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

- **Citation:** [2012] 1 S.C.R. 573
- **Court:** Supreme Court of India
- **Decided:** 2012-01-20
- **Case number:** Civil Appeal No. 733 of 2012
- **Bench:** S.H. Kapadia, K.S. Radhakrishnan, Swatanter Kumar
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/vodafone-international-holdings-b-v-v-union-of-india-anr-28083
- **Pages:** 206

## Headnote

Income Tax Act, 1961:
s.45 read with ss. 195, 201 and 201(1A) - Capital gains
B
c
- Offshore transaction - Territorial tax jurisdiction of Indian tax
authorities -
Transaction between VIH and HTIL (both
companies incorporated outside India) with regard to sale
and purchase of the entire share capital of CGP, also a D
company incorporated outside India - Revenue seeking to
tax the capital gains arising from the sale of share capital of
CGP on the basis that CGP held the underlying Indian assets
- Held: Indian tax authorities had no territorial jurisdiction to
tax the said offshore transaction - Applying the look at test,
E
in order to ascertain the true nature and character of the
transaction, the Offshore Transaction in the instant case, is a
bonafide structured FD/ investment into India which fell outside
India's territorial tax jurisdiction and, as such, not taxable -
The said Offshore Transaction evidences participative
investment and not a sham or tax avoidant preordained F
transaction.
s.9(1)(i) - Income deemed to accrue or arise in India -
Expression, 'transfer of a capital asset situate in India" - Held:
s.9(1)(i) cannot by a process of interpretation be extended to
G
cover indirect transfers of capital assets/property situate in
India - The legislature has not used the words indirect
transfer in s.9(1)(i) - Similarly, the words 'underlying asset'
do not find place in s. 9(1 )(i) - Further, "transfer" should be of
573
H
574
SUPREME COURT REPORTS
[2012] 1 S.C.R.
A an asset in respect of which it is possible to compute a capital
gain in accordance with the provisions of the Act - A legal
fiction has a limited scope - It cannot be expanded by giving
purposive interpretation -
The question of providing "look
through" in the statute or in the treaty is a matter of policy -
B It is to be expressly provided for in the statute or in the treaty
-
Similarly, limitation of benefits has to be expressly
provided for in the treaty - Such clauses cannot be read into
the Section by interpretation - Therefore, s. 9(1 )(i) is not a
"look through" provision - Interpretation of Statutes.
c
s. 195 -
Deduction of tax at source -
Scope and
applicability of - Held: The payment in question must have
an element of income embedded in it which is chargeable to
tax in India - If the sum paid or credited by the payer is not
chargeable to tax then no obligation to deduct the tax would
D arise - Shareholding in companies incorporated outside India
(CGP) is property located outside India - Where such shares
become subject matter of offshore transfer between two nonresidents, there is no liability for capital gains tax - Jn such a
case, question of deduction of TAS would not arise -
The
E instant case concerns the transaction of "outright sale"
between two non-residents of a capital asset (share) outside
India - Further, the said transaction was entered into on
principal to principal basis - Therefore, no liability to deduct
TAS arose -Further, in the case of transfer of the Structure
F in its entirety, one has to look at it holistically as one Single
Consolidated Bargain which took place between two foreign
companies outside India for which a Jump sum price was paid
- Acquisition of CGP share which gave V/H an indirect control
over three genres of companies evidences a straightforward
G share sale and not an asset sale -
The case does not
involve sale of assets on itemized basis - There was no split
up of Jump sum payment, asset-wise, as claimed by Revenue
- There was no assignment of price for each right, considered
by Revenue to be a "capital asset" in the transaction - Tax
H presence must be construed in the context, and in a manner
VODAFONE INTERNATIONAL HOLDINGS B.V. v.
575
UNION OF INDIA & ANR.
that brings the non-resident assessee under the jurisdiction
A
of the Indian tax authorities - In the instant case, Revenue
has failed to establish any connection with s.9(1)(i) - Under
the circumstances, s. 195 is not applicable.
ss. 163(1)(c) read with

## Text

_Characters 0–39,757 of 406,785. This is a partial read: ask again with offset=39757 for what follows._

[2012] 1 S.C.R. 573
VODAFONE INTERNATIONAL HOLDINGS B.V.
A
v.
UNION OF INDIA & ANR.
(Civil Appeal No. 733 of 2012)
JANUARY 20, 2012
[S.H. KAPADIA, CJI, K.S. RADHAKRISHNAN AND
SWATANTER KUMAR, JJ.]
Income Tax Act, 1961:
s.45 read with ss. 195, 201 and 201(1A) - Capital gains
B
c
- Offshore transaction - Territorial tax jurisdiction of Indian tax
authorities -
Transaction between VIH and HTIL (both
companies incorporated outside India) with regard to sale
and purchase of the entire share capital of CGP, also a D
company incorporated outside India - Revenue seeking to
tax the capital gains arising from the sale of share capital of
CGP on the basis that CGP held the underlying Indian assets
- Held: Indian tax authorities had no territorial jurisdiction to
tax the said offshore transaction - Applying the look at test,
E
in order to ascertain the true nature and character of the
transaction, the Offshore Transaction in the instant case, is a
bonafide structured FD/ investment into India which fell outside
India's territorial tax jurisdiction and, as such, not taxable -
The said Offshore Transaction evidences participative
investment and not a sham or tax avoidant preordained F
transaction.
s.9(1)(i) - Income deemed to accrue or arise in India -
Expression, 'transfer of a capital asset situate in India" - Held:
s.9(1)(i) cannot by a process of interpretation be extended to
G
cover indirect transfers of capital assets/property situate in
India - The legislature has not used the words indirect
transfer in s.9(1)(i) - Similarly, the words 'underlying asset'
do not find place in s. 9(1 )(i) - Further, "transfer" should be of
573
H
574
SUPREME COURT REPORTS
[2012] 1 S.C.R.
A an asset in respect of which it is possible to compute a capital
gain in accordance with the provisions of the Act - A legal
fiction has a limited scope - It cannot be expanded by giving
purposive interpretation -
The question of providing "look
through" in the statute or in the treaty is a matter of policy -
B It is to be expressly provided for in the statute or in the treaty
-
Similarly, limitation of benefits has to be expressly
provided for in the treaty - Such clauses cannot be read into
the Section by interpretation - Therefore, s. 9(1 )(i) is not a
"look through" provision - Interpretation of Statutes.
c
s. 195 -
Deduction of tax at source -
Scope and
applicability of - Held: The payment in question must have
an element of income embedded in it which is chargeable to
tax in India - If the sum paid or credited by the payer is not
chargeable to tax then no obligation to deduct the tax would
D arise - Shareholding in companies incorporated outside India
(CGP) is property located outside India - Where such shares
become subject matter of offshore transfer between two nonresidents, there is no liability for capital gains tax - Jn such a
case, question of deduction of TAS would not arise -
The
E instant case concerns the transaction of "outright sale"
between two non-residents of a capital asset (share) outside
India - Further, the said transaction was entered into on
principal to principal basis - Therefore, no liability to deduct
TAS arose -Further, in the case of transfer of the Structure
F in its entirety, one has to look at it holistically as one Single
Consolidated Bargain which took place between two foreign
companies outside India for which a Jump sum price was paid
- Acquisition of CGP share which gave V/H an indirect control
over three genres of companies evidences a straightforward
G share sale and not an asset sale -
The case does not
involve sale of assets on itemized basis - There was no split
up of Jump sum payment, asset-wise, as claimed by Revenue
- There was no assignment of price for each right, considered
by Revenue to be a "capital asset" in the transaction - Tax
H presence must be construed in the context, and in a manner
VODAFONE INTERNATIONAL HOLDINGS B.V. v.
575
UNION OF INDIA & ANR.
that brings the non-resident assessee under the jurisdiction
A
of the Indian tax authorities - In the instant case, Revenue
has failed to establish any connection with s.9(1)(i) - Under
the circumstances, s. 195 is not applicable.
ss. 163(1)(c) read with ss. 161 and 9(1)(i) - "Agent" in
8
relation to a non-resident -
Held: s. 161 makes a
representative assessee liable only if the eventualities
stipulated ins. 161 are satisfied - In the instant case, Revenue
has invoked s. 163(1 )(c) - Both ss. 163(1 )(c) and 9(1 )(i) state
that income should be deemed to accrue or arise in India -
Both these Sections have to be read together - On facts of C
the instant case, s. 163(1 )(c) is not attracted as there is no
transfer of a capital asset situated in India - Consequently,
'VIH' cannot be proceeded against even u/s 163 of the Act
as a representative assessee.
D
Taxation:
Tax avoidance - Offshore transaction - Held: When it
comes to taxation of a Holding Structure, at the threshold, the
burden is on the Revenue to allege and establish abuse, in
the sense of tax avoidance in the creation and/or use of such
E
structure(s) - It is the task of the Revenue/court to ascertain
the legal nature of the transaction and while doing so it has
to look at the entire transaction as a whole and not to adopt
a dissecting approach - Every strategic foreign direct
investmf!nt coming to India, as an investment destination,
F
should be seen in a holistic manner - While doing so, the
Revenue/courts should keep in mind: the concept of
participation in investment, the duration of time during which
the Holding Structure exists; the period of business operations
in India; the generation of taxable revenues in India; the
G
timing of the exit; the continuity of business on such exit -
Onus will be on the Revenue to identify the scheme and its
dominant purpose - Besides, there is a conceptual difference
between pre-ordained transaction which is created for tax
avoidance purposes, on the one hand, and a transaction
H
576
SUPREME COURT REPORTS
[2012] 1 S.C.R.
A
which evidences investment to participate in India - In the
instant case, the sale of shares is relevant and not the sale
of assets, item-wise - The Revenue has adopted a dissecting
approach at the Department level -It cannot be said that the
structure was created or used as a sham or tax avoidant - In
B
such a case, where the structure has existed for a
considerable length of time generating taxable revenues right
from 1994 and the transaction satisfies all the parameters of
"participation in investment", the court need not go into the
questions such as de facto control vs. legal control, legal
c rights vs. practical rights, etc.
Companies Act, 1956:
Transfer of shares of a company - Situs of shares. - Held:
Situs of the shares would be where the company is
D incorporated and where its shares can be transferred - In the
instant case, transfer of CGP share was recorded in the
Cayman Islands, where the register of members of CGP is
maintained - In the circumstances, it cannot be said that the
situs of CGP share was situated in the place (India) where the
E
underlying assets stood situated.
ss. 2(47) and 4 - 'Holding company' and 'Subsidiary' -
Held: A company is a separate legal persona and the fact that
all its shares are owned by one person or by the parent
F
company has nothing to do with its separate legal existence
- The difference is between having the power and having a
persuasive position -
The decisive criteria is whether the
parent company's management has such steering
interference with the subsidiary's core activities that subsidiary
can no longer be regarded to perform those activities on the
G authority of its own executive directors - In the instant case,
HTIL, as a Group holding company, had no legal right to
direct its downstream companies in the matter of voting,
nomination of directors and management rights - Principle
of lifting the corporate veil - Doctrine of substance over form
H - Concept of beneficial ownership - Concept of alter ego.
VODAFONE INTERNATIONAL HOLDINGS B.V. v.
577
UNION OF INDIA & ANR.
Legislation:
A
Need for legislation -
Tax statutes - Held: FD/ flows
towards location with a strong governance infrastructure which
includes enactment of laws and how well the legal system
works - Certainty and stability form the basic foundation of 8
any fiscal system - Tax policy certainty is crucial for taxpayers
(including foreign investors) to make rational economic
choices in the most efficient manner - Legal doctrines like
"Limitation of Benefits" and "look through" are matters of
policy - It is for the Government of the day to have them C
incorporated in the Treaties and in the laws so as to avoid
conflicting views - Investors should know where they stand -
It also helps the tax administration in enforcing the provisions
of the taxing laws.
On 11.2.2007, VIH, and HTIL, both companies D
incorporated outside India, entered into an Agreement for
Sale and Purchase of Share and Loans (SPA) under
which HTIL agreed to procure for VIH the sale of the
entire share capital of CGP (a company resident for tax
purposes in the Cayman Islands) which it held through E
HTIHL. HTIHL was a wholly owned subsidiary (indirect)
of HTIL. The completion of the acquisition took place on
8.5.2007. Indian Tax Authorities (Revenue) sought to tax
the capital gains arising from the sale of the share capital
of CGP on the basis that CGP, whilst not a. tax resident F
in India, held the underlying Indian assets. The stand of ·
the Revenue was that by the said transaction the stated
aim of VIH was "acquisition of 67% controlling interest
in "HEL", which was a company resident for tax
purposes in India. On the other hand, the case of VIH was G
that it had agreed to acquire companies which in turn
controlled a 67% interest, but not controlling interest, in
HEL. On 31.5.2010, an order was passed u/ss 201.(1) and
201 (1A) of the Income Tax Act, 1961 (the Act), declaring
that the "Revenue" had jurisdiction to tax the transaction,
H
578
SUPREME COURT REPORTS
[2012] 1 S.C.R.
A against which VIH filed a writ petition which was
dismissed by the High Court. Aggrieved, VIH filed the
appeal.
B
Allowing the appeal, the Court
HELD:
Per S.H. Kapadia, CJI (for himself and for Swatanter
Kumar, J.):
C
1.1. The majority judgment in McDowell held that "tax
. D
planning may be legitimate provided it is within the
framework of law". Thus, it cannot be said that all tax
planning is illegal/illegitimate/impermissible. In cases of
treaty shopping and/or tax avoidance, there is no conflict
between McDowell and Azadi Bachao or between
McDowell and Mathuram Agrawal. [Para 64] [641-G; 642-D]
McDowell and Co. Ltd. v. CTO 1985 (3) SCR 791 =
(1985) 3 SCC 230; Union of India v. Azadi Bachao Ando/an
2003 (4) Suppl. SCR 222 = (2004) 10 SCC 1; and Mathuram
E Agrawal v. State of Madhya Pradesh 1999 (4) Suppl.
SCR 195 = (1999) 8 SCC 667 - referred to.
International Tax Aspects of Holding Structures:
1.2. It is fairly well settled that for tax treaty purposes
F a subsidiary and its parent are also totally separate and
distinct tax payers. However, the fact that a parent
company exercises shareholder's influence on its
subsidiaries does not generally imply that the
subsidiaries are to be deemed residents of the State in
G which the parent company resides. [Para 66-67] [643-BC; 643-D]
1.3.·Where the subsidiary's executive directors'
competences are transferred to other persons/bodies or
H where the subsidiary's executive directors' decision
VODAFONE INTERNATIONAL HOLDINGS B.V. v.
579
UNION OF INDIA & ANR.
making has become fully subordinate to the Holding A
Company with the consequence that the subsidiary's
executive directors are no more than puppets then the
turning point in respect of the subsidiary's place of
residence comes about. Similarly, if an actual controlling
Non-Resident Enterprise (NRE) makes an indirect transfer B
through "abuse of organisation form/legal form and
without reasonable business purpose" which results in
tax avoidance or avoidance of withholding tax, then the
Revenue may disregard the form of the arrangement or
the impugned action through use of Non-Resident c
Holding Company, re-characterize the equity transfer
according to its economic substance and impose the tax
on the actual controlling Non-Resident Enterprise. [Para
67] [643-F-H; 644-A-B]
1.4. Whether a transaction is used principally as a D
colourable device for the distribution of earnings, profits
and gains is determined by a review of all the facts and
circumstances surrounding the transaction: It is in such
cases that the principle of lifting the corporate veil or the
doctrine of substance over form or the concept of E
beneficial ownership or the concept of alter ego arises.
There are many other circumstances, where separate
existence of different companies, that are part of the
same group, will be totally or partly ignored as a device
or a conduit (in the pejorative sense). [Para 67] [644-B-C]
F
Salomon v. Salomon (1897) A.C. 22 - referred to.
1.5. In the instant case, the Court is concerned with
the concept of GAAR. India already has a judicial anti-
·avoidance rule. When it comes to taxation of a Holding G
Structure, at the threshold, the burden is on the Revenue
to allege and establish abuse, in the sense of tax
avoidance in the creation and/or use of such structure(s).
In the application of a judicial anti-avoidance rule, the
Revenue may invoke the "substance over form" principle H
580
SUPREME COURT REPORTS
[2012) 1 S.C.R.
A or "piercing the corporate veil" test only after it is able to
establish on the basis of the facts and circumstances
surrounding the transaction that the impugned
transaction is a sham or tax avoidant. [Para 68] [644-GH; 645-A-D]
B
1.6. In view of the "look at" principle enunciated in
Ramsay, the Revenue or the court must look at a
document or a transaction in a context to which it
properly belongs to. It is the task of the Revenue/court
to ascertain the legal nature of the transaction and while
C doing so it has to look at the entire transaction as a whole
and not to adopt a dissecting approach. The Revenue
cannot start with the question as to whether the
impugned transaction is a tax deferment/saving device
but it should apply the "look at" test to ascertain its true
D legal nature.In the instant case, the Revenue has
adopted a dissecting approach at the Department level.
[Para 60 and 68] [640-F-H; 645-F-G]
The Commissioners of Inland Revenue v. His Grace the
E Duke of Westminster 1935 All E.R. 259 and WT. Ramsay
Ltd. v. Inland Revenue Commissioners (1981) 1 All E.R. 865;
Furniss (Inspector of Taxes) v. Dawson (1984) 1 All E.R. 530;
Craven (Inspector of Taxes) v. White (Stephen) (1988) 3 All.
E.R. 495; and Craven (Inspector of Taxes) v. White (Stephen)
F
(1988) 3 All. E.R. 495 - referred to.
1.7. Every strategic foreign direct investment coming
to India, as an investment destination, should be seen in
a holistic manner. The onus will be on the Revenue to
identify the scheme and its dominant purpose. The
G corporate business purpose of a transaction is evidence
of the fact that the impugned transaction is not
undertaken as a colourable or artificial device. The
stronger the evidence of a device, the stronger the
corporate business purpose must exist to overcome the
H · evidence of a device.[Para 68] [646-A-D]
VODAFONE INTERNATIONAL HOLDINGS B.V. v.
581
UNION OF !NOIA & ANR.
Section 9(1 )(i) is not a look through provision:
A
2.1. Section 9(1)(i) of the Income Tax Act, 1961 gathers
in one place various types of income and directs that
income falling under each of the sub-clauses shall be
deemed to accrue or arise in India. Broadly, there are four
items of income. The income dealt with in each sub8
clause is distinct and independent of the other and the
requirements to bring income within each sub-clause, are
separately noted. Therefore, it is not necessary that the
income falling in one category under any one of the subclauses should also satisfy the requirements of the other C
sub-clauses to bring it within the expression "income
deemed to accrue or arise in India" in s.9(1 )(i). In the
instant case, the last sub-clause of s.9(1 )(i), which refers
to income arising from "transfer of a capital asset situate
in India", is relevant. The fiction created by s.9(1 )(i) applies D
to the assessment of income of non-residents. In the
case of a non-resident, unless the place of accrual of
income is within India, he cannot be subjected to tax. Any
income that accrues or arises to a non-resident, directly
or indirectly, outside India is fictionally deemed to accrue
E
or arise in India· if such income accrues or arises as a
sequel to the transfer of a capital asset situate in India.
Once the factum of such transfer is established by the
Revenue, then the income of the non-resident arising or
accruing from such transfer is made liable to be taxed by
F
reason of s.5(2)(b) of the Act. This fiction comes into play
only when the income is not charged to tax on the basis
of receipt in India, as receipt of income in India by itself
attracts tax whether the recipient is a resident or nonresident.Thus, the income accruing or arising to a nonG
resident outside India on transfer of a capital asset situate
in India is fictionally deemed to accrue or arise in India,
which income is made liable to be taxed by reason of
s.5(2)(b) of the Act. This is the main purpose behind
enactment of s.9(1)(i) of the Act. [Para 71] [647-F-H; 648H
A-H]
582
SUPREME COURT REPORTS
[2012] 1 S.C.R.
A
2.2. The language of the section, when it is
unambiguous and admits of no doubt regarding its
interpretation, has to be given effect to, particularly when
a legal fiction is embedded in that section. A legal fiction
has a limited scope. It cannot be expanded by giving
B purposive interpretation particularly if the result of such
interpretation is to transform the concept of chargeability
which is also there in s.9(1 )(i), when one reads s.9(1 )(i)
with s.5(2)(b) of the Act. [Para 71) [649-A-C]
C
2.3. Section 9(1 )(i) cannot by a process of
interpretation be extended to cover indirect transfers of
capital assets/property situate in India. To do so, would
amount to changing the content and ambit of s.9(1 )(i). The
Court cannot re-write s.9(1)(i). The legislature has not
used the words indirect transfer in s.9(1)(i). If the word
D indirect is read into s.9(1)(i), it would render the express
statutory requirement of the 4th sub-clause in s.9(1 )(i)
nugatory. This is because s.9(1 )(i) applies to transfers of
a capital asset situate in India. This is one of the elements
in the 4th sub-clause of s.9(1 )(i) and if indirect transfer of
E a capital asset is read into s.9(1)(i) then the words capital
asset situate in India would be rendered nugatory. [Para
71) [649-C-F]
2.4. Similarly, the words 'underlying asset' do not
F find place in s.9(1 )(i). Further, "transfer" should be of an
asset in respect of which it is possible to compute a
capital gain in accordance with the provisions of the Act.
Moreover, even s.163(1)(c) is wide enough to cover the
income whether received directly or indirectly. Thus, the
G words directly or indirectly in s.9(1 )(i) go with the income
and not with the transfer of a capital asset (property).
[Para 71) [649-F-H]
2.5. Lastly, the Direct Tax Code (OTC) Bill, 2010
proposes taxation of offshore share transactions. This
H proposal indicates in a way that indirect transfers are not
VODAFONE INTERNATIONAL HOLDINGS B.V. v.
583
UNION OF INDIA & ANR.
covered by the existing s.9(1 )(i) of the Act. In fact, the OTC
A
Bill, 2009 expressly stated that income accruing even
from indirect transfer of a capital asset situate in India
would be deemed to accrue in India. Thes.e proposals,
therefore, show that in the existing s.9(1 )(i) the word
indirect cannot be read on the basis of purposive B
construction. The question of providing "look through"
in the statute or in the treaty is a matter of policy. It is to
be expressly provided for in the statute or in the treaty.
Similarly, limitation of benefits has to be expressly
provided for in the treaty. Such clauses cannot be read c
into the Section by interpretation. Therefore, s.9(1 )(i) is not
a "look through" provision. [Para 71) [649-H; 650-A-D]
Transfer of HTIL's property rights by Extinquishment?
3.1. In the instant case, the Court is concerned with D
the sale of shares and not the sale of assets, item-wise.
The facts of this case show sale of the entire investment
made by HTIL, through a Top company, viz. CGP, in the
Hutchison Structure. In this case, the Court needs to
apply the "look at" test, and the task of the Revenue is E
to ascertain the legal nature of the transaction and, while
doing so, it has to look at the entire transaction
holistically and not to adopt a dissecting approach. [Para
73) [652-A-D]
3.2. Besides, there is a conceptual difference
F
between preordained transaction which is created for tax
avoidance purposes, on the one hand, and a transaction
which evidences investment to participate in India. In
order to find out the nature of the transaction one has to
take into account the factors, namely, duration of time G
during which the holding structure existed, the period of
business operations in India, generation of taxable
- revenue in India during the period of business operations
in India, the timing of the exit, the continuity of business
on such exit, etc. Applying these tests to the facts of the
H
584
SUPREME COURT REPORTS
[2012] 1 S.C.R.
A instant case, it is evident that the Hutchison structure has
been in place since 1994. It operated during the period
1994 to 11.02.2007. It has paid income tax ranging from
Rs. 3 crore to Rs. 250 crore per annum during the period
2002-03 to 2006-07. Even after 11.02.2007, taxes are being
B paid by VIH ranging from Rs.394 crore to Rs. 962 crore
per annum during the period 2007-08 to 2010-11 (these
figures are apart from indirect taxes which also run in
crores). Moreover, the SPA indicates "continuity" of the
telecom business on the exit of its predecessor, namely,
c HTIL. Thus, it cannot be said that the structure was
created or used as a sham or tax avoidant. [Para 73] [652D-H]
3.3. If one applies the look at test, without invoking
the dissecting approach, then, extinguishment took place
D because of the transfer of the CGP share and not by
virtue of various clauses of SPA. In such a case, where
the structure has existed for a considerable length of time
generating taxable revenues right from 1994 and where
the court is satisfied that the transaction satisfies all the
E parameters of "participation in investment", the court
need not go into the questions such as de facto control
vs. legal control, legal rights vs. practical rights, etc. [Para
73] [653-A-C]
3.4. However, if HTIL did not possess a legal right to
F appoint directors onto the board of HEL and as such did
not have "property right" in HEL, the question of such a
right getting "extinguished" will not arise. A legal right is
an enforceable right. Enforceable by a legal process. A
company is a separate legal persona and the fact that all
G its shares are owned by one person or by the parent
company has nothing to do with its separate legal
existence. The fact that the parent company exercises
share holder's influence on its subsidiaries cannot
obliterate the decision-making power or authority of its
H (subsidiary's) directors. The difference is between having
VODAFONE INTERNATIONAL HOLDINGS B.V. v.
585
UNION OF INDIA & ANR.
the power and having a persuasive position. The decisive
A
criteria is whether the parent company's management has
such steering interference with the subsidiary's core
activities that subsidiary can no longer be regarded to
perform those activities on the authority of its own
executive directors. Therefore, though it may be
B
advantageous for a parent and subsidiary companies to
work as a group, each subsidiary has to protect its own
separate commercial interests. [Para 74-75] [653-D-F-G;
654-E-G; 655-E]
3.5. On the facts and circumstances of the instant c
case, the right of HTIL, if at all it is a right, to direct a
downstream subsidiary as to the manner in which it
should vote would fall in the category of a persuasive
position/influence rather than having a power over the
0
subsidiary. [Para 75] [655-E-F]
3.6. In this case, the Court is concerned with the
expression "capital asset" in the income tax law. Applying
the test of enforceability, influence/ persuasion cannot be
construed as a right in the legal sense. [Para 76] [656-E]
E
3.7. Further, the concept of "de facto" control, which
existed in the Hutchison structure, conveys a state of
being in control without any legal right to such state. This
aspect is important while construing the words "capital
F
asset" under the income tax law. Enforceability is an
important aspect of a legal right. Applying these tests, on
the facts of the case and that too in the light of the
ownership structure of Hutchison, this Court holds that
HTIL, as a Group holding company, had no legal right to
G
direct its downstream companies in the matter of voting,
nomination of directors and management rights. [Para
. 76] [656-F -G]
3.8. Exit is an important right of an investor in every
strategic investment. The present case concerns transfer
H
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SUPREME COURT REPORTS
[2012) 1 S.C.R.
A of investment in entirety. Exit coupled with continuity of
business is one of the tell-tale important circumstance
which indicates the commercial/business substance of
the transaction. Thus, the need for SPA arose to re-adjust
the outstanding loans between the companies; to provide
B for standstill arrangements in the interregnum between
the date of signing of the SPA on 11.02.2007 and its
completion on 8.05.2007; to provide for a seamless
transfer and to provide for fundamental terms of price,
indemnities, warranties etc. [Para 75] [654-H; 655-A-C]
c
3.9. As regards continuance of the 2006
Shareholders/Framework Agreements by S.PA, one
needs to keep in mind two relevant concepts, viz.,
participative and protective rights. This is a case of HTIL
0 exercising its exit right under the holding structure and
continuance of the telecom business operations in India
by VIH by acquisition of shares. A minority investor has
what is called as a "participative" right, which is a subset
of "protective rights". This "exit right" comes under
"protective rights". On examination of the Hutchison
E structure in its entirety, it becomes evident that both,
participative and protective rights, were provided for in
the Shareholders/ Framework Agreements of 2006 in
favour of Centrino, NOC and SMMS which enabled them
to participate, directly or indirectly, in the operations of
F HEL. Even without the execution of SPA, such rights
existed in the above agreements. Therefore, it would not
be correct to say that such rights flowed from the SPA.
[Para 76] [656-G-H; 657-A-G]
G
3.1 O. It is impossible for the acquirer to visualize all
events that may take place between the date of execution
of the SPA and completion of acquisition. Therefore,
there is a provision for standstill in the SPA and so also
the provision for transition. But, from that, it does not
follow that without SPA, transition could not ensue.
H Moreover, the very object of the SPA is to cover the
VODAFONE INTERNATIONAL HOLDINGS B.V. v.
587
UNION OF !NOIA & ANR.
situations which may arise during the transition and those A
which are capable of being anticipated and dealt with. The
rights and obligations created under the SPA had to be
preserved. In any event, preservation of such rights with
a view to continue business in India is not
extinguishment. [Para 76] [657-G-H; 658-A-B; 660-A-B]
B
3.11. This Court, therefore, holds that under the HTIL
structure, as it existed in 1994, HTIL occupied only a
persuasive position/influence over the downstream
companies qua manner of voting, nomination of directors C
and management rights; that, the minority shareholders/
investors had participative and protective rights
(including RoFR/TARs, call and put options which
provided for exit) which flowed from the CGP share; that,
the entire investment was sold to the VIH through the
investment vehicle (CGP). Consequently, there was no D
extinguishment of rights as alleged by the Revenue. [Para
Tl] [660-C-E]
Role of CGP in the transaction:
4.1. It is incorrect to say that CGP stood inserted at a E
late stage in the transaction in order to bring in a tax-free
entity (or to create a transaction to avoid tax) and thereby
avoid capital gains. CGP was incorporated in 1998 in
Cayman Islands. It was in the Hutchison structure from
F
1998. The transaction in the instant case was of
divestment and, therefore, the transaction of sale was
structured at an appropriate tier, so that the buyer really
acquired the same degree of control as was exercised by
HTIL. VIH agreed to acquire companies and the
companies it acquired controlled 67% interest in HEL. G
CGP was an investment vehicle. It is through the
acquisition of CGP that VIH proposed to indirectly acquire
the rights and obligations of GSPL(lndian Company) in
the Centrino and NOC Framework Agreements. The
advantage of transferring the CGP share enabled VIH to H
588
SUPREME COURT REPORTS
[2012] 1 S.C.R.
A indirectly acquire the rights and obligations of GSPL in
the Centrino and NOC Framework agreements. This was
the reason for VIH to go by the CGP route. [Para 78 and
80] [660-F; 662-A-E]
B
4.2. The role of CGP in the transaction is evident from
two documents: one is the Report of the KPMG dated
18.10.2010 in which it is stated that through the
acquisition of CGP, VIH had indirectly acquired the rights
and obligations of GSPL in the Centrino and NOC
C Framework Agreements; and the second document is the
Annual Report 2007 of HTIL. Under the caption
"Overview", the Report observes that on 11.02.2007, HTIL
entered into an agreement to sell its entire interests in
CGP, a company which held through various
subsidiaries, the.direct and indirect equity and loan
D interests in HEL (renamed VEL) and its subsidiaries to
VIH. This supports the fact that the sole purpose of CGP
was not only to hold shares in subsidiary companies but
also to enable a smooth transition of business, which is
the basis of the SPA. Therefore, it cannot be said that the
E intervened entity (CGP) had no business or commercial
purpose. [para 81] [663-G-H; 664-A-D]
4.3. As regards situs of the CGP share, under the
Indian Companies Act, 1956, the situs of the shares
F would be where the company is incorporated and where
its shares can be transferred. In the instant case, it has
been asserted by VIH that the transfer of the CGP share
was recorded in the Cayman Islands, where the register
of members of the CGP is maintained. This assertion has
G neither been rebutted in the impugned order of the
Department dated 31.05.2010 nor traversed in the
pleadings filed by the Revenue nor controverted before
this Court. In the circumstances, it cannot be said that the
situs of tne CGP share was situated in the place (India)
where the underlying assets stood situated. [Para 82]
H [664-G-H; 665-A-C]
VODAFONE INTERNATIONAL HOLDINGS B.V. v.
589
UNION OF INDIA & ANR.
Did VIH acquire 67% controlling interest in HEL (and
A
not 42%/ 52% as sought to be propounded)?
5.1. The expression "control" is a mixed question of
law and fact. On perusal of Hutchison structure, it is
evident that HTIL had, through its 100% wholly owned
B
subsidiaries, invested in 42.34% of HEL (i.e. direct
interest). Similarly, HTIL had invested through its non100% wholly owned subsidiaries in 9.62% of HEL
(through the pro rata route). Thus, on the basis of the
shareholding test, HTIL could be said to have a 52%
control over HEL. By the same test, it could be equally
C
said that the balance 15% stakes in HEL remained with
AS, AG and IDFC (Indian partners) who had through their
respective group companies invested 15% in HEL
through Tll and Omega and, consequently, HTIL had no
control over 15% stakes in HEL. At this stage, it may be
D
stated that. under the Hutchison structure shares of
Plustech in the AG Group, shares of Scorpios in the AS
Group and shares of SMMS came under the options held
by GSPL. Pending exercise, options are not management
rights. Till date GSPL has not exercised its rights under
E
the Framework Agreement 2006 because of the sectoral
cap of 74% which in turn restricts the right to vote.
Therefore, the transaction in the instant case provides for
a triggering event, viz. relaxation of the sectoral cap. Till
such date, HTIL/VIH cannot be said to have a control
F
over 15% stakes in HEL. It is for this reason that even
FIPB gave its approval to the transaction by saying that
VIH was acquiring or has acquired effective shareholding
of 51.96% in HEL. [Para 83] [666-B-H]
5.2. Under the Company Law, the management G
control vests in the Board of Directors and not with the
.shareholders of the company. The Term Sheet dated
15.3.2007 entered into between VIH and Essar stated that
they shall have to nominate directors on the Board of H
590
SUPREME COURT REPORTS
[2012] 1 S.C.R.
A Directors of HEL in proportion to the aggregate beneficial
shareholding held by members of the respective groups.
Therefore, neither from Clause 5.2 of the Shareholders
Agreement nor from the Term Sheet dated 15.03.2007, one
could say that VIH had acquired 67% controlling interest
B in HEL. [Para 84] [667-H; 668-A]
5.3. As regards the question as to why VIH should
pay consideration to HTIL based on an enterprise value
of 67% of the share capital of HEL, it is important to note
that valuation cannot be the basis of taxation. The basis
C of taxation is profits or income or receipt. In this case, the
Court is not concerned with tax on income/ profit arising
from business operations but with tax on transfer of
rights (capital asset) and gains arising therefrom. In the
latter case, the conditions on which the tax becomes
D payable under the Income Tax Act have to be seen. In the
instant case, VIH paid for 67% of the enterprise value of
HEL plus its downstream companies having operational
licences. VIH agreed to acquire companies which in turn
•
controlled a 67% interest in HEL and its subsidiaries.
E Valuation is a matter of opinion. When the entire business
or investment is sold, for valuation purposes, one may
take into account the economic interest or realities. Risks
as a discounting factor are also to be taken into
consideration apart from loans, receivables, options,
F RoFR/ TAR, etc. In this case, Enterprise Value is made up
of two parts, namely, the value of HEL, the value of CGP
and the companies between CGP and HEL. [Para 85] [668B-G]
5.4. In the instant case, the Revenue cannot invoke
G s.9 of the Income Tax Act on the value of the underlying
asset or consequence of acquiring a share of CGP. The
Valuation done was on the basis of enterprise value. The
price paid as a percentage of the enterprise value had to
be 67% not because the figure of 67% was available in
H praesenti to VIH, but on account of the fact that the
VODAFONE INTERNATIONAL HOLDINGS B.V. v.
591
UNION OF INDIA & ANR.
competing Indian bidders would have had de facto
A
access to the entire 67%, as they were not subject to the
limitation of sectoral cap, and, therefore, would have
immediately encashed the call options. The expression
"equity interest" came from US GAAP. The difference
between the 52% figure (control) and 67% (equity
B
interest) arose on account of the difference in
computation under the Indian and US GAAP. [Para 85]
[668-G-H; 669-A-C; G-H]
5.5. The instant case concerns an offshore
transaction involving a structured investment. This case
C
concerns a straight forward share sale and not an asset
sale. It concerns sale of an entire investment. A "sale"
may take various forms. Accordingly, tax consequences
will vary. The tax consequences of a share sale would be
different from the tax consequences of an asset sale. A D
slump sale would involve tax consequences which could
be different from the tax consequences of sale of assets
on itemized basis. "Control" is a mixed question of law
and facts. Ownership of shares may, in certain situations,
result in the assumption of an interest which has the
character of a controlling interest in the management of
the company. A controlling interest is an incident of
ownership of shares in a company, something which
flows out of the holding of shares. A controlling interest
is, therefore, not an identifiable or distinct capital asset
independent of the holding of shares. The control of a
company resides in the voting power of its shareholders
and shares represent an interest of a shareholder which
E
F
is made up of various rights contained in the contract
embedded in the Articles of Association. The right of a G
shareholder may assume the character of a controlling
interest where the extent of the shareholding enables the
shareholder to control the management. Shares, and the
rights which emanate from them, flow together and
cannot be disser,ted. [Para 88] [670-E; 671-A-B]
H
592
SUPREME COURT REPORTS
[2012] 1 S.C.R.
A
!RC v. Crossman [1936] 1 All ER 762 - referred to
5.6. VIH acquired Upstream shares with the intention
that the congeries of rights, flowing from the CGP share,
would give VIH an indirect control over the three genres
of companies. Acquisition of the CGP share gave VIH an
B indirect control over the tier I Mauritius companies which
owned shares in HEL totalling to 42.34%; CGP India (Ms),
which in turn held shares in Tll and Omega and which on
a pro rata basis (the FOi principle), totalled up to 9.62%
in HEL and an indirect control over Hutchison TeleC Services (India) Holdings Ltd. (Ms), which in turn owned
shares in GSPL, which held call and put options. It is
significant to note that till date options have remained unencashed with GSPL. Therefore, even if it be assumed
that the options under the Framework Agreements 2006
D could be considered to be property rights, there has been
no transfer or assignment of options by GSPL till date.
Even if it be assumed that the options constituted capital
assets, even then s.9(1)(i) of the Act was not applicable
as these options have not been transferred till date. [Para
E 88] [671-C-H]
F
5.7. Call and put options were not transferred by SPA
dated 11.02.2007 or under any other document
whatsoever. Moreover, if, on principle, it is accepted that
the transfer of the CGP share did not lead to the transfer
of a capital asset in India, even if it resulted in a transfer
of indirect control over 42.34% (52%) of shares in HEL,
then surely the transfer of indirect control over GSPL
which held options (contractual rights), would not make
the transfer of the CGP share taxable in India. Acquisition
G of the CGP.share which gave VIH an indirect control over
three genres of companies evidences a straightforward
shNe sale and not an asset sale. It is also significant to
note that 67% of the economic value of HEL is not 67%
of the equity capital. Further, Essar has 33% stakes in
H DEL out of which 22% was held by Essar Mauritius. Thus,
VODAFONE INTERNATIONAL HOLDINGS B.V. v.
593
UNION OF INDIA & ANR.
VIH did not acquire 67% of equity capital of HEL, as held
A
by the High Court. [Para 88] [671-H; 672-A-C, F-H]
B
5.8. This case does not involve sale of assets on
itemized basis. Applying the look at test, the entire
Hutchison structure, as it existed, ought to have been
looked at holistically. This case concerns investment into
India by a holding company (parent company), HTIL
through a maze of subsidiaries. CGP was treated in the
Hutchison structure as an investment vehicle.