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CONSIDERATIONS GUIDING THE

INTERPRETATION OF TAX STATUTES

(With Special Reference to Vodafone Judgment)


SYNOPSIS:
Research Methodology
The scope of this paper is limited to subjective analysis of the decisions of the courts
on the issue of evidentiary value of confessions of co-accused. This paper deals indepth with the stance of validity of transactions of companies outside the terrirtory of
India wrt the taxing policies and underrstanding of Income Tax Laws and the
interpretation of the courts of this subject. Since the paper is based on opinions
formed after in depth analysis of the judgments dealt with, it conveys subjectivity and
may vary from the general notion of perception.
The method of research adopted in this research paper is the Doctrinal method of
research. Primary and Secondary Sources of data have been used to formulate
opinions. Books and internet content constitute major part of the research and surveys
and examinations have not been conducted for the research.
The aim of this project is to look at the Vodafone judgement passed by the honourable
Supreme Court and its consequences. Thereby analyzing the various concepts in
Taxation Law such as Tax avoidance, Capital Gain etc and the way it has been dealt to
incur the liabilities.

To understand the concept of tax avoidance.


Taxing statutes have to be construed strictly
To analyze that just because the operating company pays taxes in India, can

the investor company be exempted from Capital gains tax.


To examine the various impacts caused by tax haven concept.

Statement of Problem:
The tax alert summarises the decisions of the supreme court of India in the case of
Vodafone Intl. Holdings B.V. (Vodafone NL)1 wherein the issue bfore the SC was
whether the tax authority had jurisdiction under the indian tax laws to tax the gains
arising to a foreign company from transfer of shares of a foreign holding company
which indirectly held underline indian assets (Indirect transfer) .
The withholding tax provisions under the ITL will not apply when there is an offshore
transaction between two non-residents; accordingly, such provisions would not have
an extra territorial operation. The SC also observed that the inclusion of an anti-abuse
provision under the statute/tax treaty is a matter of national economic policy and, in
the absence of the same, it cannot be implied.
Government amended the Income Tax Act Retrospectively and made sure that any
company in similar circumstances is not able to avoid tax by operating out of tax
heavens.
The researcher focuses 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.
Despite such a clear pronouncement, recent judgments of smaller Supreme Court
benches have gone back to calling artificial tax avoidance devices legitimate tax
planning.

1 (SLP NO. 26529/2010)

Research Questions

How are the taxing laws in India interpreted and formulated?


What has been the stance of the judiciary over interpretation of the taxing
statutes with reference to the creation of a special purpose vehicle to plan tax

and avoidance of taxes?


What are the contrary views of the court, prior to the Vodafone Judgement on

taxing statutes?
Have the courts taken a liberal view on the vodafone case and what have been
the implications?

Review of Literature
1. Use of the corporate vehicle for tax planning: the Vodafone case and
direct taxes code
- Mathews P George and Pankharia Agarwal
The use of corporate entity in tax planning is permissible as long as it is not used as
a colorable device. The Vodafone judgment in 2009 applied lax standards to lift the
corporate veil. If the tax claim eventually becomes successful, it can make any tax
planning involving a corporate entity difficult. From provisions related to general
anti-avoidance rule, residence of a foreign company, controlled foreign corporations
and double tax avoidance agreements under the proposed direct taxes code, it can be
inferred that the use of a corporate vehicle for tax planning shall become more
difficult when it comes into application, and may have uncertain results. Although the
ruling of the authority for advanced rulings in E trade in the same year is favorable
towards using corporate entity for tax planning, it does not set a precedent and is
binding only on the parties involved.

Analysis

Planning the formulation of a system, which in its implementation is designed to


achieve a specific result. While economic planning is the privilege of the state, tax
planning is that of the subject. In general, tax planning aims to reduce the outflow of
cash resources made available to the government by way of taxes so that the same
may be effectively utilized for the benefit f the individual or the business, as the case
may be. It involves arranging one's financial affairs by intelligently anticipating the
effects of tax laws on the arrangements that have been adopted.

2. 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.2

Analysis
The Tax Authority had contended that the decision of the SC in the case of Azadi
Bachao Andolan 3so far as tax avoidance was concerned, would need to be overruled
as it had departed from the principles laid down in the case
of McDowell4 where one of the judges had given a separate ruling on the issue and
other judges had concurred with it.

2 http://www.ey.com/Publication/vwLUAssets/EY-tax-alert-vodafone-case-study/$FILE/EY-tax-alertvodafone-case-study.pdf

3 [263 ITR 706]


4 [154 ITR 148]

The majority ruling in McDowell had clearly held that tax planning was legitimate,
provided that it was within the framework of law and that colorable devices could not
be a part of tax planning. The separate ruling by the fifth judge was in relation to tax
evasion through colorable devices by resorting to dubious methods and subterfuges. It
is nowhere mentioned that tax planning is illegitimate or impermissible and,
moreover, the fifth judge, himself agreed with the majority ruling.
This excerpt also talks about, the difference between having a taxing device to plan
their tax and courts having appreciated the concept of tax planning through legal
means.

Hypothesis
There is a strong need to create a balance between understanding the creation of
special purpose vehicle to tax plan and to avoid paying taxes through illegal means
along with correct and direct interpretation of taxing laws.

TPA

SYNOPSIS
INTRODUCTION
Property is one of the most fundamental elements of the socio-economic life of an
individual. Juristically, property can be said to be a bundle of rights in a thing or a
land. However, the word has gradually been given a wider meaning. Economic
significance of the property, therefore, rests more on its dispositions. Property law has
therefore become an important branch of civil law. The Transfer of Property Act, 1882
deals with the transfer of immoveable property inter-vivos (although some provisions
deal with the transfer of moveable as well as immovable property).
Before this enactment, the transfers of immovable property were mostly governed by
English equitable principles as applies by Anglo-Indian Courts. The doctrine of part-

performance is one of the equitable doctrines applied by these Courts. In this project,
the various aspects of doctrine of part-performance have been analyzed in detail.

In case the buyer has made defaults, or from his conduct it appears that he will not
fulfill his promises, which are required to complete sale, then buyer may not get
protection of section 53A and the seller can cancel sale and repossess property. The
compliance of conditions, on part of the buyer is to be considered in light of the terms
and conditions agreed in the contract, and also the applicable provisions of the Indian
Contract Act. Therefore, the seller can insist on the buyer to fulfill his promises which
he is required to fulfill, in a sequential manner, if any, applicable and provided in the
contract.

RESEARCH PROBLEM
Part performance as a doctrine in the Indian context acts as a defence mechanism for
the transferee rather than something a party to contract would sue offensively for, like
other provisions but faces the problem of understanding the application of this
doctrine. This research project deals mainly with the kind of situations where in this
doctrine could be applied and the essentials for a transfer to attract the provision of
53A along with the challenges faced. The provision provides a statutory right to the
transferee against any right of the transferor to defend his possession over the
property, either taken possession or right in continuance of the possession, the scope
of which is discussed in this project.
The project will deal with if any right of the transferor. As to the property, the
project shall look into the meaning and scope of the word property and what all can
be included in the word property. Also, the phrase taken or continued in possession

will be dealt with in order to establish a reasonable link with the rights of the
transferor and the transferee as any right is only subject to the possession being taken
or already in possession of the transferee and no other condition, we shall also shed
some light on the interpretation apart from whats stated of this provision.
The aim and object of the provision is to protect an innocent party against fraud, in
layman terms.
We will also look at, the unclear execution and implication of this provision, and how
it could be beneficial for the party in distress. Considering this provision has been
adopted from the English, We also need to understand how have the courts interpreted
S. 53A, and how has it been relevant in the contemporary Indian scenario.

RESEARCH QUESTIONS
1. What is the meaning, objective and rights of the parties involved under S. 53A
of TPA, 1882 and to understand the doctrine of part performance?
2. Where does the doctrine of part performance find its origin from, and
application under English and Indian law and the difference between them?
3. What are the nature of transferees rights under S. 53A and when could it be
used as a defence mechanism?
4. What are the essential requirements of S. 53A?
5. What are the exceptions to the doctrine of part performance?
6. How is the relationship of tenant and landlord different from the usual
application of the doctrine of part performance?
7. What is significance of having the instrument of transfer and sale deed
registered under the law for the enforcement of S. 53A?
8. How is an unregistered instrument of transfer of sale deed different from that
of an instrument of lease?
9. What are the recent developments and the principles laid down in the doctrine
of part performance with reference to recent judgements and precedents?

LIMITATION OF THE PROJECT

The project fails to conduct a primary research, thorough examination, interviews and
surveys due to lack of time. The research of the project limits to book and internet
content.