OffShore Transaction of Transfer of Shares Between Two NRs Resulting in Change in Control of Indian Company — Withholding Tax Obligation and Other Implications

3.2 The said view of the Bombay High
Court came up for consideration before the Apex Court at the instance of
VIH. Effectively, the Apex Court was required to consider the true
nature of the transaction between the parties, the taxability thereof
and the withholding tax obligations of VIH including the jurisdiction of
the Revenue in that respect, as well as the liability of VIH to be
treated as representative assessee u/s.163.

3.2.1 In this case,
views and the observations of the Court are given in two separate
judgments i.e., one by two Judges, namely, Shri S. H. Kapadia, CJ and
Shri Swatanter Kumar, J (Majority Judgment), and another by Shri K. S.
Radhakrishnan, J (Concurring Judgment). In both the judgments,
conclusions are the same. However, there are some differences in the
reasons given for the same conclusions, particularly in the context of
applicability of section 195. In the Concurring Judgment, certain
additional observations have also been made. On all major issues,
learned judge of the Concurring Judgment has expressly stated that he
fully concurs with the views expressed in the Majority Judgment.
However, the Majority Judgment is salient on the views expressed and
various observations made in the Concurring Judgment. This write-up is
primarily based on the Majority Judgment.

Facts relating to nature of transaction

3.3
For the purpose of deciding the issues, the Court noted the brief facts
of the case and various events which took place (referred to in paras
2.1 to 2.3.2 of Part I of this write-up).

3.3.1 After referring
to all relevant events which had taken place and various agreements and
arrangements made by the parties for the purpose of giving effect to the
transaction and the procedures followed for compliance of Indian law,
the Court observed that 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. The Court then noted that these rights
and interests are enumerated in the order of Revenue dated 31-5-2010,
the details of which are given in para 35 of the Majority Judgment.

3.3.2
The Court also referred to the arrangements made between VIH and Essar
Group which, inter alia, include various terms agreed for regulating the
affairs of HEL and the relationship of shareholders of HEL including
the arrangement of put option wherein, the Essar Group can require VIH
to buy from Essar Group shareholders at their option, the shares held by
them, etc.

3.3.3 The Court then noted that on receipt of the
approval from FIBP on 7-5-2007, the board resolutions were passed by CGP
on 8-5-2007 and its downstream companies, consequent to which, various
steps were taken to give an effect to the transaction the detail of
which are appearing at para 46 of the Majority Judgment.

Tax avoidance/evasion — Settled position

3.4
After referring to the facts relating to the nature of transaction
between the parties, the Court considered the correctness of the
judgment of the Apex Court in the Azadi Bachao Andolan (263 ITR 706) as
the same was questioned by the Revenue on the ground that in that case,
the Division Bench of the Apex Court has not considered certain aspects
of the judgment in the case of McDowell & Co. Ltd. (154 ITR 148).
For this purpose, the Court noted that in that case two aspects were
dealt with viz. (i) validity of Circular issued by the CBDT concerning
Mauritius Tax Treaty and (ii) the concept of tax avoidance/evasion and
stated that in the context of this case, the Revenue has only raised
objection with regard to the second aspect i.e., tax avoidance/ evasion.

3.4.1 The Court then noted the principle laid down in the case
of Duke of Westminster in UK, popularly known as Westminster Principle,
and noted that the said principle states that “given that a document or
transaction is genuine, the Court cannot go behind it to some supposed
underlined substance”. The Court then took note of the fact that the
said principle has been reiterated in subsequent English Court judgments
as ‘the cardinal principle’. Explaining the effect of such subsequent
judgments, the Court stated that 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
dissecting approach, (‘Look at’ test). The Court then observed that in
the present case, the Revenue has adopted a dissecting approach.

3.4.2
The Court then stated that the majority judgment in McDowell’s case
held that “Tax planning may be legitimate provided it is within the
framework of law ‘. . . . . however’ colourable device cannot be a part
of tax planning and it is wrong to encourage or entertain the belief
that it is honourable to avoid the payment of tax by resorting to
dubious methods.”

3.4.3 The Court then concluded that the
judgment in the case of Azadi Bachao Andolan has been correctly decided
and held as under on this aspect (page 34, para 64):

“. . . . .
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.”

Tax
aspects of holding structure

3.5.1 The Court then noted that it is generally accepted that the group parent company is involved in giving principal guidance to group. The fact that a parent company exercises shareholder’s influence on its sub-sidiaries does not generally imply that subsidiaries are to be deemed residents of the State in which the parent company resides. However, if subsidiary’s executive directors are no more than puppets, then the turning point in respect of subsidiary’s residence come about. If the transaction is arranged through abuse of organisation form/legal form and without reasonable business purpose to avoid tax implications, then the Revenue may disregard the form of the arrangement or structure, recharacterise the arrangement according to its economic substance and determine tax implications accordingly on actual controlling enterprise. This should be decided on overall facts of each case.
In this context, the Court further stated as under (pages 35/36, para 67):

“…..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).”

3.5.2 The Court then noted that it is 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 CI or Mauritius-based company, for both tax and business purpose. In doing so, foreign investors are able to avoid lengthy approval and registration processes required for a direct transfer of equity interest in a foreign-invested Indian company.

3.5.3 The Court then further noted that the taxation of such holding structures gives rise to issue such as double taxation, tax deferrals, tax avoidance and application of anti-avoidance rules (GAAR). The Court then stated that in the present case, it is concerned with concept of GAAR (and not with the treaty shopping) which is not new to India since India already has a judicial GAAR, like some other jurisdictions. The Court then noted that lack of clarity and absence of appropriate provisions in the statute and/or in the treaty regarding the circumstances in which the judicial GAAR would apply has generated litigation in India. The Court then took the view that when it comes to taxation of a holding structure, at the threshold, the burden is on the Revenue to establish the abuse, in the sense of tax avoidance in the creation and/or use of such structures. In this context, the Court then observed as under (pages 36/37, para 68):

“…….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….’’

3.5.4 The Court then reiterated that for the above purposes, the Revenue must apply ‘Look at’ test and the Revenue cannot start with the question as to whether the impugned transaction is a tax deferment/savings device, but that it should apply the ‘Look at’ test to ascertain its true legal nature. While concluding on the issue of tax avoidance, the Court stated as under (Page 37, para 68):

“……. Applying the above tests, we are of the view that every strategic foreign direct investment coming to India as an investment destination, should be seen 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 busi    ness purpose must exist to overcome the evidence of a device.”

Whether section 9 is a ‘Look through’ provision and covers ‘indirect transfer’ of Indian Capital Asset

3.6 The Court then dealt with the contention of Rev-enue that u/s.9(1)(i) can ‘Look through’ the transfer of shares of a foreign company holding shares in an Indian company and treat such transfer as equivalent to transfer of shares of the Indian company on the premise that section 9(1)(i) covers direct and indirect transfer of capital asset.

3.6.1 Dealing with the above issue, the Court noted that section 9(1)(i) gathers in one place various types of income and 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 of bringing income within each sub-clause are separately stated. In the case under consideration, the Court is concerned with the last sub-clause of section 9(1)(i), which refers to income arising from ‘transfer of a capital assets situated in India’. This provides a fiction which comes into play only when the income is not charged to tax on the basis of receipt in India, as receipt of income in India by itself attracts tax whether the recipient is a resident or non-resident. This fiction is introduced to avoid any possible arrangement on the part of the non-resident vendor that profit accrued or arose outside India on the basis that the contract to sell is executed outside India. A legal fiction has a limited scope and when the language is unambiguous and admits no doubt, it cannot be expanded by giving purposive interpretation.

3.6.2 According to the Court, section 9(1)(i) cannot by a process of interpretation be extended to cover indirect transfers of capital assets situated in India as the Legislature has not used the words ‘indirect transfer’ in section 9(1)(i). The words directly or indirectly used in section 9(1) (i) go with the income and not with the transfer of capital assets. For this purpose, the Court also drew support from the language of the provisions of section 163(1)(c) and the proposal contained In the Direct Tax Code Bill, 2010 as well as its earlier draft version of 2009. Based on this, while taking a view that indirect transfer is not covered within the said sub-clause of section 9(1)(i), the Court finally concluded on this contention of the Revenue as under (Page 40, para 71):

“…….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 into the section by interpretation. For the foregoing reasons, we hold that section 9(1)(i) is not a ‘look through’ provision.”

Whether there was extinguishment of the property rights of HTIL?

3.7 The Court then dealt with the primary argument advanced on behalf of the Revenue that SPA, commercially construed, evidences a transfer of property rights of HTIL by their extinguishment. According to the Revenue, HTIL’s property rights (i.e., right of control and management over HEL and its subsidiaries) got directly extinguished under SPA and accordingly, there was a transfer of capital assets situated in India. For this purpose, the Revenue relied on various features of SPA and on various arrangements entered into between the parties. It was the contention of the Revenue that HTIL possesses de facto control over HEL and its subsidiaries and such control was the subject-matter of transfer under SPA.

3.7.1 For the purpose of dealing with the above contentions of the Revenue, the Court reiterated the position that it is concerned with the transaction of sale of share and not with the sale of assets, item wise. In this context, the Court observed as under (Page 41, para 73):

“…….. 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 we need to apply the ‘look at’ test. In the impugned judgment, the High Court has rightly observed that the arguments advanced on behalf of the Department vacillated. The reason for such vacillation was adoption of ‘dissecting approach’ by the Department in the course of its arguments……….”

3.7.2 The Court then considered the legal position that whether HTIL possesses a legal right to appoint directors on the board of HEL and as such had some ‘property right’ in HEL. In this context, the Court stated that a legal right is an enforceable right by a legal process. In a proper case of lifting of ‘corporate veil’, it would be proper to say that the parent company and the subsidiary form one entity. But barring such cases, the legal position of any company incorporated abroad is that its powers, functions, and responsibilities are governed by the law of its incorporation. A company is a separate legal person even with one shareholder. Thus even though a subsidiary may normally comply with the request of a parent company, it is not just a puppet of a parent company. There is a difference between having a power or having a persuasive position. The power of persuasion cannot be constructed as a right in legal sense. The concept of ‘de facto’ control, which existed in Hutchison structure, conveys a state of being in control without any legal right to such a state. Based on this, the Court concluded that HTIL as group holding company has no legal right to direct its downstream companies in the manner of voting, nomination of directors and management rights.

3.7.3 Dealing with the power of a parent company on account of its shareholding in subsidiary, the Court concluded as under (Page 43, para 74):

“…..The fact that the parent company exercises shareholder’s influence on its subsidiaries cannot obliterate the decision-making power or authority of its (subsidiary’s) directors. They cannot be reduced to be puppets. The decisive criteria is whether the parent company’s management has such steering interference with the subsidiary’s core activities that subsidiary can no longer be regarded to perform those activities on the authority of its own executive directors.”

3.7.4 The Court then dealt with the need for executing an SPA and stated that exit is an important right of an investor in every strategic investment. Thus, a need for an SPA arose to re-adjust the outstanding loans between companies; to provide for standstill arrangements in the interregnum between date of SPA and completion of the transaction, to provide for seamless transfer and to provide for fundamental terms of price, indemnities, warranties, etc. SPA was entered into, inter alia, for smooth transaction of business of divestment by HTIL.

3.7.5 Dealing with the issue with regard to arrangements entered into with Essar Group, partner in HEL, as well as with other Indian companies holding 15% interest in HEL (minority investors), the Court stated that the minority investor has what is called a ‘participative’ right, which is subset of ‘protective rights’. These participative rights in certain instances restrict the powers of the shareholders with majority voting interest to control the operations or assets of the investee. Even minority investors are entitled to exit. This ‘exit right’ comes under ‘protective rights’. Considering the Hutchi-son structure in its entirety, the Court found that the participative and protective rights existed in Hutchison structure under various arrangements. Even without execution of SPA, such rights existed in the above arrangements and therefore, it would not be correct to say that such rights flowed from SPA. The Court also stated that it is important to note that ‘transition’ is a vide concept. It is impossible for the acquirer to visualise all events that may take place between the date of SPA and completion of acquisition. For all such things, an SPA may become necessary, but that does not mean that all the rights and entitlements flow from SPA.

3.7.6 After considering various agreements, arrangements and features of SPA, on the issue of extinguishment of property rights of HTIL, the Court concluded as under (Page 48, para 77):

“For the above reasons, we hold that under the HTIL structure, as it existed in 1994, HTIL occupied only a persuasive position/influence over the downstream companies qua manner of voting, nomination of directors and management rights. That, the minority shareholders/investors had participative and protective rights (including RoFR/TARs, call and put options which provided for exit) which flowed from the CGP share. That, the entire investment was sold to VIH through the investment vehicle (CGP). Consequently, there was no extinguishment of rights as alleged by the Revenue.”

Whether Hutchison structure is sham or tax-avoidant?

3.8 The Court also considered the issue as to whether the structure of Hutchison Group is a sham/device/tax-avoidant and whether it was pre-ordained to avoid the tax in question.

3.8.1 Dealing with the above issue, the Court stated that there is a conceptual difference between ‘pre-ordained transaction’ which is created for tax avoidance purposes and a transaction which evidences ‘investment to par-ticipate’ in India. Having mentioned this conceptual difference, the Court explained the concept of ‘investment to participate’ and stated that in order to find out whether a given transaction evidences a pre-ordained transaction in the sense indicated above or investment to participate, one has to take into account various factors enumerated earlier and again re-iterated them, such as duration of time during for 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, etc. referred to the para 3.5.4 above. Explaining the effect of these tests on the case on hand, the Court held as under (Pages 42, para 73):

“……Applying these tests to the facts of the present case, we find that the Hutchison structure has been in place since 1994. It operated during the period 1994 to 11-2-2007. 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 11-2-2007, taxes are being 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, SPA indicates ‘continuity’ of the telecom business on the exit of its predecessor, namely, HTIL. Thus, it cannot be said that the structure was created or used as a sham or tax-avoidant…..”

3.8.2 While taking the above view, the Court further observed as under (Page 42, para 73):

“……. In a case like the present one, where the structure has existed for a considerable length of time generating taxable revenues right from 1994 and where the Court is satisfied that the transaction satisfies all the parameters of ‘participation in investment’ then in such a case the Court need not go into the questions such as de facto control v. legal control, legal rights v. practical rights, etc.’’

The effect of introduction of CGP before entering into transaction

3.9 The main contention of the Revenue was that CGP was inserted at a late stage in the transaction in order to bring in a tax-free entity (or to create a transaction to avoid tax) and thereby, avoid tax on capital gains. Originally in this transaction, the transfer of shares of Array was contemplated. According to the Revenue, the Mauritius route was not available to HTIL in this transaction to get the benefit to avoid liability of tax.

3.9.1 Dealing with the above contention of the Revenue, the Court first noted that when a business gets big enough, it does two things. First, it reconfigures itself into corporate group by dividing itself multitude of commonly owned subsidiaries. Second, it causes various entities in the said group to guarantee each other’s debts. A typical large business corporation consists of sub-incorporates. Such division is legal and recognised by various laws including laws of taxation. If large firms are not divided into subsidiaries, creditors would have to monitor the enterprise in its entirety. Subsidiaries also promote the benefits of specialisation, permit creditors to lend against only specified division of the firm, reduce the amount of information that creditor needs together, etc. These are efficiencies inbuilt in a holding structure. As a group member, subsidiaries work together in many ways and they are financially inter-linked. The Court then further observed as under (Page 49, para 79):

“….. Such grouping is based on the principle of internal correlation. Courts have evolved doctrines like piercing the corporate veil, substance over form, etc. enabling taxation of underlying assets in cases of fraud, sham, tax avoidant, etc. However, genuine strategic tax planning is not ruled out.”

3.9.2 CGP was incorporated in 1998 in CI and it was in Hutchison structure since then. CGP was an investment vehicle. The transfer of Array had the advantage of transferring control over the entire shareholding held by downstream Mauritius companies, other than 3GSPL (GSPL). On the other hand, the advantage of acquisition of CGP share was to enable VIH to also indirectly acquire the rights and obligations of GSPL (the option to acquire further 15% interest in HEL). This was the reason for VIH to go by CGP route. Dealing with the argument with regard to non-availability of Mauritius route for getting the tax benefit, the Court stated that HTIL could have influenced its Mauritius subsidiaries (indirect) to sell the shares of Indian companies in which case no liability to pay tax on capital gain would have arisen. Thereafter, nothing prevented Mauritius companies from declaring dividend to ultimately remit money to HTIL and there is no tax on dividend in Mauritius in such cases. Thus, the Mauritius route was also available, but it was not opted because that route would not have given the control over GSPL. The Court then took the view that it was open to the parties to opt for any one of the two routes available to them. Accordingly, taking a holistic view, the Court held that it cannot be said that the intervened entity (CGP) had no business or commercial purpose.

Situs of CGP share

3.10 It was contended by the Revenue that under the Companies Law of CI, an exempted company was not entitled to conduct business in CI and therefore, CGP, being exempted company, cannot conduct business in CI and hence, the situs of CGP share existed where the ‘underlying assets are situated’, that is to say, India. While dealing with this contention, the Court stated that the Court does not wish to pronounce authoritatively on the Companies Law of CI. However, under the Indian Companies Act, 1956, the situs of the shares would be where the company is incorporated and where its shares can be transferred. In the present case, it has been asserted by VIH that the transfer of CGP share was recorded in CI and this has neither been rebutted in the order of the Department, nor traversed in the pleadings filed by the Revenue, nor controverted before the Court. Accordingly, the Court took the view that the situs of CGP share cannot be taken at the place where underlying assets stood situated and hence, the same is not in India.

Did VIH acquire 67% controlling interest in HEL?

3.11 It was the contention of the Revenue that VIH acquired 67% controlling interest (including option to acquire 15% interest in HEL held by AS/AG/IDFC through various companies). For this, the Revenue relied on various agreements, arrangements and features of SPA.

3.11.1 Dealing with the above contention of the Revenue, the Court noted that primary argument of the Revenue is based on the equation of ‘equity interest’ with the word ‘control’. On the basis of the shareholding test, HTIL can be said to have 52% control over HEL. By the same test, it can be equally said that the balance 15% stake in HEL remained with AS/AG/IDFC, who had through their respective group companies invested in HEL. This 15% stake comes under the options held by GSPL. Pending exercise, options are not management rights. At the highest, options can be treated as potential shares and they cannot provide right to vote or management or control. HTIL/VIH cannot be said to have a control over 15% stakes in HEL. It is for this reason that even FIBP gave its approval to the transaction by saying that VIH was acquiring or has acquired shareholding of 51.96% in HEL.

3.11.2 Dealing with the case of the arrangement with Indian JV partner Essar Group, the Court stated that it was entered into in order to regulate the affairs of HEL and to regulate the relationship of shareholders of HEL and continue the practice of appointment of directors on agreed basis. The articles of association of HEL did not grant any specific person or entity a right to appoint directors. Under the Company Law, the management control vests in the Board of Directors and not with the shareholders. Therefore, neither from SPA, nor from the terms sheets one can say that VIH had acquired 67% controlling interest in HEL.

3.11.3 Dealing with the contention of the Revenue that why VIH should pay consideration to HTIL based on 67% of the enterprise value of HEL, the Court stated that it is important to know that valuation cannot be the basis of taxation. The basis of taxation is profits or income or receipt. In this case, the Court is not concerned with the tax on income/profit arising from business operations but with the tax on transfer of rights (capital asset) and gains arisen therefrom. In the present case, VIH paid US $ 11.08 bn for 67% of the enterprise value of HEL and its downstream companies having operational licences. When the entire business or investment is sold, for valuation purposes, one may take into account the economic interest or realities. In this case, enterprise value is made-up of two parts, namely, the value of HEL, the value of CGP and companies between CGP and HEL. The Revenue cannot invoke section 9 of the Act on the value of underlying assets or consequence of acquiring a share of CGP. The price paid as a percentage of enterprise value ought to be 67% not because that was available in praesenti to VIH, but on account of the fact that competing Indian bidders would have had de facto access to the entire 67%, as they were not subject to limitation of FDI cap and therefore, they would have immediately encashed the call options.

Approach of the High Court and true nature of transaction

3.12 Dealing with the dissecting approach adopted by the High Court, the Court stated as under (Page 56, para 88):

“We have to view the subject-matter of the transaction, in this case, from a commercial and realistic perspective. The present case concerns an offshore transaction involving a structured investment. This case concerns ‘a 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 slump sale would involve tax consequences which could be different from the tax consequences of sale of assets on itemised basis.”

3.12.1 Further, dealing with the question of transfer of controlling interest dealt with by the High Court, the Court state as under (Page 56, para 88):

“…….Ownership of shares may, in certain situations, result in the assumption of an interest which has the character of a controlling interest in the management of the company. A controlling interest is an incident of ownership of shares in a company, something which flows out of the holding of shares. A controlling interest is, therefore, not an identifiable or distinct capital asset independent of the holding of shares. The control of a company resides in the voting power of its shareholders and shares represent an interest of a shareholder which is made up of various rights contained in the contract embedded in the articles of association. The right of a 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 dissected…..”

3.12.2 The Court further stated that if owners’ structure is looked at by acquiring one share of CGP, VIH acquired control over various companies which gave it 52% shareholding control over HEL and indirect control over GSPL which gave VIH control over the options to acquire further 15% interest in HEL. These options continued to be held by GSPL and there is no transfer of them. The options have remained un-encashed with GSPL and therefore, even if options are treated as capital asset as held by the High Court, section 9 (1)(i) was not applicable as there was no transfer of such options. The Court also stated that the High Court wrongly viewed the transaction as acquisition of 67% of the equity capital of HEL. 67% of economic value is not equivalent to 67% of equity capital. If the High Court was right, then entire investment would have breached the FDI norms (which had imposed a sectorial cap of 74%) as in this case, Essar group held 22% of its stake through Mauritius Companies.

3.12.3 The Court also stated that as a general rule, in case of transaction involving transfer of shares lock, stock and barrel, such a transaction cannot be broken up in to separate individual components, assets or rights such as right to vote, right to participate in company meetings, management’s rights, controlling rights, control premium, brand licences and so on as shares constitute a bundle of rights. According to the Court, the High Court failed to examine the nature of various items such as non-compete agreement, control premium, call and put options, etc. The Court then took the view that the High Court ought to have examined entire transaction holistically. The transaction should be looked at as an entire package. Where the parties have agreed for a lump sum consideration without placing separate value for each of the items which go to make up the entire ‘investment in participation’, merely because certain values are included in the correspondence with FIPB which had raised the query, would not mean that the parties had agreed for the price payable for such individual items. The transaction remained a contract of outright sale of the entire investment for a lump sum consideration.

3.12.4 Finally, the Court did not agree with the dissecting approach adopted by the High Court and treated the transaction as sale of one share of CGP outside India and accordingly, it does not involve any gain arising on transfer of capital asset situated in India. Hence, capital gain in question is not chargeable to tax u/s.9(1)(i) of the Act and as such, question of deduction of TAS does not arise. Accordingly, the ultimate view of the High Court that the proceedings initiated by the Revenue Authorities did not lack jurisdiction and VIH was under an obligation to deduct TAS while making the payment in this case did not find favour with the Apex Court.
(to be concluded in the third part)

Note: Subsequent Developments
In the Finance Bill, 2012, certain amendments are proposed with retrospective effect from 1-4-1962 to effectively overturn the final position emerging from the above judgment. With these proposals, the stand of the Revenue Authorities with regard to the taxability of such gain, withholding tax obligation of the NR Payer and the jurisdiction of the Revenue Authorities in that respect is sought to be retrospectively confirmed by the legislative amendments.

We understand that on 20th March, 2012, the Apex Court has dismissed the review petition filed by the Government in Vodafone’s case.