CPT V24P7-Art1 (Content).pmd - Taxmann

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.
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