DR.

RAM MANOHAR LOHIYA NATIONAL LAW

UNIVERSITY, LUCKNOW

Interpretation of Statutes
PROJECT

CONSIDERATIONS GUIDING THE

INTERPRETATION OF TAX STATUTES
(With Special Reference to Vodafone
Judgment)

Submitted to:
Ms. Samreen Hussain
Asst.Prof (Law)

Submitted by:
Anshita Mani
Roll No: 21
B.A.,LL.B.

(Hons.)

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5th Semester

ACKNOWLEDGEMENT

While bearing full responsibility for any mistakes, I wish to thank Ms. Samreen Hussain for
making a number of helpful comments and constructive criticisms for my project. I would
like to thank her for allowing me to make project on an appropriate topic of my choice and
that has helped me in better understanding of the subject. I also thank the comments and
suggestions of my seniors, which were also of great assistance. However, I am alone
responsible for all the remaining errors and inadequacy.

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INDEX
1. Introduction.. 4-5
2. Chapter 1: Considerations Guiding The Interpretation Of Tax Statutes
1.1: The classical rule: Strict construction of taxing statutes ... 6-7
1.2: Dilutions to the Principle of Strict Construction. 8-14
3. Chapter 2: Vodafone Saga and its Critical Analysis.15-16
4. Chapter 3: Conclusion17
5. Bibliography18

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INTRODUCTION

In this paper, the researcher studies the ancient maxim that taxing statutes have to be
construed strictly with special reference of Vodafone judgment. Beginning with a discussion
of the classical rule, the researcher moves on to focus on the various dilutions to the rule of
strict construction and comment on the same. These include a shift to purposive construction,
external aids, machinery provisions, exemptions and evasions. The purpose is to gather a
sense of what could be driving the judiciary to dilute the rule of strict construction and the
implications of the same.
Tax avoidance through artificial devices holding companies, subsidiaries, treaty shopping
and selling valuable properties indirectly by entering into a maze of framework agreements
has become a very lucrative industry today.
A large part of the income of the Big 5' accountancy and consultancy firms derives from tax
avoidance schemes which flourish in the name of tax planning. Their legality has agitated
courts in India and abroad for a long time. In 1985, a 5-judge bench of the Supreme Court in
the McDowell case settled the question decisively, observing:
In that very country where the phrase tax avoidance' originated, the judicial attitude
towards [it] has changed and the smile, cynical or even affectionate though it might have
been at one time, has now frozen into a deep frown. The courts are now concerning
themselves not merely with the genuineness of a transaction, but with [its] intended effect for
fiscal purposes. No one can now get away with a tax avoidance project with the mere
statement that there is nothing illegal about it. In our view, the proper way to construe a
taxing statute, while considering a device to avoid tax is to ask whether the transaction
is a device to avoid tax, and whether the transaction is such that the judicial process may
accord its approval to it.
It is neither fair not desirable to expect the legislature to take care of every device and
scheme to avoid taxation, the ruling added. It is up to the Court to determine the nature
of the new and sophisticated legal devices to avoid tax ... expose [them] for what they really
are and refuse to give judicial benediction.

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Legitimate tax planning'

Despite such a clear pronouncement, recent judgments of smaller Supreme Court benches
have gone back to calling artificial tax avoidance devices legitimate tax planning.
Though the Income Tax Act obliges even non-residents to pay tax on incomes earned in
India, many foreign institutional investors avoided paying taxes citing the Double Taxation
Treaty with Mauritius. This treaty says a company will be taxed only in the country where it
is domiciled. All these FIIs, though based in other countries and operating exclusively in
India, claimed Mauritian domicile by virtue of being registered there under the Mauritius
Offshore Business Activities Act (MOBA). Companies registered under MOBA are not
allowed to acquire property, invest or conduct business in Mauritius.
Yet these Post Box Companies' claimed to be domiciled there and the I-T department
allowed them to get away with claiming the benefits of the treaty for many years. Given the
benign attitude of the Indian tax authorities and the fact that there was no capital gains tax
and virtually no tax at all on these companies in Mauritius, most FIIs and most of the foreign
investment in India, by 2000, came to be routed through Mauritius.
The party finally ended when a proactive tax officer tried to stop this blatant evasion. Relying
on McDowell, he lifted the corporate veil of MOBA companies to determine their place of
management and actual place of residence. Since this happened to be in different countries in
Europe or North America, the relevant Double Tax Avoidance treaty became the one between
India and that country. All these treaties provided for capital gains to be taxed where the gains
had accrued. Since the gains accrued in India, he levied capital gains tax on these FIIs.

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Chapter 1: Considerations Guiding The Interpretation Of Tax

Statutes

1.1: The classical rule: Strict construction of taxing statutes

The classical rule with regard to the construction of taxing statutes is that they should be
strictly construed. It is a well-established rule that can be traced to common law in England
and has been imported into the Indian legal system as well.1
A person should not be taxed unless there are clear words indicating that purpose. Every
statute must be read according to the natural construction of its words. 2 In a taxing statute,
it is only what is clearly said that needs to be looked at. Considerations guiding the
interpretation of taxing statutes cannot include equity or presumptions. Nothing must be read
in or implied. In the interpretation of taxing statutes, the language of the statute is the only
thing that can be fairly looked at.3 This has been the classical approach towards the
interpretation of tax statutes as followed in England as well as in India.
The rationale for the strict construction of taxing statutes lies in the fact that they impose
pecuniary burdens. Therefore, in some sense, they operate as penalties. It is on the basis of
this that clear and unambiguous language is required in order to make out a charge of tax.4
This rule of strict construction is also known as the Duke of Westminster principle, being
named after its famous exposition in the case of IRC v. The Duke of Westminster5. In this
case, the respondent i.e. Duke of Westminster, covenanted to pay his gardener an yearly sum
for a period of seven years without prejudice to the remuneration received by the gardener for
1 G.P. Singh, PRINCIPLES OF STATUTORY INTERPRETATION, 815 (12th edn., 2010).
2 In re Micklethwait, (1885) 11 Ex 452 (Court of Exchequer Chamber); Tennant v. Smith, [1892]
A.C. 150 (House of Lords).
3 Cape Brandy Syndicate v. Inland Revenue Commissioners, [1921] 1 K.B. 64 (Kings Bench
Division).
4 P.B. Maxwell, INTERPRETATION OF STATUTES, 256 (12th edn., 1962).
5 The Commissioners of Inland Revenue v. The Duke of Westminster, [1936] A.C. 1 (House of
Lords).
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his services. The Duke then sought to deduct such payments in order to ascertain his total
taxable income for surtax. The Revenue i.e. Appellant however sought to show these
payments as payments of salary or wages and impose tax thereon. In this case, the court
rejected the argument that in the construction of taxing statutes, it must ignore the legal
position and instead focus on the substance of the matter. The court observed that every
person is entitled to arrange his affairs in such a manner that the burden of tax that falls upon
him be as low as legally permissible. The doctrine of substance of the matter cannot be
used to impose a greater liability on the person. It is the true nature of the legal obligation and
nothing else that is the substance. On this basis, the court dismissed the appeal.6
As mentioned before, this line of reasoning has found resonance in India too. The Supreme
Court of India has reiterated the position that it is a maxim of tax law that tax is not to be
imposed on a person unless the words of the taxing statute are unambiguous. 7 The Supreme
Court has observed that the strict letter of the law is to be considered in determining tax
liability and not other things such as the spirit of the statute or the substance of the law. If the
Court is satisfied that a case falls within the provisions, then a tax can be imposed. However,
if a situation does not fall within the four corners of the provisions of the taxing statute, no
tax can be imposed. Inference, analogy and probing of legislative intent in order to get to the
substance of the matter are not permitted in the interpretation of tax statutes.8
A taxing statute has three components: the subject of the tax, the person liable to pay tax and
the rate at which tax is to be paid. In the case of ambiguity regarding any of these three
ingredients in a taxing statute, there is no tax in law. Unless the legislature does not modify
the defect, no tax can be imposed as per law. This is because taxing statutes need to be strictly
construed.9

6 The Commissioners of Inland Revenue v. The Duke of Westminster, [1936] A.C. 1 (House of
Lords).
7 Mathuram Agrawal v. The State of Madhya Pradesh, AIR 2000 SC 109 (Supreme Court of India).
8 A.V. Fernandez v. State of Kerala, AIR 1957 SC 657 (Supreme Court of India).
9 Mathuram Agrawal v. The State of Madhya Pradesh, AIR 2000 SC 109 (Supreme Court of India).
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Another principle of statutory interpretation that is seen with respect to taxing statutes is that
the courts must favour the assessee in case there is ambiguity and two or more reasonable
interpretations of the taxing provisions exist.10
Thus, in this section, it has been seen that the judiciary has stressed on the requirement of
clear and unambiguous language in order to impose a tax upon an individual. This strict rule
of has governed the interpretation of tax statutes. However, from the latter half of the
previous century, several dilutions to this strict rule have been seen. In the following sections
of this paper, the researcher seeks to discuss these detours from the straight route laid down
by the rule of strict construction
.

1.2: Dilutions to the Principle of Strict Construction

A shift to purposive construction?

As has been noted above, the strict rule of construction has been subject to some dilution,
especially since the latter half of the previous century.
A good example of this was seen in the decision of the Supreme Court in CCE v. ACER India
Ltd.11. The main question in the case revolved around whether the value of operational
software could be deducted from the total value of computers supplied to customers in the
calculation of the amount of central excise payable as duty. In this background, an entire
section of the judgment was directed towards the principles guiding the interpretation of
taxing statutes. The Supreme Court noted that the imposition of tax is a constitutional
function. It referred to the strict construction that needs to be given to taxing statutes. It also
observed that the doctrine of substance of the matter had been rejected. However, the court
noted several other considerations to be made in the interpretation of taxing statutes that fall
outside the four corners of the language of the statute.12

10 CIT v. Karamchand Premchand Ltd., AIR 1960 SC 1175 (Supreme Court of India).
11 Commissioner of Central Excise, Pondicherry v. ACER India Ltd., (2004) 8 SCC 173 (Supreme
Court of India).
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In the eyes of the researcher, many of these signify a departure from the strict rule of
interpretation. Some of these had their basis in previous judgments whereas some others
seemed to be pronounced by the court for the first time. To begin with, the Court noted that
existing market practice must be a consideration behind the interpretation of taxing statutes.
Similarly, the court also noted that public policy could be a guiding factor in the
interpretation and application of taxing statutes. 13
The court also noted that the statute must not be interpreted in such a manner that it leads to
the wide scale evasion of duty. An interpretation based on this dictum can have significantly
different results in practice from those seen earlier based upon the strict rule of interpretation.
While, in this case, the dictum was motivated by the desire to prevent consumers of computer
products from having to face the burden of excess duty imposed on the respondent, its
ramifications on other types of cases involving taxation can be quite telling. The researcher
opines that this would go far in tilting the balance of power in favour of the Revenue.14
Most importantly, the Supreme Court made observations expressly providing that the rule of
strict construction was not to be always applied in the interpretation of tax statutes. The
Supreme Court noted that the principle of strict construction may not be adhered to in case
the statutory construction can reasonably have only one meaning. The court went on to
substantiate this by the statement that the principle of purposive construction will be adhered
to in case the literal meaning results in absurdity. The Supreme Court here explicitly provided
that purposive construction could be given precedence over literal meaning in the case of
absurdity and that this maxim is applicable even in the case of taxing statutes. 15 This is
reflective of the shift in favour of purposive construction, at least in some cases, even in the
interpretation of taxing statutes. This is extremely significant because this allows the courts to
12 Commissioner of Central Excise, Pondicherry v. ACER India Ltd., (2004) 8 SCC 173 (Supreme
Court of India).
13 Commissioner of Central Excise, Pondicherry v. ACER India Ltd., (2004) 8 SCC 173 (Supreme
Court of India).
14 Commissioner of Central Excise, Pondicherry v. ACER India Ltd., (2004) 8 SCC 173 (Supreme
Court of India).
15 Commissioner of Central Excise, Pondicherry v. ACER India Ltd., (2004) 8 SCC 173 (Supreme
Court of India).
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go beyond the four corners of the statute in order to determine legislative purpose in a
manner that was not allowed hitherto. This is an extremely controversial and significant shift
which leaves open a wide range of conclusions open with respect to the interpretation of tax
statutes. It might be argued that it purposive construction would only come into operation in
case literal construction leads to absurd results. Yet, even this must be seen to be significant.
The following paragraph illustrates a case where this difference has been seen.
In the case of CWS v. CIT16, the Court delved into provisions of the Income Tax Act, 1961
revolving around the imposition of tax on the appellant, which was the assessee company,
with regard to expenditure on the companys assets used by its employees either partly or
wholly for their own benefit. A plain reading of the statute would have meant that liability
could not be imposed. However, the court went ahead to uphold the assessment of the
Revenue on the basis of a reading of the statute along with legislative intent to tax. The court
compared the impugned provision with analogous provisions in previous and successive
versions of the Income Tax Act and concluded that the assessee must be held liable for tax in
accordance with its reading of Parliamentary intention. The Court stated that non-taxation
here would be a result that would be incongruous, discriminatory and most importantly,
absurd. The court opined that though literal construction was the general rule in the
interpretation of tax statutes, it could not be adhered to in case the result was incongruous,
discriminatory or absurd. It stated that interpretation of statutes could not be a mechanical
exercise. It held that the object of all interpretation was to give effect to the object of the
enactment with regard to the language used. In this manner, the Supreme Court went ahead to
affirm the taxation of the assessee company i.e. the appellant in spite of the fact that literal
interpretation would have led to a contrary result of non-taxation.17
It is submitted that while such decisions of the Supreme Court might seem as the right step in
order to ensure that the ends of justice are met in a particular case, they also create a large
enough window of opportunity allowing for some unnecessary judicial flexibility that could
negatively impact the interpretation of tax statutes when they operate as precedents.
Grandiose declarations embracing purposive construction and privileging it over strict
16 C.W.S. (India) Ltd. v. Commissioner of Income Tax, JT 1994 (3) SC 116 (Supreme Court of
India).
17 C.W.S. (India) Ltd. v. Commissioner of Income Tax, JT 1994 (3) SC 116 (Supreme Court of
India).
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construction can lead to unintended consequences. The problem would lie not in ascertaining
the existence of absurdity. Like most cases, the problem would lie in ascertaining legislative
intent and the purpose of the statute. The researcher feels that the availability of such
interpretive capacity in the hands of the judiciary could lead to a strengthening of the position
of the Revenue as against the assessee and seriously impact the interests of the assessee in
this manner.
The following sections highlight certain other dilutions to the rule of strict construction.
a. The usage of external aids
It has been seen that courts have employed certain external aids in the interpretation of taxing
provisions. In doing so, they have gone beyond the four corners of the language of the statute
and have thereby diluted the rule of strict construction.
For example, in the case of Nawn Estates v. CIT18, the Supreme Court was called upon to
interpret the term investment as found in the Income Tax Act, 1922. This term had not been
defined by the statute. The Supreme Court considered various external aids in coming to the
conclusion that the appellant was to be brought within the purview of the tax on the basis that
it was an investment company. The Court considered the legislative history of the Income
Tax Act 1922, right from its amendment in 1955. It also considered the legislative history of
the Income Tax Act, 1961. The Supreme Court also sought to substantiate its position on the
understanding of investment in common business parlance. Significantly, the Court even
went on to recognise that English authorities can be useful guides in the interpretation of
analogous provisions, fundamental concepts and general principles unaffected by the
specialties of the English Income Tax Statutes. Again, it is reiterated that while the Court
may have concluded rightly in the case, the acceptance of such a broad variety of external
aids to construction can lead to some vulnerability of the rule of strict construction. The
researcher is especially concerned with the idea of usage of analogous English provisions in
the interpretation of Indian counterparts. It must be understood that taxing environments and
policy considerations in the two countries are different. Therefore, the researcher opines that
importing an English understanding of specific taxing provisions to the Indian scenario will
lead to more questions than the solutions it provides. Extreme caution needs to be exercised
by the interpreting authority in this regard.
18 Nawn Estates (P) Ltd. v. C.I.T, West Bengal (1977) 1 SCC 7 (Supreme Court of Indi a).
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b. Exemptions
An area of considerable disagreement in the construction of taxing statutes has been that of
exemptions. An exemption is an exception from the general obligation to pay taxes. 19 There
are two opinions on the matter of construction of exemptions in case of ambiguity. According
to one view, an exemption must be liberally construed so as to benefit the assessee from then
operation of the duty. The other view is that exemptions tend to increase the burden on the
general burden of taxpayers, and for this reason, they must be strictly construed against the
assessee.20
There is no presumption with regard to the application of exemption. The person claiming the
exemption has to establish that he is entitled to it as per the language of the taxing
enactment.21
An example of the liberal interpretation of exemptions was seen in CCE v. NE Tobacco
Company22. The question was whether the unit or factory established by the respondent in a
certain Export Promotion Industrial Park could be given the status of a new industrial unit
so as to avail an exemption. The Supreme Court held that an exemption notification must be
liberally construed in favour of the respondent. It therefore dismissed the appeal. 23 However,
it must be mentioned that there are various authorities in opposition to this view, including
various other judgments of the Supreme Court.
An illustration is the case of Orissa State Warehousing Corporation v. CIT24. In this case, the
appellant sought to benefit from an exemption on the basis of Section 10(29) of the Income
Tax Act, 1961. The appellant argued that liberal interpretation must be given to income
19 A.B. Kafatiya, INTERPRETATION OF STATUTES, 293 (2008).
20 Singh, supra note 1, at 839 and 840.
21 Commissioner of Income Tax v. Ramakrishna Deo, AIR 1959 SC 239 (Supreme Court of India).
22 Commissioner of Central Excise v. North- Eastern Tobacco Company, AIR 2003 SC 616
(Supreme Court of India).
23 Commissioner of Central Excise v. North- Eastern Tobacco Company, AIR 2003 SC 616
(Supreme Court of India).
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derived from letting out of godowns or warehouses for storage, processing or facilitating the
marketing so as to include interest derived on fixed deposits. The Supreme Court observed
that exemptions are an exception to the general rule that a taxing statute must be construed in
favour of the assessee in case of ambiguity. The Court, dismissing the appeal, held that
entitlement for exemptions should not be read with any wider connotation or latitude to the
taxpayer. This case was an example of the literal approach to construction of exemptions.25
Therefore, it can be concluded that authorities exist in support of both liberal as well as literal
interpretation of exemption provisions in statutes.
However, where there is a beneficient object, such as increased production or incentives to
co-operatives, exemption provisions are to be liberally construed. In the case of CIT v. Straw
Board Manufacturing26, the Supreme Court employed liberal interpretation to strawboard
within the expression paper and pulp so as to enable the respondent to benefit from
concessions for the furtherance of industrial activity.27
The researcher opines that the observations of the Supreme Court in UoI v Wood
Papers28provides a part of the solution in resolving the conflicting methods of interpretation
of exemptions. The Court noted that the applicability of an exemption needs to be strictly
viewed keeping in mind legislative intent, inequitable burden on taxpayers and augmentation
of revenue. However, once doubt about applicability is removed, and it is ascertained that the
assessee was meant to be entitled, and then a liberal construction is appropriate. Therefore,

24 Orissa State Warehousing Corporation v. Commissioner of Income Tax, AIR 1999 SC 1388
(Supreme Court of India).
25 Orissa State Warehousing Corporation v. Commissioner of Income Tax, AIR 1999 SC 1388
(Supreme Court of India).
26 Commissioner of Income Tax, Amritsar v. Straw Board Manufacturing Co. Ltd., AIR 1989 SC
1490 (Supreme Court of India).
27 Commissioner of Income Tax, Amritsar v. Straw Board Manufacturing Co. Ltd., AIR 1989 SC
1490 (Supreme Court of India).
28 Union of India v. M/S Wood Papers Ltd., AIR 1991 SC 2049 (Supreme Court of India).
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strict and liberal constructions are to be invoked at different stages of interpretation of an

exemption provision.29
The researcher is in agreement with this reading by the Supreme Court.
c. Machinery provisions
It has been held by the Supreme Court that a fiscal statute must be strictly construed only
with regard to taxing provisions such as charging provisions and not to machinery provisions.
A machinery section should be so construed so as to effectuate liability. 30 The researcher
agrees with this line of reasoning. As long as the subject, assessee and the rate of tax are
clear, procedural aspects like the machinery for enforcement must not allow one to escape the
clutches of taxation.
d. Evasion of tax
A significant departure from the Westminster principle was seen in the decision of the House
of Lords in Ramsay v. IRC31. In this case, the taxpayer company sought to reduce its capital
gains tax through a series of transactions that would create artificial capital losses. Each of
these losses would seem genuine as per the Westminster principle. But taken on the whole,
the effect was that the company would escape tax liability. The court held that it could not
stand still in the face of increasingly sophisticated devices of tax avoidance. It had to view the
scheme as a whole and not step by step. Holding that the court could not apply the
Westminster principle for sham transactions, the appeal was dismissed.32
The above decision significantly formed the backbone of the decision of the Constitution
Bench of the Supreme Court in McDowell v. CTO33 (McDowell). The Supreme Court
dramatically held that the Westminster principle had been buried in England and that India
29 Union of India v. M/S Wood Papers Ltd., AIR 1991 SC 2049 (Supreme Court of India).
30 CIT Central, Calcutta v. National Taj Traders, AIR 1980 SC 485 (Supreme Court of India).
31 W.T. Ramsay v. Inland Revenue Commissioners, [1982] A.C. 300 (House of Lords).
32 W.T. Ramsay v. Inland Revenue Commissioners, [1982] A.C. 300 (House of Lords).
33 McDowell and Co. v. Commercial Tax Officer, AIR 1986 SC 649 (Supreme Court of India).
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should also dissociate itself from the principle. The court stated that intended effect of a
transaction for fiscal purposes had to be considered in determining tax liability and that no
one could get away with a tax avoidance project merely by stating that nothing was illegal
about it. The court was motivated by various ill-effects of tax avoidance such as loss of
revenue, piling up of black money, burden on remaining taxpayers, inequity of advice
available to the Revenue and the skillful avoider. The Court also observed that tax avoidance
was unethical in a welfare state. The court held that the construction of a scheme of tax
avoidance was neither liberal nor literal. Rather, the question is whether a transaction is a
device to avoid tax and whether the judiciary can accord approval to it. The Court had to take
stock of new and sophisticated legal devices and relate it to existing legislation with the help
of emerging techniques of interpretation.34
This above case was notably criticized by the Supreme Court itself in Union of India v. Azadi
Bachao Andolan35. The Court here referred to various authorities to support its proposition
that the Westminster principle was dead. However, it incorrectly held that the concurring
judgment in the McDowell case was not reflective of the majority. The researcher opines that
it was also wrong in placing reliance on another Constitution Bench decision of the Supreme
Court that came after McDowell i.e. Mathuram Agrawal v. State of MP36 since this latter
decision was not pronounced in the context of tax avoidance schemes.
It is thus the researchers opinion that the McDowell case has indeed succeeded in modifying
the Westminster principle at least in the context of tax avoidance schemes, and has provided a
qualification to the rule of strict construction to that extent. While this is a theoretical
anomaly, it has been practically necessitated so as to prevent large scale losses to the revenue
through intricately designed schemes. It has led to the strengthening of the position of the
Revenue vis--vis the assessee.
Yet, the researcher argues that this qualification has made the task of interpretation very
complex. It becomes tough to delineate acceptable tax planning from unacceptable tax
34 McDowell and Co. v. Commercial Tax Officer, AIR 1986 SC 649 (Supreme Court of India).
35 Union of India v. Azadi Bachao Andolan, AIR 2004 SC 1107 (Supreme Court of India).
36 Mathuram Agrawal v. The State of Madhya Pradesh, AIR 2000 SC 109 (Supreme Court of
India).
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avoidance. Moreover, an inquiry into the motives of either the legislature or the assessee is
always going to be fraught with danger. The wisdom of this step must be doubted, at least
from the point of view of statutory interpretation.

Chapter 2: Vodafone Saga and its Critical Analysis

Departments view in brief: Departments claim, in essence was: CGP is a nullity, a sham
entity. Transfer of CGPs shares has no substance. The parties to the transfer themselves
laid bare the real transaction that of sale of HEL stake. Real transfer is: The transfer of
substantial interest (67% stake) in HEL. This controlling shareholding has its situs in India.
Since the transferred asset is situated in India, the capital gains arising on the same is liable to
tax in India. VIH was therefore required to deduct tax at source.
Honourable Supreme Court has given a ruling that only the legal transaction sale of
CGP share - is to be considered. By selling CGP share, the seller may have transferred its
interests in HEL. However, Indian interest arises due to sale of CGP share. It does not arise
out of the SPA (which recorded the real facts). All the arguments of the revenue were
rejected.
Crux of the matter: Should one simply consider the legal form of the transaction (i.e., sale
of one share in CGP); or should one consider real form - the entire set of facts as
stated by the parties themselves in the SPA and various other correspondences? Is the
case fit for considering Substance over Form? Is the case fit for lifting the
Corporate Veil?

Critical Analysis

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Vodafone's argument was that it did not pay directly for an asset located in India. It paid for
acquiring the controlling interest in a Cayman Islands-based holding company. The
transaction was between two non-resident companies. The Supreme Court applied several
well-established principles of tax jurisprudence in deciding the case in favour of Vodafone.
The doctrine of form over substance, the source rule, the law relating to direct and indirect
transfers, the concept of business assets, and the anti-abuse rules were all gone into in the
276-page judgment. Did the deal amount to questionable tax planning or tax avoidance
device? The Supreme Court gave a firm no' as the answer to this question. In its opinion, use
of holding companies and the investment structure and also the use of offshore financial
entities can be driven in certain cases by business and commercial purposes.
The use of such devices will not imply tax avoidance. Taxpayers are free to arrange their
affairs to minimise tax within the framework of tax laws. There is a distinction between
legitimate tax minimisation and abusive tax avoidance. The Court upheld the law laid down
in the Azadi Bachao case and also distinguished the Mcdowell ruling.
The Supreme Court has ruled that the case concerned mere sale of shares simplicity and there
was no sale of assets. It was only by acquiring the shares of CGP that Vodafone got an
indirect control over several kinds of companies in the group structure of Hutchison. True,
sale of shares of a foreign company is not subject to tax in India. But what about other rights
acquired by Vodafone by virtue of this complex transaction? What about control premium
because of the 67 per cent acquisition?
What about the non-compete agreement? What about the brand licences, operating licences,
customer base, etc.? According to the Supreme Court, these rights were acquired only as a
consequence of the transfer of shares in CGP. The transaction cannot be dissected and the
payment cannot be split into compartments. There was no anti-avoidance provision in the
Indian law. The Court made the distinction between the look-to principle and the lookthrough principle. In the absence of anti-avoidance provisions in the law, it is not possible to
invoke the theory of see through.
A major consideration that prevailed with the Supreme Court was that the complicated
structures were put in place long before acquisition of the relevant shares. It rejected the
Bombay High Court's view that applying the proportionality theory, a part of the transaction

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must be brought to tax. It concluded that the deal should be viewed as a consolidated
transaction based on economic nexus. Applying the look at' test in order to ascertain the
true nature and character of the transaction, we hold, that the offshore transaction herein is
a bona fide structured FDI investment into India which fell outside India's territorial tax
jurisdictions, hence not taxable. This was not a sham transaction. Nor was it meant to avoid
tax.

Chapter 3: Conclusion

In the eyes of the researcher, the various dilutions to the rule of strict construction are
reflective of judicial recognition of the fact that the legislature is possibly missing a few steps
in its attempt to grapple with fast paced economic developments. This is visibly seen in the
case of tax evasions. The rate of growth of the nature and functions of the Revenue is far
outstripped by the growth of the creatures and activities subject to taxation. The strict rule of
construction was inspired by a need to balance the powers of the individual against the State
and prevent the State from penalizing the individual unnecessarily. However, economic
developments have shifted the balance against the State and in favour of companies, who
have at their disposal considerable resources and tax expertise. It is no surprise then that most
of the dilutions, such as purposive construction and evasion seem to favour the Revenue. The
few constructions that favour the assessee, such as liberal construction of exemptions, also
have underlying economic objectives such as promotion of industrialization as their basis.
However, the researcher is of the opinion that the judiciary has invited some trouble on itself
by creating dilutions to the rule of strict construction. It has opened up avenues for arguments
based on legislative intent and real nature of transactions in cases involving taxation. The
researcher believes that the judiciary will resolve this conflict, more often than not, by
favouring the Revenue, in keeping with the reasons for the creation of dilutions.
The brunt of this change, however, shall be borne by the weaker of the taxpayers. Neither do
they have the wherewithal to come up with intricate arguments to reduce their tax burden nor
does judicial attitude seem to be in their favour.

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In order that the interests of these weaker sections are protected, the researcher hopes that the
dilutions to the rule of strict construction be viewed with great caution. From a theoretical
point of view too, the researcher is of the opinion that the dilutions represent a definite
compromise and that they will lead to various problems in statutory interpretation. While the
rule of strict construction still holds a dominant position in the interpretation of taxing
statutes, there can be no doubt that the departures from the rule have struck its effectiveness
in a manner that the implications will be substantial.

BIBLIOGRAPHY
Books Referred:
1. A.B. Kafatiya, INTERPRETATION OF STATUTES, 293 (2008).

2. G.P. Singh, Principles of Statutory Interpretation, 815 (12th edn., 2010).

3. P.B. Maxwell, Interpretation of Statutes, 256 (12th edn., 1962).

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