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Vodafone Case : Its Consequences

Vodafone Case : Its Consequences

CA Rashmin Sanghvi
CA Naresh A. Ajwani
CA Rutvik R. Sanghvi


"If I had a world of my own, everything would be nonsense. Nothing would be what it is, because everything would be what it isn't. And contrary wise, what is, it wouldn't be. And what it wouldn't be, it would. -ALICE IN WONDERLAND (LEWIS CARROLL)

The world of Tax Havens is as strange as Alice’s Wonderland. Expect the unexpected. - Rashmin


Contents


Sr. No. Topics Covered
1. Introduction.
2. Analysis of the Case.
3. Consequences of the Case.
4. Consequences on FDI.
Annexures
1. List of SAARs in Income-tax Act.
5. Extract from Honourable Chief Justice Kapadia’s speech.

Note : The same article by the authors has been published in the magazines - “Taxmann’s International Taxation” and in Chamber of Tax Consultants’ “Income Tax Review” (February 2012 issues).

I. Introduction.

I.1 In this case two issues are involved :

i. Taxability of the transaction. Paragraphs II.1 to II.18

ii. Vodafone’s liability to deduct tax at source. Paragraph II.19

In our submission, the income is taxable in India and Vodafone is liable to deduct tax at source. For failing in its duty to deduct the tax – despite advance warnings, Government is entitled to proceed against Vodafone.

Since Honourable Supreme Court (SC) has decided differently, today the law prevalent in India is that the income is not taxable and hence Vodafone is not liable to deduct the tax at source. In our humble submission, with respect to the Honourable Supreme Court, the decision is incorrect. Income is taxable & hence Vodafone is liable to deduct tax at source.

This is a fit case for retrospective amendment in law. Not doing so has serious consequences. Wide scale aggressive tax avoidance through tax havens and their approval by honourable SC creates a risk of equally wide & harsh tax provisions. These will affect all: aggressive tax planners as well as honest tax payers.

We are personally against Retrospective Amendments. Normally, a retrospective amendment means injustice. However, the present case is an open and massive abuse of law. Honourable SC has, in our humble submission, not given justice to India and to Indians. This is a fit case for retrospective amendment.

It is possible that Honourable SC Justices could have considered the consequences on FDI and given such a decision. Not realising that this compromise in law can open up flood gates of abuse of law.

I.2 Notes :

(ii) It is possible that our view is the minority view. Hence this article is presented at length responding to most of the issues raised by supporters of the decision. The important issue is stated in Part IV – consequences of the decision on FDI.

(ii) In the year 2009, we have written a detailed article on this subject - “Vodafone – A Wake Up Call”. It covers the issues: (i) Tax Havens (ii) Substance Vs. Form & (iii) Company, a separate legal entity. Our submission in the article was that Hutchison’s income was taxable in India. This issue is summarised in the present article. Earlier article is available on our website : http://www.rashminsanghvi.com/articles/taxation/vodafone-a-wake-up-call.html

Facts of the case are also explained in that article. Hence we are not repeating these matters in our article. Only the facts necessary to discuss our views are included here.

In this case, taxability & jurisdiction require detailed discussion.

I.3 Key Facts :

3.1 The main companies involved were as under :


HTIL Hutchison Telecommunications International Ltd. – a company incorporated in Cayman Island in 2004. It was listed on Hong Kong and New York Stock Exchanges. It was the seller and earner of Capital Gain.
VIH Vodafone International Holdings BV – a company incorporated in Netherlands. It was the purchaser of one share of CGP.
CGP CGP Investments (Holdings) Ltd. (CI) – a company incorporated in Cayman Islands in 1998. It is the company whose share has been transferred.
HEL Hutchison Essar Ltd. – a company incorporated in India. It is the main business company. Controlling share holding in the same has been transferred by virtue of Share Purchase Agreement and several related documents. Transfer of CGP share was one of several documents.

Other companies in the structure are not considered in this article.

3.2 Hutchison group is a Hong Kong group. Its listed company (HTIL) held a major portion of shares in HEL through a structure of several companies. In simple words, the investment flow through companies was as given below :

Cayman Island à BVI à Cayman Island à Mauritius à India.

3.3 Some important communications were as under :

• For the sale, HTIL invited bids for sale of its “equity interests in HEL”. Vodafone Group Plc bid for the equity interest. The legal transaction was purchase of 1 share of CGP from HTIL. A Share Purchase Agreement (SPA) was signed on 11.2.2007 between VIH and HTIL, whereby HTIL agreed to procure the sale of CGP share.

• The parties made application to FIPB in India, where it was declared that Vodafone was purchasing from Hutchison its stake in the Indian business.

• HTIL made declaration to the stock exchanges that it was selling its stake in the Indian business to Vodafone. It made several such communications to the shareholders and public at large.

I.4 Short forms used in this Article.

ABA - Azadi Bachao Andolan.
CIT - Commissioner of Income-tax.
DTA - Double Tax Avoidance Agreement.
GOI - Government of India.
ITA - Income-tax Act.
LOB - Limitation of Benefits.
NRI - Non-Resident Indian.
SC - Supreme Court.
SPV - Special Purpose Vehicle. A company formed for a special purpose.
UAE - United Arab Emirates.



II. Analysis of the Vodafone Case

II.1 Normal view / Assessee’s view :

A normal view would be that 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.

II.2 Department’s view – in brief :

Department’s claim, in essence was: CGP is a nullity, a sham entity. Transfer of CGP’s shares has no substance. The parties to the transfer themselves laid bare the real transaction – that of sale of HEL stake. Real transfer is: The transfer of substantial interest (67% stake) in HEL. This controlling shareholding has its situs in India. Since the transferred asset is situated in India, the capital gains arising on the same is liable to tax in India. VIH was therefore required to deduct tax at source.

II.3 Honourable Supreme Court has given a ruling that – only the legal transaction –sale of CGP share - is to be considered. By selling CGP share, the seller may have transferred its interests in HEL. However, Indian interest arises due to sale of CGP share. It does not arise out of the SPA (which recorded the real facts). All the arguments of the revenue were rejected.

II.4 Crux of the matter :

Should one simply consider the legal form of the transaction (i.e., sale of one share in CGP); or should one consider real form - the entire set of facts as stated by the parties themselves in the SPA and various other correspondences? Is the case fit for considering “Substance over Form”? Is the case fit for lifting the Corporate Veil?

A few facts in the international tax practice may be observed before discussing specifics of the case.

II.5 Tax Havens are designed to help the rich people and MNCs evade/ avoid taxes in regular countries like India, Germany, France etc. During the American & European financial crisis (September, 2008 onwards) there has been a huge uproar that these tax havens are bleeding the tax revenues of regular countries. Global attempts are being made to curb this tax evasion and avoidance.

In Vodafone’s case, clearly a series of tax havens and SPVs have been used to avoid Indian taxes.

By holding this transaction as a tax free transaction, Honourable SC has given a licence to the tax payers to use tax havens, abuse treaty shopping and bleed India’s tax revenue. Not recognising the true character of tax havens and their SPV – despite a global uproar against them is, in our submission, an error.

II.6 Tax Avoidance Mechanisms :

(i) Transfer Pricing Mechanism in short means - shifting or transferring taxable profits to a tax haven by use of SPVs and elaborate paper work. This mechanism is used in regular trade.

(ii) For shifting capital gains out of the host country and into a tax haven a different mechanism is used. Hold the operating company’s shares through an SPV in a tax haven. Then claim that the SPV is a separate legal entity. Whenever you want to sell the operating company (or your stake in the operating company), transfer the shares of the SPV. You have shifted the situs of entire operating company to a tax haven and avoided the tax.

Both these mechanisms are there to be seen by everyone. Now the issue is, do we need specific legislation to curb these practices?

(i) TP : Our submission is if something is sham, one does not need any legal provision to ignore the sham and go for substance. In cases of under invoicing and over invoicing, the Income-tax department was disallowing expenditure and making additions to taxable income decades before the TP provisions were introduced into the law. However, proving under/ over invoicing is difficult. TP provisions provide a mechanism to the department for taxing such transactions. They also bring in reporting requirements and shift the onus for proving that the transactions are arm’s-length on to the assesses. The fact that TP provisions exist in the Income-tax Act, does not mean that in the absence of TP provisions the assessing officer was not able to tax income transferred outside India.

(ii) Capital Gains : In the present case it is apparent that Hutchison had a preordained corporate structure to shift its taxable transaction from India to a tax haven through the use of tax haven SPVs. Apart from the operating companies, rest of the structure was and is sham. It does not need any specific provision in law to ignore this structure, to recognise that – the controlling shareholding in an Indian company has been sold. Department is fully entitled to ignore all tax haven SPVs and tax the income arising in India.

This income is covered within the Scope of Total Income under Section 5 itself. There is no need even for the deeming provision of Section 9. Honourable SC’s observations that Government of India failed in bringing about the requisite legal provisions – is, in our humble submission, an error.

II.7 In paragraph 73 Honourable SC has laid down a five step test to determine whether a structure is “Preordained transaction which is created for tax avoidance” or an “investment to participate in India”. Honourable SC considers all the business done and taxes paid by HEL. Again in paragraph 91 on page 101 the decision says: “From 2002-03 to 2010-11 the Group has contributed an amount of Rs. 20,242 crores towards direct and indirect taxes on its business operations in India and concludes that neither HTIL nor VIH was a “fly by night operator.”

Our submissions : Operating company – HEL got substantial tax exemption U/s. 80 IA. Investor companies got exemption U/s. 10 (23) (G) as it was available till 31st March, 2007. In any case telecom operating companies were making losses. Hence payment of direct taxes cannot be substantial.

Real issue is different. Department has never challenged the genuineness of HEL. It is a genuine company. What was under challenge was the genuineness of CGP. CGP is a tax haven company with no accounts, no business. Its only purpose is to hold several investments outside India and avoid Indian taxes.

Just because an operating company pays taxes in India, can the investor company be exempted from Capital Gains tax? To compare, Hindustan Unilever Ltd. is present in India for 100 years. It has paid huge direct and indirect taxes over 100 years. Is it adequate reason to say that – if Unilever Plc sells its holding in Hindustan Unilever; such capital gains should not be taxed? It is like considering the merits of student A and passing student B. We humbly and with respect submit that this is an error.

II.8 In international investments, companies plan their “Exit” even before they invest. Use of tax haven SPVs is made to facilitate tax free exits. The fact that this structure existed from 1994 to 2007 means that Hutchison had pre-planned tax avoidance structure for thirteen years. This is no justification to hold a tax avoidance structure as “participative investment” structure. And even when there is a genuine investment, when the investment yields capital gains, the tax has to be paid. Irrespective of whether the investment was held for 13 years or 100 years.

II.9 Department had presented massive documentary evidence about the real conduct of the assessee. Correctness of this evidence was admitted by Vodafone before Bombay High Court. SC has ignored/ glossed over these facts.

Share Purchase Agreement (SPA). Vodafone refused to give the SPA to the department and initially, even to Bombay HC. On insistence by Honourable SC, Vodafone relented and submitted the document.

SPA establishes beyond any doubt that the assessees themselves had ignored CGP’s existence. Vodafone & Hutchson’s conduct established that they have directly sold the 67% stake in the Indian Company – HEL.

There is a series of decisions that in any tax matter, the Court has to consider all relevant facts in a holistic manner. It is a settled principle of law. Ignoring SPA & parties’ conduct and upholding share transfer of CGP as the only transaction that mattered is incorrect. This, in our humble submission, is an error.

Revenue department’s submissions were in a few thousand pages. We are raising here only a few important issues.

II.10 What was on sale; and by which party to which party :

Let us see the specific statements in the order :

Para 11. On 22.12.2006, an Open Offer was made by Vodafone Group Plc. on behalf of Vodafone Group to Hutchison Whampoa Ltd., a non-binding bid for US $11.055 bn being the enterprise value for HTIL’s 67% interest in HEL.

Observations :

It can be seen that Vodafone Group Plc (it is a UK registered parent company of Vodafone group) made the offer. Offer was made to Hutchison Whampoa Ltd. (not even to HTIL). The offer was for – HTIL’s 67% interest in HEL.

Para 12. On 22.12.2006, a press release was issued by HTIL in Hong Kong and New York Stock Exchanges that it had been approached by various potentially interested parties regarding a possible sale of “its equity interests” (not controlling interest ) in HEL. That, till date no agreement stood entered into by HTIL with any party.

Observations :

“Equity interests” and “Controlling interest” are distinguished. Does it suggest that “Equity interest” and “Controlling interest” are to be treated differently? The revenue has claimed that HTIL has sold its “Controlling interest” in HEL – the same phrase as used by VIH while reporting to SEC in Washington and London stock exchanges. (See para 23 of the judgement).

Para 21. On 11.02.2007, VIH and HTIL entered into an Agreement for Sale and Purchase of Share and Loans (“SPA” for short), under which HTIL agreed to procure the sale of the entire share capital of CGP which it held through HTIHL (BVI) for VIH. Further, HTIL also agreed to procure the assignment of Loans owed by CGP and Array Holdings Limited [“Array” for short] (a 100% subsidiary of CGP) to HTI (BVI) Finance Ltd. (a direct subsidiary of HTIL). As part of its obligations, undertook to procure that each Wider Group Company would not terminate or modify any rights under any of its Framework Agreements or exercise any of their Options under any such agreement. HTIL also provided several warranties to VIH as set out in Schedule 4 to SPA which included that HTIL was the sole beneficial owner of CGP share.

Observations :

It was HTIL which procured sale of shares of CGP; assignment of loans owed by CGP; each “Wider Group company” would not terminate or modify any rights under any of its Framework agreements; etc. HTIL also provided several warranties to VIH.

An application was made to FIPB for transfer of share of CGP. In one such communication, it was stated as under :

Para 32. ….. However, in practice the directors of HEL have been appointed pro rata to their respective shareholdings which resulted in 4 directors being appointed from the Essar Group, 6 directors from HTIL Group and 2 directors from TII.

Observations :

The directors were appointed by HTIL group and not CGP which was supposed to be the investment vehicle that was sold. The directors were not even appointed by the immediate shareholder companies of HEL. This shows - who was the real owner of HEL.

Amongst the several steps undertaken after the receipt of FIPB approval, one was the payment of consideration for sale by VIH to HTIL. (Para 46 (xi)). The funds were not even paid to the shareholder of CGP. These were straight remitted to HTIL!

CGP did not even have any accounts prior to 2007. It did not even have a bank account. The companies in between HTIL and CGP also did not have a bank account. The funds were paid directly to HTIL. All parties involved in the transaction had ignored the existence of CGP. Only when the taxman asked, they claimed that CGP shares were sold.

II.11 Share Purchase Agreement (SPA) :

11.1 VIH and HTIL entered into a SPA for sale of CGP share. It should be noted that the agreement was signed by HTIL and not by the shareholder of CGP. There were 3 companies between HTIL and CGP. It clearly suggests that other companies were treated as non-existent.

The revenue highlighted some of the features (para 72) :

(v) the SPA ignores legal entities interposed between HTIL and HEL enabling HTIL to directly nominate the Directors on the Board of HEL;

(vi) Qua management rights, even if the legal owners of HEL’s shares (Mauritius entities) could have been directed to vote by HTIL in a particular manner or to nominate a person as a Director, such rights existed dehors the CGP share;

(vii) Vide clause 6.2 of the SPA, HTIL was required to exercise voting rights in the specified situations on the diktat of VIH ignoring the legal owner of CGP share [HTIHL (BVI)]. Thus, according to the Revenue, HTIL ignored its subsidiaries and was exercising the voting rights qua the CGP and the HEL shares directly, ignoring all the intermediate subsidiaries which are 100% held and which are non-operational. According to the Revenue, extinguishment took place dehors the CGP share. It took place by virtue of various clauses of SPA as HTIL itself disregarded the corporate structure it had set up;

(viii) As a holder of 100% shares of downstream subsidiaries, HTIL possessed de facto control over such subsidiaries. Such de facto control was the subject matter of the SPA.

This was one of the most important issues of the facts. One cannot look at only one aspect that a share of CGP was transferred. The company by its own admission has stated that it was the owner of Indian company’s share.

11.2 The Supreme Court has observed as under :
“At the outset, we need to reiterate that in this case we are concerned with the sale of shares and not with the sale of assets, item-wise. The facts of this case show sale of the entire investment made by HTIL, through a Top company, viz. CGP, in the Hutchison Structure. In this case we need to apply the “look at” test.”

It further states :

“If one applies the look at test discussed hereinabove, without invoking the dissecting approach, then, in our view, extinguishment took place because of the transfer of the CGP share and not by virtue of various clauses of SPA.”

With due respect, we do not agree with the observations. The SPA states - what is the real contract. CGP share is only a title document of what is actually transferred. If one considers only the title document, and not the main transaction, is it correct!

The department has filed several documents as a part of its submissions. The entire set of documents represent exactly what were the real assets. None of the same have even been referred to in the decision!

II.12 Alter-ego :

The Honourable Supreme Court has observed as to what is alter ego. In para 74 it states: “For instance, take the case of a one-man company, where only one man is the shareholder perhaps holding 99% of the shares, his wife holding 1%. In those circumstances, his control over the company may be so complete that it is his alter ego. But in case of multinationals it is important to realise that their subsidiaries have a great deal of autonomy in the country concerned except where subsidiaries are created or used as a sham.”

MNCs like Unilever Plc & Colgate USA have their subsidiaries in India. These are autonomous companies. But same cannot be said about tax haven companies. CGP did not have any independent existence. HTIL was taking decisions. Agreement was entered into with HTIL and not the immediate holding company of CGP. CGP did not even have a bank account. CGP Yet it was considered not as an alter ego but an independent company!

In our view, this was not even a case of substance versus form. It was simply a case of looking at facts – as announced by the assessee. What more can one look at!

If a person holds up a veil (a corporate veil), hides behind the veil, then probably he can ask you not to look behind the veil. But when the person himself throws away the veil, he is exposed before the whole world. Then he has no right to claim that you must look at the absent veil.

Having considered the decision by Honourable SC, let us see some principles of law.

II.13 Company :

It is presumed that a company is a separate legal entity – distinct from its shareholders as well as directors. This is a legal presumption. Considering company to be a separate entity; law grants limited liability to the shareholders. However a registration certificate and one file in a tax haven consultant’s office does not mean a company. The shareholders also have to act as if the company is a separate legal entity; company’s assets are separate assets.

When the company is simply a paper company, when the tax payers themselves ignore its existence and treat the company’s assets as their own assets, that paper certificate has no value. Company does not have an independent existence. It needs to be ignored for all practical purposes.

Courts may lift the Corporate Veil when a controlling interest is being considered or when a company is incorporated with improper objective. Tax evasion is an improper objective. Courts may not knowingly permit people abusing the legal entity & status granted to a company when that status is being abused.

In CIT Vs. Sri Meenakshi Mills Ltd., AIR 1967 SC 819, the Supreme Court held that: “The Income tax Authorities were entitled to pierce the veil of corporate entity and to look at the reality of the transaction to examine whether the corporate entity was being used for tax evasion. In this case, a separate legal entity was brought into existence outside the taxable territory with the ulterior motive of evading the tax obligation by the assessees.”

II.14 Title Document :

When HTIL transferred the shares of a Cayman Island company, what was the value of the share certificates? These shares are just like a Warehouse Receipt (WR). A WR by itself has no value. It represents the goods. Every time the WR is sold, in substance, the goods are being sold. If the goods are lying in a ware house in India; and the WR is transferred outside India, it is still a transaction liable to Indian taxes.

The form is: the WR is being transferred. The substance is, the goods in India are being transferred.

In Vodafone’s case, the shares of the Mauritius Company as well as the shares of the Cayman Island Company were nothing more than warehouse receipts or title documents. In themselves, the CGP shares had no value. The companies had no substance and no independent existence.

One can go by “Form” when the “Form” represents the facts. However, when the form does not represent facts, one has to look at the real facts – substance. Form has to be ignored. It is the duty and right of the assessing officer to ignore the form.

II.15 International Holding Structures :

In which cases would an interposed company be held to be a sham or tax avoidant?

Where off-the-shelf shell companies are used and conduct of the holding and operational group companies shows that these shell companies are treated as non-existent - the Revenue has the power to disregard the structure and accordingly tax the gains in India.

Of course, not all interposing companies are sham or tax avoidant. This would be the case where proper board meetings are held; amongst independent directors; discussing strategic and commercial matters; at regular intervals. If these facts can be proved conclusively through board meeting minutes, conduct and correspondence, it would be very difficult for the Revenue to ‘look through’ such an interposed company – even if it is incorporated in a low-tax jurisdiction.

However, it is apparent from the facts presented by the Revenue department before both the Honourable Bombay High Court and the Honourable Supreme Court that the all intermediary companies in the Hutchison’s holding structure were acting as puppets - with common directors, taking synchronised decisions, on an automatic basis, as per instructions from the main holding company. Unfortunately, the Honourable Supreme Court has not considered these facts. On the contrary, it has held that this structure was a bonafide holding structure on the basis of the duration the shell structure existed, the period of business operations in India, the amount of taxes paid, the timing of the exit, the continuity of the business on such exit, etc.

In our humble submission, the Honourable Supreme Court has incorrectly held that the Hutchison structure in this case is not a sham!

II.16 Assessee’s Conduct :

This was one of the most important aspects which seems to have been ignored by the Honourable Supreme Court. HTIL, Hutchison Whampoa Ltd. and Vodafone communicated with the shareholders, various Government authorities and public at large that what was been transacted was the equity interests of HEL. In almost all these statements, CGP was ignored. Hutchison Chairman also wrote to its shareholders in its annual report for the year 2006 as under: “I am particularly pleased to report on the proposed sale of the Group’s interests in India, ….. attracted some of the world’s leading mobile operators to approach and ultimately make an offer for the Group’s entire interests in its Indian mobile telecommunications operation comprising Hutchison Essar Limited and its subsidiaries (“Hutchison Essar”). Most of these statements are available even today on relevant websites. It is only from 2007 that CGP was mentioned in the annual reports. CGP is not even mentioned in the list of important subsidiaries.

II.17 Ratio of Ramsay’s decision.

The Honourable SC in Vodafone case has considered some English Court decisions. Let us analyse these observations.

17.1 Ramsay decision though a landmark decision is only one of the many anti-tax avoidance decisions ruled by UK Courts. The UK Supreme Court (or the House of Lords as it was called previously) has moved on and incorporated several other principles in adjudicating on anti-tax avoidance cases. The SC in Vodafone has totally disregarded the later decisions which have analysed and modified the ‘Ramsay Principle’ to quite some extent. However, even if the SC had based its decision only on Ramsay, the ruling would have been in favour of the tax revenue. This is because of the misinterpretation of the decision by the SC as mentioned further.

17.2 The SC has used the principle of ‘look at’ from Ramsay to justify that the transaction should be looked at in a holistic manner. Ramsay never says this! The phrase ‘look at’ is mentioned only twice in the whole decision.

17.3 At page 15 by Lord Wilberforce :

Given that a document or transaction is genuine, the court cannot go behind it to some supposed underlying substance. This is the well known principle of I.R.C. v. Duke of Westminster [1936] A.C. 1. This is a cardinal principle but it must not be overstated or overextended. While obliging the court to accept documents or transactions, found to be genuine, as such, it does not compel the court to look at a document or a transaction in blinkers, isolated from any context to which it properly belongs. If it can be seen that a document or transaction was intended to have effect as part of a nexus or series of transactions, or as an ingredient of a wider transaction intended as a whole, there is nothing in the doctrine to prevent it being so regarded: to do so is not to prefer form to substance, or substance to form. It is the task of the court to ascertain the legal nature of any transaction to which it is sought to attach a tax or a tax consequence and if that emerges from a series or combination of transactions, intended to operate as such, it is that series or combination which may be regarded. For this there is authority in the law relating to income tax and capital gains tax—see Chinn v. Hochstrasser [1981] 2 W.L.R. 14, I.R.C. v. Plummer [1980] A.C. 896.

As can be seen clearly, Lord Wilbeforce used the phrase “look at” to mean that the Court must look at the context and surrounding facts, and not just the transaction. On the other hand, Honourable SC has only gone on the fact of one share of a Cayman Islands company being sold and not the SPA, declarations and intention of the parties!

17.4 The phrase is mentioned for the second and last time in Lord Wilbeforce’s analysis of anti-tax avoidance case law before Ramsay at page 5 :

I will now refer to some recent cases which show the limitations of the Westminster doctrine and illustrate the present situation in the law.

1. Floor v. Davis [1978] Ch. 295 (1979) 2 W.L.R. 830 (H.L.). The key transaction in this scheme was a sale of shares in a company called IDM to one company (FNW) and a resale by that company to a further company (KDI). The majority of the Court of Appeal thought it right to look at each of the sales separately and rejected an argument by the Crown that they could be considered as an integrated transaction. But Eveleigh L.J. upheld that argument. He held that the fact that each sale was genuine did not prevent him from regarding each as part of a whole, or oblige him to consider each step in isolation. Nor was he so prevented by the Westminster case. Looking at the scheme as a whole, and finding that the taxpayer and his sons-in-law had complete control of the IDM shares until they reached KDI, he was entitled to find that there was a disposal to KDI.

Here again, the English Court has gone on to support the dissenting decision of Lord Eveleigh in Floor v. Davis (which had the same modus operandi) and held that all steps can be looked at as one and not to be looked at in isolation.

17.5 On treating company as a separate entity :

Lord Wilberforce’s decision mentions four cardinal principles. The third one on page 4 states :

It is for the fact-finding commissioners to find whether a document, or a transaction, is genuine or a sham. In this context to say that a document or transaction is a "sham" means that while professing to be one thing, it is in fact something different. To say that a document or transaction is genuine, means that, in law, it is what it professes to be, and it does not mean anything more than that.

17.6 On looking at not just share transfer but also at all other facts :

3rd Para on Page 4 of the decision mentions :

For the commissioners considering a particular case it is wrong, and an unnecessary self limitation, to regard themselves as precluded by their own finding that documents or transactions are not "shams", from considering what, as evidenced by the documents themselves or by the manifested intentions of the parties, the relevant transaction is.

17.7 On the fact that legal form = substance.

Ramsay mentions another decision of Floor V. Davis where a similar CGP like interposing company was used. Though that decision went in favour of the taxpayer, the judge in Ramsay upheld the minority judge’s dissenting decision :

Lord Fraser of Tullybelton :

The view that I take of this appeal is entirely consistent with the decision in Chinn v. Hochstrasser, supra, and it could in my opinion have been the ground of decision in Floor v. Davis [1980] A.C. 695 in accordance with the dissenting opinion of Eveleigh L.J. in the Court of Appeal with which I respectfully agree. In that case the taxpayer wished to dispose of shares in a company to an American company called KDI at a price which would have produced a large chargeable gain. In order to avoid the liability to capital gains tax he adopted a scheme which involved the incorporation of another company, FNW, to which he transferred his shares in order that they could subsequently be transferred by FNW to KDI Eveleigh LJ. said at [1978] 3 W.L.R. 360, 376C :

"I see this case as one in which the court is not required to consider each step taken in isolation. It is a question of whether or not the shares were disposed of to KDI by the taxpayer. I believe that they were. Furthermore, they were in reality at the disposal of the original shareholders until the moment they reached the hand of KDI, although the legal ownership was in FNW. I do not think that this conclusion is any way vitiated by Inland Revenue Commissioners v. Duke of Westminster. In that case it was sought to say that the payments under covenant were not such but were payments of wages. I do not seek to say that the transfer to FNW was not a transfer. The important feature of the present case is that the destiny of the shares was at all times under the control of the taxpayer who was arranging for them to be transferred to KDI The transfer to FNW was but a step in that process."

In my opinion the reasoning contained in that passage is equally applicable to the present appeals.

In our submission in Ramsay, the Honourable English Court ruled that one must look at the whole transaction holistically and then arrive at a conclusion. Court specifically asked not to look at one solitary transaction out of a series. In Vodafone’s case Honourable SC has quoted Ramsay’s decision and did opposite of the ratio of the decision.

In our humble submission, Honourable SC has erred by misapplying English decisions in Vodafone case.

II.18 Conclusion on Taxability :

HTIL sold its 67% controlling share holding in the Indian company HEL (together with considerable other rights) to VIL. This was a transfer of an Indian capital asset. The capital gains are liable to Indian Income-tax.

In our humble opinion, the decision amounts to miscarriage of justice. This is a fit case for retrospective amendment of the law to set right the injustice.

II.19 Section 195 :

Extract from Late Mr. Palkhivala’s commentary on Section 1 (on page no. 4 of Chapter I – Eighth Edition)

“Those sections which impose the charge or levy should be strictly construed; but those which deal merely with the machinery of assessment and collection should not be subjected to a rigorous construction but should be construed in a way that makes the machinery workable ( 8 ITR 442 – CIT Vs Mahaliram). Sections which merely provide a machinery for collection of a charge which is imposed in general terms elsewhere, cannot restrict the attachment of the charge, being “in aid and not in derogation of it” (13 TC 563 – IR Vs Countess of Longford).”

19.1 Does the Government of India have jurisdiction to force a Non-Resident to deduct Indian tax at source? Does the Parliament have jurisdiction to make laws with extra territorial operations?

19.2 Honourable SC – the majority bench decision in paragraph 89 states that since the transaction is not liable to Indian tax, the question of TDS does not arise.

As we have already submitted earlier, this transaction is liable to tax in India.

In GVK industries case Honourable SC has decided that :

(i) Normally Parliament cannot enact a law which requires operations outside the territory of India.

(ii) However, where sufficient nexus exists, in the interests of India and Indians, Parliament can enact such laws.

Vodafone had admitted before FIPB that it will comply with the Indian law. It cannot go back on its commitment.

19.3 In the minority judgement, Honourable justice K. S. Radhakrishnan decides that in section 195 the term “Person” covers only Indian residents. It does not cover non-residents.

In our submission, the term “Person” covers all residents as well as non-residents. Very simple illustration: A non-resident has a permanent establishment in India. Say, a foreign bank’s branch in India. The non-resident conducts its business in India and makes several payments. Can it claim exemption from TDS provisions because it is a non-resident? Certainly not.

The issue is :
Does the non-resident have sufficient nexus with India? In this case Vodafone had sufficient nexus and it had agreed to abide by the Indian law. In our view, Vodafone is liable to comply with Indian TDS provisions.

Conclusion :
Hutchison’s income is taxable in India. Vodafone is liable to deduct tax at source and pay to the Government of India.



III. Consequences of the case

Hutchison’s tax planning, Vodafone’s execution and Honourable Supreme Court’s decision pause a serious risk to the tax paying people of India. Let us elaborate the risk.

To grasp real impact of this risk, please consider development of Income-tax Act over past several decades. Look at the flow, the process of development rather than trying to interpret an individual section. How simple was the earlier Act, how complex it is now and how much more complex it will be in near future. Who is responsible for constantly increasing complexity of the law?

III.1 Tax Planning – Cause of SAAR & GAAR :

There was a time when the law was simple. Then people started diverting their income to wife & children. Hence Section 64 had to be introduced. Now if a parent gives a gift to a spouse or minor children, the income is clubbed. This was a planning done by a tax payer himself. Plugging such loopholes was easy.

Then came the tax planning of discretionary trusts, oral trusts, AOP, HUF and multiple HUFs. These plans required advice from expert tax consultants. Those who have practised in the decades of 1970’s and 1980’s would remember entire series of tax planning – plugging the loop hole by amending the law – tax planning to avoid the plug – next plug – next plan and so on. All this planning was worthwhile when tax rates were high. Today with low tax rates and high exemption limits this kind of planning has lost much of its importance. We have more than 30 SAAR provisions in the Income-tax Act. All these have been introduced in the law because some one did aggressive planning & some Courts permitted such planning.

New forms of aggressive tax planning are : Use of tax havens to avoid taxation. Treaty Shopping, Resorting to Transfer Pricing; Lobbying before Government of India and getting laws amended to avoid tax for the rich – at the cost of middle class (some instances – Tax concessions to FIIs and zero tax on long term capital gains); & so on. This needs the help of tax consultants expert in International tax planning. TP, CFC, GAAR & similar provisions are the result of the new planning.

Our submission : The Greedy Tax Planner is responsible for aggressive amendments in the law. Ultimately, the greedy tax payer does not bother. But the honest tax payer suffers.

III.2 Aggressive Tax Planning is more harmful than black money.

When a person simply resorts to “cash” transactions- or black money, the Investigation Wing and Enforcement Directorate will take care of him. The honest section of the society is not worried about these people. Because the honest have no black money.

Aggressive tax planning is responded to by aggressive anti-avoidance legislation. This aggressive legislation is then used by the aggressive officers to harass all assessees. The assessee who has already evaded tax does not mind. He has already saved the cost of harassment and much more. How does an honest tax payer face the harassment?

Some people believe in Zero Tax Religion. There are some tax payers who will go to any extent with a religious zeal to ensure that they do not pay any tax at all. And there are consultants who will develop any theory and any products to have more & more followers of this religion. They will have elaborate paper work. And little beyond paper work. (Like CGP in this case.) Based on just paper work they would expect to pay zero tax.

One has to wake up & question whether this is the right tax practice? Or is it the invitation to GAAR & other harsh provisions?

III.3 Tax Law Drafting :

When the draftsman drafts the law - he may have following issues in mind: There are greedy tax payers. There are tax consultants who advise on tax evasion as well as aggressive tax planning. And the department has lost before the Court of Law in many cases. Hence the draftsman goes on drafting taxing provisions which have wide deeming provisions. One can give a series of illustrations on aggressive drafting of the law. And when he drafts the penal provisions, they are harsh. Punishment is compulsory. Government doesn’t trust CITs with any discretion. And in some cases, even Courts are not given discretion. These harsh provisions become the tools in the hands of the assessing officer to beat the tax payer. Then honest people doing honest transactions can be/are victimised.

The commissioner who is out to make money meets with dishonest tax payer and greedy tax consultant. All of them are happy. They make money at the cost of the nation.

However, when the greedy tax commissioner meets an honest tax consultant or an honest tax payer, there is friction. And the draftsmen have not made provision for this eventuality. They do not build in protection for the honest assessees. There are appellate provisions. However the AO has an array of tools available to frustrate the tax payer despite appellate provisions. Ultimately the honest tax payer suffers. His sufferings are due to the aggressive tax planning done by some smart people.

III.4 Impractical law :

When the Government goes on adding strict, far reaching deeming provisions in the law, one day it becomes an Impractical law.

FERA was an Impractical law trying to control each & every foreign exchange transaction. It could not. Smuggling & hawala were wide spread. Hence Government went on giving absolute powers to enforcement directorate. What happened was wide scale hawala, flight of capital outside India and weakening of the Indian economy. This law was violated by anybody who had money & power – politicians, bureaucrats and businessmen. In Jain Hawala case Honourable Supreme Court could not punish the guilty. Hasan Ali Khan’s case also shows that the real people behind Hasan Ali Khan have succeeded in avoiding legal action. So far. FEMA is a law which is not respected by the powerful in the country. And the powerful are so powerful that even Supreme Court & Reserve Bank of India cannot punish them. Only people who are punished under the FEMA are small & medium sized people (SME). This is a series of proofs that an impractical law fails.

Similarly, Estate Duty Act was an impractical law. 85% estate duty. Almost entire estate would be wiped out if one were to pay full estate duty. Hence what happened was massive tax evasion. Hardly a few crores were collected @ 85% rate by the department.

Our experience with Transfer Pricing is fresh. Earlier, people used to resort to under/ over invoicing. Department was making additions on “Gross Profit Percentage” and other bases. But MNCs use international tax haven operations and it becomes difficult for the department to catch them. So they brought about TP provisions.

These provisions give wide deeming powers to the TPO. Many people have suffered so widely and deeply because of rampant use of the power by TPOs. For every assessee who has suffered by an absurd TP order, the root cause is the MNC that did transfer pricing and invited TP provisions.

III.5 Direct Taxes Code will have all the SAAR provisions from the Income-tax Act, 1961. (A list 30 SAAR provisions is given as Annexure 1.) In addition there will be some more SAAR provisions like CFC. And there will be GAAR. GAAR can be an open licence for the greedy AO to harass the honest assessee. What is the protection for an honest tax payer from a greedy tax officer?

GAAR provisions as they have been drafted under DTC bill, already cause shivers for the tax payers. With such wide deeming provisions, every tax payer is exposed to the harassment by the greedy officers.

Hutchison’s tax avoidance planning justified GAAR provisions. Now honourable SC decision can make the Government to expand the GAAR provisions, make deeper and wide reaching TDS provisions and expose an entire tax paying public to harassment. Then the Income-tax officer can start behaving like the Enforcement Officers under FERA.

It is better to bring about a specific retrospective amendment. Tax Hutchison’s income. Recover tax from Vodafone. But leave GAAR provisions as reasonable provisions. Provide adequate safety for the honest tax payer.



IV. Consequences of the decision on FDI

IV.1 Some people have said that foreigners wanting to invest in India need clarity & certainty in tax law. A liberal tax policy would attract more Foreign Direct Investment into India.

Some professionals say that Honourable SC could have considered this issue and hence the decision is in favour of the foreign investor. (Please see the Annexure for Honourable Justice Kapadia’s views in the matter.) If it is so, it is unfortunate.

In our submission, any investor who wants to invest in India and make profits / gains from India, must be prepared to pay Indian taxes on the profits/gains. Government of India has to announce a clear and consistent policy: “If you make profits in India, you pay taxes in India”. There should be no confusion. The uncertainty has been created by people who do the tax planning, not by GOI.

Assume that a Government should exempt tax on FDI to attract FDI. Tatas have invested in Corus and Jaguar Land Rover – two British Companies. Will the British Government exempt Tata’s incomes from these two companies?

IV.2 Unfortunately, Government of India has been confused and inconsistent. A long history is stated below in short :

2.1 In the year 1991, Government of India started economic liberalisation. By 1992-93 India was being considered as an investment opportunity.

2.2 India had signed Double Tax Avoidance Agreement (DTA) with Mauritius in the year 1984. At that time Mauritius was a small economy and probably no one knew its existence.

2.3 In 1993 Mauritius changed its tax and corporate laws and became a tax haven. Mauritian Government made massive campaign to attract NRIs & investors. Appeal was: Use India-Mauritius DTA and save taxes. Mauritius became popular centre for treaty shopping and became well known world - wide.

2.4 Income-tax department was clearly against treaty shopping. However, the then Finance Minister Dr. Manmohan Singh made a public statement. “I am more interested in foreign investment than in Income-tax”. Department was instructed to be silent.

2.5 Government signed DTA with two more tax havens - Cyprus & Malta. It is alleged that massive money laundering and round tripping through these tax havens started.

2.6 Ketan Parekh manipulated Indian stock exchanges by using Mauritius SPVs. Share prices of a few scripts rose. Sensex rose. When the scandal was exposed, markets crashed. Indian economy and Government were paralysed for some time.

2.7 Still Government took no action to scrap or amend the DTA.

2.8 FIIs were widely using Mauritius for treaty shopping. Around the year 2000 some intelligent income-tax commissioners investigated and found that the Mauritian SPVs had no substance at all. They passed assessment orders denying treaty relief to such SPVs.

Some tax consultants and a bank made a huge campaign and literally frightened GOI. “If department will keep denying treaty relief, then FDI will stop.” Media played along with the campaign.

Government was terrorised. Concerned commissioners were transferred on punishment postings. CBDT issued circular No. 789 dated 13th April, 2000; and instructions asking the department to grant DTA relief. CBDT Chairman came on television to placate the campaigners assuring them of DTA relief.

This was a successful black mail of GOI by a handful of tax consultants and tax payers.

2.9 In the meanwhile bleeding of tax revenue accelerated. GOI was losing tax revenue of a few thousand crores.

2.10 Azadi Bachao Andolan – an NGO and a retired CIT filed a Public Interest Litigation in the Delhi High Court. Their contention was: Abuse of Indo-Mauritian DTA was causing huge tax losses to India. CBDT circular permitting treaty shopping was illegal and should be cancelled. Delhi High Court held the circular illegal.

2.11 If GOI had accepted Delhi H.C. judgment, it would have gained substantially. However, a most curious turn of events took place. GOI joined the case in Supreme Court. Government argued in favour of continuing the DTA and against its own tax revenues.

A lot of things happened.

Finally Honourable Supreme Court ruled in Azadi Bachao Andolan case as under. There was no Limitation of Benefits (LOB) clause either in the DTA or in the Income-tax Act. Hence treaty shopping was valid. This was in the year 2003.

2.12 From 2003 to 2012 GOI has failed amending the law and bringing out an LOB clause or any provision preventing treaty shopping. Country’s tax revenues continue to be lost on a massive scale.

2.13 When too many questions were raised on abuse of Indo-Mauritian DTA, GOI started negotiations with Mauritius to amend the DTA. Negotiations went on for ten years with no results. Many tax consultants started believing that some powerful ministers wanted treaty shopping to continue.

2.14 GOI went ahead and modified Indo-Singapore DTA permitting treaty shopping subject to some conditions.

2.15 Some judicial decisions held that Investors from United Arab Emirates (UAE) cannot take benefit of India-UAE DTA. There is no tax in UAE. If there is no double tax, how can there be a Double Tax Avoidance! GOI modified the DTA (protocol) permitting DTA relief to investors from Dubai. Wide scale permissions have been given by GOI to resort to treaty shopping. All these permissions are ostensibly for attracting FDI. But have also resulted in permitting round tripping.

2.16 Round Tripping.

If foreigners want tax exemption for investing in India, why not Indians/Indian residents?

We the ordinary people keep complaining about the injustice. Smart people go ahead and resort to round tripping.

RBI has expressed that Round Tripping is not permitted. Yet the Tatas & Birlas resorted to it in “Idea”. Essar resorted to it for investing in HEL. And now it is rumoured that Essar will claim refund of taxes that it has paid on the latest sale of its SPV to Vodafone.

If you have smart international tax advisor, you pay zero tax. Otherwise pay full tax. Is this the consequence that GOI and SC want?

IV.3.1 By now it is clear to the world that : Income-tax Department has been consistent in its approach from 1993 till date. Government has been confused. GOI itself is damaging its own tax revenue by permitting massive abuse of DTA. All kinds of “quick money” flowed into the country through several tax havens. Money laundering through FIIs & PNs is normal. Open round tripping, treaty shopping and treaty abuse is the norm.

3.2 Western investors are expert in brain washing the authorities. They have succeeded in spreading Zero Tax Religion. Vodafone is a classic case where they have made huge capital gains because of Indian operations and succeeded in taking away whole gain without paying any tax.

3.3 Azadi Bachao Andolan & Vodafone decisions together are open licence to people for massive abuse of tax havens & DTA. These will cause massive losses to India and Indians.

3.4 If “encouraging FDI” is the reason why Honourable SC has ruled in favour of Vodafone, in our humble submission, it is unfortunate.

3.5 If this abuse is allowed, Direct Taxes Code will be a strange Cocktail of contradictory legal provisions. On the one hand, long list of SAAR & GAAR. On the other hand, massive abuse of the law deliberately permitted by GOI and SC of India. Really India is Incredible!

3.6 First time in Independent India’s history, a movement has started against the Court decision. People are asking for a review of the decision or an appropriate amendment in the law.

3.7 Our Submission : Any Government that deliberately permits such abuses is inviting massive scandals. One day these scandals can be too dangerous for the welfare of India. A retrospective amendment in law and recovery of tax from Vodafone will give a clear message to: (i) tax consultants of the world that you cannot brainwash GOI; and (ii) investors of the world that if you earn in India, you pay taxes in India.

In some sections of the society, greed has become wide spread. Vivek is forgotten. Aggressive tax planning is the Cause of all Causes for grievances. Greed needs to be controlled. If not controlled, the results will be :

Consequence 1 : Harsh & impractical law.

Consequence 2 : The Big Bosses do not care for the law.

Consequence 3 : Wide spread movements against the Big Bosses.

Consequence 4 : If these movements fail, it will lead to next result : Collapse of Indian society like the American & European collapse.

For all sections of the society consequences of this tax planning & the decision by Honourable SC are serious.



Annexure 1

SAAR in the Income –tax Act, 1961.
Contributed by - CA Nishit Bhupendra Shah

a. Section 2(22)(e) - Deemed Dividend where funds are distributed to shareholders as loans / advances (i.e. otherwise then dividend to escape from dividend distribution tax)

b. Section 10A / 10B / 10AA – Pre-conditions of availing tax holiday [unit should not be formed by transfer of plant & machinery, existing business]

c. Section 14A – Disallowance of expenditure incurred for earning exempt income

d. Section 17(2) – Benefits granted by employer to employee to be taxed as perquisite in hands of employee.

e. Section 40(a) – Disallowance of payments made to residents / non residents without withholding of taxes

f. Section 40A(2) – Excessive domestic payments to related parties [However, no corresponding provision to reduce the income of related party receiving the payment in case of such disallowance]

g. Section 40A(3) – Disallowance of expenditure incurred in cash beyond minimum threshold

h. Section 47 – Withdrawal of exemption in case of certain transactions involving transfer of capital assets between group companies / parent – subsidiary.

i. Section 55A – Reference to valuation officer to determine the fair value of capital asset

j. Section 56 (vii) – Gift received by individual / HUF from non relative is taxable

k. Section 56(viia) – Gift received by a firm / private company of shares of private company is taxable

l. Section 60/ 61– Taxing transfer of income in hands of transferor where income is structured to be transferred without actual transfer of assets

m. Section 64 – Clubbing the income arising in hands of spouse / children etc by way of transfer of assets to them for inadequate consideration

n. Section 68/69/69A/69B/69C – Provisions taxing unexplained credit / cash / money / expenditure / investments

o. Section 70 – Restrictions in set off of short term capital loss and long term capital loss

p. Section 71 – Restriction on intra head set off of losses – business loss not allowed to be set off against salary income, capital loss not allowed to be set off against income under any other head

q. Section 79 – Restrictions on taking advantage of losses in privately held companies by divesting majority stake

r. Section 80IA(8) – Inter unit / business transfer of goods to be at market value

s. Section 80IA(10) – AO has the power to not allow tax holiday on more than ordinary profits

t. Section 92 – Transactions with international related parties to be at arm’s length (To curb shifting of profits outside India or reduction in Indian profits by overbooking of expenses / purchases)

u. Section 93 - Transactions resulting in transfer of income to non-residents.

v. Section 94 - To curb interest stripping / dividend stripping in transactions involving purchase / sale of securities

w. Section 94A - Transaction with parties in non-co-operative jurisdictions to be applied provisions of the Act such Transfer Pricing, withholding of taxes, Stringent anti avoidance provisions resulting in disallowance of expenditure

x. Section 115JB – Taxing zero tax companies availing tax holiday / tax incentives

y. Section 148 – Reopening of assessment to tax income escaping assessment

z. Section 160 - Taxing payer of income to non-resident as a representative assessee

za. Section 164 / 164A – Taxing income in case where share of beneficiaries are unknown / in case of oral trust.

zb. Section 201 – Recovery of taxes from payer of income along with interest and penalty where payer has not withheld taxes on income which was liable to tax in India

zc. Section 206AA – Bringing with the ambit of Indian Tax all receivers of income whose income is liable to tax in India by making it mandatory for such receivers to obtain Indian Tax Registration Number for application of prescribed rate of tax withholding else penalizing with increased rate of tax withholding i.e. 20%

zd. Section 271(1)(c) – Rigorous penalty provisions – 100% to 300% of tax sought to be evaded.

Note by authors :
Today we consider Section 64 as simple. However, look at any good commentary on section 64. We find hundreds of case laws which caused this section in the form in which it is today. All those people who planned diversion of their taxable income; and the Court decisions which allowed such diversion – are responsible for the way section 64 has been drafted.

Today the ways of tax avoidance have become far more complex. Hence the anti avoidance provisions are even more complex. This ongoing process of tax planning and anti avoidance provisions has made tax compliance costly and unbearable.

Vodafone decision by Honourable Supreme court is unfair and hence against the interest of tax payers and the country as a whole. Can we devise a tax law, administration, tax practice and tax jurisprudence which is based on striking a reasonable and fair balance, using Vivek? If we can be fair at every level, India’s future can be better.



Annexure 2

Honourable Chief Justice S. H. Kapadia’s speech on the topic ‘Constitutional Morality’

Speech at Ahmedabad on 13th March, 2011.

Extracts

“I would like to share that I am a believer in God. I owe it to God, my family and certain great people including Shri PD Desai for what I am today.

There are students here to attend the lecture. I have a message for students coming from poor families - “Do not be disheartened. India is a great country. It can make as Chief Justice someone who started his career as a peon, as class four employee, in a small trust office; in this land of opportunity you can make it”.

Now coming to Justice PD Desai, there is a quote – “imitation is the best form of flattery”. I have imbibed good values from Justice PD Desai. He had great qualities - he was truly independent. He had nothing to fear. He had no personal agenda. This is very important in judicial career.

I always claim that the path of righteousness is easier than the path of deviousness. Without courage there can not be truth. Without truth there can be no other virtue. These apply to life and character of Justice PD Desai. His advice to me in particular when I joined the Bombay high court was on clarity of thought.

He had this simple advice for judges – which I noted in my diary: “Whenever you sit in judgments on PIL matters, economic matters, always have the consequences in mind. It should not have an impact that may have adverse effect on larger public interest. This, I keep in mind and I meticulously follow even today. It has helped me in my work as CJI. That is the greatest advice he gave me.

He had this simple advice for judges – which I noted in my diary: “Whenever you sit in judgments on PIL matters, economic matters, always have the consequences in mind. It should not have an impact that may have adverse effect on larger public interest. This, I keep in mind and I meticulously follow even today. It has helped me in my work as CJI. That is the greatest advice he gave me.

His beliefs were even at that time towards charity, social good. He implemented that in action setting up trusts including this one. He told me never compromise your strengths and honor. He gave me number of examples where he did not compromise. He stood on his principles of strength and honor. He had respect for his work.

I would like to quote a French author who said “I should follow a straight route because it has been found by experience that straight road in the end is the happiest and most useful track. This is an advice I would like to share with younger people who are likely to join bar in future.

Now take the balancing part. Which is more important in appointment to higher offices - - presumption of innocence or presumption of integrity or presumption of institutional integrity/competence etc. All these have to be weighed in the context of act placed before courts.

Similarly in criminal matters - decide by evidence, not by personal likes/dislikes. I am of the view that if courts decide on matters in principles, many of the controversies will be obliterated.

Constitutional morality can not be separated from ethical morality. Ethical morality is equally important. Judge should be ethically moral. Intellectualism alone won’t suffice. We do not need exceptional people. We want ethical people that understand nuances. That is enough for us. That will give credibility to the institution.

Even tension between executive/legislature if it is constructive is to be appreciated; as it contributes to the development of law. We need to be focused for success. And please remember that ability may take u to the top. But you shall need character to stay at the top.

Source : http://zoomindianmedia.posterous.com/45915172

Note : Vodafone decision has adverse impact on larger public interest. This consequence has been ignored by Honourable Supreme Court.

Thanks
Rashmin, Naresh & Rutvik.