pertaining to offshore transactions - particularly cross-border mergers/acquisitions and tax

avoidance/evasion. The judgment in this case covers a detailed examination of various issues
pertaining to separate corporate identity, holding/subsidiary company structure, controlling
interest, look at v. look through provisions, underlying assets, circumstances when corporate veil
can be lifted, jurisdiction in offshore transactions, indirect transfer of underlying assets, tax
avoidance-cum-tax evasion, international treaties, DTAAs, TAS under section 195(1),
Representative Assessee and the Scope of section 9(1)(i) of Income Tax Act, 1961, etc. This
judgment merits attention not only because a huge tax demand has been quashed, but also for the
detailed and authoritative exposition of law by the Supreme Court on various contentious issues.
At this juncture it is appropriate to mention that in recent years the Income Tax Department has,
after sparing a large number of domestic taxpayers from "scrutiny" assessments, shifted its focus
to offshore transactions involving various complex issues, e.g., "Determination of Arm's Length
Price", "Establishing Territorial nexus of income", "Application of source rule", "Interpretation
of DTAAs", "Impact of Indo-Mauritius Treaty", "Applicability of withholding tax provisions",
"Discovering payments for royalties embedded in complex transactions", etc.
The inadequacy of existing taxation laws in dealing with such vexed issues and the prejudicial
approach of the Revenue have been exposed in a number of cases decided by the Courts,
including the impugned case of Vodafone International Holding B.V. ( supra).
Brief facts of the case
2. The Hutchison Group, Hong Kong first invested into the telecom business in India in 1992
when the said Group invested in an Indian joint venture vehicle by the name of Hutchison Max
Telecom Ltd. (HMTL) - later on renamed as HEL. HEL was an Indian company in which shares
were acquired by Hutchison group of companies through a structural arrangement of holding and
subsidiary companies incorporated in various foreign countries, particularly in Mauritius.
Hutchison Telecommunication International Ltd. (HTIL) was incorporated in Cayman Islands.
HTIL and its downstream companies held interests in mobile telecommunications business in
several countries including India. CGP was a 100 per cent subsidiary of HTIL incorporated in
Cayman Islands as an 'exempted company' and it had a controlling interest in HEL. The
appellant-company, namely-Vodafone, International Holdings BV, (VIH), was resident for tax
purposes in the Netherlands. On 11-2-2007 a Sale Purchase Agreement (SPA) was entered into
between the appellant and HTIL under which HTIL agreed to transfer to the appellant its entire
issued share capital in CGP and thereby, the entire interest of HTIL in HEL was transferred to
the appellant.
The Controversy
3. The issue that came up for consideration was as to whether aforesaid transfer could be termed
as an indirect transfer of a capital asset situate in India and whether section 9(1)(i ) would be
attracted in such a case and, consequently, whether capital gain arising from such transactions
could be taxed in India.?
The deeming provision contained in section 9(1)(i) of the Income Tax Act, 1961 reads as under:
"Income deemed to accrue or arise in India.
9. (1) The following incomes shall be deemed to accrue or arise in India :-
(i) all income accruing or arising, whether directly or indirectly, through or from any
business connection in India, or through or from any property in India, or through or
from any asset or source of income in India, or through the transfer of a capital
 asset situate in India.
…………"
On analysis of the above provision, it transpires that all income accruing or arising, whether
directly or indirectly is liable to be deemed to accrue or arise in India, in either of the following
four circumstances:
(a) through or from any business connection in India;
(b) through or from any property in India;
(c) through or from any asset or source of income in India;
(d) through the transfer of a capital asset situate in India.
The Revenue contended that as Vodafone received certain rights and entitlements from HTIL in
India which constituted "Capital assets" within the meaning of section 2(14) of the Act, capital
gains tax on transfer of such assets was taxable in India as provided in the 4th limb of the clause
highlighted hereinabove. As per Revenue, such rights and entitlements were following:
(a) Indirect interest in HEL;