7th Nani Palkhiwala Research Paper Competition

7TH NANI PALKHIWALA MEMORIAL RESEARCH PAPER 1

PIERCING THE CORPORATE VEIL IN TAXATION MATTERS

- Divyata Badiani & Hridhay R. Khurana

By way of this paper, the different dimensions pertaining to Lifting of the Corporate Veil

have been dealt with. The growing role of Special Purpose Vehicle’s and the lacunae in the

primeval Income Tax Act justifies the need for lifting the Corporate Veil. Further Lifting of

the Corporate Veil has added layers to the Jurisprudence of Company Law and contributed

to an interpretation of the Holding – Subsidiary relationship of Companies. The base – line

around which the structure of this paper has been developed is that in the absence of the

Direct Tax Code to “look through transactions” piercing the Corporate Veil is the only

solution available to understand the muddled structure of Companies and their Ownerships.

INDEX

INTRODUCTION ……………………………………………………………………….. 1 - 3

1. Modus Operandi of Piercing the Corporate Veil ……………………………………… 4 - 6

2. Realism and Company Law…………………………………………………………….. 7 - 21

3. Piercing All the Veils: Applying an Established Doctrine

to a New Business Order…………………………………………………………............ 22 - 25

CONCLUSION …………………………………………………………………………... 26 - 27

BIBLIOGRAPHY ………………………………………………………………………... 28 - 30

BIO – DATA OF HRIDHAY R. KHURANA …………………………………………… 31

INTRODUCTION

A sham, bogus or contrived transaction would, in appropriate circumstances, justify piercing the

corporate veil. However, the tax authorities must act with circumspection while challenging the

corporate status of an entity.

H. P. Ranina.

The Prince, known as Machiavellianism, has been viewed as evil throughout the centuries, but

most business leaders and politicians agree Machiavelli has only defined the physics of power.

Machiavelli set the precedent for the cold and calculated regardless of the century they live in.


He was in the business of power preservation not piety. Those who desire power in any

situation may look to his strategies for solid aid.

"...The (the leader of the state) must stick to the good so long as he can, but, being

compelled by necessity, he must be ready to take the way of the evil."1 The political

doctrine of Machiavelli, which denies the relevance of morality in political affairs and

holds that craft and deceit are justified in pursuing and maintaining political power."

This definition implies that in the arena of power the end justifies the means. This is essentially

the core of Machiavelianism. The premise of the Machiavelli theory was way ahead of its time.

This similarly explains the behavioral trend when it comes to Corporate Veil. Corporations

were overwhelmed by the convenience created by the Corporate Veil making them unwilling to

look past it. Recognizing that a physical cause of harm cannot escape liability because of some

metaphysical obstruction, because the causative elements of nature dictate that every action

must have a consequence and every action must have its source from something physical. This

is the premise and more importantly the “means” aimed to be achieved behind Lifting of the

Corporate Veil.

There has been much scholarly attention generating dramatic opposing views, with some legal

commentators advocating complete abolishing of the doctrines and others advocating a

significant relaxation of the standards of lifting of the corporate veil. Those who argue that

abolition of this doctrine argue limited liability of the incorporators has significant economic

benefits2. Those scholars argue that aside from reducing the cost of equity ownership and

facilitating economic growth, limited liability facilitates diversification of investments, reduces

monitoring costs, increases liquidity of shares, and encourages managers to undertake

beneficial projects that otherwise might be deemed too risky. Allowing plaintiffs to pierce

1 (Machiavelli, 63).

2 See e.g., Stephen M. Bainbridge, ‘Abolishing Veil Piercing’, 26 J CORP C 479, 495, (2001), (“ [T]here is a widely shared viewed that limited liability was and remains, essential to attracting the enormous amount of investment capital necessary for industrial corporations to arise and flourish”), Frank H. Easterbook & Daniel R. Fischel, ‘Limited Liability and the Corporation’ 52 U CHI L REV 89, 90 – 98 (1985), Stephen B. Presser, ‘Thwarting the Filling of the Corporation: Limited Liability, Democracy an Economics’ 87 NW UL REV 148- 164 (1992). (“If it is true that the original justification of limited liability was that in encourages investments in the small firms, or investments by entrepreneurs of modest means and if we are still interested in encouraging individual entrepreneurship through incorporation this ought to be, perhaps, the most crucial aspect to be considered in veil piercing doctrine”)


corporate veil and shield of limited liability removes these benefits and creates uncertainty for

investors and other corporate shareholders - particularly in light of the standards applied by the

courts that are less than clear.

In contrast those who seek to relax the requirements for piercing the corporate veil argue that

limited liability improperly shifts costs into innocent creditors.3 As a result management may

undertake business activities that are harmful to society because they are able to externalize the

risk of such projects, resulting in a moral hazard problem. These costs, the commentators assert

outweigh the benefits of limited liability. This article aims to strike equilibrium. The first part

of the Article talks about the Modus Operandi of Lifting the Corporate Veil. It broadly

addresses the commonly accepted circumstances under which veil piercing is justified. The

second part of the paper deals with Realism in Company with special reference to the Direct

Tax Code (hereinafter for the sake of brevity referred to as DTC). It addresses the Implications

of latest judgments involving the application of General Anti Avoidance Rule (hereinafter for

the sake of brevity referred to as GAAR). The third part of the paper deals with the application

of lifting the Corporate Veil in the context of Limited Liability Companies and Limited

Liability Partnership. It aims to answer the simple question that with this contemporary concept

of Limited Liability Partnerships and Limited Liability Companies coupled with the jumbled

jurisprudence surrounding their existence what guidelines should be adopted. This is in light of

the practise of simply transposing the guidelines applied to Corporations to Limited Liability

Partnership.

3 See, e.g., Henry Hansmann & Renier Kraakman, Toward Unlimited Shareholder Liability for Corporate Torts, 100 YALE L.J. 1879, 1880, 1920 (1991); Lynn M. LoPucki, The Death of Liability, 106 YALE L.J. 1 (1996).


Section I: - Modus Operandi of Lifting the Corporate Veil

The presumption of limited shareholders liability is a “bedrock” principle of corporate law 4.

“Distinct Companies, even parent and subsidiary companies are presumed separate.”5 Indeed,

this has been the case “since the earliest days of corporate law”6. As a result “shareholders

protection through the corporate form is ‘ingrained in our economic and legal system7”.

Moreover, the limited liability associated with the corporate form has played a significant role

“in the expansion of industry and in the growth of trade and commerce”.8

Since the commencement of the use of the corporate form in the business world, parties have

utilized the corporate form to insulate other entities, stakeholders, members and shareholders

from liability. A strong presumption exists for the separate nature of a corporation and its

members, shareholders or related entities. “Limited liability is the rule not the exception.”9

Courts and legal scholars have characterized this limited liability as a corporate veil, which

may be pierced only in exceptional circumstances.10

Limited liability is the cornerstone of company law. In the common law world, the origins of

limited liability reflect an economic drive for a laissez-faire market in which perfect freedom

was desired for investors and entrepreneurs.

The corporate form itself also, according to Smith, was inherently inefficient and he was

opposed to it:

4 Escobedo v. BHM Health Assoc., Inc., 818 N.E.2d 930, 933 (Ind. 2004). 1 FLETCHER CYCLOPEDIA OF PRIVATE CORP. § 43 (Nov. 2004) (“As a general rule, two separate corporations are regarded as distinct legal entities even if the stock of one is owned wholly or partly by the other. . . . Thus, under ordinary circumstances, a parent corporation will not be liable for the obligations of its subsidiary.”).5

Greater Hammond Community Servs., Inc. v. Mutka, 735 N.E.2d 780, 784 (Ind. 2000). See also Hickman v. Rawls, 638 S.W.2d 100, 102 (Tex. Ct. App. 1982) (“The general rule is that a corporate entity may not be ignored.”); In re Hillsborough Holdings Corp. v. Celotex Corp., 166 B.R. 461, 468 (Bankr. M.D. Fla. 1994) (“Delaware courts disregard the corporate entity in only the most extraordinary cases.”)

6 Winkler v. V.G. Reed & Sons, Inc., 638 N.E.2d 1228, 1232 (Ind. 1994).

7 Hambleton Bros., 397 F.3d at 1227.8 Escobedo v. BHM Health Assoc., Inc., 818 N.E.2d 930,933 (Ind. 2004).

9 Ibid

10 Calvert v. Huckins, 875 F. Supp. 674, 678 (E.D.Cal. 1995).


The directors of such companies . . . being the managers of other people’s money than

their own, it cannot well be expected that they should watch over it with the same

anxious vigilance . . . Negligence and profusion must always prevail, more or less, in

the management of such a company.11

The phrase “piercing the corporate veil” was described in a 1973 case as “now fashionable”12

and further described as “out of date”13. The English courts expressly separate the meaning of

the two phrases. Staughton LJ, in Atlas Maritime Co SA v Avalon Maritime Ltd (No 1)14, stated

that: “To pierce the corporate veil is an expression that I would reserve for treating the rights

and liabilities or activities of a company as the rights or liabilities or activities of its

shareholders. To lift the corporate veil or look behind it, on the other hand, should mean to have

regard to the shareholding in a company for some legal purpose.”

The doctrine of lifting of the veil has been applied, in the words of Justice Palmer, in five

categories of cases:

Where companies are in relationship of holding and subsidiary (or sub-subsidiary) companies;

Where a shareholder has lost the privilege of limited liability and has become directly liable to

certain creditors of the company on the ground that, with his knowledge, the company

continued to carry on business six months after the number of its members was reduced below

the legal minimum;

In certain matters pertaining to the law of taxes, death duties and stamps;

Particularly where the question of the "controlling interest" is in issue;

In the law relating to exchange controls, and in the law relating to trading with the enemy

11 A Smith, Wealth of Nations, Vol 2, 1776, p 233.

12 Brewarrana v Commissioner of Highways (1973) 4 SASR 476, 480 (Bray CJ).

13 Walker v Hungerfords (1987) 44 SASR 532, 559 (Bollen J).

14 Atlas Maritime Co SA v Avalon Maritime Ltd (No 1) [1991] 4 All ER 769.


where the test of control is adopted15. In some of these cases, judicial decisions have lifted the

veil and considered the substance of the matter.

The metaphysical nature of limited liability fails to recognize that harm and liabilities, in

reality, are caused and created by people and real and tangible things. That such real causes of

harm and liabilities are to be protected from accountability by some intangible construct of the

mind, the corporate veil, is both illusive and a delusion. As a result, the male fide avoidance of

criminal or civil liability through reliance on the principle of limited liability has prompted the

courts to find exceptions to limited liability by piercing the corporate veil.

15 Palmer's Company Law; page 215, 24th Edn., 1987


Section II: - Realism in Company Law

Realism is a fragmented school of thought, in which ‘reality’ has different and opposing

definitions.16 The legal realist movement was influenced by the view ‘that there was more to

the study of law than the study of a system of rules; that for most purposes legal doctrine

should be seen in the context of the totality of the social processes’.17According to Bix,

American legal realists were ‘realists’ ‘in the sense that they wanted citizens, lawyers, and

judges to understand what was really going on behind the jargon and mystification of the

law’.18Realists, like Pound and Frank,19sought to debunk the ‘mechanical jurisprudence’20

advocated by classical formalists by peering beyond ‘paper rules’ to expose the ‘real rules’

extracted from uniformities in actual judicial behavior. That is, looking not at the particular

decision reached, but the mode of reasoning employed to reach that decision21and decisions

with similar factual matrix. The formalists believed that law was of itself an exact science, and

the correct legal solution could be gained by the application of law without reference to outside

social considerations. Cohen’s summary of traditional legal theory accurately summarizes the

stance of formalists:

16 One thing is clear. There is no school of realists. There is no likelihood that there will be such a school. There is no group with an official or accepted, or even with an emerging creed. There is no abnegation of independent striking out. . . . New recruits acquire tools and stimulus, not masters, nor overmastering ideas. Old recruits diverge in interests from each other. They are related, says Frank, only in their negotiations, and in their skepticisms, and in their curiosity’. See K Llewellyn, ‘Some Realism About Realism’ (1931) 44 Harv L Rev 1233

17 W Twining, Karl Llewellyn and the Realist Movement, Weidenfeld and Nicolson, London, 1973, p 382. Also see N Andrews, ‘Wormes in the entrayles: the corporate citizen in law?’ (1998) 5(2) Murdoch Uni Electronic Jnl of Law n 168.

18 B Bix, A Dictionary of Legal Theory, Oxford University Press, Oxford; New York, 2004, p 3.

19 Although, it should be noted that Frank was an outspoken critic of Llewellyn’s ‘rule scepticism’, as he regarded himself as a ‘rule sceptic’.

20 See R Pound, ‘Mechanical Jurisprudence’ (1908) 8 Columbia L Rev 605.

21 See, eg, Cohen’s analysis of Tauza v Susquelvanna Coal Company 220 NY 259; 115 NE 915 (1917) in F Cohen, ‘Transcendental Nonsense and the Functional Approach’ (1935) 35 Columbia L Rev 809 at 809ff.


Legal concepts (for example, corporations or property rights) are supernatural entities,

which do not have a verifiable existence except to the eyes of faith. Rules of law, which

refer to these legal concepts, are not descriptions of empirical social facts (such as the

customs of [people] or the customs of judges) nor yet statements of moral ideals, but

are rather theorems in an independent system. It follows that all legal argument can

never be refuted by a moral principle nor yet by any empirical fact. Jurisprudence,

then, as an autonomous system of legal concepts, rules, and arguments, must be

independent both of ethics and of such positive sciences as economics or psychology. In

effect, it is a special branch of the science of transcendental nonsense.

In contrast, for the realists, judges should look beyond legal doctrine and its interpretation to

behavioural matters including ‘the area of contact, of interaction, between official regulatory

behaviour and the behaviour of those affecting or affected by official regulatory

behaviour’.22One reason for this openness was the recognition by the realists, following Oliver

Wendell Holmes Jr, that judges made law and policy. Holmes wrote:

Ours is not a closed system of existing precedent. The law is not such a formal system at

all. . . . Courts must make law. Indeed courts are major policy makers in our system of

government. We must be wary of petrifying the common law into a rigid system, utterly

behind the times and totally at odds with the progress of science and social change.23

This is important in Company Law. For the realists, company law was an alternative set of

legal principles and policies which could be used to produce different outcomes to those

produced by other legal principles and policies, particularly those relating to agency. The

company existed in law as the outcome of this alternative form of legal analysis. It meant that

company law was inherently in conflict with other legal doctrines and policies. Realists were

22 K Llewellyn, ‘A Realistic Jurisprudence — The Next Step’ (1930) 30 Columbia L Rev 431 at 464.

23 244 US 205 at 221 per Holmes J (dissenting)


critical of judges who saw company law in other ways or the company as a tangible thing.

Cohen, for example, criticized judges for implicitly believing that companies were

metaphysical beings like angels which had an independent existence apart from the rules which

applied to them and a capacity to travel ‘about from State to State as mortal men do’. That

imagined existence was then used to resolve issues in a process of ‘transcendental nonsense’

without reference to proper policies involving ‘political or ethical value judgments’.24 The

proper issues to be considered, according to Cohen, were the hardship to plaintiffs of having to

sue out of state and the possible hardship to the firm in having to defend actions in many states,

because these were tangible considerations that could be proven with positive evidence and

ethical argument. Cohen’s distinction between legal authority backed by the metaphysical as

opposed to the pragmatic is important to company law, and in particular veil piercing cases,

because it exemplifies the artificiality of legal argument that has little use to the factual matrix.

To argue that an entity is a person or a corporation because it can be sued relied on empirical

evidence of litigation in reality, as opposed to arguing that an entity can be sued because it is a

corporation, which, in the words of Cohen, ignores practical questions of value or of positive

fact. The issue here, in the context of veil piercing in particular, is separating the metaphysical

cause of limited liability from the physical purpose for limited liability. That is, recognizing

that a physical cause of harm cannot escape liability because of some metaphysical obstruction,

because the causative elements of nature dictate that every action must have a consequence and

every action must have its source from something physical. The corporate veil cannot be

measured physically, nor can the corporation be touched, hand cuffed or made to do hard labor.

This is not to say, while it may be true for some, that realists deny the existence of the

corporate veil. It only exists, in law, if it has some pragmatic rationalization and cause or some

purpose for which it is worthy to be recognized. If the facts rationalize it and provide purpose

for its existence, then it’s grounding in the pragmatic is evident. However, in the course of

time, the doctrine, that a corporation or company has legal or separate entity of its own has

been subjected to certain exceptions by the application of the fiction that the veil of the

corporation can be lifted and its face examined in substance.

The current Indian Economy presents a contradiction. Over the years socio-economic and

political milieu of the country has undergone a sea change. The international presence of

24 Cohen, above n 9, at 810–1. Cohen criticises a decision of Cardozo J in the NY Court of Appeal in which the question whether a Pennsylvanian company could be sued in New York was answered by only reference to the question ‘where is the corporation?’


corporate world along with increase of cross boarder transactions has necessitated revisiting the

age old Income Tax Act of 1961 (hereinafter referred to as the Act). The Indian Revenue

Authorities are increasingly applying the concept of ‘Lifting of the Corporate Veil’. The

Income-tax Act, 1961 (hereinafter for the sake of brevity referred to as the act), as it

stands today, does not have explicit provisions for “looking through” the transactions.

However, the proposed Direct Taxes Code (hereinafter referred to as DTC) has General

Anti Avoidance Rules (hereinafter referred to as GAAR) provisions embedded in it. The

DTC, which will come into effect on April 1, 2012 specifically, spells out the conditions under

which indirect transfer will be subject to tax in India. The tax policy direction seems to be to

tax only those transactions where there is sale of substantial business interests in the Indian

company and not where there is either portfolio sale or a sale of a block of shares not resulting

in outright sale of the business in India. India has thus joined China, amongst other countries, in

attempting to tax indirect transfers and to this extent cross border transactions will need to

factor in the current view of Revenue as well as proposed changes in the DTC so as not to be

caught by surprise at a later stage. Further, an analysis of how inadequate tax principles present

a difficult choice for India.

Transactions involving indirect transfer of controlling stake are not specifically covered under

the Income Tax Act, however the same find place in the proposed DTC. While, the intention of

the legislature to tax such transactions is clear, the implications under the current act become

critical for completed transactions and existing structures. Besides, India, a member of both G-

20 and Financial Action Task Force (hereinafter referred to as FATF) requires aligning her tax

principles with those followed and accepted internationally. Since liberalization was introduced

in 1991, attempt has been made to rationalize the country’s tax system to make Indian trade and

industry globally competitive.

The proliferation of Double Taxation Avoidance Agreements entered into by India with several

foreign countries has created a new branch of tax law. The placement of a subject within the

domain of two sovereign jurisdictions is the pivotal reason for treating such subject

distinctively in comparison of the subjects, which lie purely within the tax-dominion of one

jurisdiction. Thus emerges international taxation as a distinct branch of fiscal laws governing


the tax treatment of entities/transactions upon which two or more sovereign States can claim

their right to tax. These Agreements come into play when a resident of one state has income

sourced in another state. For the purpose of such Agreements income is regarded as sourced in

a state if the payer is based there. A country’s appetite for taxation being insatiable, both states

would like to tax the income arising from the same transaction. It is here that Double Taxation

Avoidance Agreements come into play. The Agreements deal with different types of income

and some of them have a residual “catch-all” provision. With reference to different types of

income different modes of avoiding/restricting double taxation are evolved. The problem arises

when the Domestic Laws and this branch of International Laws are in inconsonance. This

Inconsonance is at a time when the Indian Mergers and Acquisitions (hereinafter for the sake of

Brevity referred to as M&A) market has been marching ahead witnessing an increasing trend in

the number of deals with many more in the pipeline and to come. While this action is

happening in the market, the Indian tax authorities are also keeping themselves busy by having

a close watch on the deals, especially the big ticket ones coupled with their inability to answer

the simple question as to who has to be taxed?

Hereto manifested is a recent instance before the Karnataka High Court where the absence of

the any explicit provision to addressing Double Taxation Avoidance leave Lifting of the

Corporate Veil as the only viable solution. It was an unwritten rule that the Indian tax law

regards form over substance. Richter Holdings Limited (hereinafter referred to as RHL) a

Cypriot company and West Globe Limited a Mauritian company purchased all shares of

Finsider International Company Limited (hereinafter referred to as FICL), a UK company from

Early Guard Limited (hereinafter referred to as EGL), another UK company. FICL held 51%

shares of Sesa Goa Limited, an Indian Company. The allegation of the Indian tax department

was that this transaction would trigger withholding tax obligation on the ground that the

transfer of shares constituted transfer of capital asset. On the other hand, RHL argued that the

transfer of shares did not amount to acquisition of immovable property or controlling the

management of Indian company and it was only an incident to owning the shares of a company,

which flows out of the holding of shares. The Karnataka High Court held that since the

agreement produced in the Court did not throw any significant light on the transaction, the tax

authorities should do a further fact-finding exercise, for which the corporate veil can also be

lifted.


Another example would be of the recent AT&T Birla judgment that further justifies that the

absence of the Direct Tax Code to address the issue of Double Taxation leaves Lifting of the

Corporate Veil as the only panacea to understand the instructive nature of transactions. The

facts of the case are briefly summarized as follows:

In 2007, the Birla and Tata Group - both shareholders in Idea, exercised a Right of First

Refusal (hereinafter referred to as ROFR) to buyout AT&T stake in the Indian telecom

company. Aditya Birla Nuvo agreed to purchase Idea shares from AT&T Mauritius and

thereafter Tata Industries agreed to purchase AT&T Mauritius itself. As AT&T Mauritius had a

tax residency certificate, Nuvo obtained a new withholding order from the Indian Tax

Department. Tata Industry believed since theirs was an offshore transaction, there would be no

tax liability. But, in 2008, the tax department issued orders against Nuvo, Tata Industries along

with AT&T, following which; the matter went to the Bombay High Court and the revenue

department won. The court determined that AT&T Mauritius was only a ‘permitted transferee’.

The beneficial owner was AT&T USA and hence the transactions were not eligible for

Mauritius treaty benefits. It has allowed the tax department to now initiate assessment

proceedings.

There are two terms that have been frequently used in the Joint Venture Agreement-founder

member and their authority, secondly the permitted transferee. Now if you look at the permitted

transferee and founder member, founder members have capped, have retained all authority onto

themselves and they have permitted a nominee to hold shares in their names. That is the

essence of that judgment and the entire judgment is based on that premise that the Mauritius

entity had no role. Who is capable of sailing a particular aspect?

To answer the above the courts goes to unravel fundamentals of the Transaction. What is

shareholding? Shareholding should give you the rights of dividends, should give you the rights

of disposal of shares, should give you the voting rights and if it is controlling, then it should

give you the rights to have a controlling nominee on the board of the company in which you

have invested. So as long as there is alignment of those rights, there is no reason, ordinarily

speaking, to challenge the shareholding. ‘Azadi Bachao Andolan25’ decision said, at least for 25 Union Of India (Uoi) And Anr. vs Azadi Bachao Andolan And Anr, (2004) 1 CompLJ 50 SC, (2003) 184 CTR SC 450


the last decade in this country, we have been saying that form scores over substance. This

judgment goes far beyond form and looks into substance of who the real beneficial owner is.

Now in almost all cases of foreign investment, as you would be familiar with, the permitted

transferee, for example one in Mauritius company will be owned by non-Mauritius parent.

Therefore, the question of ownership arises. The predicament arises in the disparity in

adjudication by the Revenue Department and by the Courts. The Revenue Department moves

on the application of the same principle to varying situations and the Courts adopt a fact-to-fact

basis. Another grounds for justification for the lifting of the Corporate Veil is the structure of

holding – subsidiary companies. When you embark on a new business what you do first- first

you enter into Memorandum of Understanding (hereinafter referred to as MoU). Both parties

agree, in-principle, on certain points and then it is provided that finally when the MoU is

implemented, that would be through a separately incorporated company; invariably by and

large always it happens. What do you do when you set up a subsidiary company? One- you can

fund as a parent company by way of equity capital or by loan capital. Two- when you fund it as

an equity capital provider or a loan capital provider, you have to behave on an arms length

basis. When you deal with subsidiary company, you also deal as you are dealing with third

party and secure all the rights that normally a lender would provide. So this brings about the

question, who is to be held liable? The Income-tax Act, 1961 (ITA), as it stands today, does

not have explicit provisions for “looking through” the transactions and to identity their

instrinctive nature. This form in substance- this tangle has been going on and you cannot say

that a decade after the decision of the Bombay High Court in Azadi Bachao Andolan26, the

issue is settled. Not at all because courts have been looking at it- even in England, the courts

have been looking at it in form and substance from fact-to- fact; from case-to-case.

The very core of the judgment focuses on the identification of who is the real owner. The whole

point is with regards to the ownership. Consider an example,

Ownership is a bundle of rights. It is not a one single thing. Even as a lender and as a borrower,

if I have given number of rights to the lender, it does not mean that I do not own the shares-

even if I have 1% or so. If I am dealing with a lender, I may give right of voting, I may give

right to do a number of things and in fact the parent company can be constituted as agent of the

Mauritius company rather than vice versa. Because once I am the legal owner, that’s the whole

issue here, of course its very fact specific but the way in which I would look at it is that this is 26 See Supra Note 24


not an uncommon transaction. This is how the documents are done world over when big groups

deal with each other. They start with notes at the parent company level but the ultimate

implementation happens at the subsidiary company level.

Conclusively, This muddled up structure of companies coupled with the absence of any explicit

provision in the Current Income Tax to tackle such a situation leaves Lifting the Corporate Veil

as the only Panacea to answer the question of Ownership.

The second grounds for adopting Realism in Company would be the case of the Vodafone Essar tax

dispute regarding the payment of capital gains tax on the transfer of a controlling interest in an Indian

entity from one foreign company to another, in order to illustrate the loopholes in Indian tax law, the

choice that is present before Indian courts - a choice between abiding by the principles of

international taxation or changing Indian tax policy altogether, and a view on the way international

taxation agreements are to be read in light of the norms of international. The facts of the case are

briefly summarized are follows27: -

In this case, Vodafone BV, a Dutch company acquired shareholding of a Cayman company in

consequence of which the business interest of Hutchison in its joint venture telecom company

in India got transferred to Vodafone. Vodafone's contention has consistently been that this is a

case of transfer of shares of a foreign company, which under current Indian law cannot be taxed

in India as the location of the share is outside India. Accordingly, Vodafone argued that the

value of the business enterprise is captured in the sale price of the shares and the gain made by

the sale is a capital gain in the jurisdiction where the share is situated. This being a case of

transfer of shares of a Cayman company, the question of taxation in India should not arise.

The main argument of the Indian Revenue has been that the share purchase agreement (SPA)

and other transaction documents clearly establish that the subject matter of the transaction is

not merely the transfer of shares of the Cayman company but includes transfer of the composite

rights in Indian joint venture, which clearly gives rise to a source of income arising in India and

therefore is subject to tax in India. The Revenue also contended that in this case the transfer of

share was merely a mode or vehicle to transfer the bundle of business rights and assets situated

in India.

The Bombay High Court observed that the controlling interest does not constitute a distinct

27 Vodafone International Holdings v. Union of India, [2009] 311 ITR 46 (High Court of Bombay).


capital asset for the purpose of the Indian tax law. In other words, controlling interest arises

from the acquisition of a sufficient number of shares in a company as would enable the

shareholder to exercise significant voting power which would result in the control of the

management of the company. The controlling interest is therefore not an identifiable or distinct

capital asset independent of the shareholding. Accordingly, the high court seems to imply that

part of sale consideration which relates to the value of the share of the Cayman company

including controlling interest should not be subject to tax in India as the share is located outside

of India.

However, the court agreed with Revenue's contention that this is not a case of simpliciter

transfer of shares but the transaction involves a variety of business rights and interest which are

all located in India. In arriving at this conclusion, the court has considered the commercial and

business understanding between the parties and the various legal documents, which were

entered into to consummate transfer of business in India. The court has specifically held these

bundle of rights and entitlements as capital assets and hence consideration attributable to such

rights and entitlements situated in India would be subject to tax in India. The high court has left

it for the tax officer to apportion the income between what is attributable to these business

rights in India and what is attributable to the shareholding outside of India.

This ruling seems to suggest a fundamentally different approach to taxation of transactions

where there is a transfer of controlling interest in India regardless of the fact that such transfer

is affected by way of sale of shares of an overseas company. This will create a degree of

uncertainty in respect of similar transactions, which have already taken place and where the

revenue department will make an attempt to take support of the Bombay High Court judgment

to tax those transactions. Having said this, in cases, which can be distinguished on facts, and

especially in those situations where there is no transfer of business or other valuable

commercial rights in India it will still be possible to argue against taxation arising in India. For

example, where there is not an outright sale of business in India but a large interest in the

Indian company is indirectly transferred through shares of a foreign company, the earlier

position should prevail i.e., sale of a foreign company not being subject to tax in India.

There is a prison thick line between Tax Evasion and Tax Avoidance. There has been a lacuna

in the fiscal jurisprudence to ascertain what classifies as Tax Evasion and Tax Avoidance.

Further with the timeworn Income Tax Act the possible solution available to the Revenue is the

Lifting of the Corporate Veil. This is explained by way of the “rule set in the McDowell case


and its implication on recent development such as the Vodafone and Azadi Bachao Andolan

Judgment.

The rule in McDowell’s Case28 (hereinafter for the sake of brevity referred to as “McDowell”)

has been the source of significant controversy in the area of tax governance. While on one

hand, it may seem to have completely changed the face of fiscal jurisprudence and tax planning

in India, some writers are of the opinion that it has in fact had no such result and is merely a

judicial aberration in the otherwise cogent exposition of fiscal principles by the Supreme

Court.29 Indeed, judicial pronouncements after McDowell have also contributed to the

confusion surrounding the position of law on tax planning, and have resulted in significantly

divergent views on what is as well as what should be permissible in the determination of tax

liability through transactions undertaken by the assessee. Therefore, it is submitted that in order

to ascertain the exact effect of the judicial pronouncements in question, it is imperative that

much of the gloss that surrounds them be stripped away to reveal the answer to two questions;

what the court sought to do and what the court in fact did.

To briefly summaries the issues raised in the McDowell’s case. The question before the court in

that case was simply whether Excise Duty paid by the wholesale buyers of liquor should be

considered as part of the ‘turnover’, chargeable to Sales Tax in the hands of the manufacturer.

The court answered this question by applying the fundamental principle that “…it is immaterial

to enquire how the total amount charged as consideration is made up and whether it consists of

excise duty or sales tax or freight…”30 and on a plain reading of the definition of ‘turnover’

under the Sales Tax Act. Therefore, the ratio of the case was simply that the Excise duty paid by

the buyers could be considered as a part of the turnover and hence should be chargeable to Sales

Tax under the relevant provisions of the Act.

Now, it was in response to two contentions forwarded by the appellants that the majority made

some observations about the question of tax evasion. First, the Court rejected the ‘common till

theory’, holding it inapplicable as a general rule to the question of what must be included within

28 McDowell & Co. Ltd. v. Commercial Tax Officer, AIR 1986 SC 649 (Supreme Court of India).

29 See NANI PALKHIVALA ET AL., THE LAW AND PRACTICE OF INCOME TAX 66 (9th edn., Dinesh Vyas ed., 2004) [hereinafter “PALKHIVALA”].30 Supra Note 29


‘turnover’ and observed that if this theory was accepted, the buyer and seller could enter into an

agreement to keep out of the ‘common till’ (and therefore the turnover chargeable to tax) any

amount which would ordinarily constitute ‘consideration proper’, and thereby reduce their tax

liability. Secondly, the Court addressed the ‘legitimacy’ argument, commenting that while tax

planning is a legitimate exercise of prudence, it cannot be carried out through the use of

‘colourable devices’ or ‘subterfuges’ and that it is wrong to encourage a belief in the legitimacy

of such methods.31 It is evident from the words of the judgment7 that the Court, in fact, merely

sought to respond the appellant’s argument, and relied on a number of cases for this purpose. It

was not a definitive pronouncement on the specific delineation of what is and is not permissible

in seeking to reduce one’s tax liability.

Indeed, it is submitted, the observation implies that the Court was referring not to a

determination of the merits of any method of tax planning etc., but to the desirable line of

analysis that courts must undertake in order to make such a determination. Therefore, the ‘rule’32

in McDowell, properly understood, was that the nature of the analysis to be undertaken by the

Court in order to determine whether a transaction is permissible as a measure to reduce one’s tax

liability is to examine whether the device used for such reduction is ‘colourable’ or ‘dubious’ or

amounts to a ‘subterfuge’. To elaborate, the Court did not make any determination of what kind

of transactions would be permissible or impermissible, but answered the question how a court

must go about making such a determination.

McDowell is relevant, inter-alia, as an important marker in the treatment of tax-reducing

transactions, it is now pertinent to examine the delineations that inform the tax evasion debate

with a view to understanding the location of McDowell33, Azadi34, Vodafone35 and the DTC in the

landscape of the debate. At the outset, it may be pointed out that while the analysis undertaken

by courts has revolved around the interpretation of the purpose or the legal and economic effect

31 The Court considered a number of judgments in support of the Appellant’s contention. However, it found no support for the proposition that every instance of tax planning or avoidance was permissible and that any analysis of the device used for the reduction of tax liability, despite its legal validity, is beyond the scope of the court. See McDowell, supra note 28

32 The term ‘rule’ is not used to refer to the ratio decidendi of the case. The ‘rule’ in McDowell is merely meant to signify the position of law, observed in that case, insofar as it is relevant to address the question of tax evasion.

33 Supra Note 29

34 Supra Note 2435

Supra Note 28


of the transaction in question, such analysis cannot meaningfully proceed in a vacuum, i.e.,

without consideration of the yardstick to which such transaction must conform. While courts

have not expressly addressed the question of the interpretation of the statute as a relevant

consideration to determine whether the offending transaction is to be disregarded, this analysis, it

is submitted, is central to such determination. Although courts have, in arriving at their decision,

sought to understand the position of law laid down by the relevant statute, it is submitted that this

aspect requires more serious consideration to reach any meaningful finding on the validity of

questionable transactions and, furthermore, that courts ought to clearly articulate this aspect so as

not to obscure its significance in arriving at the ultimate decision.36

From this perspective, there are broadly two conflicting approaches that may be adopted; the

textualist and the purposivist approach37. In essence, the textualist approach requires that the true

nature of any transaction be examined in relation to the permissible standard laid down by the

express words of the relevant taxing statute. In other words, as long as a transaction falls within

the words of the statute, it should be regarded as a wholesome transaction and the law confers

the full benefit of such a transaction to the assessee. This approach is embodied in the traditional

treatment of questionable transactions, as seen in a number of cases following the Duke of

Westminster v. Inland Revenue38 (hereinafter “Westminster”) and the Fischers Executors39

(hereinafter “Fischers”) reasoning. It is submitted that the most striking feature in all these cases

seems to be their emphasis on the commercial freedom of parties to transact in any manner

permissible by the letter of the law and thereby avoid or reduce their tax liability by availing of

the benefits conferred by the law. This approach has even been taken to allow parties the

freedom to take advantage of the inadequacies in the letter of the law with a view to reducing

their tax liability.40

36

Indeed, writers have emphatically drawn attention to the interpretation of the statute as the central consideration in determining whether a transaction must be disregarded for the purpose of taxation. For instance, see K.B. Brown, Substance Over Form Theory in U.S. and U.K. Tax Law, 15 HASTINGS INT’L & COMP. L. REV. 169, 173 (1992).37

See generally J. Freeman, Interpreting Tax Statutes: Tax Avoidance and The Intention of Parliament, 123 L. Q. REV. 53 (2007); C. Evans, Barriers to Avoidance: Recent Legislative and Judicial Developments in Common Law Jurisdictions , 37 H. K .L. J. 103 (2007); A.D. Madison, The Tension Between Textualism and Substance-Over-Form Doctrines in Tax Law, 43 SANTA CLARA L. REV. 699 (2003).38

Duke of Westminster v. Inland Revenue, 19 T.C. 490 (H.L.) (U.K.).39

Inland Revenue Comissioners v. Fischer’s Executors, 1926 AC 395 (H.L.) (U.K.).40


The purposivist approach, on the other hand, requires taxing statutes to be interpreted in light of

their avowed purpose, whereby courts may depart from the express words of the statute to

determine the ‘spirit’ of the law, which is then enforced as the legal standard to judge the

transaction in question. The purposivist approach is often informed by an attempt to answer the

question as to what was the true purpose of the transaction. If the purpose of the transaction falls

beyond the spirit of the statute, i.e., beyond the pale of legitimate purposes that the statute was

created to serve, then it cannot be given effect and must be disregarded as an attempt to

circumvent the law. Another significant aspect of the purposivist approach is that its analysis is

often accompanied by an invocation to a sense of moral sanction purportedly entrenched within

taxing statutes.41

Now, the DTC contains specific tax evasion provisions and imposes a ‘general anti-avoidance

rule’. Section 112 of the DTC provides for the declaration of any ‘arrangement’ as an

‘impermissible avoidance arrangement’ and allows the Revenue to determine the consequences

of such an arrangement by disregarding or re-characterizing it or altogether considering it void.

Section 113(14) defines ‘impermissible avoidance arrangement’ in relation to its purpose, as

well as its effect.42 Clearly, therefore, the DTC also adopts a firmly purposivist approach,

providing that any arrangement entered into with a view to obtaining a tax benefit and having an

‘atypical’ effect, is liable to be disregarded.

It must be noted, at this juncture, that one of the main problems with the application of this

dichotomy between textualism and purposivism is that each approach emerges as a knee-jerk

reaction to the other. It is submitted that tax evasion is unquestionably a major concern in tax

governance; neither courts nor the legislature can afford to ignore it. However, in an effort to

find the ‘silver bullet’,43 courts and the legislature seem to have a tendency to adhere to either

one of these approaches in response to the failure of the other.

It is this context the Supreme Court decisions in Vodafone and Azadi are to be analysed. It must

Supra Note 2941

See Viscount Simon LC, Latilla v. Inland Revenue Commissioners, (1943) T.C. 107 (H.L.) (U.K.),42

The sub-section provides that if the purpose of the arrangement is to obtain some tax benefit and its effect is wither the creation of rights or obligations not normally entered into in ‘arms-length’ transactions, or lacking ‘commercial substance’, or the carrying out of such an arrangement in a manner resulting in ‘abuse of the provisions’ of the Code or not bona fide, then it shall be treated as an ‘impermissible avoidance agreement’.

43 See M.A. Chirelstein and L.A. Zelenak, Tax Shelters and the Search for the Silver Bullet, 105 COLUM. L. REV. 1939 (2005). The authors discuss the continual legislative and administrative efforts to curtail the rampant use of tax shelters in the U.S., and conclude that the ‘silver bullet’ may not be found in narrowly tailored legislative responses to specific tax shelter, but in the ‘disallowance of non-economic loss’ approach suggested by them.


be remembered that Azadi can be considered as the bulwark of the current position on tax

evasion, and has been given the distinction of having “set the law in the right perspective” in

India44. Now, in Vodafone, the Bombay High Court, upholding the show-cause notice issued to

the petitioners, made a determination on the nature of the transaction, for the limited purpose of

determining that the notice was not altogether non-est,45 on two grounds. First, the transaction

was not merely a transfer of shares resulting in a transfer of the controlling interest of the

Cayman Islands entity in its Indian subsidiary, but was in fact a transfer of the underlying assets

of that subsidiary. Any profit arising from the business of the subsidiary would be considered as

the profit of the transferee and not merely the profit of the ‘shell company’, and would therefore

be liable to tax as ‘capital gains’ in India. Secondly, the Court held that even without ‘piercing

the veil’ and considering the assets of the subsidiary as the subject of the transfer, a mere transfer

of the controlling interest implied a transfer of a number of valuable intangible assets such as the

right to carry on business and operate mobile telephony in India, which transfer was taxable in

India.

In arriving at these findings, the Court was largely influenced by two considerations; the legal

substance of the transaction46 and the scope of transactions intended to be covered by the statute.

In Azadi again, the Court proceeded on an analysis of the ‘purpose and consequence’ of the

Double Taxation Avoidance Convention, along with a reading of the provisions of the Income

Tax Act, relevant to the subject of Double Taxation Relief.47 Therefore, in both the above cases,

the court read the provisions of the relevant statutes, interpreting them in the context of the

meaning of the words intended by Parliament, and applied such interpretation to the substance of

the transaction in question to arrive at a conclusion as to whether the transaction fell foul of the

statute so interpreted. It is submitted that this approach, which has been called ‘purposive

textualism’ in the context of similar U.K. and U.S. cases,48 provides the much-needed ‘midway 44

PALKHIVALA, supra note 3045

Therefore, the determination of the true nature of the transaction is not a binding ratio, as it was merely incidental to the decision on the validity of the show-cause notice.46

Supra Note 28

47 The Supreme Court determined that section 90 of the Income Tax Act was introduced with the intention of allowing the Central Government to enter into agreements with foreign countries for the purpose of the avoidance of double taxation and that the provisions of the Convention and the Act must be read in this context. See Azadi, supra 3448


path’ approach to be adopted by courts in the analysis of transactions for the purpose of

determining their wholesomeness in the context of tax evasion.

Hence, it is submitted that the analysis brought to light in Azadi and Vodafone is neither purely

purposive nor strictly textualist in approach; it seeks to construe the provisions of the statute in

light of their intended meaning by the legislature, and apply that standard to interpret the

transaction. It is pertinent, at this juncture, to revert to Palkhivala’s observation on the current

state of the law on tax evasion. While observing that Azadi has set the record straight from the

“temporary turbulence created in the wake of McDowell,” the learned authors make the crucial

observation that the judicial reaction to McDowell was to reject the sweeping observations of the

concurring opinion in that case and to distance the Court’s position from those observations.49

They further observe that the spate of judgments delivered in opposition to McDowell “make the

time extremely ripe for an Indian parallel to Macniven”,50 which has in fact consummated in the

form of Azadi.

Thus, reading the progression of cases as a single line of development towards this approach

beginning from the actual ‘rule in McDowell’ as enunciated,51 resulting in the Azadi approach

and continuing through Vodafone, courts may find a useful pattern to be applied in subsequent

cases. This reading, it is submitted, will enable courts to find ample support for the proposition

that the approach of ‘purposive textualism’ is indeed a desirable one and has in fact been

developing in the reasoning underlying a series of cases, including Vodafone.

See S.S. Schumacher, Macniven and Tax Advice: Using Purposive Textualism to Deal With Tax Shelters and Promote Legitimate Income Tax Advice, 92 MARQ. L. REV. 33 (2008).49

For instance, Sabyasachi Mukherjee J., in two judgments following McDowell,namely, CWT v. Arvind Narottam, 173 ITR 479 (Supreme Court of India) and Union of India v. Playworld Electronics, 184 ITR 308 (Supreme Court of India) forcefully dismissed the observations of Reddy J. as ‘moral sermons’ and warned that “one should avoid subverting the rule of law50

PALKHIVALA, supra note 3051

The rule laid down by the court in relation to the nature of analysis to which the transaction must be subject, i.e., to the extent that it is not a ‘dubious’ or ‘colourable’ exercise, and removed from any consideration of the ‘purpose’ of the transaction


Section III: - Piercing All the Veils: Applying an Established Doctrine to a New Business Order

“I weigh my words when I say that in my judgment the limited liability corporation is the

greatest single discovery of modern times … Even steam and electricity are far less

important than the limited liability corporation, and they would be reduced to comparative

impotence without it.”

–President Nicholas Murray of Columbia University (1911)

While interpreting a statute the rule that has to be adopted is that no statute must be read it

isolation. The interpretation of a statue must not go to the extent of compromising the

fundamental features of a corresponding statute. In the early part of the twentieth century,

limited partnerships were created by statute as a hybrid between the two existing forms,

offering the corporate-like liability shield to investors, so long as they did not participate in

control of the business. By business law standards this entity is still quite new; there are

limited cases to lay down guidelines for their performance. This is coupled with coupled with

jumbled jurisprudence behind Limited Liability Corporation (hereinafter for the sake of

brevity referred to LLC) and Limited Liability Partnership (hereinafter for the sake of brevity

referred to LLP). This has resulted in transplanting the piercing doctrine generated for the

Corporation to Limited Liability Corporation, compromising upon their very essence of

Limited Liability. By way of this section the Application of the Established Doctrine to a New

Business Order within the framework if taxation matters has been dealt with.


LLCs (sprang into existence twenty-five years ago but leapt to the forefront of small business

law in America only in the last fifteen, with the resolution of their tax status. In the latter part

of the last century, as tax considerations became a more important factor in business planning,

the “flow through” treatment for profits and losses that partnerships offered investors proved

more attractive than the corporate model. Tax law usually mandated double taxation of a

corporation’s profits and allowed shareholders no direct attribution of its losses, which could

be used to shelter other income from taxation. Both general and limited partnerships were

imperfect instruments for investors because, the former raised the specter of personal liability

for its owners, and the latter could likewise result in such unpleasant consequences for any

limited partners who became active in management. Legal innovators went through several

intermediate steps to remedy that unsatisfactory choice and finally hit upon a new entity, the

LLC. It could provide its members with partnership-like flexibility in its operation, while at

the same time giving them full limited liability protection regardless of how active they

became in the business. When the Internal Revenue Service ruled that the LLC was entitled to

flow-through tax treatment, it seemed that the ideal structure for a non-publicly-held business

had now been created. It now appears to be the best legal organization for small businesses

with just a few owners who work closely together. While limiting entrepreneurial liability

serves a valid goal, it ought to be laid down when it should occur. In cases of evading existing

liability the Government should be able to secure relief from those who own the business.

And since LLCs and LLPs offer their members and partners more direct management power

than usually afforded shareholders, there may be even greater justification to hold them

personally accountable for the obligations of their businesses than the stockholder/owners of a

corporation. Although by business law standards both those entities are still quite new,

applying veil piercing to those new entities. Courts of course should respect the basic

legislative judgment that owners of LLCs and LLPs are entitled to shield their personal

assets from the obligations of their firms. Yet the equitable remedy of piercing the corporate

veil has grown up to deal with egregious situations where business owners have conducted

their operations in a fraudulent, unjust, or socially irresponsible manner. Equilibrium should

be maintained by extending the doctrine to cover similar states of affairs involving LLCs or

LLPs—particularly since the owners of those enterprises are usually able to exercise control

over their operations in a more direct, hands-on manner than stockholders of corporations.


This development has given rise to debate among legal scholars as to whether the line of

jurisprudence permitting veil piercing in corporations should also be extended to LLP and

LLC could be traced to their revolutionary tax status. This part addresses that lacuna, offering

a doctrinal and economic analysis of veil piercing. It concludes that veil piercing cannot be

justified and, accordingly, advocates abolishing the doctrine or establish a new set of

guidelines for LLC and LLP. The standards which veil effects piercing are vague, leaving

judges great discretion. The result has been uncertainty and lack of predictability, increasing

transaction costs for small businesses. A standard academic move treats veil piercing as a

safety valve allowing courts to address cases in which the externalities associated with limited

liability seem excessive.

The manifestation of the abovementioned jumbled Jurisprudence could be traced to the words

of the US Treasury Secretary Timothy Geithner who told the Senate Finance Committee Feb.

15 that Congress should “revisit” long- standing rules that give businesses a choice of paying

taxes as a corporation or through a structure such as a partnership through which they can

report business income on individual tax returns.`

“Congress has to revisit this basic question about whether it makes sense for us as a

country to allow certain businesses to choose whether they’re treated as corporations for

tax purposes or not,” Geithner told Senate Finance Committee members. Later in his

testimony he said: “You have to look at business taxes outside the corporate sector if you’re

going to do something sensible here.”

The recommendation, which Geithner repeated in a meeting with reporters this week at

Bloomberg News in Washington, would affect income earned by the nation’s largest law

firms, investment partnerships and so-called S corporations. It would more than double, to

about $3 trillion, the amount of business income potentially affected by tax-law changes.

Obama called for a rewrite of business tax rules in his State of the Union address on Jan. 25

and in his fiscal 2012 budget proposal released Feb. 14. This overhaul given to the current tax

code is in times where there is increased globalization bringing about uncertainty as to what is

the character of the LLP and the LLC.


To some degree, an examination of both forms of business taxation is unavoidable. Many

business tax breaks, such as accelerated write-offs for equipment, benefit both types of filers.

Eliminating a break in exchange for lowering the corporate tax rate would lead to debate

about whether non- corporate businesses should be able to claim the deduction.

LLCs and LLPs may be the most important developments in business law during the last

century. As with any significant legal innovation, it will probably take some time for our

system to flesh out decisive rules to cover all of the issues that will arise from these new

forms. But the piercing question has been the most litigated matter in corporate law, and it is

easy to foresee that trend continuing in the context of LLCs and LLPs.

So far, both statutory and case law have found it convenient to borrow piercing standards

from the corporate area to adjudicate piercing in LLCs. But both LLCs and LLPs are new and

different creatures that resemble the classic general partnership more closely than the

traditional corporation with its multiple layers of authority. As one commentator has therefore

put it, “the development of a clear, well-reasoned body of case law dealing with the newer

types of unincorporated entities will depend in large part on how effectively litigants educate

courts as these cases arise.”

To that end, courts should respect the legislative decision that gives a basic liability shield to

those who form LLCs and LLPs. But they certainly do not have to accept the argument by

conservative commentators that this immunity ought to be absolute. Principles of simple

justice and important concerns about the social responsibility of businesses are relevant here.

Firms should not be allowed to completely externalize their costs on legitimate contract

claimants and tort victims.

In developing this new piercing doctrine, it is entirely appropriate for courts of equity to

proceed on a case-by-case basis, examining the facts of each situation carefully. In doing so,

they should keep in mind two elemental questions that form the crux of corporate piercing

jurisprudence: first, have the individual defendants so dominated this business that there is

really no distinct entity here? And second, are these defendants. using this purportedly

separate organization to perpetrate a fraud or injustice?


CONCLUSION

Pure descriptive statistics indicate that the relationship between plaintiff type (i.e.

individual or entity) and claim type (tort, existing obligation etc) is significantly

significant, as are relationships separately between claim types and piercing. This

would suggest that either claim type, or both have a statistically significant effect on

piercing. However these do not provide to be true when these hypotheses are tested in

regressive models. That is, even though these descriptive statistics tells us when

courts pierce, they do not explain why they pierce. Inadequate tax trinciples create

difficulties for India. To conclude, with the current availability of laws, piercing the

Corporate Veil is the only solution to a plethora of problems. Which entity has to be

taxed? What happens in case of Indirect Transfer of shares? In many cases SPV are

established to carry out foreign transactions. In cases where these proceeds are

remitted back as a loan to evade tax what remedy of to be adopted? Along with the

necessity to use veil piercing to understand this complex structure of ownership, it is

necessary to strike an equilibrium sufficiently balancing out the rights of the

Corporation.

As then-New York Court of Appeals Judge Benjamin Cardozo observed over six


decades ago, veil piercing is a doctrine “enveloped in the mists of metaphor,”52a

complaint that remains true today. Veil piercing cases are highly fact-specific.53

Successful veil piercing claims differ only in degree, but not in kind, from

unsuccessful claims. It is therefore very hard to make sweeping generalizations in

this area. What follows is thus somewhat of an exercise in futility—an attempt to

articulate doctrinal standards for an area all too often characterized by ambiguity,

unpredictability, and even a seeming degree of randomness.

52 Berkey v. Third Ave. Ry. Co., 155 N.E. 58, 61 (N.Y. 1926)

53 Veil piercing claims are treated as pure questions of fact. Whether the trier of fact will be the judge or jury depends on whether the jurisdiction treats veil piercing as an equitable remedy. Stephen M. Bainbridge in his paper “Abolishing Veil Piercing” states that veil piercing is an equitable remedy, there is substantial disagreement on that question in the literature. The significance of the issue, of course, is that equitable remedies need not be tried before a jury but parties subject to legal remedies generally are entitled to trial by jury. Compare U.S. v. Golden Acres, Inc., 684 F. Supp. 96, 103 (D. Del. 1988) (veil piercing is equitable remedy and affords no right to jury trial); Dow Jones Co. v. Avenel, 198 Cal. Rptr. 457, 460 (Cal. App. 1984) (same) with Bower v. Bunker Hill Co., 675 F. Supp. 1254, 1261-62 (E.D. Wash. 1986) (veil piercing a legal remedy because it seeks a money judgment and thus a right to jury trial exists). See also Wm. Passalacqua Builders, Inc. v. Resnick Developers South, Inc., 933 F.2d 131, 136 (2d Cir. 1991) (veil piercing has roots in both law and equity, so it was proper for trial court to submit issue to jury); American Protein Corp. v. AB Volvo, 844 F.2d 56, (2d Cir. 1988) (veil piercing is an equitable remedy but issue is normally submitted to a jury). In either case, however, appellate courts generally defer to the trier of fact and reverse only for abuse of discretion. Stoker c. Coker, 129 P.2d 390 (Cal. 1942). As the California Supreme Court acknowledged, this standard means that appellate opinions typically provide only “general rules” for guidance.


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http://www.academicjournals.org/JAT

http://www.plusfoundation.org/wp-content/uploads/2011/04/Piercing-the-Veil.pdf






Union Of India (Uoi) And Anr. vs Azadi Bachao Andolan And Anr, (2004) 1 CompLJ

50 SC

The Commissioner Of Income-Tax, ... vs Sri Meenakshi Mills Ltd. & Ors, 1967 AIR

819

ONLINE MATERIAL:

Developments in Taxation: Constitutionality of Service Tax; and Tax Planning through the

"Mauritius Route", August 6, 2011, available athttp://indiacorplaw.blogspot.com/2011/08/developments-in-taxation.html

Vodafone International Holdings v. Union of India: Extracts and Initial Comments,

September 8, 2010, available at

http://indiacorplaw.blogspot.com/2010/09/vodafone-international-holdings-v-

union.html

Implications of Birla-AT&T-Tata tax judgment, July 23, 2011, available at

http://www.moneycontrol.com/news/management/implicationsbirla-att-tata-tax-

judgment_568315.html

Lifting the Corporate Veil for Tax Purposes, April 26, 2011, available athttp://indiacorplaw.blogspot.com/2011/04/lifting-corporate-veil-for-tax-purposes.html

Lift The Corporate Veil Says Karnataka HC, April 27, 2011, available at

http://www.moneycontrol.com/news/features/lift-the-corporate-veil-says-karnataka-

hc_537688.html

Taxing Times: What Will the Vodafone Case Mean for Cross-border M&A, September

23, 2010, available at

http://knowledge.wharton.upenn.edu/india/article.cfm?articleid=4529

Geithner Says Tax Overhaul Must Address Businesses Filing as Individuals, February

25, 2011, available at

http://www.bloomberg.com/news/2011-02-25/geithner-says-tax-overhaul-must-

address-businesses-filing-as-individuals.html

Tearing the corporate veil can be taxing, November 13, 2004, available at

http://www.thehindubusinessline.in/2004/11/13/stories/2004111300090800.htm

Implications of Vodafone Ruling, September 11, 2010, available at

http://www.thehindubusinessline.in/2004/11/13/stories/2004111300090800.htm

http://www.bloomberg.com/news/2011-02-25/geithner-says-tax-overhaul-must-address-businesses-filing-as-individuals.html

http://www.bloomberg.com/news/2011-02-25/geithner-says-tax-overhaul-must-address-businesses-filing-as-individuals.html

http://knowledge.wharton.upenn.edu/india/article.cfm?articleid=4529

http://www.moneycontrol.com/news/features/lift-the-corporate-veil-says-karnataka-hc_537688.html

http://www.moneycontrol.com/news/features/lift-the-corporate-veil-says-karnataka-hc_537688.html

http://indiacorplaw.blogspot.com/2011/04/lifting-corporate-veil-for-tax-purposes.html

http://www.moneycontrol.com/news/management/implicationsbirla-att-tata-tax-judgment_568315.html

http://www.moneycontrol.com/news/management/implicationsbirla-att-tata-tax-judgment_568315.html

http://indiacorplaw.blogspot.com/2010/09/vodafone-international-holdings-v-union.html

http://indiacorplaw.blogspot.com/2010/09/vodafone-international-holdings-v-union.html

http://indiacorplaw.blogspot.com/2011/08/developments-in-taxation.html


http://economictimes.indiatimes.com/opinion/guest-writer/implications-of-vodafone-

ruling/articleshow/6534213.cms

BIO – DATA OF HRIDHAY R. KHURANA

NAME: - HRIDHAY R. KHURANA

COLLEGE NAME: - SVKM’S PRAVIN GANDHI COLLEGE OF LAW

CONTACT NUMBER: - +919920214389

E – MAIL ADDRESS: - [email protected]

ADDRESS: - 703 EVEREST BLDG

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mailto:[email protected]

http://economictimes.indiatimes.com/opinion/guest-writer/implications-of-vodafone-ruling/articleshow/6534213.cms

http://economictimes.indiatimes.com/opinion/guest-writer/implications-of-vodafone-ruling/articleshow/6534213.cms

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