Sudevanand Vs. State Through CBI [January 19, 2012]
2012 Latest Caselaw 53 SC

Vodafone International Holdings B.V. Vs. Union of India & ANR.

[Civil Appeal No.733 of 2012 arising out of S.L.P. (C) No. 26529 of 2010]

J U D G M E N T

S.H. KAPADIA, CJI

1.     Leave granted.Introduction

2.     This matter concerns a tax dispute involving the Vodafone Group with the Indian Tax Authorities [hereinafter referred to for short as "the Revenue"], in relation to the acquisition by Vodafone International Holdings BV [for short "VIH"], a company resident for tax purposes in the Netherlands, of the entire share capital of CGP Investments (Holdings) Ltd. [for short "CGP"], a company resident for tax purposes in the Cayman Islands ["CI" for short] vide transaction dated 11.02.2007, whose stated aim, according to the Revenue, was "acquisition of 67% controlling interest in HEL", being a company resident for tax purposes in India which is disputed by the appellant saying that VIH agreed to acquire companies which in turn controlled a 67% interest, but not controlling interest, in Hutchison Essar Limited ("HEL" for short).

According to the appellant, CGP held indirectly through other companies 52% shareholding interest in HEL as well as Options to acquire a further 15% shareholding interest in HEL, subject to relaxation of FDI Norms. In short, the Revenue seeks to tax the capital gains arising from the sale of the share capital of CGP on the basis that CGP, whilst not a tax resident in India, holds the underlying Indian assets.FactsA. Evolution of the Hutchison structure and the Transaction

3.     The Hutchison Group, Hong Kong (HK) first invested into the telecom business in India in 1992 when the said 3Group invested in an Indian joint venture vehicle by the name Hutchison Max Telecom Limited (HMTL) - later renamed as HEL.

4.     On 12.01.1998, CGP stood incorporated in Cayman Islands, with limited liability, as an "exempted company", its sole shareholder being Hutchison Telecommunications Limited, Hong Kong ["HTL" for short], which in September, 2004 stood transferred to HTI (BVI) Holdings Limited ["HTIHL (BVI)" for short] vide Board Resolution dated 17.09.2004. HTIHL (BVI) was the buyer of the CGP Share. HTIHL (BVI) was a wholly owned subsidiary (indirect) of Hutchison Telecommunications International Limited (CI) ["HTIL" for short].

5.     In March, 2004, HTIL stood incorporated and listed on Hong Kong and New York Stock Exchanges in September, 2004.

6.     In February, 2005, consolidation of HMTL (later on HEL) got effected. Consequently, all operating companies below HEL got held by one holding company, i.e., HMTL/HEL. This was with the approval of RBI and FIPB. The ownership of the said holding company, i.e., 4HMTL/HEL was consolidated into the tier I companies all based in Mauritius. Telecom Investments India Private Limited ["TII" for short], IndusInd Telecom Network Ltd. ["ITNL" for short] and Usha Martin Telematics Limited ["UMTL" for short] were the other shareholders, other than Hutchison and Essar, in HMTL/HEL. They were Indian tier I companies above HMTL/HEL. The consolidation was first mooted as early as July, 2003.

7.     On 28.10.2005, VIH agreed to acquire 5.61% shareholding in Bharti Televentures Ltd. (now Bharti Airtel Ltd.). On the same day, Vodafone Mauritius Limited (subsidiary of VIH) agreed to acquire 4.39% shareholding in Bharti Enterprises Pvt. Ltd. which indirectly held shares in Bharti Televentures Ltd. (now Bharti Airtel Ltd.).

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

9.     On 1.03.2006, TII Framework and Shareholders Agreements stood executed under which the shareholding of 5HEL was restructured through "TII", an Indian company, in which Analjit Singh (AS) and Asim Ghosh (AG), acquired shares through their Group companies, with the credit support provided by HTIL. In consideration of the credit support, parties entered into Framework Agreements under which a Call Option was given to 3 Global Services Private Limited ["GSPL" for short], a subsidiary of HTIL, to buy from Goldspot Mercantile Company Private Limited ["Goldspot" for short] (an AG company) and Scorpios Beverages Private Limited ["Scorpios" for short] (an AS company) their entire shareholding in TII. Additionally, a Subscription Right was also provided allowing GSPL a right to subscribe to the shares of Centrino Trading Company Private Limited ["Centrino" for short] and ND Callus Info Services Private Limited ["NDC" for short]. GSPL was an Indian company under a Mauritius subsidiary of CGP which stood indirectly held by HTIL. These agreements also contained clauses which imposed restrictions to transfer downstream interests, termination rights, subject to objection from any party, etc.

10.  The shareholding of HEL again underwent a change on 7.08.2006 through execution of 2006 IDFC Framework Agreement with the Hinduja Group exiting and its shareholding being acquired by SMMS Investments Private Limited ["SMMS" for short], an Indian company. Hereto, the investors (as described in the Framework Agreement) were prepared to invest in ITNL provided that HTIL and GSPL procured financial assistance for them and in consideration whereof GSPL would have Call Option to buy entire equity shares of SMMS. Hereto, in the Framework Agreement there were provisions imposing restrictions on Share Transfer, Change of Control etc. On 17.08.2006, a Shareholders Agreement stood executed which dealt with governance of ITNL.

11.  On 22.12.2006, an Open Offer was made by Vodafone Group Plc. on behalf of Vodafone Group to Hutchison Whampoa Ltd., a non-binding bid for US $11.055 bn being the enterprise value for HTIL's 67% interest in HEL.

12.  On 22.12.2006, a press release was issued by HTIL in Hong Kong and New York Stock Exchanges that it had been approached by various potentially interested parties regarding a possible sale of "its equity interests" (not controlling interest ) in HEL. That, till date no agreement stood entered into by HTIL with any party.

13.  On 25.12.2006, an offer comes from Essar Group to purchase HTIL's 66.99% shareholding at the highest offer price received by HTIL. Essar further stated that any sale by HTIL would require its consent as it claimed to be a co-promoter of HEL.

14.  On 31.01.2007, a meeting of the Board of Directors of VIH was held approving the submission of a binding offer for 67% of HTIL's interest at 100% enterprise value of US $17.5 bn by way of acquisition by VIH of one share (which was the entire shareholding) in CGP, an indirect Cayman Islands subsidiary of HTIL. The said approval was subject to: (i) reaching an agreement with Bharti that allowed VIH to make a bid on Hutch; and (ii) entering into an appropriate partnership arrangement to satisfy FDI Rules in India.

15.  On 6.02.2007, HTIL calls for a binding offer from Vodafone Group for its aggregate interests in 66.98% of the issued share capital of HEL controlled by companies owned, directly or indirectly, by HTIL together with inter-related loans.

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

17.  On the same day, i.e., 9.02.2007, Bharti conveys its no objection to the proposal made by Vodafone Group to purchase a direct or indirect interest in HEL from the Hutchison Group and/ or Essar Group.

18.  On 10.02.2007, a re-revised offer was submitted by Vodafone valuing HEL at an enterprise value of US $18.80 bn and offering US $11.076 bn for HTIL's interest in HEL.

19.  On 11.02.2007, a Tax Due Diligence Report was submitted by Ernst & Young. The relevant observation from the said Report reads as follows: "The target structure now also includes a Cayman company, CGP Investments (Holdings) Limited, CGP Investments (Holdings) Limited was not originally within the target group. After our due diligence had commenced the seller proposed that CGP Investments (Holdings) Limited should be added to the target group and made available certain limited information about the company. Although we have reviewed this information, it is not sufficient for us to be able to comment on any tax risks associated with the company.

20.  "20. On 11.02.2007, UBS Limited (Financial Advisors to VIH) submitted a financial report setting out the methodology for valuation of HTIL's 67% effective interest in HEL through the acquisition of 100% of CGP.

21.  On 11.02.2007, VIH and HTIL entered into an Agreement for Sale and Purchase of Share and Loans ("SPA" for short), under which HTIL agreed to procure the sale of the entire share capital of CGP which it held through HTIHL (BVI) for VIH. Further, HTIL also agreed to procure the assignment of Loans owed by CGP and Array Holdings Limited ["Array" for short] (a 100% subsidiary of CGP) to HTI (BVI) Finance Ltd. (a direct subsidiary of HTIL). As part of its obligations, HTIL undertook to procure that each Wider Group Company would not terminate or modify any rights under any of its Framework Agreements or exercise any of their Options under any such agreement. HTIL also provided several warranties to VIH as set out in Schedule 4 to SPA which included that HTIL was the sole beneficial owner of CGP share.

22.  On 11.02.2007, a Side Letter was sent by HTIL to VIH inter alia stating that out of the purchase consideration, up to US $80 million could be paid to some of its existing partners. By the said Side Letter, HTIL agreed to procure that Hutchison Telecommunications (India) Ltd. (Ms) ["HTIL Mauritius" for short], Omega Telecom Holdings Private Limited ["Omega" for short] and GSPL would enter into IDFC Transaction Agreement prior to the completion of the acquisition pursuant to SPA, which completion ultimately took place on 8.05.2007.

23.  On 12.02.2007, Vodafone makes public announcement to Securities and Exchange Commission ["SEC" for short], Washington and on London Stock Exchange which contained two assertions saying that Vodafone had agreed to acquire a controlling interest in HEL via its subsidiary VIH and, second, that Vodafone had agreed to acquire companies that control a 67% interest in HEL.

24.  On the same day, HTIL makes an announcement on HK Stock Exchange stating that it had agreed to sell its entire direct and indirect equity and loan interests held through subsidiaries, in HEL to VIH.

25.  On 20.02.2007, VIH applied for approval to FIPB. This application was made pursuant to Press Note 1 which applied to the acquisition of an indirect interest in HEL by VIH from HTIL. It was stated that "CGP owns directly and indirectly through its subsidiaries an aggregate of 42.34% of the issued share capital of HEL and a further indirect interests in 9.62% of the issued share capital of HEL". That, the transaction would result in VIH acquiring an indirect controlling interest of 51.96% in HEL, a company competing with Bharti, hence, approval of FIPB became necessary. It is to be noted that on 20.02.2007, VIH held 5.61% stake (directly) in Bharti.

26.  On the same day, i.e., 20.02.2007, in compliance of Clause 5.2 of SPA, an Offer Letter was issued by Vodafone Group Plc on behalf of VIH to Essar for purchase of its entire shareholding (33%) in HEL.

27.  On 2.03.2007, AG wrote to HEL, confirming that he, through his 100% Indian companies, owned 23.97% of a joint venture company-TII, which in turn owned 19.54% of HEL and, accordingly, his indirect interest in HEL worked out to 4.68%. That, he had full and unrestricted voting rights in companies owned by him. That, he had received credit support for his investments, but primary liability was with his companies.

28.  A similar letter was addressed by AS on 5.03.2007 to FIPB. It may be noted that in January, 2006, post dilution of FDI cap, HTIL had to shed its stake to comply with 26% 1local shareholding guideline. Consequently, AS acquired 7.577% of HEL through his companies.

29.  On 6.03.2007, Essar objects with FIPB to HTIL's proposed sale saying that HEL is a joint venture Indian company between Essar and Hutchison Group since May, 2000. That, Bharti is also an Indian company in the "same field" as HEL. Bharti was a direct competitor of HEL in India. According to Essar, the effect of the transaction between HTIL and VIH would be that Vodafone with an indirect controlling interest in HEL and in Bharti violated Press Note 1, particularly, absent consent from Essar. However, vide letter dated 14.03.2007, Essar gave its consent to the sale. Accordingly, its objection stood withdrawn.

30.  On 14.03.2007, FIPB wrote to HEL seeking clarification regarding a statement by HTIL before US SEC stating that HTIL Group would continue to hold an aggregate interest of 42.34% of HEL and an additional indirect interest through JVCs [TII and Omega] being non-wholly owned subsidiaries of HTIL which held an aggregate of 19.54% of HEL, which added up to 61.88%, whereas in the communication to FIPB dated 6.03.2007, the direct and indirect FDI held by HTIL was stated to be 51.96%.

31.  By letter of the same date from HEL to FIPB, it was pointed out that HTIL was a company listed on NY SE. Accordingly, it had to file Statements in accordance with US SEC. That, under US GAAP, HTIL had to consolidate the assets and liabilities of companies even though not majority owned or controlled by HTIL, because of a US accounting standard that required HTIL to consolidate an entity whereby HTIL had "risk or reward".

Therefore, this accounting consolidation required that even though HTIL held no shares nor management rights still they had to be computed in the computation of the holding in terms of the Listing Norms. It is the said accounting consolidation which led to the reporting of additional 19.54% in HEL, which leads to combined holding of 61.88%. On the other hand, under Indian GAAP, the interest as of March, 2006 was 42.34% + 7.28% (rounded up to 49.62%).

After the additional purchase of 2.34% from Hindujas in August 2006, the aggregate HTIL direct and indirect FDI stood at 51.96%. In short, due to the difference in the US GAAP and the Indian GAAP the Declarations varied. The combined holding for US GAAP purposes was 61.88% whereas for Indian GAAP purposes it was 51.96%. Thus, according to HEL, the Indian GAAP number reflected the true equity ownership and control position.

32.  By letter dated 9.03.2007, addressed by FIPB to HEL, several queries were raised. One of the questions FIPB had asked was "as to which entity was entitled to appoint the directors to the Board of Directors of HEL on behalf of TIIL which owns 19.54% of HEL?" In answer, vide letter dated 14.03.2007, HEL informed FIPB that under the Articles of HEL the directors were appointed by its shareholders in accordance with the provisions of the Indian company law.

However, in practice the directors of HEL have been appointed pro rata to their respective shareholdings which resulted in 4 directors being appointed from the Essar Group, 6 directors from HTIL Group and 2 directors from TII. In practice, the directors appointed by TII to the Board of HEL were AS and AG. One more clarification was sought by FIPB from HEL on the credit support received by AG for his investment in HEL.

In answer to the said query, HEL submitted that the credit support for AG Group in respect of 4.68% stake in HEL through the Asim Ghosh investment entities, was a standby letter of credit issued by Rabobank Hong Kong in favour of Rabo India Finance Pvt. Ltd. which in turn has made a Rupee loan facility available to Centrino, one of the companies in AG Group.

33.  By letter dated 14.03.2007 addressed by VIH to FIPB, it stood confirmed that VIH's effective shareholding in HEL would be 51.96%. That, following completion of the acquisition HTIL's shares in HEL the ownership of HEL was to be as follows :

                      i.        VIH would own 42% direct interest in HEL through its acquisition of 100% CGP (CI).

                     ii.        Through CGP (CI), VIH would also own 37.25% in TII which in turn owns 19.54% in HEL and 38% (45.79%) in Omega which in turn owns 5.11% in HEL (i.e. pro-rata route).

                    iii.        These investments combined would give VIH a controlling interest of 52% in HEL.

                    iv.        In addition, HTIL's existing Indian partners AG, AS and IDFC (i.e. SMMS), who between them held a 15% interest in HEL (i.e. option route), agreed to retain their shareholdings with full control, including voting rights and dividend rights. In other words, none of the Indian partners exited and, consequently, there was no change of control.

                     v.        The Essar Group would continue to own 33% of HEL.

34.  On 15.03.2007, a Settlement Agreement was signed between HTIL and Essar Group. Under the said Agreement, HTIL agreed to pay US $415 mn to Essar for the following: (a) acceptance of the SPA; (b) for waiving rights or claims in respect of management and conduct of affairs of HEL; (c) for giving up Right of First Refusal (RoFR), Tag Along Rights (TARs) and shareholders rights under Agreement dated 2.05.2000; and (d) for giving up its objections before FIPB.

35.  Vide Settlement Agreement, HTIL agreed to dispose of its direct and indirect equity, loan and other interests and rights, in and related to HEL, to VIH. These other rights and interests have been enumerated in the Order of the Revenue dated 31.05.2010 as follows :

a.     Right to equity interest (direct and indirect) in HEL.

b.    Right to do telecom business in India

c.     Right to jointly own and avail the telecom licences in India

d.    Right to use the Hutch brand in India

e.     Right to appoint/remove directors from the Board of HEL and its subsidiaries

f.     Right to exercise control over the management and affairs of the business of HEL (Management Rights)

g.    Right to take part in all the investment, management and financial decisions of HEL

h.     Right over the assigned loans and advances utilized for the business in India

i.      Right of subscribing at par value in certain Indian companies

j.      Right to exercise call option at the price agreed in Indian companies

k.     Right to control premium

l.      Right to non-compete against HTIL within the territory of India

m.   Right to consultancy support in the use of Oracle license for the Indian business

n.     Other intangible rights (right of customer base, goodwill etc.)

36.  On 15.03.2007, a Term Sheet Agreement between VIH and Essar Teleholdings Limited, an Indian company which held 11% in HEL, and Essar Communications Limited, a Mauritius company which held 22% in HEL, was entered into for regulating the affairs of HEL and the relationship of the shareholders of HEL. In the recitals, it was stated that VIH had agreed to acquire the entire indirect shareholding of HTIL in HEL, including all rights, contractual or otherwise, to acquire directly or indirectly shares in HEL 2owned by others which shares shall, for the purpose of the Term Sheet, be considered to be part of the holding acquired by VIH. The Term Sheet governed the relationship between Essar and VIH as shareholders of HEL including VIH's right as a shareholder of HEL:

a.     to nominate 8 directors out of 12 to the Board of Directors;

b.    nominee of Vodafone had to be there to constitute the quorum for the Board of Directors;

c.     to get a RoFR over the shares held by Essar in HEL;

d.    d) should Vodafone Group shareholder sell its shares in HEL to an outsider, Essar had a TAR in respect of Essar's shareholding in HEL.

37.  On 15.03.2007, a Put Option Agreement was signed between VIH and Essar Group requiring VIH to buy from Essar Group Shareholders all the Option Shares held by them.

38.  By letter dated 17.03.2007, HTIL confirmed in writing to AS that it had no beneficial, or legal or any other right in AS's TII interest or HEL interest.

39.  On 19.03.2007, a letter was addressed by FIPB to VIH asking VIH to clarify as to under what circumstances VIH agreed to pay US $11.08 bn for acquiring 67% of HEL when the actual acquisition is only 51.96%. This query presupposes that even according to FIPB the actual acquisition was only 51.96% (52% approx.).

40.  On the same day, VIH replied that VIH has agreed to acquire from HTIL, interests in HEL which included 52% equity shareholding for US $11.08 bn. That, the price included a control premium, use and rights to the Hutch Brand in India, a non-compete agreement with the Hutch Group, the value of non-voting non-convertible preference shares, various loans obligations and the entitlement to acquire a further 15% indirect interest in HEL as set out in the letter dated 14.03.2007 addressed to FIPB (see page 6117 of SLP Vol. 26). According to the said letter dated 19.03.2007, all the above elements together equated to 67% of the economic value of HEL.

41.  Vide Agreement dated 21.03.2007, VIH diluted its stake in Bharti by 5.61%.

42.  In reply to the queries raised by FIPB regarding break up of valuation, VIH confirmed as follows: Various assets and liabilities of CGP included its rights and entitlements, including subscription rights, call options to acquire in future a further 62.75% of TII, call options to acquire in future a further 54.21% of Omega which together would give a further 15.03% proportionate indirect equity ownership of HEL, control premium, use and rights to Hutch brand in India and a non-compete agreement with HTIL. No individual price was assigned to any of the above items. That, under IFRS, consolidation included TII and Omega and, consequently, the accounts under IFRS showed the total shareholding in HEL as 67% (approx.). Thus, arrangements relating to Options stood valued as assets of CGP. In global basis valuation, assets of CGP consisted of: its downstream holdings, intangibles and arrangement relating to Options, i.e. Bundle of Rights acquired by VIH. This reply was in the letter dated 27.03.2007 in which it was further stated that HTIL had conducted an auction for sale of its interests in HEL in which HTIL had asked each bidder to name its price with reference to the enterprise value of HEL. As a consequence of the transaction, Vodafone will effectively step into the shoes of HTIL including all the rights in respect of its Indian investments that HTIL enjoyed. Lastly, the Indian joint venture partners would remain invested in HEL as the transaction did not involve the Indian investors selling any of their respective stakes.

43.  On 5.04.2007, HEL wrote to the Joint Director of Income Tax (International Taxation) stating that HEL had no tax liabilities accruing out of the subject transaction.

44.  Pursuant to the resolution passed by the Board of Directors of CGP on 30.04.2007, it was decided that on acquisition loans owed by CGP to HTI (BVI) Finance Ltd. would be assigned to VIH; the existing Directors of CGP would resign; Erik de Rijk would become the only Director of CGP. A similar resolution was passed on the same day by the Board of Directors of Array.

45.  On 7.05.2007, FIPB gave its approval to the transaction, subject to compliance with the applicable laws and regulations in India.

46.  On 8.05.2007, consequent upon the Board Resolutions passed by CGP and its downstream companies, the following steps were taken:

              i.        resignation of all the directors of Hutch Group;

             ii.        (ii) appointment of new directors of Vodafone Group;

            iii.        resolutions passed by TII, Jaykay Finholding (India) Private Limited, UMT Investments Ltd., UMTL, Omega (Indian incorporated holding companies) accepting the resignation of HTIL's nominee directors and appointing VIH's nominee directors;

            iv.        same steps were taken by HEL and its subsidiaries;

             v.        sending of a Side Letter by HTIL to VIH relating to completion mechanics; (vi) computation of net amount payable by VIH to HTIL including retention of a certain amount out 2 of US $11.08 bn paid on 8.05.2007 towards expenses to operationalize the Option Agreements and adjustments for breach (if any) of warranties, etc.;

            vi.        assignment of loans given by HTI (BVI) Finance Ltd. to CGP and Array in favour of VIH;

           vii.        cancellation of share certificate of HTIHL (BVI) and entering the name of VIH in the Register of Members of CGP;

          viii.        execution of Tax Deed of Covenant indemnifying VIH in respect of tax or transfer pricing liabilities payable by Wider Group (CGP, GSPL, Mauritius holding companies, Indian operating companies).

            ix.        a Business Transfer Agreement between GSPL and a subsidiary of HWP Investments Holdings (India) Ltd. (Ms) for sale of Call Centre earlier owned by GSPL;

             x.        payment of US $10.85 bn by VIH to HTIL (CI).

47.  On 5.06.2007, under the Omega Agreement, it was agreed that in view of the SPA there would be a consequent change of control in HTIL Mauritius, which holds 45.79% in Omega, and that India Development Fund ("IDF" for short), IDFC and SSKI Corporate Finance Private Limited ("SSKI" for short) would, instead of exercising Put Option and Cashless Option under 2006 IDFC Framework Agreement, exercise the same in pursuance of Omega Agreement. That, under the Omega Agreement, GSPL waived its right to exercise the Call Option under the 2006 IDFC Framework Agreement.

48.  On 6.06.2007, a Framework Agreement was entered into among IDF, IDFC, SMMS, IDFC PE, HTIL Mauritius, GSPL, Omega and VIH by which GSPL had a Call Option to buy the entire equity shares of SMMS. Consequently, on 7.06.2007, a Shareholders Agreement was executed by which the shareholding pattern of Omega changed with SMMS having 61.6% and HTIL Mauritius having 38.4%.

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

50.  On 5.07.2007, a Framework Agreement was entered into among AG, AG Mercantile Company Private Limited, Plustech Mercantile Co. (P) Ltd ["Plustech" for short], GSPL, Nadal Trading Company Private Limited ["Nadal" for short] and VIH. Under clause 4.4, GSPL had an unconditional right to purchase all shares of AG in AG Mercantile Company Pvt. Ltd. at any time and in consideration for such call option, GSPL agreed to pay to AG an amount of US $6.3 mn annually.

51.  On the same day, i.e., 5.07.2007, a Framework Agreement was entered into among AS, his wife, Scorpios, MVH, GSPL, NDC and VIH. Under clause 4.4 GSPL had an unconditional right to purchase all shares of AS and his wife held in Scorpios at any time and in consideration for the call option GSPL agreed to pay AS and his wife an amount of US$ 10.2 mn per annum.

52.  On 5.07.2007, TII Shareholders Agreement was entered into among Nadal, NDC, CGP India Investments Limited ["CGP India" for short], TII and VIH to regulate the affairs of TII. Under clause 3.1, NDC had 38.78% shareholding in TII, CGP India had 37.85% and Nadal had 23.57%.

53.  It is not necessary to go into the earlier round of litigation. Suffice it to state that on 31.05.2010, an Order was passed by the Department under Sections 201(1) and 201(1A) of the Income Tax Act, 1961 ["the Act" for short] declaring that Indian Tax Authorities had jurisdiction to tax the transaction against which VIH filed Writ Petition No. 1325 of 2010 before the Bombay High Court which was dismissed on 8.09.2010 vide the impugned judgment [reported in 329 ITR 126], hence, this Civil Appeal. B. Ownership Structure

54.  In order to understand the above issue, we reproduce below the Ownership Structure Chart as on 11.02.2007. The Chart speaks for itself.

55.  To sum up, CGP held 42.34% in HEL through 100% wholly owned subsidiaries [Mauritius companies], 9.62% indirectly through TII and Omega [i.e. pro rata route], and 15.03% through GSPL route.

56.  To explain the GSPL route briefly, it may be mentioned that on 11.02.2007 AG Group of companies held 23.97% in TII, AS Group of companies held 38.78% in TII whereas SMMS held 54.21% in Omega. Consequently, holding of AG in HEL through TII stood at 4.68% whereas holding of AS in HEL through TII stood at 7.577% and holding of SMMS in HEL through Omega stood at 2.77%, which adds up to 15.03% in HEL. These holdings of AG, AS and SMMS came under the Option Route. In this connection, it may be mentioned that GSPL is an Indian company indirectly owned by CGP. It held Call Options and Subscription Options to be exercised in future under circumstances spelt out in TII and IDFC Framework Agreements (keeping in mind the sectoral cap of 74%). Correctness of Azadi Bachao case - Re: Tax Avoidance/Evasion

57.  Before us, it was contended on behalf of the Revenue that Union of India v. Azadi Bachao Andolan (2004) 10 SCC 1 needs to be overruled insofar as it departs from McDowell and Co. Ltd. v. CTO (1985) 3 SCC 230 principle for the following :

              i.        Para 46 of McDowell judgment has been missed which reads as under: "on this aspect Chinnappa Reddy, J. has proposed a separate opinion with which we agree". [i.e. Westminster principle is dead].

             ii.        That, Azadi Bachao failed to read paras 41-45 and 46 of McDowell in entirety. If so read, the only conclusion one could draw is that four learned judges speaking through Misra, J. agreed with the observations of Chinnappa Reddy, J. as to how in certain circumstances tax avoidance should be brought within the tax net.

            iii.        That, subsequent to McDowell, another matter came before the Constitution Bench of five Judges in Mathuram Agrawal v. State of Madhya Pradesh (1999) 8 SCC 667, in which Westminster principle was quoted which has not been noticed by Azadi Bachao. 3Our Analysis

58.  Before coming to Indo-Mauritius DTAA, we need to clear the doubts raised on behalf of the Revenue regarding the correctness of Azadi Bachao (supra) for the simple reason that certain tests laid down in the judgments of the English Courts subsequent to The Commissioners of Inland Revenue v. His Grace the Duke of Westminster 1935 All E.R. 259 and W.T. Ramsay Ltd. v. Inland Revenue Commissioners (1981) 1 All E.R. 865 help us to understand the scope of Indo-Mauritius DTAA. It needs to be clarified, that, McDowell dealt with two aspects. First, regarding validity of the Circular(s) issued by CBDT concerning Indo-Mauritius DTAA. Second, on concept of tax avoidance/evasion. Before us, arguments were advanced on behalf of the Revenue only regarding the second aspect.

59.  The Westminster principle states that, "given that a document or transaction is genuine, the court cannot go behind it to some supposed underlying substance". The said principle has been reiterated in subsequent English Courts Judgments as "the cardinal principle".

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

61.  Ramsay did not discard Westminster but read it in the proper context by which "device" which was colourable in nature had to be ignored as fiscal nullity. Thus, Ramsay lays down the principle of statutory interpretation 3rather than an over-arching anti-avoidance doctrine imposed upon tax laws.

62.  62. Furniss (Inspector of Taxes) v. Dawson (1984) 1 All E.R. 530 dealt with the case of interpositioning of a company to evade tax. On facts, it was held that the inserted step had no business purpose, except deferment of tax although it had a business effect. Dawson went beyond Ramsay. It reconstructed the transaction not on some fancied principle that anything done to defer the tax be ignored but on the premise that the inserted transaction did not constitute "disposal" under the relevant Finance Act.

Thus, Dawson is an extension of Ramsay principle.63. After Dawson, which empowered the Revenue to restructure the transaction in certain circumstances, the Revenue started rejecting every case of strategic investment/tax planning undertaken years before the event saying that the insertion of the entity was effected with the sole intention of tax avoidance. In Craven (Inspector of Taxes) v. White (Stephen) (1988) 3 All. E.R. 495 it was held that the Revenue cannot start with the question as to whether the transaction was a tax deferment/saving device 3but that the Revenue should apply the look at test to ascertain its true legal nature.

It observed that genuine strategic planning had not been abandoned.64. The majority judgment in McDowell held that "tax planning may be legitimate provided it is within the framework of law" (para 45). In the latter part of para 45, it held that "colourable device cannot be a part of tax planning and it is wrong to encourage the belief that it is honourable to avoid payment of tax by resorting to dubious methods". It is the obligation of every citizen to pay the taxes without resorting to subterfuges. The above observations should be read with para 46 where the majority holds "on this aspect one of us, Chinnappa Reddy, J. has proposed a separate opinion with which we agree".

The words "this aspect" express the majority's agreement with the judgment of Reddy, J. only in relation to tax evasion through the use of colourable devices and by resorting to dubious methods and subterfuges. Thus, it cannot be said that all tax planning is illegal/illegitimate/impermissible. Moreover, Reddy, J. himself says that he agrees with the majority. In the judgment of Reddy, J. there are repeated references to schemes and devices in contradistinction to "legitimate avoidance of tax liability" (paras 7-10, 17 & 18).

In our view, although Chinnappa Reddy, J. makes a number of observations regarding the need to depart from the "Westminster" and tax avoidance - these are clearly only in the context of artificial and colourable devices. Reading McDowell, in the manner indicated hereinabove, in cases of treaty shopping and/or tax avoidance, there is no conflict between McDowell and Azadi Bachao or between McDowell and Mathuram Agrawal. International Tax Aspects of Holding Structures. In the thirteenth century, Pope Innocent IV espoused the theory of the legal fiction by saying that corporate bodies could not be ex-communicated because they only exist in abstract.

This enunciation is the foundation of the separate entity principle.66. The approach of both the corporate and tax laws, particularly in the matter of corporate taxation, generally is founded on the abovementioned separate entity principle, i.e., treat a company as a separate person. The Indian Income Tax Act, 1961, in the matter of corporate taxation, is founded on the principle of the independence of companies 3and other entities subject to income-tax. Companies and other entities are viewed as economic entities with legal independence vis-a-vis their shareholders/participants.

It is fairly well accepted that a subsidiary and its parent are totally distinct tax payers. Consequently, the entities subject to income-tax are taxed on profits derived by them on standalone basis, irrespective of their actual degree of economic independence and regardless of whether profits are reserved or distributed to the shareholders/ participants. Furthermore, shareholders/ participants, that are subject to (personal or corporate) income-tax, are generally taxed on profits derived in consideration of their shareholding/participations, such as capital gains.

Now a days, it is fairly well settled that for tax treaty purposes a subsidiary and its parent are also totally separate and distinct tax payers.67. It is generally accepted that the group parent company is involved in giving principal guidance to group companies by providing general policy guidelines to group subsidiaries. However, the fact that a parent company exercises shareholder's influence on its subsidiaries does not 3generally imply that the subsidiaries are to be deemed residents of the State in which the parent company resides. Further, if a company is a parent company, that company's executive director(s) should lead the group and the company's shareholder's influence will generally be employed to that end.

This obviously implies a restriction on the autonomy of the subsidiary's executive directors. Such a restriction, which is the inevitable consequences of any group structure, is generally accepted, both in corporate and tax laws. However, where the subsidiary's executive directors' competences are transferred to other persons/bodies or where the subsidiary's executive directors' decision making has become fully subordinate to the Holding Company with the consequence that the subsidiary's executive directors are no more than puppets then the turning point in respect of the subsidiary's place of residence comes about.

Similarly, if an actual controlling Non-Resident Enterprise (NRE) makes an indirect transfer through "abuse of organisation form/legal form and without reasonable business purpose" which results in tax avoidance or avoidance of withholding tax, then the Revenue may disregard the form of the arrangement or the impugned action through use of Non-Resident Holding Company, re-characterize the equity transfer according to its economic substance and impose the tax on the actual controlling Non-Resident Enterprise.

Thus, whether a transaction is used principally as a colourable device for the distribution of earnings, profits and gains, is determined by a review of all the facts and circumstances surrounding the transaction. It is in the above cases that the principle of lifting the corporate veil or the doctrine of substance over form or the concept of beneficial ownership or the concept of alter ego arises. There are many circumstances, apart from the one given above, where separate existence of different companies, that are part of the same group, will be totally or partly ignored as a device or a conduit (in the pejorative sense).

The common law jurisdictions do invariably impose taxation against a corporation based on the legal principle that the corporation is "a person" that is separate from its members. It is the decision of the House of Lords in Salomon v. Salomon (1897) A.C. 22 that opened the door 4to the formation of a corporate group. If a "one man" corporation could be incorporated, then it would follow that one corporation could be a subsidiary of another.

This legal principle is the basis of Holding Structures. It is a common practice in international law, which is the basis of international taxation, for foreign investors to invest in Indian companies through an interposed foreign holding or operating company, such as Cayman Islands or Mauritius based company for both tax and business purposes.

In doing so, foreign investors are able to avoid the lengthy approval and registration processes required for a direct transfer (i.e., without a foreign holding or operating company) of an equity interest in a foreign invested Indian company. However, taxation of such Holding Structures very often gives rise to issues such as double taxation, tax deferrals and tax avoidance. In this case, we are concerned with the concept of GAAR. In this case, we are not concerned with treaty-shopping but with the anti-avoidance rules. The concept of GAAR is not new to India since India already has a judicial anti-avoidance rule, like some other jurisdictions.

Lack of clarity and absence of appropriate 4provisions in the statute and/or in the treaty regarding the circumstances in which judicial anti-avoidance rules would apply has generated litigation in India. Holding Structures are recognized in corporate as well as tax laws. Special Purpose Vehicles (SPVs) and Holding Companies have a place in legal structures in India, be it in company law, takeover code under SEBI or even under the income tax law. When it comes to taxation of a Holding Structure, at the threshold, the burden is on the Revenue to allege and establish abuse, in the sense of tax avoidance in the creation and/or use of such structure(s).

In the application of a judicial anti-avoidance rule, the Revenue may invoke the "substance over form" principle or "piercing the corporate veil" test only after it is able to establish on the basis of the facts and circumstances surrounding the transaction that the impugned transaction is a sham or tax avoidant. To give an example, if a structure is used for circular trading or round tripping or to pay bribes then such transactions, though having a legal form, should be discarded by applying the test of fiscal nullity. Similarly, in a case where the Revenue finds that in a Holding Structure an entity which has no commercial/business substance has been interposed only to avoid tax then in such cases applying the test of fiscal nullity it would be open to the Revenue to discard such inter-positioning of that entity.

However, this has to be done at the threshold. In this connection, we may reiterate the "look at" principle enunciated in Ramsay (supra) in which it was held that the Revenue or the Court must look at a document or a transaction in a context to which it properly belongs to. It is the task of the Revenue/Court to ascertain the legal nature of the transaction and while doing so it has to look at the entire transaction as a whole and not to adopt a dissecting approach.

The Revenue cannot start with the question as to whether the impugned transaction is a tax deferment/saving device but that it should apply the "look at" test to ascertain its true legal nature [See Craven v. White (supra) which further observed that genuine strategic tax planning has not been abandoned by any decision of the English Courts till date]. Applying the above tests, we are of the view that every strategic foreign direct investment coming to India, as an investment destination, should be 4seen in a holistic manner.

While doing so, the Revenue/Courts should keep in mind the following factors: the concept of participation in investment, the duration of time during which the Holding Structure exists; the period of business operations in India; the generation of taxable revenues in India; the timing of the exit; the continuity of business on such exit. In short, the onus will be on the Revenue to identify the scheme and its dominant purpose. The corporate business purpose of a transaction is evidence of the fact that the impugned transaction is not undertaken as a colourable or artificial device.

The stronger the evidence of a device, the stronger the corporate business purpose must exist to overcome the evidence of a device. Whether Section 9 is a "look through" provision as submitted on behalf of the Revenue?69. According t