Vodafone International Holdings BV v. Union of India, (2012) 6 SCC 613

Transcription

1 Vodafone International Holdings BV v. Union of India, (2012) 6 SCC 613 Non-Residents/Offshore Transactions Taxation of - Need for certainty in law to encourage foreign direct investment (FDI) - (1) Look at principle and (2) Judicial Anti-Avoidance Rules (JAAR) - (3) Limitation of benefits (LOB) principle and (4) look through principle - Application of - Need for clear incorporation of Principles (3) & (4) in legislation and treaties as against there being no such requirement for application of Principles (1) and (2) by court - Limited scope of judicial intervention even in applying Principle (2) i.e. JAAR - Need for court to apply look at principle i.e. to look at impugned transaction as a whole and not adopt a dissecting approach, followed by application of JAAR thereupon, if still warranted after application of look at principle - Look through principle or LOB principle cannot be applied in absence of specific legislative incorporation thereof - Held, certainty and stability form basic foundation of any fiscal system - Tax policy certainty is crucial for taxpayers, including foreign investors, to make rational economic choices in the most efficient manner - It also helps Revenue in enforcing provisions of taxing laws, (2012) 6 SCC 613-A Tax Planning/Tax Avoidance or Tax Evasion General Anti-Avoidance Rules (GAAR)/Judicial Anti-Avoidance Rules (JAAR) - Invocation of GAAR like look through and limitation of benefits (LOB) vis--vis invocation of JAAR like substance over form, nature and character of transaction, piercing corporate veil, true beneficial ownership or alter ego, participative investment, preordained transaction and fiscal nullity read with look at principle - Held, said GAAR may be invoked by Revenue only when expressly incorporated in legislation or treaty - However, said JAAR may be invoked if Revenue, after first applying look at test to the transaction upon a review of all the facts and circumstances surrounding impugned transaction, still establishes at threshold that dominant purpose of impugned transaction or holding structure is a sham or tax evasion, (2012) 6 SCC 613-B Tax Planning/Tax Avoidance or Tax Evasion Tax Planning/Tax Avoidance - Meaning and permissibility of - Distinction from tax evasion, explained - Principles and tests to be applied by court/revenue to determine whether a transaction amounts to genuine tax planning or is a colourable device meant to evade tax - Matters to be considered by court/revenue - Legal position in India and England extensively surveyed and summarised - Invocation of General Anti-Avoidance Rules (GAAR) like look through and limitation of benefits (LOB) vis--vis invocation of Judicial Anti-Avoidance Rules (JAAR) like substance over form, nature and character of transaction, piercing corporate veil, true beneficial ownership or alter ego, participative investment, preordained transaction and fiscal nullity if still warranted after application of look at principle - Cardinal importance for impugned transaction to have some genuine corporate, commercial, economic or business purpose to establish its legitimacy as a tax planning device - Application of these principles in context of foreign direct investment (FDI) - Diversification of corporate holding structure to take advantage of tax havens for tax planning purposes - Permissibility of - Exit by one foreign investor coupled with continuity of business by transferee investor, as strong indicium of legitimacy of transaction - Firstly, reiterated (per curiam), legitimate avoidance of tax liability i.e. strategic tax planning is permissible provided it is within framework of law - It is only colourable devices, dubious methods and subterfuges to evade tax which are impermissible - A subject is not to be taxed by inference or analogy, but only by the plain words of a statute applicable to facts and circumstances of each case - It is a cornerstone of the law that every taxpayer is entitled to arrange his affairs so that his taxes shall be as low as possible and he is not bound to choose that pattern which will replenish Treasury - Fact that motive for a transaction is to avoid tax does not invalidate it unless a particular enactment so provides; but it is essential that the transaction has some economic or commercial substance - Secondly, held (per curiam), to determine whether a transaction or device is legitimate or colourable, it is task of Revenue and court to ascertain true legal nature of transaction concerned by first applying look at principle i.e. by looking at the entire impugned transaction as a whole and not by adopting a dissecting approach nor by looking at the impugned transaction isolated from the context to which it properly belongs - Revenue or court cannot start with question as to whether transaction was a tax evasion device but should first apply look at test to ascertain its true legal nature - If, upon application of look at test Revenue still establishes abuse or intent to evade tax, then abovestated JAAR may be applied - JAAR can be applied even in the absence of any statutory authorisation to that effect (see for details, Sixthly, below) - However, court may apply GAAR like look through principle or limitation of benefits (LOB) principle only if statute or treaty concerned expressly incorporates said principle(s) - Thirdly, in context of FDI the above principles (in Secondly) amount to determining if transaction is a participative investment in which case it shall qualify as legitimate tax planning, or it is a preordained tax evading transaction in which case it shall be struck down as a colourable device - Holistic view of

2 transaction is to be adopted so as not to discourage genuine FDI into India - For a transaction to be a declared a fiscal nullity there should be a set of preordained steps inserted for no commercial purpose - Fourthly, to determine whether a transaction/fdi is legitimate/participative or colourable/preordained Revenue/courts must consider following parameters: (i) duration and timing of coming into existence of holding structure or part thereof via which FDI in question entered India; (ii) period of business operation in India; (iii) generation of taxable revenues in India; (iv) time of exit from India; and (v) continuity of business on exit in India - Existence of stable business over a period of time is an indication of participative investment - Fifthly, exit right secured by a foreign investor by itself, and exit thereupon from India does not necessarily lead to inference of tax evasion when transaction otherwise appears bona fide - Exit is an important right of an investor in every strategic investment - Exit by one investor coupled with continuity of business by transferee investor is an important tell-tale circumstance which indicates legitimate commercial/business substance of the transaction, indicating its nature as a legitimate participative investment venture - Sixthly, so as to invoke JAAR of ``substance over form'', ``nature and character of transaction'', ``piercing of corporate veil'', ``true beneficial ownership or alter ego'' and fiscal nullity, onus is on Revenue to establish that dominant purpose of transaction or holding structure is a sham or tax evasion - This must be done by first applying the look at test (see for details Secondly, above) upon a review of all the facts and circumstances surrounding impugned transaction and adopting a holistic view - Existence of a genuine corporate or business purpose as the basis for impugned transaction is evidence that impugned transaction is not a colourable or artificial device - However, stronger the evidence of colourable device, more compelling must be the corporate business purpose underlying the impugned transaction to overcome evidence of a colourable device - For instance, if it is established that corporate holding structure is being used for circular trading, round tripping, bribery or has no real commercial/business worth or purpose, then Revenue may resort to the abovesaid JAAR and impose tax ignoring titular entity - Seventhly, it is a common practice in international law, which is the basis of international taxation, for foreign investors to invest in Indian companies through an interposed foreign holding or operating company, such as a Cayman Islands or Mauritius-based company (i.e. tax haven based companies) for both tax and business purposes - Tax havens may be utilised by diversification of corporate structure for sound commercial and legitimate tax planning reasons - To prevent tax avoidance, proper course is to update laws - However, courts and Revenue authorities can go behind outward cloak and investigate real purpose - Burden to prove that corporate restructuring is not for bona fide purpose, is on Revenue (again, principles in Secondly and Sixthly become applicable) - Eighthly, (per Radhakrishnan, J.), abus de droit ``abuse of rights doctrine'', not to be imported into India - Thus, on facts held (per curiam), impugned transaction between HTIL and appellant VIH, when looked at, not a sham nor tax evasion device nor a preordained tax evasive transaction nor a fiscal nullity as it was entered into for a genuine business/commercial purpose - These business/commercial purposes, explained in detail - It was a bona fide participative investment which had to be viewed holistically - Hutchison structure had genuine business presence in India for a fairly long time, invested significantly in India and contributed significantly to Indian revenues - Revenue overlooked fact that the impugned share purchase agreement dt (SPA) between HTIL to VIH was a single transaction involving transfer of CGP share alone - Separate values could not therefore be assigned to different rights and benefits flowing from it (none of which were property rights other than the share itself), nor could the transfer of some underlying asset situate in India be divined, as erroneously contended by Revenue and held by High Court (see for details Shortnote V) - Lastly, Hutchison's exit from India could not be doubted as a tax evasion device when control of telecom business in India which stood transferred from Hutchison to Vodafone via the impugned transaction, had been continued by Vodafone, and continued to contribute significantly to Indian economy and Indian revenues thereafter - Thus, it could not be said that the intervened entity CGP had no business or commercial purpose in execution of impugned SPA, (2012) 6 SCC 613-C Tax Planning/Tax Avoidance or Tax Evasion General Anti-Avoidance Rules (GAAR)/Judicial Anti-Avoidance Rules (JAAR) - Judicial initiative in India - Held, GAAR are already in place by means of legal precedents in India - GAAR therefore not a new concept for India - Deficiencies in present Indian concept and its effect - Lack of clarity and absence of appropriate statutory and treaty provisions regarding circumstances in which JAAR like substance over form, nature and character of transaction, piercing corporate veil, true beneficial ownership or alter ego, participative investment, preordained transaction and fiscal nullity would apply, held, has generated litigation, (2012) 6 SCC 613-D Non-Residents/Offshore Transactions Tax haven or financial haven - Shell company - Meanings of, explained (per Radhakrishnan, J.) - Tax havens are places where there is considerable latitude in taxation - Shell company (a pejorative usage) exists on paper only and is used for investment purpose principally to evade tax, (2012) 6 SCC 613-E

3 Tax Planning/Tax Avoidance or Tax Evasion Foreign investments in India - Sources of - Overseas companies - Misuse of - Need for updation of laws - Creation of adequate regulatory mechanism to prevent tax evasion - Offshore Finance Centres (OFC) - Joint Ventures (JVs) - Wholly owned subsidiaries (WOS) - What are - Permissibility in law - Uses and misuses highlighted - Vodafone-Hutchison offshore deal regarding CGP sale which led to transfer of controlling interest in Hutch/Vodafone India, held (per Radhakrishnan, J.), exposes loopholes in existing Indian set up through which foreign companies could dodge tax authorities - Besides, there must be certainty in foreign investment policy - Appropriate regulatory measures therefore urgently needed - India can take benefit from experience of other countries and bring its laws in tune with present day realities, (2012) 6 SCC 613-F Industry, Trade, Development and Business Laws Foreign Trade and Investment Provision for exit option - Judicial Anti-Avoidance Rules (JAAR) - Applicability of - Judicial review - Scope of - Held (per curiam), exit is an important right of an investor in every strategic investment - Exit coupled with continuity of business is an important tell-tale circumstance which indicates legitimate commercial/business substance of the transaction, indicating its nature as a legitimate participative investment venture - A foreign investor protects himself by providing exit route on account of several business reasons, primarily to withdraw his capital if unfavourable circumstances develop in foreign land - Such a decision being for purely commercial purposes, is generally not susceptible to judicial review (but see Shortnote C, Secondly and Sixthly for extent, mode and manner of judicial intervention permissible), (2012) 6 SCC 613-G Corporate Taxation Holding structures - Subsidiaries - Taxation of company, shareholders, holding company and subsidiaries, all individually and independently - Holding structures - Legal basis - Separate entity principle, explained - Subsidiaries - Misuse of, for tax evasion and other fraudulent purposes - Court's duty to intervene - Incorporated company as a legal person different from its shareholders - Subsidiary too an independent legal person - Company's income different from shareholders' income - Problems arising in existing legal set-up - Tax havens like Cayman Islands, Mauritius, etc. being misused to some extent by corporate world for tax evasion - Existing legal position extensively explained (per curiam) - Loopholes, pointed out, (2012) 6 SCC 613-H Holding structures - Subsidiaries - Reasons for creation of - Modes by which corporate holding structure consisting of parent/holding company and subsidiaries might come into existence - Efficient management of business through smaller entities having their own legal existence - Permissibility in law to have sub-entities - Working of corporate group as a family - Principle of internal co-relation - Explained in detail, (2012) 6 SCC 613-I Subsidiary vis--vis parent/holding company - Control exercised by parent/holding company - Effect, if any, (1) on subsidiary's independent legal existence, and (2) on determination of residence of parent company or subsidiary, for tax purposes - Absolute or persuasive control - Determination of - Effect of absolute control being exercised by parent/holding company over subsidiary where subsidiary can be considered a ``puppet'' - Position in general, and with regard to multinational companies (MNCs)/transnational companies (TNCs) - Impact of extent of control on taxation - Separate existence of subsidiary if to be ignored where control is all pervasive (on the legal nature of controlling interest in a company see Shortnote Z) - Subsidiary, held, despite control exercised by parent/holding company, retains its own legal existence and ownership of its own assets because Directors of subsidiary owe responsibility to their own company rather than to parent/holding company - Besides, assets of subsidiary, on winding up, vest in liquidator and not in parent/holding company - Steering interference by parent company is decisive test to determine whether subsidiary is a puppet of parent company - Close cooperation between parent and subsidiary is desirable, yet in law, subsidiary is

4 bound to protect its own interests - Subsidiaries of multinational companies do enjoy a great deal of autonomy in countries where they operate but it may not be so in case of one-man parent company - Hence, ordinarily, residence of both parent company and subsidiary company(ies) for tax purposes shall be taken to be place where they are incorporated or registered - However, where subsidiary's Executive Directors' competencies are transferred to other persons/bodies or where subsidiary's Executive Directors' decision-making has become fully subordinate to parent/holding company with consequence that subsidiary's Executive Directors are no more than puppets, then the turning point in respect of subsidiary's place of residence comes about, (or parent company could be deemed to be a resident of place where downstream subsidiary is incorporated, which was Revenue's key argument in present case) - On facts held, parent company HTIL, enjoyed only persuasive control over downstream Indian subsidiary HEL - HEL was therefore not a mere puppet - Separate existence of HEL could therefore not be ignored for purpose of determining tax liability of its offshore holding companies, HTIL and appellant herein, VIH i.e. HTIL/VIH could not be held to have a tax presence in India based on the contention that HEL was their puppet in India, (2012) 6 SCC 613-J Tax Residence Corporate taxation - Holding structure - Determination of residence of upstream parent company or downstream subsidiary for tax purposes - Key factor would be if one is ``puppet'' of another i.e. there is no genuine separate existence of one of them, (2012) 6 SCC 613-K Subsidiaries - Operations of - Held, have to conform to local laws and therefore must, and usually do, have autonomy, and exist as independent legal entities, (2012) 6 SCC 613-L Holding company - Definition - Holding company is a company having sufficient shares power to control affairs of a subsidiary including appointment of Directors, though holding company and subsidiary company retain their independent and separate legal existence, (2012) 6 SCC 613-M Accounts, Accountants and Accountancy Corporate Accounts Accounts of parent company and its subsidiaries - Composite accounts and separate accounts - Parameters laid down (per Radhakrishnan, J.), (2012) 6 SCC 613-N Act, 1961 S. 9(1)(i) sub-clause (4) and Ss. 5(2)(b), 45, 163(1)(c), 2(14) and 64 - Income deemed to accrue or arise in India through transfer of capital asset situate in India - Limited scope of legal fiction, and impermissibility of expansion thereof by purposive interpretation - Source of income test - Indirect transfers of capital assets/property situate in India - Completely offshore transfer of capital asset/property transaction but where some alleged underlying asset or source of value of the transaction is situate in India - Whether covered - S. 9(1)(i) whether a ``look through'' provision or one containing a limitation of benefits (LOB) clause - Hence, transfer of shares of offshore company holding shares in Indian company if can be treated as equivalent to transfer of shares of Indian company on premise that S. 9(1)(i) covers indirect transfer of capital assets situate in India - Import of words ``directly or indirectly'' in S. 9(1)(i) - Held (per curiam), parameters for applicability of the legal fiction in S. 9(1)(i) are defined in S. 9(1)(i) itself and therefore said legal fiction cannot operate beyond its field - Thus, indirect transfers of capital assets/property situate in India are not covered by S. 9(1)(i) - So also there is no concept under S. 9(1)(i) as it stands of taxing an offshore transaction where some underlying asset is alleged to be situate in India - Source in relation to income that is taxable under S. 9(1)(i) sub-clause (4) has to be construed as place where transaction of sale takes place, and not as contended by Revenue as place where item of

5 value, which was subject of the transaction, was acquired or derived from - Contrary interpretation would be against express provisions of S. 9(1)(i) and would render some of its clauses nugatory - Clarified that words ``directly or indirectly'' in S. 9(1)(i) govern words that precede them i.e. ``all income accruing or arising'' and not ``transfer of capital asset situate in India'' - Comparison of S. 9(1)(i) with corresponding provision in proposed Direct Taxes Code, further reveals that restricted language of S. 9(1)(i) does not cover indirect transfers of capital assets/property situate in India - Loophole in existing law is sought to be plugged in proposed Direct Taxes Code [Ed.: Impact of S. 9(1)(i) Explns. 4 & 5, and S. 195(1) Expln. 2 inserted vide Finance Act, 2012, enacted in May 2012, may be considered in this regard, especially for prospective operation] - Lastly, S. 9(1)(i) is neither a look through provision, nor can the principle of limitation of benefits (LOB) be read into S. 9(1)(i) since such principles have to be expressly provided for in the statute - Such clauses cannot be read into a statute by interpretation - Further held (per Radhakrishnan, J.), for imposing tax under S. 9(1)(i) it must be shown that there is specific nexus between earning of the income and territory which seeks to levy tax on that income - Thus, contention of Revenue that transfer of shares of offshore company holding shares of Indian company could be treated as equivalent to transfer of shares of Indian company, rejected (per curiam) - Since transferor and transferee were offshore companies, and sale of shares concerned was also of an offshore company, though underlying value of said sale concerned control over an Indian company, applying even source test, held (per Radhakrishnan, J.), source of income was also outside India, and not taxable under S. 9(1)(i) sub-clause (4), (2012) 6 SCC 613-O Direct Taxes Code Bill, 2010 Cl. 5(4)(g) - General Anti-Avoidance Rule (GAAR) - Per Radhakrishnan, J., said clause held, seeks to give effect to GAAR, (2012) 6 SCC 613-P Act, 1961 S. 9(1)(i) sub-clauses (1) to (4) and S Applicability of - Requirements of - Income deemed to have accrued in India - Legal fiction - Scope of applicability - Four categories of income covered by four sub-clauses of S. 9(1)(i) - Income from (1) business connection in India, (2) property in India, (3) assets or source of income in India, and (4) transfer of capital asset situate in India - Each category is independent of other - Cumulative and additive elements necessary for attracting each sub-clause, explained, (2012) 6 SCC 613-Q Act, 1961 S. 9(1)(i) sub-clause (4) and Ss. 5(2)(b) and 45 - Income deemed to have accrued or arisen from India from transfer of capital asset situate in India - Cumulative and additive requirements for applicability of - Held, said three elements of S. 9(1)(i) sub-clause (4) are: (a) transfer, and (b) existence of capital asset, and (iii) location of such asset in India - All three elements must exist simultaneously to attract S. 9(1)(i) sub-clause (4) - Transfer, further held, to be brought under S. 9(1)(i) must have taken place during previous year, (2012) 6 SCC 613-R Taxation in India Underlying bases - Accrual of income and residence in India - Taxation of residents who are (a) ordinarily resident in India, and (b) not ordinarily resident in India - Scope of - Taxation of non-residents - Scope of and justification for - Indian connection of income - Need for, (2012) 6 SCC 613-S Constitution of India Arts. 265 and 14 - Taxation according to legislative mandate only - Effect of Art. 265 on interpretation of taxing statutes - Spirit of Art. 265 to be followed while giving judicial interpretation - Natural construction to be adopted so as to remain within authority conferred by law - Construction therefore must be fair and reasonable - Relevance of possibility of

6 legitimate tax avoidance by clever taxpayers in interpreting taxing statute - Held (per Radhakrishnan, J.), 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, nor is equitable or purposive construction of words in taxing statute permissible - There is no presumption as to tax - Nothing is to be read in, nothing is to be implied - One can only look fairly at the language used in the statute - Charging section has to be strictly construed - It may seem hard that a cunningly advised taxpayer should be able to avoid what appears to be his equitable share of the general fiscal burden and cast it on the shoulders of his fellow citizens - But for courts to try to stretch the law to meet hard cases (whether hardship appears to bear on individual taxpayer or on general body of taxpayers as represented by Revenue) is not merely to make bad law but to run the risk of subverting rule of law itself, (2012) 6 SCC 613-T Shares - Situs of - Held, is at a place where a company is incorporated/registered and where transfer of shares can take place - Further held, situs of shares cannot be shifted to place where some underlying value of shares concerned is situated, unless statute expressly provides for the same - Hutchison-Vodafone deal for transfer of CGP share - Held, situs was in Cayman Islands and not India, (2012) 6 SCC 613-U Non-Residents/Offshore Transactions Offshore transfer by share purchase agreement (SPA) dt of a single share representing 100% shareholding of CGP an offshore company, between two non-resident corporate bodies i.e. from HTIL to appellant VIH - Tax effect, if any, in India - Vodafone case - Transfer of said CGP share vide SPA yielding handsome profit on account of transfer of control over Indian subsidiary (HEL) down below in corporate hierarchy which was engaged in telecom business in India - If share sale could be dissected and considered instead as constituting a sale of property rights and entitlements situate in India, which were concomitants of said offshore share sale - ``Nature and character of transaction test'' - If a valid test - Whether transaction should be looked at or looked through for tax purposes [Ed.: for detailed ruling on applicability of look at principle and look through principle, see Shortnote C in SCC] - Separate values sought to be attached by Revenue to concomitant rights and entitlements of CGP share sale, such as control premium, non-compete agreement, consultancy support, customer base, brand licences, operating licences, etc., all of which were included in SPA - Revenue particularly emphasising that real subject-matter of SPA was transfer of 67% controlling interest of HTIL in HEL, and that said controlling interest was a property right situate in India which stood transferred by virtue of SPA to VIH - Revenue also contending that certain rights and entitlements created by shareholder/framework agreements (other than SPA) inter se between various shareholders and holding companies of HEL, were also truly subject-matter of SPA as they were recognised in, and continued by SPA, and also constituted transfer of property rights situate in India - Whether these rights and entitlements were (a) at all legal rights proper; (b) if they were legal rights, then were they at all property rights, and (c) whether all the rights purportedly transferred by virtue of SPA were really rights of HTIL which stood transferred to VIH, or independent rights of third parties, so that all or any of the abovesaid concomitant rights and entitlements were liable to taxation under S. 9(1)(i) sub-clause (4), IT Act - Firstly, held, Hutchison group to which HTIL belonged had been in India for a fairly long time (13 years) and had contributed substantially to Indian revenues (Rs 20,242 crores) - CGP transfer was therefore not a fleeting adventure to make quick gain - Look at principle applied and held, offshore transaction SPA between appellant VIH and HTIL was a bona fide participative investment in India through CGP route, and had to be viewed holistically - Revenue and High Court overlooked fact that upon applying look at test SPA was a single transaction involving transfer of CGP share alone - Separate values could not therefore be assigned to different rights and benefits flowing from it - Look through principle could not be applied to treat transaction as a sham or tax evasion device, as said principle did not stand expressly incorporated in the statute - Secondly, held, said concomitant rights and entitlements were either not legal rights at all, or if they were legal rights, were merely contractual rights and not property rights situate in India a transfer whereof could be taxed under S. 9(1)(i) sub-clause (4) - Controlling interest of shareholders in a company can at most be a contractual right - Said 67% de facto controlling interest of HTIL in HEL though the real and principal purpose for entering into SPA, was in the facts of the case not even a legal right as it only conferred a degree of persuasion/influence on HTIL/VIH over HEL which was a state of being in control without any legal right to such state, so there was no question of it qualifying as a property right which stood transferred by SPA - Thirdly, held, many of the rights and entitlements which Revenue was seeking to bring within purview of rights transferred by virtue of SPA were neither rights and entitlements of HTIL which stood transferred to VIH, nor were they subject-matter of SPA, but were subject-matter of shareholder/framework agreements concerned which were independent of SPA, though recognised and continued by SPA - Thus, sale of 100% CGP share vide SPA being an offshore transaction between two non-residents, and it being transfer of share of an offshore company, tax authorities in India had no jurisdiction to impose tax thereon, (2012) 6 SCC 613-V

7 Securities Share sale, sale of assets of company, and slump sale of assets of company, and each of their tax consequences, distinguished, (2012) 6 SCC 613-W Shares - Nature of - Relationship of shareholder with property or assets of company - Concomitant rights that emanate automatically from holding of shares - Share sale - Constituents of - Effect of form of consideration or fact that rights being sold are contingent rights i.e. options in respect of shares - A share, held, is a right to a specified amount of share capital of a company - On incorporation, corporate property i.e. assets of company belong to company and holding of shares confers no direct proprietary rights to corporate property on shareholders, but merely to their shares in company - Shares constitute items of movable property, transferable in manner provided by articles of association of company - Holding of shares in a company, held, usually entitles shareholder automatically to a concomitant congeries of rights and liabilities, such as voting rights, controlling rights, meeting rights, management rights, right to share in profits, share in surplus upon liquidation, etc., which are creatures of Companies Acts and memorandum and articles of association of company - All these rights are personal rights/contractual rights flowing from ownership of the share, are not property rights, and cannot by themselves and apart from the share be acquired or disposed of or taken possession of - Shares, and said concomitant rights which emanate from them, flow together and cannot be dissected - Thus, transfer of such concomitant rights upon transfer of shares cannot be construed as separate and independent transfers - Further held, essential character of a transaction as an alienation cannot be altered by form of consideration, its payment in instalments or that subject-matter of sale includes sale of contingent rights, (2012) 6 SCC 613-X Voting arrangements in shareholder (SHA)/framework (FWA)/pooling arrangements - Right of shareholders to enter into - Nature and effect of such arrangements - Held, right to vote cannot be decoupled from the share and it is shareholder's right to enter into agreements to exercise voting rights in a desired manner, and entering into such agreements does not decouple voting right from share and assign it to another - Further held, voting arrangements in SHA/FWA are not property, but are only contractual obligations, (2012) 6 SCC 613-Y Controlling interest in company - What is, and nature of - How acquired, and determination of - Whether (i) a legal right, and if so, (ii) an independent property right or capital asset - Transfer of, as in incidence of share transfer, and independent liability to tax, if any - Controlling interest of upstream parent/holding company in downstream subsidiary - Nature and extent of (See also Shortnote J on issue of control of upstream parent over downstream subsidiary) - Held (per curiam), control of a company resides in the voting power of its shareholders - Held (per Kapadia, C.J. for himself and Kumar, J.), ``control'' is a mixed question of law and fact - Ownership of shares may, in certain situations, result in assumption of an interest which has character of a controlling interest in management of company - Controlling interest of upstream parent/holding company in downstream subsidiary if merely amounting to a degree of influence or persuasion of upstream parent over downstream subsidiary - De facto control which existed in Hutchison structure conveys a state of being in control without any legal right to such state - Hence, in such case it cannot qualify as a legal right, and question of it being a property right would not arise - Held (per Radhakrishnan, J.), controlling interest is inherently a contractual right and not a property right and transfer thereof cannot be considered a transfer of property, unless the statute stipulates otherwise - Furthermore held (per curiam), a controlling interest is an incident of ownership of shares in a company and is an inalienable part thereof - Hence, controlling interest cannot be construed as an identifiable or distinct capital asset independent of the holding of shares - It cannot be separately acquired or transferred, unless expressly provided for otherwise by statute - Rather, it passes automatically to transferee when share transfer takes place - Thus, transfer of controlling interest is not taxable independently - In present case, controlling interest of parent/holding company, HTIL over downstream subsidiary, HEL qua manner of voting, nomination of Directors and management rights fell only in category of persuasive position/influence rather than any legal right, let alone a property right - Hence, upon transfer of this controlling interest from HTIL to VIH as an inseverable concomitant of share sale of CGP, an intermediate holding company of HTIL, to VIH there was no transfer of a capital asset situate in India so as to

8 attract S. 9(1)(i) sub-clause (4), IT Act, (2012) 6 SCC 613-Z Jurisprudence Right - Legal right - What is - Enforceability as criterion for - Legal right, held, is a right enforceable through legal process, (2012) 6 SCC 613-ZA Holding structure - Controlling interest of parent/holding company in downstream subsidiary - Computation of - Valuation of, for purposes of taxation - (i) ``Effective shareholding'', vis--vis (ii) ``enterprise value'' or ``economic value'' of stakes (including shareholding) held by parent/holding company in downstream subsidiary - Distinction between and computation of - Value of options held by parent company to purchase shares in downstream subsidiary concerned - De facto control exercised by parent company with respect to number of Directors it appointed to Board of subsidiary concerned - Effect of, in computation controlling interest - Controlling interest, held, is a concomitant right flowing from effective shareholding and not from enterprise or economic value of stakes held in a company - Shareholding of parent company (HTIL/VIH) in downstream company (HEL) through 100% wholly owned subsidiaries and through non-100% wholly owned subsidiaries (pro rata holding), added up to effective shareholding of 52% - As holding of options does not confer voting or management rights, held, the same cannot be included in reckoning effective shareholding and thus controlling interest, though value of options can be included in estimating enterprise value - Hence, though effective shareholding of HTIL/VIH in HEL and hence its controlling interest therein was only 52%, enterprise value of their holding in HEL by including value of options added up to 67% of enterprise value of HEL - Furthermore, number of Directors that HTIL/VIH in practice could appoint to Board of HEL, not relevant in determining controlling interest held by HTIL/VIH in HEL - Lastly, held, valuation based on economic value or enterprise value of stakes held in a company cannot be basis of taxation, (2012) 6 SCC 613-ZB Securities Contracts (Regulation) Act, 1956 S. 2(d) - Call and put options in respect of shares - Nature of - Rights conferred by call options - Held, call and put options are contractual rights and do not sound in property, and in the absence of statutory stipulation cannot be construed as capital assets - Pending exercise, call options at the highest can be treated as potential shares and till exercised they cannot provide voting or management or controlling rights in the company, (2012) 6 SCC 613-ZC Mergers, Acquisitions and Takeovers Valuation of target company or controlling stake therein - Valuation of ``enterprise value'' or ``economic value'' of company - Matters to be considered, (2012) 6 SCC 613-ZD Mergers, Acquisitions and Takeovers Transition and Standstill rights in acquisition agreement - Nature of and need for - Takeover agreement (SPA) i.e. share purchase agreement transferring 100% shareholding of intermediate holding company held by parent company which in turn transferring control of business of downstream subsidiary to acquirer - Obligations under SPA of vendor parent company in regard to corporate control and allied matters to ensure smooth transition of business on transfer of control of downstream subsidiary, held, are contractual obligations and not property obligations which would attract capital gains tax under S. 9(1)(i) sub-clause (4), IT Act, (2012) 6 SCC 613-ZE

9 Mergers, Acquisitions and Takeovers Protection of rights of minority shareholders in acquisition agreement transferring majority stake - Acquisition agreement i.e. share purchase agreement (SPA) between majority stakeholder and acquirer which transferred control of target company, also recognising and continuing participative and protective rights of minority shareholders which existed independently by virtue of various shareholders/framework agreements inter se between minority shareholders, and company law - Nature of such rights - Recognition and continuance of such rights by SPA, held, did not change their nature as independent contractual rights which arose out of shareholders/framework agreements concerned and company law - Nor did they become rights of transferor majority stakeholder under SPA by virtue of said recognition and continuance, so as to qualify as property rights transfer of which under SPA would be liable to capital gains tax under S. 9(1)(i) sub-clause (4), IT Act, (2012) 6 SCC 613-ZF Minority shareholders' rights - Protective and participative rights of - Participative rights as subset of protective rights - Purpose of participative right explained - Minority to prevent consolidation of operations or assets by the controlling shareholder - Exit right as protective right, (2012) 6 SCC 613-ZG Mergers, Acquisitions and Takeovers Transition and Standstill rights - Non-compete clause - Acquisition agreement i.e. share purchase agreement (SPA) between majority stakeholder and acquirer which transferred control of target company - Transferor binding itself with non-compete clause in SPA as well - Nature of right conferred thereby, and tax consequences - Held (per Radhakrishnan, J.), said right is purely contractual in nature and does not sound in property - Particular amount if paid as consideration for the same, may be assessable as business income under S. 28(v-a), IT Act, but existence of noncompete right in SPA cannot be construed as transfer of capital asset so as to attract S. 9(1)(i) sub-clause (4), (2012) 6 SCC 613-ZH Mergers, Acquisitions and Takeovers Transition and Standstill rights - Licences to continue using brand, accounting software for limited period to prevent disruption, and assignment of intra-transferor-group company loans - Acquisition agreement i.e. share purchase agreement (SPA) between majority stakeholder and acquirer which transferred control of target company - Transferor permitting acquirer continued use of its brand which was being used by target company, certain accounting software for limited period so as to avoid disruption of business of target company upon transfer to acquirer and assigning certain intra-transferor-group company loans to transferee - Nature of rights conferred thereby, and tax consequences in India - In present case, what was conferred were bare licences to use said brand and accounting software free of charge for a limited period - There was no conferral of a property right in either case so as to constitute transfer of a capital asset - And in any case, as there was no consideration, the same were not taxable - Lastly, all Loan agreements and assignments of loans concerned took place entirely outside India at face value and, hence cannot be termed to be a transfer of assets situate in India, (2012) 6 SCC 613-ZI Shareholders (SHA)/Framework (FWA) agreements - Nature and content of - Held, they are contracts amongst shareholders themselves - Purpose is to define how shareholders will conduct themselves while participating in affairs of a company - SHA and articles of association - Overriding effect of articles - Breach of SHA - Remedy for, held (per Radhakrishnan, J.), is same as available for breach of any other contract - However, breach of SHA is not equivalent to breach of articles of association - Provisions included in SHA - Right of first refusal (RoFR) - Drag-along rights (DARs) - Tag-along rights (TARs) - Pre-emption rights - Call option - Put option - Subscription option - Voting arrangements in SHA - Held, are not property, (2012) 6 SCC 613-ZJ

10 Complex arrangements for buying and selling of shares - ``Right of first refusal (RoFR)'', ``Tag-along rights (TARs)'', ``Drag-along rights (DARs)'', ``Subscription option'', ``Call option'', ``Put option'' and ``Cash and cashless options'' - Explained in detail (per Radhakrishnan, J.), (2012) 6 SCC 613-ZK Act, 1961 Ss. 195(1), 163, 9(1)(i), 200(3), 201, 203, 203-A, 191-A, 194-B, 194-C, 194-D, 194-E, 194-I, 194-J and 115-BBA - Payment to non-resident - Deduction of tax at source (TDS) - Statutory obligations arising from TDS, indicated - Condition precedent for liability to deduct TDS from payment made to non-resident - Payment concerned must have element of income embedded in it which is chargeable to tax in India - If sum paid or credited by payer is not chargeable to tax in India, then no obligation to deduct TDS would arise - In present case, obligation to deduct TDS could only arise if payment concerned included in it income arising from transfer of a capital asset situate in India chargeable to tax as per S. 9(1)(i) sub-clause (4) - However, since transaction in present case i.e. transfer of shareholding of completely offshore company (a capital asset situate outside India) was between two completely offshore entities, there was no income chargeable to tax in India - Said outright sale of shareholding in offshore company could not be split up into various constituents or some underlying asset which could be construed to constitute transfer(s) of capital asset(s) situate in India, so as to attract S. 9(1)(i) sub-clause (4) - Contentions of Revenue in this regard, comprehensively rejected (for detail see Shortnotes V et seq.) - Hence, there was no obligation to deduct TDS, (2012) 6 SCC 613-ZL Act, 1961 Ss. 163(1)(a) to (d), 161(1), 160(1)(i) and 9(1)(i) - Taxation as representative assessee i.e. as agent of non-resident - Conditions precedent for - Income in question to have element chargeable to tax in India - Held, merely because a person is agent or is to be treated as agent of non-resident does not automatically make such person liable to pay tax on behalf of non-resident - Such agent is to be treated as representative assessee whose tax liability under S. 161 arises with reference to income represented by him and not other income of principal assessee - Common thread in Ss. 163(1)(c) and 9(1)(i), held, is that income should be deemed to have accrued in or arisen from India - Both sections must therefore be read together - On facts held, S. 163 not attracted as there was no transfer of capital assets situate in India and hence no income chargeable to tax in India (Paras 176 to 178; and 422), (2012) 6 SCC 613-ZM Act, 1961 Ss. 9(1), 195 and Tax presence in India - Held, has to be viewed in the context of transaction that is subject to tax and not with reference to an entirely unrelated matter, (2012) 6 SCC 613-ZN Act, 1961 S Payment to non-resident - Deduction of tax at source (TDS) - Object of - Held, is to collect tax at earliest point of time so that there is no difficulty later on, (2012) 6 SCC 613-ZO Act, 1961 S Payment to non-resident - Deduction of tax at source (TDS) - Person liable to deduct TDS, held (per Radhakrishnan, J.), can only be person who has tax presence in India - Including non-residents within scope of person liable to make deduction under S. 195 would lead to absurd consequences, (2012) 6 SCC 613-ZP

11 Tax Deducted at Source (TDS) Nature of liability to deduct TDS, and liability under regular assessment to pay tax - Difference between, explained, (2012) 6 SCC 613-ZQ Constitution of India Art. 245(2) - Extra-territorial operation of law made by Parliament - Laws made by a country, held (per Radhakrishnan, J.), are intended to be applicable to its own territory - Such presumption however can be displaced by showing that a particular law was intended to have extra-territorial application, (2012) 6 SCC 613-ZR Non-Residents/Offshore Transactions Indo-Mauritius DTA Treaty - Tax benefits flowing therefrom - Mauritius-registered company used as route to channelise investment to India from a third country - Admissibility of tax benefit - Held (per Radhakrishnan, J.), tax benefit if not allowed, will render Treaty a dead letter because tax benefit is main reason for which third country investor uses Mauritius route - Further held, Government cannot feign ignorance of Treaty being used by non-mauritius investors for investing money in India, (2012) 6 SCC 613-ZS Non-Residents/Offshore Transactions Indo-Mauritius DTA Treaty - Conditions for availing tax benefit under - Abuse of benefits flowing therefrom - Roundtripping and similar malpractices - Judicial Anti-Avoidance Rules (JAAR) - JAAR like lifting corporate veil read with look at principle - When may be applied (for detailed rulings on applicability of JAAR read with look at principle see Shortnote C ) - CBDT Circular No. 789 of 2000 dated Tax Residency Certificate (TRC) issued by Mauritian authorities and absence of limitation of benefits (LOB) clause in Treaty - Implications of - TRC, if conclusive - Held (per Radhakrishnan, J.), Treaty entitles third country investor to avail benefit under Treaty - However, TRC is not conclusive and can be ignored if it is used as device for tax fraud - Reiterated, though look through or limitation of benefits (LOB) principles cannot be read into a treaty, in such cases, court can apply look at principle - Thereafter, if it is warranted, court can lift corporate veil and see real nature of transaction - If it is established, on facts, that Mauritius company has been interposed as owner of shares in India, at time of disposal of shares to a third party, solely with a view to avoid tax without any commercial substance, Revenue, in such a situation, notwithstanding that Mauritian company is required to be treated as beneficial owner of shares under Circular No. 789 and Treaty, is entitled to look at entire transaction of sale as a whole and if it is established that Mauritian company has been interposed as a device, it is open to Revenue to discard the device and take into consideration real transaction between parties, and transaction may be subjected to tax, (2012) 6 SCC 613-ZT Separate legal person - Legal fiction - History of origin - Pope Innocent IV's theory in 13th Century that corporate bodies being of abstract existence, could not be excommunicated, (2012) 6 SCC 613-ZU