tax Act, 1961:
                                                                  c
      s.45 read with ss. 195, 201 and 201(1A) - Capital gains
- Offshore transaction - Territorial tax jurisdiction of Indian tax
authorities - Transaction between VIH and HTIL (both
companies incorporated outside India) with regard to sale
and purchase of the entire share capital of CGP, also a D
company incorporated outside India - Revenue seeking to
tax the capital gains arising from the sale of share capital of
CGP on the basis that CGP held the underlying Indian assets
- Held: Indian tax authorities had no territorial jurisdiction to
tax the said offshore transaction - Applying the look at test, E
in order to ascertain the true nature and character of the
transaction, the Offshore Transaction in the instant case, is a
bonafide structured FD/ investment into India which fell outside
 India's territorial tax jurisdiction and, as such, not taxable -
 The said Offshore Transaction evidences participative
investment and not a sham or tax avoidant preordained F
 transaction.

     s.9(1)(i) - Income deemed to accrue or arise in India -
Expression, 'transfer of a capital asset situate in India" - Held:
s.9(1)(i) cannot by a process of interpretation be extended to G
cover indirect transfers of capital assets/property situate in
India - The legislature has not used the words indirect
transfer in s.9(1)(i) - Similarly, the words 'underlying asset'
do not find place in s. 9(1 )(i) - Further, "transfer" should be of
                                  573                               H
    574      SUPREME COURT REPORTS                 [2012] 1 S.C.R.


A an asset in respect of which it is possible to compute a capital
  gain in accordance with the provisions of the Act - A legal
  fiction has a limited scope - It cannot be expanded by giving
  purposive interpretation - The question of providing "look
  through" in the statute or in the treaty is a matter of policy -
B 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 - Therefore, s. 9(1 )(i) is not a
  "look through" provision - Interpretation of Statutes.
c       s. 195 - Deduction of tax at source - Scope and
   applicability of - Held: The payment in question 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
D 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 - Jn such a
   case, question of deduction of TAS would not arise - The
E instant 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
F 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 Jump sum price was paid
  - Acquisition of CGP share which gave V/H an indirect control
  over three genres of companies evidences a straightforward
G share sale and not an asset sale - The case does not
  involve sale of assets on itemized basis - There was no split
  up of Jump sum payment, asset-wise, as claimed by Revenue
  - There was no assignment of price for each right, considered
  by Revenue to be a "capital asset" in the transaction - Tax
H presence must be construed in the context, and in a manner
  VODAFONE INTERNATIONAL HOLDINGS B.V. v.                 575
          UNION OF INDIA & ANR.
that brings the non-resident assessee under the jurisdiction      A
of the Indian tax authorities - In the instant case, Revenue
has failed to establish any connection with s.9(1)(i) - Under
the circumstances, s. 195 is not applicable.

     ss. 163(1)(c) read with ss. 161 and 9(1)(i) - "Agent" in
                                                                 8
relation to a non-resident - Held: s. 161 makes a
representative assessee liable only if the eventualities
stipulated ins. 161 are satisfied - In the instant case, Revenue
has invoked s. 163(1)(c) - Both ss. 163(1)(c) and 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 C
the instant case, s. 163(1)(c) is not attracted as there is no
transfer of a capital asset situated in India - Consequently,
'VIH' cannot be proceeded against even u/s 163 of the Act
as a representative assessee.
                                                                 D
     Taxation:

      Tax avoidance - Offshore transaction - Held: 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     E
structure(s) - 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 - Every strategic foreign direct
investmf!nt coming to India, as an investment destination,        F
should be seen in a holistic manner - While doing so, the
Revenue/courts should keep in mind: 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        G
 timing of the exit; the continuity of business on such exit -
 Onus will be on the Revenue to identify the scheme and its
 dominant purpose - Besides, there is a conceptual difference
 between pre-ordained transaction which is created for tax
 avoidance purposes, on the one hand, and a transaction           H
     576      SUPREME COURT REPORTS                [2012] 1 S.C.R.

A   which evidences investment to participate in India - In the
    instant case, the sale of shares is relevant and not the sale
    of assets, item-wise - The Revenue has adopted a dissecting
    approach at the Department level -It cannot be said that the
    structure was created or used as a sham or tax avoidant - In
B   such a case, where the structure has existed for a
    considerable length of time generating taxable revenues right
    from 1994 and the transaction satisfies all the parameters of
    "participation in investment", the court need not go into the
    questions such as de facto control vs. legal control, legal
c   rights vs. practical rights, etc.

           Companies Act, 1956:

         Transfer of shares of a company - Situs of shares. - Held:
    Situs of the shares would be where the company is
D   incorporated and where its shares can be transferred - In the
    instant case, transfer of CGP share was recorded in the
    Cayman Islands, where the register of members of CGP is
    maintained - In the circumstances, it cannot be said that the
    situs of CGP share was situated in the place (India) where the
E   underlying assets stood situated.

         ss. 2(47) and 4 - 'Holding company' and 'Subsidiary' -
   Held: A company is a separate legal persona and the fact that
   all its shares are owned by one person or by the parent
F company has nothing to do with its separate legal existence
  - The difference is between having the power and having a
  persuasive position - 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
G authority of its own executive directors - In the instant case,
  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 - Principle
  of lifting the corporate veil - Doctrine of substance over form
H - Concept of beneficial ownership - Concept of alter ego.
   VODAFONE INTERNATIONAL HOLDINGS B.V. v.               577
           UNION OF INDIA & ANR.
    Legislation:                                               A

      Need for legislation - Tax statutes - Held: FD/ flows
towards location with a strong governance infrastructure which
includes enactment of laws and how well the legal system
works - Certainty and stability form the basic foundation of 8
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 C
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.

     On 11.2.2007, VIH, and HTIL, both companies D
incorporated outside India, entered into an Agreement for
Sale and Purchase of Share and Loans (SPA) under
which HTIL agreed to procure for VIH the sale of the
entire share capital of CGP (a company resident for tax
purposes in the Cayman Islands) which it held through E
HTIHL. HTIHL was a wholly owned subsidiary (indirect)
of HTIL. The completion of the acquisition took place on
8.5.2007. Indian Tax Authorities (Revenue) sought 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 F
in India, held the underlying Indian assets. The stand of ·
the Revenue was that by the said transaction the stated
aim of VIH was "acquisition of 67% controlling interest
in "HEL", which was a company resident for tax
purposes in India. On the other hand, the case of VIH was G
that it had agreed to acquire companies which in turn
controlled a 67% interest, but not controlling interest, in
HEL. On 31.5.2010, an order was passed u/ss 201.(1) and
201 (1A) of the Income Tax Act, 1961 (the Act), declaring
that the "Revenue" had jurisdiction to tax the transaction, H
      578      SUPREME COURT REPORTS             [2012] 1 S.C.R.


 A    against which VIH filed a writ petition which was
      dismissed by the High Court. Aggrieved, VIH filed the
      appeal.

            Allowing the appeal, the Court
 B          HELD:

         Per S.H. Kapadia, CJI (for himself and for Swatanter
      Kumar, J.):

 C         1.1. The majority judgment in McDowell held that "tax
      planning may be legitimate provided it is within the
      framework of law". Thus, it cannot be said that all tax
      planning is illegal/illegitimate/impermissible. In cases of
      treaty shopping and/or tax avoidance, there is no conflict
. D   between McDowell and Azadi Bachao or between
      McDowell and Mathuram Agrawal. [Para 64] [641-G; 642-D]

       McDowell and Co. Ltd. v. CTO 1985 (3) SCR 791            =
   (1985) 3 SCC 230; Union of India v. Azadi Bachao Ando/an
                                =
   2003 (4) Suppl. SCR 222 (2004) 10 SCC 1; and Mathuram
 E Agrawal v. State of Madhya Pradesh 1999 (4) Suppl.
                 =
    SCR 195 (1999) 8 SCC 667 - referred to.

      International Tax Aspects of Holding Structures:

       1.2. It is fairly well settled that for tax treaty purposes
 F a subsidiary and its parent are also totally separate and
   distinct tax payers. 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
 G which the parent company resides. [Para 66-67] [643-B-
   C; 643-D]
      1.3.·Where the subsidiary's executive directors'
   competences are transferred to other persons/bodies or
 H where the subsidiary's executive directors' decision
  VODAFONE INTERNATIONAL HOLDINGS B.V. v.              579
          UNION OF INDIA & ANR.
making has become fully subordinate to the Holding A
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 B
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 c
Holding Company, re-characterize the equity transfer
according to its economic substance and impose the tax
on the actual controlling Non-Resident Enterprise. [Para
67] [643-F-H; 644-A-B]
     1.4. Whether a transaction is used principally as a D
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 such
cases that the principle of lifting the corporate veil or the
doctrine of substance over form or the concept of E
beneficial ownership or the concept of alter ego arises.
There are many other circumstances, 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). [Para 67] [644-B-C] F
    Salomon v. Salomon (1897) A.C. 22 - referred to.
     1.5. In the instant case, the Court is concerned with
the concept of GAAR. India already has a judicial anti-
·avoidance rule. When it comes to taxation of a Holding G
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 H
    580     SUPREME COURT REPORTS                [2012) 1 S.C.R.

A   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. [Para 68] [644-G-
    H; 645-A-D]
B
      1.6. In view of the "look at" principle enunciated in
  Ramsay, 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
C 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 it should apply the "look at" test to ascertain its true
D legal nature.In the instant case, the Revenue has
  adopted a dissecting approach at the Department level.
  [Para 60 and 68] [640-F-H; 645-F-G]

         The Commissioners of Inland Revenue v. His Grace the
E   Duke of Westminster 1935 All E.R. 259 and WT. Ramsay
    Ltd. v. Inland Revenue Commissioners (1981) 1 All E.R. 865;
    Furniss (Inspector of Taxes) v. Dawson (1984) 1 All E.R. 530;
    Craven (Inspector of Taxes) v. White (Stephen) (1988) 3 All.
    E.R. 495; and Craven (Inspector of Taxes) v. White (Stephen)
F   (1988) 3 All. E.R. 495 - referred to.
         1.7. Every strategic foreign direct investment coming
    to India, as an investment destination, should be seen in
    a holistic manner. The onus will be on the Revenue to
    identify the scheme and its dominant purpose. The
G 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
H · evidence of a device.[Para 68] [646-A-D]
   VODAFONE INTERNATIONAL HOLDINGS B.V. v.                 581
           UNION OF !NOIA & ANR.
Section 9(1 )(i) is not a look through provision:                A
     2.1. Section 9(1)(i) of the Income Tax Act, 1961 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- 8
clause is distinct and independent of the other and the
 requirements to bring income within each sub-clause, are
separately noted. Therefore, it is not necessary that the
income falling in one category under any one of the sub-
clauses should also satisfy the requirements of the other C
sub-clauses to bring it within the expression "income
deemed to accrue or arise in India" in s.9(1 )(i). In the
instant case, the last sub-clause of s.9(1 )(i), which refers
to income arising from "transfer of a capital asset situate
in India", is relevant. The fiction created by s.9(1 )(i) applies D
to the assessment of income of non-residents. In the
case of a non-resident, unless the place of accrual of
income is within India, he cannot be subjected to tax. Any
income that accrues or arises to a non-resident, directly
or indirectly, outside India is fictionally deemed to accrue E
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
Revenue, then the income of the non-resident arising or
accruing from such transfer is made liable to be taxed by F
reason of s.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.Thus, the income accruing or arising to a non- G
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
s.5(2)(b) of the Act. This is the main purpose behind
enactment of s.9(1)(i) of the Act. [Para 71] [647-F-H; 648- H
A-H]
    582     SUPREME COURT REPORTS                [2012] 1 S.C.R.


A      2.2. The language of the section, when it is
  unambiguous and admits of no doubt regarding its
  interpretation, has to be given effect to, particularly when
  a legal fiction is embedded in that section. A legal fiction
  has a limited scope. It cannot be expanded by giving
B purposive interpretation particularly if the result of such
  interpretation is to transform the concept of chargeability
  which is also there in s.9(1 )(i), when one reads s.9(1 )(i)
  with s.5(2)(b) of the Act. [Para 71) [649-A-C]

C      2.3. 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 s.9(1 )(i). The
  Court cannot re-write s.9(1)(i). The legislature has not
  used the words indirect transfer in s.9(1)(i). If the word
D indirect is read into s.9(1)(i), it would render the express
  statutory requirement of the 4th sub-clause in s.9(1 )(i)
  nugatory. This is because s.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 s.9(1 )(i) and if indirect transfer of
E a capital asset is read into s.9(1)(i) then the words capital
  asset situate in India would be rendered nugatory. [Para
  71) [649-C-F]

       2.4. Similarly, the words 'underlying asset' do not
F find place in s.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 s.163(1)(c) is wide enough to cover the
  income whether received directly or indirectly. Thus, the
G words directly or indirectly in s.9(1 )(i) go with the income
  and not with the transfer of a capital asset (property).
  [Para 71) [649-F-H]

      2.5. Lastly, the Direct Tax Code (OTC) Bill, 2010
  proposes taxation of offshore share transactions. This
H proposal indicates in a way that indirect transfers are not
   VODAFONE INTERNATIONAL HOLDINGS B.V. v.               583
           UNION OF INDIA & ANR.
 covered by the existing s.9(1 )(i) of the Act. In fact, the OTC A
 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. Thes.e proposals,
 therefore, show that in the existing s.9(1 )(i) the word
 indirect cannot be read on the basis of purposive B
 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 c
 into the Section by interpretation. Therefore, s.9(1 )(i) is not
 a "look through" provision. [Para 71) [649-H; 650-A-D]

 Transfer of HTIL's property rights by Extinquishment?

      3.1. In the instant case, the Court is concerned with D
 the sale of shares and not 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, the Court needs to
 apply the "look at" test, and the task of the Revenue is E
 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. [Para
 73) [652-A-D]
       3.2. Besides, there is a conceptual difference F
  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 the nature of the transaction one has to
  take into account the factors, namely, duration of time G
  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 H
    584     SUPREME COURT REPORTS                [2012] 1 S.C.R.

A instant case, it is evident 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
  Rs. 3 crore to Rs. 250 crore per annum during the period
  2002-03 to 2006-07. Even after 11.02.2007, taxes are being
B paid by VIH ranging from Rs.394 crore to Rs. 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,
c HTIL. Thus, it cannot be said that the structure was
  created or used as a sham or tax avoidant. [Para 73] [652-
  D-H]
       3.3. If one applies the look at test, without invoking
  the dissecting approach, then, extinguishment took place
D because of the transfer of the CGP share and not by
  virtue of various clauses of SPA. In such a case, 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
E parameters of "participation in investment", the court
  need not go into the questions such as de facto control
  vs. legal control, legal rights vs. practical rights, etc. [Para
  73] [653-A-C]
       3.4. However, if HTIL did not possess a legal right to
F appoint directors onto the board of HEL and as such did
  not have "property right" in HEL, the question of such a
  right getting "extinguished" will not arise. A legal right is
  an enforceable right. Enforceable by a legal process. A
  company is a separate legal persona and the fact that all
G its shares are owned by one person or by the parent
  company has nothing to do with its separate legal
  existence. The fact that the parent company exercises
  share holder's influence on its subsidiaries cannot
  obliterate the decision-making power or authority of its
H (subsidiary's) directors. The difference is between having
    VODAFONE INTERNATIONAL HOLDINGS B.V. v.               585
            UNION OF INDIA & ANR.

 the power and having a persuasive position. The decisive        A
 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. Therefore, though it may be                B
 advantageous for a parent and subsidiary companies to
 work as a group, each subsidiary has to protect its own
 separate commercial interests. [Para 74-75] [653-D-F-G;
 654-E-G; 655-E]
                                                                 c
     3.5. On the facts and circumstances of the instant
 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
                                                                 0
 subsidiary. [Para 75] [655-E-F]

      3.6. In this case, the Court is 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. [Para 76] [656-E]      E

       3.7. Further, 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        F
  asset" under the income tax law. Enforceability is an
  important aspect of a legal right. Applying these tests, on
  the facts of the case and that too in the light of the
  ownership structure of Hutchison, this Court holds that
  HTIL, as a Group holding company, had no legal right to        G
  direct its downstream companies in the matter of voting,
  nomination of directors and management rights. [Para
. 76] [656-F -G]
      3.8. Exit is an important right of an investor in every
 strategic investment. The present case concerns transfer        H
    586    SUPREME COURT REPORTS                [2012) 1 S.C.R.


A of investment in entirety. Exit coupled with continuity of
  business is one of the tell-tale important 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
B 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. [Para 75] [654-H; 655-A-C]
c      3.9. As regards continuance of the 2006
  Shareholders/Framework Agreements by S.PA, one
  needs to keep in mind two relevant concepts, viz.,
  participative and protective rights. This is a case of HTIL
  exercising its exit right under the holding structure and
0
  continuance of the telecom business operations in India
  by VIH by acquisition of shares. A minority investor has
  what is called as a "participative" right, which is a subset
  of "protective rights". This "exit right" comes under
  "protective rights". On examination of the Hutchison
E structure in its entirety, it becomes evident that both,
  participative and protective rights, were provided for in
  the Shareholders/ Framework Agreements of 2006 in
  favour of Centrino, NOC and SMMS which enabled them
  to participate, directly or indirectly, in the operations of
F 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.
  [Para 76] [656-G-H; 657-A-G]
G      3.1 O. 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,
  there is 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.
H Moreover, the very object of the SPA is to cover the
  VODAFONE INTERNATIONAL HOLDINGS B.V. v.              587
          UNION OF !NOIA & ANR.
situations which may arise during the transition and those A
which are capable of being anticipated and dealt with. 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. [Para 76] [657-G-H; 658-A-B; 660-A-B]      B

     3.11. This Court, therefore, holds 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 C
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 D
extinguishment of rights as alleged by the Revenue. [Para
Tl] [660-C-E]

Role of CGP in the transaction:
                                                              E
     4.1. It is incorrect to say 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. CGP was incorporated in 1998 in
Cayman Islands. It was in the Hutchison structure from F
1998. The transaction in the instant 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 exercised by
HTIL. VIH agreed to acquire companies and the
companies it acquired controlled 67% interest in HEL. G
CGP was an investment vehicle. It is through the
acquisition of CGP that VIH proposed to indirectly acquire
the rights and obligations of GSPL(lndian Company) in
the Centrino and NOC Framework Agreements. The
advantage of transferring the CGP share enabled VIH to H
    588    SUPREME COURT REPORTS              [2012] 1 S.C.R.

A   indirectly acquire the rights and obligations of GSPL in
    the Centrino and NOC Framework agreements. This was
    the reason for VIH to go by the CGP route. [Para 78 and
    80] [660-F; 662-A-E]

       4.2. The role of CGP in the transaction is evident from
B
  two documents: 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 NOC
C Framework Agreements; and 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
D interests in HEL (renamed VEL) and its subsidiaries to
  VIH. 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
E intervened entity (CGP) had no business or commercial
  purpose. [para 81] [663-G-H; 664-A-D]

       4.3. As regards situs of the CGP share, under the
  Indian Companies Act, 1956, the situs of the shares
F would be where the company is incorporated and where
  its shares can be transferred. In the instant 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
G 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
  this Court. In the circumstances, it cannot be said that the
  situs of tne CGP share was situated in the place (India)
  where the underlying assets stood situated. [Para 82]
H [664-G-H; 665-A-C]
   VODAFONE INTERNATIONAL HOLDINGS B.V. v.               589
           UNION OF INDIA & ANR.

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

     5.1. The expression "control" is a mixed question of
law and fact. On perusal of Hutchison structure, it is
evident that HTIL had, through its 100% wholly owned            B
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, 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         C
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 Tll and Omega and, consequently, HTIL had no
control over 15% stakes in HEL. At this stage, it may be        D
stated 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. Till date GSPL has not exercised its rights under       E
the Framework Agreement 2006 because of the sectoral
cap of 74% which in turn restricts the right to vote.
Therefore, the transaction in the instant case provides for
a triggering event, viz. relaxation of the sectoral cap. Till
such date, HTIL/VIH cannot be said to have a control            F
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. [Para 83] [666-B-H]
                                                                G
      5.2. Under the Company Law, the management
 control vests in the Board of Directors and not with the
.shareholders of the company. The Term Sheet dated
 15.3.2007 entered into between VIH and Essar stated that
 they shall have to nominate directors on the Board of          H
    590     SUPREME COURT REPORTS                [2012] 1 S.C.R.


A Directors of HEL in proportion to the aggregate beneficial
  shareholding held by members of the respective groups.
  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
B in HEL. [Para 84] [667-H; 668-A]
         5.3. 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, it is important to note
    that valuation cannot be the basis of taxation. The basis
C   of taxation is profits or income or receipt. In this case, the
    Court is 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, the conditions on which the tax becomes
D   payable under the Income Tax Act have to be seen. In the
    instant case, VIH paid for 67% of the enterprise value of
    HEL plus its downstream companies having operational
    licences. VIH agreed to acquire companies which in turn
                                 •
    controlled a 67% interest in HEL and its subsidiaries.
E   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,
F   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. [Para 85] [668-
    B-G]
      5.4. In the instant case, the Revenue cannot invoke
G s.9 of the Income Tax Act on the value of the underlying
  asset or consequence of acquiring a share of CGP. 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
H praesenti to VIH, but on account of the fact that the
  VODAFONE INTERNATIONAL HOLDINGS B.V. v.             591
          UNION OF INDIA & ANR.
competing Indian bidders would have had de facto            A
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 expression
"equity interest" came from US GAAP. The difference
between the 52% figure (control) and 67% (equity            B
interest) arose on account of the difference in
computation under the Indian and US GAAP. [Para 85]
[668-G-H; 669-A-C; G-H]
     5.5. The instant case concerns an offshore
transaction involving a structured investment. This case C
concerns a straight forward 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 D
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 facts. Ownership of shares may, in certain situations,
result in the assumption of an interest which has the E
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 F
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 G
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 disser,ted. [Para 88] [670-E; 671-A-B]
                                                             H
    592      SUPREME COURT REPORTS              [2012] 1 S.C.R.


A         !RC v. Crossman [1936] 1 All ER 762 - referred to

         5.6. 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. Acquisition of the CGP share gave VIH an
B   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 Tll and Omega and which on
    a pro rata basis (the FOi principle), totalled up to 9.62%
    in HEL and an indirect control over Hutchison Tele-
C   Services (India) Holdings Ltd. (Ms), which in turn owned
    shares in GSPL, which held call and put options. It is
    significant to note that till date options have remained un-
    encashed with GSPL. Therefore, even if it be assumed
    that the options under the Framework Agreements 2006
D   could be considered to be property rights, there has been
    no transfer or assignment of options by GSPL till date.
    Even if it be assumed that the options constituted capital
    assets, even then s.9(1)(i) of the Act was not applicable
    as these options have not been transferred till date. [Para
E   88] [671-C-H]

       5.7. Call and put options were not transferred by SPA
  dated 11.02.2007 or under any other document
  whatsoever. Moreover, if, on principle, it is accepted that
  the transfer of the CGP share did not lead to the transfer
F
  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
G of the CGP.share which gave VIH an indirect control over
  three genres of companies evidences a straightforward
  shNe sale and not an asset sale. It is also significant to
  note that 67% of the economic value of HEL is not 67%
  of the equity capital. Further, Essar has 33% stakes in
H DEL out of which 22% was held by Essar Mauritius. Thus,
  VODAFONE INTERNATIONAL HOLDINGS B.V. v.             593
          UNION OF INDIA & ANR.
VIH did not acquire 67% of equity capital of HEL, as held    A
by the High Court. [Para 88] [671-H; 672-A-C, F-H]

    5.8. This case does not involve sale of assets on
itemized basis. Applying the look at test, the entire
Hutchison structure, as it existed, ought to have been
                                                             B
looked at holistically. This case concerns investment into
India by a holding company (parent company), HTIL
through a maze of subsidiaries. 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            C
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. [Para 88]     D
[672-H; 673-A-D]

    Charanjit Lal v. Union of India 1950 SCR 869 : AIR
1951 SC 41- relied on.
                                                             E
   Venkatesh (minor) v. CIT 243 ITR 367 (Mad) and Smt.
Maharani Ushadevi v. CIT 131 ITR 445 (MP) -referred to.

     5.9. The entire transaction has to be examined
holistically. The transaction in question should be looked
at as an entire package. The items like, control premium,    F
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.
Merely because at the time of exit, capital gains tax        G
becomes not payable or exigible to tax would not make
the entire "share sale" (investment) a sham or a tax
avoidant. 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       H
    594    SUPREME COURT REPORTS             [2012) 1 S.C.R.


A transaction have not agreed upon a separate price for the
  CGP share. 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
B 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
C 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.
0
  The transaction remained a contract of outright sale of
  the entire investment for a lump sum consideration. [Para
  88] [673-E; 674-A-8]

       CIT (Central), Calcutta v. Mugneeram Bangur and
E   Company (Land Deptt.), (1965) 57 ITR 299 (SC) - referred
    to.

        Commentary on Model Tax Convention on Income and
    Capital dated 28.01.2003 - referred to.
F     5.10. Thus, the Court needs 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. [Para 88]
G [674-E]

       6.1. Section 195 of the Act casts an obligation on the
  payer to deduct tax at source ("TAS") from payments
  made to non-residents which payments are chargeable
H to tax. Such payment(s) must have an element of income
  VODAFONE INTERNATIONAL HOLDINGS B.V. v.               595
          UNION OF INDIA & ANR.
embedded in it which is chargeable to tax in India. If the     A
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              B
between two non-residents, there is no liability for capital
gains tax. In such a case, question of deduction of TAS
would not arise. The object of s.195 is to ensure that the
tax due from non-resident persons is secured at the
earliest point of time so that there is no difficulty in       c
collection of tax subsequently at the time of regular
assessment. The instant 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.              D
Therefore, no liability to deduct TAS arose. [Para 89] [674-
F-H; 675-A-D]

     6.2. 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              E
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         F
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           G
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. [Para 89] [675-E-H; 676-A]
                                                               H
    596     SUPREME COURT REPORTS               [2012] 1 S.C.R.

A        6.3. 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
s   Income Tax Act 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. [Para 89] [676-A-
    C]
c        6.4. Lastly, in the instant case, the Revenue has failed
    to establish any connection with s.9(1 )(i). Under the
    circumstances, s.195 is not applicable. [Para 89] [676-8-
    C]
D      7.1. As regards the stand of the Revenue that VIH can
  be proceeded against as representative assessee u/s 163,
  it is significant to note that s.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
E of s.160(1)(i), s.161(1) and s.163 of the Act shows that,
  under given circumstances, certain persons can be
  treated as "representative assessee" on behalf of non-
  resident specified in s.9(1). This would include an agent
  of non-resident and also who is treated as an agent u/s
F 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 s.163(1), such
  a person would be the "agent" of the non-resident for the
  purposes of the Act. [Para 89] [676-C-F]

G      7.2. 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
H 161 makes a "representative assessee" liable only "as
   VODAFONE INTERNATIONAL HOLDINGS B.V. v.                  597
           UNION OF INDIA & ANR .
.regards the income in respect of which he is a                    A
representative assessee". Section 161 makes a
representative assessee liable only if the eventualities
stipulated in the said Section are satisfied. This is the
scope of ss. 9(1)(i), 160(1), 161(1) read with ss. 163(1) (a)
to (d). In the instant case, the Department has invoked            B
s.163(1 )(c). Both ss. 163(1 )(c) and 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,
this Court holds that s.163(1)(c) is not attracted as there
is no transfer of a capital asset situated in India.               C
Consequently, VIH cannot be proceeded against even u/
s 163 of the Act as a representative assessee. [Para 89]
[676-F-H; 677-A-B]

     8.1. Applying the look at test in order to ascertain the
true nature and character of the transaction, this Court           D
holds, that the Offshore Transaction in the instant case
is a bonafide structured FOi investment into India which
fell outside India's territorial tax jurisdiction, hence not
taxable. The said Offshore Transaction evidences
participative investmen.t and not a sham or tax avoidant           E
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).       F
Consequently, the Indian Tax Authority had no territorial
tax jurisdiction to tax the said Offshore Transaction. [Para
90] [677-D-E]

    8.2. FOi flows towards location with a strong                  G
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               H
    598     SUPREME COURT REPORTS              [2012] 1 S.C.R.


A 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
B the tax administration in enforcing the provisions of the
  taxing laws. [Para 91] [677-G-H; 678-A]

       8.3. The impugned judgment of the High Court is set
  aside. The Revenue is directed to return the sum of
  Rs.2,500 crores, which came to be deposited by the
C appellant in terms of the interim order, with interest at the
  rate of 4%. The interest shall be calculated from the date
  of withdrawal by the Revenue from the Registry of the
  Supreme Court up to the date of payment. [Para 92] [678-
  C-E]
D
  Per K.S. Radhakrishnan. J. (Concurring}:

    CORPORATE STRUCTURE/GENERAL PRINCIPLES

    (National and lntrnational):
E
      1.1. Overseas companies are companies incorporated
  outside India and neither the Companies Act nor the
  Income Tax Act enacted in India has any control over
  them. They are governed by the laws in the countries
F where they are established. 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
G absence of any express provision to the contrary. [para
  43 and 49] [702-E-F; 705-B-C]

      1.2. 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
H natural residence of the investing company, provisions
  VODAFONE JNTERNATIONAL HOLDINGS B.V. v.                 599
           UNION OF INDIA & ANR.
are usually made for exit route to facilitate an exit as and      A
when necessary for good business and commercial
reasons, which is generally foreign to judicial review.
(para 45] (703-E-F]

    1.3. Multi-national companies, for corporate
                                                                  B
governance, may develop corporate structures, affiliate
subsidiaries, joint ventures for operational efficiency, tax
avoidance, mitigate risks etc. 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           C
the incorporation, consolidation, restructuring etc. has
been effected to achieve a fraudulent, dishonest purpose,
so as to defeat the law. [para 43 and 46] (702-E; 703-G-H]

     1.4. Section 2(47) of the Indian Companies Act 1956          D
defines "subsidiary company" or "subsidiary", a
subsidiary company within the meaning of s. 4 of the Act.
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.           E
Holding company and subsidiary company are considered as
separate legal entities, and subsidiary are allowed
decentralized management. But, the business of a subsidiary
is not the business of the holding company. Parent company
of a WOS is not responsible legally for the unlawful activities
                                                                  F
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. [para 56, 58,
59 and 61] (708-D-E; 709-D-E; 710-A-B; F-G]

     Bacha F. Guzdar v. CIT 1955 SCR 876 =AIR 1955 SC             G
74; Carew and Company Ltd. v. Union of India 1976 ( 1 )
 SCR 379 = (1975) 2 SCC 791; and Carrasco Investments
Ltd. v. Special Director, Enforcement (1994) 79 Comp Case
631 (Delhi) - referred to.
                                                                  H
    600      SUPREME COURT REPORTS              [2012] 1 S.C.R.

A         Gramophone & Typewriter Ltd. v. Stanley, (1908-10) All
    ER Rep 833- referred to.

      1.5. Shareholders' Agreement (SHA) is a private
  contract between the shareholders compared to Articles
  of Association of the Company, which is a public
8
  document. Being a private document it binds parties
  thereof and not the other remaining shareholders in the
  company. Shareholders can enter into any agreement in
  the best interest of the company, prvided that the
  provisions in the SHA do not go contrary to the Articles
C of Association. The essential purpose of the SHA is to
  make provisions for proper and effective internal
  management of the company. [para 62 and 64] [710-H;
  711-A-B; 712-A-B]

D      V. B. Rangaraj v. V. B. Gopalakrishnan and Ors. 1991
                        =
  (3) Suppl. SCR 1 (1992) 1SCC160; and Gherulal Parekh
  v. Mahadeo Das Maiya (1959) SCR Supp (2) 406; S. P. Jain
  v. Kalinga Cables Ltd. (1965) 2 SCR 720;Chiranjit Lal
  Chowdhuri v. Union of India (1950) 1 SCR 869 : AIR 1951
E SC 41; Dwarkadas Shrinivas of Bombay v. Sholapur
  Spinning & Weaving Company (1954) SCR 674: AIR 1954
  SC 119; and /RC v. V. T Bibby & Sons (1946) 14 ITR (Supp)
    7 - referred to.

       1.6. Shares of any member in a company is a movable
F property and can be transferred in the manner provided
  by the Articles of Association of the Company. Control,
  is an interest arising from holding a particular number of
  shares and the same cannot be separately acquired or
  transferred. Controlling interest forms an inalienable part
G of the share itself and the same cannot be treated
  separately unless otherwise provided by the statute.
  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
H
      VODAFONE INTERNATIONAL HOLDINGS B.V. v.            601
              UNION OF INDIA & ANR.
from the terms of the contract and the surrounding              A
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,    B
which is purely a commercial concept and tax is levied
on the transaction, not on its effect. [para 67, 73 and 74)
[715-A-B; 717-C-H; 718-A-B)

Lifting the Corporate veil-Tax Laws:
                                                                c
      1.7. 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        D
transaction. 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      E
legal personalities, if the facts reveal that they indulge in
dubious methods for tax evasion. [para 75-76) [718-C-D;
719-8)

    Commissioner of Income Tax v. Sri Meenakshi Mills Ltd.,
                                                                F
                              =
Madurai, AIR 1967 SCR 934 1967 SC 819; Life Insurance
Corporation of India v. Escorts Limited and Others 1985 (3)
                   =
 Suppl. SCR 909 (1986) 1 SCC 264; Juggilal Kampa/pat
v. Commissioner of Income Tax, U.P. , (1969) 1 SCR 988 :
AIR 1969 SC 932 - relied on.
                                                                G
   United States v. Bestfoods 524 US 51 (1998); and
Adams v. Cape Industries Pie. (1991) 1 All ER 929- referred
to.

                                                                H
    602     SUPREME COURT REPORTS              [2012] 1 S.C.R.

· A Tax Avoidance and Tax Evasion:

        2. The expressions tax avoidance and tax evasion
   are being used in different context by the Courts. Many
   of the offshore companies use the facilities of Offshore
 B 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
 C has always encouraged such arrangements, unless it is
   fraudulent or fictitious. [para 50 and 76] [706-A-C; 719-C-
    D]
         /RC v. Burmah Oil Co Ltd. (1982) 54 TC 200; /RC v.
   Plummer (1979) 3 All ER 775; Ensign Tankers (Leasing) Ltd.
 D v. Stokes (1992) 1 AC 655; Floor v. Davis (1978) 2 All ER
   1079 : (1978) Ch 295; Inland Revenue Commissioner v.
   McGuckian (1997) BTC 346; MacNiven v. Westmore/and
   Investments Limited (2003) 1 AC 311; Barclays Mercantile
   Business Finance Limited v. Mawson (2005) AC 685 (HL).;
 E Inland Revenue Commissioner v. Scottish Provident
   Institution 2004 [1] WLR 3172- referred to.

    Limitation of Benefit Clause (LOB):

       3.1. Unlike lndo-US Treaty, lndo Mauritius Treaty
F does not contain any limitation of Benefit (LOB) clause,
  nor does it 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
G 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
H Mauritius but from other global investors situate outside
  VODAFONE INTERNATIONAL HOLDINGS B.V. v.              603
          UNION OF INDIA & ANR.
Mauritius. [para 95] [731-B-E]                                A

    3.2. In the absence of LOB Clause and the presence
of Circular No. 789 dated 13.4.2000 and TRC certificate,
on the residence and beneficial interest/ownership, tax
department cannot at the time of sale/disinvestment/exit
                                                              8
from such FDI, d.eny 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. Setting up of a WOS
Mauritius subsidiary/SPV by Principals/genuine
substantial long term FDI in India from/through Mauritius,    C
pursuant to the DTAA and Circular No. 789 can never be
considered to be set up for tax evasion. (para 97] [732-
D-H]

TRC Whether conclusive:                                       D
     3.3. LOB and look through provisions cannot be read
into a t11x treaty. However, DTAA and Circular No. 789
would not preclude the Income Tax Department from
denying the tax treaty benefits, if it is established, on
                                                              E
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            F
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        G
consideration the real transaction between the parties,
and the transaction may be subjected to tax. Thus, TRC
does not prevent enquiry into a tax fraud. Nothing
prevents the Revenue from looking into special
                                                              H
    604      SUPREME COURT REPORTS              [2012] 1 S.C.R.

A agreements, contracts or arrangements made or effected
  by Indian resident or the role of the OCB in the entire
  transaction. [para 98] [733-B-E]

       3.4. No court will recognise sham transaction or a
  colourable device or adoption of a dubious method to
8
  evade tax, but, at the same time, it cannot be said that the
  lndo-Mauritian Treaty will recognise FDI and Fii only if it
  originates from Mauritius, not the investors from third
  countries, incorporating company in Mauritius. Facts,
  clearly show that almost the entire FDI and Fii made in
C India from Mauritius under DTAA does not originate from
  that country, but has been made by Mauritius Companies
  I SPV, which are owned by companies/individuals of
  third countries providing funds for making FDI by such
  companies/individuals not from Mauritius, but from third
D countries. [para 99] [733-F-H; 734-A-B]

       3.5. Mauritius and India have also signed a
  Memorandum of Understanding (MOU) laying down the
  rules for information, exchange between the two
E 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
F 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
G abusive use of treaty. Thus, there is no reason to import
  the "abuse of rights doctrine" (abus de droit) to India.
  [para 100-101] [734-C-E]

          A Holding Aps. (8 ITRL) - held inapplicable.

H
  VODAFONE INTERNATIONAL HOLDINGS B.V. v.                605
          UNION OF INDIA & ANR.

Round Tripping:                                                 A

    3.6. Large amounts can be routed back to India using
TRC as a defence, but CJnce 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
                                                                8
Round Tripping; then TRC can be ipnored, since the
transaction is fraudulent and against national interest.
[para 105] [736-E]

    3.7. Adequate legislative measures have to be taken
to plug the loopholes, all the same, a genuine corporate        C
structure set up· for purely commercial purpose and
indulging in genuine investment be recognized. [para
106] [736-F-G]

     3.8. However, if the fraud is detected by the Court of
                                                                0
Law, it can pierce the corporate structure since fraud
unravels everything, even a statutory provision, if it is a
stumbling block, because legislature never intends to
guard fraud. Certainly TRC certificate though can be
accepted as a conclusive evidence for accepting status
                                                                E
oi 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. [para 106] [736-
G-H; 737-A]

     4.1. Revenue cannot tax a subject without a statute        F
to support and in the course it is acknowledged 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. It cannot be said that the ratio laid down in         G
McDowell is contrary to what has been laid down in Azadi
Bachao Ando/an; and, therefore, calls for no
reconsideration by a larger branch. [para 117] [740-F-G]

    Union of India v. Azadi Bachao Ando/an 2003 (4) Suppl.
                                                                H
    606     SUPREME COURT REPORTS             [2012] 1 S.C.R.


A            =
     SCR 222 (2004) 10 SCC 1; McDowell and Co. Ltd. v. CTO
                     =
    1985 (3) SCR 791 (1985) 3 SCC 230; CIT v. A. Raman and
    Co. (1968) 1 SCC 10, CIT v. B. M. Kharwar (1969) 1 SCR
    651, Bank of Chettinad Ltd. v. CIT (1940) 8 ITR 522 (PC),
  Jiyajeerao Cotton Mills Ltd. v. Commissioner of Income Tax
B and Excess Profits Tax, Bombay AIR 1959 SC 270; CIT v.
  Vadila/ Lal/ubhai (1973) 3 SCC 17 and Latilla v. /RC. 26 TC
  107: (1943) AC 377; Sankar/al Balabhai v. /TO (1975) 100
  ITR 97 (Guj.); and Mathuram Agrawal v. State of Madhya
                                       =
  Pradesh 1999 (4) Suppl. SCR 195 (1999) 8 SCC 667 -
C referred to.

    CGP and its interposition:

       4.2. Parties, it is trite, are free to choose whatever
  lawful arrangement which will suit their business and
D commercial purpose, but the true nature of the
  transaction can be ascertained only by looking into the
  legal arrangement actually entered into and carried out
  lndisputedly, the contracts have to be read holistically to
  arrive at a conclusion as to the real nature of a
E transaction. [para 118] [7 41-8-C]

       4.3. 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
F 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. [para 122) [7 42-E-F]

G      4.4. 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
H Mauritius. HTIL, after acquiring the share of CGP (Cl) in
  VODAFONE INTERNATIONAL HOLDINGS B.V. v.                 607
          UNION OF INDIA & ANR.
the year 1994 which constituted approximately 42% direct         A
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. [para 121]
[742-C-D]
                                                                 B
     4.5. 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 u~ of its
investments and exercise control over and strategically
influence the affairs of HEL. Consolidation operations of        C
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. [para 124] [743-A-B; E-F]
                                                                 D
    4.6. Sale of CGP share, for exiting from the Indian
Telecommunication Sector cannot be considered as pre-
ordained transaction, with no commercial purpose, other
than tax avoidance. Sale of CGP share was a genuine
business transaction, not a fraudulent or dubious method         E
to avoid capital gains tax. Once entry into the structure
is honourable, exit from the structure can also be
honourable. [para 123 and 126] [742-G-H; 744-E]

Situs of CGP:
                                                                 F
     4.7. 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 Islands and materials placed on
record would indicate that Cayman Islands law, unlike            G
other laws does not recognise the multiplicity of registers.
The facts in this case as well as the provisions of the
Caymen Islands Act would clearly indicate that the CGP
(Cl) share situates in Caymen Island. [para 127] [744-G-
H; 745-A-B]                                                      H
    608     SUPREME COURT REPORTS               [2012] 1 S.C.R.

A        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-Genera/ for
    Ontario, 1930.AC 161 PC 10, R. v. Williams [1942] AC 541
    - referred to.
B
       5.1. HTIL had the controlling interest in HEL before
  its exit from the Indian Telecom Sector. 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
C Subsidiaries in HEL. Mauritian subsidiaries controlled
  42% voting rights in HEL and HTIL could not however
  exercise voting rights in HEL directly but only through
  indirect subsidiary CGP(M) which in turn held equity
  interest in Tll, an Indian company which held equity
D interest in HEL. HTIL likewise through an indirect
  subsidiary HTl(M), which held equity interest in Omega an
  Indian company which held equity interest in HEL, could
  exercise only indirect voting rights in HEL. [para 129]
  [745-E; 746-C-D]
E
      5.2. 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.
F 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. [para 130] [746-E-F]
       5.3. Vodafone on acquisition of CGP share got
G controlling interest of 42% over HE.L/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. Voting rights,
H
  VODAFONE INTERNATIONAL HOLDINGS B.V. v.             609
          UNION OF INDIA & ANR.

controlling rights, right to manage etc., of Mauritian A
Companies vested in those companies. HTIL has never
sold nor did Vodafone purchase 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 B
Mauritius or to India. [para 132] [749-C-G]
     5.4. 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 C
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 D
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.
[para 133] [749-H; 750-A-C]
                                                            E
     5.5. Acquisition of shares, may carry the acquisition
of controlling interest which is purely a commercial_
concept and tax can be levied only on the transaction
and not on its effect. On transfer of CGP share, Vodafone
gets controlling interest in its indirect subsidiaries which F
are situated in Mauri"tius which have equity interests in
Tll and Omega, Indian Companies which are independent
legal entities. Controlling interest, which stood
transferred to Vodafone from HTIL accompany the CGP
share and cannot be dissected so as to be treated as
transfer of controlling interest of Mauritian entities and G
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 carries other valuable rights like, right to receive H
    610    SUPREME COURT REPORTS               [2012] 1 S.C.R.


A 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.Vodafone, on purchase of CGP share got all
  those rights, and the price paid by Vodafone is for all
B 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
c 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.
  [para 133-135] [750-E-F-H; 751-A-F]

       5.6. Vodafone, on purchase of CGP share also got
D control over its WOS, l:ffSH(M) which is having control
  over its WOS, 3GSPL, an Indian Company which
  exercised voting rights in HEL. 3 GSPL has call and put
  options, which are contractual rights and do not sound
  in property and, therefore, cannot be, in the absence of
E a statutory stipulation considered as capital assets. Even
  assuming so, they are in favour of 3 GSPL and continue
  to be so even after entry of Vodafone. [para 137] [752-D-
    E]
F      6.1. In none of the 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
G 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. [para 138] [752-F-G]
H
  VODAFONE INTERNATIONAL HOLDINGS B.V v.                611
          UNION OF INDIA & ANR
     6.2. Controlling right over Tll through Tll SHAs in the   A
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. [para 141] [754-8-C]
                                                              B
     6.3. Various agreements 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 C
capital gains tax. Right to preference shares or rights
cannot be termed as transfer in terms of s.2(47) of the Act.
Further, SPA contains a non-compete agreement which
is a pure contractual agreement. An agreement for a non-
compete clause executed offshore, by no principle of law
can be termed as "property" so as to come within the D
meaning of capital gains taxable in India in the absence
of any legislation. [para 149-151] [758-G; 759-A-F]

     6.4. On transfer of CGP share, HTIL had transferred
only 42% equity interest it had in HEL and approximately       E
10% (pro-rata) to VIH, 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           F
to be a transfer of asset situated in India. Rights and
entitlements referred to also cannot be termed as capital
assets, attr~cting 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             G
neither HTIL nor VIH was a party. [para 154] [760-E-G]

    Commissioner of Income Tax v. Grace Collins and
Others 248 ITR 323 - referred to.

    7.1. Section 9 of the Income Tax Act, 19.61 extends        H
    612    SUPREME COURT REPORTS               [2012] 1 S.C.R.

A   its provisions to certain 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.
B   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
c   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. [para 160) [763-D-E]

      7.2. Section 9 on a plain reading would show, it refers
D 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
E purport to cover income arising from the indirect transfer
  of capital asset in lndia.[para 165] [767 -G-H]

       7.3. Source in relation to an income has been
  construed to be where the transaction of sale takes place
F 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
G such transactions. [para 167) [768-C)

         7.4. 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 s.9(1 )(i)
    is "source of income in India" which implies that income
H
  VODAFONE INTERNATIONAL HOLDINGS B.V. v.               613
          UNION OF INDIA & ANR.
arises from that source and there is no question of A
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 B
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.
[para 168] [768-D-F]

   C.I. T. Bombay City II v. Shakuntala (1962) 2 SCR 871, C
Mancheri Puthusseri Ahmed v. Kuthiravattam Estate Receiver
(1996) 6 sec 185 - relied on.

    7.5. Power to impose tax is essentially a legislative
function which finds in its expression Art. 265 of the D
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 E
construction of its words. [para 169] [768-G-H; 769-A]

    Cape Brandy Syndicate v. !RC (1921) 1 KB 64, P. 71
(Rowlatt, J.) ; Ransom (Inspector of Tax) v. Higgs 1974 3 All
ER 949 (HL), Ormond Investment Co. v. Betts (1928) All ER       F
Rep 709 (HL) - referred to.

    7 .6. An invitation to purposively construe ·s. 9
applying look through provision without legislative
sanction, would be contrary to the ratio of Mathuram
Aggarwal. [para 170] [769-G]                          G

    Mathuram Agrawal v. State of Madhya Pradesh 1999 (4)
Suppl. SCR 195   =(1999) 8 SCC 667 - relied on.
    7.7. Section 9(1)(i) covers only income arising or
accruing directly or indirectly or through the transfer of H
    614     SUPREME COURT REPORTS               (2012] 1 S.C.R.


A   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. [para 171] [769-H; 770-A]

       7.8. On transfer of shares of a foreign company to a
8
  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 said that the transfer
  of shares of the foreign holding company, results in an
C 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 c:ompany's share off-
  shore, cannot result in an extinguishment of the holding
  company right of control of the Indian company nor can
D it be stated that the same constitutes extinguishment and
  transfer of an asset/ management and control of property
  situated in India. [para 172] [770-B-C]

       7.9. The Legislature wherever wanted to tax the
E income which arises indirectly from the assets, the same
  has been specifically provided so. On a comparison of
  ss. 64 and 9{1)(i) what is discernible is that the Legislature
  has not chosen to extend s.9(1 ){i) to "indirect transfers".
  Wherever "indirect transfers" are intended to be covered,
F 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". [para 173] [770-
G D-H]
        CIT v. Kothari (CM) (1964) 2 SCR 531 ;tshikawajma-
    Harima Heavy Industries Ltd. v. Director of Income Tax,
    Mumbai (2007) 3 SCC 481 and CIT v. R.D. Aggarwal (1965)
    1 SCR 660 - referred to.
H
  VODAFONE INTERNATIONAL HOLDINGS B.V. v.               615
          UNION OF INDIA & ANR.
     7.10. Section 9 has no "look through provision" and A
such a provision cannot be brought through
construction or interpretation of a word 'through' in s. 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. Section 9 B
has no inbuilt "look through mechanism". [para 174] [771-
D-E]
     Federal Commission Of Taxation V. Lamesa Holdings av
(LN) - (1998) 157 A.LR. 290 - referred to.
                                                                c
     7.11. Capital gains are chargeable u/s 45 and their
computation is to be in accordance with the provisions
that follow s. 45 and there is no notion of indirect transfer
in s.45. [para 175] [1.71-F]
     7.12. Section 9(1 )(i), therefore, will not apply to the D
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. [para 176]
[771-G]                                                       E
    8.1. 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. A reading of ss.191A, F
1948, 194C, 1940, 194E, 1941, 194J read with ss.11588A,
1941, 194J would show that the intention of Parliament
was first to apply s.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 ss. 200(3), 203 and G
203A. [para 178 and 184] [772-8-C; 775-G-H; 776-A]

    8.2. The expression "any person" looking at the
context in which s.195 has been placed, would mean any
person who is a resident in India. [para 185] [776-8]  H
    616      SUPREME COURT REPORTS               (2012] 1 S.C.R.

A       Ex Parle Blain, In re Sawers (1879) LR 12 ChD 522;
    Clark (Inspector of Taxes) v. Oceanic Contractors Inc. (1983)
    1 ALL ER 133; Clark (Inspector of Taxes) v. Oceanic
    Contractors Inc. (1983) 1 ALL ER 133; and Agassi v.
    Robinson [2006] 1 WLR 2126 - referred to.
B
       8.3. In the instant case, indisputedly, CGP share was
  transferred offshore. Both the companies were
  incorporat~d not in India but offshore. Both the
  companies have no income or fiscal assets in India, leave
C 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 would apply
  only if payments made from a resident to another non-
  resident and no( between two non-residents situated
D outside India. In the instant 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,
E the legal nature of the transaction has to be examined and
  not the indirect transfer of rights and entitlements in India.
  Consequently, VIH is not legally obliged to respond to s.
  163 notice which relates to the treatment of a purchaser
  of an asset as a representative assessee. [para 187] [777-
F E-H; 778-A]

          CIT v. Eli Lilly and Company (India) P Ltd. (2009) 15
    sec 1 - held inapplicable.
       8.4. It can,, therefore, not be said that the sale of CGP
G share by HTIL to VIH would amount to transfer of a capital
  asset within the meaning of s.2(14) of the Indian Income
  Tax Act and the rights and entitlements that flow from
  FWAs, SHAs, Term Sheet, loan assignments, brand
  license etc. form integral part of CGP share attracting
H
  VODAFONE INTERNATIONAL HOLDINGS B.V. v.                617
          UNION OF INDIA & ANR.
capital gains tax. Consequently, the demand of nearly           A
Rs.12,000 crores by way of capital gains tax lacks
authority of law and, therefore, stands quashed. [para
188] [778-C-E]

Need for Legislation:                                           B
     9. Lack of proper regulatory laws, leads to
uncertainty and passing inconsistent ordE:rs by Courts,
Tribunals and other forums, putting Revenue and tax
payers at bay. It is often said that insufficient legislation
in the countries where offshore financial centres operate       C
gives opportunities for money laundering, tax evasion etc.
and, hence, it is imperative that Indian Parliament would
address all these issues with utmost urgency. Direct Tax
Code Bill (OTC) 2010, proposed in India, envisages
creation of an economically efficient, effective direct tax     D
system, proposing GAAR. GAAR intends to prevent tax
avoidance, what is inequitable and undesirable. [para 53
and 55] [707-C-D, H; 708-A-C]

     Seth Pushalal Mansinghka (P) Ltd. v. CIT (1967) 66 ITR     E
159 (SC); Assam Consolidated Tea Estates v. Income Tax
Officer "A" Ward (1971) 81 ITR 699 Cal. and C./. T. West
Bengal v. National and Grindlays Bank Ltd. (1969) 72 ITR
121 Cal. CIT v. Grace Collis (2001) 3 SCC 430; CIT v.
National Insurance Company (1978) 113 ITR 37(Cal.) and
Laxmi Insurance Company Pvt. Ltd. v. CIT (1971) 80 ITR 575      F
(Delhi) - cited.

     /RC v. Duke of Westminster (1936) AC 1 (HL), W. T.
Ramsay v. /RC (1982) AC 300 (HL), Craven v. White (1988)
3 All ER 495, Furniss v. Dawson (1984) 1 All ER 530 - cited     G
                     Case Law Reference:
Per S.H. Kapadia, CJI.

 2003 (4) Suppl. SCR 222          referred to      para 57      H
    618     SUPREME COURT REPORTS              [2012] 1 S.C.R.


A    1985 (3) SCR 791            referred to        para 57
     1999 (4) Suppl. SCR 195     referred to        para 57
     1935 All E.R. 259           referred to        para 58

B    (1981) 1 All E.R. 865       referred to        para 58
     (1984) 1 All E.R. 530       referred to        para 62
     (1988) 3 All. E.R. 495      referred to        para 62
     (1897) A.C. 22              referred to        para 68
c
     1950 SCR 869                relied on          para 88
     243 ITR 367 (Mad)           relied on          para 88
     131 ITR 445 (MP)            relied en          para 88
D    (1965) 57 ITR 299 (SC)      referred to        para 88

    Per Radhakrishnan, J.

     (1967) 66 ITR 159 (SC)         cited           para 38
E    (1971) 81 ITR 699              cited           para 38
     (1969) 72 ITR 121 Cal.         cited           para 38
     (2001) 3 sec 430               cited           para 38

     (1936) AC 1 (HL),              cited           para 38
F
     (1982) AC 300 (HL),            cited           para 38
     (1988) 3 All ER 495            cited           para 38
     (1984) 1 All ER 530            cited           para 38
G
     (1978) 113 ITR 37(Cal.)        cited           para 41
     (1971) 80 ITR 575 (Delhi)      cited           para 41
     (1908-10) All ER Rep 833       referred to para 56
H    1955 SCR 876                   referred to para 56
 VODAFONE INTERNATIONAL HOLDINGS B.V. v.          619
         UNION OF INDIA & ANR.
1976 (1) SCR 379                 referred to para 58    A
(1994) 79 Comp Case 631 (Delhi) referred to para 58
524 us 51 (1998)                 referred to para 60
1991) 1 All ER 929               referred to para 60
                                                        B
1991 (3) Suppl. SCR 1            referred to para 63
(1959) SCR Supp (2) 406          referred to para 63
(1965) 2 SCR 720                 referred to para 64
(1950) 1 SCR 869                 referred to para 70
                                                        c
(1954) SCR 674                   referred to para 70
(1946) 14 ITR (Supp) 7 at 9-10   referred to para 73
1967 SCR 934                     relied on   para 75    D

1985 (3) Suppl. SCR 909          relied on   para 75
(1969) 1 SCR 988                 relied on   para 75
(1982) 54 TC 200                 referred to para 78    E
(1979) 3 All ER 775              referred to para 78
(1992) 1 AC 655                  referred to para 81
(1978) 2 All ER 1079             referred to para 81
                                                        F
(1997) BTC 346                   referred to para 84
(2003) 1 AC 311                  referred to para 85
(2005) AC 685 (HL).              referred to para 88
2004 [1] WLR 3172                referred to para 89    G

(1968) 1 sec 10                  referred to para 107
(1969) 1 SCR 651                 referred to para 107
1940) 8 ITR 522 (PC),            referred to para 107   H
    620   SUPREME COURT REPORTS              [2012] 1 S.C.R.

A   AIR 1959 SC 270                   referred to para 107
    (1973) 3 sec 11                   referred to para 107
    26 TC 107: (1943) AC 377          referred to para 107
    AIR 1959 SC 270                   referred to para 107
B
    26 TC 107: (1943) AC 377          referred to para 107
    (1975) 100 ITR 97 (Guj.)          referred to para 109
    1999 (4) Suppl. SCR 195           referred to para 116
c   2003 (4) Suppl. SCR 222           referred to para 5
                                                  and 117
    1985 (3) SCR 791                  referred to para 5
                                                  and 117
D
    1925] AC 371                      referred to para 127
    1927] 1 Ch. 107                  referred to para 127
    1930 AC 161 PC 10                 referred to para 127
E   [1942] AC 541                     referred to para 127
    248 ITR 323                       referred to para 157
    (1962) 2 SCR 871                  relied on   para 168
    (1996) 6 sec 185                  relied on   para 168
F
    (1921) 1 KB 64, P. 71 (Rowlatt, J.)referred to para 169
    1974 3 All ER 949 (HL),           referred to para 170
    (1928) All ER Rep 709 (HL)       referred to para 170
G
    1999 (4) Suppl. SCR 195          relied on    para 171
    (1964) 2 SCR 531                 referred to para 173
    c2001i 3 sec 481                 referred to para 173
H
  VODAFONE INTERNATIONAL HOLDINGS B.V. v.              621
          UNION OF INDIA & ANR.
 (1965) 1 SCR 660              referred to        para 173    A

 (1998) 157 A.LR. 290          referred to        para 174.
 (1879) LR 12 ChD 522          referred to        para 185
 (1983) 1 ALL ER 133           referred to        para 185
                                                              B
 (2006] 1 WLR 2126             referred to        para 185

 (2009) 15 sec 1               held inapplicablepara 186

     CIVIL APPELLATE JURISDICTION: Civil Appeal No. 733
of 2012.                                                C

    From the Judgment and Order dated 08.09.2010 of the
High Court of Bombay in WP in No. 1325 of 2010.

     Mohan Parasaran, ASG, Aspi Chinoy, Percy Pardiwala,
                                                              0
K.V. Vishwanathan, Anuradha Dutt, Fereshte D. Sethna,
Vijayalakshmi Menon, Ekta Kapil, Anish Kapur, Pawan Sharma,
Kuber Dewan, Shwetha Bidhuri, Preeti Yadav, Pratyush Miglani,
Gayatri Goswami, Kamaldeep Dayal, Rook Ray, Jaiver Shergill,
Anadi Chopra, Kripa Pandit, Pavitra Kacholia, D.L. E
Chidananda, G.C. Srivastava, Girish Dave, Gaurav Dhingra,
Ritin Rai, Nakul Dewan, Arijit Prasad, C.S. Bhardwaj, B.V.
Balaram Das, D.S. Mahra, Jayant Mehta, Mamta Tiwari,
Sangeeta Mandal, Swati Sinha, Abhishek Kaushik, Rishabh
Jain, N.B. Paonam, Zoheb Hossain (for Fox Mandal and Co.) F
and Sumita Hazarika for the appearing parties.

    The Judgments of the Court was delivered by

    S.H. KAPADIA, CJI. 1. Leave granted.
                                                              G
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 H
    622        SUPREME COURT REPORTS                  [2012] 1 S.C.R.


A   "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 ["Cl" for short] vide transaction dated
    11.02.2007, whose stated aim, according to the Revenue, was
B   "acquisition of 67% controlling interest in HEL", being a
    company resident for tax purposes in India which is disputed
    by the appellant saying that VI H agreed to acquire companies
    which in turn controlled a 67% interest, but not controlling
    interest, in Hutchison Essar Limited ("HEL" for short). According
c   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 FOi 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
0
    underlying Indian assets.

    Facts

          A.    Evolution of the Hutchison structure and the
E               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.
F
         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
G   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 (Cl) ["HTIL" for short].
H
  VODAFONE iNTERNATIONAL HOLDINGS B.V. v.                    623
   UNION OF INDiA & ANR [S.H. KAPADIA, CJI.]
    5. In March, 2004, HTIL stood incorporated and listed on         A
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        B
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 ["Tll" for short], lnduslnd Telecom Network Ltd.     C
["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.
                                                                     D
    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         E
Televentures Ltd. (now Bharti Airtel Ltd.).

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

     9. On 1.03.2006, Til Framework and Shareholders
Agreements stood executed under which the shareholding of
HEL was restructured through "Tll", an Indian company, in which      G
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],       H
    624     SUPREME COURT REPORTS                   [2012] 1 S.C.R.


A a subsidiary of HTIL, to buy from Goldspot Mercantile Company
  Private Limited ["Goldspot" for short] (an AG company) and
  Scorpios Beverages Private Limited r·scorpios" for short] (an
  AS company) their entire shareholding in Tll. Additionally, a
  Subscription Right was also provided allowing GSPL a right
B to subscribe to the shares of Centrino Trading Company
  Private Limited ["Centrino" for short] and ND Callus Info
  Services Private Limited ["NOC" for short]. GSPL was an Indian
  company under a Mauritius subsidiary of CGP which stood
  indirectly held by HTIL. These agreements also contained
c 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
D 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
E 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
F dealt with governance of ITNL:

       11. On 22.12.2006, an Open Offer was made by Vodafone
  Group Pie. on behalf of Vodafone Group to Hutchison
  Whampoa Ltd., a non-binding bid for US $11.055 bn being the
G enterprise value for HTJL'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 potentiaily interested parties regarding
  a possible sale of "its equity interests" (not controliing interest)
H in HEL. That, till date no agreement stood entered into by HTIL
   VODAFONE INTERNATIONAL HOLDINGS B.V. v.                   625
    UNION OF INDIA & ANR. [S.H. KAPADIA. CJI.]

with any party.                                                      A

     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 B
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 C
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                             o
      (ii)   entering into an appropriate partnership
             arrangement to satisfy FOi 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          E
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 F
$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 G
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 t/1e Indian FD/ H
    626       SUPREME COURT REPORTS                    [2012] 1 S.C.R.


A 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
B   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
C 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:
D         "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
E         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."
F
         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.
G      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
H of Loans owed by CGP and Array Holdings Limited ["Array" for
  VODAFONE INTERNATIONAL HOLDINGS B.V. v.                 627
   UNION OF INDIA & ANR. [S.H. KAPADIA, CJI.]
short] (a 100% subsidiary of CGP) to HTI (BVI) Finance Ltd. A
(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 B
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 C
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 D
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           E
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           F
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 G
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% H
    628     SUPREME COURT REPORTS                   [2012] 1 S.C.R.


A   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.
B
        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 Pie on behalf of VIH to Essar for purchase of its entire
    shareholding (33%) in HEL.

C        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-Tl!, 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
D   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
E   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
F   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
G   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
H
  VODAFONE INTERNATIONAL HOLDINGS B.V. v.                 629
   UNION OF INDIA & ANR. [S.H. KAPADIA, CJI.]
clarification regarding a statement by HTIL before US SEC         A
stating that HTIL Group would continue to hold an aggregate
interest of 42.34% of HEL and an additional indirect interest
through JVCs [Tll 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                     B
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      C
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             D
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      E
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   F
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.                                             G

     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 trt appoint the
directors to the Board of Directors of HEL on behalf of TllL      H
    630           SUPREME COURT REPORTS               [2012] 1 S.C.R.


A 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
B their respective shareholdings which resulted in 4 directors
  being appointed from the Essar Group, 6 directors from HTIL
  Group and 2 directors from Tll. In practice, the directors
  appointed by Tll to the Board of HEL were AS and AG. One
  more clarification was sought by FIPB from HEL on the credit
c 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
0
  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
E 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 (Cl).
F
          (ii)     Through CGP (Cl), VIH would also own 37.25% in
                   Tll 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).

G         (iii)    These investments combined would give VIH a
                   controlling interest of 52% in HEL.
          (iv)     In addition, HTIL's existing Indian partners AG, AS
                   aiid IDFC (i.e. SMMS), who between them held a
                   15% interest in HEL (i.e. option route), agreed to
H
   VODAFONE INTERNATIONAL HOLDINGS B.V. v.                    631
    UNION OF INDIA & ANR. [S.H. KAPADIA, CJI.]
            retain their shareholdings with full control, including   A
            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              B
            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;
                                                                      c
      (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          D
            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       E
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.    F
      2.    Right to do telecom business in India

      3.    Right to jointly own and avail the telecom licences
            in India
                                                                      G
     4.     Right to use the Hutch brand in India

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

      6.    Right to exercise control over the management and
                                                                      H
    632         SUPREME COURT REPOHTS                [2012] 1 S.C.R.

A                 affairs of the business of HEL (Management
                  Rights)

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

B          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

C          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
D                 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,
E                 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
F   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
G   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:
H
   VODAFONE INTERNATIONAL HOLDINGS B.V. v.                     633
    UNION OF INDIA & ANR. [S.H. KAPADIA, CJI.]
       (a)   to nominate 8 directors out of 12 to the Board of A
             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            B
             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.
                                                                       c
    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   D
Tll 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           E
acquisition is only 51.96%. This query presupposes that even
according to FJPB 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 F
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 Joans
obligations and the entitlement to acquire a further 15% indirect G
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 Jetter dated 19.03.2007, all the above
elements together equated to 67% of the economic value of
HEL.                                                                   H
    634       SUPREME COURT REPORTS                    [2012] 1 S.C.R.


A       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:
B         Vanous assets and liabilities of CGP included its rights
    and entitlements, including swbscription rights, call options to
    acquire in future a further 62.75% of Tll, 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
C   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 Tll and Omega and, consequently, the
    accounts under IFRS showed the total shareholding in HEL as
D   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
E   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
F
    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
G   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
H   acquisition loans owed by CGP to HTI (BVI) Finance Ltd. would
  VODAFONE INTERNATIONAL HOLDINGS B.V. v.                   635
   UNION OF iNDIA & ANR. [S.H. KAPADIA, CJ!.]

be assigned to VIH; the existing Directors of CGP would resign; A
Erik de Rijk would become the only Director uf 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 B
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 follo':"'ing
steps were taken:                                            C

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

     (ii)    appointment of new directors of Vodafone Group;

     (iii)   resolutions passed by Tll, Jaykay Finholding (India)   .
             Private Limited, UMT Investments Ltd., UMTL,
                                                                  0
             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 E
             subsidiaries;

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

     (vi)    computation of net amount payable by VIH to HTIL F
             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 HT! (BVI) Finance Ltd. G
             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;                                      H
    636           SUPREME COURT REPORTS                (2012] 1 S.C.R.


A           (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
B
                    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 (Cl).
c
         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),
D   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
E   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 !he entire equity shares of SMMS. Consequently, on
F   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
G   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,
H
  VODAFONE INTERNATIONAL HOLDINGS B.V. v.                      637
   UNION OF INDIA & ANR. [S.H. KAPADIA, CJI.]
Nadal Trading Company Private Limited ["Nadal" for short] and          A
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 ca// option, GSPL
agreed to pay to AG an amount of US $6.3 mn annually.
                                                                       B
     51. On the same day, i.e., 5.07.2007, a Framework
Agreement was entered into among AS, his wife, Scorpios,
MVH, GSPL, NOC and VIH. Under clause 4.4 GSPL had an
unconditional right to purchase all shares of AS and his wife
held in Scorpios at any time and in consideration for the ca//
option GSPL agreed to pay AS and his wife an amount of US$             C
10.2 mn per annum.

     52. On 5.07.2007, Tll Shareholders Agreement was
entered into among Nadal, NOC, CGP India Investments
Limited ["CGP India" for short], Tll and VIH to regulate the affairs   o
of Tll. Under clause 3.1, NOC had 38.78% shareholding in Tll,
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)             E
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,           F
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              G
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 Tll and Omega [i.e. pro rata route], and
15.03% through GSPL route.                                             H
          638                SUPREME COURT REPORTS                                                       [2012] 1 S.C.R.


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                                                                                         ·:;···
   VODAFONE INTERNATIONAL HOLDINGS B.V. v.                639
    UNION OF INDIA & ANR. [S.H. KAPADIA, CJI.]
      56. To explain the GSPL route briefly, it may be mentioned A
that on 11.02.2007 AG Group of companies held 23.97% in Tll,
AS Group of companies held 38.78% in Tll whereas SMMS held
54.21 % in Omega. Consequently, holding of AG in HEL through
Tll stood at 4.68% whereas holding of AS in HEL through Tll
stood at 7.577% and holding of SMMS in HEL through Omega B
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            c
circumstances spelt out in Tll and IDFC Framework Agreements
(keeping in mind the sectoral cap of 74%).

Correctness of Azadi Bachao case - Re: Tax Avoidance/
Evasion
                                                                D
     57. Before us, it was contended on behalf of the Revenue
that Union of India v. Azadi Bachao Ando/an (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 E
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 F
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 G
of Madhya Pradesh (1999) 8 SCC 667, in which Westminster
principle was quoted which has not been noticed by Azadi
 Bachao.


                                                                H
    640      SUPREME COURT REPORTS                  [2012] 1 S.C.R.


A   Our Analysis

         58. Before coming to lndo-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
B   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 lndo-Mauritius
    DTAA. It needs to be clarified, that, McDowell dealt with two
C   aspects. First, regarding validity of the Circular(s) issued by
    CBDT concerning lndo-Mauritius DT~IA. Second, on concept
    of tax avoidance/evasion. Before us, arguments were
    advanced on behalf of the Revenue only regarding the second
    aspect.
D
          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
E   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 s·cheme, whose object was
F to create a neutral situation. The dec:reasing asset was to be
  sold so as to create an artificial loss and the increasing asset
  was to yield a gain which would be exe~mpt from tax. The Crown
  challenged the whole scheme saying that it was an artificial
  scheme and, therefore, fiscally in-effective. It was held that
G 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.
H In the present case, the Revenue has adopted a dissecting
  VODAFONE INTERNATIONAL HOLDINGS B.V. v.                     641
   UNION OF INDIA & ANR. [S.H. KAPADIA, CJI.]
approach at the Department level.                                     A

    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-        B
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          c
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 D
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        E
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         F
look at test to ascertain its true legal nature. It observed that
genuine strategic planl)ing had not been abandoned.
      64. The majorit¥ j_udgment 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 G
"colo1Jrable device cannot be a part of tax planning and it is
wrong to encourage the belief that it is honourable to avoid
payn'\ent of tax by resorting to dubious methods". It is the
E:bligation of every citizen to pay the taxes without resorting to
su~terfuges. The above observations should be read with para H
    642      SUPREME COURT REPORTS                   [2012] 1 S.C.R.


A   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
B   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
c   "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,
D   in the manner indicated hereinabove, in cases of treaty
    shopping and/or tax avoidance, them is no conflict between
    McDowell and Azadi Bachao or between McDowell and
    Mathuram Agrawal.
    International Tax Aspects of Holding Structures
E        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.
F
          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
G   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.
H
  VODAFONE INTERNATIONAL HOLDINGS B.V. v.                 643
   UNION OF INDIA & ANR. [S.H. KAPADIA, CJI.]

Consequently, the entities subject to income-tax are taxed on A
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- B
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.                                                       c
     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 D
imply that the subsidiaries are to be deemed residents of the
State in which the parent company resides. Further, if a
comp-any 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. E
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 F
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 G
 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 H
    644      SUPREME COURT REPORTS                   [2012] 1 S.C.R.


A   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
B   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
c   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
D   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
E   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
F   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 procesSE!S required for a direct
    transfer (i.e., without a foreign holding or operating company)
G   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 conceirned with the concept of
    GAAR. In this case, we are not concerned with treaty-shopping
H   but with the anti-avoidance rules. The concept of GAAR is not
   VODAFONE INTERNATIONAL HOLDINGS B.V. v.                  645
    UNION OF INDIA & ANR. [S.H. KAPADIA, CJI.]
new to India since India already has a judicial anti-avoidance A
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. B
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 c
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 D
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 E
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" F
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 G
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 defermenVsaving 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 H
    646      SUPREME COURT REPORTS                    (2012] 1 S.C.R.


A   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
B   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
c   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
0
    overcome the evidence of a device.

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

E         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
F   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
G   (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.

H         70. We find no merit in the above submission of the
  VODAFONE INTERNATIONAL HOLDINGS BV. v.                     647
   UNION OF INDIA & ANR. [S.H. KAPADIA, CJI.]

Revenue. At the outset, we quote hereinbelow the following           A
Sections of the Income Tax Act, 1961:

    Scope of total income.

    5. (2) Subject to the provisions of this Act, the total income
                                                                     8
    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
                                                                     c
            (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           D
    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     E
            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- F
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 G
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 H
     648     SUPREME COURT REPORTS                  [2012) 1 S.C.R.


A. 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 sitL:ation of such asset in India. All three elements should
B 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
c 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
0
  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
E 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
F 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
G 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
H purpose behind enactment of Section 9(1 )(i) of the Act. We
    VODAFONE INTERNATIONAL HOLDINGS B.V. v.                         649
     UNION OF INDIA & ANR. [S.H. KAPADIA, CJI.]
  have to give effect to the language of the section when it is             A
  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     B
  concept of chargeability which js 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              c
  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
                                                                            0
  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           E
   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           F
   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             G
   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 (OTC) Bill, 2010 proposes
   to tax income from transfer of shares of a foreign company by            H
    650      SUPREME COURT REPORTS                   [2012) 1 S.C.R.


A   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 fciir market value of all assets owned by the company.
    Thus, the OTC Bill, 2010 proposes taxation of offshore share
B   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 OTC 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,
c   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
0
    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?
E
       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 extinguish men!. That,
  HTIL had, under the SPA, directly extinguished its rights of
F 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
G 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
H upon transfer of control of HEL to VIH so that VIH could step
  VODAFONE INTERNATIONAL HOLDINGS B.V. v.                  651
   UNION OF INDIA & ANR. [S.H. KAPADIA, CJI.]
into the shoes of HTIL. According to the Revenue, such A
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 Tll would have stood reduced io minority; (iii) Termination of B
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 c
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 D
 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 E
 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 F
 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 G
 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.
                                                                   H
    652      SUPREME COURT REPORTS                    [2012] 1 S.C.R.


A         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
B   "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
C   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
0
    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,
E   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
F   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 Rs. 3 crore to
    Rs. 250 crore per annum during the period 2002-03 to 2006-
    07. Even after 11.02.2007, taxes are being paid by VIH ranging
G   from ·394 crore to Rs. 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
H   structure was created or used as a sham or tax avoidant. It
      VODAFONE INTERNATIONAL HOLDINGS B.V. v.                    653
       UNION OF !NOIA & ANR. [S.H. KAPADIA, CJI.]

    cannot be said that HTIL or VIH was a "fly by night" operator/       A
    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         B
    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   c
    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             D
1




  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    E
  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       F
  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                G
  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              H
    654      SUPREME COURT REPORTS                  [2012] 1 S.C.R.


A 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
B 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
c control over the company may be so c:omplete that it is his alter
  ego. But. in case of multinationals it is important to realise that
  their subsidiar!es 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
0
  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
E duty to their companies (subsidiaries). They are not to be
  dictated by the parent company 1f 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
F (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
G 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
H in every strategic investment. The present case concerns
  VODAFONE INTERNATIONAL HOLDINGS B.V. v.                     655
   UNION OF INDIA & ANR. [S.H. KAPADIA, CJI]
transfer of investment in entirety. As stated above, exit coupled A
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 B
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 c
 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 D
 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
                                                                       E
  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 F

     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,        G
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                H
    656     SUPREME COURT REPORTS                  (2012) 1 S.C.R.

A   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
B 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
c . 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 .
0
    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
E 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
F 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
G 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 ne.eds to keep in mind two relevant
H concepts, viz., participative and protective rights. As stated, this
   VODAFONE INTERNATIONAL HOLDINGS B.V. v.                    657
    UNION OF INDIA & ANR. [S.H. KAPADIA, CJI.]
is a case of HTIL exercising its exit right under the holding A
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, NOC and
SMMS through exercise of Put Option/TARs, subject to sectoral
cap being relaxed in future. These exit rights in Essar, Centrino, B
NOC and SMMS (IDFC) indicate that these companies were
independent companies. Essar was a partner in HEL whereas
Centrino, NOC 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". c
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
                                                                       0
 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/ E
 Framework Agreements of 2006 in favour of Centrino, NOC 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 F
 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, NOC, Omega. Thus, even without the SPA, upon G
 substitution of VIH in place of HTIL, on acquisition of CGP
 share, transition could have taken place. It is important to note
 that "tran3ition" 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. H
    658      SUPREME COURT REPORTS                   [2012] 1 S.C.R.


A 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
B 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,
c 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.
0
  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.
E 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
F 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
G 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 cail and put option. Under the said Agreement dated
   6.06.2007, the Investors once again agreed to grant call option
H to GSPL to buy the shares of SMMS and to enter into a
  VODAFONE INTERNATIONAL HOLDINGS B.V. v.                   659
   UNION OF INDIA & ANR. [S.H. KAf'ADIA, CJI.]
Shareholders Agreement to regulate the affairs of Omega. It A
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- B
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 NOC Framework
Agreements of 2006 [see the report of KPMG dated
 18.10.201 OJ and not through execution of the SPA. Lastly, as     c
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
                                                                     0
 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 E
 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 F
 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 G
  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 H
    660     SUPREME COURT REPORTS                  (2012] 1 S.C.R.

A 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
B 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.
c      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
D 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.
E
  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
F 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
G 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,
H
   VODAFONE INTERNATIONAL HOLDINGS B.V. v.                 661
    UNION OF INDIA & ANR. [S.H. KAPADIA, CJI.]
was the reason for the CGP share being interposed in the          A
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, B
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 C
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 D
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 E
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 F
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 G
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.
                                                                  H
    662      SUPREME COURT REPORTS                  [2012] 1 S.C.R.


A        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
s 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 NOC
c 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 ofHEL directly. The
0
    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
E company) in the Centrino and NOC 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
F (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
G 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
H
  VODAFONE INTERNATIONAL HOLDINGS B.V. v.                    663
   UNION OF INDIA & ANR. [S.H. KAPADIA, CJI.]
former to sell the shares of Indian companies in which event          A
the gains would have arisen to the Mauritius companies, who
are not liable to pay capital gains tax under the ·Inda-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        B
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                  c
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 (Cl) which was
the nominated payee. Thus, in our view, two routes were
 available, namely, the CGP route and the Mauritius route. It was
                                                                      0
 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         E
 Centrino and NOC 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       F
 distinct from the FDI norms applicable to the call centre
 business. Consequently, in order to avoid legal and regulatory
 objections from Government of India, the call centre business
 stood hived off. In our view, this step was an integral part of
 transition of business under SPA.                                    G

     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        H
    664     SUPREME COURT REPORTS                   [2012] 1 S.C.R.

A   obligations of GSPL in the Centrino and NOC 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
B   "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
c   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.
0
    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
E  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 ~evenue, since CGP was a mere holding
   company and since it could not conduct business in Cayman
F 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
G Cayman Islands, the situs of the CGP share, in the present
   case, existed "where the underlying assets stood situated"
   {India). We firid 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
H Companies Act, 1956, the situs of the shares would be where
  VODAFONE INTERNATIONAL HOLDINGS B.V. v.                  665
   UNION OF INDIA & ANR. [S.H. KAPADIA, CJI.]
the company is incorporated and where its shares can be            A
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              B
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.                                  c
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 ofVIH was
that it had acquired only 42% (or, accounting for FIPB             D
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/       E
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      F
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%152%, as sought
to be propounded by it. According to the Revenue, right from
22.12.2006 onwards when HTIL made its first public                 G
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      H
    666       SUPREME COURT REPORTS                    [2012] 1 S.C.R.


A   paid by VIH was based on an enterprise value of 67% of the
    share capital of HEL; this would never have been so ifVIH 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
B   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
c   (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
0
    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 Tll and Omega and,
E   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 1he
    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
F   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
G   provides for a triggering event, viz. relaxation of the sectoral
    cap. Till such date, HTILNIH 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
H   HEL.
  VODAFONE INTERNATIONAL HOLDINGS B.V. v.                667
   UNION OF INDIA & ANR. [S.H. KAPADIA, CJI.]
      84. As regards the Term Sheet dated 15.03.2007, it may A
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 B
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 c
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 D
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 E
 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 F
 appointed by Tll. 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 G
 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, i:iost acquisition. Under the
  Company Law, the management control vests in the Board of H
    668      SUPREME COURT REPORTS                   (2012] 1 S.C.R.

A   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
8
     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
C    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
D    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
E   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
F   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/
G   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
H   CGP. In the present case, the Valuation do.ne was on the basis
    VODAFONE INTERNATIONAL HOLDINGS B.V. v.                  669
     UNION OF INDIA & ANR. [S.H. KAPADIA, CJI.]
  of enterprise value. The price paid as a percentage of the A
. enterprise value had to be 67% not because the figure of 67%
  was available in praesenti to VIH, but on account of the hct 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 8
  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 C
   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 D
   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 E
   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 F
   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 G
    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.
                                                                     H
    670      SUPREME COURT REPORTS                  [2012) 1 S.C.R.


A 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
8 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
C 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
D Revenue has adopted the abovementioned f-ligh 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
E   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
F   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
G   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
H   resides in the voting power of its shareholders and shares
  VODAFONE INTERNATIONAL HOLDINGS B.V. v.                    671
   UNION OF INDIA & ANR. [S.H. KAPADIA, CJI.]
represent an interest of a shareholder which is made up of           A
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,          B
flow together and cannot be dissected. In the felicitous phrase
of Lord MacMillan in /RC 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,         c
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,    D
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       E
 in Tll 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              F
 documents in detail, it has miss~d 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     G
 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           H
    672      SUPREME COURT REPORTS                   (2012] 1 S.C.R


A   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
B 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
  ana not an asset sale. There is another fallacy in the impugned
C 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
o 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
E 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
F 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
G 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
H of assets on itemized basis. The High Court ought to have
  VODAFONE INTERNATIONAL HOLDINGS B.V. v.                    673
   UNION OF INDIA & ANR. [S.H. KAPADIA, CJI.]

applied the look at test in which the entire Hutchison structure,     A
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           B
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        c
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               D
 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
                                                                      E
 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       F
 existed for almost 13 years, generating huge revenues, as
 indicated above. Merely because at the time of exit capital gains
 tax becomes not payable orexigible 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$          G
 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-   H
    674      SUPREME COURT REPORTS                  [2012] 1 S.C.R.


A 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
B 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
c 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
0
  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
E 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
F
       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
G 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
H
  VODAFONE INTERNATIONAL HOLDINGS B.V. v.                     675
   UNION OF INDIA & ANR. [S.H. KAPADIA, CJI.)

capital gains tax. In such a case, question of deduction of TAS A
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 B
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                c
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 0
 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 concerf'\S the transaction of "outright sale"
 between two non-residents of a capital asset (share) outside E
  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 F
  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 FOi purposes, the FIPB had asked G
  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 H
    676     SUPREME COURT REPORTS                  [2012] 1 S.C.R.


A 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
B 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
c 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
0
  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
E 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
F 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
G 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),
  f61(1) read with Sections 163(1) (a) to (d). In the present case,
H the Department has invoked Section 163(1 )(c). Both Sections
   VODAFONE INTERNATIONAL HOLDINGS 8.V. v.                     677
    UNION OF INDIA & ANR. [S.H. KAPADIA, CJI.]
163(1)(c) and Section 9(1)(i) state that income should be              A
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               B
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 ofVIH by Dr. Abhishek
Manu Singhvi on Sections 191 and 201.

Summary of Findings
                                                                       c
      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       D
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           E
matter of the Transaction was the transfer of the CGP (a
company incorporated in Cayman Islands). Consequently, the
 Indian Tax Authority had no territorial tax jurisdiction to tax the
said Offshore Transaction.
                                                                       F
Conclusion

     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        G
system. Tax policy certainty is crucial for taxpayers (including
foreign investors) to make rational economic choices in the
most efficient manner. Legal doctrines like "Limitation of
Benefits" and "look through" are matters of policy. It is for the
Government of the day to have them incorporated in the                 H
    678      SUPREME COURT REPORTS                 [2012] 1 S.C.R.


A Treaties and in the laws so as to avoid conflicting views.
  Investors should know where they stand. It also helps the tax
  administration in enforcing the provisions of the taxing laws. As
  stated above, the Hutchison structure has existed since 1994.
  According to the details submitted on behalf of the appellant,
B we find that from 2002-03 to 2010-11 the Group has
  contributed an amount of Rs. 20,242 crores towards direct and
  indirect taxes on its business operations in India.

                                Order

C       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 Rs. 2,500 crores, which came to
D 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
E return ihe Bank Guarantee given by the appellant within four
  weeks.

          K.S. RADHAKRISHNAN, J. 1. The question involved in
  this case is of considerable public importance, especially on
F Foreign Direct Investment (FDI), which is indispensable for a
  growing economy like India. Foreign investments in India are
  generally routed through Offshore Finance Centres (OFC) also
  through the countries with whom India has entered into treaties.
  Overseas investments in Joint Ventures (JV) and Wholly Owned
  Subsidiaries (WOS) have been recognised as important
G avenues of global business in India. Potential users of off-shore
  finance are: international companies, individuals, investors and
  others and capital flows through FDI, Portfolio Debt Investment
  and Foreign Portfolio Equity Investment and so on. Demand for
  off-shore facilities has considerably increased owing to high
H
 VODAFONE INTERNATIONAL HOLDINGS B.V. v.       679
UNION OF !NOIA & ANR. [K.S. RADHAKRISHNAN, J.]
growth rates of cross-border invest.ments and a number of rich      A
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              B
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    C
the world. Many countries have entered into treaties with several
offshore companies for cross-border investments for mutual
benefits. India has also entered into treaties with several
countries for bilateral trade which has been statutorily
recognised in this country. United Nations Conference on Trade
                                                                    0
and Development (UNCTAD) Report on World Investment
prospects survey 2009-11 states that India would continue to
remain among the top five attractive destinations for foreign
investors during the next two years.

     3. Merger, Amalgamation, Acquisition, Joint Venture,           E
Takeovers and Slump-sale of assets are few methods of cross-
border re-organisations. Under the FOi Scheme, investment
can be made by availing the benefit of treaties, or through tax
havens by non-residents in the share/convertible debentures/
preference shares of an Indian company but the question which       F
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     G
laws and what measures we have to take to meet the various
unprecedented situations, that too without sacrificing national
interest. Certainty in law in dealing with such cross-border
investment issues is of prime importance, which has been felt
by many countries around the world and some have taken              H
    680     SUPREME COURT REPORTS                   [2012] 1 S.C.R.

A adequate regulatory measures so that investors can arrange
  their affairs fruitfully and effectively. Steps taken by various
  countries to meet such situations may also guide us, a brief
  reference of which is being made in the later part of this
  judgment.
B
       4. We are, in the present case, concerned with a matter
  relating to cross-border investment and the legal issues
  emanate from that. Facts have been elaborately dealt with by
  the High Court in the impugned judgment and also in the leading
C 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
D with the general principles, Part-Ill deals with Inda-Mauritian
  Treaty, judgments in Union of India v. Azadi Bachao Ando/an
  and Another (2004) 10 SCC 1 and McDowell and Company
  Limited v. Commercial Tax Officer (1985) 3 SCC 230, Part-
  IV deals with CGP Interposition, situs etc, Part-V deals with
E controlling interest of HTILNodafone and other rights and
  entitlements, Part-VI deals with the scope of Section 9, Part-
  VII deals with Section 195 and other allied provisions and Part-
  VIII is the conclusions.

F                                  Part- I
       6. Hutchison Whampoa is a multi-sectional, multi-
  jurisdictional entity which consolidates on a group basis
  tetecom operations in various countries. Hutchison Group of
G Companies (Hong Kong) had acquired interest in the Indian
  telecom business in the year 1992, when the group invested
  in Hutchison Max Telecom Limited (HTML) (later known a
  Hutchison Essar Limited (HEL), which acquired a cellular
  license in Mumbai circle in the year 1994 and commenced its
H operation in the year 1995. Hutchison Group, with the
 VODAFONE INTERNATIONAL HOLDINGS B.V. v. 681
UNION OF INDIA & ANR. [K.S. RADHAKRISHNAN, J.]
commercial purpose of consolidating its interest in various A
countries, incorporated CGP Investments Holding Limited (for
short "CGP") in Cayman Islands as a WOS on 12.01.1998 as
an Exempted Company for offshore investments. CGP held
shares in two subsidiary companies, namely Array Holdings
Limited (for short Array) and Hutchison Teleservices (India) E
Holding Ltd. [for short HTIH(M)] both incorporated in Mauritius.
CGP(lndia) Investment (for short CGPM) was incorporated in
Mauritius in December 1997 for the purpose of investing in
Telecom Investment (India) Pvt. Limited (for short Tll), an Indian
Company. CGPM acquired interests in four Mauritian C
Companies and entered into a Shareholders' Agreement
(SHA) on 02.05.2000 with Essar Teleholdings Limited (ETH),
CGPM, Mobilvest, CCII (Mauritius) Inc. and few others, to
regulate shareholders' right inter se. Agreement highlighted the
share holding pattern of each composition of Board of D
Directors, quorum, restriction on transfer of ownership of shares,
Right of First Refusal (ROFR), Tag Along Rights (TARs) etc.
      7. HTIL, a part of Hutchison Whampoa Group, incorporated
in Cayman Islands in the year 2004 was listed in Hong Kong E
(HK) and New York (NY) Stock Exchanges. In the year 2005,
as contemplated in the Term Sheet Agreement dated
05.07.2003, HTIL consolidated its Indian business operations
through six companies in a single holding company HMTL, later
renamed as Hutchison Essar Ltd. (HEL). On 03.11.2005, Press F
Note 5 of 2005 series was issued by the Government of India
enhancing the FOi ceiling from 49% to 74% in the Telecom
Sector. On 28.10.2005, Vodafone International Holding BV
(VIHBV) (Netherlands) had agreed to acquire 5.61 % of
shareholding in Bharati Tele Ventures Limited (Bharati Airtel G
Limited) and on the same day Vodafone Mauritius Limited
(Subsidiary of VIHBV) had agreed to acquire 4.39%
shareholding in Bharati Enterprises Pvt. Ltd. (renamed Bharati
 lnfotel Ltd.), which indirectly held shares in Bharati Airtel Ltd.
                                                                 H
    682     SUPREME COURT REPORTS                 [2012] 1 S.C.R.


A       8. HEL shareholding was then restructured through Tll and
  an SHA was executed on 01.03.2006 between Centrino
  Trading Company Pvt. Ltd. (Centrino), an Asim Ghosh (Group)
  [for short (AG)], ND Callus Info Services Pvt. Ltd. (for short
  NOC), an Analjit Singh (Group) [for short (AS)], Telecom
B Investment India Pvt.Ltd. [for short (Tll)], and CGP India (M).
  Further, two Framework Agreements (FWAs) were also
  entered into with respect to the restructuring. Credit facilities
  were given to the companies controlled by AG and AS. FWAs
  called, Centrino FWA and N.D . FWA were executed on
C 01.03.2006. HTIL stood as a guarantor for Centrino, for an
  amount of' 4,898 billion advanced by Rabo Bank. HTIL had
  also stood as a guarantor for ND Callus, for an award of' 7.924
  billion advanced by Rabo Bank.

       9. Following the credit support given by HTIL to AG and
0
  AS so as to enable them to acquire shares in Tll, 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
E from Gold Spot (an AG company) and Scorpios (an AS
  company) their entire shareholding in Tll 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
F respectively at a pre-determined rate equal to the face value
  of the shares of Centrino and NOC respectively exercisable
  within a period of 1O years from the date of the agreements.
  Agreements also restricted AG companies and AS companies
  from transferring any downstream interests leading to the
G shareholding in Tll.

       10. HEL shareholding again underwent change with
  Hinduja Group exiting and its shareholding being acquired by
  an Indian company called SMMS Investments Private Limited
  (SMMS). SMMS was also a joint venture company formed by
H India Development Fund (IDF) acting through IDFC Private
 VODAFONE INTERNATIONAL HOLDINGS B.V. v.       683
UNION OF INDIA & ANR. [K.S. RADHAKRISHNAN, J.]
Equity Company (IDFCPE), Infrastructure Development                 A
Finance Company Limited (IDFC) and SSKI Corporate
Finance Pvt. Ltd. (SSKI) all the three companies were
incorporated in India. Pursuant thereto, a FWA was entered into
on 07.08.2006 between IDF (through IDFCPE), IDFC, SSKI,
SMMS, HTIL (M), 3GSPL, Indus Ind Telecom Holding Pvt. Ltd.          B
(ITNL) (later named as Omega Telecom Holding Pvt. Ltd.
(Omega) and HTIL. 3GSPL, by that Agreement, had a call
option and a right to purchase the entire equity shares of SMMS
at a pre-determined price equal to ' 661,250,000 plus 15%
compound interest. A SHA was also entered into on 17.08.2006        C
by SMMS, HTIL (M), HTIL(CI) and ITNL to regulate affairs of
ITNL. Agreement referred to the presence of at least one of the
directors nominated by HTIL in the Board of Directors of
Omega. HTIL was only a confirming party to this Agreement
since it was the parent company.                                    D

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

      12. Vodafone Group Pie. came to know of the possible exit
of Hutch from Indian telecom business and on behalf of              F
Vodafone Group made a non-binding offer on 22.12.06, for a
sum of US$ 11.055 million in cash for HTIL's shareholdings in
HEL. The offer was valued at an "enterprise value" of US$ 16.5
billion. Vodafone then appointed on 02.01.2007 Ernst and
Young LLP to conduct due diligence, and a Non-Disclosure            G
(Confidentiality) Agreement dated 02.01.2007 was entered intt;i
between HTIL and Vodafone. On 09.02.2007 Vodafone Group
Pie. wrote a letter to HTIL making a "revised and binding offer''
on behalf of a member of Vodafone Group (Vodafone) for
HTIL's shareholdings in HEL together with interrelated company      H
    684     SUPREME COURT REPORTS                  (2012) 1 S.C.R.


A   loans. Bharati lnfotel Pvt. Limited on 09.02.2007 expressed its
    'no objection' to the Chairman, Vodafone Mauritius Limited
    regarding proposed acquisition by Vodafone group of direct
    and I indirect interest in HEL from Hutchison or Essar group.
    Bharati Airtel also sent a similar letter to Vodafone.
B
       13. Vodafone Group Pie. on 10.02.2007 made a final
  binding offer of US$ 11.076 billion "in cash over HTIL's
  interest", based on an enterprise value of US$ 18.800 billion
  of HEL. Ernst and Young LLP, U.K. on 11.02.2007 issued due
C diligence report in relation to operating companies in India
  namely HEL and subsidiaries and also the Mauritian and
  Cayman Island Companies. Report noticed that CGP(CI) was
  not within the target group and was later included at the instance
  of HTIL. On 11.02.2007, UBS Limited, U.K. issued fairness
  opinion in relation to the transaction for acquisition by
0
  Vodafone from HTIL of a 67% effective interest in HEL through
  the acquisition of 100% interest in CGP and granting an option
  by Vodafone to Indian Continent Investment Ltd. over a 5.6%
  stake in Bharati Airtel Limited. Bharati lnfotel and Bharati Airtel
E conveyed their no-objection to the Vodafone purchasing direct
  or indirect interest in HEL.

        14. Vodafone and HTIL then entered into a Share and
    Purchase Agreement (SPA) on 11.02.2007 whereunder HTIL
    had agreed to procure the transfer of share capital of CGP by
F HTIBVI, free from all encumbrances and together with all
    rights attaching or accruing together with assignments of loan
    interest. HTIL on 11.02.2007 issued a side letter to Vodafone
  inter alia stating that, out of the purchase consideration, up to
  US$80 million could be paid to some of its Indian Partners.
G HTIL had also undertaken that Hutchison Telecommunication
  (India) Ltd. (HTM), Omega and 3GSPL, would enter into an
  agreed form "IDFC Transaction Agreement" as soon as
  practicable. On 11.02.2007, HTIL also sent a disclosure letter
  to Vodafone in terms of Clause 9.4 of SPA- Vendor warranties
H relating to co11sents and approvals, wider group companies,
 VODAFONE INTERNATIONAL HOLDINGS e.V. v.       685
UNION OF INDIA & ANR. [K.S. RADHAKRISHNAN, J.]
material contracts, permits, litigation, arbitration and          A
governmental proceedings to limit HTIL liability.

     15. Vodafone on 12.02.2007 made a public
announcement to the Securities and Exchange Commission,
Washington (SEC), London Stock Exchange and HK Stock B
Exchange stating that it had agreed to acquire a Controlling
Interest in HEL for a cash consideration of US$ 11.1 billion.
HTIL Chairman sent a letter to the Vice-Chairman of Essar
Group on 14.02.2007 along with a copy of Press
announcement made by HTIL, setting out the principal terms C
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 D
indirect acquisition by Vodafone of 51.96% stake in HEL
through an overseas acquisition of the entire share capital of
CGP from HTIL. HTIL made an announcement on HK Stock
Exchange regarding the intended use of proceeds from sale
of HTIL's interest in HEL viz., declaring a special dividend of E
HK$ 6.75 per share, HK$ 13.9 billion to reduce debt and the
remainder to be invested in telecommunication business, both
for expansion and towards working capital and general policies.
Reference was also made to the sale share and sale loans as
being the entire issued share capital of CGP and the loans F
owned by CGP/Array to an indirect WOS. AG on 02.03.2007
sent a letter to HEL confirming that he was the exclusive
beneficial owner of his shares and was having full control over
related voting rights. Further, it was also stated that AG had
received credit support, but primary liability was with his G
 Companies. AS also sent a letter on 05.03.2007 to FIPB
confirming that he was the exclusive beneficial owner of his
 shares and also of the credit support received.

     17. Essar had filed objections with the FIPB on 06.03.2007   H
    686     SUPREME COURT REPORTS                  [2012] 1 S.C.R.


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

         18. FIPB on 14.03.2007 sent a letter to HEL pointing out
    that in filing of HTIL before the U.S. SEC in Form 6K in the
B   month of March 2006, it had been stated that HTIL Group would
    continue to hold an aggregate interest of 42.34% of HEL and
    an addition<1I indirect interest through JV companies being non-
    wholly owned subsidiaries of HTIL which hold an aggregate of
    19.54% of HEL and, hence, the combined holding of HTIL
C   Group would then be 61.88%. Reference was also made to the
    communication dated 06.03.2007 sent to the FIPB wherein it
    was stated that the direct and indirect FD/ by HTIL would be
    51.96% and, hence, was asked to clarify that discrepancy.
    Similar letter dated 14.03.2007 was also received by
    Vodafone. On 14.03.2007, HEL wrote to FIPB stating that the
0
    discrepancy was because of the difference in U.S. GAAP and
    Indian GAAP declarations and that the combined holding for
    U.S. GAAP purposes was 61.88% and for Indian GAAP
    purposes was 51.98%. It was pointed out ·that Indian GAAP
E number accurately reflected the true equity ownership and
  control position. On 14.03.2007 itself, HEL wrote to FIPB
  confirming that 7.577% stake in HEL was held legally and
  beneficially by AS and his wife and 4.78% stake in HEL was
  held legally and beneficially by AG. Further, it was also
  pointed out that 2. 77% stake in HEL through Omega and
F S.M.M.S. was legally and beneficially owned by IDFC Limited,
  IDFC Private Equity Limited and SSKI Corporate Finance
  Limited. Further, it was also pointed out that Articles of
  Association of HEL did not give any person or entity any right
G to appoint directors, however, in practice six directors were
  from HTIL, four from Essar, two from Tll and Tll had appointed
  AG & AS. On credit support agreement, it was pointed out that
  no permission of any regulatory authority was required.

         19. Vodafone also wrote to FIPB on 14.03.2007
H   confirming that VIHBV's effective shareholding in HEL would
 VODAFONE INTERNATIONAL HOLDINGS B.V. v.       687
UNION OF INDIA & ANR. [K.S. RADHAKRISHNAN, J.]
be 51.96% i.e. Vodafone would own 42% direct interest in HEL A
through its acquisition of 100% of CGP Investments (Holdings)
Limited (CGPIL) and through CGPIL Vodafone would also own
37% in Tll which in turn owned 20% in HEL and 38% in Omega
which in turn owned 5% in HEL. It was pointed out that both Tll
and Omega were Indian companies and those investments B
combined would give Vodafone a controlling interest of 52%
ir. HEL. Further, it was pointed out that HT/L's Indian partners
Ai:>, AS, IDFC who between them held a 15% interest in HEL
on aggregate had agreed to retain their shareholding with full
control including voting rights and dividend rights.             C
      20. HTIL, Essar Teleholding Limited (ETL), Essar
Communication Limited (ECL), Essar Tele Investments Limited
(ETIL), Essar Communications (India) Limited (ECIL) signed
a settlement agreement on 15.03.2007 regarding Essar D
Group's support for completion of the proposed transaction and
covenant not to sue any Hutchison Group Company etc., in lieu
of payment by HTIL of US$ 373.5 million after completion and
a further US$ 41.5 million after second anniversary of
completion. In that agreement, HTIL had agreed to dispose of E
its direct and indirect equity, loan and other interests and rights
in and related to HEL, to Vodafone pursuant to the SPA. HTIL
had also agreed to pay US$ 415 million to Essar in return of
its acceptance of the SPA between HTIL and Vodafone. On
15.03.2007 a Deed of Waiver was entered into between F
Vodafone and HTIL, whereby Vodafone had waived some of
the warranties set out in paragraphs 7.1 (a) and 7.1 (b) of
Schedule 4 of the SPA and covenanted that till payment of HTIL
under Clause 6.1 (a) of the Settlement Agreement of
30.05.2007, Vodafone should not bring any claim or action. On G
15.03.2007 a circular was issued by HTIL including the report
of Somerley Limited on the Settlement Agreement between
HTIL and Essar Group.

    21. VIHBVI, Essar Tele Holdings Limited (ETH) and ECL
entered into a Term Sheet Agreement on 15.03.2007 for            H
    688     SUPREME COURT REPORTS                 (2012] 1 S.C.R.

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

       22. The Joint Director of Income Tax (International
  Taxation), in the meanwhile, issued a notice dated 15.03.2007
0
  under Section 133(6) of the Income Tax Act calling for certain
  information regarding sale of stake of Hutchison group HK in
  HEL, to Vodafone Group Pie.

          23. HTIL, on 17.3.2007, wrote to AS confirming that HTIL
E   has no beneficial or legal or other rights in AS's Tl/ interest
    or HEL interest. Vodafone received a letter dated 19.3.2007
    from FIPB seeking clarifications on the circumstances under
    which Vodafone had agreed to pay consideration of US$ 11.08
    billion for acquiring 67% of HEL when the actual acquisition
F   was only 51.96% as per the application. Vodafone on
    19.03.2007 wrote to FIPB stating that it had agreed to acquire
    from HTIL interest in HEL which included 52% equity
    shareholding for US$ 11. 08 billion which price included
    control premium, use and rights to Hutch brand in India, a
G   non-compete agreement with Hutc/1 group, value of non-
    voting, non-convertible preference shares, various loans
    obligations and entitlement and to acquire further 15%
    indirect interest in HEL, subject to Indian foreign investment
    rules, which together equated to about 67% of the economic
H   value of HEL.
 VODAFONE INTERNATIONAL HOLDINGS B.V. v.       689
UNION OF INDIA & ANR. [K.S. RADHAKRISHNAN, J.]
     24. VIHBVI and Indian continent Investors Limiterl (ICIL)        A
had entered into an SHA on 21.03.2007 whereby VIHBVI had
to sell 106.470.268 shares in Bharati Airtel to ICIL for a cash
consideration of US$ 1,626,930.881 (which was later amended
on 09.05.2007)
                                                                      B
      25. HEL on 22.3.2007 replied to the letter of 15.03.2007,
issued by the Joint Director of Income Tax (International
Taxation) furnishing requisite information relating to HEL
clarifying that it was neither a party to the transaction nor would
there be any transfer of shares of HEL.                               c
     26. HEL received a letter dated 23.3.2007 from the
Additional Director Income Tax (International Taxation)
intimating that both Vodafone and Hutchison Telecom Group
announcements/press releases/declarations had revealed that
HTIL had made substantive gains and consequently HEL was              D
requested to impress upon HTIL/Hutchison Telecom Group to
discharge their liability on gains, before they ceased operations
in India. HEL attention was also drawn to Sections 195, 195(2)
and 197 of the Act and stated that under Section 195
obligations were both on the payer and the payee.                     E

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

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

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

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

      (d)    subject to Indian Foreign Investment Rules, its rights   H
    690     SUPREME COURT REPORTS                  [2012] 1 S.C.R.


A              and entitlements, including subscription rights at
               par value and call options to acquire in future a
               further 62. 75% of Tll and call options to acquire a
               further 54.21% of Omega Telecom Holdings Pvt.
               Ltd, which together would give Vodafone a further
B              15.03% proportionate indirect equity ownership of
               Hutch Essar, various intangible features such as
               control premium, use and rights of Hutch branch in
               India, non compete agreement with HTIL.

C HEL on 5.4.2007 wrote to the Joint director of Income Tax
  stating that it has no liabilities accruing out of the transaction,
  also the department has no locus standi to invoke Section 195
  in relation to non-resident entities regarding any purported tax
  obligations. On 09.04.2007 HTIL submitted FWAs, SHAs, Loan
  Agreement, Share-pledge Agreements, Guarantees, ·
0
  Hypothecations, Press Announcements, Regulatory filing etc.,
  charts of Tll and Omega Shareholding, note on terms of
  agreement relating to acquisition by AS, AG and IDFC,
  presentation by Goldman Sachs on fair market valuation and
  confirmation by Vodafone, factors leading to acquisition by AG
E and AS and rationale for put/call options etc.

        28. Vodafone on 09.04.2007 sent a letter to FIPB
  confirming I.hat valuation of N.D. Callus, Centrino, would occur
  as per Goldman Sach's presentation in Schedule 5 to HTIL's
F letter of 09.04.2007 with a minimum value of US$ 266.25
  million and US$164.51 million for the equity in N.D. Callus and
  Centrino respectively, which would form the basis of the future
  partnership with AS & AG. Vodafone also wrote a letter to FIPB
  setting out details of Vodafone Group's interest worldwide. On
G 30.04.07 a resolution was passed by the Board of Directors
  of CGP pertaining to loan agreement, resignation and
  appointment of directors, transfer of shares; all to take effect
  on completion of SPA Resolution also accorded approval of
  entering into a Deed of Assignment in respect of loans owed
H to HTl(BVI) Finance Limited in the sums of US$
 VODAFONE INTERNATIONAL HOLDINGS B.V. v.       691
UNION OF INDIA & ANR. [K.S. RADHAKRISHNAN, J.]
132,092.447.14 and US$ 28,972,505.70. Further resolution             A
also accorded approval to the resignations of certain persons
as Directors of the Company, to take effect on completion of
SPA. Further, approval was also accorded to the appointment
of Erik de Rjik as a sole director of CGP. Resolution also
accorded approval to the transfer of CGP from HTI BVI to             B
Vodafone. On 30.04.2007 a board of resolution was passed
by the directors of Array for the assignment of loans and
resignation of existing directors and appointment of new
directors namely Erik de Rjik and two others. On 30.04.2007,
the board of directors of HTI BVI approved the transfer              c
documentation in relation to CGP share capital in pursuance
of SPA and due execution thereof. On 04.05.2007 HTI BVI
delivered the share transfer documentation to the lawyers in
Caymen Islands to hold those along with a resolution passed
by the board of directors of HTI BVI to facilitate delivery of       D
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            E
paid by Vodafone towards consideration for acquisition of
share capital of CGP. On 08.05.2007 Vodafone's name was
entered in the register of members of CGP kept in Caymen
Islands and the share certificate No.002 of HTI BVI relating to
CGP share capital was cancelled. On the same day a Tax Deed          F
of Covenant was entered into between HTIL and Vodafone in
pursuance of SPA indemnifying Vodafone in respect of taxation
or transfer pricing liabilities payable or suffered by wider group
companies (as defined by SPA i.e., CGP, 3 GSPL, Mauritian
holding and Indian Companies) on or before completion,               G
including reasonable costs associated with any tax demand.

    30. HTIL also sent a side letter to SPA on 08.05.2007 to
Vodafone highlighting the termination of the brand licences and
brand support service agreements between HTIL and 3GSPL              H
    692     SUPREME COURT REPORTS                (2012] 1 S.C.R.

A and the Indian Operating Companies and stated that the net
  amount to be paid by Vodafone to HTIL would be US$
  10,854,229,859.05 and that Vodafone would retain US$ 351.8
  million towards expenses incurred to operationalize the option
  agreements with AS and AG, out of the total consideration of
B US$11,076,000,000. On 08.05.2007 loan assignment between
  HTI BVI Finance Limited, Array and Vodafone of Array debt in
  a sum of US$ 231, 111,427.41 was effected, whereby rights
  and benefits of HTI BVI Finance Limited to receive repayment
  was assigned in favour of Vodafone as part of the transaction
c contemplated vide SPA. On the same day loan assignment
  between HTI BVI Finance Limited, CGP and Vodafone, of CGP
  debt in the sum of US$ 28,972,505.70 was effected, whereby
  rights and benefits of HTI BVI Finance Limited to receive the
  repayment was assigned in favour of Vodafone as part of the
0 transactions contemplated vide SPA. On 08.05.2007, business
  transfer agreement between 3GSPL and Hutchison Whampoa
  Properties (India) Limited, a WOS of HWP Investments
  Holdings (India) Limited, Mauritius, for the sale of business to
  3GSPL of maintaining and operating a call centre as a going
E concern on slump-sale-basis for a c:omposite price of ' 640
  million. On 08.05.2007, as already stated, a Deed of Retention
  was executed between HTIL and Vodafone whereunder HTIL
  had agreed that out of the total consideration payable in terms
  of Clause 8.1 O(b) of the SPA, Vodafone would be entitled to
F retain US$ 351.8 million by way of HTIL's contribution towards
  acquisition cost of options i.e., stake of ..:.s & AG. On
  08.05.2007 Vodafone paid US$ 10,854,229,859.05 to HTIL.
       31. Vodafone on 18.05.2007 sent a letter to FIPB
  confirming that VIHBV had no existing joint venture or
G technology transfer/trade mark agreement in the same field as
  HEL except with Bharati as disclosed and since 20.02.2007 a
  member of Bharati Group had exercised the option to acquire
  a further 5.6% interest from Vodafone such that Vodafone's
  direct and indirect stake in Bharati Airtel would be reduced to
H 4.39%.
 VODAFONE INTERNATIONAL HOLDINGS B.V. v.      693
UNION OF INDIA & ANR [K.S. RADHAKRISHNAN, J.]
      32. An agreement (Omega Agreement) dated 05.06.2007 A
was entered into between IDF, IDFC, IDFC Private Equity Fund
II (IDFCPE), SMMS, HT India, 3GSPL, Omega, SSKI and
VIHBV. Due to that Agreement IDF, IDFC and SSKI would
instead of exercising the 'Pvt option' and 'cashless option'
under 2006 IDFC FWA could exercise the same in pursuance B
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 C
shares of SMMS. On 07.06.2007 a SHA was entered into
between SMMS, HTIL(M), Omega and VIHBV to regulate the
affairs of Omega. On 07.06.2007 a Termination Agreement
was entered into between IDF, IDFC, SMMS, HTIL, 3GSPL,
Omega and HTL terminating the 2006 IDFC FWA and the SHA D
and waiving their respective rights and claims under those
Agreements. On 27.06.2007 HTIL in their 2007 interim report
declared a dividend of HK$ 6.75 per share on account of the
gains made by the sale of its entire interest in HEL. On
04.07.2007 fresh certificates of incorporation was issued by the E
Registrar of Companies in relation to Indian operating
companies whereby the word "Hutchison" was substituted with
word "Vodafone".

     33. On 05.07.2007, a FWA was entered into between AG, F
AG Mercantile Pvt. Limited, Plustech Mercantile Company
Pvt.Ltd, 3GSPL, Nadal Trading Company Pvt. Ltd and
Vodafone as a confirming party. In consideration for the
unconditional 'call option', 3GSPL agreed to pay AG an amount
of US$ 6.3 million annually. On the same day a FWA was G
signed by AS and Neetu AS, Scorpio Beverages Pvt.
Ltd.(SBP), M.V. Healthcare Services Pvt. Ltd, 3GSPL, N.D.
Callus Info Services Pvt. Ltd and Vodafone, as a confirming
party. In consideration for the 'call option' 3GSPL agreed to pay
AS & Mrs. Neetu AS an amount of US$ 10.02 million annually. H
    694      SUPREME COURT REPORTS                  [2012] 1 S.C.R.


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

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

          35. The Income Tax Department on 06.08.2007 issued a
    notice to VEL under Section 163 of the Income Tax Act to show
    cause why it should not be treated as a representative
    assessee of Vodafone. The notice was chatfenged by VEL in
D   Writ Petition No.1942 of 2007 before the Bombay High Court.
    The Assistant Director of Income Tax (Intl.) Circle 2(2), Mumbai,
    issued a show cause notice to Vodafone under Section 201 (1)
    and 201 (1A) of the l.T. Act as to why Vodafone should not be
    treated a assessee-in-default for failure to withhold tax.
E   Vodafone then fifed a Writ Petition 2550/2007 before the
     Bombay High Court for setting aside the notice dated
     19.09.2007. Vodafone had also challenged the constitutional
    validity of the retrospective amendment made in 2008 to
    Section 201 and 191 of the l.T. Act. On 03.12.2008 the High
F   Court dismissed the Writ Petition No.2550 of 2007 against
    which Vodafone filed SLP No.464/2009 before this Court and
    this Court on 23.01.2009 disposed of the SLP directing the
    Income Tax Authorities to determine the jurisdictional challenge
    raised by Vodafone as a preliminary issue. On 30.10.2009 a
G   2nd show cause notice was issued to Vodafone under Section
    201 and 201(1A) by the Income Tax authorities. Vodafone
    replied to the show cause notice on 29.01.2010. On
    31.05.2010 the Income Tax Department passed an order under
    Section 201 and 201(1A) of the l.T. Act upholding the
H   jurisdiction of the Department to tax the transaction. A show
 VODAFONE INTERNATIONAL HOLDINGS B.V. v.      695
UNION OF INDIA & ANR. [K.S. RADHAKRISHNAN, J)
cause notice was also issued under Section 163(1) of the 1.T.        A
Act to Vodafone as to why it should not be treated as an agent
I representative assessee of HTIL.

      36. Vodafone then filed Writ Petition No.1325 of 2010
before the Bombay High Court on 07.06.2010 challenging the B
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 C
address the Department on the question of quantification of
liability under Section 201and201(1A) of the Income Tax Act.
Notice was also challenged by Vodafone in the above writ
petition by way of an amendment. The Bombay High Court
dismissed the Writ Petition on 08.09.2010 against which the D
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        E
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 F
            business understanding between the parties
            postulated that what was being transferred from
            HTIL to VIHBV was the "controlling interest" in HEL
            in India, which is an identifiable capital asset
            independent of CGP share.                              G

      (b)   HTIL had put into place during the period when it
            was in the control of HEL a complex structure
            including the financing of Indian companies which
            in turn had holdings directly or indirectly in HEL and
            hence got controlling interest in HEL.                   H
    696         SUPREME COURT REPORTS                 [2012] 1 S.C.R.


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

          (d)     The price paid by Vodafone to HTIL of US$ 11.08
                  billion factored in as part of the consideration of
                  those diverse rights and entitlements and many of
                  those entitlements are relatable to the transfer of
D
                  CGP share and that the transactional documents
                  are merely incidental or consequential to the transfer
                  of CGP share but recognized independently the
                  rights and entitlements of HTIL in relation to Indian
                  business which are being transferred to VIHBV.
E
          (e)     High Court held that the transfer of CGP share was
                  not adequate in itself to achieve the object of
                  consummating the transaction between HTIL and
                  VIHBV and the rights and entitlements followed
F                 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
G                 from it shall be treated as income which is deemed
                  to accrue or arise in India, hence, chargeable under
                  Section 9(1)(i) or 163 of the l.T. Act.

          (g)     Court directed the Assessing Officer to do
                  apportionment of income between the income that
H
 VODAFONE INTERNATIONAL HOLDINGS B.V. v.      697
UNION OF INDIA & ANR. [K.S. RADHAKRISHNAN, J]

           has deemed to accrue or arise as a result of nexus   A
           with India and that which lies outside. High Court
           also concluded that the provisions of Section 195
           can apply to a non-resident provided there is
           sufficient territorial connection or nexus between
           him and India.                                       B

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

      38. Shri Harish Salve, learned senior counsel appearing
for Vodafone explained in detail how Hutchison Corporate
Structure was built up and the purpose, object and relevance
of such vertical Transnational Structures in the international D
context. Learned Senior counsel submitted that complex
structures are designed not for avoiding tax but for good
commercial reasons and Indian legal structure and foreign
exchange laws recognize Overseas Corporate Bodies (OCB).
Learned senior counsel also submitted that such Transnational E
Structures also contain exit option to the investors. Senior
counsel also pointed out that where regulatory provisions
mandate investment into corporate structure such structures
cannot be disregarded for tax purposes by lifting the corporate
veil especially when there is no motive to avoid tax. Shri Salve F
also submitted that Hutchison corporate structure was not
designed to avoid tax and the transaction was not a colourable
device to achieve that purpose. Senior counsel also submitted
that source of income lies where the transaction is effected and
not where the underlying asset is situated or economic interest G
lies. Reference was made to judgment in Seth Pushalal
Mahsinghka (P) Ltd. v. CIT (1967) 66 ITR 159 (SC). Learned
counsel also pointed out that without any express legislation,
off-shore transaction cannot be taxed in India. Reference was
made to two judgments of the Calcutta High Court Assam H
    698      SUPREME COURT REPORTS                 [2012] 1 S.C.R.


A . Consolidated Tea Estates v. Income Tax Officer "A" Ward
     (1971) 81 ITR 699 Cal. and C./. T. West Bengal v. National and
     Grindlays Bank Ltd. (1969) 72 ITR 121 Cal. Learned senior
    counsel ai;;o pointed out that when a transaction is between two
    foreign entities and not with an Indian entity, source of income
B   cannot be traced back to India and nexus cannot be used to
    tax under Section 9. Further, it was also pointed out that
     language in Section 9 does not contain "look through
    provisions" and even the words "indirectly" or "through"
    appearing in Section 9 would not make a transaction of a non-
e   resident taxable in India unless there is a transfer of capital
    asset situated in India. Learned Senior counsel also submitted
    that the Income Tax Department has committed an error in
    proceeding on a "moving theory of nexus" on the basis that
    economic interest and underlying asset are situated in India. It
o   was pointed out that there cannot be transfer of controlling
    interest in a Company independent from transfer of shares and
    under the provisions of the Company Law. Acquisition of
    shares in a Company entitles the Board a right of "control" over
    the Company. Learned Senior Counsel also pointed out the
E   right to vote, right to appoint Board of Directors, and other
    management rights are incidental to the ownership of shares
    and there is no change of control in the eye of law but only in
    commercial terms. Mr. Salve emphasized that, in absence of
    the specific legislation, such transactions should not be taxed.
F   On the situs of shares, learned senior counsel pointed out that
    the situs is determined depending upon the place where the
    asset is situated. Learned senior counsel also pointed out that
    on transfer of CGP, Vodafone got control over HEL and merely
    because Vodafone has presence or chargeable income in
G   India, it cannot be inferred that it can be taxed in some other
    transactions. Further, it was also pointed out that there was no
    transfer of any capital asset from HTIL to Vodafone pursuant
    to Option Agreements, FWAs, executed by the various Indian
    subsidiaries. Learned Senior Counsel also pointed out that the
H   definition of "transfer" under Section 2(47) which provides for
 VODAFONE INTERNATIONAL HOLDINGS B.V. v.       699
UNION OF INDIA & ANR. [K.S. RADHAKRISHNAN, J.]
"extinguishment" is attracted for a transfer of a legal right and A
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 B
on transaction and not its effect. Learned senior counsel
pointed out that to lift the corporate veil of a legally recognised
corporate structure time and the stage of the transaction are
very important and not the motive to save the tax. Reference
was also made to several judgments of the English Courts viz, C
/RC v. Duke of Westminster (1936) AC 1 (HL), W. T. Ramsay
v. !RC (1982) AC 300 (HL), Craven v. White (1988) 3 All ER
495, Furniss v. Dawson (1984) 1 All ER 530 etc. Reference
was also made to the judgment of this Court in McDowell, Azadi
Bachao Ando/an cases (supra) and few other judgments. D
Learned senior counsel point out that Azadi Bachao Andolan
broadly reflects Indian jurisprudence and that generally Indian
courts used to follow the principles laid down by English Courts
on the issue of tax avoidance and tax evasion. Learned Senior
counsel also submitted that Tax Residency Certificate (for short E
TRC) issued by the Mauritian authorities has to be respected
and in the absence of any Limitation on Benefit (LOB Clause),
the benefit of the Inda-Mauritian Treaty is available to third
parties who invest in India through Mauritius route.
                                                                    F
     39. Mr. Salve also argued on the extra territorial
applicability of Section 195 and submitted that the same cannot
be enforced on a non-resident without a presence in India.
Counsel also pointed out that the words "any person" in Section
195 should be construed to apply to payers who have a G
presence in India or else enforcement would be impossible and
such a provision should be read down in case of payments not
having any nexus with India. Senior counsel also submitted that
the withholding tax provisions under Section 195 of the Indian
Income Tax Act, do not apply to offshore entities making off- H
    700     SUPREME COURT REPORTS                  [2012] 1 S.C.R.


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

C       40. Mr. R.F. Nariman, Learned Solicitor General appearing
  for the Income Tax Department submitted that the sale of CGP
  share was nothing but an artificial avoidance scheme and CGP
  was fished out of the HTIL legal structure as an artificial tax
  avoidance contrivance. Shri Nariman pointed out that CGP
D share has been interposed at the last minute to artificially
  remove HTIL from the Indian telecom business. Reference was
  made to the Due Diligence Report of Ernst and Young which
  stated that target structure later included CGP which was not
  there originally. Further, it was also pointed out that HTIL
E extinguished its rights in HEL and put Vodafone in its place and
  CGP was merely an interloper. Shri Nariman also pointed out
  that as per Settlement Agreement, HTIL sold direct and indirect
  equity holdings, loans, other interests and rights relating to HEL
  which clearly reveal something other than CGP share was sold
F and those transactions were exposed by the SPA. Learned
  Solicitor General also referred extensively the provisions of
  SPA and submitted that the legal owner of CGP is HTIBVI
  Holdings Ltd., a British Virgin Islands Company which was
  excluded from the Agreement with an oblique tax motive.

G      41. Mr. Nariman also submitted the situs of CGP can only
  be in India as the entire business purpose of holding that share
  was to assume control in Indian telecom operations, the same
  was managed through Board of Directors controlled by HTIL.
  The controlling interest expressed by HTIL would amount to
H property rights and hence taxable in India. Reference was made
 VODAFONE INTERNATIONAL HOLDINGS B.V. v.       701
UNION OF INDIA & ANR. [K.S. RADHAKRISHNAN, J.]
to judgments of the Calcutta High Court in CIT v. National             A
Insurance Company (1978) 113 ITR 37(Cal.) and Laxmi
Insurance Company Pvt. Ltd. v. CIT(1971) 80 ITR 575 (Delhi).
Further, it was also pointed out the "call and put" options despite
being a contingent right are capable of being transferred and
they are property rights and not merely contractual rights and         B
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              C
purposively and it contains a look through provision and that
the definition of the transfer in Section 9(1 )(i) is an inclusive
definition meant to explain the scope of that Section and not
to limit it. The resignation of HTIL Directors on the Board of HEL
could be termed as extinguishment and the right to manage a            D
Company through its Board of Directors is a right to property.
 Learned Solicitor General also extensively referred to Ramsay
Doctrine and submitted that if business purpose as opposed
to effect is to artificially avoid tax then that step should be
ignored and the courts should adopt a purposive construction           E
on the SPA. Considerable reliance was placed on judgment
of this Court in Mc.Dowell and submitted that the same be
followed and not Azadi Bachao Ando/an which has been
incorrectly decided. Further, it was also pointed out that Circular
No. 789 as regards the conclusiveness of TRC would apply only          F
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          G
have been factually and legally assigned to a Mauritian entity
 or to third party and whether the Mauritian Company was a
fac;:ade.

     42. Learned counsels, on either side, in support of their         H
    702      SUPREME COURT REPORTS                  [2012) 1 S.C.R.


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

                                  Part - II

  CORPORATE STRUCTURE I GENERAL PRINCIPLES
C (National and International)

       43. Corporate structure is primarily created for business
  and commercial purposes and multi-national companies who
  make offshore investments always aim at better returns to the
D 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
E 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
F 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
G purposes are those which are generally created or acquired:
  at the time when investment is being made; or further
  investments are being made; or the time when the Group is
  undergoing financial or other overall restructuring; or when
  operations, such as consolidation, are carried out, to clean-
H defused or over-diversified. Sound commercial reasons like
 VODAFONE INTERNATIONAL HOLDINGS B.V. v.       703
UNION OF INDIA & ANR. [K.S. RADHAKRISHNAN, J.]
hedging business risk, hedging political risk, mobility of            A
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       B
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            C
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          D
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       E
exit or restructuring. Clearly, there is a fundamental difference
in transnational investment made overseas and domestic
investment. Domestic investments are made in the home
country and meant to stay as it were, but when the trans-national
investment is m2de overseas away from the natural residence
                                                                      F
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              G
corporate structures are genuine and set up legally for a sound
and veritable commercial purpose. Burden is entirely on the
Revenue to show that the incorporation, consolidation,
restructuring etc. has been effected to achieve a fraudulent,
dishonest purpose, so as to defeat the law.                           H
    704       SUPREME COURT REPORTS                 (2012] 1 S.C.R.

A CORPORATE GOVERNANCE

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

                 "Corporate governance is a system by which
          business corporations are directed and controlled. The
          corporate governance structure specifies the distribution
          of rights and responsibilities among different participants
c         in the corporation and other stake holders and spells out
          rules and procedures for making decisions on corporate
          affairs. By doing this, it also provides a structure through
          which the company objectives are set and the means of
          attaining those objectives and monitoring performance."
D
  The Ministry of Corporate Affairs to the Government of India,
  has issued several press notes for information of such global
  companies, which will indicate that Indian corporate Law has
  also accepted the corporate structure consisting of holding
E 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
F 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
G related companies and aggregated amount of loss made by it
  to its subsidiaries and to related companies and their other
  indebtedness to it must be shown separately from other assets
  etc.

H         48. Corporate governors can also misuse their office, using
 VODAFONE INTERNATIONAL HOLDINGS B.V. v.       705
UNION OF INDIA & ANR. [K.S. RADHAKRISHNAN, J.]
fraudulent means for unlawful gain, they may also manipulate       A
their records, enter into dubious transactions for tax evasion.
Burden is always on the Revenue to expose and prove such
transactions are fraudulent by applying look at principle.
OVERSEAS COMPANIES AND FDI                                         B
     49. Overseas companies are companies incorporated
outside India and neither the Companies Act nor the Income
Tax Act enacted in India has any control over those companies
established overseas and they are governed by the laws in the
countries where they are established. From country to country C
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 D
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      E
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           F
countries including India.

     50. Investment under foreign Direct Investment Scheme
(FDI scheme), investment by Foreign Institutional Investors (Flis)
under the Portfolio Investment Scheme, investment by NRls/ G
OBCs under the Portfolio Investment Scheme and sale of
shares by NRls/OBCs on non-repatriation basis; Purchase and
sale of securities other than shares and convertible debentures
of an Indian company by a non-resident are common. Press
Notes are announced by the Ministry of Commerce and Industry H
    706      SUPREME COURT REPORTS                   [2012] 1 S.C.R.

A and the Ministry issued Press Note no. 2, 2009 and Press Note
  3, 2009, which deals with calculation of foreign investment in
  downstream entities and requirement of ownership or control
  in sectoral cap companies. Many of the offshore companies
  use the facilities of Offshore Financial Centres situate in
B Mauritius, Cayman Islands etc. Many of these offshore
    holdings and arrangements are undertaken for sound
    commercial and legitimate tax planning reasons, without any
    intent to conceal income or assets from the home country tax
    jurisdiction and India has always encouraged such
c   arrangements, unless it is fraudulent or fictitious.

       51. Moving offshore or using an OFC does not necessarily
  lead to the conclusion that they involve in the activities of tax
  evasion or other criminal activities. The multi-national
  companies are attracted to offshore financial centres mainly due
D 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
E form offshore vehicles to engage in nsky investments, through
  the use of derivatives trading etc. Many of such companies
  do, of course, involve in manipulation of the market, money
  laundering and also indulge in corrupt activities like round
  tripping, parking black money or offering, accepting etc.,
F directly or indirectly bribe or any other undue advantage or
  prospect thereof.

       52. OECD (Organisation for Economic Co-operation and
  Development) in the year 1998 issued a report called "Harmful
G Tax Competition: An Emerging Global Issue". The report
  advocated doing away with tax havens and offshore financial
  canters, like the Cayman Islands, on the basis that their low-
  tax regimes provide them with an unfair advantage in the global
  marketplace and are thus harmful to the economics of more
H developed countries. OECD threatened to place the Cayman
 VODAFONE INTERNATIONAL HOLDINGS BV v.        707
UNION OF INDIA & ANR. [K.S. RADHAKRISHNAN, J]
Islands and other tax havens on a "black list" and impose           A
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          B
exchange information with OECD. Often, complaints have
been raised stating that these centres are utilized for
manipulating market, to launder money, to evade tax, to
finance terrorism, indulge in corruption etc. All the same, it is
stated that OFCs have an important role in the international        c
economy, offering advantages for multi-national companies and
individuals for investments and also for legitimate financial
 planning and risk management. It is often said that insufficient
legislation in the countries where they operate gives
 opportunities for money laundering, tax evasion etc. and,          D
 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            E
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         F
its Income Tax Legislations. In Australia, GAAR is in Part IVA
of the Income Tax Assessment Act, 1936, which is intended to
provide an effective measure against tax avoidance
arrangements. South Africa has also taken initiative in
combating impermissible tax avoidance or tax shelters.              G
Countries like China, Japan etc. have also taken remedial
 measures.

    55. Direct Tax Code Bill (OTC) 2010, proposed in India,
envisages creation of an economically efficient, effective direct   H
    708     SUPREME COURT REPORTS                  (2012) 1 S.C.R.

A tax system, proposing GAAR. GAAR intends to prevent tax
  avoidance, what is inequitable and undesirable. Clause 5(4)(g)
  provides that the income from transfer, outside India of a share
  in a foreign company shall be deemed to arise in if the FMV
  of assets India owned by the foreign company is at least 50%
8 of its total assets. Necessity to take effective legislative
  measures has been felt in this country, but we always lag behind
  because our priorities are different. Lack of proper regulatory
  laws, leads to uncertainty and passing inconsistent orders by
  Courts, Tribunals and other forums, putting Revenue and tax
C 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
D 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
E 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
F 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
G whole as though they are merely departments of one large
  undertaking owned by the holding company. But, the business
  of a subsidiary is not the business of the holding company
  (See Gramophone & Typewriter Ltd. v. Stanley, (1908-10) All
  ER Rep 833 at 837).
H
 VODAFONE INTERNATIONAL HOLDINGS B.V. v.       709
UNION OF !NOIA & ANR. [K.S. RADHAKRISHNAN, J.]
     57. Subsidiary companies are, therefore, the integral part A
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 B
subsidiary companies in the national and international level
for better returns for the investors and for the growth of the
company. Whe·n a holding company owns all of the voting stock
of another company, the company is said to be a WOS of the.
parent company. Holding companies and their subsidiaries can C
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
                                                                0
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
                                                                E
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).
                                                                F
      59. Holding company, of course, if the subsidiary is a
WOS, may appoint or remove any director if it so desires by a
 resolution in the General Body Meeting of the subsidiary.
 Holding companies and subsidiaries can be considered as
 single economic entity and consolidated balance sheet is the G
 accounting relationship between the holding company and
 subsidiary company, which shows the status of the entire
 business enterprises. Shares of stock in the subsidiary
 company are held as assets on the books of the parent
 company and can be issued as collateral for additional debt H
    710      SUPREME COURT REPORTS                 [2012] 1 S. C.R.


A financing. Holding company and subsidiary company are,
  however, considered as separate legal entities, and
  subsidiary are allowed decentralized management. Each
  subsidiary can reform its own management personnel and
  holding company may also provide expert, efficient and
B competent services for the benefit of the subsidiaries.
        60. U.S. Supreme Court in United States v. Bestfoods 524
   US 51 (1998) explained that it is a generaf principle of
   corporate law and legal systems that a parent corporation is
C not liable for the acts of its subsidiary, but the Court went on
   to explain that corporate veil can be pierced and the parent
   company can be held liable for the conduct of its subsidiary,
  if the corporal form is misused to accomplish certain wrongful
  purposes, when the parent company is directly a participant
  in the wrong complained of. Mere ownership, parental control,
0
  management etc. of a subsidiary is not sufficient to pierce the
  status of their relationship and, to hold parent company liable.
  In Adams v. Cape Industries Pie. (1991) 1 All ER 929, the
  Court of Appeal emphasized that it is appropriate to pierce the
E corporate veil where special circumstances exist indicating that
  it is mere fa9ade concealing true facts.
     · 61. Courts, however, will not allow the separate corporate
  entities to be used as a means to carry out fraud or to evade
  tax. Parent company of a WOS, is not responsible, legally for
F 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
G themselves and separate the parent from operating companies,
  thereby protecting the multi-national companies from legal
  liabilities.
    SHAREHOLDERS' AGREEMENT
H       62. hareholders' Agreement ( for short SHA) is, essentially
 VODAFONE INTERNATIONAL HOLDINGS B.V. v.       711
UNION OF !NOIA & ANR. [K.S. RADHAKRISHNAN, J.]
a contract between some or all other shareholders in a A
company, the purpose of which is to confer rights and impose
obligations over and above those provided by the Company
Law. SHA is a private contract between the shareholders
compared to Articles of Association of the Company, which
is a public document. Being a private document it binds                 B
parties thereof and not the other remaining shareholders in
the company. Advantage of SHA is that it gives greater
flexibility, unlike Articles of Association. It also makes provisions
for resolution of any dispute between the shareholders and also
how the future capital contributions have to be made. Provisions        C
of the SHA may also go contrary to the provisions of the Articles
of Association, in that event, naturally provisions of the Articles
of Association would govern and not the provisions made in
the SHA.
                                                                  D
      63. The nature of SHA was considered by a two Judges
Bench of this Court in V. B. Rangaraj v. V. B. Gopalakrishnan
and Ors. (1992) 1 sec 160. In that case, an agreement was
entered into between shareholders of a private company
wherein a restriction was imposed on a living member of the E
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 F
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 G
where it is for some good for the community. Companies Act
1956 or the FERA 1973, RBI Regulation or the l.T. Act do not
explicitly or impliedly forbid shareholders of a company to enter
 into agreements as to how they should exercise voting rights
 attached to their shares.                                        H
     712     SUPREME COURT REPORTS                (2012] 1 S.C.R.


A       64. Shareholders can enter into any agreement in the
   best interest of the company, but the only thing is that the
   provisions in the SHA shall not go contrary to the Articles of
   Association. The essential purpose of the SHA is to make
  provisions for proper and effective internal management of the
B 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
C and members of the Company will not bind the company, but
  there is nothing unlawful in entering into agreement for
  transferring of shares. Of course, the manner in which such
  agreements are to be enforced in the case of breach is given
  in the general law between the company and the shareholders.
o A breach of SHA which does not breach the Articles of
  Association is a valid corporate action but, as we have already
  indicated, the parties aggrieved can get remedies under the
  general law of the land for any breach of that agreement.

E        65. SHA also provides for matters such as restriction of
    transfer of shares i.e. Right of First Refusal (ROFR), Right of
    First Offer (ROFO), Drag-Along Rights (DARs) and Tag-Along
    Rights (TARs), Pre-emption Rights, Call option, Put option,
    Subscription option etc. SHA in a characteristic Joint Venture
F Enterprise may regulate its affairs on the basis of various
  provisions enumerated above, because Joint Venture
  enterprise may deal with matters regulating the ownership and
  voting rights of shares in the company, control and manage the
  affairs of the company, and also may make provisions for
G resolution of disputes between the shareholders. Many of the
  above mentioned provisions find a place in SHAs, FWAs, Term
  Sheet Agreement etc. in the present case, hence, we may refer
  to some of those provisions.

        (a) Right of First Refusal IROFRl: ROFR permits its
H
 VODAFONE INTERNATIONAL HOLDINGS B.V. v. 713
UNION OF INDIA & ANR. [K.S. RADHAKRISHNAN, J.)
holders to claim the transfer of the subject of the right with a A
unilateral declaration of intent which can either be contractual
or legal. No statutory recognition has been given to that right
either in the Indian Company Law or the Income Tax Laws.
Some foreign jurisdictions have made provisions regulating
those rights by statutes. Generally, ROFR is contractual and B
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 C
not totally prevented, yet a shareholder is obliged to offer the
shares first to the existing shareholders. Consequently, the
 other shareholders will have the privilege over the third parties
with regard to purchase of shares.
                                                                   D
     · (b) Tag Along Rights !TARs): TARs, a facet of ROFR,
 often refer to the power of a minority shareholder to sell their
 shares to the prospective buyer at the same price as any other
 shareholder would propose to sell. In other words, if one
 shareholder wants to sell, he can do so only if the purchaser E
 agrees to purchase the other shareholders, who wish to sell at
 the same price. TAR ofter. finds a place in the SHA which
 protects the interest of the minority shareholders.

     (c) Subscription Option: Subscription option gives the
beneficiary a right to demand issuance of allotment of shares       F
of the target company. It is for that reason that a subscription
right is normally accompanied by ancillary provisions including
an Exit clause where, if dilution crosses a particular level, the
counter parties are given some kind of Exit option.
                                                                    G
     (d) Call Option: Call option is an arrangement often seen
 in Merger and Acquisition projects, especially when they aim
 at foreign investment. A Call option is given to a foreign buyer
 by agreement so that the foreign buyer is able to enjoy the
                                                                    H
    714      SUPREME COURT REPORTS                 [2012) 1 S.C.R.

A permitted minimum equity interests of the target company. Call
  option is always granted as a right not an obligation, which can
  be exercised upon satisfaction of certain conditions and/or
  within certain period agreed by the grantor and grantee. The
  buyer of Call option pays for the right, without the obligation to
B buy some underlying instrument from the writer of the option
  contract at a set future date and at the strike price. Call option
  is where the beneficiary of the action has a right to compel a
  counter-party to transfer his shares at a pre-determined or price
  fixed in accordance with the pre-determined maxim or even fair
c market value which results in a simple transfer of shares.
       (e) Put Option: A put option represents the right, but not
  the requirement to sell a set number of shares of stock, which
  one do not yet own, at a pre-determined strike price, before
  the option reaches the expiration date. A put option is
0
  purchased with the belief that the underlying stock price will
  drop well before the strike price, at which point one may choose
  to exercise the option.

       (f) Cash and Cashless Options: Cash and Cashless
E options are related arrangement to call and put options creating
  a route by which the investors could carry out their investment,
  in the event of an appreciation in the value of shares.

        66. SHA, therefore, regulate the ownership and voting
F 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
G the interest of the shareholders and the company. Provisions
  referred to above, which find place in a SHA, may regulate
  the rights between the parties which are purely contractual and
  those rights will have efficacy only in the course of ownership
  of shares by the parties.
H
 VODAFONE INTERNATIONAL HOLDINGS B.V. v.       715
UNION OF INDIA & ANR. [K.S. RADHAKRISHNAN, J.]
SHARES. VOTING            RIGHTS       AND     CONTROLLING            A
INTERESTS:

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

Voting Rights:
                                                                      F
     69. Voting rights vest in persons who names appear in the
Register of Members. Right to vote cannot be decoupled from
the share and an agreement to exercise voting rights in a
desired manner, does not take away the right of vote, in fact, it
is the shareholders' right. Voting rights cannot be denied by a       G
company by its articles or otherwise to holders of shares below
a minimum number such as only shareholders holding five or
more shares are entitled to vote and so on, subject to certain
limitations.
     70. Rights and obligations flowing from voting rights have       H
    716     SUPREME COURT REPORTS                  [2012] 1 S.C.R.

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

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

       72. Shares, we have already indicated, represent
  congeries of rights and controlling interest is an incident of
H holding majority shares. Control of a company vests in the
  VODAFONE INTERNATIONAL HOLDINGS B.V. v. 717
 UNION OF INDIA & ANR. [K.S. RADHAKRISHNAN, J.]
voting powers of its shareholders. Shareholders holding a A
controlling interest can determine the nature of the business,
its management, enter into contract, borrow money, buy, sell
or merge the company. Shares in a company may be subject
to premiums or discounts depending upon whether they
represent controlling or minority interest. Control, of course, B
confers value but the question as to whether one will pay a
premium for controlling interest depends upon whether the
potential buyer believes one can enhance the value of the
company.
                                                                 c
     73. The House of Lords in /RC v. V. T. Bibby & Sons
(1946) 14 ITR (Supp) 7 at 9-10, after examining the meaning
of the expressions "control" and "interest", held that controlling
interest did not depend upon the extent to which they had the
power of controlling votes. Principle that emerges is that where D
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 E
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
                                                                   F
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 G
be utilized to control the company. Controlling interest,
therefore, is not an identifiable or distinct capital asset
independent of holding of shares and the nature of the
transaction has to be ascertained from the terms of the
contract and the surrounding circumstances. Controlling H
    718      SUPREME COURT REPORTS                  [2012) 1 S.C.R.


A interest is inherently contractual right and not property right
    and cannot be considered as transfer of property and hence
    a capital asset unless the Statute stipulates otherwise.
  Acquisition of shares may carry the acquisition of controlling
  interest, which is purely a commercial concept and tax is levied
B on the transaction, not on its effect.

   A. LIFTING THE VEIL - TAX LAWS

         75. Lifting the corporate veil doctrine is readily applied in
  the cases coming within the Company Law , Law of Contract,
C Law of Taxation. Once the transaction is shown to be fraudulent,
  sham, circuitous or a device designed to defeat the interests
  of the shareholders, investors, parties to the contract and also
  for tax evasion, the Court can always lift the corporate veil and
  examine the substance of the transaction. This Court in
D Commissioner of Income Tax v. Sri Meenakshi Mills Ltd.,
  Madurai, Al R 1967 SC 819 held that the Court is entitled to lift
  the veil of the corporate entity and pay regard to the economic
  realities behind the legal fayade meaning that the court has the
  power to disregard the corporate entity if it is used for tax
E 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
F to be evaded or where associated companies are inextricably
  as to be, in reality part of one concern. Lifting the Corporate
  Veil doctrine was also applied in Juggi/a/ Kampa/pat v.
  Commissioner of Income Tax, U.P. , AIR 1969 SC. 932 :
  (1969) 1 SCR 988, wherein this Court noticed that the
G assessee firm sought to avoid tax on the amount of
  compensation received for the loss of office by claiming that it
  was capital gain and it was found that the termination of the
  contract of managing agency was a collusive transaction. Court
  held that it we>s a collusive device, practised by the managed
H
 VODAFONE INTERNATIONAL HOLDINGS B.V. v.       719
UNION OF INDIA & ANR. [K.S. RADHAKRISHNAN, J.]
company and the assessee firm for the purpose of evading             A
income tax, both at the hands of the payer and the payee.

     76. Lifting the corporate veil doctrine can, therefore, be
applied in tax matters even in the absence of any statutory
authorisation to that effect. Principle is also being applied in     8
cases of holding company - subsidiary relationship- where in
spite of being separate legal personalities, if the facts reveal
that they indulge in dubious methods for tax evasion.

B. Tax Avoidance and Tax Evasion:
                                                                     c
     Tax avoidance and tax evasion are two expressions which
find no definition either in the Indian Companies Act, 1956 or
the Income Tax Act, 1961. But the expressions are being used
in different contexts by our c·ourts as well as the Courts in
England and various other countries, when a subject is sought        D
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           E
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        F
shown as gardener's wages, then the wages paid would not
be deductible. Inland Revenue contended that the form of the
transaction was not acceptable to it and the Duke was taxed
on the substance of the transaction, which was that payment
of annuity was treated as a payment of salary or wages.              G
Crown's claim of substance doctrine was, however, rejected
by the House of Lords. Lord Tomlin's celebrated words are
quoted below:
     "Every man is entitled if he can to order his affairs so that
                                                                     ~
    720       SUPREME COURT REPORTS                       [2012] 1 S.C.R.


A         the tax attaching under the appropriate Acts is less than it
          otherwise would be. If he succeeds in ordering them so
          as to secure this result, then, however unappreciative the
          Commissioners of Inland Revenue or his fellow taxpayers
          may be of his ingenuity, he cannot be compelled to pay
B         an increased tax. This so called doctrine of 'the
          substance' seems to me to be nothing more than an
          attempt to make a man pay notwithstanding that he has
          so ordered his affairs that the amount of tax sought from
          him is not legally claimable."

C Lord Atkin, however, dissented and stated that "the substance
  of the transaction was that what was being paid was
  remuneration."

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

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

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

          (3) An arrangement is effective for tax purposes even if it
          has no business purpose and has been entered into to
          avoid tax.
F
  The House of Lords, during 1980's, it seems, began to attach
  a "purposive interpretation approach" and gradually began to
  give emphasis on "economic substance doctn'ne" as a question
  of statutory interpretation. In a most celebrated case in Ramsay
G (supra), the House of Lords considered this question again.
  That was a case whereby the taxpayer entered into a circular
  series of transactions designed to produce a loss for tax
  purposes, but which together produced no commercial result.
  Viewed that transaction as a whole, the series of transactions
  was self-canceling, the taxpayer was in precisely the same
H
 VODAFONE INTERNATIONAL HOLDINGS B.V. v.       721
UNION OF INDIA & ANR. [K.S. RADHAKRISHNAN, J.]
commercial position at the end as at the beginning of the series      A
of transactions. House of Lords ruled that, notwithstanding the
rule in Duke of Westminster's case, the series of transactions
should be disregarded for tax purposes and the manufactured
loss, therefore, was not available to the taxpayer. Lord
Wilberforce opined as follows:                                        B

    "While obliging the court to accept documents or
    transactions, found to be genuine, as such, it does not
    compel the court to look at a document or a transaction in
    blinkers, isolated from any context to which it properly          C
    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         D
    court to ascertain the legal nature of any transaction to
    which it is sought to attach a tax or a tax consequence and
    if that emerges from a series or combination of
    transactions intended to operate as such, it is that series
    or combination which may be regarded."                            E

                                            (emphasis supplied)

House of Lords, therefore, made the following important
remarks concerning what action the Court should consider in
                                                                      F
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         G
     so as to reduce tax;

     (3) Even if the purpose or object of a transaction was to
     avoid tax this did not invalidate a transaction unless an
     anti-avoidance provision applied; and
                                                                      H
    722       SUPREME COURT REPORTS                [2012) 1 S.C.R.


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

8      77. In Ramsay (supra) it may be noted, the taxpayer
  produced a profit that was liable to capital gains tax, but a
  readymade claim was set up to create an allowable loss that
  was purchased by the taxpayer with the intention of avoiding
  the capital gains tax. Basically, the House of Lords, cautioned
C 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
D the Courts would not approach the issue on a mere literal
  interpretation. Ramsay was, therefore, seen as a new
  approach to artificial tax avoidance scheme.

        78. Ramsay was followed by the House of Lords in another
  decision in /RC v. Burmah Oil Co Ltd. (1982) 54 TC 200. This
E case was also concerned with a self-cancelling series of
  transactions. Lord Diplock, in that case, confirmed the judicial
  view that a development of the jurisprudence was taking place,
  stating that Ramsay case marked a significant change in the
  approach adopted by the House of Lords to a pre-ordained
F 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
G effectiveness of a scheme should be judged by reference to
  its commercial substance rather than its legal form. On this, of
  course, there was some conflict with the principle laid down in
  Duke of Westminster. Duke of Westminster was concerned
  with the "single tax avoidance step". During 1970's, the Courts
H in England had to deal with several pre-planned avoidance
  VODAFONE INTERNATIONAL HOLDINGS B.V. v.         723
 UNION OF INDIA & ANR. [K.S. RADH.A.KRISHNAN, J.)
 schemes containing a number of steps. In fact, earlier in /RC      A
  v. Plummer(1979) 3 All ER 775, Lord Wilberforce commented
  about a scheme stating that the same was carried out with
 "almost military precision" which required the court to look at
 the scheme as a whole. The scheme in question was a "circular
  annuity" plan, in which a charity made a capital payment to the   B
. taxpayer in consideration of his covenant to make annual
  payments of income over five years. The House of Lords held
  that the scheme was valid. Basically, the Ramsay was dealing
  with "readymade schemes".

      79. The House of Lords, however, had to deal with a non
                                                                    c
 self-cancelling tax avoidance scheme in Dawson (supra).
 Dawsons, in that case, held shares in two operating companies
 which agreed in principle in September 1971 to sell their entire
 shareholding to Wood Bastow Holdings Ltd. Acting on advice,
                                                                    0
 to escape capital gains tax, Dawsons decided not to sell
 directly to Wood Bastow, rather arranged to exchange their
 shares for shares in an investment company to be incorporated
 in the Isle of Man. Greenjacket Investments Ltd. was then
 incorporated in the Isle of Man on 16.12.1971 and two              E
 arrangements were finalized (i) Greenjacket would purchase
 Dawsons shares in the operating company for £152,000 to be
 satisfied by the issue of shares of Greenjacket and (ii) an
 agreement for Greenjacket to sell the shares in the operating
 company to Wood Bastow for £152,000.
                                                                    F
       80. The High Court and the Court of Appeal ruled that
  Ramsay principle applied only where steps forming part of the
· scheme were self-cancelling and they considered that it did
  notalloW share exchange and sale agreements to .be distributed
  as steps in the scheme, because they had an enduring legal ·. G
  effect. The House· of Lords, however, held that steps inserted
  in a preordained series of transactions with no commercial
  purpose other than tax avoidance should be disregarded for
  tax purposes, notwithstanding that the inserted step (i.e. the
  introduction of Greenjacket) had a business effect. Lord H
    724       SUPREME COURT REPORTS                  [2012) 1 S.C.R.

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

         81. Even though in Dawson, the House of Lords seems to
8   strike down the transaction by the taxpayer for the purpose of
    tax avoidance, House of Lords in Craven (supra) clarified the
    position further. In that case, the taxpayers exchanged their
    shares in a trading company (Q Ltd) for shares in an Isle of Man
    holding company (M Ltd), in anticipation of a potential sale or
C   merger of the business. Taxpayers, in the meanwhile, had
    abandoned negotiations with one interested party, and later
    concluded a sale of Q Ltd's shares with another. M Ltd
    subsequently loaned the entire sale proceeds to the taxpayers,
    who appealed against assessments to capital gains tax. The
    House of Lords held in favour of the taxpayers, dismissing the
0
    crown's appeal by a majority of three to two. House of Lords
    noticed that when the share exchange took place, there was
    no certainty that the shares in Q Ltd would be sold. Lord Oliver,
    speaking for the majority, opined that Ramsay, Burmah and
E   Dawson did not produce any legal principle that would nullify
    any transaction that has no intention besides tax avoidance and
    opined as follows:

                 "My Lords, for my part I find myself unable to accept
          that Dawson either established or can properly be used
F         to support a general proposition that any transaction which
          is effected for avoiding tax on a contemplated subsequent
          transaction and is therefore planned, is for that reason,
          necessarily to be treated as one with that subsequent
          transaction and as having no independent effect."
G
  Craven made it clear that: (1) Strategic tax planning undertaken
  for months or possible years before the event (of-sale) in
  anticipation of which it was effected; (2) A series of transactions
  undertaken at the time of disposal/sale, including an
H intermediate transaction interposed into having no independent
 VODAFONE INTERNATIONAL HOLDINGS B.V. v.       725
UNION OF INDIA & ANR. [K.S. RADHAKRISHNAN, J.]
life, could under Ramsay principle be looked at and treated          A
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    B
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           C
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-         D
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.
                                                                     E
House of Lords examined the transaction as a whole and
concluded that the limited partnership had only 'incurred capital
expenditure on fhe provision of machinery or plant' of 25% and
no more.

     83. Lord Goff explained the meaning of "unacceptable tax        F
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            G
never have existed. This, of course, led to further debate as to
what is "unacceptable tax avoidance" and "acceptable tax
avoidance".

     84. House of Lords, later in Inland Revenue                     H
      726     SUPREME COURT REPORTS                · [2012] 1 S.C.R.


. A   Commissioner v. McGuckian (1997) BTC 346 said that the
      substance of a transaction may be considered if it is a tax
      avoidance scheme. Lord Steyn observed as follows:

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

 C McGuckian was associated with a tax avoidance scheme. The
   intention of the scheme was to convert the income from shares
   by way of dividend to a capital receipt. Schemes' intention was
   to make a capital receipt in addition to a tax dividend.
   Mc. Guckian had affirmed the fiscal nullity doctrine from the
 D approach of United Kingdom towards tax penalties which
   emerged from tax avoidance schemes. The analysis of the
   transaction was under the principles laid down in Duke of
   Westminster, since the entire transaction was not a tax
   avoidance scheme.
 E
       85. House of Lords in MacNiven v. Westmoreland
   Investments Limited (2003) 1 AC 311 examined the scope of
   Ramsay principle approach and held that it was one of
   purposive construction. In fact, Ramsay's case and case of
 F Duke of Westminister were reconciled by Lord Hoffmann in
   MacNiven. Lord Hoffmann clarified stating as follows

        · 'if the legal position is that tax is imposed by reference to
    a legally designed con6ept, such as stamp duty payable on a
    document which constitute conveyance or sale, the court cannot ·.
· G tax a transaction which uses no Sl!Ch document on the ground
    that it achieves the same economic effect. On the other. hand,
    the legal position is that the tax is imposed by reference to a
    commercial concept, then to have regard fo the business
    "substance" of the matter is not to· ignore the legal position but
  H to give. effect to it."
    VODAFONE INTERNATIONAL HOLDINGS B.V. v.       727
   UNION OF INDIA & ANR. [K.S. RADHAKRISHNAN, J.]
       86. In other words, Lord Hoffmann reiterated that tax          A
  statutes must be interpreted "in a purposive manner to achieve
  the intention of the Legislature". Ramsay and Dawson are said
  to be examples of these fundamental principles.

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

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

    ..· 89. On the sarneday, House of Lords had.an occasion to
  consider the Ramsay approach in Inland Revenue
  Commissioner v. Scottish Provident Institution {2004 [1]WLR ·
  3172). The question involved in Scottish Provident Institution H
    728      SUPREME COURT REPORTS                 [2012] 1 S.C.R.

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

          "the primacy of the construction of the particular taxing
D         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
E         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,
F 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
G statutory interpretation rather than an over-arching anti
  avoidance doctrine imposed upon tax laws. Ramsay approach
  ultimately concerned with the statutory interpretation of a tax
  avoidance scheme and the principles laid down in Duke of
  Westminster, it cannot be said, has been given a complete
  go by Ramsay, Dawson or other judgments of the House of
H Lords.
 VODAFONE INTERNATIONAL HOLDINGS B.V. v. 729
UNION OF INDIA & ANR. [K.S. RADHAKRISHNAN, J.]
                             PART-Ill                             A
INDO-MAURITIUS TREATY - AZADI BACHAO ANDOLAfi

      91. The Constitution Bench of this Court in McDowell
(supra) examined at length the concept of tax evasion and tax
avoidance in the light of the principles laid down by the House B
of Lords in several judgments like Duke of Westminster,
Ramsay, Dawson etc. The scope of Inda-Mauritius Double Tax
Avoidance Agreement (in short DTAA)], Circular No. 682 dated
30.3.1994 and Circular No. 789 dated 13.4.2000 issued by C
CBDT, later came up for consideration before a two Judges
Bench of this Court in Azadi Bachao Ando/an. Learned Judges
made some observations with regard to the opinion expressed
by Justice Chinnappa Reddy in a Constitution Bench judgment
of this Court in McDowell, which created some confusion with
regard to the understanding of the Constitution Bench judgment, D
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 E
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 F
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 G
dividend may also be taxed in the Contracting State of which
the company paying the dividends is a resident but if the
recipient was the beneficial owner of the dividends, the tax
should not exceed; (a) 5% of the gross amount of the dividends
if the recipient of the dividends holds at least 10% of the capital H
    730      SUPREME COURT REPORTS                  [2012] 1 S.C.R.


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

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

         94. Writ Petitions in public interest were filed before the
E Delhi High Court challenging the constitutional validity of the
    above mentioned circulars. Delhi High Court quashed Circular
    No. 789 stating that inasmuch as the circular directs the Income
    Tax authorities to accept as a certificate of residence issued
    by the authorities of Mauritius as sufficient evidence as regards
F 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
G not. The. Court also held thatthe "Treaty Shopping" by which
    the resident of a third country takes advantage of the provisions
   ·of the agreement was illegal and necessarily to be forbidden.
    Union of India preferred appeal against the judgment of the
    Delhi High Court, before this Court. This Court in Azadi Bachao
H
  VODAFONE INTERNATIONAL HOLDINGS B.V. v.       731
 UNION OF INDIA & ANR. [K.S. RADHAKRISHNAN, J.]
 Ando/an allowed the appeal and Circular No. 789 was                    A
 declared valid.

      Limitation of Benefit Clause (LOB)

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

      96. Mr. Aspi Chinoy, learned senior counsel contended that        F
 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           G
 of shares by the Mauritian company, after a reasonable time,
 the sale proceeds would be received by the Mauritius Company
 as the registered holder/owner of such shares, such benefits
 could be sent back to the Foreign Principal/100% shareholder
 of Mauritius company either by way of a declaration of special         H
    732     SUPREME COURT REPORTS                 [2012] 1 S.C.R.

A dividend by Mauritius company and/or by way of repayment of
  loans received by the Mauritius company from the Foreign
  Principal/shareholder for the purpose of making the investment.
  Mr. Chinoy is right in his contention that apart from OTAA, which
  provides for tax exemption in the case of capital gains received
B by a Mauritius company/shareholder at the time of
  disinvestmenVexit and the fact that Mauritius does not levy tax
  on dividends declared and paid by a Mauritius company/
  subsidiary to its Foreign Shareholders/Principal, there is no
  other reason for this quantum of funds to be invested from/
c through Mauritius.
         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 ;:;ale!
0
    disinvestment/exit from such FD/, deny benefits to such
    Mauritius companies of the Treaty by stating that FD/ was only
    routed through a Mauritius company, by a company/principal
  resident in a third country; or the Mauritius company had
E received all its funds from a foreign principal/company; or the
  Mauritius subsidiary is controlled/managed by the Foreign
  Principal; or the Mauritius company had no assets or business
  other than holding the investmenVshares in the Indian company;
  or the Foreign Principal/100% shareholder of Mauritius
F company had played a dominant role in deciding the time and
  price of the disinvestmenVsale/transfer; or the sale proceeds
  received by the Mauritius company had ultimately been paid
  over by it to the Foreign Principal/ its 100% shareholder either
  by way of Special Dividend or by way of repayment of loans
  received; or the real owner/beneficial owner of the shares was
G the foreign Principal Company. Setting up of a WOS Mauritius
  subsidiary/SPV by Principals/genuine substantial long term FOi
  in India from/through Mauritius, pursuant to the OTAA and
  Circular No. 789 can never be considered to be set up for tax
  evasion.
H
 VODAFONE INTERNATIONAL HOLDINGS B.V. v.       733
UNION OF INDIA & ANR. [K.S. RADHAKRISHNAN, J.]
TRC whether conclusive                                           A

       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. OTAA and Circular B
No. 789 dated 13.4.2000, in our view, would not preclude the
Income Tax Department from denying the tax treaty benefits, if
it is established, on facts, that the Mauritius company has been
interposed as the owner of the shares in India, at the time of
disposal of the shares to a third party, solely with a view to C
avoid tax without any commercial substance. Tax Department,
in such a situation, notwithstanding the fact that the Mauritian
company is required to be treated as the beneficial owner of
the shares under Circular No. 789 and the Treaty is entitled
to look at the entire transaction of sale as a whole and if it is 0
established that the Mauritian company has been interposed
as a device, it is open to the Tax Department to discard the
device and take into consideration the real transaction between
the parties • and the transaction may be subjected to tax. In
other words, TRC does not prevent enquiry into a tax fraud, E
for example, where an OCB is used by an Indian resident for
round-tripping or any other illegal activities, nothing prevents
the Revenue from looking into special agreements, contracts
or arrangements made or effected by Indian resident or the
role of the OCB in the entire transaction.
                                                                 F
      99. No court will recognise sham transaction or a
co/ourable device or adoption of a dubious method to evade
tax, but to say that the Inda-Mauritian Treaty will recognise FD/
and Fil only if it originates from Mauritius, not the investors
from third countries, incorporating company in Mauritius, is G
pitching it too high, especially when statistics reveals that for
the last decade the FD/ in India was US$ 178 billion and, of
this, 42% i.e. US$ 74.56 billion was through Mauritian route.
Presently, it is known, Fil in India is Rs.450,000 crores, out of
which Rs. 70,000 crores is from Mauritius. Facts, therefore, H
    734     SUPREME COURT REPORTS                 [2012) 1 S.C.R.


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

        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
C 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
D 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
E 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
F 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
G 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
H at with suspicion. We may, therefore, briefly examine what those
 VODAFONE INTERNATIONAL HOLDINGS B.V. v.       735
UNION OF INDIA & ANR. (K.S. RADHAKRISHNAN, J.]
expressions mean and how they are understood in the                 A
corporate world.

TAX HAVENS,         TREATY SHOPPING AND SHELL
COMPANIES

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

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

            "The role played by tax havens in encouraging and
     profiteering from tax· avoidance, tax evasion and capital
     flight from developed and developing countries is a
     scandal of gigantic proportions".
                                                                    F
The project recorded that one per cent of the world's population
holds more than 57% of total global worth and that
approximately US $ 255 billion annually was involved in using
offshore havens to escape taxation, an amount which would
more than plug the financing gap to achieve the Millennium          G
Development Goal of reducing the world poverty by 50% by
2015. ("Tax Us If You Can" September 2005, 78 available at
http:/www.taxjustice.net). Necessity of proper legislation for
charging t:iose types of transactions have already been
emphasised by us.                                                   H
    736      SUPREME COURT REPORTS                   [2012] 1 S.C.R.

A Round Tripping

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

F         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
G detected by the Court of Law, it can pierce the corporate
  structure since fraud unravels everything, even a statuto,.Y
  provision, if it is a stumbling block, because legislature never
  intents to guard fraud. Certainly, in our view, TRC certificate
  though can be accepted as a conclusive evidence for
H accepting status of residents as well as beneficial ownership
 VODAFONE INTERNATIONAL HOLDINGS B.V. v.       737
UNION OF INDIA & ANR. [K.S. RADHAKRISHNAN, J.]
for applying the tax treaty, it can be ignored if the treaty is       A
abused for the fraudulent purpose of evasion of tax.

McDowell - WHETHER CALLS FOR RECONSDIERATION:

     107. McDowell has emphatically spoken on the principle           B.
of Tax Planning. Justice Ranganath Mishra, on his and on behalf
of three other Judges, after referring to the observations of
Justice S.C. Shah in CIT v. A. Raman and Co. (1968) 1 SCC
10, CIT v. B. M. Kharwar (1969) 1 SCR 651, the judgments in
Bank of Chettinad Ltd. v. CIT (1940) 8 ITR 522 (PC),
Jiyajeerao Cotton Mills Ltd. v. Commissioner of Income Tax            C
and Excess Profits Tax, Bombay AIR 1959 SC 270; CIT v.
Vadilal Lallubhai (1973) 3 SCC 17 and the views expressed
by Viscount Simon in Latif/a v. /RC. 26 TC 107 : (1943) AC
377 stated as follows:
                                                                      D
    "Tax planning may be legitimate provided it is within the
    framework of law. Colourable devices cannot be part of
    tax planning and it is wrong to encourage or entertain the
    belief that is honourable to avoid the payment of tax by
    resorting to dubious methods. It is the obligation of every       E
    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     F
that charge of tax is distributed is not prohibited and a tax payer
may resort to a device to divert the income before it accrues
or arises to him and the effectiveness of the device depends
not upon considerations of morality, but on the operation of the
Income Tax Act. Justice Shah made the same observation in             G
B.N. Kharwar (supra) as well and after quoting a passage from
the judgment of the Privy Council stated as follows :-

           "The Taxing authority is entitled and is indeed bound
     to determine the true legal relation resulting from a
     transaction. If the parties have chosen to conceal by a          H
    738       SUPREME COURT REPORTS                    [2012) 1 S.C.R.


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

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

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

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

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

                                                  (emphasis supplied)

G Justice Reddy has, the above quoted portion shows, entirely
  agreed with Justice Mishra and has stated that he is only
  supplementing what Justice Mishra has spoken on tax
  avoidance. Justice Reddy, while agreeing with Justice Mishra
  and the other three judges, has opined that in the very country
H of its birth, the principle of Westminster has been given a
 VODAFONE INTERNATIONAL HOLDINGS B.V. v.       739
UNION OF INDIA & ANR. [K.S. RADHAKRISHNAN, J.]
decent burial and in that country where the phrase "tax              A
avoidance" originated the judicial attitude towards tax
avoidance has changed and the Courts are now concerning
themselves not merely with the genuineness of a transaction,
but with the intended effect of it for fiscal purposes. Justice
Reddy also opined that no one can get away with the tax              8
avoidance project with the mere statement that there is nothing
illegal about it. Justice Reddy has also opined that the ghost
of Westminster (in the words of Lord Roskill) has been
exorcised in England. In our view, what transpired in England
is not the ratio of McDowell and cannot be and remains               C
merely an opinion or view.

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

    112. Justice Reddy, we have already indicated, himself           E
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       F
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   G
by Justice Mishra for himself and on behalf of three other
judges, on which Justice Reddy has agreed. Justice Reddy has
clearly stated that he is only supplementing what Justice Mishra
 has said on Tax avoidance.
                                                                     H
    740     SUPREME COURT REPORTS               . [2012) 1 S.C.R.

A        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
B has been a cornerstone of law, that a tax payer is enabled to
  arrange his affairs so as to reduce the liability of tax and the
  fact that the motive for a transaction is to avoid tax does not
  invalidate it unless a particular enactment so provides
  (Westminster Principle). Needless to say if the arrangement is
c to be effective, it is essential that the transaction has some
  economic or commercial substance. Lord Roskill's view is not
  seen as the correct view so also Justice Reddy's, for the
  reasons we have already explained in earlier part of this
  judgment.
D      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 8.C. Kharwar(supra) as,
  well as the opinion expressed by Lord Roskill on Duke of
  Westminster stated that the subject is not to be taxed by
E 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 eve!}' tax
F payer is entitled to arrange his affairs so that his taxes shall
  be as low as possible and that he is not bound to choose that
  pattern which will replenish the treasuf}'.Revenue's stand that
  the ratio laid down in McDowell is contrary to what has been
  laid down in Azadi Bachao Ando/an, in our view, is
G unsustainable and, therefore, calls for no reconsideration by a
  larger branch.
                                PART-IV

    CGP AND ITS INTERPOSITION
H
 VODAFONE INTERNATIONAL HOLDINGS B.V. v.       741
UNION OF INDIA & ANR. [K.S. RADHAKRISHNAN, J.]
     118. CGP's interposition in the HTIL Corporate structure          A
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            B
transaction can be ascertained only by looking into the legal
arrangement actually entered into and carried out.
lndisputedly, that the contracts have to be read holistically to
arrive at a conclusion as to the real nature of a transaction.
Revenue's stand was that the CGP share was a mode or                   C
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           D
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,
                                                                       E
especially when another route was available for HTIL to transfer
its controlling interest in HEL to Vodafone. Further it was
pointed out that the original idea of the parties was to sell
shares in HEL directly but at the last moment the parties
changed their mind and adopted a different route since HTIL
                                                                       F
wanted to declare a special dividend out of US $ 11 million for
payment and the same would not have been possible if they
had adopted Mauritian route.

     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        G
companies directly held Mauritius entities, especially when there
is no LOB clause in India-Mauritius Treaty. Further, it was
pointed out that if the Mauritius companies had sold the shares
of HEL, then Mauritius compariies would have continued to be
                                                                       H
    742       SUPREME COURT REPORTS                  [2012] 1 S.C.R.


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

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

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




          123. HTIL preferred CGP route rather than adopting any
  other method (why ?) for which we have to examine whether
G HTIL has got any justification for adopting this route, for sound
  commercial reasons or purely for evasion of tax. In international
  investments, corporate. structures are designed to enable a
  smooth transition which can be by way of divestment or dilution.
  Once entry into the structure is honourable, exits from the
H structure can also be honourable.
 VODAFONE INTERNATIONAL HOLDINGS B.V. v.       743
UNION OF !NOIA & ANR. [K.S. RADHAKRISHNAN, J.)
      124. HTIL structure was created over a period of time and A
this was consolidated in 2004 to provide a working model by
which HTIL could make best use of its investments and exercise
control over and strategically influence the affairs of HEL. HTIL
in its commercial wisdom noticed the disadvantage of
preferring Array, which would have created problems for HTIL. B
 Hutchison Teleservices (India) Mauritius had a subsidiary,
 namely 3GSPL which carried on the call centre business in India
and the transfer of CGP share would give control over 3GSPL,
an indirect subsidiary which was incorporated in the year 1999.
 It would also obviate problems arising on account of call and c
 put options arrangements and voting rights enjoyed by 3GSPL.
 If Array was transferred, the disadvantage was that HTIL had
 to deal with call and put options of 3GSPL. In the above
 circumstances, HTIL in their commercial wisdom thought of
 transferring CGP share rather than going for any other 0
 alternatives. Further 3GSPL was also a party to various
 agreements between itself and the companies of AS, AG and
 IDFC Group. If Array had been transferred the disadvantage
 would be that the same would result in hiving off the call centre
 business from 3GSPL. Consolidation operations of HEL were E
 evidently done in the year 2005 not for tax purposes but for
 commercial reasons and the contention that CGP was inserted
 at a very late stage in order to bring a pre tax entity or to create
 a transaction that would avoid tax, cannot be accepted.

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



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

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

          126. Principle of Fiscal nullity was applied by Vinelott, J.
    in favour of the assessee in Dawson, where the judge rejected
B   the contention of the Crown that the transaction was hit by the
    Ramsay principle, holding that a transaction cannot be
    disregarded and treated as fiscal nullity if it has enduring legal
    consequerces. Principle was again explained by Lord
    Brightman stating that the Ramsay test would apply not only
    where the steps are pre-contracted, but also they are pre-
C   ordained, if there is no contractual right and in all likelihood the ·
    steps would follow. On Fiscal nullity, Lord Brightman again
    explained that there should be a pre-ordained series of
    transactions and there should be steps inserted that have no
    commercial purpose and the inserted steps are to be
D   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
E   as pre-ordained transaction, with no commercial purpose,
    other than tax avoidance. Sale of CGP share, in our view, was
    a genuine business transaction, not a fraudulent or dubious
    method to avoid capital gains tax.

F SITUS OF CGP
       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
G at the place where the company is incorporated and/ or the
  place where the share can be dealt with by way of transfer. CGP
  share is registered in Cayman Island and materials placed
  before us would indicate that Cayman Island law, unlike other
  laws does not recognise the multiplicity of registers. Section
H 184 of the Cayman Island Act provides that the company may
 VODAFONE INTERNATIONAL HOLDINGS B.V. v.       745
UNION OF INDIA & ANR. [K.S. RADHAKRISHNAN, J.]
be exempt if it gives to the Registrar, a declaration that             A
"operation of an exempted company will be conducted mainly
outside the Island". Section 193 of the Cayman Island Act
expressly recognises that even exempted companies may, to
a limited extent trade within the Islands. Section 193 permits
activities by way of trading which are incidental of off shore         B
operations also all rights to enter into the contract etc. The facts
in this case as well as the provisions of the Caymen Island Act
would clearly indicate that the CGP (Cl) share situates in
Caymen Island. The legal principle on which situs of an asset,
such as share of the company is determined, is well settled.           C
Reference may be made to the judgments in Brassard v. Smith
[1925] AC 371, London and South American Investment Trust
v. British Tobacco Co. (Australia) [1927] 1 Ch. 107. Erie
Beach Co. v. Attorney-General for Ontario, 1930 AC 161 PC
10, R. v. Williams [1942] AC 541. Situs of CGP share,                  D
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            E
fall out of an artificial tax avoidance scheme or an artificial
device, pre-ordained, or pre-conceived with the sole object of
tax avoidance, but was a genuine commercial decision to exit
from the Indian Telecom Sector.
                                                                       F
    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.           G

     2. HTIL indirect subsidiary CGP(M) held 37.25% of equity
     interest in Tll, an Indian Company, which in turn held
     12.96% equity interest in HEL. CGP(M), as a result of its
     37.25% interest in Tll had an interest in several
     downstream companies which held interest in HEL, as a             H
    746          SUPREME COURT REPORTS                [2012] 1 S.C.R.


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

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

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

E      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
F 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,
G by virtue of those agreements, had the following interests:-

           (i)    Rights (and Options) by providing finance and
                  guarantee to Asim Ghosh Group of companies to
                  exercise control over Tll and indirectly over HEL
H                 through Tll Shareholders Agreement and the
 VODAFONE INTERNATIONAL HOLDINGS B.V. v.       747
UNION OF INDIA & ANR. [K.S. RADHAKRISHNAN, J.]
             Centrino Framework Agreement dated 1.3.2006;             A

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

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

     (iv)    Finance to SMMS to acquire shares in ITNL
             (formerly Omega) with right to acquire the share         D
             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 E
             in HEL and thereby it held beneficial interest in
             2.77% of the share capital of the Indian company
             HEL;

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

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

     (viii) Interest in the form of Preference share capital in
            JKF and Tll to the extent of US$ 167 .5 million and
            USO 337 million respectively. These two
                                                                      H
     748         SUPREME COURT REPORTS                [2012] 1 S.C.R.

 A                 companies hold 19.54% equity in HEL.

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

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

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

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

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

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

    Revenue's stand before us was that the SPA on a commercial
    construction brought about an extinguishment of HTIL's rights
  F of management and control over HEL, resulting in transfer of
    capital asset in India. Further, it was pointed out that the assets,
    rights and entitlements are property rights pertaining to HTIL
    and its subsidiaries and the transfer of CGP share would have
    no effect on the Telecom operations in India, but for the transfer
· G of the above assets, rights and entitlements. SPA and other
    agreements, if examined, as a whole, according to the
    Revenue, leads to the conclusion that the substance of the
    transaction was the transfer of various property rights of HTIL
    in HEL to Vodafone attracting capital gains tax in India. Further,
  H it was point2d out that moment CGP share was transferred off-
 VODAFONE INTERNATIONAL HOLDINGS B.V. v.       749
UNION OF INDIA & ANR. [K.S. RADHAKRISHNAN, J.]
shore, HTIL's right of control over HEL and its subsidiaries              A
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       B
statute and not on assumptions and presumptions.

      132. Vodafone on acquisition of CGP share got controlling
interest of 42% over HELNEL through voting rights through eight
Mauritian subsidiaries, the same was the position of HTIL as              C
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                D
remove members of the Board of Directors of CGP. On
acquisition of CGP from HTIL , Array became an indirect
subsidiary of Vodafone. Array is also a separate legal entity
managed by its own Board of Directors. Share of CGP situates
in Cayman Islands and that of Array in Mauritius. Mauritian
                                                                          E
entities which hold 42% shares in HEL became the direct and
indirect subsidiaries of Array, on Vodafone purchasing the CGP
share. Voting rights, controlling rights, right to manage etc.,
of Mauritian Companies vested in those companies. HTIL
has never sold nor Vodafone purchased any shares of either
Array or the Mauritian subsidiaries, but only CGP, the share              F
of which situates in Cayman Islands. By purchasing the CGP
share its situs will not shift either to Mauritius or to India, a legal
issue, already explained by us. Array being a WOS of CGP,
CGP may appoint or remove any of iis directors, if it wishes              G
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               H
    750     SUPREME COURT REPORTS                 (2012] 1 S.C.R.


A interest in the Mauritian Companies and the incident of transfer
  of CGP share cannot be considered to be two distinct and
  separate transactions, one shifting of the share and another
  shifting of the controlling interest. Transfer of CGP share
  automatically results in host of consequences including
B transfer of controlling interest and that controlling interest as
  such cannot be dissected from CGP share without legislative
  intervention. Controlling interest of CGP over Array is an
  incident of holding majority shares and the control of
  Company vests in the voting power of its shareholders.
C Mauritian entities being a WOS of Array, Array as a holding
  Company can influence the shareholders of various Mauritian
  Companies. Holding Companies like CGP, Array, may exercise
  control over the subsidiaries, whether a WOS or otherwise by
  influencing the voting rights, nomination of members of the
o Board of Directors and so on. On transfer of shares of the
  holding Company, the controlling interest may also pass on to
  the purchaser along with the shares. Controlling interest might
  have percolated down the line to the operating companies but
  that controlling interest is inherently contractual and not a
E property right unless otherwise provided for in the statue.
  Acquisition of shares, may carry the acquisition of controlling
  interest which is purely a commercial concept and the tax can
  be levied only on the transaction and not on its effect.
  Consequently, on transfer of CGP share to Vodafone, Vodafone
F got control over eight Mauritian Companies which owned
  shares in VEL totalling to 42% and that does not mean that the
  situs of CGP share has shifted to India for the purpose of
  charging capital gains tax.
       134. Vodafone could exercise only indirect voting rights in
G VEL through its indirect subsidiary CGP(M) which held equity
  interests in Tll, an Indian Company, which held equity interests
  in VEL. Similarly, Vodafone could exercise only indirect voting
  rights through HTl(M) which held equity interests in Omega, an
H Indian Company which in turn held equity interests in HEL. On
 VODAFONE INTERNATIONAL HOLDINGS B.V. v.       751
UNION OF INDIA & ANR. [K.S. RADHAKRISHNAN, J.]
transfer of CGP share, Vodafone gets controlling interest in its       A
indirect subsidiaries which are situated in Mauritius which have
equity interests in Tll and Omega, Indian Companies which are
independent legal entities. Controlling interest, which stood
transferred to Vodafone from HTIL accompany the CGP share
and cannot be dissected so as to be treated as transfer of             B
controlling interest of Mauritian entities and then that of Indian
entities and ultimately that of HEL. Situs of CGP share,
therefore, determines the transferability of the share and/or
interest which flows out of that share including controlling
interest. Ownership of shares, as already explained by us,             c
carries other valuable rights like, right to receive dividend, right
to transmit the shares, right to vote, right to act as per one's
wish, or to vote in a particular manner etc; and on transfer of
shares those rights also sail along with them.
                                                                       D
      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        E
rights, which accompany stood transferred not in India, but
offshore and the facts reveal that the offshore holdings and
arrangements made by HTIL and Vodafone were for sound
commercial and legitimate tax planning, not with the motive of
evading tax.
                                                                       F
     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 G
rather than Array was that it would obviate the problems arising
on account of the call and Q..!J! agreements and voting rights
enjoyed by 3GSPL. 3GSPL was also a party to various
agreements between itself and Companies of AS, AG and
IDFC Gr0ups. AS , AG & IDFC have agreed to retain their H
    752     SUPREME COURT REPORTS                 [2012] 1 S.C.R.

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

       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
0
  obligation of the put option. Rights and obligations which flow
  out of call and put options have already been explained by us
  in the earlier part of the judgment. Ca// and put options are
  contractual rights and do not sound in property and hence they
E cannot be, in the absence of a statutory stipulation, considered
  as capital assets. Even assuming so, they are in favour of
  3GSPL and continue to be so even after entry of Vodafone.

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

H       139. IDFC FWA of August 2006 also conferred upon 3
 VODAFONE INTERNATIONAL HOLDINGS B.V. v.      753
UNION OF INDIA & ANR [K.S. RADHAKRISHNAN, J.]

GSPL only call option rights and a right to nominate a buyer if       A
investors decided to exit as long as the buyer paid a fair market
value. June 2007 Agreement became necessary because the
composition of Indian investors changed with some Indian
investors going out and other Indian investors coming in. On
June 2007, changes took place within the Group of Indian              B
investors, in that SSKI and IDFC went out leaving IDF alone
as the Indian investor. Parties decided to keep June 2007
transaction to effectuate their intention within the broad contours
of June 2006 FWA On 06.06.2007 FWA has also retained the
rights and options in favour of 3GSPL but conferred no rights C
on Vodafone and Vodafone was only a confirming party to that
Agreement. Call and put options, we have already mentioned,
were the subject matter of three FWAs viz., Centrino, N.D.
Callus, IDFC and in Centrino and N.D. Callus FWAs, neither
HTIL was a party, nor was Vodafone. HTIL was only a                   D
confirming party in IDFC FWA, so also Vodafone. Since HTIL,
and later Vodafone were not parties to those SHAs and FWAs,
we fail to see how they are bound by the terms and conditions
contained therein, so also the rights and obligations that flow
out of them. HTIL and Vodafone have, of course, had the               E
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
                                                                      F
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            G
guarantee to AG Group of Companies to exercise control over
Tll and indirectly over HEL through Tll SHA and Centrino FWA
dated 01.03.2006 were only contractual rights, as also the
revised SHAs and FWAs entered into on the basis of SPA
Rights (and options) by providing finance and guarantee to AS
                                                                      H
    754      SUPREME COURT REPORTS                   [2012] 1 S.C.R.


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

8       141. Controlling right over Tll through Tll SHAs in the form
  of right to appoint two Directors with veto power to promote its
  interest in HEL and thereby held beneficial interest in 12.30%
  of share capital in the HEL are also contractual rights. Finance
  to SMMS to acquire shares in ITNL (ultimately Omega) with
C right to acquire share capital of Omega were also contractual
  rights between the parties. On transfer of CGP share to
  Vodafone corresponding rearrangement were made in the
  SHAs and FWAs and Term Sheet Agreements in which
  Vodafone was not a party.
D      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
E 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
F 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
G adjustments with regard to certain existing rights, however, the
  options, the extent of rights in relation to options, the price etc.
  all continue to remain in place as they stood. Even if they had
  not been so entered into, all those agreements would have
  remained in place because they were in favour of 3GSPL,
H subsidiary of CGP.
 VODAFONE INTERNATIONAL HOLDINGS B.V. v.       755
UNION OF INDIA & ANR. [K.S. RADHAKRISHNAN, J.]
      144. The High Court has reiterated the common law A
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 B
of VEL, without there being any transfer of shares of VEL.
Further, the High Court failed to note on transfer of CGP share,
there was only transfer of certain off-shore loan transactions
which is unconnected with underlying controlling interest in the
Indian Operating Companies. The other rights, interests and c
entitlements continue to remain with Indian Operating
Companies and there is nothing to show they stood transferred
in Jaw.

      145. The High Court has ignored the vital fact that as far D
as the put options are concerned there were pre-existing
agreements between the beneficiaries and counter parties and
fresh agreements were also on similar lines. Further, the High
Court has ignored the fact that Term Sheet Agreement with
Essar had nothing to do with the transfer of CGP, which was a E
separate transaction which came about on account of
independent settlement between Essar and Hutch Group, for
a separate consideration, unrelated to the consideration of
CGP share. The High Court committed an error in holding that
there were some rights vested in HTIL under SHA dated
                                                                   F
5.7.2003 which is also an agreement, conferring no right to any
party and accordingly none could.have been transferred. The
 High Court has also committed an error in holding that some
 rights vested with HTIL under the agreement dated 01.08.2006,
 in fact, that agreement conferred right on Hutichison G
 Telecommunication (India) Ltd., which is a Mauritian Company
 and not HTIL, the vendor of SPA. The High court has also
 ignored the vital fact that FIPB had elaborately examined the
 nature of call and put option agreement rights and found no right
 in presenti has been transferred to Vodafone and that as and
                                                                   H
    756         SUPREME COURT REPORTS                [2012] 1 S C.R.


A when rights are to be transferred by AG and AS Group
  Companies, it would specifically require Government
  permission since such a sale would attract capital gains, and
  may be independently taxable. We may now examine whether
  the following rights and entitlements would also amount to capital
B 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
C    assigned at the face value. Clause 2.2 of the SPA stipulated
     that HTIL shall procure the assignment of and purchaser agrees
     to accept an assignment of loans free from encumbrances
     together with all rights attaching or accruing to them at
    completion. Loans were defined in the SPA to mean, all inter-
D    company loans owing by CGP and Array to a vendor group
    company including accrued or unpaid interest, if any, on the
    completion date. HTIL warranted and undertook that, as on
    completion, loans set out in Part IV of Schedule 1 shall be the
    only indebtedness owing by the Wider group company to any
E   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
F   in Part IV of Schedule 1 of the SPA would be non-interest
    bearing and on terms equivalent to the terms of those loans
    identified in Part IV of Schedule 1 of the SPA. The sum of such
    indebtedness comprised of:

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

          (b)    HK$ 377,859,382.40 (Loan 2) - reflected in a Loan
                 Agreement (effective date of Loan 31st December
H                2006; date of Loan Agreement: 28 April 2007) [(i)
 VODAFONE INTERNATIONAL HOLDINGS B.V. v.       757
UNION OF !NOIA & ANR. [K.S. RADHAKRISHNAN, J.]
            + (ii): US$ 1,050,220,607.40]                        A

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

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

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

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

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

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


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

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

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

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

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

NON COMPETE AGREEMENT

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

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

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

    ORACLE LICENSE:

        153. Oracle License was an accounting license, the benefit
D 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
E 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-
F shore, money was paid off-shore, parties were no-residents
  and hence there was no transfer of a capital asset situated in
  India. Loan agreements extended by virtue of transfer of CGP
  share were also off-shore and hence cannot be termed to be
  a transfer of asset situated in India. Rights and entitlements
G referred to also, in our view, cannot be termed as capital
  assets, attracting capital gains tax and even after transfer of
  CGP share, all those rights and entitlements remained as such,
  by virtue of various FWAs, SHAs, in which neither HTIL nor
  Vodafone was a party.
H
 VODAFONE INTERNATIONAL HOLDINGS B.V. v.       761
UNION OF INDIA & ANR. [K.S. RADHAKRISHNAN, J.]
     155. Revenue, however, wanted to bring in all those rights       A
and entitlements within the ambit of Section 9(1 )(i) on a liberal
construction of that Section applying the principle of purposive
interpretation and hence we may examine the scope of Section
9.
                                                                      B
                              PART VI

SECTION 9 AND ITS APPLICATION

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

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


A India and stressed that the source of income lies where the
  transaction is effected and not where the economic interest lies
  and pointed out that there is a distinction between a legal right
  and a contractual right. Referring to the definition of "transfer"
  in Section 2(47) of the Income Tax Act which provides for
B 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
C 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
0
  revenue receipts, income arising through or from holding an
  asset in India, income arising from the transfer of an asset
  situated in India. Mr. Cheney submitted that only the last limb
  of Section 9(1 )(i) deals with the transfer of a capital asset
E 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
F 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,
G submitted that on a close analysis of the language employed
  in Section 9 and the various expressions used therein, would
  self-evidently demonstrate that Section 9 seeks to capture
  income arising directly or indirectly from direct or indirect
  transfer. Shri Parasaran submitted, if a holding company
H
 VODAFONE INTERNATIONAL HOLDINGS B.V. v.       763
UNION OF INDIA & ANR. [K.S. RADHAKRISHNAN, J.]
incorporated offshore through a maze of subsidiaries, which are     A
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       B
shoes of the holding company, then Section 9 would get
 attracted. Learned counsel submitted that it would be a case
 of indirect transfer and a case of income accruing indirectly in
 India and consequent to the sale of a share outside India, there
 would be a transfer or divestment or extinguishment of holding     c
 company's rights and interests, resulting in transfer of capital
 asset situated in India.

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

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

     (b) Any income which accrues or arises or is deemed to
     accrue or arise in India during the relevant previous year;
     and
                                                                    H
    764       SUPREME COURT REPORTS                  [2012] 1 S.C.R.

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

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

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

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

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

          (b) Any income which accrues or arises or is deemed to
          accrue or arise to him in India during the relevant previous
          year.
F
       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)
G a business connection in India; (b) a property in India; (c) an
  establishment or source in India; and (d) transfer of a capital
  asset in India.


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

   Section 9

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

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

   (a) in the case of a business of which all the operations
   are not carried out in India, the income of the business      D
   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         E
   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
                                                                 F
   in the business of running a news agency or of publishing
   newspapers, magazines or journals, no income shall be
   deemed to accrue or arise in India to him through or from
   activities which are confined to the collection of news and
   views in India for transmission out of India;]
                                                                 G
   (a)   in the case of a non-resident, being -

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

          (2) a firm which does not have any partner who is      H
    766       SUPREME COURT REPORTS                   [2012] 1 S.C.R.


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

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

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

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

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

                 (ii) the extinguishment of any rights therein; or

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

          "2(14) "Capital asset" means property of any kind held by
          an assessee, whether or not connected with the business
          or profession, but does not include-
H
 VODAFONE INTERNATIONAL HOLDINGS B.V. v.       767
UNION OF INDIA & ANR. [K.S. RADHAKRISHr~AN, J]
    (i)   any stock-in-trade, consumable stores or raw                 A
    materials held for the purposes of his business or
    profession;

           )()()(                  )()()(            )()()(


           )()()(                  )()()(
                                                                       B

      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             C
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    D
asset in India, the transfer of which has taken place, the further
 question arises whether there is any income deeming to accrue
 in India from those situations. In relation to the expression
 "through or from a business connection in India", it must be
 established in \he first instance that (a) there is a non-resident;   E
 (b) who has a business connection in India; and (c) income
 arises from this business connection.

     164. Same is the situation in the case of income that
"arises through or from a property in India", i.e. (a) there must
                                                                       F
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      G
of this asset must yield a gain. The word 'situate', means to
set, place, locate. The words "situate in India" were added in
 Section 9(1 )(i) of the Income Tax Act pursuant to the
 recommendations of the 12th Law Commission dated
 26.9.1958.
                                                                           H
     768     SUPREME COURT REPORTS                  [2012] 1 S.C.R.

 A      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
B 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
C that the transaction had a deep connection with India, i.e.
  ultimately to transfer control over HEL and hence the source of
  the gain to HTIL was India.

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

        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
F "source of income in India" which implies that income arises
  from that source and there is no question of income arising
  indirectly from a source in India. Expression used is "source
  of income in India" and not "from a source in India". Section 9
  contains a "deeming provision" and in interpreting a provision
  creating a legal fiction, the Court is to ascertain for what
G purpose the fiction is created, but in construing the fiction it is
  not to be extended beyond the purpose for which it is created,
  or beyond the language of section by which it is created. [See
  C.J. T. Bombay City II v. Shakuntala (1962) 2 SCR 871,
  Mancheri Puthusseri Ahmed v. Kuthiravattam Estate Receiver
H
 VODAFONE INTERNATIONAL HOLDINGS B.V. v.       769
UNION OF INDIA & ANR. [K.S. RADHAKRISHNAN, J.]
(1996) 6 sec 185].                                                    A

     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   B
that the subject is not to be taxed without clear words for that
purpose; and also that every Act of Parliament must be read
according to the natural construction of its words. Viscount
Simon quoted with approval a passage from Rowlatt, J.
expressing the principle in the following words:                      c
     "In a taxing Act one has to look merely at what is clearly
     said. There is no room for any intendment. There is no
     equity about a tax. There is no presumption a!i) to tax.
     Nothing is to be read in, nothing is to be implied. One can
     only look fairly at the language used. [Cape Brandy              D
     Syndicate v. IRC (1921) 1 KB 64, P. 71 (Rowlatt,J.)]"

     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 E
appears to be his equitable share of the general fiscal burden
and cast it on the shoulders of his fellow citizens. But for the
Courts to try to stretch the law to meet hard cases (whether
the hardship appears to bear on the individual tax-payer or
on the general body of tax-payers as represented by the F
Inland Revenue) is not merely to make bad law but to run the
risk of subverting the rule of law itself. The proper course in
construing revenue Acts is to give a fair and reasonable
construction to their language without leaning to one side or the
other but keeping in mind that no tax can be imposed without G
words clearly showing an intention to lay the burden and that
 equitable construction of the words is not permissible
 [Ormond Investment Co. v. Betts (1928) All ER Rep 709 (HL)],
 a principle entrenched in our jurisprudence as well. In
 Mathuram Aggarwal (supra), this Court relied on the judgment H
    770      SUPREME COURT REPORTS                  [2012] 1 S.C.R.


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

8         171. Section 9(1)(i) covers only income arising or accruing
    directly or indirectly or through the transfer of a capital asset
    situated in India. Section 9(1)(i) cannot by a process of
    "interpretation" or "construction" be extended to cover "indirect
    transfers" of capital assets/property situate in India.
c       172. On transfer of shares of a foreign company to a non-
  resident off-shore, there is no transfer of shares of the Indian
  Company, though held by the foreign company, in such a
  case it cannot be contended that the transfer of shares of the
  foreign holding company, results in an extinguishment of the
D 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
E 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
F 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
G or indirectly on and after 1.6. 73 to the son's wife by such
  individual otherwise than for adequate consideration. The same
  was noticed by this Court in CIT v. Kothari (CM), (1964) 2 SCR
  531. Similar expression like "from asset transfered directly or
  indirectly", we find in Sections 64(7) and (8) as well. On a
H comparison of Section 64 and Section 9( 1)(i) what is
 VODAFONE INTERNATIONAL HOLDINGS B.V. v.       771
UNION OF INDIA & ANR. [K.S. RADHAKRISHNAN, J.]
discernible is that the Legislature has not chosen to extend A
Section 9(1 )(i) to "indirect transfers". Wherever "indirect
transfers" are intended to be covered, the Legislature has
expressly provided so. The words "either directly or indirectly",
textually or contextually, cannot be construed to govern the
words that follow, but must govern the words that precede them, B
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 C
 tci income and the territory that seeks to tax the income. In other
 words, when an assessee is sought to be taxed in relation to
 an income, it must be on the basis that it arises to that
 assessee directly or it may arise to the assessee indirectly. In
 other words, for imposing tax, it must be shown that there is D
 specific nexus between earning of the income and the territory
 which seeks to lay tax on that income. Reference may also be
  made to the judgment of this Court in lshikawajma-Harima
  Heavy Industries Ltd. v. Director of Income Tax, Mumbai
  (2007) 3 sec 481 and CIT v. R.O. Aggarwal (1965) 1 SCR E
  660.

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

       175. Capital gains are chargeable under Section 45 and
 their computation is to be in accordance with the provisions that
 follow Section 45 and there is no notion of indirect transfer in
 Section 45.                                                           H
     772      SUPREME COURT REPORTS                   [2012] 1 S.C.R.

 A         176. Section 9(1 )(i), therefore, in our considered opinion,
     will not apply to the transaction in question or on the rights and
     entitlements, stated to have transferred, as a fall out of the sale
     of CGP share, since the Revenue has failed to establish both
     the tests, Resident Test as well the Source Test.
B
          177. Vodafone, whether, could be proceeded against
     under Section 195(1) for not deducting tax at source and,
     alternatively, under Section 163 of the Income Tax Act as a
     representative assessee, is the next issue.

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

        179. Vodafone had "presence" in India, according to the
  Revenue at the time of the transaction biiaause it was a Joint
G Venture (JV) Partner and held 10% equity interest in Bharti
  Airtel Limited, a listed company in India. Further, out of that
  10%, 5.61 % shares were held directly by Vodafone itself.
  Vodafone had also a right to vote as a shareholder of Bharati
  Airtel Limited and the right to appoint two directors on the Board
H of Directors of Bharti Airtel Limited. Consequently, it was stated
 VODAFONE INTERNATIONAL HOLDINGS B.V. v.       773
UNION OF INDIA & ANR. [K.S. RADHAKRISHNAN, J.]

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

       180. Vodafone has taken up a specific stand that "tax
 presence" has to be viewed in the context of the transaction
 that is subject to tax and not with reference to an entirely
 unrelated matter. Investment made by Vodafone group in Bharti          F
 Airtel would not make all entities of Vodafone group of
 companies subject to the Indian Law and jurisdiction of the
 Taxing Authorities. "Presence", it was pointed out, be
 considered in the context of the transaction and not in a manner
 that brings a non-resident assessee under jurisdiction of Indian       G
  Tax Authorities. Further, it was stated that a "tax presence" might
  arise where a foreign company, on account of its business in
  India, becomes a resident in India through a permanent
  establishment or the transaction relates to the permanent
  establishment.
                                                                        H
     774    SUPREME COURT REPORTS                  [2012] 1 S.C.R.


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

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

       "Section 195. OTHER SUMS.- (1) Any person
       responsible for paying to a non-resident, not being a
D'     company, or to a foreign company, any interest or any other
       sum chargeable under the provisions of this Act (not being
       income chargeable under the head "Salaries" shall, at the
       time of credit of such income to the account of the payee
       or at the time of payment thereof in cash or by the issue
E      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
F      clause (230) of section 10 or a public financial institution
       within the me~ning of that clause, deduction of tax shall be
       made only at the time of payment thereof in cash or by the
       issue of a cheque or draft or by any other mode:
       Provided further that no such deduction shall be made in
G      respect of any dividends referred to in section 115-0.
       Explanation: For the purposes of this section, where any
       interest or other sum as aforesaid is credited to any
       account, whether called "Interest payable account" or
H      "Suspense account" or by any other name, in the books
 VODAFONE INTERNATIONAL HOLDINGS 8.V. v.      775
UNION OF INDIA & ANR. [K.S. RADHAKRISHNAN, J]
    of account of the person liable to pay such income, such           A
    crediting shall be deemed to be credit of such income to
    the account of the payee and the provisions of this section
    shall apply accordingly."

Section 195 finds a place in Chapter XVII of the Income Tax
                                                                       8
Act which deals with collection and recovery of tax.
Requirement to deduct tax is not limited to deduction and
payment of tax. It requires compliance with a host of statutory
requirements like Section 203 which casts an obligation on the
assessee to issue a certificate for the tax deducted, obligation       C
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   D
fails to deduct tax, then under Section 201 of the Act, he can
 be treated as an assessee in default. Section 271 C stipulates
 a penalty on the amount of tax which has not been deducted.
 Penalty of jail sentence can also be imposed under Section
 2768. Therefore, failure to deduct tax at source under Section        E
 195 may attract various penal provisions.

      183. Article 246 of the Constitution gives Parliament the
authority to make laws which are extra-territorial in application.
Article 245(2) says that no law made by the Parliament shall           F
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          G
intention was to make the law applicable extra territorially. We
 have to examine whether the presumption of territoriality holds
 good so far as Section 195 of the Income Tax Act is concerned
 and is there any reason to depart from that presumption.
                                                                       H
    776      SUPREME COURT REPORTS                  [2012] 1 S.C.R.

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

C       185. The expression "any person", in our view, looking at
   the context in which Section 195 has been placed, would mean
   any person who is a resident in India. This view is also
   supported, if we look at similar situations in other countries,
   when tax was sought to be imposed on non-residents. One of
   the earliest rulings which paved thlil way for many, was the
0
   decision in Ex Parte Blain; In re Sawers (1879) LR 12 ChD
   522 at 52fil, wherein the Court stated that "if a foreigner remain
   abroad, if he has never come into this country at all, it seems
   impossible to imagine that the English Legislature could ever
E 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
F application based on the principle of statutory interpretation.
  Lord Scarman, Lord Wilberforce and Lord Roskill held so on
  behalf of the majority and Lord Edmond Daviell and Lord Lowry
  in dissent. Lord Scarman said :
G       "unless the Gontrary is expressly enacted or so plainly
        implied as to make it the duty of an English court to give
        effect to it, United Kingdom Legislation is applicable only
        to British subjects or to foreigners who by coming into this
        country, whether for a long or short time, have made
H       themselves during that time subject to English jurisdiction."
 VODAFONE INTERNATIONAL HOLDINGS B.V. v.       777
UNION OF INDIA & ANR. [K.S. RADHAKRISHNAN, J.]
    The above principle was followed in Agassi v. Robinson          A
[2006] 1 WLR 2126.

      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 B
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. C
However, the salary costs paid by Eli Lilly Netherlands were not
borne by the JV G1nd 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 D
 made to non-residents as salaries would come under the
 scanner of Siction 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 E
 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.
                                                                      F
     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       G
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             H
      778      SUPREME COURT REPORTS                      [2012] 1 S.C.R.


 A 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
 B 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.

 c                                   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
  D 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, Tenn Sheet,
    loan assignments, brand license etc. form integral part of CGP
    share attracting capital gains tax. Consequently, the demand
. E 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.
F
     R.P.                                               Appeal allowed.