96. Mr. Aspi Chinoy, learned senior counsel contended that in the absence of LOB Clause in the India Mauritius Treaty, the scope of the treaty would be positive from Mauritius Special Purpose Vehicles (SPVs) created specifically to route investments into India, meets with our approval. We acknowledge that on a subsequent sale/transfer/disinvestment of shares by the Mauritian company, after a reasonable time, the sale proceeds would be received by the Mauritius Company as the registered holder/owner of such shares, such benefits could be sent back to the Foreign Principal/100% shareholder of Mauritius company either by way of a declaration of special dividend by Mauritius company and/or by way of repayment of loans received by the Mauritius company from the Foreign Principal/shareholder for the purpose of making the investment. Mr. Chinoy is right in his contention that apart from DTAA, which provides for tax exemption in the case of capital gains received by a Mauritius 197

company/shareholder at the time of disinvestment/exit and the fact that Mauritius does not levy tax on dividends declared and paid by a Mauritius company/subsidiary to its Foreign Shareholders/Principal, there is no other reason for this quantum of funds to be invested from/through Mauritius.

97. We are, therefore, of the view that in the absence of LOB Clause and the presence of Circular No. 789 of 2000 and TRC certificate, on the residence and beneficial interest/ownership, tax department cannot at the time of sale/disinvestment/exit from such FDI, deny benefits to such Mauritius companies of the Treaty by stating that FDI was only routed through a Mauritius company, by a company/principal resident in a third country; or the Mauritius company had received all its funds from a foreign principal/company; or the Mauritius subsidiary is controlled/managed by the Foreign Principal; or the Mauritius company had no assets or business other than holding the investment/shares in the Indian company; or the Foreign Principal/100% shareholder of Mauritius 198

company had played a dominant role in deciding the time and price of the disinvestment/sale/transfer; or the sale proceeds received by the Mauritius company had ultimately been paid over by it to the Foreign Principal/ its 100% shareholder either by way of Special Dividend or by way of repayment of loans received; or the real owner/beneficial owner of the shares was the foreign Principal Company. Setting up of a WOS Mauritius subsidiary/SPV by Principals/genuine substantial long term FDI in India from/through Mauritius, pursuant to the DTAA and Circular No. 789 can never be considered to be set up for tax evasion.

TRC whether conclusive

98. LOB and look through provisions cannot be read into a tax treaty but the question may arise as to whether the TRC is so conclusive that the Tax Department cannot pierce the veil and look at the substance of the transaction. DTAA and Circular No. 789 dated 13.4.2000, in our view, would not preclude the Income Tax Department from denying the tax treaty benefits, if it is established, on facts, that the Mauritius company has been interposed as the 199

owner of the shares in India, at the time of disposal of the shares to a third party, solely with a view to avoid tax without any commercial substance. Tax Department, in such a situation, notwithstanding the fact that the Mauritian company is required to be treated as the beneficial owner of the shares under Circular No. 789 and the Treaty is entitled to look at the entire transaction of sale as a whole and if it is established that the Mauritian company has been interposed as a device, it is open to the Tax Department to discard the device and take into consideration the real transaction between the parties , and the transaction may be subjected to tax. In other words, TRC does not prevent enquiry into a tax fraud, for example, where an OCB is used by an Indian resident for round- tripping or any other illegal activities, nothing prevents the Revenue from looking into special agreements, contracts or arrangements made or effected by Indian resident or the role of the OCB in the entire transaction.

99. No court will recognise sham transaction or a colourable device or adoption of a dubious method to evade 200

tax, but to say that the Indo-Mauritian Treaty will recognise FDI and FII only if it originates from Mauritius, not the investors from third countries, incorporating company in Mauritius, is pitching it too high, especially when statistics reveals that for the last decade the FDI in India was US$ 178 billion and, of this, 42% i.e. US$ 74.56 billion was through Mauritian route. Presently, it is known, FII in India is Rs.450,000 crores, out of which Rs. 70,000 crores is from Mauritius. Facts, therefore, clearly show that almost the entire FDI and FII made in India from Mauritius under DTAA does not originate from that country, but has been made by Mauritius Companies / SPV, which are owned by companies/individuals of third countries providing funds for making FDI by such companies/individuals not from Mauritius, but from third countries.

100. Mauritius, and India, it is known, has also signed a Memorandum of Understanding (MOU) laying down the rules for information, exchange between the two countries which provides for the two signatory authorities to assist each other in the detection of fraudulent market practices, 201

including the insider dealing and market manipulation in the areas of securities transactions and derivative dealings. The object and purpose of the MOU is to track down transactions tainted by fraud and financial crime, not to target the bona fide legitimate transactions. Mauritius has also enacted stringent "Know Your Clients" (KYC) regulations and Anti-Money Laundering laws which seek to avoid abusive use of treaty.

101. Viewed in the above perspective, we also find no reason to import the "abuse of rights doctrine" (abus de droit) to India. The above doctrine was seen applied by the Swiss Court in A Holding Aps. (8 ITRL), unlike Courts following Common Law. That was a case where a Danish company was interposed to hold all the shares in a Swiss Company and there was a clear finding of fact that it was interposed for the sole purpose of benefiting from the Swiss- Denmark DTA which had the effect of reducing a normal 35% withholding tax on dividend out of Switzerland down to 0%. Court in that case held that the only reason for the existence of the Danish company was to benefit from the 202

zero withholding tax under the tax treaty. On facts also, the above case will not apply to the case in hand.

102. Cayman Islands, it was contended, was a tax heaven and CGP was a shell company, hence, they have to be looked at with suspicion. We may, therefore, briefly examine what those expressions mean and understood in the corporate world.

TAX HAVENS, TREATY SHOPPING AND SHELL

COMPANIES

103. Tax Havens" is not seen defined or mentioned in the Tax Laws of this country Corporate world gives different meanings to that expression, so also the Tax Department. The term "tax havens" is sometime described as a State with nil or moderate level of taxation and/or liberal tax incentives for undertaking specific activities such as exporting. The expression "tax haven" is also sometime used as a "secrecy jurisdiction. The term "Shell Companies" finds no definition in the tax laws and the term is used in its pejorative sense, namely as a company which exits only on paper, but in reality, they are investment companies. Meaning of the expression `Treaty Shopping' was elaborately dealt with in Azadi Bachao Andolan and hence not repeated.

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104. Tax Justice Network Project (U.K.), however, in its report published in September, 2005, stated as follows: "The role played by tax havens in encouraging and profiteering from tax avoidance, tax evasion and capital flight from developed and developing countries is a scandal of gigantic proportions".

The project recorded that one per cent of the world's population holds more than 57% of total global worth and that approximately US $ 255 billion annually was involved in using offshore havens to escape taxation, an amount which would more than plug the financing gap to achieve the Millennium Development Goal of reducing the world poverty by 50% by 2015. ("Tax Us If You Can" September 2005, 78 available at http:/www.taxjustice.net). Necessity of proper legislation for charging those types of transactions have already been emphasised by us.

Round Tripping

105. India is considered to be the most attractive investment destinations and, it is known, has received $37.763 billion in FDI and $29.048 billion in FII investment in the year to March 31, 2010. FDI inflows it is reported were of $ 22.958 billion between April 2010 and January, 204

2011 and FII investment were $ 31.031 billions. Reports are afloat that million of rupees go out of the country only to be returned as FDI or FII. Round Tripping can take many formats like under-invoicing and over-invoicing of exports and imports. Round Tripping involves getting the money out of India, say Mauritius, and then come to India like FDI or FII. Art. 4 of the Indo-Mauritius DTAA defines a `resident' to mean any person, who under the laws of the contracting State is liable to taxation therein by reason of his domicile, residence, place of business or any other similar criteria. An Indian Company, with the idea of tax evasion can also incorporate a company off-shore, say in a Tax Haven, and then create a WOS in Mauritius and after obtaining a TRC may invest in India. Large amounts, therefore, can be routed back to India using TRC as a defence, but once it is established that such an investment is black money or capital that is hidden, it is nothing but circular movement of capital known as Round Tripping; then TRC can be ignored, since the transaction is fraudulent and against national interest.

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106. Facts stated above are food for thought to the legislature and adequate legislative measures have to be taken to plug the loopholes, all the same, a genuine corporate structure set up for purely commercial purpose and indulging in genuine investment be recognized. However, if the fraud is detected by the Court of Law, it can pierce the corporate structure since fraud unravels everything, even a statutory provision, if it is a stumbling block, because legislature never intents to guard fraud. Certainly, in our view, TRC certificate though can be accepted as a conclusive evidence for accepting status of residents as well as beneficial ownership for applying the tax treaty, it can be ignored if the treaty is abused for the fraudulent purpose of evasion of tax.

McDowell - WHETHER CALLS FOR RECONSDIERATION:

107. McDowell has emphatically spoken on the principle of Tax Planning. Justice Ranganath Mishra, on his and on behalf of three other Judges, after referring to the observations of Justice S.C. Shah in CIT v. A. Raman and Co. (1968) 1 SCC 10, CIT v. B. M. Kharwar (1969) 1 SCR 206

651, the judgments in Bank of Chettinad Ltd. v. CIT (1940) 8 ITR 522 (PC), Jiyajeerao Cotton Mills Ltd. v. Commissioner of Income Tax and Excess Profits Tax, Bombay AIR 1959 SC 270; CIT v. Vadilal Lallubhai (1973) 3 SCC 17 and the views expressed by Viscount Simon in Latilla v. IRC. 26 TC 107 : (1943) AC 377 stated as follows: "Tax planning may be legitimate provided it is within the framework of law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that is honourable to avoid the payment of tax by resorting to dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges."

108. Justice Shah in Raman (supra) has stated that avoidance of tax liability by so arranging the commercial affairs that charge of tax is distributed is not prohibited and a tax payer may resort to a device to divert the income before it accrues or arises to him and the effectiveness of the device depends not upon considerations of morality, but on the operation of the Income Tax Act. Justice Shah made the same observation in B.N. Kharwar (supra) as well and after quoting a passage from the judgment of the Privy Council stated as follows :-

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"The Taxing authority is entitled and is indeed bound to determine the true legal relation resulting from a transaction. If the parties have chosen to conceal by a device the legal relation, it is open to the taxing authorities to unravel the device and to determine the true

character of the relationship. But the legal effect of a transaction cannot be displaced by probing into the "substance of the transaction". In Jiyajeerao (supra) also, this Court made the following observation:

"Every person is entitled so to arrange his affairs as to avoid taxation, but the arrangement must be real and genuine and not a sham or make-believe."

109. In Vadilal Lalubhai (supra) this Court re-affirmed the principle of strict interpretation of the charging provisions and also affirmed the decision of the Gujarat High Court in Sankarlal Balabhai v. ITO (1975) 100 ITR 97 (Guj.), which had drawn a distinction between the legitimate avoidance and tax evasion. Lalita's case (supra) dealing with a tax avoidance scheme, has also expressly affirmed the principle that genuine arrangements would be permissible and may result in an assessee escaping tax. 208

110. Justice Chinnappa Reddy starts his concurring judgment in McDowell as follows:

"While I entirely agree with my brother Ranganath Mishra, J. in the judgment proposed to be delivered by me, I wish to add a few paragraphs, particularly to supplement what he has said on the "fashionable" topic of tax avoidance."

(emphasis supplied)

Justice Reddy has, the above quoted portion shows, entirely agreed with Justice Mishra and has stated that he is only supplementing what Justice Mishra has spoken on tax avoidance. Justice Reddy, while agreeing with Justice Mishra and the other three judges, has opined that in the very country of its birth, the principle of Westminster has been given a decent burial and in that country where the phrase "tax avoidance" originated the judicial attitude towards tax avoidance has changed and the Courts are now concerning themselves not merely with the genuineness of a transaction, but with the intended effect of it for fiscal purposes. Justice Reddy also opined that no one can get away with the tax avoidance project with the mere statement that there is nothing illegal about it. Justice Reddy has also opined that the ghost of Westminster (in the 209

words of Lord Roskill) has been exorcised in England. In our view, what transpired in England is not the ratio of McDowell and cannot be and remains merely an opinion or view.

111. Confusion arose (see Paragraph 46 of the judgment) when Justice Mishra has stated after referring to the concept of tax planning as follows:

"On this aspect, one of us Chinnappa Reddy, J. has proposed a separate and detailed opinion with which we agree."

112. Justice Reddy, we have already indicated, himself has stated that he is entirely agreeing with Justice Mishra and has only supplemented what Justice Mishra has stated on Tax Avoidance, therefore, we have go by what Justice Mishra has spoken on tax avoidance.

113. Justice Reddy has depreciated the practice of setting up of Tax Avoidance Projects, in our view, rightly because the same is/was the situation in England and Ramsay and other judgments had depreciated the Tax Avoidance Schemes.

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114. In our view, the ratio of the judgment is what is spoken by Justice Mishra for himself and on behalf of three other judges, on which Justice Reddy has agreed. Justice Reddy has clearly stated that he is only supplementing what Justice Mishra has said on Tax avoidance.

115. Justice Reddy has endorsed the view of Lord Roskill that the ghost of Westminster had been exorcised in England and that one should not allow its head rear over India. If one scans through the various judgments of the House of Lords in England, which we have already done, one thing is clear that it has been a cornerstone of law, that a tax payer is enabled to arrange his affairs so as to reduce the liability of tax and the fact that the motive for a transaction is to avoid tax does not invalidate it unless a particular enactment so provides (Westminster Principle). Needless to say if the arrangement is to be effective, it is essential that the transaction has some economic or commercial substance. Lord Roskill's view is not seen as 211

the correct view so also Justice Reddy's, for the reasons we have already explained in earlier part of this judgment.

116. A five Judges Bench judgment of this Court in Mathuram Agrawal v. State of Madhya Pradesh (1999) 8 SCC 667, after referring to the judgment in B.C. Kharwar (supra) as well as the opinion expressed by Lord Roskill on Duke of Westminster stated that the subject is not to be taxed by inference or analogy, but only by the plain words of a statute applicable to the facts and circumstances of each case.

117. Revenue cannot tax a subject without a statute to support and in the course we also acknowledge that every tax payer is entitled to arrange his affairs so that his taxes shall be as low as possible and that he is not bound to choose that pattern which will replenish the treasury.Revenue's stand that the ratio laid down in McDowell is contrary to what has been laid down in Azadi Bachao Andolan, in our view, is unsustainable and, therefore, calls for no reconsideration by a larger branch. 212

PART-IV

CGP AND ITS INTERPOSITION

118. CGP's interposition in the HTIL Corporate structure and its disposition, by way of transfer, for exit, was for a commercial or business purpose or with an ulterior motive for evading tax, is the next question. Parties, it is trite, are free to choose whatever lawful arrangement which will suit their business and commercial purpose, but the true nature of the transaction can be ascertained only by looking into the legal arrangement actually entered into and carried out. Indisputedly, that the contracts have to be read holistically to arrive at a conclusion as to the real nature of a transaction. Revenue's stand was that the CGP share was a mode or mechanism to achieve a transfer of control, so that the tax be imposed on the transfer of control not on transfer of the CGP share. Revenue's stand, relying upon Dawson test, was that CGP's interposition in the Hutchison structure was an arrangement to deceive the Revenue with the object of hiding or rejecting the tax liability which otherwise would incur.

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119. Revenue contends that the entire corporate structure be looked at as on artificial tax avoidance scheme wherein CGP was introduced into the structure at the last moment, especially when another route was available for HTIL to transfer its controlling interest in HEL to Vodafone. Further it was pointed out that the original idea of the parties was to sell shares in HEL directly but at the last moment the parties changed their mind and adopted a different route since HTIL wanted to declare a special dividend out of US $ 11 million for payment and the same would not have been possible if they had adopted Mauritian route.

120. Petitioner pointed out that if the motive of HTIL was only to save tax it had the option to sell the shares of Indian companies directly held Mauritius entities, especially when there is no LOB clause in India-Mauritius Treaty. Further, it was pointed out that if the Mauritius companies had sold the shares of HEL, then Mauritius companies would have continued to be the subsidiary of HTIL, their account could have been consolidated in the hands of HTIL and HTIL 214

would have accounted for the accounts exactly the same way that it had accounted for the accounts in HTIL BVI/nominated payee. Had HTIL adopted the Mauritius route, then it would have been cumbersome to sell the shares of a host of Mauritian companies.

121. CGP was incorporated in the year 1998 and the same became part of the Hutchison Corporate structure in the year 2005. Facts would clearly indicate that the CGP held shares in Array and Hutchison Teleservices (India) Holdings Limited (MS), both incorporated in Mauritius. HTIL, after acquiring the share of CGP (CI) in the year 1994 which constituted approximately 42% direct interest in HEL, had put in place various FWAs, SHAs for arranging its affairs so that it can also have interest in the functioning of HEL along with Indian partners.

122. Self centred operations in India were with 3GSPL an Indian company which held options through various FWAs entered into with Indian partners. One of the tests to examine the genuineness of the structure is the "timing test" 215

that is timing of the incorporation of the entities or transfer of shares etc. Structures created for genuine business reasons are those which are generally created or acquired at the time when investment is made, at the time where further investments are being made at the time of consolidation etc.

123. HTIL preferred CGP route rather than adopting any other method (why ?) for which we have to examine whether HTIL has got any justification for adopting this route, for sound commercial reasons or purely for evasion of tax. In international investments, corporate structures are designed to enable a smooth transition which can be by way of divestment or dilution. Once entry into the structure is honourable, exits from the structure can also be honourable.

124. HTIL structure was created over a period of time and this was consolidated in 2004 to provide a working model by which HTIL could make best use of its investments and exercise control over and strategically influence the affairs of HEL. HTIL in its commercial wisdom noticed the disadvantage of preferring Array, which would have created 216

problems for HTIL. Hutchison Teleservices (India) Mauritius had a subsidiary, namely 3GSPL which carried on the call centre business in India and the transfer of CGP share would give control over 3GSPL, an indirect subsidiary which was incorporated in the year 1999. It would also obviate problems arising on account of call and put options arrangements and voting rights enjoyed by 3GSPL. If Array was transferred, the disadvantage was that HTIL had to deal with call and put options of 3GSPL. In the above circumstances, HTIL in their commercial wisdom thought of transferring CGP share rather than going for any other alternatives. Further 3GSPL was also a party to various agreements between itself and the companies of AS, AG and IDFC Group. If Array had been transferred the disadvantage would be that the same would result in hiving off the call centre business from 3GSPL. Consolidation operations of HEL were evidently done in the year 2005 not for tax purposes but for commercial reasons and the contention that CGP was inserted at a very late stage in order to bring a pre tax entity or to create a transaction that would avoid tax, cannot be accepted.