Project

On
“Considerations Guiding the Interpretation of Tax
Statutes”

NATIONAL LAW INSTITUTE UNIVERSITY,

BHOPAL

Submitted by:
Yasha Shrivastava
BALLB (Hons.)- 11th Trimester
Roll No. 2013BALLB79

1
 Acknowledgement

It is indeed a great pleasure and a matter of immense satisfaction for me to express my deep
sense profound gratitude towards all the people who have helped and inspired me in this
project work.

First, I would like to give my gratitude to Prof. Kavita Singh for the efforts by her right from
the selection of the project to its completion. She spent her precious time whenever I was in
need of guidance.

Moreover, I would like to thank NLIU for providing opportunities and sources for learning
and eventual completion of this project.

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 Table of Contents

 Abstract

 Introduction

 Objectives of the Research

 Hypothesis

 Research Methodology

 Scope and Limitations of Research

 The Classical Rule of Strict Interpretation

 Dilutions to the principle of strict construction

 Usage of external aids

 Exemptions

 Machinery Provisions

 Evasion of Tax

 Vodafone Saga & its Critical Analysis

 Conclusion

 References

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 Abstract
Article 265 of the constitution mandates that no tax shall be levied or collected except
by the authority of law, it provides that not only levy but also the collection of a tax
must be under the authority of some law. Tax laws are highly complex, complicated
and beyond understanding of a tax-payer. The words and expressions used are not
simple. Many sections contain sub-sections, clauses, sub-clauses. Many deeming
provisions have been inserted. Meaning of an expression is extended by way of
explanation and is curtailed by way of proviso, sometimes more than one proviso and
explanations meaning differently. The following project aims to understand the
considerations guiding the interpretation of the taxing statutes in the light of decided
cases and it also lists out and focuses on the various dilutions to the rule of strict
construction and comments on the same. These include a shift to purposive
construction, external aids, machinery provisions, exemptions and evasions. The
purpose is to gather a sense of what could be driving the judiciary to dilute the rule of
strict construction and the implications of the same.

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 Introduction

In this project, the attempt has been made to study the ancient maxim that taxing
statutes have to be construed strictly with special reference of Vodafone judgment.
Beginning with a discussion of the classical rule, the researcher moves on to focus on
the various dilutions to the rule of strict construction and comment on the same. These
include a shift to purposive construction, external aids, machinery provisions,
exemptions and evasions. The purpose is to gather a sense of what could be driving
the judiciary to dilute the rule of strict construction and the implications of the same.

 Objectives of Research:

The research has the following broad objectives:-

 To explore the maxim ‘Taxing Statutes have to be construed strictly’

 To examine and understand the dilutions to the rule of strict interpretation.
 To thoroughly understand the concept of Tax and Tax Avoidance/Evasion;
 To determine the impact of Supreme Court’s Judgment by suggesting suitable
alternatives/remedies for effective interpretation of taxing Statutes in the long run.

 Hypotheses:

The researcher framed the following hypotheses:

1. It is a well settled principle in taxation law that all Taxing Statutes shall have to be
construed strictly. Whenever a person is imposed tax, he shall pay it unless and until
if not authorized by law. Interpretation of Taxing Laws should be done based on legal
principles and not on moral views or any other concern.
2. If one non-resident sells shares of a foreign company to another non-resident of India
and the transaction takes place outside India, there can be no tax on the same. The
basis for this is that Foreign Companies being incorporated outside India don’t fall
under Indian jurisdiction for all their transactions outside India. Hence, the Investor
Company is exempted from Capital Gains tax altogether.
3. The analogy behind taxing either in India or anywhere in the world is to bring
Revenue to the Government. The criteria and other pre-requisites can vary drastically
from jurisdiction to jurisdiction. But unnecessarily taxing simply increases the

5
 financial burden of Companies thereby effectively reducing the flow of investments
and other mutual associated benefits to the nation. There is no any minimum
threshold required to tax under Indian Taxing Laws.

 Research Methodology:

The research is purely doctrinal in nature. It is an analytical, comparative, critical and

descriptive research employing deductive type of logical reasoning laying core
emphasis on the various dimensions of Taxing Statutes and the kind of legal
principles involved in its application by the Courts.

 Scope & Limitation of Research:

The research excessively dwells only on Interpretation of Taxing Statutes and its
drawbacks with strict reference to the Vodafone Tax Case by comparing the
applicability of taxing Statutes under various jurisdictions and other legal intricacies
associated with it.

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  The Classical Rule : Strict Construction of Taxing Statutes

The classical rule with regard to the construction of taxing statutes is that they should
be strictly construed. It is a well-established rule that can be traced to common law in
England and has been imported into the Indian legal system as well.1

A person should not be taxed unless there are clear words indicating that purpose.
Every statute must be read “according to the natural construction of its words”. 2 In a
taxing statute, it is only what is clearly said that needs to be looked at. Considerations
guiding the interpretation of taxing statutes cannot include equity or presumptions.
Nothing must be read in or implied. In the interpretation of taxing statutes, the
language of the statute is the only thing that can be fairly looked at.3 This has been the
classical approach towards the interpretation of tax statutes as followed in England as
well as in India.

The rationale for the strict construction of taxing statutes lies in the fact that they
impose pecuniary burdens. Therefore, in some sense, they operate as penalties. It is on
the basis of this that clear and unambiguous language is required in order to make out
a charge of tax.4

This rule of strict construction is also known as the Duke of Westminster principle,
being named after its famous exposition in the case of IRC v. The Duke of
Westminster5. In this case, the respondent i.e. Duke of Westminster, covenanted to
pay his gardener an yearly sum for a period of seven years without prejudice to the
remuneration received by the gardener for his services. The Duke then sought to
deduct such payments in order to ascertain his total taxable income for surtax. The
Revenue i.e. Appellant however sought to show these payments as payments of salary
or wages and impose tax thereon. In this case, the court rejected the argument that in
the construction of taxing statutes, it must ignore the legal position and instead focus
on “the substance of the matter”. The court observed that every person is entitled to
arrange his affairs in such a manner that the burden of tax that falls upon him be as

1
G.P. Singh, PRINCIPLES OF STATUTORY INTERPRETATION, 815 (12thedn., 2010).
2
In re Micklethwait, (1885) 11 Ex 452 (Court of Exchequer Chamber); Tennant v. Smith, [1892] A.C. 150
(House of Lords).
3
Cape Brandy Syndicate v. Inland Revenue Commissioners, [1921] 1 K.B. 64 (King’s Bench Division).
4
P.B. Maxwell, INTERPRETATION OF STATUTES, 256 (12thedn., 1962).
5
The Commissioners of Inland Revenue v.The Duke of Westminster, [1936] A.C. 1 (House of Lords).

7
 low as legally permissible. The doctrine of “substance of the matter” cannot be used
to impose a greater liability on the person. It is the true nature of the legal obligation
and nothing else that is the substance. On this basis, the court dismissed the appeal.6

As mentioned before, this line of reasoning has found resonance in India too. The
Supreme Court of India has reiterated the position that it is a maxim of tax law that
tax is not to be imposed on a person unless the words of the taxing statute are
unambiguous.7 The Supreme Court has observed that the strict letter of the law is to
be considered in determining tax liability and not other things such as the spirit of the
statute or the substance of the law. If the Court is satisfied that a case falls within the
provisions, then a tax can be imposed. However, if a situation does not fall within the
“four corners of the provisions of the taxing statute”, no tax can be imposed.
Inference, analogy and probing of legislative intent in order to get to the substance of
the matter are not permitted in the interpretation of tax statutes.8

A taxing statute has three components: the subject of the tax, the person liable to pay
tax and the rate at which tax is to be paid. In the case of ambiguity regarding any of
these three ingredients in a taxing statute, there is no tax in law. Unless the legislature
does not modify the defect, no tax can be imposed as per law. This is because taxing
statutes need to be strictly construed.9

Another principle of statutory interpretation that is seen with respect to taxing statutes
is that the courts must favour the assessee in case there is ambiguity and two or more
reasonable interpretations of the taxing provisions exist.10

Thus, in this section, it has been seen that the judiciary has stressed on the
requirement of clear and unambiguous language in order to impose a tax upon an
individual. This strict rule of has governed the interpretation of tax statutes. However,
from the latter half of the previous century, several dilutions to this strict rule have
been seen. In the following sections of this paper, the researcher seeks to discuss these
detours from the straight route laid down by the rule of strict construction.

6
The Commissioners of Inland Revenue v.The Duke of Westminster, [1936] A.C. 1 (House of Lords).
7
MathuramAgrawal v.The State of Madhya Pradesh, AIR 2000 SC 109 (Supreme Court of India).
8
A.V. Fernandez v. State of Kerala, AIR 1957 SC 657 (Supreme Court of India).
9
MathuramAgrawal v.The State of Madhya Pradesh, AIR 2000 SC 109 (Supreme Court of India).
10
CIT v. KaramchandPremchand Ltd., AIR 1960 SC 1175 (Supreme Court of India).

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  Dilutions to the Principle of Strict Construction
A shift to purposive construction?

As has been noted above, the strict rule of construction has been subject to some
dilution, especially since the latter half of the previous century.

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

In the eyes of the researcher, many of these signify a departure from the strict rule of
interpretation. Some of these had their basis in previous judgments whereas some
others seemed to be pronounced by the court for the first time. To begin with, the
Court noted that existing market practice must be a consideration behind the
interpretation of taxing statutes. Similarly, the court also noted that public policy
could be a guiding factor in the interpretation and application of taxing statutes. 13

The court also noted that the statute must not be interpreted in such a manner that it
leads to the wide scale evasion of duty. An interpretation based on this dictum can
have significantly different results in practice from those seen earlier based upon the
strict rule of interpretation. While, in this case, the dictum was motivated by the desire
to prevent consumers of computer products from having to face the burden of excess
duty imposed on the respondent, its ramifications on other types of cases involving

11
Commissioner of Central Excise, Pondicherry v. ACER India Ltd., (2004) 8 SCC 173 (Supreme Court of
India).
12
Commissioner of Central Excise, Pondicherry v. ACER India Ltd., (2004) 8 SCC 173 (Supreme Court of
India).
13
Commissioner of Central Excise, Pondicherry v. ACER India Ltd., (2004) 8 SCC 173 (Supreme Court of
India).

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 taxation can be quite telling. The researcher opines that this would go far in tilting the
balance of power in favour of the Revenue.14

Most importantly, the Supreme Court made observations expressly providing that the
rule of strict construction was not to be always applied in the interpretation of tax
statutes. The Supreme Court noted that the principle of strict construction may not be
adhered to in case the statutory construction can reasonably have only one meaning.
The court went on to substantiate this by the statement that the principle of purposive
construction will be adhered to in case the literal meaning results in absurdity. The
Supreme Court here explicitly provided that purposive construction could be given
precedence over literal meaning in the case of absurdity and that this maxim is
applicable even in the case of taxing statutes.15 This is reflective of the shift in favour
of purposive construction, at least in some cases, even in the interpretation of taxing
statutes. This is extremely significant because this allows the courts to go beyond the
four corners of the statute in order to determine “legislative purpose” in a manner that
was not allowed hitherto. This is an extremely controversial and significant shift
which leaves open a wide range of conclusions open with respect to the interpretation
of tax statutes. It might be argued that it purposive construction would only come into
operation in case literal construction leads to absurd results. Yet, even this must be
seen to be significant. The following paragraph illustrates a case where this difference
has been seen.

In the case of CWS v. CIT16, the Court delved into provisions of the Income Tax Act,
1961 revolving around the imposition of tax on the appellant, which was the assessee
company, with regard to expenditure on the company’s assets used by its employees
either partly or wholly for their own benefit. A plain reading of the statute would have
meant that liability could not be imposed. However, the court went ahead to uphold
the assessment of the Revenue on the basis of a reading of the statute along with
legislative intent to tax. The court compared the impugned provision with analogous
provisions in previous and successive versions of the Income Tax Act and concluded
that the assessee must be held liable for tax in accordance with its reading of

14
Commissioner of Central Excise, Pondicherry v. ACER India Ltd., (2004) 8 SCC 173 (Supreme Court of
India).
15
Commissioner of Central Excise, Pondicherry v. ACER India Ltd., (2004) 8 SCC 173 (Supreme Court of
India).
16
C.W.S. (India) Ltd. v. Commissioner of Income Tax, JT 1994 (3) SC 116 (Supreme Court of India).

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 Parliamentary intention. The Court stated that non-taxation here would be a result that
would be incongruous, discriminatory and most importantly, absurd. The court opined
that though literal construction was the general rule in the interpretation of tax
statutes, it could not be adhered to in case the result was incongruous, discriminatory
or absurd. It stated that interpretation of statutes could not be a mechanical exercise. It
held that the object of all interpretation was to give effect to the object of the
enactment with regard to the language used. In this manner, the Supreme Court went
ahead to affirm the taxation of the assessee company i.e. the appellant in spite of the
fact that literal interpretation would have led to a contrary result of non-taxation.17

It is submitted that while such decisions of the Supreme Court might seem as the right
step in order to ensure that the ends of justice are met in a particular case, they also
create a large enough window of opportunity allowing for some unnecessary judicial
flexibility that could negatively impact the interpretation of tax statutes when they
operate as precedents. Grandiose declarations embracing purposive construction and
privileging it over strict construction can lead to unintended consequences. The
problem would lie not in ascertaining the existence of absurdity. Like most cases, the
problem would lie in ascertaining legislative intent and the purpose of the statute. The
researcher feels that the availability of such interpretive capacity in the hands of the
judiciary could lead to a strengthening of the position of the Revenue as against the
assessee and seriously impact the interests of the assessee in this manner.

The following sections highlight certain other dilutions to the rule of strict
construction.

1. The usage of external aids

It has been seen that courts have employed certain external aids in the interpretation
of taxing provisions. In doing so, they have gone beyond the four corners of the
language of the statute and have thereby diluted the rule of strict construction.

For example, in the case of Nawn Estates v. CIT18, the Supreme Court was called
upon to interpret the term ‘investment’ as found in the Income Tax Act, 1922. This
term had not been defined by the statute. The Supreme Court considered various

17
C.W.S. (India) Ltd. v. Commissioner of Income Tax, JT 1994 (3) SC 116 (Supreme Court of India).
18
Nawn Estates (P) Ltd. v. C.I.T, West Bengal (1977) 1 SCC 7 (Supreme Court of Indi a).

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 external aids in coming to the conclusion that the appellant was to be brought within
the purview of the tax on the basis that it was an ‘investment company’. The Court
considered the legislative history of the Income Tax Act 1922, right from its
amendment in 1955. It also considered the legislative history of the Income Tax Act,
1961. The Supreme Court also sought to substantiate its position on the understanding
of ‘investment’ in common business parlance. Significantly, the Court even went on
to recognise that English authorities can be useful guides in the interpretation of
analogous provisions, fundamental concepts and general principles “unaffected by the
specialties of the English Income Tax Statutes”. Again, it is reiterated that while the
Court may have concluded rightly in the case, the acceptance of such a broad variety
of external aids to construction can lead to some vulnerability of the rule of strict
construction. The researcher is especially concerned with the idea of usage of
analogous English provisions in the interpretation of Indian counterparts. It must be
understood that taxing environments and policy considerations in the two countries
are different. Therefore, the researcher opines that importing an English
understanding of specific taxing provisions to the Indian scenario will lead to more
questions than the solutions it provides. Extreme caution needs to be exercised by the
interpreting authority in this regard.

2. Exemptions

An area of considerable disagreement in the construction of taxing statutes has been

that of exemptions. An exemption is an exception from the general obligation to pay
taxes.19 There are two opinions on the matter of construction of exemptions in case of
ambiguity. According to one view, an exemption must be liberally construed so as to
benefit the assessee from then operation of the duty. The other view is that
exemptions tend to increase the burden on the general burden of taxpayers, and for
this reason, they must be strictly construed against the assessee.20

There is no presumption with regard to the application of exemption. The person

claiming the exemption has to establish that he is entitled to it as per the language of
the taxing enactment.21

19
A.B. Kafatiya, INTERPRETATION OF STATUTES, 293 (2008).
20
Singh, supra note 1, at 839 and 840.
21
Commissioner of Income Tax v. Ramakrishna Deo, AIR 1959 SC 239 (Supreme Court of India).

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 An example of the liberal interpretation of exemptions was seen in CCE v. NE
Tobacco Company22. The question was whether the unit or factory established by the
respondent in a certain Export Promotion Industrial Park could be given the status of a
‘new industrial unit’ so as to avail an exemption. The Supreme Court held that an
exemption notification must be liberally construed in favour of the respondent. It
therefore dismissed the appeal.23 However, it must be mentioned that there are various
authorities in opposition to this view, including various other judgments of the
Supreme Court.

An illustration is the case of Orissa State Warehousing Corporation v. CIT24. In this

case, the appellant sought to benefit from an exemption on the basis of Section 10(29)
of the Income Tax Act, 1961. The appellant argued that liberal interpretation must be
given to income derived from “letting out of godowns or warehouses for storage,
processing or facilitating the marketing” so as to include interest derived on fixed
deposits. The Supreme Court observed that exemptions are an exception to the
general rule that a taxing statute must be construed in favour of the assessee in case of
ambiguity. The Court, dismissing the appeal, held that entitlement for exemptions
should not be read with any wider connotation or latitude to the taxpayer. This case
was an example of the literal approach to construction of exemptions.25

Therefore, it can be concluded that authorities exist in support of both liberal as well
as literal interpretation of exemption provisions in statutes.

However, where there is a beneficient object, such as increased production or

incentives to co-operatives, exemption provisions are to be liberally construed. In the
case of CIT v. Straw Board Manufacturing26, the Supreme Court employed liberal

22
Commissioner of Central Excise v. North- Eastern Tobacco Company, AIR 2003 SC 616 (Supreme Court of
India).
23
Commissioner of Central Excise v. North- Eastern Tobacco Company, AIR 2003 SC 616 (Supreme Court of
India).
24
Orissa State Warehousing Corporation v. Commissioner of Income Tax, AIR 1999 SC 1388 (Supreme Court
of India).
25
Orissa State Warehousing Corporation v. Commissioner of Income Tax, AIR 1999 SC 1388 (Supreme Court
of India).
26
Commissioner of Income Tax, Amritsar v. Straw Board Manufacturing Co. Ltd., AIR 1989 SC 1490 (Supreme
Court of India).

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 interpretation to strawboard within the expression ‘paper and pulp’ so as to enable the
respondent to benefit from concessions for the furtherance of industrial activity.27

The researcher opines that the observations of the Supreme Court in UoI v Wood
Papers28provides a part of the solution in resolving the conflicting methods of
interpretation of exemptions. The Court noted that the applicability of an exemption
needs to be strictly viewed keeping in mind legislative intent, inequitable burden on
taxpayers and augmentation of revenue. However, once doubt about applicability is
removed, and it is ascertained that the assessee was meant to be entitled, and then a
liberal construction is appropriate. Therefore, strict and liberal constructions are to be
invoked at different stages of interpretation of an exemption provision.29

3. Machinery provisions

It has been held by the Supreme Court that a fiscal statute must be strictly construed
only with regard to taxing provisions such as charging provisions and not to
machinery provisions. A machinery section should be so construed so as to effectuate
liability.30 The researcher agrees with this line of reasoning. As long as the subject,
assessee and the rate of tax are clear, procedural aspects like the machinery for
enforcement must not allow one to escape the clutches of taxation.

4. Evasion of tax

A significant departure from the Westminster principle was seen in the decision of the
House of Lords in Ramsay v. IRC31. In this case, the taxpayer company sought to
reduce its capital gains tax through a series of transactions that would create artificial
capital losses. Each of these losses would seem “genuine” as per the Westminster
principle. But taken on the whole, the effect was that the company would escape tax
liability. The court held that it could not stand still in the face of increasingly
sophisticated devices of tax avoidance. It had to view the scheme as a whole and not

27
Commissioner of Income Tax, Amritsar v. Straw Board Manufacturing Co. Ltd., AIR 1989 SC 1490 (Supreme
Court of India).
28
Union of India v. M/S Wood Papers Ltd., AIR 1991 SC 2049 (Supreme Court of India).
29
Union of India v. M/S Wood Papers Ltd., AIR 1991 SC 2049 (Supreme Court of India).
30
CIT Central, Calcutta v. National Taj Traders, AIR 1980 SC 485 (Supreme Court of India).
31
W.T. Ramsay v. Inland Revenue Commissioners, [1982] A.C. 300 (House of Lords).

14
 step by step. Holding that the court could not apply the Westminster principle for
sham transactions, the appeal was dismissed.32

The above decision significantly formed the backbone of the decision of the
Constitution Bench of the Supreme Court in McDowell v. CTO33(“McDowell”). The
Supreme Court dramatically held that the Westminster principle had been buried in
England and that India should also dissociate itself from the principle. The court
stated that intended effect of a transaction for fiscal purposes had to be considered in
determining tax liability and that no one could get away with a tax avoidance project
merely by stating that nothing was illegal about it. The court was motivated by
various ill-effects of tax avoidance such as loss of revenue, piling up of black money,
burden on remaining taxpayers, inequity of advice available to the Revenue and the
skillful avoider. The Court also observed that tax avoidance was unethical in a welfare
state. The court held that the construction of a scheme of tax avoidance was neither
liberal nor literal. Rather, the question is whether a transaction is a device to avoid tax
and whether the judiciary can accord approval to it. The Court had to take stock of
new and sophisticated legal devices and relate it to existing legislation with the help
of “emerging” techniques of interpretation.34

This above case was notably criticized by the Supreme Court itself in Union of India
v. AzadiBachaoAndolan35. The Court here referred to various authorities to support its
proposition that the Westminster principle was dead. However, it incorrectly held that
the concurring judgment in the McDowell case was not reflective of the majority. The
researcher opines that it was also wrong in placing reliance on another Constitution
Bench decision of the Supreme Court that came after McDowell i.e.
MathuramAgrawalv. State of MP36 since this latter decision was not pronounced in
the context of tax avoidance schemes.

It is thus the researcher’s opinion that the McDowell case has indeed succeeded in
modifying the Westminster principle at least in the context of tax avoidance schemes,
and has provided a qualification to the rule of strict construction to that extent. While
this is a theoretical anomaly, it has been practically necessitated so as to prevent large

32
W.T. Ramsay v. Inland Revenue Commissioners, [1982] A.C. 300 (House of Lords).
33
McDowell and Co. v. Commercial Tax Officer, AIR 1986 SC 649 (Supreme Court of India).
34
McDowell and Co. v. Commercial Tax Officer, AIR 1986 SC 649 (Supreme Court of India).
35
Union of India v. AzadiBachaoAndolan, AIR 2004 SC 1107 (Supreme Court of India).
36
MathuramAgrawal v.The State of Madhya Pradesh, AIR 2000 SC 109 (Supreme Court of India).

15
scale losses to the revenue through intricately designed schemes. It has led to the
strengthening of the position of the Revenue vis-à-vis the assessee.

Yet, the researcher argues that this qualification has made the task of interpretation
very complex. It becomes tough to delineate acceptable tax planning from
unacceptable tax avoidance. Moreover, an inquiry into the motives of either the
legislature or the assessee is always going to be fraught with danger. The wisdom of
this step must be doubted, at least from the point of view of statutory interpretation.

16
  Vodafone Saga and its Critical Analysis

 Facts: In February 2007, Vodafone International Holdings (Vodafone or VIH), a

Dutch entity, had acquired 100 percent shares in CGP (Holdings) Limited (CGP), a
Cayman Islands company for USD 11.1 billion from Hutchinson Telecommunications
International Limited (HTIL).CGP, through various intermediate companies/
contractual arrangements controlled 67 percent of Hutchison Essar Limited (HEL), an
Indian company. The acquisition resulted in Vodafone acquiring control over CGP
and its downstream subsidiaries including ultimately HEL. HEL was a joint venture
between the Hutchinson group and the Essar group. It had obtained telecom licenses
to provide cellular telephony in different circles in India from November 199437.

 The Controversy: In September 2007, the tax department issued a show-cause notice
to Vodafone to explain why tax was not withheld on payments made to HTIL in
relation to the above transaction. The tax department contended that the transaction
of transfer of shares in CGP had the effect of indirect transfer of assets situated in
India. Vodafone filed a writ petition in the Bombay High Court, inter alia,
challenging the jurisdiction of the tax authorities in the matter. By its order dated 3
December 2008, the Bombay High Court held that the Indian Income Tax authorities
had jurisdiction over the matter.

Vodafone challenged the order of the Bombay High Court before the Supreme Court.
In its ruling dated 23 January 2009, the Supreme Court directed the tax authorities to
first determine the jurisdictional challenge raised by Vodafone. In May 2010, the tax
authorities held that they had jurisdiction to proceed against Vodafone for their
alleged failure to withhold tax from payments made under Section 201 of the Income
Tax Act, 1961. This order of the tax authorities was challenged by Vodafone before
the Bombay High Court.

By its order dated 8 September 2010, the Bombay High Court dismissed Vodafone’s
challenge to the order passed by the tax authorities. Vodafone filed a Special Leave
Petition (SLP) against the High Court order before the Supreme Court. On 26
November 2010, SLP was admitted and the Supreme Court directed Vodafone to

37
http://www.cbi.org.uk/media/2145560/making the case july_2013

17
 deposit a sum of INR 25000 million within three weeks and provide a bank guarantee
of INR 85000 million within eight weeks from the date of its order.

 Interpretation of Section 9 (1)(i) of the Income Tax Act, 1961: As per the said
section, inter alia, income accruing or arising directly or indirectly from the transfer
of a capital asset situated in India is deemed to accrue/ arise in India in the hands of a
non-resident. In this connection, the Supreme Court observed that:
 Charge to capital gains under Section 9 (1)(i) {Income deemed to accrue or arise in
India} of the Act arises on existence of three elements, namely transfer, existence of
a capital asset and situation of such asset in India.
 The legislature has not used the words ‘indirect transfer’ in Section 9 (1)(i) of the Act.
If the word ‘indirect’ is read into Section 9 (1)(i) of the Act, then the phrase ‘capital
asset situate in India’ would be rendered nugatory.
 Section 9(1)(i) of the Act does not have ‘look through’ provisions and it cannot be
extended to cover indirect transfers of capital assets/ property situated in India.
 The proposals contained in the Direct Taxes Code Bill, 2010, on taxation of off-shore
share transactions indicate that indirect transfers are not covered by Section 9(1)(i) of
the Act.
 A legal fiction has a limited scope and it cannot be expanded by giving purposive
interpretation, particularly if the result of such interpretation is to transform the
concept of chargeability which is also there in Section 9(1) (i) of the Act.

Accordingly, the Supreme Court concluded that the transfer of the share in CGP did
not result in the transfer of a capital asset situated in India, and gains from such
transfer could not be subject to Indian tax.

 Undoing the Tax Barriers: The Tax authorities further argued that the rights of
HTIL over the control and management of HEL constituted “property” in the hands of
HTIL. Accordingly, the extinguishment of such rights under the Share Purchase
Agreement (SPA) resulted in a taxable transfer of a capital asset situated in India. It
held that extinguishment took place because of the transfer of the CGP share and not
by virtue of various clauses of SPA.

Additionally, the Supreme Court held that the sole purpose of CGP was not only to
hold shares in subsidiary companies but also to enable a smooth transition of business.
Therefore, it could not be said that CGP had no business or commercial substance.

18
 The tax authorities had contended that the transfer of the CGP share was not adequate
in itself to achieve the object of consummating the transaction between HTIL and
VIH and that intrinsic to the transaction was a transfer of other ‘rights and
entitlements’. It was further contended that such “rights and entitlements” constituted
‘capital assets’, gains from the transfer of which were liable to tax in India.

The Supreme Court also observed that if a Non-Resident makes an indirect transfer
through abuse of the organization form/ legal form and without a reasonable business
purpose, which results in tax avoidance or avoidance of withholding tax, then the tax
authorities may disregard the form of the arrangement or the impugned action through
use of holding companies and may re-characterize the equity transfer according to its
economic substance and impose tax38. “The corporate business purpose of a
transaction is evidence of the fact that the impugned transaction is not undertaken as
a colourable or artificial device39”.

In finality, the Supreme Court held that:

 The question of withholding tax at source would not arise as the subject matter of
offshore transfer between the two non-residents was not liable to capital gains tax in
India.
 For the purposes of Section 195 {Other Sums} of the Income Tax Act, 1961, tax
presence has to be viewed in the context of the transaction that is subjected to tax, and
not with reference to an entirely unrelated matter. As there was no incidence of
capital gains tax in India, the provisions under Section 163 of the Income Tax Act,
1961 for treating Vodafone as a representative assessee of HTIL, were not applicable.
Section 195 of the Act would apply only if payments are made from a resident to
another non-resident and not between two non-residents situated outside India40.

38
Supra note 2, p. 874
39
Sutherland, Cambridge University Press, Statutory Construction, (2d Vol., 3d ed. 2011), p. 165
40
Crawford, Oxford University Press, Statutory Construction, (2d ed. 2009), p. 148

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 Conclusion

Vodafone is a milestone case in Indian Tax history which brought into limelight the
true parliamentary intention under Taxing Laws. Parliamentary intention can be
expressed only through the text of the statute, albeit read in context. Obviously the
best way to give effect to parliamentary intention in tax law will be to express policy
clearly in the specific legislation by having a coherent underlying framework for the
tax system. It would increase clarity, transparency and legitimacy by giving full
effect to parliamentary intention without overriding it.

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

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

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 Bibliography

 Books Referred:

1. G.P. Singh, Principles of Statutory Interpretation, 815 (12thedn., 2010).

2. P.B. Maxwell, Interpretation of Statutes, 256 (12thedn., 1962).
3. A.B. Kafatiya, INTERPRETATION OF STATUTES, 293 (2008).

 Internet Sites:

1. http://www.vodafone.com/content/dam/sustainability/pdfs/vodafone_tax_risk_manag
ement_strategy.
2. http://www.cbi.org.uk/media/2145560/making_the_case__july_2013.
3. http://www.vodafone.com/content/annualreport/annual_report14/downloads/full_annu
al_report_2014.
4. http://www.vodafone.com/content/dam/sustainability/2014/pdf/assurance_statement_t
ax_2013-2014
5. http://www.legalservicesindia.com/article/article/interpretation-of-taxing-statute-as-
strict-construction-and-exemption-1451-1.html
6. http://iasaspirations.blogspot.in/2012/04/interpretation-of-taxing-statutes.html
7. https://www.wirc-icai.org/(X(1)S(2w0hhk455dwu5t45zzu3x345))/material/Basic-
Tenets-of-Taxation-Interpretation-of-Taxing-Statutes.pdf

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