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Direct Tax Laws 626 notwithstanding that such transfer of rights has been characterized as being effected or dependent upon or flowing from the transfer of a share or shares of a company registered or incorporated outside India. (c) Explanation 5 has been added for the removal of doubts to section 9(1)(i) to clarify that an asset or a capital asset being any share or interest in a company or in an entity registered or incorporated outside India shall be deemed to be and shall always be deemed to have been situated in India, if the share or interest derives, directly or indirectly, its value substantially from the assets located in India. (d) For the removal of doubts, it has been clarified that the obligation to comply with sub-section (1) of section 195 and to make deduction thereunder applies and shall be deemed to have always applied and extends to and shall be deemed to have always extended to all persons, resident or non-resident, whether or not the nonresident person has— (i) a residence or place of business or business connection in India; or (ii) any other presence in any manner whatsoever in India. (e) It has also been declared that notwithstanding anything contained in any judgment, etc., of any Court, Tribunal, etc., all notices sent or taxes levied, demanded, collected or recovered under the provisions of the Income-tax Act, 1961, in respect of income accruing or arising through or from the transfer of a capital asset situate in India in consequence of the transfer of a share or shares of a company registered or incorporated outside India, shall be deemed to have been validly made and the notice, levy, demand, collection or recovery of tax shall be valid and shall be deemed always to have been valid and shall not be called in question on the ground that the tax was not chargeable or any ground including that it is a tax on capital gains arising out of transactions which have taken place outside India, August 1 to 15, 2012 u TAXMANN’S CORPORATE PROFESSIONALS TODAY u Vol. 24 u 6 and, accordingly, any tax levied, demanded, assessed, imposed or deposited before the commencement of this Act and chargeable for a period prior to such commencement but not collected or recovered before such commencement, may be collected or recovered and appropriated in accordance with the provisions of the Income-tax Act, 1961 as amended by this Act, and the rules made thereunder and there shall be no liability or obligation to make any refund whatsoever. 2.2 Amendments in nutshell - In nutshell, the amendments have sought to declare that the cases of tax planning by non-residents, like Hutch group or a resident group, which used subsidiaries incorporated abroad to acquire shares of Indian companies, to avoid capital gains tax on disinvestment, by transferring the shares of the subsidiary company abroad, which has the effect of indirectly transferring the shares of the Indian company held by the group, would always fall within the scope of section 9(1)(i) or section 2(47) as income accruing or deemed to accrue in India from transfer of a capital asset situate in India. It is also provided by way of a validation clause in the Finance Act that any decision of any Court, Tribunal, etc., (including the decision of the Supreme Court in Vodafone’s case (supra) which has held such indirect transfer as not falling within the scope of section 9(1)(i) and, hence, not taxable, will be disregarded. SUPREME COURT’S VIEWS/RULINGS ON NON-RESIDENT ENTERPRISE MAKING INDIRECT TRANSFER 3. The declaratory amendments, in fact, represent the Revenue’s view of the transactions entered into by Hutchison Inc. and its associates with Vodafone and its associates, which was argued before the Supreme Court to contend that Hutchison Inc. had acquired the shares of the Indian company in an indirect manner through its wholly owned subsidiaries abroad and had sold the shares later on to Vodafone Plc. in a similar manner
and the capital gains on transfer of shares had to be deemed to have accrued in India. The Supreme Court in its decision accepted that “... if an actual controlling non-resident enterprise makes an indirect transfer through ‘abuse of organizational/legal form’ and without reasonable ‘business purpose’ which results in tax avoidance, then the Revenue may disregard the form of the arrangement or the impugned action through use of non-resident holding company, recharacterize the equity transfer according to its economic substance and impose tax on the actual controlling non-resident enterprise. Whether a transaction is used principally as a colourable device for the distribution of earnings, profit and gains, is determined by a review of all the facts and circumstances surrounding the transaction.” (para 67). However, in the facts of the case the Supreme Court negated the contentions of the Department and held that “we may reiterate that the ‘look at’ principle enunciated in ‘Ramsay’ must look at a document or a transaction in the context to which it properly belongs. It is the task of the Court to ascertain the legal nature of the transaction by looking at the entire transaction and not adopting a dissecting approach…. Every strategic foreign direct investment coming to India, as an investment destination should be seen in a holistic manner. While doing so, Court should keep in mind the following factors: the concept of participation in investment, the duration of existence of the holding structure, the period of Indian operations, the timing of the exit …. The onus will be on the Revenue to identify the scheme and its dominant purpose. The corporate business purpose of a transaction is an evidence of the fact that the impugned transaction is not undertaken as a colourable or artificial device.” (para 68). COURTS HAVE MOSTLY FOLLOWED THE DICTUM LAID IN CASE OF DUKE OF WESTMINSTER 4. The reasons adduced by the Supreme Court in support of its decision in Vodafone’s case (supra) are not very convincing, but the fact remains that if we consider all the decisions of the Indian Courts since 1940’s starting from the decision of Privy Council in the case of Bank of Chettinad Ltd. v. CIT [1940] 8 ITR 522 up to the recent decision of the Supreme Court in Union of India v. Azadi Bachao Andolan [2003] 132 Taxman 373, in almost all the cases the Courts have followed the dictum laid down by Lord Tomlin of House of Lords (UK) in the case of Duke of Westminster (supra) and have refused to frown upon tax avoidance practices. The principles laid down by House of Lords (UK) in Ramsay Ltd. v. IRC [1981] 1 ALL ER 259 and other cases in 1980’s had no effect on Indian Judiciary. The only exceptions were the cases of CIT v. Sri. Meenakshi Mills Ltd. [1967] 63 ITR 609 (SC) and Juggilal Kamlapat v. CIT [1969] 73 ITR 702, where the Supreme Court felt that it was necessary to lift corporate veil to look at the substance of the transactions so as to frustrate tax avoidance efforts. 5. JUDICIAL INTERPRETATION OF STATUTORY PROVISIONS 5.1 Two schools of thought - In judicial interpretation of statutory provisions, there are two distinct schools of thought. 5.1.1 Classical literal School - The classical literal school holds a statute as the authentic enactment of the Will of the Legislature. The rule of construction of a statute is that one must not imply anything in the statute which is inconsistent with the words expressly used. If the language is clear and explicit, the Court must give effect to it, as the words of the Statute speak the intention of the Legislature. In doing so, the Court must bear in mind that its function is interpretation of existing law and not enactment of new law. The Court must not overrule the words of a statute; reform of the law must be left in the hands of the Parliament (Maxwell on interpretation of statutes, p. 1-2). Indian judicial history is replete with decisions which followed the above school of interpretation. August 1 to 15, 2012 u TAXMANN’S CORPORATE PROFESSIONALS TODAY u Vol. 24 u 7 627
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Page 5 and 6: Accounts & Audit 701 707 FOUNDER ED
Page 7: INTRODUCTION Vodafone story - 1. On
Page 11 and 12: used to introduce new rules of law,
Page 13 and 14: for earning tax exempt income. Howe
Page 15 and 16: of the hearing before the Tribunal
Page 17 and 18: (P.) Ltd.’s (supra) before the IT
Page 19 and 20: the ITAT Rules, 1946, vis-à-vis th
Page 21 and 22: Two recent instances of such practi
Page 23 and 24: ut CIT(A) are not bothered by any s
Page 25 and 26: say, twice the latter amount or mor
Page 27 and 28: Taxing the Expenditure on Litigatio
Page 29 and 30: PENALTY CHARGES FOR BREACH OF LAW C
Page 31 and 32: Exclusive Owner v. Joint Owner DIRE
Page 33 and 34: to agree with the assessee’s cont
Page 35 and 36: Retrospective Amendments - Courts D
Page 37 and 38: Court and if such party is still ag
Page 39 and 40: of the Act. It will not apply to de
Page 41 and 42: ank. It follows that if the amount
Page 43 and 44: This article aims to study various
Page 45 and 46: The true profits of the insurance b
Page 47 and 48: expenditure or allowance which is n
Page 49 and 50: the same have not yet been adopted
Page 51 and 52: 48. General Insurance Corpn. of Ind
Page 53 and 54: of income as declared by the assess
Page 55 and 56: NGOs undertake many kinds of charit
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ground not raised earlier in appeal
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As per section 145 of the IT Act bu
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enhanced rates shown as receipts in
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a common passage, common kitchen, e
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The Tribunal concluded the decision
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ent free accommodation was not bein
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(c) Lease rental shall be paid at t
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of the above definition, the assess
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The High Court held in favour of as
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‘Approach road’ treated as a pa
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or any form in which such Director
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invests in a fair manner. Generally
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Disclosure of Borrowings under Revi
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RELEVANT GUIDANCE PROVIDED BY THE I
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5.1.3 Maturity profile of unsecured
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ACCOUNTS & AUDIT IN BRIEF A Fortnig
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cost savings, greater efficiency, i
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8.2 Summary - IESBA has released th
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equirements but of late has receive
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Gram Yojana. Additionally, other sc
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