Month: January 2018

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Facts of the Case:

Vodafone International Holding (VIH) and Hutchison telecommunication international limited or HTIL are two non-resident companies. These companies entered into transaction by which HTIL transferred the share capital of its subsidiary company based in Cayman Island i.e. CGP international or CGP to VIH.

The Indian Revenue authorities issued a show cause notice to VIH as to why it should not be considered as “assesse in default” and thereby sought an explanation as to why the tax was not deducted on the sale consideration of this transaction. The Indian revenue authorities thereby through this sought to tax capital gain arising from sale of share capital of CGP on the ground that CGP had underlying Indian Assets.

Procedural History:

The Indian Revenue Authorities issued a show-cause notice to Vodafone (VIH) when the transaction took place. VIH filed a writ petition in the High Court challenging the jurisdiction of Indian revenue authorities. This writ petition was dismissed by the High Court and VIH appealed to the Supreme Court which sent the matter to Revenue authorities to decide whether the revenue had the jurisdiction over the matter. The revenue authorities decided that it had the jurisdiction over the matter and then matter went to High Court which was also decided in favor of Revenue and then finally Special Leave petition was filed in the Hon’ble Supreme Court of India.

Issues:

There were three prime issues in this case:

1. Whether the situs of shares happened in India or in Cayman Islands?
2. Whether, in this transaction, there was a sale of assets?
3. Whether to lift the corporate veil of CGP to determine if the company had all the interests in India?

Holding:

In the first issue, the Indian Revenue Authorities contested that the situs of shares has taken place in India to which the Court observed that the situs of shares has happened in Cayman Island which is not a part of Indian jurisdiction. The Court observed that shares of CGP were registered in Cayman Island and law of Cayman also does not recognize multiplicity of registers and hence site of shares and transfer of shares is situated in Cayman and shall not shift to India.

In the second issue, the Indian Revenue Authorities contested that while buying the CGP’s investment of Hutch, they have acquired the control over an Indian subsidiary and, therefore, this is a transfer of assets and such transfer of assets are covered under the Indian Income Tax Act.

To this, the Court said, that the entire investment was bought by the Vodafone Holdings. This kind of transaction is not equivalent to sale of assets in an item-wise basis. It was not like controlling the interests in a split manner. The entire transaction is to be seen as a whole. The Court, therefore, held that this is not sale of assets. This is a sale of shares in Cayman Islands. Sale of shares as a whole is not sale of assets.[1]

In the third issue, the Indian Revenue Authorities contested that if the CGP’s corporate veil is lifted, it can be observed that the Company has all the interests in India.

To this, the Court said, this is not required as this is not a case of tax evasion or forgery. The directors of the company are not personally benefitting from the transaction. The Indian Courts do not have a jurisdiction on this.

The Indian Revenue Authorities lost in this case but later the decision was legislatively overturned by a retrospective amendment.

[1] To put it in a simpler way, a sale of share is construed as sale of asset but if an entire investment is sole, it is not just sale of assets.

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FACTS:

The appellant, Mr. Macaura, formerly owned a timber estate in Northern Ireland, who consequently sold the timber to a Canadian Milling Concern, agreeing to accept payment in the shares of the company. The appellant received 42,000 fully paid up £1 shares, making him the whole owner. He was also an unsecured creditor for £19,000. The appellant took out an insurance policy on the timber in his own name, and shortly afterwards damage was caused by the fire. The appellant sought to recover from such an insurance policy, but Northern Assurance Co. refused to pay up as timber was owned by the company, and the fact that company is a separate legal entity.

ISSUE:

Is the insurance company liable to pay for the damage caused by fire to Mr. Macaura?

HELD:

The House of Lords held that insurers were not liable on the contract, as Mr. Macaura had no insurable interest in the timber, as his relation was to the company, and not to its goods. Unusually, in this case, request to lift the corporate veil was made by the corporation’s owner himself, as he contended that he held the maximum percentage of shares. However the court held that the corporator, even if he holds all the shares, is not the corporation, and neither he nor any creditor of the company has any property legal or equitable in the assets of the corporation.

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Facts:

Continental Tyre and Rubber Company was incorporated in England, but the holders of all its shares except one, and also all the directors, were Germans, residing in Germany. The secretary was English.

Continental Tyre and Rubber Co Ltd supplied tyres to Daimler, but Daimler was concerned that making payment might contravene a common law offence of trading with the enemy as well as a proclamation issued under s 1(2) Trading with the Enemy Act 1914. After the outbreak of the First World war, Continental Tyre Company brought an action against Daimler Co. Ltd. to recover trade dept.

Issue:

Whether the character of a company’s corporators is relevant to determine the character of the company; is the company capable of acquiring enemy character?

Ratio:

“I think that the analogy is to be found in control, an idea which, if not very familiar in law, is of capital importance and is very well understood in commerce and finance. The acts of a company’s organs, its directors, managers, secretary, and so forth, functioning within the scope of their authority, are the company’s acts and may invest it definitely with enemy character… it must at least be prima facie relevant… Certainly, I have found no authority to the contrary.”

The court said that the actions and character of the members of the company are capable of changing the nature of a company and a company can acquire enemy character on the basis of the character of its members.

Holding:

The House of Lords held that though the Continental Tyre Company was incorporated in England, its effective control was in the hands of Germans and, therefore, the company had acquired the enemy character.

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Facts:

Renusagar was a 100% subsidiary of Hindalco, wholly owned and controlled by Hindalco. The agreement between Renusagar and Hindalco indicated this was not a normal sale-purchase agreement between two independent persons at arm’s length. The price of electricity was determined according to the cash needs of Renusagar. It was thus contended that Renusagar must be treated as alter ego of Hindalco, i.e., own source of generation. ‘Own source of generation’ is an expression connected with the question of lifting or piercing the corporate veil.

Appellant’s Contention:

• The appellants contended that in this case there was no ground for lifting the corporate veil, urging that there was no warrant either in law or in fact to lift the corporate veil and treat Renusagar’s plant as Hindalco’s own source of generation.
• Appellants also contended that HC order was in violation of principles of natural justice.

Held:

• The person generating and consuming energy were the same and the corporate veil should be lifted.
• Hindalco and Renusagar were inextricably linked up together. Renusagar had in reality no separate and independent existence apart from and independent of Hindalco.
• Must be treated as one concern and the consumption of energy by Hindalco must be regarded as consumption by Hindalco from own source of generation.
• The Government did not act in violation either of the principles of natural justice or arbitrarily or in violation of the previous directions of the High Court.
• Appeal dismissed.

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Facts: Mr Salomon had incorporated his long standing personal business of shoe manufacture into a limited company. He held 20,001 shares and the other 6 members of his family each got one share making a total of 20,007 shares. The company failed after sometime. The debentures in the company were held mainly by Broderip and Mr Salomon himself. Upon liquidation of the company, Broderip got back his share of debenture money. The rest was taken up by Mr. Salomon himself as he was the next big secured debenture holder. Therefore the minor unsecured creditors got nothing from the liquidation.

Issue: Should the amount that was paid to Mr Salomon, the major debenture holder, be paid back to the company and distributed amongst the minor unsecured creditors?

Holding:

• High Court – Company is an agent of Mr. Salomon. He should pay the Company’s debt.
• Court of Appeal – Agreed with the HC. Decision upheld.
• House of Lords – The Company was a separate legal entity and a distinct independent corporation. A majority shareholder does not own the Company. The Company will not lose its identity to the majority shareholder.

Ratio:

• The Company is a separate legal entity.
• The creditors of a company cannot sue the company’s shareholders to pay the company’s debts.

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Facts:

A certain Tea Estate was transferred to a company by a group of 8 people who were the sole shareholders of the company. The consideration for this exchange was £43,320, the said consideration being payable in shares and debentures of the company taken at par. However, the shareholders of the company refused to pay the ad valorem duty, payable on every conveyance on such transfer of the property and hence this case. The shareholders’ reason for not paying the tax was that since they were the only shareholders of the company, therefore the transfer of the property was from them to themselves under another name.

Issue: Whether the document carrying out a particular transfer is a conveyance?

Ratio:

Whoever the shareholders in the Kondoli Tea company were, the Kondoli Tea Company, Limited, was a, separate person, a separate body, and a conveyance to the Kondoli Tea Company, Limited, of property which was the property of the sharers in their individual capacity, was just as much a conveyance, a transfer of the property as if the shareholders in the Company had been totally different persons.

The Kondoli Tea Company, Limited, is a separate body, although the conveying parties here were the shareholders of the Company, there was just as much a sale and transfer of the property and a change of ownership as there would have been if the shareholders had been different persons.

Holding:

The Court held that the Kondoli Tea Company was a separate legal entity and therefore ordered the shareholders to pay the ad valorem duty on the said transfer of property from them to the company.

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Facts –

A testator empowered the trustees of his will to invest moneys in the parliamentary stocks or public funds or in Government securities of Great Britain or India or any British colony or dependency or any foreign country or State, or upon freehold, copyhold, leasehold or chattel real securities in Great Britain……….or in the stocks, funds and securities (not payable to bearer) of any corporation or company, municipal, commercial or otherwise

Issue –

Whether trustees can invest money in the stocks, funds or securities of

1. any corporation or company formed or registered in the United Kingdom, but carrying on business abroad, and
2. any corporation or company formed or registered outside the United Kingdom.

Held –

According to BUCKLEY J. no reason occurs, why a corporation or company formed or registered in the United Kingdom should not be within the words “any corporation or company, municipal, commercial or otherwise,” merely because it carries on its business abroad.

The word ‘company’ has no strictly technical meaning. It involves two ideas–namely, first that the association is of persons so-numerous as not to be aptly described as a firm; and secondly, that the consent of all the other members is not required to the transfer of a. member’s interest.The words “corporation or company” here means, an incorporated body or an unincorporated body which is “municipal, commercial or otherwise,” and which is of such a kind as not to be what is commonly called “a firm.”

Therefore, that the trustees are at liberty to invest in the stocks, funds and securities (not payable to bearer) of any corporation or company, notwithstanding the fact that it is not formed or registered in the United Kingdom.

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