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

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(Civil Appeal No. 733 of 2012)

JANUARY 20, 2012 B

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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.

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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:

VODAFONE INTERNATIONAL HOLDINGS B.V. v. 577 UNION OF INDIA & ANR. Legislation: A

On 11.2.2007, VIH, and HTIL, both companies 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 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 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

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

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 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 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

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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 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 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 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 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 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 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]

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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 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 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 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 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 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 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

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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 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 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 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 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 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 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 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 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

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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 and management rights; that, the minority shareholders/ investors had participative and protective rights (including RoFR/TARs, call and put options which provided for exit) which flowed from the CGP share; that, the entire investment was sold to the VIH through the investment vehicle (CGP). Consequently, there was no extinguishment of rights as alleged by the Revenue. [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

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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 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 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 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 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 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 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 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 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 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 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

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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 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 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 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 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 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 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 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 character of a controlling interest in the management of the company. A controlling interest is an incident of ownership of shares in a company, something which flows out of the holding of shares. A controlling interest is, therefore, not an identifiable or distinct capital asset independent of the holding of shares. The control of a company resides in the voting power of its shareholders and shares represent an interest of a shareholder which is made up of various rights contained in the contract embedded in the Articles of Association. The right of a 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

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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 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 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, 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 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

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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 of the consideration, the payment of the consideration in instalments .or on the basis that the payment is related to a contingency ('options', in this case), particularly when the transaction does not contemplate such a split up. Where the parties have agreed for a lump sum consideration without placing separate values for each of the above items which go to make up the entire investment in participation, merely because certain values are indicated in the correspondence with FIPB which had raised the query, would not mean that the parties had agreed for the price payable for each of the above items. 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 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 sum paid or credited by the payer is not chargeable to tax then no obligation to deduct the tax would arise. Shareholding in companies incorporated outside India (CGP) is property located outside India. Where such shares become subject matter of offshore transfer between two non-residents, there is no liability for capital gains tax. In such a case, question of deduction of TAS would not arise. 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 foreign companies outside India for which a lump sum price was paid of US$ 11.08 bn. Under the transaction, there was no split up of payment of US$ 11.08 bn. It is the Revenue which has split the consolidated payment and it is the Revenue which wants to assign a value to the rights to control premium, right to non-compete, right to consultancy support etc. For FDI purposes, the FIPB had asked VIH for the basis of fixing the price of US$ 11.08 bn. But here also, there was no split up of lump sum payment, asset-wise as claimed by the Revenue. There 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

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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

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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 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 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 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 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 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 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 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 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]

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

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· 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 facts, that the Mauritius company has been interposed as the owner of the shares in India, at the time of disposal of the shares to a third party, solely with a view to avoid tax without any commercial substance. Tax Department, in such a situation, notwithstanding the fact that the Mauritian company is required to be treated as the beneficial owner of the shares under Circular No. 789 and the Treaty is entitled to look at the entire transaction of sale as a whole and if it is established that the Mauritian company has been interposed as a device, it is open to the Tax Department to discard the device and take into consideration the real transaction between the parties, and the transaction may be subjected to tax. Thus, TRC does not prevent enquiry into a tax fraud. Nothing prevents the Revenue from looking into special H

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

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 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 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

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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

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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 of the share and another shifting of the controlling interest. Transfer of CGP share automatically results in host of consequences including transfer of controlling interest and that controlling interest as such cannot be dissected from CGP share. without legislative intervention. Controlling interest of CGP over Array is an incident of holding majority shares and the control of Company vests in the voting power of its shareholders. [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 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 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

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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 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 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 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 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

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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 to a property that yields an income and that property should have the situs in India and it is the income that arises through or from that property which is taxable. Section 9, therefore, covers only income arising from a transfer of a capital asset situated in India and it does not purport to cover income arising from the indirect transfer of capital asset in 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 and not where the item of value, which was the subject of the transaction, was acquired or derived from. HTIL and Vodafone are off-shore companies and since the sale took place outside India, applying the source test, the source is also outside India, unless legislation ropes in such transactions. [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 income arising indirectly from a source in India. Expression used is "source of income in India" and not "from a source in India". Section 9 contains a "deeming provision" and in interpreting a provision creating a legal fiction, the court is to ascertain for what purpose the fiction is created, but in construing the fiction it is not to be extended beyond the purpose for which it is created, or beyond the language of section by which it is created. [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

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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 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 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 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, 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

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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 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 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, 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 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 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

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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

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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

F (1996) 6 sec 185 relied on para 168 (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.