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Contents
ACKNOWLEDGEMEN

T
CHAPTER I....................................................................................................................................4
Research Methodology...................................................................................................................6
Aims and objectives:.......................................................................................................................6
Hypothesis:......................................................................................................................................6
Mode of Writing:............................................................................................................................6
Mode of Citation:............................................................................................................................6
Chapter II........................................................................................................................................7
CONSIDERATIONS GUIDING THE INTERPRETATION OF TAX STATUTES..................7
I. The classical rule: Strict construction of taxing statutes......................................................7
II. Dilutions to the Principle of Strict Construction...............................................................9
A shift to purposive construction?................................................................................................9
Chapter III....................................................................................................................................17
Vodafone Saga and its Critical Analysis......................................................................................17
Chapter IV....................................................................................................................................20
Conclusion.....................................................................................................................................20
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CHAPTER I

INTRODUCTION:

In the particular paper, the ancient maxim stating that taxing statutes have to be
construed strictly with special reference of Vodafone judgment is studied. The aim of
the study is to collect an understanding as to what could be the driving force behind
judiciary to dilute the rule of strict construction and the implications of the same.

Subsidiaries, treaty shopping, holding firms, selling valuable property indirectly by

making framework agreements, these have all become ways of tax avoidance through
various artificial means, and it has become a very profitable industry today.

Major part of revenue of the ‘Big 5' accounts and consultants derives from tax
avoidance means that is popular in the name of tax planning. The legality of this has
agitated the courts in India as well as outside. A five-judge bench of Supreme Court of
India settled this question in 1985, in the McDowell case and observed that:

“In that very country where the phrase ‘tax avoidance' originated, the judicial attitude
towards [it] has changed and the smile, cynical or even affectionate though it might
have been at one time, has now frozen into a deep frown. The courts are now
concerning themselves not merely with the genuineness of a transaction, but with [its]
intended effect for fiscal purposes. No one can now get away with a tax avoidance
project with the mere statement that there is nothing illegal about it. In our view, the
proper way to construe a taxing statute, while considering a device to avoid tax is … to
ask … whether the transaction is a device to avoid tax, and whether the transaction is
such that the judicial process may accord its approval to it.”

“It is neither fair not desirable to expect the legislature to … take care of every device
and scheme to avoid taxation,” the ruling added. “It is up to the Court … to determine
the nature of the new and sophisticated legal devices to avoid tax ... expose [them] for
what they really are and refuse to give judicial benediction.”
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LEGITIMATE TAX PLANNING

Even after having such clarity on the issue, various other recent judgements of other
benches have fallen back on calling this system of tax avoidance a ‘legitimate tax
planning’

Even though even non-residents have to pay tax on incomes arising in India as per the
Income Tax Act, a lot of non-residential foreign investors successfully avoided paying
taxes citing the Double Taxation treaty with Mauritius. The treaty implies that a firm
will have to pay taxes only at the place it is domiciled at. All of these FIIs, even after
being based outside but operating majorly from India, claimed to have Mauritian
domicile by means of registration there under the Mauritius Offshore Business
Activities Act (MOBA). MOBA restricts the companies registered under it to acquire
property, invest or conduct business in Mauritius.

Despite these ‘Post Box Companies' claimed that they were domiciled there and IT
depart. Gave them the allowance to get away by using the treaty and claim the benefits
for many years. Given the generous mentality of the Indian assessment specialists and
the way that there was no capital increases charge and essentially no duty at all on these
organizations in Mauritius, most FIIs and the majority of the unfamiliar interest in
India, by 2000, came to be steered through Mauritius.

The gathering at long last finished when a proactive assessment official attempted to
stop this unmitigated avoidance. Depending on McDowell, he lifted the corporate cloak
of MOBA organizations to decide their place of the executives and genuine spot of
home. Since this turned out to be in various nations in Europe or North America, the
pertinent Double Tax Avoidance deal turned into the one among India and that country.
Every one of these arrangements accommodated capital additions to be burdened where
the increases had accumulated. Since the increases gathered in India, he required capital
additions charge on these FIIs.

.
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Research Methodology

Aims and objectives:

The aim of the paper is analysing the Vodafone Case and its judgement and the
consequences. Hence, analyse the different aspects in Taxation Law like Tax
avoidance, Gain on Capital, etc. and the way in which it has been dealt with to incur
liabilities.

 Help understand tax avoidance

 Help determine the impact of the Vodafone judgement with reference to FDI
 Strictly construing tax statutes
 Help analyse the fact that why just because operating firms pay tax in India, the
investor company can be exempted from Capital Gains tax
 Help examine different impacts caused tax

Hypothesis:

1. Strict construing of Tax statutes.

2. One view could be that if any one non-resident sells any shares of a foreign company to
any other non-resident of India; and that the transaction took place out of India, there
could be no tax on the same.
3. In the Vodafone case, it was evident that a series of tax havens and SPVs have been
made use of to avoid Indian taxes.  

Mode of Writing:
A descriptive and analytical method of writing has been followed.

Mode of Citation:
A uniform mode of Citation has been followed.
 Page |5

Chapter II

CONSIDERATIONS GUIDING THE INTERPRETATION OF TAX

STATUTES

I. The classical rule: Strict construction of taxing statutes

The classical rule with regard to the construction of taxing statutes is that they should
be strictly construed. It is a well-established rule that can be traced to common law in
England and has been imported into the Indian legal system as well.1

No one should be taxed unless there is a clear reason behind the same. Every statute
must be read “according to the natural construction of its words”.2 In a taxing statute, it
is only what is clearly said that needs to be looked at. Considerations guiding the
interpretation of taxing statutes cannot include equity or presumptions. Nothing must be
read in or implied. In the interpretation of taxing statutes, the language of the statute is
the only thing that can be fairly looked at.3 This has been the classical approach towards
the interpretation of tax statutes as followed in England as well as in India.

The rationale for the strict construction of taxing statutes lies in the fact that they
impose pecuniary burdens. Therefore, in some sense, they operate as penalties. It is on
the basis of this that clear and unambiguous language is required in order to make out a
charge of tax.4

This rule of strict construction is also known as the Duke of Westminster principle,
being named after its famous exposition in the case of IRC v. The Duke of
Westminster5. In this case, the respondent i.e. Duke of Westminster, covenanted to pay
his gardener an yearly sum for a period of seven years without prejudice to the
remuneration received by the gardener for his services. The Duke then sought to deduct

1
G.P. Singh, PRINCIPLES OF STATUTORY INTERPRETATION, 815 (12th edn., 2010).
2
In re Micklethwait, (1885) 11 Ex 452 (Court of Exchequer Chamber); Tennant v. Smith, [1892] A.C. 150
(House of Lords).
3
Cape Brandy Syndicate v. Inland Revenue Commissioners, [1921] 1 K.B. 64 (King’s Bench Division).
4
P.B. Maxwell, INTERPRETATION OF STATUTES, 256 (12th edn., 1962).
5
The Commissioners of Inland Revenue v. The Duke of Westminster, [1936] A.C. 1 (House of Lords).
 Page |6

such payments in order to ascertain his total taxable income for surtax. The Revenue
i.e. Appellant however sought to show these payments as payments of salary or wages
and impose tax thereon. In this case, the court rejected the argument that in the
construction of taxing statutes, it must ignore the legal position and instead focus on
“the substance of the matter”. The court observed that every person is entitled to
arrange his affairs in such a manner that the burden of tax that falls upon him be as low
as legally permissible. The doctrine of “substance of the matter” cannot be used to
impose a greater liability on the person. It is the true nature of the legal obligation and
nothing else that is the substance. On this basis, the court dismissed the appeal.6

As mentioned before, this line of reasoning has found resonance in India too. The
Supreme Court of India has reiterated the position that it is a maxim of tax law that tax
is not to be imposed on a person unless the words of the taxing statute are
unambiguous.7 The Supreme Court has observed that the strict letter of the law is to be
considered in determining tax liability and not other things such as the spirit of the
statute or the substance of the law. If the Court is satisfied that a case falls within the
provisions, then a tax can be imposed. However, if a situation does not fall within the
“four corners of the provisions of the taxing statute”, no tax can be imposed. Inference,
analogy and probing of legislative intent in order to get to the substance of the matter
are not permitted in the interpretation of tax statutes.8

A taxing statute has three components: the subject of the tax, the person liable to pay
tax and the rate at which tax is to be paid. In the case of ambiguity regarding any of
these three ingredients in a taxing statute, there is no tax in law. Unless the legislature
does not modify the defect, no tax can be imposed as per law. This is because taxing
statutes need to be strictly construed.9

Another principle of statutory interpretation that is seen with respect to taxing statutes
is that the courts must favour the assessee in case there is ambiguity and two or more
reasonable interpretations of the taxing provisions exist.10

6
The Commissioners of Inland Revenue v. The Duke of Westminster, [1936] A.C. 1 (House of Lords).
7
Mathuram Agrawal v. The State of Madhya Pradesh, AIR 2000 SC 109 (Supreme Court of India).
8
A.V. Fernandez v. State of Kerala, AIR 1957 SC 657 (Supreme Court of India).
9
Mathuram Agrawal v. The State of Madhya Pradesh, AIR 2000 SC 109 (Supreme Court of India).
10
CIT v. Karamchand Premchand Ltd., AIR 1960 SC 1175 (Supreme Court of India).
 Page |7

Thus, in this section, it has been seen that the judiciary has stressed on the requirement
of clear and unambiguous language in order to impose a tax upon an individual. This
strict rule of has governed the interpretation of tax statutes. However, from the latter
half of the previous century, several dilutions to this strict rule have been seen. In the
following sections of this paper, the researcher seeks to discuss these detours from the
straight route laid down by the rule of strict construction

II. Dilutions to the Principle of Strict Construction

A shift to purposive construction?

As has been noted above, the strict rule of construction has been subject to some
dilution, especially since the latter half of the previous century.

A good example of this was seen in the decision of the Supreme Court in CCE v. ACER
India Ltd.11. The fundamental inquiry for the situation rotated around whether the
estimation of operational programming could be deducted from the absolute estimation
of PCs provided to clients in the figuring of the measure of focal extract payable as
obligation. In this foundation, a whole segment of the judgment was coordinated
towards the standards directing the translation of burdening rules. The Supreme Court
noticed that the burden of assessment is a sacred capacity. It alluded to the severe
development that should be given to burdening rules. It likewise saw that the regulation
of "substance of the matter" had been dismissed. But the court noted several other
considerations to be made in the interpretation of taxing statutes that fall outside the
four corners of the language of the statute.12

According to the specialist, a large number of these mean a takeoff from the severe
guideline of translation. A portion of these had their premise in past decisions though
some others appeared to be articulated by the court interestingly. Regardless, the Court
noticed that current market practice should be a thought behind the understanding of

11
Commissioner of Central Excise, Pondicherry v. ACER India Ltd., (2004) 8 SCC 173 (Supreme Court of
India).
12
Commissioner of Central Excise, Pondicherry v. ACER India Ltd., (2004) 8 SCC 173 (Supreme Court of
India).
 Page |8

burdening rules. Similarly, the court also noted that public policy could be a guiding
factor in the interpretation and application of taxing statutes. 13

The court likewise noticed that the resolution should not be deciphered in such a way
that it prompts the wide scale avoidance of obligation. An understanding dependent on
this announcement can have fundamentally various outcomes practically speaking from
those seen before dependent on the severe guideline of translation. While, for this
situation, the decree was persuaded by the longing to keep buyers of PC items from
confronting the weight of overabundance obligation forced on the respondent, its
consequences on different sorts of cases including tax collection can be very telling.
The researcher opines that this would go far in tilting the balance of power in favor of
the Revenue.14

In particular, the Supreme Court mentioned observable facts explicitly giving that the
standard of severe development was not to be constantly applied in the translation of
assessment rules. The Supreme Court noticed that the rule of severe development may
not be clung to on the off chance that the legal development can sensibly have just one
importance. The court proceeded to prove this by the explanation that the guideline of
purposive development will be clung to on the off chance that the exacting significance
brings about idiocy. The Supreme Court here explicitly provided that purposive
construction could be given precedence over literal meaning in the case of absurdity
and that this maxim is applicable even in the case of taxing statutes. 15 This reflects in
the move for purposive development, at any rate now and again, even in the
understanding of burdening rules. This is amazingly critical on the grounds that this
permits the courts to go past the four corners of the resolution to decide "authoritative
reason" in a way that was not permitted heretofore. This is an incredibly questionable
and huge move which leaves open a wide scope of ends open regarding the
understanding of expense rules. It very well may be contended that it purposive
development would just come into activity in the event that exacting development
prompts ludicrous outcomes. However, even this should be believed to be critical. The
accompanying section delineates a situation where this distinction has been seen.
13
Commissioner of Central Excise, Pondicherry v. ACER India Ltd., (2004) 8 SCC 173 (Supreme Court of
India).
14
Commissioner of Central Excise, Pondicherry v. ACER India Ltd., (2004) 8 SCC 173 (Supreme Court of
India).
15
Commissioner of Central Excise, Pondicherry v. ACER India Ltd., (2004) 8 SCC 173 (Supreme Court of
India).
 Page |9

In the case of CWS v. CIT16, the Court delved into provisions of the Income Tax Act,
1961 revolving around the imposition of tax on the appellant, which was the assessee
company, with regard to expenditure on the company’s assets used by its employees
either partly or wholly for their own benefit. A simple reading of the statute would have
implied that risk couldn't be forced. Nonetheless, the court went on to maintain the
evaluation of the Revenue based on a perusing of the statute alongside administrative
aim to burden. The court contrasted the reproved arrangement and undifferentiated
from arrangements in past and progressive forms of the Income Tax Act and inferred
that the assessee should be expected to take responsibility for charge as per its perusing
of Parliamentary aim. The Court expressed that non-tax assessment here would be an
outcome that would be disjointed, prejudicial and above all, crazy. The court believed
that however exacting development was the overall guideline in the translation of
assessment resolutions, it couldn't be clung to in the event that the outcome was
indiscernible, unfair or crazy. It expressed that translation of resolutions couldn't be a
mechanical exercise. It held that the object of all translation was to offer impact to the
object of the authorization concerning the language utilized. In this manner, the
Supreme Court went ahead to affirm the taxation of the assessee company i.e. the
appellant in spite of the fact that literal interpretation would have led to a contrary result
of non-taxation.17

It is presented that while such decisions of the Supreme Court may appear as the correct
advance to guarantee that the ends of justice are met in a specific case, they likewise
make an enormous enough open door considering some superfluous legal adaptability
that could contrarily affect the translation of assessment resolutions when they work as
points of reference. Pompous affirmations accepting purposive development and
privileging it over severe development can prompt unintended results. The issue would
lie not in determining the presence of ridiculousness. Like most cases, the issue would
lie in discovering authoritative goal and the reason for the resolution. The scientist feels
that the accessibility of such interpretive limit in the possession of the legal executive
could prompt a fortifying of the situation of the Revenue as against the assessee and
truly sway the interests of the assessee thusly.

The following sections highlight certain other dilutions to the rule of strict construction.

16
C.W.S. (India) Ltd. v. Commissioner of Income Tax, JT 1994 (3) SC 116 (Supreme Court of India).
17
C.W.S. (India) Ltd. v. Commissioner of Income Tax, JT 1994 (3) SC 116 (Supreme Court of India).
 P a g e | 10

a. The usage of external aids

It has been seen that courts have utilized certain outside guides in the translation of
burdening arrangements. In doing as such, they have gone past the four corners of the
language of the rule and have subsequently weakened the standard of exacting
development.

For example, in the case of Nawn Estates v. CIT18, the Supreme Court was called upon
to interpret the term ‘investment’ as found in the Income Tax Act, 1922. This term had
not been defined by the statute. The Supreme Court considered different outer guides in
reaching the resolution that the appealing party was to be brought inside the domain of
the assessment on the premise that it was an 'speculation organization'. The Court
considered the administrative history of the Income Tax Act 1922, directly from its
correction in 1955. It additionally viewed as the administrative history of the Income
Tax Act, 1961. The Supreme Court likewise looked to validate its situation on the
comprehension of 'interest' in like manner business speech. Altogether, the Court even
proceeded to perceive that English specialists can be valuable aides in the translation of
closely resembling arrangements, basic ideas and general standards "unaffected by the
strengths of the English Income Tax Statutes". Once more, it is emphasized that while
the Court may have finished up appropriately for the situation, the acknowledgment of
a particularly expansive assortment of outer guides to development can prompt some
weakness of the standard of severe development. The scientist is particularly worried
about the possibility of utilization of undifferentiated from English arrangements in the
understanding of Indian partners. It should be perceived that burdening conditions and
strategy contemplations in the two nations are extraordinary. Along these lines, the
analyst thinks that bringing in an English comprehension of explicit burdening
arrangements to the Indian situation will prompt a larger number of inquiries than the
arrangements it gives. Outrageous alert should be practiced by the deciphering expert in
such manner.

b. Exemptions

18
Nawn Estates (P) Ltd. v. C.I.T, West Bengal (1977) 1 SCC 7 (Supreme Court of Indi a).
 P a g e | 11

An area of considerable disagreement in the construction of taxing statutes has been

that of exemptions. An exemption is an exception from the general obligation to pay
taxes.19 There are two conclusions on the matter of development of exceptions in the
event of uncertainty. As per one view, an exception should be generously understood in
order to profit the assessee from that point activity of the obligation. The other view is
that exemptions tend to increase the burden on the general burden of taxpayers, and for
this reason, they must be strictly construed against the assessee.20

There is no presumption with regard to the application of exemption. The person

claiming the exemption has to establish that he is entitled to it as per the language of the
taxing enactment.21

An example of the liberal interpretation of exemptions was seen in CCE v. NE Tobacco

Company22. The inquiry was whether the unit or processing plant set up by the
respondent in a specific Export Promotion Industrial Park could be given the situation
with 'another modern unit' in order to benefit an exception. The Supreme Court held
that an exception warning should be generously understood for the respondent. It
subsequently excused the allure. In any case, it should be referenced that there are
different experts contrary to this view, including different decisions of the Supreme
Court.

An illustration is the case of Orissa State Warehousing Corporation v. CIT23. The

inquiry was whether the unit or processing plant set up by the respondent in a specific
Export Promotion Industrial Park could be given the situation with 'another modern
unit' in order to benefit an exception. The Supreme Court held that an exception
warning should be generously understood for the respondent. It subsequently excused
the allure. In any case, it should be referenced that there are different experts contrary
to this view, including different decisions of the Supreme Court. This case was an
example of the literal approach to construction of exemptions.24

19
A.B. Kafatiya, INTERPRETATION OF STATUTES, 293 (2008).
20
Singh, supra note 1, at 839 and 840.
21
Commissioner of Income Tax v. Ramakrishna Deo, AIR 1959 SC 239 (Supreme Court of India).
22
Commissioner of Central Excise v. North- Eastern Tobacco Company, AIR 2003 SC 616 (Supreme Court of
India).
23
Orissa State Warehousing Corporation v. Commissioner of Income Tax, AIR 1999 SC 1388 (Supreme Court
of India).
24
Orissa State Warehousing Corporation v. Commissioner of Income Tax, AIR 1999 SC 1388 (Supreme Court
of India).
 P a g e | 12

Subsequently, it tends to be presumed that specialists exist on the side of both liberal
just as exacting translation of exception arrangements in resolutions.

Nonetheless, where there is a beneficient object, like expanded creation or motivating

forces to co-agents, exception arrangements are to be generously understood.In the case
of CIT v. Straw Board Manufacturing25, the Supreme Court employed liberal
interpretation to strawboard within the expression ‘paper and pulp’ so as to enable the
respondent to benefit from concessions for the furtherance of industrial activity.26

The researcher opines that the observations of the Supreme Court in UoI v Wood
Papers27provides a part of the solution in resolving the conflicting methods of
interpretation of exemptions. The Court noticed that the relevance of an exception
should be carefully seen remembering authoritative plan, biased weight on citizens and
enlargement of income. Notwithstanding, when question about materialness is taken
out, and it is learned that the assessee was intended to be entitled, and afterward a
liberal development is suitable. Therefore, strict and liberal constructions are to be
invoked at different stages of interpretation of an exemption provision.28

The researcher is in agreement with this reading by the Supreme Court.

c. Machinery provisions

It has been held by the Supreme Court that a fiscal statute must be strictly construed
only with regard to taxing provisions such as charging provisions and not to machinery
provisions. A machinery section should be so construed so as to effectuate liability. 29
The researcher concurs with this line of thinking. However long the subject, assessee
and the pace of expense are clear, procedural viewpoints like the hardware for
authorization should not permit one to get away from the grip of tax collection.

25
Commissioner of Income Tax, Amritsar v. Straw Board Manufacturing Co. Ltd., AIR 1989 SC 1490
(Supreme Court of India).
26
Commissioner of Income Tax, Amritsar v. Straw Board Manufacturing Co. Ltd., AIR 1989 SC 1490
(Supreme Court of India).
27
Union of India v. M/S Wood Papers Ltd., AIR 1991 SC 2049 (Supreme Court of India).
28
Union of India v. M/S Wood Papers Ltd., AIR 1991 SC 2049 (Supreme Court of India).
29
CIT Central, Calcutta v. National Taj Traders, AIR 1980 SC 485 (Supreme Court of India).
 P a g e | 13

Evasion of tax

A significant departure from the Westminster principle was seen in the decision of the
House of Lords in Ramsay v. IRC30. For this situation, the citizen organization tried to
diminish its capital additions charge through a progression of exchanges that would
make fake capital misfortunes. Every one of these misfortunes would appear "certified"
according to the Westminster standard. Yet, taken all in all, the impact was that the
organization would get away from charge obligation. The court held that it couldn't
bear stilling notwithstanding progressively refined gadgets of expense evasion. It
needed to see the plan in general and not bit by bit. Holding that the court could not
apply the Westminster principle for sham transactions, the appeal was dismissed.31

The above decision significantly formed the backbone of the decision of the
Constitution Bench of the Supreme Court in McDowell v. CTO32 (“McDowell”). The
Supreme Court significantly held that the Westminster standard had been covered in
England and that India ought to likewise separate itself from the guideline. The court
expressed that expected impact of an exchange for monetary purposes must be
considered in deciding assessment risk and that nobody could pull off an expense
shirking project simply by expressing that nothing was illicit about it. The court was
spurred by different sick impacts of assessment evasion like loss of income,
accumulating of dark cash, trouble on excess citizens, imbalance of counsel accessible
to the Revenue and the handy avoider. The Court likewise saw that charge evasion was
deceptive in a government assistance state. The court held that the development of a
plan of duty shirking was neither liberal nor exacting. Or maybe, the inquiry is whether
an exchange is a gadget to maintain a strategic distance from expense and whether the
legal executive can accord endorsement to it. The Court had to take stock of new and
sophisticated legal devices and relate it to existing legislation with the help of
“emerging” techniques of interpretation.33

30
W.T. Ramsay v. Inland Revenue Commissioners, [1982] A.C. 300 (House of Lords).
31
W.T. Ramsay v. Inland Revenue Commissioners, [1982] A.C. 300 (House of Lords).
32
McDowell and Co. v. Commercial Tax Officer, AIR 1986 SC 649 (Supreme Court of India).
33
McDowell and Co. v. Commercial Tax Officer, AIR 1986 SC 649 (Supreme Court of India).
 P a g e | 14

This above case was notably criticized by the Supreme Court itself in Union of India v.
Azadi Bachao Andolan34. The Court here alluded to different specialists to help its
suggestion that the Westminster guideline was dead. Notwithstanding, it erroneously
held that the agreeing judgment in the McDowell case was not intelligent of the
dominant part. The researcher opines that it was also wrong in placing reliance on
another Constitution Bench decision of the Supreme Court that came after McDowell
i.e. Mathuram Agrawal v. State of MP35 since this latter decision was not pronounced in
the context of tax avoidance schemes.

It is in this manner the analyst's assessment that the McDowell case has in reality
prevailing with regards to altering the Westminster rule at any rate with regards to
burden evasion plots, and has given a capability to the standard of exacting
development to that degree. While this is a hypothetical peculiarity, it has been
essentially required to forestall enormous scope misfortunes to the income through
unpredictably planned plans. It has prompted the fortifying of the situation of the
Revenue opposite the assessee. However, the scientist contends that this capability has
made the undertaking of translation exceptionally perplexing. It gets intense to portray
satisfactory duty arranging from unsuitable expense shirking. Besides, an investigation
into the thought processes of either the council or the assessee is continually going to be
loaded with threat. The intelligence of this progression should be questioned, in any
event according to the perspective of legal understanding.

34
Union of India v. Azadi Bachao Andolan, AIR 2004 SC 1107 (Supreme Court of India).
35
Mathuram Agrawal v. The State of Madhya Pradesh, AIR 2000 SC 109 (Supreme Court of India).
 P a g e | 15

Chapter III

Vodafone Saga and its Critical Analysis

Department’s view – in brief: Department’s claim, in essence was: CGP is a nullity, a

sham entity.  Transfer of CGP’s shares has no substance. The parties to the transfer
themselves laid bare the real transaction – that of sale of HEL stake. Real transfer is:
The transfer of substantial interest (67% stake) in HEL.  This controlling shareholding
has its situs in India.  Since the transferred asset is situated in India, the capital gains
arising on the same is liable to tax in India. VIH was therefore required to deduct tax at
source.
 
Honourable Supreme Court has given a ruling that – only the legal transaction –sale
of CGP share - is to be considered. By selling CGP share, the seller may have
transferred its interests in HEL. However, Indian interest arises due to sale of CGP
share. It does not arise out of the SPA (which recorded the real facts). All the
arguments of the revenue were rejected.
 
Crux of the matter: Should one simply consider the legal form of the transaction (i.e.,
sale of one share in CGP); or should one consider real form - the entire set of facts as
stated by the parties themselves in the SPA and various other correspondences? Is the
case fit for considering “Substance over Form”? Is the case fit for lifting the Corporate
Veil?

Critical Analysis

Vodafone's contention was that it didn't pay directly for an asset situated in India. It
paid for gaining the controlling interest in a Cayman Islands-based holding
organization. The exchange was between two non-inhabitant organizations. The
Supreme Court applied a few grounded standards of assessment statute in choosing the
case for Vodafone. The tenet of structure over substance, the source rule, the law
identifying with immediate and roundabout exchanges, the idea of business resources,
and the counter maltreatment rules were totally gone into in the 276-page judgment.
Did the arrangement add up to sketchy assessment arranging or duty evasion gadget?
 P a g e | 16

The Supreme Court gave a firm 'no' as the response to this inquiry. As its would like to
think, utilization of holding organizations and the speculation structure and furthermore
the utilization of seaward monetary substances can be driven in specific cases by
business and business purposes.

The utilization of such gadgets won't infer charge evasion. Citizens are allowed to
mastermind their issues to limit charge inside the structure of duty laws. There is a
differentiation between genuine duty minimisation and oppressive assessment shirking.
The Court maintained the law set down in the Azadi Bachao case and furthermore
recognized the Mcdowell administering.

The Supreme Court has decided that the case concerned simple offer of offers
straightforwardness and there was no offer of resources. It was simply by getting the
portions of CGP that Vodafone oversaw a few sorts of organizations in the gathering
design of Hutchison. Valid, offer of portions of an unfamiliar organization isn't liable to
burden in India. Be that as it may, shouldn't something be said about different rights
procured by Vodafone by goodness of this perplexing exchange? What might be said
about control premium as a result of the 67% obtaining?

Shouldn't something be said about the non-contend understanding? Shouldn't

something be said about the brand licenses, working licenses, client base, and so on? As
per the Supreme Court, these rights were obtained uniquely as an outcome of the
exchange of offers in CGP. The exchange can't be taken apart and the installment can't
be part into compartments. There was no enemy of evasion arrangement in the Indian
law. The Court made the qualification between the look-to standard and the glance
through guideline. Without against evasion arrangements in the law, it is beyond the
realm of imagination to expect to summon the hypothesis of transparent.

A significant thought that won with the Supreme Court was that the convoluted designs
were set up some time before securing of the important offers. It dismissed the Bombay
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High Court's view that applying the proportionality hypothesis, a piece of the exchange
should be brought to burden. It reasoned that the arrangement ought to be seen as a
united exchange dependent on financial nexus. "Applying the 'take a gander at' test to
learn the real essence and character of the exchange, we hold, that the seaward
exchange thus is a real organized FDI interest into India which fell external India's
regional duty purviews, henceforth not available." This was not a trick exchange. Nor
was it intended to keep away from charge.
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Chapter IV

Conclusion

According to the researcher, the different dilutions to the standard of exacting

development are intelligent of legal acknowledgment of the way that the law-making
body is perhaps missing a couple of steps in its endeavour to wrestle with speedy
financial turns of events. This is noticeably found on account of tax avoidances. The
pace of development of the nature and elements of the Revenue is far exceeded by the
development of the animals and exercises subject to tax assessment. The exacting
guideline of development was motivated by a need to adjust the forces of the person
against the State and keep the State from punishing the individual superfluously. Be
that as it may, monetary advancements have moved the equilibrium against the State
and for organizations, who have available to them significant assets and expense
ability. It is nothing unexpected then that a large portion of the dilutions, for example,
purposive development and avoidance appear to support the Revenue. The couple of
developments that favour the assessee, like liberal development of exceptions,
additionally have hidden financial destinations like advancement of industrialization as
their premise.

In any case, the analyst is of the assessment that the legal executive experiences
welcomed some difficulty on itself by making dilutions to the standard of exacting
development. It has opened up roads for contentions dependent on administrative goal
and "genuine nature" of exchanges in cases including tax assessment. The analyst
accepts that the legal executive will settle this contention, as a general rule, by
preferring the Revenue, with regards to the explanations behind the production of
dilutions.

The brunt of this change, nonetheless, will be borne by the more fragile of the citizens.
Neither do they have the fortitude to concoct multifaceted contentions to lessen their
taxation rate nor helps legal demeanour appear to be in out.
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All together that the interests of these more vulnerable areas are ensured, the specialist
trusts that the dilutions to the standard of severe development be seen with incredible
alert. From a hypothetical perspective as well, the specialist is of the assessment that
the dilutions address a positive trade off and that they will prompt different issues in
legal translation. While the standard of exacting development actually stands firm on a
prevailing footing in the understanding of burdening resolutions, there can be no
uncertainty that the take offs from the standard have struck its viability in a way that the
ramifications will be considerable.
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