The Supreme Court’s judgment today in Vodafone is of enormous importance to a number of branches of Indian law. The majority judgment has been delivered by the Chief Justice and Swatanter Kumar J. A concurring judgment delivered by K.S. Radhakrishnan J. in some respects goes even further. A copy of the judgment is available on the Supreme Court’s website. A detailed analysis of the judgment will follow. This post reproduces key extracts from the two judgments with brief comments, on some of the issues before the Court.
1. Azadi Bachao Andolan and McDowell
Both judgments hold that Azadi Bachao Andolan is good law. The Chief Justice holds that there is no conflict between Azadi and McDowell because the observations of Reddy J. are confined to cases in which a colourable device is used. Radhakrishnan J. appears to have gone even further and has expressly said that the “ghost” of the Duke of Westminster has not been exorcised. We will analyse this in detail in the coming days.
[para 64] The words “this aspect” [ed: referring to the majority’s observation that they “on this aspect” agree with Reddy J.’s judgment] express the majority’s agreement with the judgment of Reddy, J. only in relation to tax evasion through the use of colourable devices and by resorting to dubious methods and subterfuges. Thus, it cannot be said that all tax planning is illegal/illegitimate/impermissible. Moreover, Reddy, J. himself says that he agrees with the majority. In the judgment of Reddy, J. there are repeated references to schemes and devices in contradistinction to “legitimate avoidance of tax liability” (paras 7-10, 17 & 18). In our view, although Chinnappa Reddy, J. makes a number of observations regarding the need to depart from the “Westminster” and tax avoidance – these are clearly only in the context of artificial and colourable devices. Reading McDowell, in the manner indicated hereinabove, in cases of treaty shopping and/or tax avoidance, there is no conflict between McDowell and Azadi Bachao or between McDowell and Mathuram Agrawal.
JUSTICE K.S RADHAKRISHNAN
[paras 110, 112] Justice Reddy has, the above quoted portion shows, entirely agreed with Justice Mishra and has stated that he is only supplementing what Justice Mishra has spoken on tax avoidance. Justice Reddy has also opined that the ghost of Westminster (in the words of Lord Roskill) has been exorcised in England. In our view, what transpired in England is not the ratio of McDowell and cannot be and remains merely an opinion or view. 112. Justice Reddy, we have already indicated, himself has stated that he is entirely agreeing with Justice Mishra and has only supplemented what Justice Mishra has stated on Tax Avoidance, therefore, we have go by what Justice Mishra has spoken on tax avoidance
2. Corporate Veil
Both the Chief Justice and Radhakrishnan J. hold that the existence of a holding-subsidiary relationship is no reason to suppose that the two entities are not separate in law. The Chief Justice sets out circumstances in which the Revenue may appeal to India’s “judicial anti-avoidance rule”. Justice Radhakrishnan cites with approval Adams v Cape Industries.
THE CHIEF JUSTICE
[paras 67, 68] However, the fact that a parent company exercises shareholder’s influence on its subsidiaries does not generally imply that the subsidiaries are to be deemed residents of the State in which the parent company resides
In the application of a judicial anti-avoidance rule, 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 transaction that the impugned transaction is a sham or tax avoidant…the concept of participation in investment, the duration of time during which the Holding Structure exists; the period of business operations in India; the generation of taxable revenues in India; the timing of the exit; the continuity of business on such exit. In short, the onus will be on the Revenue to identify the scheme and its dominant purpose. The corporate business purpose of a transaction is evidence of the fact that the impugned transaction is not undertaken as a colourable or artificial device. The stronger the evidence of a device, the stronger the corporate business purpose must exist to overcome the evidence of a device
JUSTICE K.S. RADHAKRISHNAN
[paras 58, 61] Legal relationship between a holding company and WOS is that they are two distinct legal persons and the holding company does not own the assets of the subsidiary and, in law, the management of the business of the subsidiary also vests in its Board of Directors
3. Shareholders’ Agreements and Rangaraj
Justice Radhakrishnan has expressed the view that Rangaraj v Gopalakrishnan, which we have discussed on several occasions, may have been wrongly decided because shareholders have the freedom to contract unless there are specific restrictions in legislation.
[paras 63, 64] The nature of SHA was considered by a two Judges Bench of this Court in V. B. Rangaraj v. V. B. Gopalakrishnan and Ors. (1992) 1 SCC 160 … This Court has taken the view that provisions of the Shareholders’ Agreement imposing restrictions even when consistent with Company legislation, are to be authorized only when they are incorporated in the Articles of Association, a view we do not subscribe
64. Shareholders can enter into any agreement in the best interest of the company, but the only thing is that the provisions in the SHA shall not go contrary to the Articles of Association. The essential purpose of the SHA is to make provisions for proper and effective internal management of the company
4. Controlling Interest and Extinguishment
Both the Chief Justice and Justice KS Radhakrishnan have held (on this aspect affirming the legal conclusion of the Bombay High Court in the impugned judgment) that “controlling interest” is not a distinct capital asset.
THE CHIEF JUSTICE
[para 88] As a general rule, in a case where a transaction involves transfer of shares lock, stock and barrel, such a transaction cannot be broken up into separate individual components, assets or rights such as right to vote, right to participate in company meetings, management rights, controlling rights, control premium, brand licences and so on as shares constitute a bundle of rights
JUSTICE K.S. RADHAKRISHNAN
[para 144] Further, the High Court failed to note on transfer of CGP share, there was only transfer of certain off-shore loan transactions which is unconnected with underlying controlling interest in the Indian Operating Companies. The other rights, interests and entitlements continue to remain with Indian Operating Companies and there is nothing to show they stood transferred in law
5. Section 9
THE CHIEF JUSTICE
[para 71] Hence, it is not necessary that income falling in one category under any one of the sub-clauses [ed: of section 9] should also satisfy the requirements of the other sub-clauses to bring it within the expression “income deemed to accrue or arise in India” in Section 9(1)(i)… The said sub-clause consists of three elements, namely, transfer, existence of a capital asset, and situation of such asset in India. All three elements should exist in order to make the last sub-clause applicable [emphasis added].
JUSTICE K.S. RADHAKRISHNAN
[paras 171-174] Section 9, therefore, covers only income arising from a transfer of a capital asset situated in India and it does not purport to cover income arising from the indirect transfer of capital asset in India. Section 9 has no “look through provision” and such a provision cannot be brought through construction or interpretation of a word ‘through’ in Section 9. In any view, “look through provision” will not shift the situs of an asset from one country to another. Shifting of situs can be done only by express legislation
6. Situs of the CGP Share
Although both the Chief Justice and Justice K.S. Radhakrishnan hold that the situs of the CGP share is the place of incorporation/register of shares, they appear to have adopted different approaches: the Chief Justice applies the Indian Companies Act, while Justice KS Radhakrishnan applies the well-known conflict of laws rules on situs of shares. This will be discussed in more detail in a subsequent post.
THE CHIEF JUSTICE
[para 82] Be that as it may, under the Indian Companies Act, 1956, the situs of the shares would be where the company is incorporated and where its shares can be transferred. In the present case, it has been asserted by VIH that the transfer of the CGP share was recorded in the Cayman Islands, where the register of members of the CGP is maintained.
JUSTICE K.S. RADHAKRISHNAN
[para 127] Situs of shares situates at the place where the company is incorporated and/ or the place where the share can be dealt with by way of transfer. CGP share is registered in Cayman Island and materials placed before us would indicate that Cayman Island law, unlike other laws does not recognise the multiplicity of registers
Vodafone's appeal allowed
It has been reported that Vodafone’s appeal has been allowed, the Supreme Court inter alia rejecting the Revenue’s “extinguishment” argument and holding that section 9 is not a “look-through” provision.
We will have an opportunity to discuss this judgment in detail over the coming days once a copy is available.
Second Week of Arguments: Constitution Bench on Bhatia International
Arguments continued this week before the Constitution Bench comprising the Chief Justice, and Justices Jain, Nijjar, Khehar and Desai. As we noted, counsel for the appellants in the first week concentrated principally on whether the courts of the seat of arbitration have exclusive jurisdiction to test the validity of an arbitral award even when the proper law of the contract is the law of another country.
This week, Mr Gopal Subramanium developed the submissions he had outlined last week. It is easiest to describe counsel’s contentions by dividing his case into two parts: a negative case, which sought to establish that the “seat of arbitration” is not the basis on which the jurisdiction of the courts has been defined under the Indian Arbitration Act; and a “positive” case, which consisted of certain propositions on the correct approach to jurisdiction under the Indian Act, drawing from the principle of party autonomy, the significance of choice of law, English law and from the travaux préparatoires to the UNCITRAL Model Law on International Commercial Arbitration. In his negative case, counsel submitted that the primacy accorded to the “seat of arbitration” in England is in fact judge-made law; that the drafters of the Model Law in 1985 were fully aware of the contesting views, and yet defined “international commercial arbitration” in article 1(3) not only with reference to the seat of arbitration but also the places of business of the parties; and that the Indian legislature went even further because it omitted all references to the seat in section 2(1)(f) of the 1996 Act. Counsel further submitted that it is possible that parties to an arbitration with a foreign seat expressly designate the 1996 Act as applicable, in which event the 1996 Act must ex hypothesi apply even though the seat of arbitration is outside India. Counsel also relied extensively on the judgment of the UK Supreme Court (particularly Lords Mance and Collins) in Dallah Real Estate v Government of Pakistan, which we have discussed here, to suggest that a court must always have jurisdiction to examine matters which are “fundamental” to an arbitration, such as arbitrability of the dispute, whether there was a valid arbitration agreement etc. Counsel then relied on section 48(1)(e) of the Act, which corresponds to art. 5(2)(e) of the New York Convention, to suggest that Parliament clearly contemplates that not only the court of the seat of the arbitration (captured by the words “country in which the award was made”) but also the court of the country whose law governs the arbitration agreement has jurisdiction to set aside the award.
Counsel then argued that the test of jurisdiction under the 1996 Act is therefore not seat, but “subject matter”, for section 2(1)(f) defines an “international commercial arbitration” without reference to its seat, and section 2(1)(e) the jurisdiction of a “court” by reference to the subject matter of the arbitration. Counsel reiterated that section 2(2) only indicates when the Indian court has jurisdiction, and not when it does not, and submitted as a consequence that a Convention award under Part II may be enforced either under Part II or under Part I because the provisions of Part II are “additional” to those in Part I. As an example, counsel pointed out that although sections 8 and 45 deal with similar issues, the right of the defendant to have the parties referred to arbitration is lost under section 8 if he takes the objection after the written statement is filed, but is never lost under section 45. There are of course other differences. The Chief Justice put to counsel that this results in duplication and that it may not have been necessary for Parliament to enact Parts I and II separately, to which counsel said that these provisions are additional for those awards that fall within Part II. Counsel therefore submitted that it is open to an Indian court to exercise the power to appoint an arbitrator under section 11 in respect of a Convention arbitration agreement. Justices Nijjar and Khehar put to counsel the possibility that this is wholly unnecessary since the court under section 45 also has the power to appoint an arbitrator, to which counsel said that this would have the effect of rendering section 11 otiose, for such a power must ipso facto also exist under section 8 as well.
On Thursday, Dr Abhishek Singhvi briefly outlined his submissions, which will be developed next week. In contrast to the submissions of counsel before him, he stated that his case is confined to section 9, and argued that the court is entitled to take an independent view of section 9 – that is, it is possible that section 9 may be invoked in respect of a foreign arbitration even if section 34 or any other provision of Part I cannot be. He started by suggesting that a party may be left entirely remediless if a section 9 power is not available, and gave the example of an arbitration with its seat in Brussels involving a party whose major asset is a castle in the State of Rajasthan. Counsel submitted that the claimant in the Brussels arbitration has only three remedies: (i) obtaining interim relief from a court in Brussels (under its arbitration legislation); (ii) obtaining interim relief from the Tribunal and (iii) obtaining interim relief in respect of property situated elsewhere (for example in America). Counsel submitted that as far as the castle in Rajasthan is concerned, none of these remedies is “worth the paper” it is written on. The Bench put to counsel the possibility that a party may not be entirely remediless, for a civil suit may be maintainable, to which counsel said that it may not be correct to hold that a suit is maintainable despite the existence of an arbitration agreement. In short, counsel’s submission was that “the core of Bhatia” is correct, and the fact that it has engendered other decisions on other sections of Part I should not lead one to conclude that Bhatia is itself incorrect as far as section 9 is concerned.
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