ASSIGNMENTTON/CASETANALYSISTON (TAXTEVASIONTANDTTAXTAVOIDANCE) SubmittedTasTperTtheTrequirementTofTPSDATforTTaxTLawTCourse
SubmittedTto: Ms.TPreetikaTSharma AssistantTProfessor
SubmittedTby: (SAGARTMURAL) VIITSemesterTBATLL.B.T(H) Batch:T2015-2020
VIVEKANANDATINSTITUTETOFTPROFESSIONALTSTUDIES, GGSIPTUNIVERSITY,TNEWTDELHI
TopicT:T
TaxTevasionT andT taxTavoidanceT
Abstract
EveryTassesseTwantsTtoTbreakoutTfromTpayingTtaxes,TwhichTleadsTthemTtoTuseTvariousTm eansTtoTavoidTsuchTpayment.TAndTwhenTit’sTaboutTsavingsTtaxesTtwoTmostTusedTpractices TthatTcanTbeTseenTallTaroundTtheTglobeTareTtaxTavoidanceTandTtaxTevasion.T
TaxTavoidanceTisTanTexerciseTinTwhichTtheTassesseeTlegallyTtriesTtoTbeatTtheTbasicTintenti onTofTtheTlaw,TbyTtakingTadvantageTofTtheTfaultTinTtheTlegislature.
OnTtheotherThandTaxTevasionTisTaTpracticeTofTreducingTtaxTliabilityTthroughTillegalTmeans TthatTisTbyTquashingTincomeTorTraiseTexpensesTorTbyTshowingTlessTincome.TInTotherTwo rds,TTaxTAvoidanceTisTtotallyTlawfulTasTonlyTthoseTmeansTareTemployedTwhichTareTlegal, TwhileTTaxTEvasionTisTconsideredTasTaTcrimeTinTtheTwholeTworld,TasTitTresortsTtoTvario usTkindsTofTintentionalTmanipulations.T
TaxTavoidanceTcanTbeTcalledTanTartTnotTtoTpayTtaxesTwithoutTbreakingTanyTlaw.TAvoidin gTtaxesTitTisTimitatingTaTchainTofTtransactionsTinTresultTofTwhichTaTtaxTpayerTgetsTtaxTb enefit.T
TaxTavoidanceTrulesTcouldTbeTdividedTintoTgeneralTanti-avoidanceTandTspecificTanti- avoidanceTrule.TGAARTstandsTforTgeneralTanti- avoidanceTruleT,TareTusedTwhenTfacingTtaxTavoidanceTmethodsTthatTareTnotTregulatedTbyT otherTone.TInTthisTinstanceTtaxTadministratorThasTdiscretionTtoTdecideTwhetherTactionTofTa TtaxTpayerTcorrelatewithTtheTaimsTofTtaxTlaws.
WhenTanalysingTtheTnatureTofTcommonTtaxTavoidanceTtermsTtwoTbeliefThaveTtoTbeTsepar atedTthatTisTbusinessTpurposeTruleTandTsubstanceToverTformTprinciple.TTaxTavoidanceTisTd efinedTusingTbothTofTtheseTprinciplesTinTTaxTadministrationTlawTofTtheTRepublicTofTLithu ania.TAccordingTtoTtheTArticleT69,TwhenTanyTtransactionTofTaTtaxTpayerTorTanyTgroupTof TtransactionsTareTmadeTtoTreachTaTtaxTbenefitT(directlyTorTindirectlyTdelayTaTtermTtoTpay TaTtax,TtoTreduceTaTtaxTorTcompletelyTescapeTfromTtaxation,TorTtoTincreaseTtheTsumTofT aTtax,TwhichTtheTtaxTpayerThasTaTrightTtoTrefundT(deduct),TorTtoTshortenTaTtermTforTthis TrefundingT(deduction),TtaxTadministratorThasTaTrightTtoTcalculateTpayableTtaxTusingTsubst anceToverTformTprinciple.TInTthisTsituationTtaxTadministratorTactsTindependentlyTfromTtheT
taxTpayer’sTexpressionTofThisTactionsTandTregeneratesTtheTmisreportTorTunsaidTfacts,Twhic hTisTanTnecessaryTobjectTofTtaxation.
ATtaxTpayerTcanTavoidTtaxesTinTdifferentTwaysTbyThidingTfacts,TwhichTareTanTobjectTofT taxation.TATtaxTpayerTcanTcomposeTaTshamTtransaction,TwhichTisTnotTreflectingTtheTrealT purposeTofTit.TAlsoTheTcanTmakeTfabricatedTcontractTorTrepresentTinTaccountancyTfabricate dTtransactions.TItTshouldTbeTstatedTthatTaTlegitimateTtransactionTcouldTbeTacceptedTasTtax Tavoidance,TifTitTisTcomposedTamongTassociatedTpersonsThavingTpurposeTtoTavoidTtaxes.T SuchTtransactionTwouldThaveTotherTconditionsTifTitTisTmadeTamongTnon- associatedTpersons.
ItTisTstatedTthatTtaxTavoidanceTisTaTsituationTwhenTaTtaxTpayerTreducesTaTtaxTbasisTimita tingToneTorTsomeTactions,TwhichTofficiallyTfulfilsTtheTrequirementsTofTtaxTlaws.TAsTaTco nsequence,TtheTtaxTpayerTgetsTaTtaxTbenefit.TTheseTactionsTusuallyTareTfixatedTinTaccount ancyTnotTfalsifyingTthem.TTaxTevasionTisTaTsituationTwhenTaTtaxTpayerTtransactsTcontradi ctoryTtoTtaxTlawsTgenerallyTnotTfixingTrealTtransactionsTrevenueTinTaccountancy.T
MainTcontentT DefinitionTofTTaxTEvasion
TheTnon- paymentTofTtaxesTbyTmeansTofTnotTreportingTallTtaxableTincome,TorTbyTtakingTdeductions TwhichTareTnotTallowed.AnTillegalTact,TmadeTtoTescapeTfromTpayingTtaxesTisTknownTasT TaxTEvasion.TSuchTillegalTpracticesTcanTbeTdeliberateTconcealmentTofTincome,Tmanipulatio nTinTaccounts,TdisclosureTofTunrealTexpensesTforTdeductions,TshowingTpersonalTexpenditure TasTbusinessTexpenses,ToverstatementTofTtaxTcreditTorTexemptionsTsuppressionTofTprofitsTa ndTcapitalTgains,Tetc.TThisTwillTresultTinTtheTdisclosureTofTincomeTwhichTisTnotTtheTactu alTincomeTearnedTbyTtheTentity. TaxTEvasionTisTaTcriminalTactivityTforTwhichTtheTassesseeTisTsubjectTtoTpunishmentTunder TtheTlaw.TItTinvolvesTactsTlike:
• DeliberateTmisrepresentationTofTmaterialTfacts.
• HidingTrelevantTdocuments.
• NotTmaintainingTcompleteTrecordsTofTallTtheTtransactions.
WhatTisTTaxTEvasion
TaxTevasionTisTtheTcriminalTactTofTusingTillegalTmeansTtoTavoidTpayingTtaxes.TTaxTevasi onTschemesTareTabundant,TbutTallTinvolveTtheTmisrepresentationTofTanTindividual’sTorTbusi ness’sTincomeTand/orTassetsTwhenTreportingTtoTtheTInternalTRevenueTService,TinTorderTto TreduceTtheTamountTofTtaxesTtheyTowe.
TaxTevasionTactivitiesTinclude:
▪ ▪ ▪ ▪
UnderreportingTincome InflatingTdeductionsTorTexpenses HidingTmoney HidingTinterestTinToffshoreTaccounts
UnitedTStatesTinTitsTcode,TsectionT7201statesTthatT,T“anyTpersonTwhoTintentionallyTattempt sTinTanyTmannerTtoTevadeTorTdefeatTanyTtaxTimposedTbyTthisTtitleTorTtheTpaymentTthere ofTshall,TinTadditionTtoTotherTpenaltiesTprovidedTbyTlaw,TbeTguiltyTofTaTfelonyTand,Tupo nTconvictionTthereof,TshallTbeTfinedTnotTmoreTthanT$100,000T($500,000TinTtheTcaseTofTa Tcorporation),TorTimprisonedTnotTmoreTthanT5Tyears,TorTboth,TtogetherTwithTtheTcostsTof Tprosecution.” ThisTmeansTthatTdeliberatelyTattemptingTtoTevadeTpayingTtaxesTisTaTfelonyTcriminalTact,Te achTcountTofTwhichTcarriesTaTheavyTfine,TandTaTprisonTsentence.TInTaddition,TtheTperson TisTheldTresponsibleTforTpayingTtheTprosecution’sTcostsTofTtheTcriminalTprocedure.
ElementsTofTTaxTEvasion
AccordingTtheTfederalTlawsTinTtheTUnitedTStates,TtaxTevasionTisTaTseriousTcrime.TATsucc essfulTconvictionTrequiresTthatTtheTprosecutionTproveTcertainTspecificTelements,Thowever.TIf ToneTorTmoreTofTtheTrequiredTelementsTisTmissing,TtheTdefendantTmayTavoidTprosecution. TelementsTinclude:
▪ ▪
aTtax
▪
MiaTisTaTserverTatTaTpopularTsteakhouse,TwhereTsheTearnsTanTaverageTofT$300TperTnight TinTtips.THerTemployerTdoesTnotTkeepTtrackTofTtheTservers’Ttips,TrelyingTonTeachToneTto TwriteTtheTtotalTdownTinTaTlogTbook.TInTanTattemptTtoTlowerTherTincomeTtaxTrestriction, TMiadeliberatelyTreportsTonTherTtaxTreturnTonlyTthatTsmallTamountTsheTwroteTinTherTemp loyer’sTlog,TwhichTaveragesTaboutT$60TperTnight. BecauseTserversTareTrequiredTtoTreportTtheirTtipsTasTincome,TtheTtaxTliabilityTdoesTexist,T MiaTtookTspecificTactionTthroughoutTtheTyearTwithTtheTintentTtoTevadeTthisTtaxTobligation .TMiaThasTcommittedTtaxTevasion,TwhichTisTaTfelonyTcrime.
TheTunpaidTtaxTliabilityTdoesTexist TheTdefendantTtookTspecificTactionsTtoTevade,TorTinTanTattemptTtoTevade,TpayingT
TheTdefendantThadTaTspecificTintentTtoTevadeThisTlegalTdutyTtoTpayTaTtax ForTexample:
ExamplesTofTTaxTEvasion
IfTyou’reTfrustratedTbyTtheTamountTofTtaxesTyouTpay,TseekThelpTfromTaTtaxTprofessional TtoTexploreTlegalTmethodsTforTreducingTyourTburden.TRemember,TtaxTevasionTisTaTcrimeT withTseriousTpenalties.TDoTnotTtakeTpartTinTanyTofTtheseTactivities:
• UnderTReportingTIncome:TPerhapsTyouTearnedTincomeTonTtips,TorTwalkingTdogsTaft erTschool.TIfTyouTdon’tTreportTallTyourTincome,TyouTcanTbeTfoundTguiltyTofTtaxTe vasion.
• TakingTUnearnedTDeductions:TThisTcommonlyToccursTwhenTtaxpayersTclaimTexpense sTonTtheirTtaxesTthatTtheyTdidTnotTincur.TWhenTyouTfileTyourTreturnTyouTobligedT toTprovideThonestTandTtrueTstatementsTofTearningsTofTfaceTcriminalTcharges.
• Don’tTFileTTaxTReturns:TYouTcan’tThideTfromTtheTIRSTbyTnotTfilingTaTreturn.TThe TgovernmentTmonitorsTtaxTstatementsTfromTemployersTandTinterestTstatementsTfromT financialTinstitutions.TIfTyouTmadeTmoney,TtheTIRSTlikelyTknowsTandTexpectTyourTt oTfileTaTreturn.
• DeliberatelyTUnderpayingTTaxes:TFilingTyourTreturnTisTonlyThalfTofTyourTresponsibil ity.TYouTareTalsoTrequiredTtoTpayTyourTtaxes.TFailingTtoTpayTisTpunishedTasTharshl yTasTifTyouTneverTfiled.TIfTyou’reThavingTtroubleTpaying,TcontactTtheTIRSTorTstate TagencyTandTarrangeTpayments.
UnderstandingTtheTdifferenceTbetweenTtaxTevasionTversusTtaxTavoidanceTdoesn’tThaveTtoTb eTcomplicated.TTheTinformationTandTexamplesTthatTfollowTwillTexplainTwhatTactivitiesTcro ssTtheTlineTandTleaveTyouTexposedTtoTanTaudit,TorTworse.
WhatTIsTTaxTAvoidance?
YouTdon’tThaveTtoTrelyonTcheatingTtoTminimiseTyourTtaxes.TThereTareTlotTofTmethodsTap provedTbyTtheTIRSTorTstateTtaxTcodeTthatTcanThelp.TTheTuseTofTtheseTlegitimateTwaysTo fTloweringTtaxTliabilityTisTknownTasTtaxTavoidance.
ManyTpeopleTpayTmoreTincomeTtaxTthanTnecessaryTsimplyTbecauseTtheyTdoesTnotTunderst andTtheTtaxTlawsTandTdoesTnotTkeepTgoodTrecords.TTheTmostTcommonTmeansTofTtaxTav oidanceTisTaccomplishedTbyTclaimingTallTyourTpermissibleTdeductionsTandTcredits.TForTexa mple,TcontributingTtoTaTpre-taxTretirementTfundTlower’sTyourTcurrentTtaxableTincome.
ExamplesTofTTaxTAvoidance
FederalTandTstateTtaxTregulationsTprovideTforTdeductions,Tcredits,TandTadjustmentsTtoTyour TincomeTthatTwillTlowerTyourTtaxTburden.THereTareTsomeTfrequentlyTusedTtaxTavoidanceT strategies.
• IncreaseTRetirementTSavings:TPuttingTasideTmoneyTforTyourTretirementTisTanTeffectiv eTtaxTavoidanceTtool.TJoiningTanTemployer- sponsoredTplanTifTpossible.TTheseTplansTfrequentlyTtakeTfromTyourTpre- taxTearningsTandTareTwithdrawnTdirectlyTfromTyourTpayTcheck.TNoTemployerTplanTn oTproblem.TYouTcanTopenTandTIRATaccountTand,TwithinTcertainTlimits,TyourTcontrib utionsTareTtaxTdeductible.
• MaximiseTWorkTDeductions:TDon’tToverlookTyourTnon- reimbursedTbusinessTexpenses.TTheTIRSTletsTyouTdeductTexpensesTthatTareT"ordinary TandTnecessary"TtoTdoTyourTjob.TThatTwouldTincludeTthingsTlikeTunionTdues,TduesT orTsubscriptionsTtoTprofessionalTsocieties,TunreimbursedTmileageTandTtools.
• Tax- SmartTCollegeTSavings:TSomeTcollegeTplansTworkTlikeT401(k)sTorTIRAsTinTthatTyour TinvestmentTgrows- taxTdeferred,TandTpaymentsTforTcollegeTcostsTcomeToutTfederallyTtax-free.TButTthe
• UseTHomeTEquity:TUnlikeTotherTformsTofTborrowing,ThomeTequityTloansThaveTtheTb onusTofTtax-
deductibleTinterest.TThere’sTaTcapTonTtheTamountTofTtheTannualTdeductionTyouTcanT
takeTbasedTonTyourTincomeTandTifTtheTfundsTwereTusedTforThomeTimprovements.
• HealthTSavingsTAccount:TIfTyouThaveTaThighTdeductibleThealthTcareTplan,TyouTshoul dTconsiderTaThealthTsavingsTplanT(HSA).TTheTmoneyTyouTcontributedTtoTtheTHASTi
sTtaxTdeductibleTandTitTcanTbeTusedTtoTpayTforTqualifiedTmedicalTexpenses.TWhatTy ouTdon’tTuseTisTrolledToverTtoTsubsequentTyears.
DifferenceTbetweenTtaxTevasionTandTtaxTavoidanceT
1. ATplanningTmadeTtoTreduceTtheTtaxTburdenTwithoutTcontraventionTofTtheTlegislatureT isTknownTasTTaxTAvoidance.TAnTunlawfulTact,TdoneTtoTavoidTtaxTpaymentTisTknow nTasTTaxTEvasion.
2. TaxTavoidanceTrefersTtoTenclosingTofTtax,TbutTtaxTevasionTimpliesTtheTsubduingTofTt ax.
3. TaxTavoidanceTisTimmoralTthatTleadsTtoTbendTtheTlawTwithoutTcausingTanyTdamageT toTit.TUnlikeTtaxTevasion,TwhichTisTnotTlegalTandTobjectionableTbothTaccordingTtoTla wTandTmorality.
4. TaxTavoidanceTaimsTatTlowerTtheTtaxTburdenTbyTapplyingTthelaw.THowever,TtaxTeva sionTlowerTtheTtaxTliabilityTbyTexercisingTunfairTmeans.
5. TaxTAvoidanceTinvolvesTtakingTbenefitTofTtheTloopholesTinTtheTlaw.TConversely,TTax TEvasionTincludesTtheTdeliberateTconcealmentTofTmaterialTfacts.
6. TheTarrangementTforTtaxTavoidanceTisTmadeTpriorTtoTtheToccurrenceTofTtaxTliability. TUnlikeTTaxTEvasion,TwhereTtheTarrangementsTforTit,TareTmadeTafterTtheToccurrence TofTtheTtaxTliability.
7. TaxTavoidanceTisTcompletelyTlegalThoweverTTaxTEvasionTisTaTcriminalTactivity.
8. TheTresultTofTtaxTavoidanceTisTtheTpostponementTofTtax,TwhereasTtheTconsequenceTo fTtaxTevasionTifTtheTassesseeTisTfoundTguiltyTofTdoingTso,TisTeitherTimprisonmentTor TpenaltyTorTboth.TaxTevasionTinTaTcrimeTinTwhichTanTindividualTorTentityTintentiona
llyTunderpays,TorTavoidsTpaying,Ttaxes.TEveryTyear,TeachTcitizenTwhoThasTincomeTan d/orTassetsTisTrequiredTtoTfileTaTtaxTreturn.TEachTyearTmanyTpeopleTmisrepresentTho wTmuchTmoneyTtheyTearned,TandTclaimTdeductionsTtoTwhichTtheyTareTnotTentitledTi nTanTeffortTtoTkeepTtheirTmoneyTawayTfromTtheTIRS.TTheTU.TS.TGovernmentTestim atesTthatTmoreTthanT$300TbillionTisTlostTeachTyearTdueTtoTtaxTevasion.TToTexploreT thisTconcept,TconsiderTtheTfollowingTtaxTevasionTdefinition.
TaxTAvoidanceTandTTaxTEvasionTbothTareTmeantTtoTreduceTtheTtaxTliabilityTultimatelyTbu tTwhatTmakesTtheTdifferenceTisTthatTtheTformerTisTjustifiedTinTtheTeyesTofTtheTlawTasTit TdoesTnotTmakeTanyToffenceTorTbreaksTanyTlaw.THowever,TitTisTbiasedTasTtheThonestTta xTpayersTareTnotTfools,TbutTtheyTcanTalsoTmakeTarrangementsTforTpostponingTunnecessary Ttax.TIfTweTtalkTaboutTtheTlatter,TitTisTcompletelyTunjustifiedTbecauseTitTisTaTfraudulentT activity,TbecauseTitTinvolvesTtheTactsTwhichTareTforbiddenTbyTtheTlawTandThenceTitTisTpu nishable.T TaxTAvoidanceTandTTaxTEvasionTbothTareTmeantTtoTreduceTtheTtaxTliabilityTultimately,Tb utTwhatTmakesTtheTdifferenceTisTthatTtheTformerTisTjustifiedTinTtheTeyesTofTlawTasTitTdo esTnotTmakeTanyToffenceTorTbreaksTanyTlaw.THoweverTitTisTbiasedTasTtheThonestTtaxTpa yersTareTnotTfools,TbutTtheyTcanTalsoTmakeTarrangementsTforTpostponingTunnecessaryTtax.
TIfTweTtalkTaboutTtheTlatter,TitTisTcompletelyTunjustifiedTbecauseTitTisTaTfraudulentTactivi ty,TbecauseTitTinvolvesTtheTactsTwhichTareTforbiddenTbyTlawTandThenceTitTisTpunishable.
CONCLUSIONT HavingTbeenTawareTofTtheTillTeffectsTofTtaxTevasion,TitTbecomesTeachToneTofTourTrespon sibilityTtoTsupportTtheTgovernmentTbyTcomplyingTwithTtheTtaxTproceduresTandTpayTtaxesT promptly.TAsTitTisTrightlyTsaidTthatTeveryTdropTofTwaterTmakesTanTocean,TitTcanTalsoTbe TsaidTthatTourTsmallTcontributionTmakesTaThugeTdifferenceTinTtheTgrowthTofTtheTeconom y.TInsteadTofTexpectingTforTchangeTtoThappen,TletTusTbeTtheTchangeTagentsTwhoTcanTbri ngTinTaTdrasticTdevelopmentTbyTjustTfulfillingTourTresponsibilitiesTpromptly.TIfTeachToneT ofTusTspeaksTtheTsameTlanguage,TthenTthereTwillTbeTleastTorTnoTscopeTforTusTtoTbeTexp loitedTbyTanyTinstitutionTorTauthority.TSoTletTusTfulfilTourTdutiesTfirstTandTclaimTourTrigh tsTnext.
ASSIGNMENTTON/CASETANALYSISTON (vodafoneTinternationalTholdingTvTunionTofTIndiaT) SubmittedTasTperTtheTrequirementTofTPSDATforTTaxTLawTCourse
SubmittedTto: Ms.TPreetikaTSharma AssistantTProfessor
SubmittedTby: (SAGARTMURAL) VIITSemesterTBATLL.B.T(H) Batch:T2015-2020
VIVEKANANDATINSTITUTETOFTPROFESSIONALTSTUDIES, GGSIPTUNIVERSITY,TNEWTDELHI
VodafoneTinternationalTholdingT (VIH)T
vT UnionTofTIndiaT(UOI)
Overview
TheTSupremeTCourtTofTIndiaTpronouncedTtheTlandmarkTjudgmentTinTVodafoneTInternationa lTHoldingT(VIH)Tv.TUnionTofTIndiaT(UOI).TTheTBenchTconsistingTofTChiefTJusticeTS.HT Kapadia,TK.TS.TRadhaTkrishnanTandTSwatanterTKumarTquashedTtheTorderTofTHighTCourtT ofTdemandTofTRsT12000TcroresTasTcapitalTgainTtaxTandTabsolvedTVIHTfromTliabilityTofT paymentTofTRsT12000TcroresTasTcapitalTgainTtaxTinTtheTtransactionTdatedT11.2.2007Tbetw eenTVIHTandTHutchinsonTTelecommunicationTInternationalTLimitedTorTHTILT(non- residentTcompanyTforTtaxTpurposes).
TheTcourtTheldTthatTinTIndianTrevenueTauthoritiesTdoTnotThaveTjurisdictionTtoTimposeTtax TonTanToffshoreTtransactionTbetweenTtwoTnon- residentsTcompaniesTwhereTinTcontrollingTinterestTinTaT(Indian)TresidentTcompanyTisTacquir edTbyTtheTnon-residentTcompanyTinTtheTtransaction.
FactsTofTtheTcaseT
1.TVodafoneTInternationalTHoldingT(VIH)TandTHutchisonTtelecommunicationTinternationalTli mitedTorTHTILTareTtwoTnon- residentTcompanies.TTheseTcompaniesTenteredTintoTtransactionTbyTwhichTHTILTtransferredT theTshareTcapitalTofTitsTsubsidiaryTcompanyTbasedTinTCaymanTIslandTi.e.TCGPTinternation alTorTCGPTtoTVIH.
2.TVIHTorTVodafoneTbyTvirtueTofTthisTtransactionTacquiredTaTcontrollingTinterestTofT67Tp ercentTinTHutchTisTonTEssarTLimitedTorTHELTthatTwasTanTIndianTJointTventureTcompany T(betweenTHutchinsonTandTEssar)TbecauseTCGPTwasTholdingTtheTaboveT67TpercentTinteres tTpriorTtoTtheTaboveTdeal.
3.TTheTIndianTRevenueTauthoritiesTissuedTaTshowTcauseTnoticeTtoTVIHTasTtoTwhyTitTsho uldTnotTbeTconsideredTasT“assesseTinTdefault”TandTtherebyTsoughtTanTexplanationTasTtoT whyTtheTtaxTwasTnotTdeductedTonTtheTsaleTconsiderationTofTthisTtransaction.T
4.THutchisonT(Hongkong)’TisTaTNonTresidentThavingTnoTtaxTimplicationsTinTIndia.T‘Cayma nTIslandT(Mauritius)’TwasTaT100T%TSubsidiaryTofTHutchisonT(Hongkong).THutchisonTEssar TwasTanTIndianTco.TinTwhichTCaymanTIslandT(Mauritius)TwasTholdingT67T%TsharesTandT EssarThadTtotalTholdingTofT33T%Tonly.
5.TMauritiusTisTconsideredTasTaTtaxTHeavenTCountry,TSoTCaymanTIslandTwasTincorporated TforTthisTtransactionTexclusively.TVodafoneTisTaTco.TincorporatedTinTNederlandT(UK),Ttreat edTasTforeignTco.TinTIndia.
6.TCaymanThasTacquiredT67T%TsharesTinTHutchisonTEssarTinitially,THutchisonT(Hongkong) ThasTsoldTCaymanTIslandTtoTVodafoneT(UK)T@T$T10TbillionTinT2007TandTVodafoneThas TpaidTentireTsumTtoTHutchisonT(Hongkong)TwithoutTdeductingTanyTTDS.
7.TAsTperTIndianTtaxTlaw,TthisTtransactionTwasTnotTtaxableTinTIndia,TbecauseTBuyerTandT sellerTbothTwereTnonTresidentTofTIndiaTandTcompanyTsoldT(CaymanTIsland)TwasTalsoTaTf oreignTco.TIndirectlyTtheTcontrollingTInterestTofTHutchisonTEssarT(IndianTCo.).ThasTbeenTs oldTthroughTthisTtransaction.TBecauseTCaymanTIslandTwasTonlyTaTpaperTco.,TwhichThasTn oTvalueTinTitselfTwithoutTcontrollingTinterestTinTHutchisonTEssarT(IndianTCo.).THutchisonT hasTsoldTsharesTofTIndianTco.TinTformTofTCaymanTIslandTtoTVodafoneTUK.TButTbyTthisT methodTtheyThaveTsavedTcapitalTgainTtaxesT(OughtTtoTbeTarisenTinTIndia)TonTsuchTTransa ction.
8.TAssessingTofficerT(IndianTIncomeTTaxTDept.)ThasTissuedTaTshowTcauseTnoticeTu/sT201 TtoTVodafoneTforTimposingTpenaltyTu/sT271CT(TotalTdemandTofTRs.T11000TCrore)TonTno nTdeductionTofTTDSTu/sT195TforTamountTpaidTtoTHutchisonT(HK).TVodafoneThasTnotTrep liedTtoTthatTnoticeTandTfiledTaTwritTpetitionTtoTchallengeTtheT‘jurisdictionTofTIncomeTtaxT Department’TforTissuingTsuchTnotice,TbeforeTMumbaiTHighTCourt.THonourableTMumbaiTHi ghTCourtThasTrejectedTtheirTpetitionTwithTcost.TThenTVodafoneThasTfiledTanTSLPTbeforeT SupremeTCourtTagainstTsuchTrejection.THonourableTSupremeTCourtThasTtransferredTtheTcase TtoTIncomeTTaxTdepartmentTwithTspecificTinstructionsTtoTexamineTFactsTandTdetermineTth atTwhetherTdept.ThadTjurisdictionTorTnotTforTissuingTsuchTnotice.TSCTasksTVodafoneTtoTa ppearTbeforeTIncomeTTaxTDeptTinTsuchTcase.TTheTcourtTalsoTmadeTitTclearTthatTifTtheTI- TTDepartmentTpassesTanyTorderTforTpenalty,TitTwouldTnotTbeTenforced,TtillTSupremeTCour tTfurtherTdecidesTtheTmainTmatterTofTtaxTdispute.
SomeTOtherTInterestingTFactsTofTthisTCase:
THutchisonT(Hongkong)TisTstillTnotTaTpartyTtoTanyTproceedingTbutTtheTA.O.TwhoThasTop enedTthisTcase,ThasTbeenTpromotedTtoTChiefTCommissionerTofTIncomeTtaxTdirectly.LawTh asTbeenTamendedTretrospectivelyTtoTstopTtaxTevasionTbyTthisTmethodTandTthereafterTInco meTtaxTDept.THasTopenedTmoreTthanT50TsimilarTcases;TLike- TTheTrevenueTdepartmentTisTembroiledTinTaTlegalTbattleTwithTUS- basedTGeneralTElectricTforTitsT60%TstakeTsaleTinTGenpact.TStakesTwasTsoldTforT$500Tmil lionTinT2007.
FewTQuestionsTwhichTareTstillTunanswered:TDoesTaskingTaTnon- residentTtoTcomplyTwithTIndianTlegalTproceduresTamountTtoTExtraTTerritorialTJurisdiction?T CanTaTcompanyTmerelyThavingTaTincorporationTcertificateTofTaTtaxTheavenTcountryTandTa TfewTfilesTinTitsToffice,TshouldTbeTallowedTtoTevadeTtaxesTbyTvariousTmethods? TheTtaxTofficeThadTaskedTVodafoneTtoTpayT$2.5TbillionT(ApproxTRs.T11218TCrore).OnT1 5thTNovT2010T– TIndia’sTtopTcourtT(SupremeTcourt)TdirectedTVodafoneT(VOD.L)TtoTdepositT$550TmillionT withinTthreeTweeksTinTrelationTtoTaT$2.5TbillionTtaxTdispute.TVodafoneThasTalsoTbeenTdir ectedTtoTmakeTaTbankTguaranteeTworthT1.9TbillionTwithinTeightTweeks.
OnT4thTAUG,T2011:TReferringTsectionT9TofTtheTI- TTAct,TwhichTdefinesTIncomeTdeemedTtoTaccrueTorTariseTinTIndia,TVodafoneTsaidTitTdoes TnotTmentionTanyTsuchTtransferTofTcontrolTtoTbeTtaxed.T“EvenTtheTIndianTfirmsTwhichTp ayTtheirTdividendsToutsideTIndiaTareTnon- taxableTunderTtheTAct,”.T4.TTheTIndianTrevenueTauthoritiesTtherebyTthroughTthisTsoughtTto TtaxTcapitalTgainTarisingTfromTsaleTofTshareTcapitalTofTCGPTonTtheTgroundTthatTCGPTha dTunderlyingTIndianTAssets.
VIHTfiledTwritTpetitionTtheTHighTCourtTchallengingTtheTjurisdictionTofTIndianTrevenueTaut horities.TThisTwritTpetitionTwasTdismissedTbyTtheTHighTCourtTandTVIHTappealedTtoTtheT SupremeTCourtTwhichTsentTtheTmatterTtoTRevenueTauthoritiesTtoTdecideTwhetherTtheTreven ueThadTtheTjurisdictionToverTtheTmatter.TTheTrevenueTauthoritiesTdecidedTthatTitThadTtheT jurisdictionToverTtheTmatterTandTthenTmatterTwentTtoTHighTCourtTwhichTwasTalsoTdecided TinTfavourTofTRevenueTandTthenTfinallyTSpecialTLeaveTpetitionTwasTfiledTinTtheTSupreme TCourt.
IssueTbeforeTtheTSupremeTCourt
TheTissueTbeforeTtheTApexTcourtTwasTwhetherTtheTIndianTrevenueTauthoritiesThadTtheTjuri sdictionTtoTtaxTanToffshoreTtransactionTofTtransferTofTsharesTbetweenTtwoTnon- residentTcompaniesTwherebyTtheTcontrollingTinterestTofTanTIndianTresidentTcompanyTisTacq uiredTbyTvirtueTofTthisTtransaction.
ArgumentsTofTRevenue
TheTrevenueTsubmittedTthatTthisTentireTtransactionTofTsaleTofTCGPTbyTHTILTtoTVIHTwas TinTsubstanceTtransferTofTcapitalTassetsTinTIndiaTandTthusTattractedTcapitalTgainTtaxesTtran sactionTledTtoTtransferringTofTallTdirect/indirectTrightsTinTHELTtoTVIHTandTthisTentireTsal eTofTCGPTwasTaTtaxTavoidanceTschemeTandTtheTcourtTmustTuseTaTdissectingTapproachTa ndTlookTintoTtheTsubstanceTandTnotTatT“lookTat”TformTofTtransactionTasTaTwhole.
ObservationsTmadeTbyTtheTSupremeTCourt
1.
CorporateTstructures
◦ MultinationalTcompaniesToftenTestablishTcorporateTstructuresTorTaffiliateTsubsi diariesTorTjointTventuresTforTvariousTbusinessTandTcommercialTpurposesTandT theseTareTprimarilyTaimedTtoTyieldTbetterTreturnsTtoTtheTinvestorsTandThelpT inTprogressTofTtheTcompany.
◦ AndTthereforeTtheTburdenTisTentirelyTuponTtheTrevenueTtoTshowTthatTsuchTi ncorporation,Tconsolidation,TrestructuringThasTbeenTaffectedTforTfraudulentTpur poseTsoTasTtoTdefeatTtheTlawTorTevadeTtheTtaxes.
◦ EvenTMinistryTofTCorporateTaffairsTrecogniseTsuchTstructuresTthatTconsistTof THoldingTandTsubsidiaryTcompaniesTwhereinTHoldingTcompanyTmayTincludeT enoughTvotingTstockTinTtheTsubsidiaryTtoTcontrolTtheTmanagementTandTalsoT
2.
OverseasTcompanies
◦ ManyToverseasTcompaniesTinvestTinTcountriesTlikeTMauritius,TCaymanTIsland TdueTtoTbetterTopportunitiesTofTinvestmentTandTtheseTareTundertakenTforTsou ndTcommercialTandTsoundTlegitimateTtaxTplanningTandTnotTtoTconcealTtheirT incomeTorTassetsTfromThomeTcountryTtaxTjurisdictionTandTIndiaThaveTrecogn isedTsuchTstructures.
◦ TheseToffshoreTtransactionsTorTtheseToffshoreTfinancialTcentresTdoTnotTnecess arilyTleadTtoTtheTconclusionTthatTtheseTareTinvolvedTinTtaxTevasion.
3.
HoldingTandTSubsidiaryTCompanies
◦ TheTcompaniesTactThaveTrecognisedTthatTsubsidiaryTcompanyTisTaTseparateTl egalTentityTandTthoughTholdingTcompanyTcontrolTtheTsubsidiaryTcompaniesTa ndTrespectiveTbusinessTofTtheTcompanyTwithinTaTgroupTbutTitTisTsettledTprin cipleTthatTbusinessTofTsubsidiaryTisTseparateTfromTtheTHoldingTcompany.
◦ TheTassetsTofTsubsidiaryTcompaniesTcanTbeTkeptTasTcollateralTbyTtheTparent TcompanyTbutTstillTtheseTtwoTareTdistinctTentitiesTandTtheTholdingTcompany TisTnotTlegallyTliableTforTtheTactsTofTsubsidiariesTexceptTinTfewTcircumstanc esTwhereTtheTsubsidiaryTcompanyTisTaTsham.
◦ TheTHoldingTcompanyTandTsubsidiaryTcompaniesTmayTformTpyramidTofTstru cturesTwherebyTtheTsubsidiaryTcompanyTmayTholdTcontrollingTinterestTinToth erTcompaniesTformingTparentTcompany.
4.
SharesTandTcontrollingTinterest
◦ TheTtransferTofTsharesTandTshiftingTofTcontrollingTinterestTcannotTbeTseenTas TtwoTseparateTtransactionsTofTtransferTofTsharesTandTtransferTofTcontrollingTi nterest.
◦ TheTcontrollingTinterestTisTnotTanTidentifiableTorTaTdistinctTcapitalTassetTind ependentTofTholdingTofTsharesTandTisTinherentlyTaTcontractualTrightTandTnot
hintedTthatTmanyTtransnationalTinvestmentsTareTmadeTinTtaxTneutralT/investor TfriendlyTnationsTprimarilyTsoTasTtoTavoidTdoubleTtaxationTorTplanTactivities TinTmannerTtoTyieldTbestTreturnsTtoTinvestors.
TpropertyTrightTandTcannotTbeTconsideredTasTtransferTofTpropertyTandTcapita lTassetsTunlessTtheTStatueTstipulatesTotherwise.
◦ TheTacquisitionTofTsharesTmayTcarryTacquisitionTofTcontrollingTinterestTwhich TisTpurelyTcommercialTconceptTandTtaxTisTleviedTonTtransactionTandTnotTon TitsTeffect.
5.
6.
TaxTplanning/TtaxTevasion/taxTavoidance
◦ ItTisTcornerstoneTlawTthatTaTtaxTpayerTisTenabledTtoTarrangeThisTaffairsTsoT asTtoTreduceTtheTliabilityTofTtaxTandTtheTfactTthatTtheTmotiveTforTtheTtrans actionTisTtoTavoidTtaxTdoesTnotTinvalidateTitTunlessTaTparticularTenactmentTs oTprovided.
◦ ItTisTessentialTthatTtheTtransactionTshouldThaveTsomeTeconomicTorTcommerci alTsubstanceTinTorderTtoTbeTeffective.
◦ TheTrevenueTcannotTtaxTaTsubjectTwithoutTaTstatuteTtoTsupportTandTeveryTta xTpayerTisTentitledTtoTarrangeThisTaffairsTsoTthatThisTtaxesTshallTbeTasTlow TasTpossibleTandTheTisTnotTboundTtoTchooseTthatTpatternTwhichTwillTrepleni shTtheTtreasury.
◦ AllTtaxTplanningTisTnotTillegitimateTandTobservedTthatTtheTmajorityTinTMcD owellTcaseTheldTthatTtaxTplanningTisTlegitimateTprovidedTitTisTwithinTtheTfra meworkTofTlawTandTcolourableTdevicesTcannotTbeTpartTofTtaxTplanning.
7.
RoleTofTCGP
CorporateTveil
◦ TheTprincipleTofTliftingTofTcorporateTveilTcanTalsoTbeTappliedTinTrelationshi pTofTHoldingTandTsubsidiaryTcompanyTinTspiteTofTtheirTseparateTlegalTperso nalitiesTifTfactsTrevealTthatTdubiousTmethodsTwereTadoptedTtoTevadeTtax.
◦ TheTrevenueTauthoritiesTshouldTlookTatTtransactionTinTaTholisticTmannerTand TshouldTnotTstartTwithTtheTquestionTthatTtheTimpugnedTtransactionTisTtaxTde ferment/savingTdevice.
◦ TheTrevenueTauthoritiesTmayTinvokeTtheTprincipleTofTpiecingTofTtheTcorporat eTveilTonlyTafterTitTisTableTtoTestablishTonTtheTfactsTandTcircumstancesTsurr oundingTtheTtransactionTthatTtheTimpugnedTtransactionTisTaTshamTorTtaxTavo idant.
◦ CGPTwasTalreadyTpartTofTHTILTcorporateTstructureTandTsaleTofTCGPTshare TwasTaTgenuineTbusinessTtransactionTandTcommercialTdecisionTtakenTinterest TofTinvestorsTandTcorporateTentityTandTnotTaTdubiousTone.
8.
9.
TheTsiteTofTsharesTofTCGP
◦ SharesTofTCGPTwereTregisteredTinTCaymanTIslandTandTlawTofTCaymanTalso TdoesTnotTrecogniseTmultiplicityTofTregistersTandThenceTsiteTofTsharesTandTt ransferTofTsharesTisTsituatedTinTCaymanTandTshallTnotTshiftTtoTIndia.
ExtinguishmentTofTrightsTofTHTILTinTHEL
◦ TheTtransferTofTCGPTshareTautomaticallyTresultedTinThostTofTconsequencesTt
hatTincludedTtransferTofTcontrollingTinterest.
◦ AndTcontrollingTinterestTcannotTbeTdissectedTfromTCGPTshareTwithoutTlegisla
tiveTintervention.
◦ UponTtransferTofTsharesTofTtheTholdingTCompany,TtheTcontrollingTinterestTm ayTalsoTpassTonTtoTtheTpurchaserTalongTwithTtheTsharesTandTthisTControllin gTinterestTmightThaveTpercolatedTdownTtheTlineTtoTtheToperatingTcompaniesT butTthatTcontrollingTinterestTisTstillTinherentlyTremainsTcontractualTandTnotTa TpropertyTrightTunlessTotherwiseTisTprovidedTbyTtheTstatue.
◦ TheTacquisitionTofTsharesTmayTcarryTtheTacquisitionTofTcontrollingTinterestTa ndTthisTisTpurelyTaTcommercialTconceptTandTtheTtaxTcanTbeTleviedTonlyTon TtheTtransactionTandTnotTonTitsTeffectTandThence,Tconsequently,TonTtransferT ofTCGPTshareTtoTVodafone,TVodafoneTgotTcontrolToverTeightTMauritianTCo mpanyTandTthisTdoesTnotTmeanTthatTtheTsiteTofTCGPTshareThasTshiftedTtoT IndiaTforTtheTpurposeTofTchargingTcapitalTgainsTtax.
10. SectionT9TofTtheTincomeTtaxTact
◦ TheTtaxTisTimposedTonTtheTbasisTofTsourceTandTthisTsourceTinTrelationTtoTi ncomeTisTtheTplaceTwhereTtheTtransactionTofTsaleTtakesTplaceTandTnotTwher eTtheTitemTofTvalueTwhichTwasTsubjectTofTtheTtransactionTisTderivedTorTacq uiredTfrom.
◦ HTILTandTVIHTareTbothToffshoreTcompaniesTandTtheTsaleTalsoTtookTplaceT outsideTIndiaTtherebyTsourceTofTincomeTisToutsideTIndiaTunlessTlegislationTro pesTinTthisTtransaction.
◦ TheTrevenueTstatutesTareTtoTbeTreasonablyTconstruedTandTtaxTcannotTbeTimp osedTwithoutTclearTwordsTindicatingTtheTintentionTtoTlayTtheTburden.
◦ TheTchargingTsectionTisTtoTbeTstrictlyTconstruedTandTsectionT9T(1)T(i)Tcanno tTbeTextendedTtoTcoverTindirectTtransferTofTcapitalTassetsTinTIndiaTbyTinterp retation.
◦ ATspecificTnexusTisTrequiredTtoTexistTbetweenTtheTearningTofTtheTincomeTa ndTtheTterritoryTthatTseeksTtoTimposeTtaxTforTtheTimpositionTofTtax.
◦ SectionT9ThasTnoTinbuiltT“lookTin”TmechanismTandT“lookTthrough”Tprinciple TshallTnotTshiftTtheTsiteTofTassets.TThisTcanTbeTdoneTonlyTbyTexpressTprovi sionTinTthisTregard.
◦ TheTLegislatureTinTcaseTwantedTtoTtaxT“income”TwhichTarisesTindirectlyTfro mTtheTassets;TtheTsameTmustThaveTbeenTspecificallyTprovidedTso.TTheTcourt TcitedTtheTexampleTofTSectionT64.
11. SectionT195
◦ TheTtaxTpresenceThasTtoTbeTviewedTinTcontextTofTtheTtransactionTinTquestio
nTandTnotTwithTreferenceTtoTunrelatedTmatter.
◦ TheTsectionT195TshallTapplyTinTcaseTpaymentsTareTmadeTbyTresidentTtoTnon
-residentTandTnotTbetweenTtwoTnon-residentTcompanies.
◦ TheTlegalTnatureTofTtransactionTisTtoTbeTexamined.
◦ TheTpresentTtransactionTwasTbetweenTtwoTnon- residentsTentitiesTthroughTaTcontractTexecutedToutsideTIndiaTwhereTtheTconsid erationTwasTalsoTpassedToutsideTIndiaTandThenceTVIHTisTnotTlegallyTobliged TtoTrespondTtoTtheTnoticeTunderTsectionT163TwhichTrelatesTtoTtheTtreatment TofTpurchaserTasTaTrepresentativeTassesses.
DecisionTofTtheTCourt
SaleTofTCGPTshareTbyTHTILTtoTVodafoneTorTVIHTdoesTnotTamountTtoTtransferTofTcapita lTassetsTwithinTtheTmeaningTofTSectionT2T(14)TofTtheTIncomeTTaxTActTandTtherebyTallTt heTrightsTandTentitlementsTthatTflowTfromTshareholderTagreementTetc.TthatTformTintegralTp
artTofTshareTofTCGPTdoTnotTattractTcapitalTgainsTtax. TheTorderTofTHighTCourtTofTtheTdemandTofTnearlyTRs.12,T000TcroresTbyTwayTofTcapital TgainsTtaxTwouldTamountTtoTimposingTcapitalTpunishmentTforTcapitalTinvestmentTandTitTla cksTauthorityTofTlawTandTthereforeTisTquashed.
Conclusion
TheTapexTcourtTpronouncedTaTlandmarkTjudgmentTinTVodafoneTInternationalTHoldingTv.TU nionTofTIndiaTandTclearedTtheTuncertaintyTwithTrespectTtoTimpositionTofTtaxes.TTheTapexT courtTthroughTthisTjudgmentTrecognised:
• TheTprinciplesTofTtaxTplanning.
• BusinessTentitiesTorTindividualTmayTarrangeTtheTaffairsTofTtheirTbusinessTsoTasTtoT
reduceTtheirTtaxTliabilityTinTabsenceTofTanyTstatutoryTstipulationTprohibitingTtheTsa
me.
• TheTmultinationalTcompaniesToftenTestablishTcorporateTstructuresTandTallTtheseTstruc
turesTshouldTbeTestablishedTforTbusinessTandTcommercialTpurposesTonly.
• TheTcorporateTveilTmayTbeTliftedTinTcaseTfactsTandTcircumstancesTrevealTthatTtheTt
ransactionTorTcorporateTstructureTisTshamTandTintendedTtoTevadeTtaxes.
• TheTtransactionsTshouldTbeTlookedTholisticTmannerTandTnotTinTaTdissectingTmanner TandTtheTpresenceTofTcorporateTstructuresTinTtaxTneutral/investorTfriendlyTnationsTs
houldTnotTleadTtoTtheTconclusionTthatTtheseTareTmeantTtoTavoidTtaxes. InTtheTend,TitTcanTbeTsaidTthatTthisTjudgmentThasThelpedTinTremovingTuncertaintiesTwith TrespectTtoTimpositionTofTtaxesTandTrecognisedTtheTprincipleTtheTifTmotiveTofTtheTtransac tionTisTtoTavoidTtaxTdoesTnotTnecessarilyTleadTtoTassumptionTofTevasionTofTtaxesTandTth eTsupremeTcourtThasTendorsedTtheTviewTofTlegitimateTtaxTplanning.