TEAM CODE:

IN THE HONOUR OF SUB DIVISIONAL JUDICIAL

MAGISTRATE OF CHANDIGARH

Mr. Nuan
Plaintiff

v.

TODAY TIMES NEWSPAPER `AGENCY

Respondent

MEMORIAL FOR THE RESPONDENT ON BEHALF OF

Table of Contents

TABLE OF CONTENTS
INDEX

OF

AUTHORITIES..................................................................................................................ii

Statutes.................................................................................................................................i
i

Books....................................................................................................................................i
i

Table of Cases....................................................................................................................iii

LIST

OF

ABBREVIATIONS................................................................................................................vi
STATEMENT

OF

JURISDICTION.....................................................................................................

vii
STATEMENT OF FACTS................................................................................................................ viii
QUESTION

OF

LAW........................................................................................................................

OF

ARGUMENTS............................................................................................................

ix
SUMMARY
x

ARGUMENTS ADVANCED.................................................................................................................1

CONTENTION

1:

THAT

THE

ALLEGED

PUBLICATION

WAS

NOT

DEFAMATORY.....................................................................................................1

CONTENTION 2:
THE

EFFECT

THAT THE APOLOGY TENDERED SUBSEQUENTLY EFFACE

OF

DEFAMATORY

STATEMENT

MEMORIAL ON BEHALF OF THE RESPONDENTS

PUBLISHED

Table of Contents

ii

EARLIER............................................................................................................3

CONTENTION 3: THAT THE DAMAGES CLAIMED BY THE PLAINTIFF ARE

TOO REMOTE AND THUS NOT AMENABLE

..........................................................................................................................8
PRAYER..................................................................................................................xi

MEMORIAL ON BEHALF OF THE RESPONDENTS

Index of Authorities

ii

INDEX OF AUTHORITIES
TABLE OF STATUTES
Civil procedure code,1908
Indian evidence act,1973
English law statues
Defamation act ,1952
TABLE OF BOOKS

Ratanlal & Dheerajlal The law of Torts 24th ed,2004

Ramaswamy iyer,Law of Tort 10th ed. 2007

MEMORIAL ON BEHALF OF THE RESPONDENTS

Index of Authorities

iii

TABLE OF CASES
1. T.V. Ramasubba Iyer And Anr. vs A.M. Ahamed Mohideen AIR 1972 Mad 398
2. Union Benefit Guarantee Co. Ltd. vs Thakorlal P. Thakor And Ors. AIR 1936 Bom 114
3.

RIGBY VS HEWIT

(1850) 5 EX. 240

4. Greenland v Chaplin (1850) 155 ER 104

MEMORIAL ON BEHALF OF THE RESPONDENTS

List of Abbreviations

vi

LIST OF ABBREVATIONS

AIR All India Reporter

Art article

Bom Bombay

Co.--- corporation

Ed Edition

Er

Mad madras

Ors Others

p. page

para paragraph

SC Supreme Court

SCR supreme court cases

Sec Section

vs

& And

eastern railway

versus

MEMORIAL ON BEHALF OF THE RESPONDENTS

Statement of Facts

vii

STATEMENT OF JURISDICTION

THE RESPONDENT STANDS BEFORE THE HONOBLE SUB

DIVISIONAL JUDICIAL MAGISTRATE COURT OF CHANDIGARH
UNDER SECTION 19 OF CIVIL PROCEDURE COURT,1908

MEMORIAL ON BEHALF OF THE RESPONDENTS

Statement of Facts

viii

STATEMENT OF FACTS

CASE OF THE PLAINTIFF :

Mr Nuan, the plaintiff has filed a
newspaper averring

suit for damages against defendant

that TODAY TIMES is a newspaper with worldwide

circulation. On its publication dated 28thJuly 2012, it ran a front page story of
a hospital in the Union Territory of Chandigarh under the name of Smart
Hospital which was caricatured as the abattoir of human kidneys for
thepurpose of trafficking. There was also a photograph of the front of an
office bearing the nameSui Mi & Co. next to the story.The sole owner of the
company, Mrs. Sui Mi was pregnant during this period. She was depressed
and this led to a pre - term delivery on 4 th August 2012 at 10:00 pm. After
the delivery, she suffered from post partum health issues including post
partum depression;although the child was comparatively healthy. The
plaintiff contacted the legal department of Today Times and claimed
compensation as well as asked them to pay off Mrs. Sui Mis postpartum
medical expenses hoever, the same was refused by the legal presentatives
of the newspaper

CASE OF THE DEFANDANT . :

MEMORIAL ON BEHALF OF THE RESPONDENTS

Statement of Facts

ix

The defendant newspaper denies the averments of the plaintiff and further
pleads that the photo of Sui Mi & Co. was not a part of the article in relation
to kidney trafficking; & that even if it was, the newspaper had issued an
apology in this respect .It is further averred that on 26 th July 2012 an
anonymous person who claimed to be a patient in the hospital made a tweet
on Twitter regarding use of human kidneys for trafficking and the newspaper
published the article based on information given by this anonymous patient.
In any case , the defendant later through its publication dated 5 th August
2012
published an apology. Thus , the plaintiff is not entiltled to claim any
compensation from the defendant.

MEMORIAL ON BEHALF OF THE RESPONDENTS

Question of Law

ix

QUESTION OF LAW

WHETHER THE ALLEGED PUBLICATION OF PHOTO OF SUI MUI & CO.

BY TODAY TIMES NEWSPAPER WAS DEFAMATORY?

ISSUES INVOLVED
1. Whether the alleged publication amounts to defamation?
2. Whether the apology tendered by the defendant
subsequently efface the effect of defamatory statement
published earlier?
3. Whether the defendant

had

any

publishing the alleged statement?

MEMORIAL ON BEHALF OF THE RESPONDENTS

justification

for

Summary of Arguments

SUMMARY OF ARGUMENTS

THAT THE ALLEGED PUBLICATION WAS DEFAMATORY

.
THAT

THE PROVISIONS OF THE

GAAR

AND THE

DTC

ARE NOT VOILATIVE OF THE

CONSTITUTION OF INDIA.
The GAAR and the provision of income deemed to accrue in India are not violative of the
Constitution of India, the settled tax treaties and the territorial limits of India .The Treaty
obligations have not been flouted merely because India is not a signatory to the Vienna
Convention. Moreover, the code being a law later in time would prevail over the DTAA. And
also, the legislation can unilaterally tax a transaction happening out of India between two non
residents.
THAT

THE CAPITAL GAINS CAN BE DEEMED TO HAVE ACCRUED OR ARISEN IN INDIA UNDER

SECTION

5 OF THE CODE.

That SPA-II was sham and colourable. It was aimed at tax evasion. This is a fit case for lifting
the Corporate Veil and concluding that the transfer of shares of Pay Not Tax in fact amounted to
transfer of business of Need Not Pay Tax. That the DDIT did not commit per incuriam by not
following the settled judgments.

MEMORIAL ON BEHALF OF THE RESPONDENTS

Arguments Advanced

ARGUMENTS ADVANCED
CONTENTION 1 THAT THE WRIT PETITION
UNDER

ARTICLE 226 OF THE CONSTITUTION

WAS NOT MAINTAINABLE AGAINST THE

DDIT

OF INDIA IN THE HIGH COURT.

The writ was not maintainable before the High Court because the writ filed was premature and
alternative remedies were available to petitioner, i.e. YPT. The petitioner should have had faith in
the relevant authorities and taken the due course of law. The petitioner should have filed appeals
under alternative remedies. The court will not entertain a writ under Article 226 when the
petitioner has another remedy which without being unduly onerous provides an equally
efficacious remedy1. The principles laid down under Part IV of the Constitution of India are
merely directive and are neither binding nor enforceable2 and would jeopardize the sovereignty
of Indias power to legislate statutes to safeguard its revenue interests.
That the alternative remedies were not exhausted before approaching the high court.
Availability of an alternative remedy is one consideration which the High Court may take into
account to refuse to exercise its jurisdiction. In various cases the Apex Court has held that there
is a hierarchy of appeals which a party must exhaust before resorting to writ jurisdiction 3.
Alternative remedies were available to the petitioner before approaching the High Court.
Adequate remedies are available under the Income Tax Act, 1961. Writ petition need not be
1

Thansingh Nathmal vs. A. Mazid, Superintendent Of Taxes , 1964 AIR 1419

Article 51(c), Constitution of India, 1949

G Veerappa Pillai v. Raman and Raman Ltd., AIR (1952) SC 192, Assistant Collector of Central Excise v. Dunlop
India Ltd., AIR (1985) SC 330; Ramendra Kishore Biswas v. State of Tripura, AIR (1999) SC 294; Shivgonda
Anna Patil and Ors. v. State of Maharashtra, AIR (1999) SC 2281; C.A. Abraham v. I.T.O. Kottayam, AIR (1961)
SC 609; Titaghur Paper Mills Co. Ltd. v. State of Orissa, AIR (1983) SC 603; H.B. Gandhi v. M/s Gopinath and
Sons, (1992) Suppl. 2 SCC 312; Whirlpool Corporation v. Registrar of Trade Marks, AIR (1999) SC 22; Tin Plate
Co. of India Ltd. v. State of Bihar, AIR (1999) SC 74; Sheela Devi v. Jaspal Singh, (1999) 1 SCC 209; Punjab
National Bank v. O.C. Krishnan (2001) 6 SCC 569

MEMORIAL ON BEHALF OF THE RESPONDENTS

Arguments Advanced
entertained4. The petitioners could have approached the Authority of Advanced Rulings under S.
256 and 258(18) of the Code. An appeal could have been filed by the petitioner under S. 178
with the Commissioner (Appeals). Another remedy is an appeal which can be filed to the
Appellate Tribunal under Section 183. Alternative remedy wherever available should be
exhausted at the first instance5. The petitioners, YPT ignored all these alternative remedies
available to them against the respondent and filed a writ petition in the High Court which was
not maintainable.
That the DDIT had powers to issue a Show Cause Notice to the assessee
The writ of the DDIT was filed after the DDIT ruled against the petitioner and held the
petitioners transaction sham, stating that the SPA II was signed for tax evasion and the DTC
had powers and the GAAR granted powers to tax the transaction, stating that Section 5 of the
code was wide enough to cover such transactions. Applying S. 128 of the Direct Tax Code,
2010,6 the DDIT has all the powers possessed by an Assessing Officer under this code in relation
to the making of inquiries. According to Section 156 (3) of the DTC, 2010, the Assessing Officer,
shall, provide the assessee an opportunity of being heard by serving a notice calling upon the
assessee to show cause7. We have inferred that the DDIT was an income tax authority who
possessed the power of issuing a SCN, which was the power of an Assessing Officer.

CIT v. Uttar Pradesh Forest Corporation, AIR 1988 SC 1125, (1998) 3 SCC 530

Chandy Varghese v. K. Abdul Khader (2003) 11 SCC 328

Section 128, Direct Tax Code 2010 Any Income-Tax authority, above the rank of Assessing Officer, shall have all
the powers that an Assessing Officer has under this Code in relation to the making of inquiries.
7

Section 156(3) Direct Tax Code, 2010 The Assessing Officer shall, before making the assessment under subsection (1), provide the assessee an opportunity of being heard by serving a notice calling upon the assessee to show
cause, on a date and time to be specified in the notice, as to why the assessment should not be completed to the best
of his judgment.

MEMORIAL ON BEHALF OF THE RESPONDENTS

Arguments Advanced
CONTENTION 2 - THAT THE

PROVISIONS OF THE

GAAR

AND THE

DTC

ARE NOT VOILATIVE

OF THE CONSTITUTION OF INDIA

The State shall endeavor to foster respect for international law and treaty obligations in the
dealings of organized peoples with one another8. The assessee argued that the new provision,
GAAR9 is unconstitutional. The introduction of GAAR will legislatively empower the tax
authorities to intervene in circumstances where they allege that the primary motive of a particular
transaction or arrangement is to obtain a tax advantage. In some cases, domestic tax laws
specifically provide that the domestic anti-avoidance rules shall remain effective even where the
tax treaty is applicable i.e. Australia, France, Denmark, New Zealand and US.
A purposive interpretation of legislation requires the words of the provision to be interpreted in
accordance with the object and spirit of the provision 10. GAAR will empower the Revenue to
disregard any or all steps in a tax avoidance transaction, re-characterize income accruing on such
transactions and lift the corporate veil to give effect to the anti-avoidance rules 11. In the present
case also, the main aim of YPT was to evade tax which can be construed from their act of
revoking SPA-I and entering into a fresh contract with NNPT, a Mauritius company so as to
obtain treaty benefits of Indo-Mauritius treaty12. The fundamental principle that must be borne in
mind is that what is directly forbidden cannot be indirectly achieved 13. Apex court in case of

Article 51(c) Constitution of India, 1949

Section 123, Direct Tax Code, 2012 Any arrangement entered into by a person may be declared as an
impermissible avoidance agreement
10

Corporation Notre-Dame de Bon-Secours v. Communaute Urbaine de Quebec, 95 DTC 5017 SCC

11

Mukesh Butani, India searches for GAAR best practices

12

Article 13.4 of Indian-Mauritius DTAA

13

Indira Nehru Gandhi v. Raj Narain, 1975 Supp SCC 1: AIR 1975 SC 2299

MEMORIAL ON BEHALF OF THE RESPONDENTS

Arguments Advanced
Gramphone Co. V. Birendra14 & Tractor-export V. Tarapore15 held that Municipal courts are
bound to apply the municipal law where there is an unavoidable conflict with International law.
Therefore, there is nothing unconstitutional about the enactment of GAAR.
The GAAR and the provision of income deemed to accrue in India are not violative of the
Constitution of India, the settled tax treaties and the territorial limits of India
While examining the constitutionality of a statute, the first and most basic obstacle encountered
is the strong presumption in favour of the constitutionality of a statute 16, a presumption which the
Supreme Court itself has stated, only the clearest and weightiest evidence can displace it 17.One
of the proven methods for examining the legislative competencies is by the application of
doctrine of pith and substance18. In this process it is necessary for courts to go into and examine
the true character of the enactment, its object, its scope and effect to find its plausibility 19. In the
present case the provision of income deemed to accrue in India is enacted to avoid any possible
argument on the part of the non-resident vendor that profit accrued or arose outside India by
reason of the contract to sell having been executed outside India. Therefore legislative intend of
enacting this provision is to restrain sham 20 and colorable transactions which is also tried by the
petitioner in present case. According to Constitution of India parliament can make laws for
whole or any part of India21. No law made by Parliament shall be deemed to be invalid on the
14

AIR 1984 SC 667 5-6

15

AIR 1977 SC 2328 52

16

HM. Seervai, Constitutional Law of India p. 455 (2002)

17

R.C. Tobacco v. Union of India, (2005) 7 SCC 725

18

Kartar Singh v. State of Punjab, 1994 (3) SCC 569 : 1994 Cri LJ 3139

19

E.V. Chinnaiah v. State of Andhra Pradesh, AIR 2005 SC 162 p171

20

Bonavista Cold Storage Co. V. M.N.R., 83 DTC 89 (TRB)

21

Article 245 (1), Constitution of India

MEMORIAL ON BEHALF OF THE RESPONDENTS

Arguments Advanced
ground that it would have extra territorial operation 22. In A.H. Wadia v. CIT23, however, while
further impressing on the need for territorial nexus, the Bombay High Court declared that there
was nothing unconstitutional about an extra territorial legislation as long as such nexus
requirement is fulfilled24. On the face of it, it would appear that the law as it stands is clear and
precise in disregarding any previous requirement of territorial nexus, the provision of income
deemed to accrue in India is constitutional as it is the need of the present day and enacted by
staying within the doctrine of territorial nexus. Therefore, the Parliament undoubtedly has power
to enact laws having extra-territorial application25.
The Treaty obligations have not been flouted merely because India is not a signatory to the
Vienna Convention
Some people have made massive abuse of the treaties. Treaty Shopping, conversion of Indian
black money into white, manipulation of Indian stock markets; etc. have been exposed as big
scandals. Government of India has realized how the group of people operate and abuse treaties.
Therefore they have brought the new code i.e. DTC. It does not aim to override any treaty
arbitrarily. It aims at halting impermissible tax avoidance, which most of the times arises from
the route of using benefits of international treaty. Even OECD permits to deny the treaty benefits
in case any transaction constitutes a treaty abuse 26. There is a certain degree of support in

22

Article 245 (2), Constitution of India

23

(1949) 17 ITR 63 (F)

24

Chagla, J. No limitation is placed upon the Legislature that the provisions of the Act of the Legislature passed
should be intra-territorial in their character. It is entirely a matter of State policy to what extent the Indian
Legislature should enact extraterritorial statutes. No Legislature would like to stultify itself and no Legislature
would pass laws which it could not enforce; but those are not matters for a Court of laws.
25

Electronic corporation of India ltd. V. CIT, 183 ITR 44 (SC)11

26

Model Tax Convention on Income and on Capital, OECD, July 15, 2005, Article 1, 9.2

MEMORIAL ON BEHALF OF THE RESPONDENTS

Arguments Advanced
international jurisprudence for application of internal anti-abuse rules in situation of treaty
abuse27. India is not a member to Vienna convention but even countries which are member of the
convention may not pay close attention to the rules of Convention in interpreting tax treaties. In
U.S., the domestic anti rules were applied without any consideration of whether the rule was
consistent with the treaty or not28. This is arguable, inconsistent with the Vienna Convention.
Canada is a member of Vienna Convention but they also have GAAR clause under their rule of
law and they can also set aside any treaty if found necessary. Therefore not being a signatory to
Vienna Convention is not the only reason for enactment of the Act, it is need of time and law
which made Government do this.
The code being a law later in time would prevail over the DTAA
The doctrine of law being later prevail is basically practiced in U.S. To resolve conflicts with
federal statutes, courts apply one of the most important doctrines governing the domestic
effect of treaties: the "last-in-time" rule. This doctrine holds that when a treaty and federal
statute are in conflict, whichever was enacted last in time controls29. The U.S. Government
possesses the flexibility to suspend the last-in-time rule by statute when it believes such a
suspension is necessary on policy grounds. Giving Congress such political flexibility may
actually foster, rather than hinder, U.S. participation in the development of the new international
law. Not only that, according to changing time, statute can be ameliorated, even treaty
obligations can be imposed in subsequent statute30. This proves the scope of this doctrine is very
wide and it vests the Government with powers to control undesirable practices, keeping all these
27

Natalie Goyette, Country Tax Treaty Abuse: A Canadian Perspective on International Issue, The Tax
Professional Series (Toronto: Canadian Tax Foundation, 1999), p.52
28

Del Commercial Properties Inc. v. Commissioner, 251 F.3d (CA-DC 2001)

29

Whitney v. Robertson, 124 US 190 (1888); Taylor v. Morton, 23 F Cas. 784 CCD Mass 1855), affd on other
grounds, 67 U.S. (2 Black) 481 (1862)
30

Aiken Indus., Inc. v. Commissioner of Internal Revenue, 56 T.C. 925 (1971)

MEMORIAL ON BEHALF OF THE RESPONDENTS

Arguments Advanced
things in view. The doctrine of later-in-time should apply and GAAR should prevail over
DTAA in present case.
Legislation can unilaterally tax a transaction happening out of India between two non
residents
Domestic Income-tax Act is a unilateral legislation. When India passes the Indian IT Act, it does
not need any permission from Mauritius or other Governments. Now days, It is a common
practice in international law, which is the basis of international taxation, for foreign investors to
invest in Indian companies through a foreign holding or operating company. In these sorts of
cases corporate veil can be pierced and the parent company can be held liable for the conduct of
its subsidiary31. Same has also been done in this particular case, the exclusive parent company
i.e. HTA has used its NNPT subsidiary in Mauritius to evade tax and make impermissible tax
avoidance. Therefore by using the doctrine of beneficial ownership and lifting corporate veil,
AID can be held liable for not withholding tax. In the case of a non-resident, unless the place of
accrual of income is within India, he cannot be subjected to tax. In other words, if any income
accrues or arises to a non-resident, directly or indirectly, outside India, is fictionally deemed to
accrue or arise in India if such income accrues or arises as a sequel to the transfer of a capital
asset situate in India32.

31

United States v. Bestfoods 524 US 51 (1998)

32

Eli Lilly and Company (India) P. Limited reported in 312 ITR 225 (SC)

MEMORIAL ON BEHALF OF THE RESPONDENTS

Arguments Advanced
CONTENTION 3 - THAT THE
IN INDIA UNDER SECTION

CAPITAL GAINS CAN BE DEEMED TO HAVE ACCRUED OR ARISEN

5 OF THE CODE

That SPA-II was a sham and colorable

The term sham refers to the acts done or documents executed by the parties, which are
intended by them, to give the third parties or the court an appearance of creating between the
parties legal rights and obligations different from the actual legal rights and obligations which
the parties intend to create33. Persons who are non residents of a foreign country cannot directly
take the benefits of the tax treaties, therefore tax payers have formed corporations in the treaty
country in an attempt to come under its favourable treaty provisions, this is known as treaty
shopping34.
Beneficial ownership: A beneficial owner is one recognised in equity as owner of
something, because use and title belongs to that person even though legal title belongs to
someone else35. To treat the transaction as sham the court must find that the party was motivated
by no business purpose other than obtaining tax benefits in entering the transaction, and the
transaction has no economic substance because no reasonable possibility of profits exist 36. HTA
was responsible for giving the required permissions to TFT and NNPT to enter into SPA-II which
shows that NNPT was a remote control company and was dependant on HTA and it was the
beneficial owner as it enjoyed the rights of ownership even if the legal title was held by NNPT.

33

Snook v. London and West Riding Investments (1967) 2 QB p.801

34

Robert L Sommers, Judicial doctrines Relevant to Tax Fraud Schemes

35

Blacks Law Dictionary, p1137

36

Rices Toyota, Inc v. Cm.,752 F. 2d 8991 (4th cir, 1985)

MEMORIAL ON BEHALF OF THE RESPONDENTS

Arguments Advanced
In the case Aditya Birla Nuvo v. DDIT37, the Bombay High Court has made observations which
suggest that even though the Mauritian entity was the registered owner of the shares, having
regard to the facts and circumstances, it could not be regarded as the legal beneficial owner of
the gains arising on the transfer of the shares.
Business purpose: This doctrine is based on the principle that, transactions must serve a
bona-fide business purpose and not just for tax avoidance to qualify for beneficial tax
treatment38. Courts will not recognize a transaction that lacks any business or corporate
purpose39. A case that lacks business purpose and economic substance is referred to as sham40.
SPA-II had been entered into by revoking SPA-I, with the sole intention of tax evasion. Thus, by
applying the doctrine of business purpose SPA-II was sham and colorable and was formed totally
to treaty shop.
Substance over form: The "form" of a transaction is generally the label the parties attach
to their arrangement and there might be documents that support the form, but the courts are not
concerned with these labels or documents that purport to govern the transaction the courts
focus on the substance of the transaction, regardless of the labels used by the parties 41.A
transaction which actually occurred but lacked the form it presented is a sham transaction 42. The
substance of the transaction, rather than its form, determines the tax consequences43.

37

(2011) 200 Taxman 437 (Bom)

38

Blacks Law Dictionary, p212

39

Helvering v Gregory, 69 F. 2d 809, (2d Cir. 1934); Gregory v. Helvering, 293 US 465, 469 (1935); CIR v
Transport Trading & Terminal Corp., 176 F. 2d 570, 572 (2d Cir. 1949)
40

IES Industries v. United States 253 F.3d 350, 358 (8th cir. 2001)

41

Robert L Sommers, Judicial doctrines Relevant to Tax Fraud Schemes (supra 34)

42

Kirchman v .Cm, 862 F. 2d 1486 (11th Cir, 1989)

43

U.S. v. Phellis, 257 US 156, 168 (1921); Weinerts Est. v. CIR, 294 F. 2d 750, 755 (5th Cir. 1961)

MEMORIAL ON BEHALF OF THE RESPONDENTS

Arguments Advanced
In CIT v. Sri Meenakshi Mills Ltd.44, the apex court held that the court is entitled to lift the veil of
the corporate entity and pay regard to the economic realities behind the legal faade meaning that
the court has the power to disregard the corporate entity if it is used for tax evasion. Therefore,
the court should look into the facts of the present case and some of the facts which indicate that
the transaction was a sham and colorable.
Firstly, SPA-I entered into by HTA and YPT was revoked and SPA-II was entered into between
NNPT and YPT with the necessary authorizations being given by HTA and TFT which shows
that NNPT was nothing but a remote control subsidiary of HTA. Secondly, the sale consideration
received by NNPT from YPT amounting to Rs.10,000 Crores was transferred by NNPT to TFT
and from TFT to HTA. Thirdly, HTA was left happy as what it could not achieve directly it
achieved indirectly keeping the above facts in mind, it can be concluded that.
a. HTA was the beneficial owner in this transaction
b. SPA-II was a bona-fide business transaction
c. The substance of the transaction was not what its form portrayed
This is a fit case for lifting the Corporate Veil and concluding that the transfer of shares of
Pay Not Tax in fact amounted to transfer of business of Need Not Pay Tax.
The transactions in which, the form of the corporate bodies are misused can be set aside by
piercing the corporate veil. The rationale behind this is that, the law will not allow the corporate
form to be misused, in those circumstances in which, the court feels that the corporate forms are
being misused it will rip through the corporate veil and expose its true character and nature 45.
This is an established principle that in certain situations courts may disregard the corporate

44

AIR 1967 SC 819

45

HG Henn and JR Alexander, Corporations (3rd edn, Hornbooks 1983), Ch7, p 344.

MEMORIAL ON BEHALF OF THE RESPONDENTS

Arguments Advanced
entity46. The horizons of piercing the corporate veil are constantly expanding 47 and are
permissible for benefit of the revenue 48. The Supreme Court has held that courts have the power
to disregard the corporate entity when used for tax evasion or to circumvent tax obligations 49.
The separate existence of subsidiaries or sub-subsidiaries may be ignored50. Piercing the
corporate veil is justified when the companies in question are mere facade51 .
In Adams v. Cape Industries Plc52, the Court of Appeal emphasized that it is appropriate to pierce
the corporate veil where special circumstances exist indicating that is a mere faade concealing
the true facts.
The benefits of the DTAA between India and Mauritius should not be made available to such
sham and colorable transaction. Most double taxation avoidance conventions entered into by
various countries contain a number of rules called limitation on benefits clauses, the purpose of
which is to prevent the application of the benefits of the treaties to treaty shopping structures 53.
According to the Supreme Court in Vodafone International Holdings BV Ltd. v. Union of India 54
DTAA and circular no. 789 dated 13.4.2000, would not preclude the Income Tax Department
from denying the tax treaty benefits, if it is established, on facts, that the Mauritius company has

46

CIT v. Sri Meenakshi Mills, AIR 1967 SC 819; Juggilal Kamlapat v. CIT, AIR 1969 SC 932; in re Dinshaw
Maneckji Petit, AIR 1927 Bom 371; CIT v. Associated Clothiers, AIR 1963 Cal 629
47

State of Uttar Pradesh v. Renusagar Power Co. (1991) 70 comp cas 127 (SC)

48

Apthorpe v. Peter Schoenhofen Brewing Co., (1899) 4 TC 1

49

Juggilal Kamlapat v. CIT, AIR 1969 SC 932

50

Tata Engineering and Locomotive Co. Ltd. vs. State of Bihar, AIR 1965 SC 40

51

Jones v. Lipman (1962) 1 WLR 832 ; Gower, Principles of Modern Company Law (6th ed., 1997) p171 ;
Palmer, Company Law (25th ed., 1992)
52

(1991) 1 All ER 929

53

Flix Alberto Vega Borrego, Limitation of Benefits Clause in Double Taxation Conventions

54

CIVIL APPEAL NO. 733 OF 2012-01-29

MEMORIAL ON BEHALF OF THE RESPONDENTS

Arguments Advanced
been interposed as the owner of the shares in India, at the time of disposal of the shares to a third
party, solely with a view to avoid tax without any commercial substance.
The OECD, the agency that has been at the forefront of the global crackdown on tax havens said
India's Double Tax Avoidance Agreement (DTAA) with Mauritius had gaps 55. In the case
Copthorne Holdings Ltd. v. Canada56, the court affirmed that the tax department has the
statutory power to deny a taxpayer any benefits that accrue from transactions that are conducted
primarily for purposes of exploiting loopholes in the law. SPA-II is a sham and colorable
transaction and has been entered into purely to treaty shop and to evade tax. It seeks to take
advantage of the DTAA between India and Mauritius but is not fit to do so.
(GAAR): The transaction is not fit to avail the benefits of the DTAA between India and
Mauritius also because it falls into the category of impermissible avoidance agreements under
the GAAR of the DTC. According to Section 123 of the DTC any arrangement entered into, by a
person may be declared an impermissible avoidance agreement. Impermissible Avoidance
Arrangement means a step in, or a part or whole of, an arrangement, whose main purpose is to
obtain a tax benefit and it lacks commercial substance in whole or in part or is entered into or
carried out by means or in a manner which would not be normally employed for bona fide
purposes57. An arrangement shall be presumed to have been entered into, or carried out, for the
main purpose of obtaining a tax benefit unless the person obtaining the tax benefit proves that
obtaining the tax benefit was not the main purpose of the arrangement and an arrangement shall

55

The Times of India, January 28, 2011

56

2011 SC 63

57

Section 124(15), Direct Tax Code, 2010

MEMORIAL ON BEHALF OF THE RESPONDENTS

Arguments Advanced
be presumed to have been entered into, or carried out, for the main purpose of obtaining a tax
benefit, if the main purpose of a step in, or part of, the arrangement is to obtain a tax benefit58.
It is evident from the facts of the case that it is an impermissible avoidance agreement. Moreover,
in Life Insurance Corporation of India v. Escorts Limited and Others59, the court held that the
corporate veil may be lifted where a statute itself contemplates lifting of the veil. If the parties
have chosen to conceal by a device the legal relation, it is open to the taxing authorities to
unravel the device and to determine the true character of the relationship 60. Every person is
entitled so as to arrange his affairs to avoid taxation, but the arrangement must be real and
genuine and not a sham or make believe61. For the GAAR to apply there must be tax benefit from
an avoidance transaction62 and that is what YPT is trying to do under the guise of the DTAA.
Therefore, the provisions of GAAR also apply to this transaction and the transaction, i.e. SPA-II
was a sham and should not be given the benefits of the treaty.
That the DDIT did not commit per incuriam by not following the settled judgments
Cases in which decisions should be per incuriam are those decisions given in ignorance or
forgetfulness of some inconsistent statutory provision or of some authority binding on the court
concerned so that in such cases some part of the decision or some step in the reasoning on which
it is based is found, on that account, to be demonstrably wrong63.

58

Section 125, Direct Tax Code, 2010

59

(1986) 1 SCC 264

60

CIT v. B.M. Kharwar, (1969) 1 SCR 651

61

Jiyajeerao Cotton Mills Ltd . v. Commissioner of Income Tax and Excess Profits Tax , Bombay AIR 1959 SC
270
62

Evans v. Queen, 2005 DTC 1762; Overs v. Queen, 2006 DTC 2192; Lipson et al vs. Queen 2006 DTC 2687

63

Morelle Ltd v. Wakeling, (1955) 1 All ER 708

MEMORIAL ON BEHALF OF THE RESPONDENTS

Arguments Advanced
Mcdowell and Co. Ltd. v. Commercial Tax Officer64 where it was decided by the Apex court that
devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it
is honourable to avoid the payment of tax by resorting to dubious methods 65. This observation
has been followed in the present case as the corporate veil has been lifted. Thus, the transaction
in question should not be given the benefits of the DTAA as it is a sham and colorable
transaction and such transactions do not find a place in law.
It is up to the Court to take stock to determine the nature of the new and sophisticated legal
devices to avoid tax and consider whether the situation created by the devices could be related to
the existing legislation so as to expose the devices for what they really are and to refuse to give
judicial benediction66. The DDIT and the income tax authorities have complied with the
judgment rather than violating the same as alleged by the petitioners. Therefore, DDIT has not
committed per incuriam as he did not violate the above stated judgment.
In the case Union of India vs. Azadi Bachao Andolan67, it has been held that there is no doubt
that, where necessary, the Courts are empowered to lift the veil of incorporation while applying
the domestic law. The DDIT and the income tax authorities fully complied with the above
judgment and in pursuance of the objective of exposing the sham transactions it served a SCN to
the petitioner.
In the case of Vodafone International Holdings BV Ltd. V. Union of India 68, it has been held that
the Revenue may invoke the substance over form principle or piercing the corporate veil test
only after it is able to establish on the basis of the facts and circumstances surrounding the
64

AIR 1986 SC 649

65

supra, 26

66

supra, 47

67

263 ITR 706 (SC)

68

CIVIL APPEAL NO. 733 OF 2012

MEMORIAL ON BEHALF OF THE RESPONDENTS

Arguments Advanced
transaction that the impugned transaction is a sham or tax avoidant. It was also held that the
substance of a transaction may be considered if it is a tax avoidance scheme 69. If an actual
controlling Non-Resident Enterprise (NRE) makes an indirect transfer through abuse of
organization form/legal form and without reasonable business purpose which results in tax
avoidance or avoidance of withholding tax, then the Revenue may disregard the form of the
arrangement or the impugned action through use of Non-Resident Holding Company, recharacterize the equity transfer according to its economic substance and impose the tax on the
actual controlling Non- Resident Enterprise.
The DDIT and the income-tax authorities followed the judgment cited above and their actions
were not in contradiction to the judgment of the case. They aimed at lifting the corporate veil and
exposing the sham transaction that SPA-II is, so as to serve the interests of the nation and
maintain the rule of law without allowing anyone to abuse it.

69

Inland Revenue Commissioner v. McGuckian, (1997) BTC 346

MEMORIAL ON BEHALF OF THE RESPONDENTS

Prayer

xi

PRAYER

In the light of the facts of the case, arguments advanced, issues raised and authorities cited, the
counsel for the Respondent humbly prays before this Honble Court to kindly:
DISMISS SLP BEFORE HONBLE COURT
OR ADJUDICATE AND DECLARE:

THAT

WRIT BEFORE

HIGH COURT

WAS NOT MAINTAINABLE AND PETITIONER

SHOULD EXHAUST ALTERNATE REMEDIES FIRST

THAT

PROVISION OF GAAR AND INCOME DEEMED TO ACCRUE IN INDIA ARE

CONSTITUTIONAL

THAT

PETITIONER IS LIABLE TO PAY TAX AND IMPUGNED ORDER IS BINDING

AGAINST HIM

And pass any other appropriate order as this Honble Court may deem fit.
And for this act of Kindness, the Counsel for the Respondent, as in duty bound,
shall forever pray.

Respectfully Submitted
Sd/Counsel for Respondent

MEMORIAL ON BEHALF OF THE RESPONDENTS