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Rashmin Sanghvi & Associates

Chartered Accountants

109, 1st Floor, Arun Chambers,
Tardeo Road,
Mumbai - 400 034,
Maharashtra, India.

Tel. Nos.: (+91 22) 2351 1878, 2352 5694.

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Home Articles Taxation         Share :

Vodafone - A Wake up Call


CA Rashmin Chandulal Sanghvi


Sr. No. Topics Covered
I. Charts
II. Tax Havens
III. Substance Vs. Form
IV. Company – Separate Legal Entity
V. Alternatives
VI. Other Legal Issues
VII. Wake Up Call
VIII. Tax Planning Possible

Note: A similar article by the author has been published in the magazine: “Taxmann’s Corporate Professionals Today” in its February 2009 issue. This article considers some more issues.

I.1 Vodafone case - simple presentation

Let us see with two simple charts, the facts of the present case of transfer of shares by Hutchison to Vodafone.

Chart 1

A Non-Resident of India (Hutchison) sold the shares of a Foreign Co. (Cayman Island Co.) to another Non-Resident – Vodafone. Payment is completed outside India. All contracts were executed outside India.

Can Government of India tax the capital gains arising from the sale? Shares are situated at the registered office of the company – i.e., Cayman Island. Does India have a jurisdiction to tax foreign capital gains!

Assessee’s stand is: Neither the assessee - seller is an Indian resident, nor the source of income is in India. Hence India has no jurisdiction. Hence all proceedings in the matter are void–ab-initio.

I.2 Vodafone case

Chart II

Comments arising from the second chart: There is an Indian business valued at $11 billion. There is an attempt to cover it up under a network of tax haven companies. Doesn’t it look like some one trying to cover up an elephant behind a handkerchief! Even if they use ten handkerchiefs, can they cover the elephant!

Note: the above is a representative chart to explain the case. It does not show exactly the number of tax haven companies involved, or the actual costs of the company. The issue is: in a tax haven, you can form as many companies as you want. The cost may be from $ 1,000 to $ 10,000 per company. You don’t need an office or a person there. The local consultant registers a company with the local Government, & opens a file in the company’s name. That is all that is present in the tax haven.

Now whether there were one or ten companies in several tax havens, they were supposed to be the owners of a stake in an Indian business sold for dollars eleven billions.

I.3 Summary of the decisions :

Since the decisions are well known, only a summary is given here. After the sale, Indian Income-tax department served a notice on Vodafone and asked it to show cause why tax was not deducted at source as required under S. 195. Instead of responding to the notice, Vodafone filed a writ petition in the Mumbai High Court challenging the jurisdiction of the Income tax department. Honourable High Court dismissed the writ petition with costs.

Vodafone filed appeal before the Supreme Court. Honourable Supreme Court has referred the matter to the Income tax department with specific instructions to examine facts & determine whether the department had jurisdiction in the present case or not.

Now the matter has to start at the assessing officer level. Vodafone has to submit full facts to the department & department has to decide the issue on jurisdiction. Subsequent steps will follow.

It is interesting to note that the main party – the seller – Hutchison is still not a party to the proceedings.

U.S. Government has passed legislation and curbed this loophole. If tax rates are made reasonable and full credit is given for ‘double tax’, the attraction for CFC can be reduced.

II. What is a tax haven country!

A tax haven is a country where it is the undeclared objective of the Government to help the rich people of the world in avoiding other countries’ taxes and regulatory laws. The tax haven prevents its own people from tax evasion. But incorporates laws specifically to help tax evasion of other countries.

How do you prove the above statement?

The proof is in conduct. And to understand the conduct one should be capable of having a macro look at all the laws and all the circumstances. No Government is going to admit that it is helping in tax evasion.

Consider an illustration of Malta.

During the 1990’s, Government of Malta issued a tender. They wanted best tax advisor to redraft the Maltese Income-tax Act. Brief given was : “Make the Maltese Income-tax Act so complex that foreign courts won’t understand it.”

The logic was as under.

Malta is a tax haven and would not target tax collection based on income. If it grants total tax exemption to its offshore companies, foreign courts would hold that “the companies are not liable to tax in Malta. So they are not residents of Malta. So they are not entitled to Maltese Double Tax Avoidance Treaty.”

How to ensure that the offshore companies are not taxed and yet they get the benefit of the Treaty! An International firm of chartered accountants won the tender. Finally the tax law was made on the following lines :

Maltese Income-tax Act levied normal tax on offshore companies. Some other corporate law provided that total tax paid by the offshore company would be refunded by the Government to the shareholders. The promice was, the refund will be granted within twenty four hours.

This is how a tax haven makes laws.

A sovereign Country is a separate country having its own existence, constitution & laws. It gets an equal status in the U.N. The size of the country is not important. Even Mauritius gets one vote just as China & India would get one vote at the U.N.

However, when the country passes laws specifically designed to help tax evasion by the rich of the world, can that tax haven be given same status as any other regular country! Especially by Income-tax department! U.N. has different objectives. Income-tax department has different objectives. In my humble submission, with respect, it would be incorrect to grant equal status to a tax haven country as far as tax laws are concerned. U.S. Government does not sign Double Tax Avoidance Treaties with any tax haven – unless that Government promices and effectively curbs tax avoidance for U.S. residents. They have clarity of mind.

However, In India, Government itself is confused. Indian Parliament has not passed laws preventing abuse of Indian Income-tax Act and treaties through tax havens. And Indian courts would go by Indian laws. If the Government chooses not to pass the relevant anti-abuse laws, Courts may not take up the Parliament’s function.

As long as in India, the Government does not pass necessary laws, can one use tax havens for its tax planning! Of course, yes. However, in the case of Vodafone & Hutchison, there are more issues to be considered.

III. Substance Vs. Form.

The above charts prima facie show that the substance of the facts is different from the form of transfer of shares of a Cayman island company. When do you look at the facts and substance rather than the form!

III.1 Illustrations :

Sadhu. Consider an illustration: Supposing a man takes Diksha, starts wearing orange clothes and gives sermons on Geeta. Everyone considers him to be a Sadhu. Now the allegations are that in addition to the above, he has been enticing his lady bhaktas, forcing sex with them, taking pornographic films and was involved in violent activities. Would you still call him a Sadhu?

The point is : The outward form leads one to certain presumptions about facts. Normally, we join our hands in “Pranam” the moment we look at a man wearing orange clothes. Every time we see a Sadhu, we don’t ask his antecedents. We simply say: “Pranam”.

If the facts genuinely tally with the presumptions, then everything is fine. You go by the form. However where the facts do not tally with the presumptions, the form has to be rejected and substance has to be considered. The accused in this illustration will certainly not be treated as a Sadhu. An intelligent man will not worship such a person. His Diksha is to be ignored.

One more illustration : An Income-tax officer is doing assessment of a case. Is he permitted to doubt each and every transaction! An assessee may submit his books of accounts for assessment. Can the Commissioner ask him to prove every purchase bill, every expense voucher and every loan! No. Prima facie he has to accept the facts as submitted. However, if one of the purchase bill is from a company known to be doing the business of issuing bogus bills; then the officer has every right to doubt the assessee. Once the doubt has arisen, he can ask the assessee to prove everything.

There can be no hard and fast rules about when to investigate. These are matters of discretion, reasonable judgement and wisdom.

III.2 Company :

It is presumed that a company is a separate legal entity. SW Its existence is independent of the existence of its shareholders as well as directors.

However a registration certificate and one file in a tax haven consultant’s office does not mean a company.

By a company we mean people who have come together to jointly do business in a corporate form. The company would have its own activities, business, assets & liabilities and an independent management.

When the company is simply a paper company, when the tax payers themselves ignore its existence and treat the company assets as their own assets, that paper certificate has no value. Company does not have an independent existence. It needs to be ignored for all practical purposes.

III.3 Title Document :

When Hutchison transferred the shares of a Cayman Island company, what was the value of the share certificates? Consider an illustration of Warehouse Receipt.

We are aware of the normal business tradition where large quantities of commodities are stored in warehouses. Wholesalers and traders trade and speculate in these commodities. For sale of 10,000 tonnes of wheat lying in a particular godown, they would only be transferring warehouse receipts (WR). The WR may change hands ten times in a week. That does not mean that 1,000 trucks will transport the 10,000 tonnes of wheat ten times in a week.

And yet the WR by itself has no value. It represents 10,000 tonnes. Every time the WR is sold, in substance, the wheat is being sold.

The form is : the WR is being transferred. The substance is, the wheat is being transferred.

In Vodafone’s case, the shares of the Mauritius Company as well as the shares of the Cayman Island Company were nothing more than warehouse receipts or title documents. In themselves, the shares had no value. The companies had no substance and no independent existence.

III.4 Title Document : One can go by “Form” when the form represents the fact.

When do you challenge the form & enquire whether form truly represents facts or not! If an Income tax commissioner (CIT) were to scrutinise each & every transaction of each & every assessee – it would be impossible to run the department.

Hence, normally the department accepts the returns & scrutinises only a small percentage of the total. Auditors also do random – sample – checking. Thus normally, form – what the assessee says, is to be accepted.

However, when the form does not represent facts, one has to look at the real facts – substance.

III.5 Assessee’s Conduct :

It has been admitted before the Honorable Mumbai High Court that Hutchison made a statement to its share holders that it had sold its stake in the Indian business. The auction of its stake in Hutchison Essar, the final agreement between the buyer & the seller, submissions to FIPB for permission for transfer of shares from seller to the buyer, Hutchison’s declaration to the SEC of U.S. – all legal & statutory declarations & filings stated that Hutchison’s stake in the Indian business had been sold to Vodafone. In all these statements, all the - Cayman Island companies & the Mauritian companies were ignored. Most of these statements are available even today on relevant websites.

See the note below Chart II. What happened here was that both companies announced to the world that a transfer of the elephant had taken place. When Indian tax department enquired, they said, we have only transferred the handkerchief.

The facts were not submitted by the assessees. The tax commissioners searched on the internet, down loaded these statements & submitted the same before the honorable Mumbai High Court.

When the Honorable High Court queried the assessee’s representative – whether the submissions by the Income-tax commissioner were right or wrong, it was admitted that the submissions were right.

To see the facts, there is no need for amendment in the Indian Income-tax Act. You don’t need a specific provision to say that department shall go by true facts and not by artificial tax avoidance instruments. It is not necessary for the department to “Lift the Corporate Veil”. The seller & the buyer both have demolished the corporate veil.

III.6 Let us consider different circumstances. When some one makes a portfolio investment in shares, his investment is only in the shares. Nothing more. The investor has no right, title or interest in the assets of the company. Hence, when a portfolio investor sells his shares in a company, he does not have to consider the value of the assets held by the company.

However, when some one owns substantial / controlling stake, perceptions change. In real life, for valuation of shares for take over etc. we do accept this fact. In this decade, some famous valuations were made in India for division of companies between brothers. The reputed valuers determined values on the basis of the businesses controlled by those companies. These values were different from the values which a portfolio investor would get on the share market.

Can we have different criteria for Income-tax! In other words, can we say that for Income-tax purposes, we will ignore facts & go by form only!

III.7 Conclusion on Substance Vs. Form

Normally, all authorities would go by form. When there is a prima facie evidence that the form does not represent facts, the authorities should investigate & recognise facts. In the present case, it is not necessary for the CIT to raise the issue of Substance Vs. Form. Assessees themselves have thrown the ‘Form’ to the wind. The CIT has to simply consider the facts as stated by the assessees before their own share holders and several authorities. Simply recognize the assessee’s conduct.

Substance Vs. Form Completed.

IV. Company – Separate Legal Entity.

IV.1 Normal Sequence of Events.

(i) Sale Transaction. Normally, there would be a share transfer form for the Cayman Island company. This may be supplemented by a transfer agreement. In this case, the agreement did not even refer to Cayman Island company.

(ii) Where the transfer needs permission, appropriate permission is taken. In this case, FIPB permission was taken. The application was for transfer of Indian JV partnership from Hutchison to Vodafone. No mention was made about Mauritius or Cayman Island companies.

(iii) Buyer pays consideration to seller and the seller transfers capital asset to the Buyer. If what the assessee claimed was true, Vodafone, the Netherlands company should make payment to the Cayman Island company. It seems, Vodafone, the British company made a direct payment to Hutchison, the Hong Kong company. Transfer of Cayman Island company was not mentioned any where. These facts appear from several discussions.

(iv) Before making the payment, the seller deducts tax at source and pays to the Government of India. If the transaction is not taxable, there will be no deduction of tax at source.

Who is to decide whether a transaction is taxable or not! Normally, the assessee’s chartered accountant will consider the facts & give a certificate. However, this is procedure. Not final. In case of doubt, an application is to be made to the tax commissioner. He will issue the necessary certificate.

IV.2 Legal Issues: Company is a separate legal entity – Company Law.

Words & Concepts develop over time. Only natural person is an individual. All associations of two or more individuals are contractual/legal arrangements. These associations may be separate legal entities or may not be separate legal entities.

We have studied during student days in the subject: “Mercantile Law” that basically, there was the Indian Contract Act, 1872. Partnership is a contract between the partners to do business together. Since, this is a very popular form of contract, Chapter XI - Sections 239 to 266 in the Contract Act is replaced by a separate Law: The Indian Partnership Act, 1932.

Similarly the Memorandum and Articles of Association is an agreement amongst original promoters of a company to do business in a particular manner. When they register their agreement with the Registrar of Companies, the law grants a separate legal entity status. (Section 34 of the Indian Companies Act.) History of the concept of “Separate Legal Entity” involves the case of Saloman Vs. Saloman, the East India Company and several developments. (This is an interesting study & Wikipedia website gives considerable information.)

We all study the development and history of these concepts as students. Moment, we pass our exams, all history is “purged”. We look at the current legal position, take it for granted & then argue strongly based on the concept developed.

We may remember that law is an evolutionary process. From the barter system of trade we have come a long way. In that evolutionary process, human kind has developed several concepts. These concepts, when given the form of law, acquire the sanctity & force of law. (Hindu Law is a classic illustration.) But the methods of business will keep changing. Because of the advances in technology, the methods of business change faster than law. In the process, we forget the link, create a confusion & then litigation.

For resolving the confusion, we have to simply go back to the whole process, remember it & then apply the concepts to the current facts.

IV.3.1 Section 34 of Indian Companies Act grants the legal status of a separate legal entity. When the promoters of the company/ subscribers to the Memorandum of Association of the company submit the Memorandum to the Registrar of Companies; and the Registrar registers the company, their association is known as a company – a separate legal entity.

The share holder or even a director of a Company cannot claim any right over any specific asset of the Company. Share holders’ only rights are to get a dividend if and when the Company declares a dividend, to participate in the liquidation proceeds and to vote at the share holders’ meetings. Bacha F. Guzdar V. CIT AIR 1955 SC 74; 25 Co. Cases 1.

IV.3.2 Company has perpetual existence. (Section 34, Indian Companies Act.) Even if all the share holders of the Company die, Company’s existence continues. The heirs of the deceased share holders will become the new share holders.

IV.3.3 Company’s liability is not the liability of the share holders.

In fact substantial growth of the corporate sector is largely due to these concepts having found favour with the law makers.

This Concept is accepted. And yet, this concept has been developed, compromised to a great extent in practical life. And we experience & accept it. We realise that “The concept is not an Absolute.”

Illustrations :

When a closely held company applies for a loan, the bank asks for and the directors & substantial share holders give personal guarantees. The Concept of Limited Liability goes for a toss.

Under the Companies Act, Income-tax Act, FEMA & several other regulatory laws, the directors are held personally responsible for certain offences of the Company. The concept of Separate Legal Entity goes for a toss.

Why! After all, the Company operates through its directors. A director cannot commit a violation of a law, & then hide behind the veil of separate corporate entity. No one even talks of separate legal entity. If the directors have committed fraud, they will go to Jail.

IV.3.4 Assets of the Company do not belong to the share holders of the Company.

Hence when the shares of a company are transferred, the consequences are for transfer of shares. Not as if the assets of the company are transferred.

When the shares of a company are transferred, the assets of the company remain the assets of the company. There is no transfer of Company’s assets.

However, when the promoters & directors themselves violate this assumption, can they still claim protection behind the legal fiction! As commonly seen in India: if the directors stay in Company owned residences & treat the same as their personal asset, Company owned cars are used as personal vehicles for Directors’ children’s travels; if all Board & Share Holders’ meetings are held on dining table; for income tax & stamp duty purposes, can they claim that Company’s assets are not their own assets!

IV.4 Courts may lift the Corporate Veil when a controlling interest is being considered or when a company is incorporated with improper objective. Tax evasion is an improper objective. Courts will not knowingly permit people abusing the legal entity & status granted to a company when that status is being abused.

In CIT Vs. Sri Meenakshi Mills Ltd., AIR 1967 SC 819, the Supreme Court held that: “The Income tax Authorities were entitled to pierce the veil of corporate entity and to look at the reality of the transaction to examine whether the corporate entity was being used for tax evasion. In this case, a separate legal entity was brought into existence outside the taxable territory with the ulterior motive of evading the tax obligation by the assessees.”

IV.5 As seen earlier (paragraph III.5 – Assessee’s Conduct), in this case, the CIT does not have to lift the corporate veil. Both – the seller & the buyer have destroyed the corporate veil.

---- Company – Legal Entity discussion Completed -----

V. Alternatives :

In my submission, based on the above stated facts, the assessee – Hutchison is clearly liable to tax in India on the Capital Gains. The assessee – Vodafone is liable to deduct income tax at source & pay to the Government of India. Let us consider some alternatives.

V.1 Mauritius

Assuming that the Mauritian company had transferred the shares in the Indian company instead of Hutchison Hong Kong transferring the shares of the Cayman Island company, what would be the consequences?

The shares of the Indian company would be and are Indian assets. Now whether one considers: (i) the shares being transferred; or (ii) a controlling stake in the Indian company being transferred; either way it would be transfer of an Indian asset by a Mauritian company. For a moment leaving aside my views on “Substance Vs. Form”, and going by the Supreme Court decision in Azadi Bachao Andolan case, there would be capital gains taxable in India under the Indian Income-tax Act. Under the India - Mauritian treaty, these capital gains cannot be taxed in India. Hence, it would be tax free. All the controversies would disappear.

Since the Azadi Bachao Andolan (ABA) decision has been given by the Supreme Court, no CIT could levy income tax on such a transaction. In a way, one can say that the Government has accepted the ABA decision. So Indo-Mauritian treaty is valid and treaty shopping is permitted by Government of India & even by the Supreme Court of India.

Why they did not transfer Indian Shares & transferred the Cayman shares! We do not know. Let us not go into the hypothetical issues of why certain transaction was not conducted in a certain matter.

V.2 Hutchison’s Income-tax Return :

So far, all legal actions have been between the Income-tax department and Vodafone. Now, supposing Hutchison files income-tax return & takes up proceedings in its own hands. What will be the consequences!

Hutchison Mauritius may file an Income-tax return & claim that it has sold the 67% (or what ever may be the correct percentage) shares in Hutchison Essar. It would claim the benefit under India – Mauritius Double Tax Avoidance Agreement (DTA). It would produce the Residence certificate from Mauritius authorities. Relying on the SC decision in Azadi Bachao Andolan case, it would claim that it is not liable to Income-tax in India. Hutchison is not bound by the submissions made by Vodafone. If Hutchison is held to be not liable to tax on the transaction, Vodafone automatically gets the relief. It is settled law in India that if the earner of income is not liable to income-tax; the payer has no responsibility to deduct tax at source.

The fact is, Hutchison Hong Kong company has always maintained that it (Hutchison Hong Kong) has sold its stake in the Indian company. This statement is made at so many places. The existence of Mauritius company has always been ignored. Now if they make such a claim, it may be considered as an “after thought” or “sham” claim. If it can prove substance in such a claim, it has got tremendous opportunity.

V.3 A shareholder does not acquire rights in the assets of the company unless he does.

In the present case, Vodafone acquired rights in the name, IPR, and all assets of the company. Collectively it is called controlling stake. Controlling stake is different from the land/ Building & IPR of the company as well as different from the shares in the company.

When someone buys shares and then actually gets possession over the company’s assets; what happens! Can you still say that the shares do not represent the assets!

When you buy shares in a Co-operative Housing Society, what are you buying – a house or shares!

There are some builders who have incorporated Pvt. Ltd. Companies instead of Co-operative societies. The shareholder in the company gets a right to occupy a flat. Can you still say that you are only transferring shares and not the flat!

There is a statement: “Nothing is Absolute.” It very much applies to this discussion. Company is a separate legal entity. Fine. But the statement is not absolute. If facts of the case warrant ignoring the separate legal entity, it has to be ignored. Of course, this is a serious action to be taken with utmost care.

VI. Other Legal Issues :

VI.1 In the present case, Hutchison Hong Kong has transferred 67% shares with its controlling interest in an Indian company – Hutchison Essar. It has earned capital gains. Hence, prima facie it is liable to pay capital gains tax in India – under the Indian Income-tax Act.

Hutchison is a resident of Hong Kong. There is no DTA between India and Hong Kong.

VI.2 Vodafone, as a payer has to deduct tax at source and pay to the Government of India.

VI.3 Does asking a Non-Resident to comply with Indian legal procedures amount to extra-territorial jurisdiction? It is now held by the Honourable Supreme Court that Vodafone cannot refuse to respond to the notice served by the department. However, once the assessee submits all information, still, the issue remains open: Does the department have a jurisdiction to insist on Vodafone deducting tax at source!

As per the information available from the decision, Vodafone had applied to FIPB for a permission to invest. It had agreed to comply with Indian legal procedure.

Vodafone was put on notice by the Income-tax department. Considering both facts, it could not make a claim of extra-territorial jurisdiction.

This is a provision where “Balance of Convenience” may be considered. A non-resident having absolutely no connection with India may not be expected to comply with Indian procedures. For example, a foreign company pays interest, dividends or professional fees to an Indian resident. It cannot be expected to comply with Indian legal procedure. Vodafone had accepted before FIPB to comply with Indian law. It can be expected to comply with all applicable Indian laws.

VI.4 Cayman Island:

We have considered here, Section 34 of the Indian Companies Act. However, the assessee claims transfer of shares of the Cayman Island Company. Hence one may also have a look at the Companies Act of the Cayman Island. Following is the relevant extract :

Cayman Islands Companies Act.

“Consequences of incorporation.

27. (1) Upon the filing of the memorandum of association a company shall be deemed to be registered, and the Registrar shall issue a certificate under his hand and seal of office that the company is incorporated with effect from the date of the registration of the memorandum of association and, in the case of a limited company, that the company is limited.

(2) From the date of incorporation, the subscribers of the memorandum of association, together with such other persons as may, from time to time, become members of the company, shall be a body corporate by the name contained in the memorandum of association, capable forthwith of exercising all the functions of a natural person of full capacity irrespective of any question of corporate benefit, and having perpetual succession with power to hold lands but with such liability on the part of the members to contribute to the assets of the company in the event of its being wound up as is provided in this Law. This subsection applies to companies incorporated before, on or after the 18th January, 1988.

(3) A certificate of incorporation of a company issued under this Law shall be conclusive evidence that compliance has been made with all the requirements of this Law in respect of incorporation and registration.

(4) Every copy of a memorandum or articles of association filed and registered in accordance with this Law or any extract there from certified under the hand and seal of office of the Registrar as a true copy shall be received in evidence in any court of the Islands without further proof.”

It is largely similar to Indian Companies Act. Does not require any additional comment. Principles discussed in this article would apply.

In a legal debate, one can find precedents on either side of the matter. This fact has been proved in several cases. Vodafone’s matter before the Bombay High Court is only the latest illustration of this fact. Both sides had presented volumes of precedents before the High Court. All the decisions are correct decisions. The point is, one can go on arguing over the form of the matter for ages. However if one were to look at the substance of the facts, the matter does not need more than half an hour discussion. The huge complicated net work of legal arguments needs to be cut down to size with down-to-earth common sense. (Note: There is considerable literature on the internet on the subject: “Death of Common Sense”.)

VI.5 Let us go a few steps further in the logical arguments. 

Can the assessee claim: “Fine. Shares of both the Mauritius Company and the Cayman Island Company are only title documents. Ignore all tax haven companies. Now can we claim the benefit of India’s DTA with the Countries of Residence of the ultimate beneficial owner!”

Can Hutchison claim ……. Sorry. There is no treaty with Hong Kong.

Vodafone is U.K. resident & hence can it claim India – U.K. – DTA relief! As far as Vodafone is concerned, it has not earned income in this transaction. As a payer & tax deductor, it is liable to follow procedure under the Indian Income tax Act. There is no protection under DTA for non-performance of one’s duties. Vodafone is like any other defaulter for non deduction of tax at source.

VI.6 Assuming that Hutchison were a resident of Italy & not of Hong Kong, could it claim the relief under India – Italy DTA? There are a few DTAs with OECD countries where capital gains are not chargeable in the Country of Source. They are chargeable only in the Country of Residence.

Under article 14(6) of this DTA, the capital gains would not be taxable in India. This would be a new debate. Purpose of this paragraph is to raise a debate. It would be interesting for all those assessees who have already entered into such transactions.

Can an assessee make one claim (Relief under India – Mauritius DTA); and when that claim is rejected; make an alternative claim?

If Income-tax Commissioner can pass “Protective Assessment Orders”, why can’t assesses make “Protective Claims”?

VI.7 When an assessee makes capital gains, the department claims tax dues. Many assessees have made investments through offshore companies; and have incurred substantial losses. Can they claim losses!

It is not the department’s stand that Indo-Mauritian DTA is to be ignored. So let us consider a case of an investor who has directly invested in India through a Cayman Island/ BVI/ Islands/ Jersey Island. Well, such capital gains as well losses would of course be subject to normal treatment under the Indian Income-tax Act.

VII. Wake Up Call

I believe that the Vodafone case clearly tells all consultants the following: Please wake up.

(i) Do not under estimate Indian Income tax commissioners. Expect that their knowledge on International tax is as good as the knowledge of most experts in International Taxation. They can see through games & planning.

(ii) One cannot make public statements to all and sundry & then make a different statement to the Income-tax department. And further expect that the CIT would simply rely on papers officially filed before him; that he will not make his own independent enquiries.

(iii) One cannot refuse to respond to legal notices served by the Indian Government.

(iv) When regular appellate recourse is available, one cannot skip this appellate process & file a writ petition.

VIII. Tax Planning Possible :

Having said all these matters, the following may still be remembered :

(i) Section 34 of the Indian Companies Act is still valid. There is no challenge to it. A company is a separate legal entity. When a share holder sells shares of a company, in normal circumstances, there is no question of going into the details of the assets of the company. However, such companies may better have proper substance. Not be just a paper file company. And assessees may not forget the tax haven companies they incorporate.

(ii) Azadi Bachao Andolan decision is still the law of the land. As long as the Government does not take adequate anti avoidance steps, treaty shopping is permitted by the Indian government. In fact, Vodafone case is a wake up call for the Government also.

By its conduct, Government of India has repeatedly given a signal that it does not object to Treaty shopping & use of tax havens for investment into India. Department’s attempt at collecting tax on the present transfer is like the earlier refusal by the department to grant relief under the India- Mauritius DTA. That time also, the Officer acted contrary to the Government’s broad policy. Honourable Supreme Court ruled in favour of the assessee.

In this case also, the department is acting contrary to the signals given earlier. It is high time that the Government makes up its mind once & for all. Does it want investment into India through tax havens or does it not want! What ever is the decision, has to be conveyed by appropriate amendment in the Income-tax Act. Finality in law will also be good for investors world over.

(iii) In this case, there have been some serious errors by the assessees. This case may not be a precedent for those assessees who have taken proper precautions.

Many thanks

Best Wishes

Rashmin Chandulal Sanghvi.