Authors Note

In this article I have tried to present the judgment in a very simplified and lucid manner for the readers (those Chartered Accountants and Advocates) who may be sound in taxation but may not be strong in legal thinking and for those who are good in legal interpretation but may not be comfortable with taxation and corporate law from the angle of accountants. The author is grateful to Mr. Rahul Balaji, senior advocate and partner in Parasarans one of the leading solicitors of the nation for spending hours in analysing the entire case which is the basis for this write up. The entire credit must go to Shri Rahul Balaji for his legal acumen. The write up is focussed at making the complicated issues simple. It does not comment on the merits or demerits of the judgment. In this first part, we have covered all the issues except, the discussion on whether the transfer mechanism adopted amounts to extinguishment of property rights? The concept of holding structures, defacto control, role of CGP (the transferor company in the transaction), and the High Court approach, which will be taken up as second part in the next issue.

VODAFONE CASE
Judgment of Honourable Supreme Court of India
INTRODUCTION Hutchison Essar Limited (HEL for short) being a company resident for tax purposes in India, Vodafone International Holdings [for short VIH], a company resident for tax purposes in the Netherlands, CGP Investments (Holdings) Ltd. [for short CGP], a company resident for tax purposes in the Cayman Islands [CI for short]

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.VIH acquired 100% (entire) share capital of CGP Investments (Holdings) Ltd. This is a transaction of sale of shares between two corporate entities (VIH and CGP), who are non residents for the purpose of taxation in India. In other words it is an overseas sale of a single share whose underlying asset is in India. The Revenue (Income Tax Department) 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. The stand of the revenue is that the asset namely HEL which

is operating in India whose 67% shares were held by CGP, transfers its (CGP) entire interest to VIH for a consideration and the profit there from is sought to be taxed which is opposed by the Appellant. The Bombay High Court gave judgment in favour of revenue. The Apex Court reversed the decision of the Bombay High Court and up held the contention of VIH. The approach of the revenue in the legal battle Try to bring the transaction under Section 45 (Capital Gains Tax) by taking the stand that 11.08bn US $ paid is for rights to control premium, right to non-compete, right to consultancy support etc, and not consider it as a lump sum onetime payment. Try to bring the transaction under Section 45 (Capital Gains Tax) by taking the stand that this transaction is an extinguishment of rights which comes under the definition of transfer [section 2(47)] Try to bring the transaction under 9(1)(i) (deemed incomes) read with Section 5(2) Scope of total income. The above arguments 1,2,3 will establish the chargeability of the transaction that is they will bring the transaction into the tax net but in the above case the revenue is fighting against VIH which is the buyer and not the transferor who is normally liable to the capital gains tax for substantiating their claim Try to bring the transaction as one falling under Section 201 (assessee-in-default) read with Section 195 (Tax at Source) Try to bring the transaction representative assessee Establish that the entire transaction is a subterfuge (Deceit used in order to achieve one's goal). as one falling under Section 161 and 163 as

It was a difficult case for revenue as it has to battle out facts which are glaringly against them. The stand of the revenue, the proof adduced, the arguments advanced and the Judgment in reply with thread bear analysis will show unparallel all around excellence in the world class skills of legal interpretation. Counsel for Income Tax Department Mr. Rohinton Nariman, Solicitor General. Mr.Mohan Parasaran, Addl. Solicitor General. Counsel for Vodafone Mr.Harish Salve, Sr.Advocate. Ms.Anuradha Dutt and others. .

Strict Interpretation for Taxing Statutes Before we go into the actual discussion, we thought it fit to brush up our readers on the cardinal principles and cannons of taxing statutes. The world over and in particular, The English and The Indian Jurisprudents agree that the taxing statutes must be interpreted according to the letter and spirit that is the written law enacted by the Parliament (litrascripta). In other words it is a settled law that the Courts should always follow the following principles CHARGING SECTION (WHICH IMPOSES THE TAX) should be strictly construed. The rule of construction of a charging section is that before taxing any person, it must be shown that he falls within the ambit of the charging section by clear words used in the section. Thus no one can be taxed by implication. If a person has not been brought within the ambit of the charging section by clear words, he cannot be taxed at all. (CWT VS. ELLIS BRIDGE GYMKHANA (1998) 1 SCC 384 When there are two interpretations possible, the interpretation favourable to the assessee should be preferred. If any doubt arises in the construction of a taxing statute it must be resolved in favour of the assessee (STP LTD. VS.CCE1998(1)SCC 297 If the legislature uses tautologous words (repetition of unnecessary words) in the taxing statute the courts must give benefit to the assessee.

TAX AVOIDANCE AND EVASION What do the Courts say?

The shortest definition of tax avoidance is the art of dodging tax without breaking the law. Much legal sophistry and judicial exposition have gone into the attempt to differentiate the concepts of tax evasion and tax avoidance and to discover the invisible line supposed to exist which distinguishes one from the other. Tax avoidance, it seems is legal; tax evasion is illegal.

Though initial the law was, the jurisprudents suppose the law still is, there is no equity about a tax, there is no presumption as to tax, nothing is to be read in, nothing is to be implied

During the period between the World Wars, the theory came to be propounded and developed that it was perfectly open for reasons to evade (avoid) income-tax and other

taxes if they could do so legally. For some time, it looked as if tax avoidance was even viewed with affection. According to LORD WRIGHT, the true nature of legal obligation arises out of a genuine transaction, and not in the substance hence the courts must look into the transaction whether it is a genuine or fake. Lord Tomlin echoing what Lord Sumner had said observed in Inland Revenue Commissioners vs. Duke of Westminster (1936 Ac 1) as follows, typifying the prevalent attitude towards tax avoidance at that time: Every man is entitled if he can order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, however unappreciative for the Commissioners of Inland Revenue or his fellow tax payers may be of his ingenuity, he cannot be compelled to pay an increased tax.

Then came World War II and in its wake huge profiteering and racketeering something which persists till today, but on a much larger scale. The attitude of the Courts in Europe towards avoidance of tax was perceptibly changed and hardened.

Lord Denning repeatedly quoted that the tax avoidance schemes are nothing but the magic performance of the lawyer-turned-magicians. While the techniques of tax avoidance progress and are technically improved the Courts are not obliged to stand still. Such immobility must result either in loss of tax, to the prejudice of other taxpayers, or to Parliamentary congestion or (most likely) to both. To force the Courts to adopt, in relation to closely integrated situations, a step by step, dissecting approach which the parties themselves may have negated would be a denial rather than an affirmation of the true judicial process. In each case the facts must be established, and a legal analysis made. The law will develop from case to case. It is referred as the emerging principle in W.T. Ramsay Ltd. Vs. IRC (1981) 1 AER 865). What has been established with certainty by the House in Ramsays case is that the determination of what does, and what does not, constitute unacceptable tax evasion is a subject suited to development by judicial process.

Let us further move and look at few settled cases of tax avoidance which was held to be legal and valid

Case 1 Vanila Silk Mills Pvt. Ltd. Vs. Commissioner of I.T. Ahmedabad (1991) 4 SCC22)

Brief Facts: The appellant company purchased machinery worth Rs.2,81,741 in 1967 and gave it on hire to another company M/s Jasmine Mills Pvt. Ltd. at an annual rent of Rs.33,900/- Jasmine company insured the machinery. As a result of a fire which broke out in the premises, the machine was extensively damaged and became useless. The insurance company paid Rs.6, 32,533 to jasmine company. As a result of compromise between jasmine company and the appellant, the jasmine company paid entire insurance claim amount to the appellant.

The appellant company showed the said amount in the annual income tax return for the assessment year 1967-68. The Income-tax officer imposed income-tax on Rs.3,50,792 (6,32,533-2,81,741) treating the same as capital gains chargeable under Section 45 read with Section2 (47) The income tax is chargeable for the transfer of property on the profits of such sales under section 45. Section 2(47) of the income-tax act, 1961 runs as follows. Transfer, in relation to a capital asset, includes the sale, exchange or relinquishment of the assets or the extinguishment of any rights there in or the compulsory acquisition thereof under any law.

The assessee contended that as the asset was destroyed, there was no question of transferring it to others hence it was not liable to tax on Rs. 3,50,792/-. The revenue

contended that the words extinguishment of any rights would include accident and thus accrual of compensation by insurance company.

Judgement: the Supreme Court gave judgement in favour of the assessee-appellant

Principles: (i) extinguishment of any rights in the asset referred to in the inclusive definition of transfer in sec. 2 (47) of the income-tax, 1961 should be construed in accordance with rule of nosciturasociis. (ii) The definition mentions such transactions as sale, exchange, etc. to which the words transfer would properly apply in its popular and natural import. Since those associated words and expression imply the existence of the asset and of the transferee, according to the rule of nosciturasociis, the expression extinguishment of any rights there in would not

have included the obvious instances of transfer, viz., sale, exchange.etc,. Hence the expression extinguishment of any rights thereinwill have to be confined to the extinguishment of rights on account of transfer and cannot be extended to mean any extinguishment of right independent of or otherwise than on account of transfer.

Explanation: The definition of the transfer as per section 2(47) sale, exchange, relinquishment, compulsory acquisition. All these words would mean a transfer to someone else for some benefit/consideration in money or monies worth. In this case there was no transfer of asset to the insurance company which paid the amount as per hedging contract, hence the word extinguishment in this case does not take the colour of the other words in its company (for example the word pink in the group of flowers will mean flower, whereas the word pink in the company of beautiful girls refers to girls). The above is a case of interpretation where the assessee cannot be brought into the charging section hence he cannot be taxed.

Case 2 - Typical case of Tax avoidance in strategic tax planning

A British Management Consultancy firm resigned from (extinguishment of rights) and advised its client, a leading Indian company to appoint an Indian Management Consultancy firm with which it has entered into agreement for a consideration of huge sum. This happened prior to 1956 when there was no gift tax and the definition of transfer as per Sec 2(47) of Income Tax Act, 1922 included only sale or exchange. In other words to bring the transaction to the charging section 45 (Capital Gains tax) three conditions must be satisfied namely there should be capital asset, (management consultancy) and it should be transferred and the result of transfer must be a gain. But the above arrangement could not be brought under the charging section because it does not fall under the purview of transfer, hence exempt from tax. Since there was no gift tax at that time the entire amount was not taxed. This is an example of an arrangement whereby the assessee escaped from the tax net legally, but this calls for extraordinary legal skills and the government will not keep quite it will plug the loopholes by amending the act. Because of the above instance the definition of transfer now includes - sale, exchange, relinquishment, extinguishment and compulsory acquisition.

The Broad Spectrum of Legal issues in the Vodafone Case:

1)

The transaction sought to be taxed by revenue is neither a straight forward share sale nor an asset sale of an Indian company. In other words it is an overseas sale of a single share whose underlying asset is in India.

2) 3)

The revenue must prove its case by establishing That the transaction in question clearly falls under the ambit of provisions of the Indian Income Tax. In other words it is within the purview of the charging sections.

4)

If there is any ambiguity in the legislation, then the remedy will be to prove that the entire arrangement of creating holding companies and subsidiaries is a sham transaction intended only for evading the taxes and does not have any business motive.

5)

The Appellant naturally must rebut the arguments of revenue vide points a) and b) and must convince the court.

The Stand of the Revenue and the Judgment of the Honourable Supreme Court

Refer to para 69 to 80 of the Judgment.

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

The revenue took the stand that the charging section 9(1)(i) read with section 5(2) provides for a look through. Assuming that its primary arguments namely extinguishment of property rights held in HEL and its subsidiaries fails to come under the S 45 (Capital Gains charging section). This transaction will still fall under S 9 as that Section provides for a look through. In this connection, it was submitted that the word through in Section 9 inter alia means in consequence of. It was, therefore, argued that if transfer of a capital asset situate in India happens in consequence of something which has taken place overseas (including transfer of a capital asset), then all income derived even indirectly from such transfer, even though abroad, becomes taxable in India. That, even if control over HEL were to get transferred in consequence of transfer of the CGP Share outside India, it would yet be covered by Section 9.

Judgement
The Apex Court felt that S 9(1)(i) read with section 5(2), 163(1)(c) and s 195 all fail to bring this transaction under the tax net. Refer to para 91 of the Judgment

FDI flows towards location with a strong governance infrastructure which includes enactment of laws and how well the legal system works. Certainty is integral to rule of law. Certainty and stability form the basic foundation of any fiscal system. Tax policy certainty is crucial for taxpayers (including foreign investors) to make rational economic choices in the most efficient manner. Legal doctrines like Limitation of Benefits and look through are matters of policy. It is for the Government of the day to have them incorporated in the 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. It should be mentioned here that in some countries like Australia, there is a specific provision for taxing such transactions, (another example North sea island gas assets) whereas in India such legislation is proposed only in the Direct Tax Code (proposed legislation). Rationality SCs conclusion as per its judgment para 71 the principle laid down in this discussion is, the deemed provisions are fictions of law and it has only a limited scope it cannot be expanded by giving purposive interpretation particularly if the interpretation is to transform the concept of chargeability. What do S 5(2) and 9(1) of Income Tax Act, 1961 say? 5. (2) Scope of total income Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which (a)is received or is deemed to be received in India in such year by or on behalf of such person; or (b)accrues or arises or is deemed to accrue or arise to him in India during such year. 9. (1) Income deemed to accrue or arise in India. The following incomes shall be deemed to accrue or arise in India : (i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India. Explanation Section 9(1)(i) gathers in one place various types of income and directs that income falling under each of the sub clauses shall be deemed to accrue or arise in India. Broadly there are four items of income. The income dealt with in each sub-clause is distinct and independent

of the other and the requirements to bring income within each sub-clause are separately noted. In the case of a resident, it is immaterial whether the place of accrual of income is within India or outside India, since in either event, he is liable to be charged to tax on such income. But, in the case of a non-resident, unless the place of accrual of income is within India, he cannot be subjected to tax. In other words, if any income accrues or arises to a non resident, directly or indirectly, outside India is fictionally deemed to accrue or arise in India if such income accrues or arises as a sequel to the transfer of a capital asset situate in India. What is contended on behalf of the Revenue is that under Section 9(1)(i) it can look through the transfer of shares of a foreign company holding shares in an Indian company and treat the transfer of shares of the foreign company as equivalent to the transfer of the shares of the Indian company on the premise that Section 9(1)(i) covers direct and indirect transfers of capital assets. For the above reasons, Section 9(1)(i) cannot by a process of interpretation be extended to cover indirect transfers of capital assets/property situate in India. To do so, would amount to changing the content and ambit of Section 9(1)(i). We cannot re-write Section 9(1)(i). The legislature has not used the words indirect transfer in Section 9(1)(i). Scope and applicability of Sections 195 and 163 of IT Act (para 89 of the Judgment) Section 195/201 The revenue contended that VIH (the purchaser) who paid 11.08bn US$ is liable to deduct tax and failing to do makes it an assessee-in-default. Section 195(1) casts a duty upon the payer of any income specified therein to a non-resident to deduct there from the TAS unless such payer is himself liable to pay income-tax thereon as an Agent of the payee. Section 201 says that if such person fails to so deduct TAS he shall be deemed to be an assesseein-default in respect of the deductible amount of tax (Section 201). The Court felt there is no merit in the above argument for the following reasons a) Shareholding in companies incorporated outside India (CGP) is property located outside India. Where such shares become subject matter of offshore transfer between two non-residents, there is no liability for capital gains tax. In such a case, question of deduction of TAS would not arise. The present 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.

b) Liability to deduct tax is different from assessment under the Act. Thus, the person on whom the obligation to deduct TAS is cast is not the person who has earned the income. Assessment has to be done after liability to deduct TAS has arisen. The object of Section 195 is to ensure that tax due from non-resident persons is secured at the earliest point of time so that there is no difficulty in collection of tax subsequently at the time of regular assessment. Further, in the case of transfer of the Structure in its entirety, one has to look at it holistically as one Single Consolidated Bargain which took place between two foreign companies outside India for which a lump sum price was paid of US$ 11.08 bn. c) Under the transaction, there was no split up of payment of US$ 11.08 bn. It is the Revenue which has split the consolidated payment and it is the Revenue which wants to assign a value to the rights to control premium, right to non-compete, right to consultancy support etc. For FDI purposes, the FIPB had asked VIH for the basis of fixing the price of US$ 11.08 bn. But here also, there was no split up of lump sum payment, asset-wise as claimed by the Revenue. There was no assignment of price for each right, considered by the Revenue to be a capital asset in the transaction. d) Lastly, in the present case, the Revenue has failed to establish any connection with Section 9(1)(i). Under the circumstances, Section 195 is not applicable. Section 161/163 VIH should be treated as a representative assessee and therefore made liable. The Revenue contended that VIH can be proceeded against as representative assessee under Section 163 of the Act. The Apex court did not buy this argument citing the following reasons.

a) Section 163 relates to treating a purchaser of an asset as a representative assessee. A conjoint reading of Section 160(1)(i), Section 161(1) and Section 163 of the Act shows that, under given circumstances, certain persons can be treated as representative assessee on behalf of non-resident specified in Section 9(1). This would include an agent of non-resident and also who is treated as an agent under Section 163 of the Act which in turn deals with special cases where a person can be regarded as an agent. b) Once a person comes within any of the clauses of Section 163(1), such a person would be the Agent of the non-resident for the purposes of the Act. However, merely because a person is an agent or is to be treated as an agent, would not lead to an automatic conclusion that he becomes liable to pay taxes on behalf of the nonresident. It would only mean that he is to be treated as a representative assessee.

c)

Section 161 of the Act makes a representative assessee liable only as regards the income in respect of which he is a representative assessee. This is the scope of Sections 9(1)(i), 160(1), 161(1) read with Sections 163(1) (a) to (d). In the present case, the Department has invoked Section 163(1)(c). Both Sections 163(1)(c) and Section 9(1)(i) state that income should be deemed to accrue or arise in India. Both these Sections have to be read together. On facts of this case, we hold that Section 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 under Section 163 of the Act as a representative assessee

Summary 1) S 9(1)(iv) is a distinct one, the last sub clause reads as under through the transfer of a capital asset situate in India. The words indirectly or directly used will not apply to capital assets and will only apply to business connection in India which is in the first sub clause. In other words 9(1)(i) should be read as under y(1),(2),(3) and not as y(1), y(2), y(3). Example in integers 2) The word underlying asset do not find place in S 9(1) 3) Further, transfer should be of an asset in respect of which it is possible to compute a capital gain in accordance with the provisions of the Act. Moreover, even Section 163(1)(c) is wide enough to cover the income whether received directly or indirectly. Thus, the words directly or indirectly in Section 9(1)(i) go with the income and not with the transfer of a capital asset (property). 4) Lastly, it may be mentioned that the Direct Tax Code (DTC) Bill, 2010 proposes to tax income from transfer of shares of a foreign company by a non-resident, where at any time during 12 months preceding the transfer, the fair market value of the assets in India, owned directly or indirectly, by the company, represents at least 50% of the fair market value of all assets owned by the company. Thus, the DTC Bill, 2010 proposes taxation of offshore share transactions. This proposal indicates in a way that indirect transfers are not covered by the existing Section 9(1)(i) of the Act. 5) In fact, the DTC Bill, 2009 expressly stated that income accruing even from indirect transfer of a capital asset situate in India would be deemed to accrue in India. These proposals, therefore, show that in the existing Section 9(1)(i) the word indirect cannot be read on the basis of purposive construction.

6) Since the above transaction as already discussed in detail does not attract liability to tax either under S 9(1)(i) or under S 45 of the Income Tax Act, 1961, the question of proceeding against VIH as an assessee-in-default under S 201 read with 195 does not arise. 7) For the same reasons cited in point 6 VIH cannot be proceeded under S 161 read with 163 as a representative assessee. 8) Had the transaction of purchase by VIH resulted in acquiring the controlling interest or had there been split up of the consideration of 11.08bn US$ into control premium, right to non-compete, right to consultancy support etc. Then S 9(1) and also S 45 would have clearly attracted the transaction. But in the absence, this arrangement has become perfectly legal.

Overview A Ltd transfers its 100% share capital to B Ltd both are operating outside India (Non Residents), the result of the share transfer gives B Ltd controlling interest in the company X which is situated in India (Resident). The fact is A Ltd was holding shares in companies which all put together 52% interest in X and not a direct holding of 52% by A Ltd in X. This transaction is one of sale of share capital and not assets sale. Therefore S 45 Capital Gains tax will not apply. The revenue wanted to bring this transaction by taking the stand that S 9(1)(iv) will apply to this transaction as it is a indirect transfer of underlying asset (the company resident for tax purposes) and that the deeming provision empowers the court to look through the entire transaction by giving purposive interpretation and not through the strict interpretation. The Apex Court felt that the deeming provisions are fiction of law and cannot be expanded to such an extent in altering the scope of the charging section. In other words the legal fiction has limited scope and that too subject to strict interpretation. The court also felt that the word indirect will not be applicable to the sub clause 9(1)(i) forth sub clause. When can piercing the corporate veil test can be invoked? (refer to para 57 to 68 of the judgment.) Arranging the affairs, of an entity solely with the object of tax evasion is illegal. This settled law is reinforced in this judgment when form has substance it cannot be ignored. In other words if form is supported by substance then substance will prevail. The burden is on the revenue to allege and establish the abuse in the sense of tax avoidance in creation and/or in use of such holding structures. Only on the revenue establishing such abuse can the application of a judicial anti-avoidance rule or the principle of piercing the corporate veil test can be invoked

The Apex Court first looked into the decided cases of the English Courts namely 1) The Commissioners of Inland Revenue v. His Grace the Duke of Westminster 1935 All E.R. 259 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. The principle laid in this case 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 (Vodafone), the Revenue has adopted a dissecting approach at the Department level. 2) W.T. Ramsay Ltd. v. Inland Revenue Commissioners (1981) 1 All E.R. 865 It is a clear case of misusing the tax provisions with a sole intention of evading taxes, hence the lifting of corporate veil is allowed as the scheme was artificial and fiscally ineffective. Ramsay did not discard Westminster but read it in the proper context by which device which was colourable in nature had to be ignored as fiscal nullity. Thus, Ramsay lays down the principle of statutory interpretation rather than an over-arching anti-avoidance doctrine imposed upon tax laws. 3) Furniss (Inspector of Taxes) v. Dawson (1984) 1 All E.R. 530 The Court in this case dealt with a situation of inter positioning 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. 4) White - Craven (Inspector of Taxes) v. White (Stephen) (1988) 3 All. E.R. 495 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 but 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.

The Decided cases of Indian Courts, 1) McDowell and Co. Ltd. v. CTO (1985) 3 SCC 230, Union of India v. Azadi Bachao Andolan (2004) 10 SCC 1, Mathuram Agrawal v. State of Madhya Pradesh (1999) 8 SCC 667 McDowell dealt with two aspects. First regarding validity of the Circular(s) issued by CBDT concerning Indo-Mauritius DTAA (Double Taxation Avoidance Agreement). Second, on concept of tax avoidance/evasion. The revenue concentrated only on the second part in their defence and did not deliberate on the first issue. The majority judgment in McDowell held that tax planning may be legitimate provided it is within the framework of law. The learned judges held that colourable device (what we cannot do directly is being done in an indirect way) 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 (Deceit used in order to achieve one's goal). The Apex Court in this judgment reiterated that there is no conflict between McDowell and Azadi Bachao or between McDowell and Mathuram Agrawal. Summary Revenue argued that the creation of subsidiaries/holding companies is only a dubious device to evade taxes and argued for lifting the corporate veil by applying the look in and look through approach. However the Apex Court was not impressed with the argument and felt that the instant case is a genuine arrangement and not a subterfuge by noticing certain factors. a) The Hutchison structure has existed since 1994. b) According to the details submitted on behalf of the appellant, we find that from 2002-03 to 2010-11 the Group has contributed an amount of 20,242 crores towards direct and indirect taxes on its business operations in India. c) Applying the look at test in order to ascertain the true nature and character of the transaction, we hold, that the Offshore Transaction herein is a bonafide structured FDI investment into India which fell outside Indias territorial tax jurisdiction, hence not taxable.

d) The said Offshore Transaction evidences participative investment and not a sham or tax avoidant preordained transaction. The said Offshore Transaction was between HTIL (a Cayman Islands company) and VIH (a company incorporated in Netherlands). The subject matter of the Transaction was the transfer of the CGP (a company incorporated in Cayman Islands). Consequently, the Indian Tax Authority had no territorial tax jurisdiction to tax the said Offshore Transaction.

V. Venkata Siva Kumar