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PIERCING THE CORPORATE VEIL IN TAXATION MATTERS - Divyata Badiani & Hridhay R. Khurana
By way of this paper, the different dimensions pertaining to Lifting of the Corporate Veil have been dealt with. The growing role of Special Purpose Vehicles and the lacunae in the primeval Income Tax Act justifies the need for lifting the Corporate Veil. Further Lifting of the Corporate Veil has added layers to the Jurisprudence of Company Law and contributed to an interpretation of the Holding Subsidiary relationship of Companies. The base line around which the structure of this paper has been developed is that in the absence of the Direct Tax Code to look through transactions piercing the Corporate Veil is the only solution available to understand the muddled structure of Companies and their Ownerships.

INDEX INTRODUCTION .. 1 - 3 1. Modus Operandi of Piercing the Corporate Veil 4 - 6 2. Realism and Company Law.. 7 - 21 3. Piercing All the Veils: Applying an Established Doctrine to a New Business Order............ 22 - 25 CONCLUSION ... 26 - 27 BIBLIOGRAPHY ... 28 - 30 BIO DATA OF HRIDHAY R. KHURANA 31

INTRODUCTION A sham, bogus or contrived transaction would, in appropriate circumstances, justify piercing the corporate veil. However, the tax authorities must act with circumspection while challenging the corporate status of an entity. H. P. Ranina. The Prince, known as Machiavellianism, has been viewed as evil throughout the centuries, but most business leaders and politicians agree Machiavelli has only defined the physics of power. Machiavelli set the precedent for the cold and calculated regardless of the century they live in.

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He was in the business of power preservation not piety. Those who desire power in any situation may look to his strategies for solid aid.

"...The (the leader of the state) must stick to the good so long as he can, but, being compelled by necessity, he must be ready to take the way of the evil."1 The political doctrine of Machiavelli, which denies the relevance of morality in political affairs and holds that craft and deceit are justified in pursuing and maintaining political power."

This definition implies that in the arena of power the end justifies the means. This is essentially the core of Machiavelianism. The premise of the Machiavelli theory was way ahead of its time. This similarly explains the behavioral trend when it comes to Corporate Veil. Corporations were overwhelmed by the convenience created by the Corporate Veil making them unwilling to look past it. Recognizing that a physical cause of harm cannot escape liability because of some metaphysical obstruction, because the causative elements of nature dictate that every action must have a consequence and every action must have its source from something physical. This is the premise and more importantly the means aimed to be achieved behind Lifting of the Corporate Veil. There has been much scholarly attention generating dramatic opposing views, with some legal commentators advocating complete abolishing of the doctrines and others advocating a significant relaxation of the standards of lifting of the corporate veil. Those who argue that abolition of this doctrine argue limited liability of the incorporators has significant economic benefits2. Those scholars argue that aside from reducing the cost of equity ownership and facilitating economic growth, limited liability facilitates diversification of investments, reduces monitoring costs, increases liquidity of shares, and encourages managers to undertake beneficial projects that otherwise might be deemed too risky. Allowing plaintiffs to pierce corporate veil and shield of limited liability removes these benefits and creates uncertainty for
1

(Machiavelli, 63).

See e.g., Stephen M. Bainbridge, Abolishing Veil Piercing, 26 J CORP C 479, 495, (2001), ( [T]here is a widely shared viewed that limited liability was and remains, essential to attracting the enormous amount of investment capital necessary for industrial corporations to arise and flourish), Frank H. Easterbook & Daniel R. Fischel, Limited Liability and the Corporation 52 U CHI L REV 89, 90 98 (1985), Stephen B. Presser, Thwarting the Filling of the Corporation: Limited Liability, Democracy an Economics 87 NW UL REV 148- 164 (1992). (If it is true that the original justification of limited liability was that in encourages investments in the small firms, or investments by entrepreneurs of modest means and if we are still interested in encouraging individual entrepreneurship through incorporation this ought to be, perhaps, the most crucial aspect to be considered in veil piercing doctrine)

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investors and other corporate shareholders - particularly in light of the standards applied by the courts that are less than clear. In contrast those who seek to relax the requirements for piercing the corporate veil argue that limited liability improperly shifts costs into innocent creditors.3 As a result management may undertake business activities that are harmful to society because they are able to externalize the risk of such projects, resulting in a moral hazard problem. These costs, the commentators assert outweigh the benefits of limited liability. This article aims to strike equilibrium. The first part of the Article talks about the Modus Operandi of Lifting the Corporate Veil. It broadly addresses the commonly accepted circumstances under which veil piercing is justified. The second part of the paper deals with Realism in Company with special reference to the Direct Tax Code (hereinafter for the sake of brevity referred to as DTC). It addresses the Implications of latest judgments involving the application of General Anti Avoidance Rule (hereinafter for the sake of brevity referred to as GAAR). The third part of the paper deals with the application of lifting the Corporate Veil in the context of Limited Liability Companies and Limited Liability Partnership. It aims to answer the simple question that with this contemporary concept of Limited Liability Partnerships and Limited Liability Companies coupled with the jumbled jurisprudence surrounding their existence what guidelines should be adopted. This is in light of the practise of simply transposing the guidelines applied to Corporations to Limited Liability Partnership.

See, e.g., Henry Hansmann & Renier Kraakman, Toward Unlimited Shareholder Liability for Corporate Torts, 100 YALE L.J. 1879, 1880, 1920 (1991); Lynn M. LoPucki, The Death of Liability, 106 YALE L.J. 1 (1996).

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Section I: - Modus Operandi of Lifting the Corporate Veil

The presumption of limited shareholders liability is a bedrock principle of corporate law 4. Distinct Companies, even parent and subsidiary companies are presumed separate.5 Indeed, this has been the case since the earliest days of corporate law6. As a result shareholders protection through the corporate form is ingrained in our economic and legal system7. Moreover, the limited liability associated with the corporate form has played a significant role in the expansion of industry and in the growth of trade and commerce.8 Since the commencement of the use of the corporate form in the business world, parties have utilized the corporate form to insulate other entities, stakeholders, members and shareholders from liability. A strong presumption exists for the separate nature of a corporation and its members, shareholders or related entities. Limited liability is the rule not the exception.9 Courts and legal scholars have characterized this limited liability as a corporate veil, which may be pierced only in exceptional circumstances.10 Limited liability is the cornerstone of company law. In the common law world, the origins of limited liability reflect an economic drive for a laissez-faire market in which perfect freedom was desired for investors and entrepreneurs. The corporate form itself also, according to Smith, was inherently inefficient and he was opposed to it: The directors of such companies . . . being the managers of other peoples money than their own, it cannot well be expected that they should watch over it with the same
4

Escobedo v. BHM Health Assoc., Inc., 818 N.E.2d 930, 933 (Ind. 2004). 1 FLETCHER CYCLOPEDIA OF PRIVATE CORP. 43 (Nov. 2004) (As a general rule, two separate corporations are regarded as distinct legal entities even if the stock of one is owned wholly or partly by the other. . . . Thus, under ordinary circumstances, a parent corporation will not be liable for the obligations of its subsidiary.).
5

Greater Hammond Community Servs., Inc. v. Mutka, 735 N.E.2d 780, 784 (Ind. 2000). See also Hickman v. Rawls, 638 S.W.2d 100, 102 (Tex. Ct. App. 1982) (The general rule is that a corporate entity may not be ignored.); In re Hillsborough Holdings Corp. v. Celotex Corp., 166 B.R. 461, 468 (Bankr. M.D. Fla. 1994) (Delaware courts disregard the corporate entity in only the most extraordinary cases.)
6

Winkler v. V.G. Reed & Sons, Inc., 638 N.E.2d 1228, 1232 (Ind. 1994). Hambleton Bros., 397 F.3d at 1227. Escobedo v. BHM Health Assoc., Inc., 818 N.E.2d 930,933 (Ind. 2004). Ibid Calvert v. Huckins, 875 F. Supp. 674, 678 (E.D.Cal. 1995).

7 8

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anxious vigilance . . . Negligence and profusion must always prevail, more or less, in the management of such a company.11 The phrase piercing the corporate veil was described in a 1973 case as now fashionable12 and further described as out of date13. The English courts expressly separate the meaning of the two phrases. Staughton LJ, in Atlas Maritime Co SA v Avalon Maritime Ltd (No 1)14, stated that: To pierce the corporate veil is an expression that I would reserve for treating the rights and liabilities or activities of a company as the rights or liabilities or activities of its shareholders. To lift the corporate veil or look behind it, on the other hand, should mean to have regard to the shareholding in a company for some legal purpose. The doctrine of lifting of the veil has been applied, in the words of Justice Palmer, in five categories of cases: Where companies are in relationship of holding and subsidiary (or sub-subsidiary) companies;

Where a shareholder has lost the privilege of limited liability and has become directly liable to certain creditors of the company on the ground that, with his knowledge, the company continued to carry on business six months after the number of its members was reduced below the legal minimum;

In certain matters pertaining to the law of taxes, death duties and stamps;

Particularly where the question of the "controlling interest" is in issue;

In the law relating to exchange controls, and in the law relating to trading with the enemy where the test of control is adopted15. In some of these cases, judicial decisions have lifted the veil and considered the substance of the matter.

11

A Smith, Wealth of Nations, Vol 2, 1776, p 233. Brewarrana v Commissioner of Highways (1973) 4 SASR 476, 480 (Bray CJ). Walker v Hungerfords (1987) 44 SASR 532, 559 (Bollen J). Atlas Maritime Co SA v Avalon Maritime Ltd (No 1) [1991] 4 All ER 769. Palmer's Company Law; page 215, 24th Edn., 1987

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13

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The metaphysical nature of limited liability fails to recognize that harm and liabilities, in reality, are caused and created by people and real and tangible things. That such real causes of harm and liabilities are to be protected from accountability by some intangible construct of the mind, the corporate veil, is both illusive and a delusion. As a result, the male fide avoidance of criminal or civil liability through reliance on the principle of limited liability has prompted the courts to find exceptions to limited liability by piercing the corporate veil.

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Section II: - Realism in Company Law

Realism is a fragmented school of thought, in which reality has different and opposing definitions.16 The legal realist movement was influenced by the view that there was more to the study of law than the study of a system of rules; that for most purposes legal doctrine should be seen in the context of the totality of the social processes.17According to Bix, American legal realists were realists in the sense that they wanted citizens, lawyers, and judges to understand what was really going on behind the jargon and mystification of the law.18Realists, like Pound and Frank,19sought to debunk the mechanical jurisprudence20 advocated by classical formalists by peering beyond paper rules to expose the real rules extracted from uniformities in actual judicial behavior. That is, looking not at the particular decision reached, but the mode of reasoning employed to reach that decision21and decisions with similar factual matrix. The formalists believed that law was of itself an exact science, and the correct legal solution could be gained by the application of law without reference to outside social considerations. Cohens summary of traditional legal theory accurately summarizes the stance of formalists:

Legal concepts (for example, corporations or property rights) are supernatural entities, which do not have a verifiable existence except to the eyes of faith. Rules of law, which refer to these legal concepts, are not descriptions of empirical social facts (such as the customs of [people] or the customs of judges) nor yet statements of moral ideals, but are rather theorems in an independent system. It follows that all legal argument can
16

One thing is clear. There is no school of realists. There is no likelihood that there will be such a school. There is no group with an official or accepted, or even with an emerging creed. There is no abnegation of independent striking out. . . . New recruits acquire tools and stimulus, not masters, nor overmastering ideas. Old recruits diverge in interests from each other. They are related, says Frank, only in their negotiations, and in their skepticisms, and in their curiosity. See K Llewellyn, Some Realism About Realism (1931) 44 Harv L Rev 1233
17

W Twining, Karl Llewellyn and the Realist Movement, Weidenfeld and Nicolson, London, 1973, p 382. Also see N Andrews, Wormes in the entrayles: the corporate citizen in law? (1998) 5(2) Murdoch Uni Electronic Jnl of Law n 168.
18

B Bix, A Dictionary of Legal Theory, Oxford University Press, Oxford; New York, 2004, p 3. Although, it should be noted that Frank was an outspoken critic of Llewellyns rule scepticism, as he regarded himself as a rule sceptic. See R Pound, Mechanical Jurisprudence (1908) 8 Columbia L Rev 605.

19

20

21

See, eg, Cohens analysis of Tauza v Susquelvanna Coal Company 220 NY 259; 115 NE 915 (1917) in F Cohen, Transcendental Nonsense and the Functional Approach (1935) 35 Columbia L Rev 809 at 809ff.

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never be refuted by a moral principle nor yet by any empirical fact. Jurisprudence, then, as an autonomous system of legal concepts, rules, and arguments, must be independent both of ethics and of such positive sciences as economics or psychology. In effect, it is a special branch of the science of transcendental nonsense.

In contrast, for the realists, judges should look beyond legal doctrine and its interpretation to behavioural matters including the area of contact, of interaction, between official regulatory behaviour and the behaviour of those affecting or affected by official regulatory behaviour.22One reason for this openness was the recognition by the realists, following Oliver Wendell Holmes Jr, that judges made law and policy. Holmes wrote:

Ours is not a closed system of existing precedent. The law is not such a formal system at all. . . . Courts must make law. Indeed courts are major policy makers in our system of government. We must be wary of petrifying the common law into a rigid system, utterly behind the times and totally at odds with the progress of science and social change.23

This is important in Company Law. For the realists, company law was an alternative set of legal principles and policies which could be used to produce different outcomes to those produced by other legal principles and policies, particularly those relating to agency. The company existed in law as the outcome of this alternative form of legal analysis. It meant that company law was inherently in conflict with other legal doctrines and policies. Realists were critical of judges who saw company law in other ways or the company as a tangible thing. Cohen, for example, criticized judges for implicitly believing that companies were metaphysical beings like angels which had an independent existence apart from the rules which applied to them and a capacity to travel about from State to State as mortal men do. That imagined existence was then used to resolve issues in a process of transcendental nonsense without reference to proper policies involving political or ethical value judgments. 24 The
22

K Llewellyn, A Realistic Jurisprudence The Next Step (1930) 30 Columbia L Rev 431 at 464. 244 US 205 at 221 per Holmes J (dissenting)

23

24

Cohen, above n 9, at 8101. Cohen criticises a decision of Cardozo J in the NY Court of Appeal in which the question whether a Pennsylvanian company could be sued in New York was answered by only reference to the question where is the corporation?

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proper issues to be considered, according to Cohen, were the hardship to plaintiffs of having to sue out of state and the possible hardship to the firm in having to defend actions in many states, because these were tangible considerations that could be proven with positive evidence and ethical argument. Cohens distinction between legal authority backed by the metaphysical as opposed to the pragmatic is important to company law, and in particular veil piercing cases, because it exemplifies the artificiality of legal argument that has little use to the factual matrix. To argue that an entity is a person or a corporation because it can be sued relied on empirical evidence of litigation in reality, as opposed to arguing that an entity can be sued because it is a corporation, which, in the words of Cohen, ignores practical questions of value or of positive fact. The issue here, in the context of veil piercing in particular, is separating the metaphysical cause of limited liability from the physical purpose for limited liability. That is, recognizing that a physical cause of harm cannot escape liability because of some metaphysical obstruction, because the causative elements of nature dictate that every action must have a consequence and every action must have its source from something physical. The corporate veil cannot be measured physically, nor can the corporation be touched, hand cuffed or made to do hard labor. This is not to say, while it may be true for some, that realists deny the existence of the corporate veil. It only exists, in law, if it has some pragmatic rationalization and cause or some purpose for which it is worthy to be recognized. If the facts rationalize it and provide purpose for its existence, then its grounding in the pragmatic is evident. However, in the course of time, the doctrine, that a corporation or company has legal or separate entity of its own has been subjected to certain exceptions by the application of the fiction that the veil of the corporation can be lifted and its face examined in substance. The current Indian Economy presents a contradiction. Over the years socio-economic and political milieu of the country has undergone a sea change. The international presence of corporate world along with increase of cross boarder transactions has necessitated revisiting the age old Income Tax Act of 1961 (hereinafter referred to as the Act). The Indian Revenue Authorities are increasingly applying the concept of Lifting of the Corporate Veil. The Income-tax Act, 1961 (hereinafter for the sake of brevity referred to as the act), as it stands today, does not have explicit provisions for looking through the transactions. However, the proposed Direct Taxes Code (hereinafter referred to as DTC) has General Anti Avoidance Rules (hereinafter referred to as GAAR) provisions embedded in it. The

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DTC, which will come into effect on April 1, 2012 specifically, spells out the conditions under which indirect transfer will be subject to tax in India. The tax policy direction seems to be to tax only those transactions where there is sale of substantial business interests in the Indian company and not where there is either portfolio sale or a sale of a block of shares not resulting in outright sale of the business in India. India has thus joined China, amongst other countries, in attempting to tax indirect transfers and to this extent cross border transactions will need to factor in the current view of Revenue as well as proposed changes in the DTC so as not to be caught by surprise at a later stage. Further, an analysis of how inadequate tax principles present a difficult choice for India. Transactions involving indirect transfer of controlling stake are not specifically covered under the Income Tax Act, however the same find place in the proposed DTC. While, the intention of the legislature to tax such transactions is clear, the implications under the current act become critical for completed transactions and existing structures. Besides, India, a member of both G20 and Financial Action Task Force (hereinafter referred to as FATF) requires aligning her tax principles with those followed and accepted internationally. Since liberalization was introduced in 1991, attempt has been made to rationalize the countrys tax system to make Indian trade and industry globally competitive. The proliferation of Double Taxation Avoidance Agreements entered into by India with several foreign countries has created a new branch of tax law. The placement of a subject within the domain of two sovereign jurisdictions is the pivotal reason for treating such subject distinctively in comparison of the subjects, which lie purely within the tax-dominion of one jurisdiction. Thus emerges international taxation as a distinct branch of fiscal laws governing the tax treatment of entities/transactions upon which two or more sovereign States can claim their right to tax. These Agreements come into play when a resident of one state has income sourced in another state. For the purpose of such Agreements income is regarded as sourced in a state if the payer is based there. A countrys appetite for taxation being insatiable, both states would like to tax the income arising from the same transaction. It is here that Double Taxation Avoidance Agreements come into play. The Agreements deal with different types of income and some of them have a residual catch-all provision. With reference to different types of income different modes of avoiding/restricting double taxation are evolved. The problem arises

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when the Domestic Laws and this branch of International Laws are in inconsonance. This Inconsonance is at a time when the Indian Mergers and Acquisitions (hereinafter for the sake of Brevity referred to as M&A) market has been marching ahead witnessing an increasing trend in the number of deals with many more in the pipeline and to come. While this action is happening in the market, the Indian tax authorities are also keeping themselves busy by having a close watch on the deals, especially the big ticket ones coupled with their inability to answer the simple question as to who has to be taxed? Hereto manifested is a recent instance before the Karnataka High Court where the absence of the any explicit provision to addressing Double Taxation Avoidance leave Lifting of the Corporate Veil as the only viable solution. It was an unwritten rule that the Indian tax law regards form over substance. Richter Holdings Limited (hereinafter referred to as RHL) a Cypriot company and West Globe Limited a Mauritian company purchased all shares of Finsider International Company Limited (hereinafter referred to as FICL), a UK company from Early Guard Limited (hereinafter referred to as EGL), another UK company. FICL held 51% shares of Sesa Goa Limited, an Indian Company. The allegation of the Indian tax department was that this transaction would trigger withholding tax obligation on the ground that the transfer of shares constituted transfer of capital asset. On the other hand, RHL argued that the transfer of shares did not amount to acquisition of immovable property or controlling the management of Indian company and it was only an incident to owning the shares of a company, which flows out of the holding of shares. The Karnataka High Court held that since the agreement produced in the Court did not throw any significant light on the transaction, the tax authorities should do a further fact-finding exercise, for which the corporate veil can also be lifted. Another example would be of the recent AT&T Birla judgment that further justifies that the absence of the Direct Tax Code to address the issue of Double Taxation leaves Lifting of the Corporate Veil as the only panacea to understand the instructive nature of transactions. The facts of the case are briefly summarized as follows: In 2007, the Birla and Tata Group - both shareholders in Idea, exercised a Right of First Refusal (hereinafter referred to as ROFR) to buyout AT&T stake in the Indian telecom company. Aditya Birla Nuvo agreed to purchase Idea shares from AT&T Mauritius and thereafter Tata Industries agreed to purchase AT&T Mauritius itself. As AT&T Mauritius had a

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tax residency certificate, Nuvo obtained a new withholding order from the Indian Tax Department. Tata Industry believed since theirs was an offshore transaction, there would be no tax liability. But, in 2008, the tax department issued orders against Nuvo, Tata Industries along with AT&T, following which; the matter went to the Bombay High Court and the revenue department won. The court determined that AT&T Mauritius was only a permitted transferee. The beneficial owner was AT&T USA and hence the transactions were not eligible for Mauritius treaty benefits. It has allowed the tax department to now initiate assessment proceedings. There are two terms that have been frequently used in the Joint Venture Agreement-founder member and their authority, secondly the permitted transferee. Now if you look at the permitted transferee and founder member, founder members have capped, have retained all authority onto themselves and they have permitted a nominee to hold shares in their names. That is the essence of that judgment and the entire judgment is based on that premise that the Mauritius entity had no role. Who is capable of sailing a particular aspect? To answer the above the courts goes to unravel fundamentals of the Transaction. What is shareholding? Shareholding should give you the rights of dividends, should give you the rights of disposal of shares, should give you the voting rights and if it is controlling, then it should give you the rights to have a controlling nominee on the board of the company in which you have invested. So as long as there is alignment of those rights, there is no reason, ordinarily speaking, to challenge the shareholding. Azadi Bachao Andolan25 decision said, at least for the last decade in this country, we have been saying that form scores over substance. This judgment goes far beyond form and looks into substance of who the real beneficial owner is. Now in almost all cases of foreign investment, as you would be familiar with, the permitted transferee, for example one in Mauritius company will be owned by non-Mauritius parent. Therefore, the question of ownership arises. The predicament arises in the disparity in adjudication by the Revenue Department and by the Courts. The Revenue Department moves on the application of the same principle to varying situations and the Courts adopt a fact-to-fact basis. Another grounds for justification for the lifting of the Corporate Veil is the structure of holding subsidiary companies. When you embark on a new business what you do first- first
25

Union Of India (Uoi) And Anr. vs Azadi Bachao Andolan And Anr, (2004) 1 CompLJ 50 SC, (2003) 184 CTR SC 450

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you enter into Memorandum of Understanding (hereinafter referred to as MoU). Both parties agree, in-principle, on certain points and then it is provided that finally when the MoU is implemented, that would be through a separately incorporated company; invariably by and large always it happens. What do you do when you set up a subsidiary company? One- you can fund as a parent company by way of equity capital or by loan capital. Two- when you fund it as an equity capital provider or a loan capital provider, you have to behave on an arms length basis. When you deal with subsidiary company, you also deal as you are dealing with third party and secure all the rights that normally a lender would provide. So this brings about the question, who is to be held liable? The Income-tax Act, 1961 (ITA), as it stands today, does not have explicit provisions for looking through the transactions and to identity their instrinctive nature. This form in substance- this tangle has been going on and you cannot say that a decade after the decision of the Bombay High Court in Azadi Bachao Andolan26, the issue is settled. Not at all because courts have been looking at it- even in England, the courts have been looking at it in form and substance from fact-to- fact; from case-to-case. The very core of the judgment focuses on the identification of who is the real owner. The whole point is with regards to the ownership. Consider an example, Ownership is a bundle of rights. It is not a one single thing. Even as a lender and as a borrower, if I have given number of rights to the lender, it does not mean that I do not own the shareseven if I have 1% or so. If I am dealing with a lender, I may give right of voting, I may give right to do a number of things and in fact the parent company can be constituted as agent of the Mauritius company rather than vice versa. Because once I am the legal owner, thats the whole issue here, of course its very fact specific but the way in which I would look at it is that this is not an uncommon transaction. This is how the documents are done world over when big groups deal with each other. They start with notes at the parent company level but the ultimate implementation happens at the subsidiary company level. Conclusively, This muddled up structure of companies coupled with the absence of any explicit provision in the Current Income Tax to tackle such a situation leaves Lifting the Corporate Veil as the only Panacea to answer the question of Ownership. The second grounds for adopting Realism in Company would be the case of the Vodafone Essar tax dispute regarding the payment of capital gains tax on the transfer of a controlling interest in an Indian

26

See Supra Note 24

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entity from one foreign company to another, in order to illustrate the loopholes in Indian tax law, the choice that is present before Indian courts - a choice between abiding by the principles of international taxation or changing Indian tax policy altogether, and a view on the way international taxation agreements are to be read in light of the norms of international. The facts of the case are briefly summarized are follows27: In this case, Vodafone BV, a Dutch company acquired shareholding of a Cayman company in consequence of which the business interest of Hutchison in its joint venture telecom company in India got transferred to Vodafone. Vodafone's contention has consistently been that this is a case of transfer of shares of a foreign company, which under current Indian law cannot be taxed in India as the location of the share is outside India. Accordingly, Vodafone argued that the value of the business enterprise is captured in the sale price of the shares and the gain made by the sale is a capital gain in the jurisdiction where the share is situated. This being a case of transfer of shares of a Cayman company, the question of taxation in India should not arise. The main argument of the Indian Revenue has been that the share purchase agreement (SPA) and other transaction documents clearly establish that the subject matter of the transaction is not merely the transfer of shares of the Cayman company but includes transfer of the composite rights in Indian joint venture, which clearly gives rise to a source of income arising in India and therefore is subject to tax in India. The Revenue also contended that in this case the transfer of share was merely a mode or vehicle to transfer the bundle of business rights and assets situated in India. The Bombay High Court observed that the controlling interest does not constitute a distinct capital asset for the purpose of the Indian tax law. In other words, controlling interest arises from the acquisition of a sufficient number of shares in a company as would enable the shareholder to exercise significant voting power which would result in the control of the management of the company. The controlling interest is therefore not an identifiable or distinct capital asset independent of the shareholding. Accordingly, the high court seems to imply that part of sale consideration which relates to the value of the share of the Cayman company including controlling interest should not be subject to tax in India as the share is located outside of India. However, the court agreed with Revenue's contention that this is not a case of simpliciter
27

Vodafone International Holdings v. Union of India, [2009] 311 ITR 46 (High Court of Bombay).

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transfer of shares but the transaction involves a variety of business rights and interest which are all located in India. In arriving at this conclusion, the court has considered the commercial and business understanding between the parties and the various legal documents, which were entered into to consummate transfer of business in India. The court has specifically held these bundle of rights and entitlements as capital assets and hence consideration attributable to such rights and entitlements situated in India would be subject to tax in India. The high court has left it for the tax officer to apportion the income between what is attributable to these business rights in India and what is attributable to the shareholding outside of India. This ruling seems to suggest a fundamentally different approach to taxation of transactions where there is a transfer of controlling interest in India regardless of the fact that such transfer is affected by way of sale of shares of an overseas company. This will create a degree of uncertainty in respect of similar transactions, which have already taken place and where the revenue department will make an attempt to take support of the Bombay High Court judgment to tax those transactions. Having said this, in cases, which can be distinguished on facts, and especially in those situations where there is no transfer of business or other valuable commercial rights in India it will still be possible to argue against taxation arising in India. For example, where there is not an outright sale of business in India but a large interest in the Indian company is indirectly transferred through shares of a foreign company, the earlier position should prevail i.e., sale of a foreign company not being subject to tax in India. There is a prison thick line between Tax Evasion and Tax Avoidance. There has been a lacuna in the fiscal jurisprudence to ascertain what classifies as Tax Evasion and Tax Avoidance. Further with the timeworn Income Tax Act the possible solution available to the Revenue is the Lifting of the Corporate Veil. This is explained by way of the rule set in the McDowell case and its implication on recent development such as the Vodafone and Azadi Bachao Andolan Judgment. The rule in McDowells Case28 (hereinafter for the sake of brevity referred to as McDowell) has been the source of significant controversy in the area of tax governance. While on one hand, it may seem to have completely changed the face of fiscal jurisprudence and tax planning in India, some writers are of the opinion that it has in fact had no such result and is merely a judicial aberration in the otherwise cogent exposition of fiscal principles by the Supreme
28

McDowell & Co. Ltd. v. Commercial Tax Officer, AIR 1986 SC 649 (Supreme Court of India).

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Court.29 Indeed, judicial pronouncements after McDowell have also contributed to the confusion surrounding the position of law on tax planning, and have resulted in significantly divergent views on what is as well as what should be permissible in the determination of tax liability through transactions undertaken by the assessee. Therefore, it is submitted that in order to ascertain the exact effect of the judicial pronouncements in question, it is imperative that much of the gloss that surrounds them be stripped away to reveal the answer to two questions; what the court sought to do and what the court in fact did. To briefly summaries the issues raised in the McDowells case. The question before the court in that case was simply whether Excise Duty paid by the wholesale buyers of liquor should be considered as part of the turnover, chargeable to Sales Tax in the hands of the manufacturer. The court answered this question by applying the fundamental principle that it is immaterial to enquire how the total amount charged as consideration is made up and whether it consists of excise duty or sales tax or freight30 and on a plain reading of the definition of turnover under the Sales Tax Act. Therefore, the ratio of the case was simply that the Excise duty paid by the buyers could be considered as a part of the turnover and hence should be chargeable to Sales Tax under the relevant provisions of the Act. Now, it was in response to two contentions forwarded by the appellants that the majority made some observations about the question of tax evasion. First, the Court rejected the common till theory, holding it inapplicable as a general rule to the question of what must be included within turnover and observed that if this theory was accepted, the buyer and seller could enter into an agreement to keep out of the common till (and therefore the turnover chargeable to tax) any amount which would ordinarily constitute consideration proper, and thereby reduce their tax liability. Secondly, the Court addressed the legitimacy argument, commenting that while tax planning is a legitimate exercise of prudence, it cannot be carried out through the use of colourable devices or subterfuges and that it is wrong to encourage a belief in the legitimacy of such methods.31 It is evident from the words of the judgment7 that the Court, in fact, merely
29

See NANI PALKHIVALA ET AL., THE LAW AND PRACTICE OF INCOME TAX 66 (9th edn., Dinesh Vyas ed., 2004) [hereinafter PALKHIVALA]. 30 Supra Note 29
31

The Court considered a number of judgments in support of the Appellants contention. However, it found no support for the proposition that every instance of tax planning or avoidance was permissible and that any analysis of the device used for the reduction of tax liability, despite its legal validity, is beyond the scope of the court. See McDowell, supra note 28

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sought to respond the appellants argument, and relied on a number of cases for this purpose. It was not a definitive pronouncement on the specific delineation of what is and is not permissible in seeking to reduce ones tax liability. Indeed, it is submitted, the observation implies that the Court was referring not to a determination of the merits of any method of tax planning etc., but to the desirable line of analysis that courts must undertake in order to make such a determination. Therefore, the rule32 in McDowell, properly understood, was that the nature of the analysis to be undertaken by the Court in order to determine whether a transaction is permissible as a measure to reduce ones tax liability is to examine whether the device used for such reduction is colourable or dubious or amounts to a subterfuge. To elaborate, the Court did not make any determination of what kind of transactions would be permissible or impermissible, but answered the question how a court must go about making such a determination. McDowell is relevant, inter-alia, as an important marker in the treatment of tax-reducing transactions, it is now pertinent to examine the delineations that inform the tax evasion debate with a view to understanding the location of McDowell33, Azadi34, Vodafone35 and the DTC in the landscape of the debate. At the outset, it may be pointed out that while the analysis undertaken by courts has revolved around the interpretation of the purpose or the legal and economic effect of the transaction in question, such analysis cannot meaningfully proceed in a vacuum, i.e., without consideration of the yardstick to which such transaction must conform. While courts have not expressly addressed the question of the interpretation of the statute as a relevant consideration to determine whether the offending transaction is to be disregarded, this analysis, it is submitted, is central to such determination. Although courts have, in arriving at their decision, sought to understand the position of law laid down by the relevant statute, it is submitted that this aspect requires more serious consideration to reach any meaningful finding on the validity of questionable transactions and, furthermore, that courts ought to clearly articulate this aspect so as not to obscure its significance in arriving at the ultimate decision.36
32

The term rule is not used to refer to the ratio decidendi of the case. The rule in McDowell is merely meant to signify the position of law, observed in that case, insofar as it is relevant to address the question of tax evasion.
33

Supra Note 29 Supra Note 24 Supra Note 28 Indeed, writers have emphatically drawn attention to the interpretation of the statute as the central consideration in determining whether a

34

35

36

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From this perspective, there are broadly two conflicting approaches that may be adopted; the textualist and the purposivist approach37. In essence, the textualist approach requires that the true nature of any transaction be examined in relation to the permissible standard laid down by the express words of the relevant taxing statute. In other words, as long as a transaction falls within the words of the statute, it should be regarded as a wholesome transaction and the law confers the full benefit of such a transaction to the assessee. This approach is embodied in the traditional treatment of questionable transactions, as seen in a number of cases following the Duke of Westminster v. Inland Revenue38 (hereinafter Westminster) and the Fischers Executors39 (hereinafter Fischers) reasoning. It is submitted that the most striking feature in all these cases seems to be their emphasis on the commercial freedom of parties to transact in any manner permissible by the letter of the law and thereby avoid or reduce their tax liability by availing of the benefits conferred by the law. This approach has even been taken to allow parties the freedom to take advantage of the inadequacies in the letter of the law with a view to reducing their tax liability.40 The purposivist approach, on the other hand, requires taxing statutes to be interpreted in light of their avowed purpose, whereby courts may depart from the express words of the statute to determine the spirit of the law, which is then enforced as the legal standard to judge the transaction in question. The purposivist approach is often informed by an attempt to answer the question as to what was the true purpose of the transaction. If the purpose of the transaction falls beyond the spirit of the statute, i.e., beyond the pale of legitimate purposes that the statute was created to serve, then it cannot be given effect and must be disregarded as an attempt to circumvent the law. Another significant aspect of the purposivist approach is that its analysis is often accompanied by an invocation to a sense of moral sanction purportedly entrenched within

transaction must be disregarded for the purpose of taxation. For instance, see K.B. Brown, Substance Over Form Theory in U.S. and U.K. Tax Law, 15 HASTINGS INTL & COMP. L. REV. 169, 173 (1992).
37

See generally J. Freeman, Interpreting Tax Statutes: Tax Avoidance and The Intention of Parliament, 123 L. Q. REV. 53 (2007); C. Evans, Barriers to Avoidance: Recent Legislative and Judicial Developments in Common Law Jurisdictions, 37 H. K .L. J. 103 (2007); A.D. Madison, The Tension Between Textualism and Substance-Over-Form Doctrines in Tax Law, 43 SANTA CLARA L. REV. 699 (2003).
38

Duke of Westminster v. Inland Revenue, 19 T.C. 490 (H.L.) (U.K.). Inland Revenue Comissioners v. Fischers Executors, 1926 AC 395 (H.L.) (U.K.). Supra Note 29

39

40

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taxing statutes.41 Now, the DTC contains specific tax evasion provisions and imposes a general anti-avoidance rule. Section 112 of the DTC provides for the declaration of any arrangement as an impermissible avoidance arrangement and allows the Revenue to determine the consequences of such an arrangement by disregarding or re-characterizing it or altogether considering it void. Section 113(14) defines impermissible avoidance arrangement in relation to its purpose, as well as its effect.42 Clearly, therefore, the DTC also adopts a firmly purposivist approach, providing that any arrangement entered into with a view to obtaining a tax benefit and having an atypical effect, is liable to be disregarded. It must be noted, at this juncture, that one of the main problems with the application of this dichotomy between textualism and purposivism is that each approach emerges as a knee-jerk reaction to the other. It is submitted that tax evasion is unquestionably a major concern in tax governance; neither courts nor the legislature can afford to ignore it. However, in an effort to find the silver bullet,43 courts and the legislature seem to have a tendency to adhere to either one of these approaches in response to the failure of the other. It is this context the Supreme Court decisions in Vodafone and Azadi are to be analysed. It must be remembered that Azadi can be considered as the bulwark of the current position on tax evasion, and has been given the distinction of having set the law in the right perspective in India44. Now, in Vodafone, the Bombay High Court, upholding the show-cause notice issued to the petitioners, made a determination on the nature of the transaction, for the limited purpose of determining that the notice was not altogether non-est,45 on two grounds. First, the transaction was not merely a transfer of shares resulting in a transfer of the controlling interest of the Cayman Islands entity in its Indian subsidiary, but was in fact a transfer of the underlying assets

41

See Viscount Simon LC, Latilla v. Inland Revenue Commissioners, (1943) T.C. 107 (H.L.) (U.K.),

42

The sub-section provides that if the purpose of the arrangement is to obtain some tax benefit and its effect is wither the creation of rights or obligations not normally entered into in arms-length transactions, or lacking commercial substance, or the carrying out of such an arrangement in a manner resulting in abuse of the provisions of the Code or not bona fide, then it shall be treated as an impermissible avoidance agreement.
43

See M.A. Chirelstein and L.A. Zelenak, Tax Shelters and the Search for the Silver Bullet, 105 COLUM. L. REV. 1939 (2005). The authors discuss the continual legislative and administrative efforts to curtail the rampant use of tax shelters in the U.S., and conclude that the silver bullet may not be found in narrowly tailored legislative responses to specific tax shelter, but in the disallowance of non-economic loss approach suggested by them.
44

PALKHIVALA, supra note 30

45

Therefore, the determination of the true nature of the transaction is not a binding ratio, as it was merely incidental to the decision on the validity of the show-cause notice.

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of that subsidiary. Any profit arising from the business of the subsidiary would be considered as the profit of the transferee and not merely the profit of the shell company, and would therefore be liable to tax as capital gains in India. Secondly, the Court held that even without piercing the veil and considering the assets of the subsidiary as the subject of the transfer, a mere transfer of the controlling interest implied a transfer of a number of valuable intangible assets such as the right to carry on business and operate mobile telephony in India, which transfer was taxable in India. In arriving at these findings, the Court was largely influenced by two considerations; the legal substance of the transaction46 and the scope of transactions intended to be covered by the statute. In Azadi again, the Court proceeded on an analysis of the purpose and consequence of the Double Taxation Avoidance Convention, along with a reading of the provisions of the Income Tax Act, relevant to the subject of Double Taxation Relief.47 Therefore, in both the above cases, the court read the provisions of the relevant statutes, interpreting them in the context of the meaning of the words intended by Parliament, and applied such interpretation to the substance of the transaction in question to arrive at a conclusion as to whether the transaction fell foul of the statute so interpreted. It is submitted that this approach, which has been called purposive textualism in the context of similar U.K. and U.S. cases,48 provides the much-needed midway path approach to be adopted by courts in the analysis of transactions for the purpose of determining their wholesomeness in the context of tax evasion. Hence, it is submitted that the analysis brought to light in Azadi and Vodafone is neither purely purposive nor strictly textualist in approach; it seeks to construe the provisions of the statute in light of their intended meaning by the legislature, and apply that standard to interpret the transaction. It is pertinent, at this juncture, to revert to Palkhivalas observation on the current state of the law on tax evasion. While observing that Azadi has set the record straight from the temporary turbulence created in the wake of McDowell, the learned authors make the crucial observation that the judicial reaction to McDowell was to reject the sweeping observations of the
46

Supra Note 28

47

The Supreme Court determined that section 90 of the Income Tax Act was introduced with the intention of allowing the Central Government to enter into agreements with foreign countries for the purpose of the avoidance of double taxation and that the provisions of the Convention and the Act must be read in this context. See Azadi, supra 34
48

See S.S. Schumacher, Macniven and Tax Advice: Using Purposive Textualism to Deal With Tax Shelters and Promote Legitimate Income Tax Advice, 92 MARQ. L. REV. 33 (2008).

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concurring opinion in that case and to distance the Courts position from those observations.49 They further observe that the spate of judgments delivered in opposition to McDowell make the time extremely ripe for an Indian parallel to Macniven,50 which has in fact consummated in the form of Azadi. Thus, reading the progression of cases as a single line of development towards this approach beginning from the actual rule in McDowell as enunciated,51 resulting in the Azadi approach and continuing through Vodafone, courts may find a useful pattern to be applied in subsequent cases. This reading, it is submitted, will enable courts to find ample support for the proposition that the approach of purposive textualism is indeed a desirable one and has in fact been developing in the reasoning underlying a series of cases, including Vodafone.

49

For instance, Sabyasachi Mukherjee J., in two judgments following McDowell, namely, CWT v. Arvind Narottam, 173 ITR 479 (Supreme Court of India) and Union of India v. Playworld Electronics, 184 ITR 308 (Supreme Court of India) forcefully dismissed the observations of Reddy J. as moral sermons and warned that one should avoid subverting the rule of law
50

PALKHIVALA, supra note 30

51

The rule laid down by the court in relation to the nature of analysis to which the transaction must be subject, i.e., to the extent that it is not a dubious or colourable exercise, and removed from any consideration of the purpose of the transaction

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Section III: - Piercing All the Veils: Applying an Established Doctrine to a New Business Order

I weigh my words when I say that in my judgment the limited liability corporation is the greatest single discovery of modern times Even steam and electricity are far less important than the limited liability corporation, and they would be reduced to comparative impotence without it. President Nicholas Murray of Columbia University (1911)

While interpreting a statute the rule that has to be adopted is that no statute must be read it isolation. The interpretation of a statue must not go to the extent of compromising the fundamental features of a corresponding statute. In the early part of the twentieth century, limited partnerships were created by statute as a hybrid between the two existing forms, offering the corporate-like liability shield to investors, so long as they did not participate in control of the business. By business law standards this entity is still quite new; there are limited cases to lay down guidelines for their performance. This is coupled with coupled with jumbled jurisprudence behind Limited Liability Corporation (hereinafter for the sake of brevity referred to LLC) and Limited Liability Partnership (hereinafter for the sake of brevity referred to LLP). This has resulted in transplanting the piercing doctrine generated for the Corporation to Limited Liability Corporation, compromising upon their very essence of Limited Liability. By way of this section the Application of the Established Doctrine to a New Business Order within the framework if taxation matters has been dealt with. LLCs (sprang into existence twenty-five years ago but leapt to the forefront of small business law in America only in the last fifteen, with the resolution of their tax status. In the latter part of the last century, as tax considerations became a more important factor in business planning, the flow through treatment for profits and losses that partnerships offered investors proved more attractive than the corporate model. Tax law usually mandated double taxation of a corporations profits and allowed shareholders no direct attribution of its losses, which could be used to shelter other income from taxation. Both general and limited partnerships were imperfect instruments for investors because, the former raised the specter of personal liability for its owners, and the latter could likewise result in such unpleasant consequences for any

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limited partners who became active in management. Legal innovators went through several intermediate steps to remedy that unsatisfactory choice and finally hit upon a new entity, the LLC. It could provide its members with partnership-like flexibility in its operation, while at the same time giving them full limited liability protection regardless of how active they became in the business. When the Internal Revenue Service ruled that the LLC was entitled to flow-through tax treatment, it seemed that the ideal structure for a non-publicly-held business had now been created. It now appears to be the best legal organization for small businesses with just a few owners who work closely together. While limiting entrepreneurial liability serves a valid goal, it ought to be laid down when it should occur. In cases of evading existing liability the Government should be able to secure relief from those who own the business. And since LLCs and LLPs offer their members and partners more direct management power than usually afforded shareholders, there may be even greater justification to hold them personally accountable for the obligations of their businesses than the stockholder/owners of a corporation. Although by business law standards both those entities are still quite new, applying veil piercing to those new entities. Courts of course should respect the basic legislative judgment that owners of LLCs and LLPs are entitled to shield their personal assets from the obligations of their firms. Yet the equitable remedy of piercing the corporate veil has grown up to deal with egregious situations where business owners have conducted their operations in a fraudulent, unjust, or socially irresponsible manner. Equilibrium should be maintained by extending the doctrine to cover similar states of affairs involving LLCs or LLPsparticularly since the owners of those enterprises are usually able to exercise control over their operations in a more direct, hands-on manner than stockholders of corporations. This development has given rise to debate among legal scholars as to whether the line of jurisprudence permitting veil piercing in corporations should also be extended to LLP and LLC could be traced to their revolutionary tax status. This part addresses that lacuna, offering a doctrinal and economic analysis of veil piercing. It concludes that veil piercing cannot be justified and, accordingly, advocates abolishing the doctrine or establish a new set of guidelines for LLC and LLP. The standards which veil effects piercing are vague, leaving judges great discretion. The result has been uncertainty and lack of predictability, increasing transaction costs for small businesses. A standard academic move treats veil piercing as a safety valve allowing courts to address cases in which the externalities associated with limited

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liability seem excessive. The manifestation of the abovementioned jumbled Jurisprudence could be traced to the words of the US Treasury Secretary Timothy Geithner who told the Senate Finance Committee Feb. 15 that Congress should revisit long- standing rules that give businesses a choice of paying taxes as a corporation or through a structure such as a partnership through which they can report business income on individual tax returns.` Congress has to revisit this basic question about whether it makes sense for us as a country to allow certain businesses to choose whether theyre treated as corporations for tax purposes or not, Geithner told Senate Finance Committee members. Later in his testimony he said: You have to look at business taxes outside the corporate sector if youre going to do something sensible here. The recommendation, which Geithner repeated in a meeting with reporters this week at Bloomberg News in Washington, would affect income earned by the nations largest law firms, investment partnerships and so-called S corporations. It would more than double, to about $3 trillion, the amount of business income potentially affected by tax-law changes. Obama called for a rewrite of business tax rules in his State of the Union address on Jan. 25 and in his fiscal 2012 budget proposal released Feb. 14. This overhaul given to the current tax code is in times where there is increased globalization bringing about uncertainty as to what is the character of the LLP and the LLC. To some degree, an examination of both forms of business taxation is unavoidable. Many business tax breaks, such as accelerated write-offs for equipment, benefit both types of filers. Eliminating a break in exchange for lowering the corporate tax rate would lead to debate about whether non- corporate businesses should be able to claim the deduction. LLCs and LLPs may be the most important developments in business law during the last century. As with any significant legal innovation, it will probably take some time for our system to flesh out decisive rules to cover all of the issues that will arise from these new forms. But the piercing question has been the most litigated matter in corporate law, and it is easy to foresee that trend continuing in the context of LLCs and LLPs. So far, both statutory and case law have found it convenient to borrow piercing standards

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from the corporate area to adjudicate piercing in LLCs. But both LLCs and LLPs are new and different creatures that resemble the classic general partnership more closely than the traditional corporation with its multiple layers of authority. As one commentator has therefore put it, the development of a clear, well-reasoned body of case law dealing with the newer types of unincorporated entities will depend in large part on how effectively litigants educate courts as these cases arise. To that end, courts should respect the legislative decision that gives a basic liability shield to those who form LLCs and LLPs. But they certainly do not have to accept the argument by conservative commentators that this immunity ought to be absolute. Principles of simple justice and important concerns about the social responsibility of businesses are relevant here. Firms should not be allowed to completely externalize their costs on legitimate contract claimants and tort victims. In developing this new piercing doctrine, it is entirely appropriate for courts of equity to proceed on a case-by-case basis, examining the facts of each situation carefully. In doing so, they should keep in mind two elemental questions that form the crux of corporate piercing jurisprudence: first, have the individual defendants so dominated this business that there is really no distinct entity here? And second, are these defendants. using this purportedly separate organization to perpetrate a fraud or injustice?

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CONCLUSION

Pure descriptive statistics indicate that the relationship between plaintiff type (i.e. individual or entity) and claim type (tort, existing obligation etc) is significantly significant, as are relationships separately between claim types and piercing. This would suggest that either claim type, or both have a statistically significant effect on piercing. However these do not provide to be true when these hypotheses are tested in regressive models. That is, even though these descriptive statistics tells us when courts pierce, they do not explain why they pierce. Inadequate tax trinciples create difficulties for India. To conclude, with the current availability of laws, piercing the Corporate Veil is the only solution to a plethora of problems. Which entity has to be taxed? What happens in case of Indirect Transfer of shares? In many cases SPV are established to carry out foreign transactions. In cases where these proceeds are remitted back as a loan to evade tax what remedy of to be adopted? Along with the necessity to use veil piercing to understand this complex structure of ownership, it is necessary to strike an equilibrium sufficiently balancing out the rights of the Corporation. As then-New York Court of Appeals Judge Benjamin Cardozo observed over six decades ago, veil piercing is a doctrine enveloped in the mists of metaphor, 52a complaint that remains true today. Veil piercing cases are highly fact-specific.53 Successful veil piercing claims differ only in degree, but not in kind, from
52

Berkey v. Third Ave. Ry. Co., 155 N.E. 58, 61 (N.Y. 1926)

53

Veil piercing claims are treated as pure questions of fact. Whether the trier of fact will be the judge or jury depends on whether the jurisdiction treats veil piercing as an equitable remedy. Stephen M. Bainbridge in his paper Abolishing Veil Piercing states that veil piercing is an equitable remedy, there is substantial disagreement on that question in the literature. The significance of the issue, of course, is that equitable remedies need not be tried before a jury but parties subject to legal remedies generally are entitled to trial by jury. Compare U.S. v. Golden Acres, Inc., 684 F. Supp. 96, 103 (D. Del. 1988) (veil piercing is equitable remedy and affords no right to jury trial); Dow Jones Co. v. Avenel, 198 Cal. Rptr. 457, 460 (Cal. App. 1984) (same) with Bower v. Bunker Hill Co., 675 F. Supp. 1254, 1261-62 (E.D. Wash. 1986) (veil piercing a legal remedy because it seeks a money judgment and thus a right to jury trial exists). See also Wm. Passalacqua Builders, Inc. v. Resnick Developers South, Inc., 933 F.2d 131, 136 (2d Cir. 1991) (veil piercing has roots in both law and equity, so it was proper for trial court to submit issue to jury); American Protein Corp. v. AB Volvo, 844 F.2d 56, (2d Cir. 1988) (veil piercing is an equitable remedy but issue is normally submitted to a jury). In either case, however, appellate courts generally defer to the trier of fact and reverse only for abuse of discretion. Stoker c. Coker, 129 P.2d 390 (Cal. 1942). As the California Supreme Court acknowledged, this standard means that appellate opinions typically provide only general rules for guidance.

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unsuccessful claims. It is therefore very hard to make sweeping generalizations in this area. What follows is thus somewhat of an exercise in futilityan attempt to articulate doctrinal standards for an area all too often characterized by ambiguity, unpredictability, and even a seeming degree of randomness.

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BIBLIOGRAPHY

BOOKS: Ramaiya, A, Guide to Company Act Part I Sec. 1 145, Nagpur: Lexis Nexis Butterworths. Davies, Paul L., Principles of Modern Company Law, 8th Edn, Thomson. Ferran, Principles of Corporate Finance Law, Oxford: 2008. Halsbury Laws of India, Company and Corporations, Vol. 27, Lexis Nexis: 2006.

REPORTS: Raul, Prof. R. K., Direct Tax Code (DTC) Panacea to Tax Induced Distortion (September 28, 2010). Available at SSRN: http://ssrn.com/abstract=1683941 Jain, Tarun, Tweaking with Treaty Provisions: A Lawyers Perspective on the Direct Taxes Code Bill, 2009 (October 1, 2010). Available at SSRN:

http://ssrn.com/abstract=1865040 Capuano, Angelo, The Realist's Guide to Piercing the Corporate Veil: Lessons from Hong Kong and Singapore (March 1, 2009). Australian Journal of Corporate Law, Vol. 23, No. 1, 2009. Available at SSRN: http://ssrn.com/abstract=1369110 Harris , Jason , Lifting the Corporate Veil on the Basis of an Implied Agency: A ReEvaluation of Smith, Stone and Knight. Company and Securities Law Journal, Vol. 23, 2005. Available at SSRN: http://ssrn.com/abstract=870516 Matheson, John H., Why Courts Pierce: An Empirical Study of Piercing the Corporate Veil (January 1, 2010). Berkeley Business Law Journal, Vol. 7, No. 1, 2010. Available at SSRN: http://ssrn.com/abstract=1870 Kryvoi, Yaraslau, Piercing the Corporate Veil in International Arbitration (March 16, 2010). Global Business Law Review, Vol. 1, p. 169, 2011. Available at SSRN: http://ssrn.com/abstract=1572634 Ohrenstein, Dov, Lifting the Corporate Veil. Available at

http://www.radcliffechambers.com/articleDocs/374.pdf Morrissey, Daniel J., Piercing All the Veils: Applying an Established Doctrine to a

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New Business Order. Journal of Corporation Law, Vol. 32, No. 3, 2007. Available at SSRN: http://ssrn.com/abstract=110918. Rappold, Anne B., Piercing the Limited Liability Veil: The Application of the Corporate Veil Piercing Rules to Limited Liability Entities, available at http://www.plusfoundation.org/wp-content/uploads/2011/04/Piercing-the-Veil.pdf Sharma, Priyesh, and Dang Siddharth Myth and reality of the imbricating concepts of tax avoidance and evasion, Journal of Accounting and Taxation Vol. 3(3), pp. 40-46, July 201, available at http://www.academicjournals.org/JAT Rajayer, Sanjit R., Existence and Relevance of the Mcdowell Rule: Use of the corporation as a vehicle of tax Planning in light of vodafone and the direct Taxes code, National Law School of India Review, Vol. 22(2), 2010, available at https://docs.google.com/viewer?a=v&pid=explorer&chrome=true&srcid=0B9hDlqOkHzqBN WZjYjkzMDktYzdjYy00ODQ0LWE1ZWEtZmEzNjhhYmY1MGY2&hl=en_US&pli=1 Bainbridge, Stephen M., Abolishing Veil Piercing (July 21, 2000). Available at SSRN: http://ssrn.com/abstract=236967 or doi:10.2139/ssrn.23696

CASE LAWS: Andhra Pradesh State Road Transport Corporation. vs ITO(SC), 52 ITR 524(SC). Commissioner of Income-tax v. Atul Products Ltd, [2002] 125 TAXMAN 727 (GUJ.) Daimler Company, Limited Appellants; v. Continental Tyre and Rubber Company (Great Britain), [1916] 2 AC 307. Richter Holding v. The Assistant Director of Income Tax, MANU/KA/0193/2011. Mcdowell And Co. Ltd. vs Commercial Tax Officer, AIR 1986 SC 649. Union Of India (Uoi) And Anr. vs Azadi Bachao Andolan And Anr, (2004) 1 CompLJ 50 SC The Commissioner Of Income-Tax, ... vs Sri Meenakshi Mills Ltd. & Ors, 1967 AIR 819 ONLINE MATERIAL: Developments in Taxation: Constitutionality of Service Tax; and Tax Planning through the "Mauritius Route", August 6, 2011, available at http://indiacorplaw.blogspot.com/2011/08/developments-in-taxation.html Vodafone International Holdings v. Union of India: Extracts and Initial Comments, September 8, 2010, available at http://indiacorplaw.blogspot.com/2010/09/vodafone-international-holdings-v-

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union.html Implications of Birla-AT&T-Tata tax judgment, July 23, 2011, available at http://www.moneycontrol.com/news/management/implicationsbirla-att-tata-taxjudgment_568315.html Lifting the Corporate Veil for Tax Purposes, April 26, 2011, available at http://indiacorplaw.blogspot.com/2011/04/lifting-corporate-veil-for-tax-purposes.html Lift The Corporate Veil Says Karnataka HC, April 27, 2011, available at http://www.moneycontrol.com/news/features/lift-the-corporate-veil-says-karnatakahc_537688.html Taxing Times: What Will the Vodafone Case Mean for Cross-border M&A, September 23, 2010, available at http://knowledge.wharton.upenn.edu/india/article.cfm?articleid=4529 Geithner Says Tax Overhaul Must Address Businesses Filing as Individuals, February 25, 2011, available at http://www.bloomberg.com/news/2011-02-25/geithner-says-tax-overhaul-mustaddress-businesses-filing-as-individuals.html Tearing the corporate veil can be taxing, November 13, 2004, available at http://www.thehindubusinessline.in/2004/11/13/stories/2004111300090800.htm Implications of Vodafone Ruling, September 11, 2010, available at http://economictimes.indiatimes.com/opinion/guest-writer/implications-of-vodafoneruling/articleshow/6534213.cms

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BIO DATA OF HRIDHAY R. KHURANA

NAME: COLLEGE NAME: CONTACT NUMBER: E MAIL ADDRESS: ADDRESS: -

HRIDHAY R. KHURANA SVKMS PRAVIN GANDHI COLLEGE OF LAW +919920214389 hridhaykhurana@gmail.com 703 EVEREST BLDG 7 BUNGALOWS VERSOVA RAHEJA COMPLEX ANDHERI (WEST) MUMBAI 400061