Hill J in Faucilles Pty Ltd v FC of T considered that a ‘sham’ transaction is once which is intended to have

no legal effect, if there is a common intention of the parties that the transaction should be a ‘cloak’ or
‘disguise’ for another transaction, or no transaction at all. Lockhart J in Sharrment Pty Ltd & Ors v Official
Trustee in Bankruptcy (1988) FCR 449 at paragraph 16 defined the term ‘sham’ as: … something that is
intended to be mistaken for something else or that is not what it really purports to be. It is a spurious
imitation, a counterfeit, a disguise or a false front. It is not genuine or true, but something made in
imitation of something else, or made to appear to be something which is not. It is something which is
false or deceptive.

That is, a sham will be found where the acts or documents executed by a taxpayer (and other parties)
are intended to give the appearance of legal arrangements which differ from the actual legal rights and /
or obligations created by the taxpayer.

That is, a transaction is a sham when the parties to a transaction have a common intention that their
acts or documents are not to create the legal rights and obligations which they give the appearance of
creating (Bayly v FC of T (1997) 15 SASR 446). Whilst a sham transaction is legally ineffective, not all
ineffective transactions will be shams (Commissioner of Taxation v Just Jeans Pty Ltd (1987) 16 FCR 110),
even if illegality is involved (Lau v FC of T (1984) 54 ALR 167).

As noted in Jaques v FC of T (1924) 34 CLR 328 at 325, a transaction of itself is void, has no legal effect,
and does not require a statutory provision to nullify such a transaction.

As discussed in Kirby J in Raftland Pty Ltd v FC of T 2008 ATC 20-029, when considering whether a
transaction is a sham, one must consider whether the arrangement is (according to the parties to the
transaction) to have legal reality, or whether the purported transaction is a mere pretence.

It should be noted that just because a transaction is ‘artificial or contrived’ (which is a hallmark of tax
avoidance), does not mean that the transaction is a ‘sham’ (see Oakey Abattoir Pty Ltd v FC of T 84 ATC
4406). Some cases in which the courts have considered that a transaction is a ‘sham’ includes: 3.6.1
Alloyweld 84 ATC 4328 – where a prepaid interest scheme was considered to be a ‘sham’ because of an
admission by a director of the taxpayer company that he ‘… regarded the arrangement as not being a
loan at all and did not consider the company to be under any obligation other than to complete the
circularity of the transaction in time’. 3.6.2 Richard Walter Pty Ltd v FC of T (1996) 67 FCR 243 – where a
loan transaction was held to be a sham, because there was no intention as between the relevant parties
to a loan, that the loan would in fact be repaid (with the result that the ‘loan’ was a taxpayer’s ordinary
income); and 3.6.3 Hickman v FC of T [2005] AATA 339 where interest with respect to a loan was not
considered to be deductible, as the taxpayer did not use its own money in any of the transactions –
which were also held to be not on arm’s length or on a commercial basis. It was held that a round robin
transaction was a façade for an overriding purpose of obtaining tax advantages. 3.7 A result of a
transaction being a sham (or indeed legally ineffective) is that the transaction may be disregarded
without regard to (for example) any anti-avoidance provisions (see FC of T v Newton (1957) 96 CLR 577).
However, the application of the principles of sham to part of a transaction will not prevent the
application of any anti-avoidance provisions to the whole of an arrangement (Richard Walter Pty Ltd v
Commissioner of Taxation (1996) 67 FCR 243).

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 objecti ve. 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.”

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 sa ys
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 DIT v. Copal Research Limited1, the primaryissue before the Delhi High Court
was whether the taxpayer’s transaction amounted to a prima facie avoidance of tax.
To give a background, the writ was filed bythe Revenue against a ruling given bythe
Authorityfor Advance Rulings (“AAR”). The AAR is precluded from considering a
particular transaction if it has been designed prima facie for the avoidance of tax, and
such applications are not admissible before the AAR for a ruling. The transaction
under question was the acquisition of control by Moody’s group over Copal group’s
holdings. The acquisition was structured in three parts – separating the transfer of the

1
W.P.(C) 2033/2013.
underlying Indian entities from the transfer of the offshore holding company. The
Revenue’s main contention was that the transactions were carried out for the purpose
of avoidance of capital gains tax arising from the indirect transfer of underlying
Indian assets. It was further contended that had the transfer of underlying Indian
subsidiaries been effectuated through the transfer of the offshore holding company,
there would have been a taxincidence in India. On the issue of tax avoidance, the
Delhi High Court held that the taxpayer’s transaction was not structured primarilyfor
the purpose of tax avoidance. This was on the basis that the taxpayer had sufficient
commercial reasons for carrying out the transaction in that manner. Interestingly,
another contention of the tax authorities in the present case was with respect to
relocation of residence of a Mauritius based company, on the basis that key decision
making of the Mauritius based company was carried out by a UK resident.
Consequently, the tax department argued that the control and management of the
Mauritius companies should be said to be carried out in UK, the place of residence of
such key person. On this issue, the Delhi High Court was of the view that although
key decisions were carried out bythe UK resident, this fact cannot alone lead to
disregarding the Mauritius based company(an operating company which had
generated revenues, and was involved in providing inter-companyservices).