The Authority For Advance Rulings (Income Tax) vs. Tiger Global International Ii Holdings

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REPORTABLE

IN THE SUPREME COURT OF INDIA
2026 INSC 60
CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 262 OF 2026
[Arising out of SLP (C) No. 2640 OF 2025]


THE AUTHORITY FOR ADVANCE RULINGS
(INCOME TAX) AND OTHERS .... APPELLANT(S)

VERSUS
TIGER GLOBAL INTERNATIONAL II
HOLDINGS .... RESPONDENT(S)



WITH

CIVIL APPEAL NO. 263 OF 2026
[Arising out of SLP (C) No. 2565 of 2026]
[Arising out of SLP (C) Diary No. 1260 of 2025]

THE AUTHORITY FOR ADVANCE RULINGS
(INCOME TAX) AND OTHERS .... APPELLANT(S)

VERSUS

Signature Not Verified
Digitally signed by
CHANDRESH
Date: 2026.01.15
16:58:47 IST
Reason:
TIGER GLOBAL INTERNATIONAL IV
HOLDINGS .... RESPONDENT(S)


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WITH

CIVIL APPEAL NO. 264 OF 2026
[Arising out of SLP (C) No. 5987 OF 2025]


THE AUTHORITY FOR ADVANCE RULINGS
(INCOME TAX) AND OTHERS .... APPELLANT(S)

VERSUS
TIGER GLOBAL INTERNATIONAL III
HOLDINGS .... RESPONDENT(S)


J U D G M E N T

R. MAHADEVAN, J.
1. Delay condoned.

2. Leave granted. The present appeals arise from a final judgment and
common order dated 28.08.2024 passed by the High Court of Delhi at New
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Delhi in W.P. (C) Nos. 6764, 6765 and 6766 of 2020 and are, therefore,
disposed of by this common judgment.

3. For the sake of clarity and systematic analysis, this judgment is divided
into the following heads:

1
Hereinafter referred to as “the High Court”

3

I. INTRODUCTION
4. The power of an independent Republic to levy and collect tax forms part
of its inherent sovereign functions, and such power is circumscribed only by the
requirement of being within the authority of law . Article 265 of the Constitution
of India envisages the same. In a world where nations must necessarily engage

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with each other for mutual economic growth through trade, commerce and
business, and for reasons of economic policy, international cooperation, and
diplomatic balance, the power of each nation is often exercised in tune with
such bilateral or multilateral agreements, which do not take away such inherent
power but which now stand shaped by the legal framework agreed to between
the parties. Having said this, it is for the legislatures to employ their discretion
to innovate through the empirical process and in line with treaty obligations,
evolve new ways of tapping revenue and placing checks on new methods and
devices of tax evasion that may have arisen by abuse of beneficial provisions
based on treaties. Here, the Court will have to tread carefully and cautiously to
ascertain whether the action of the Revenue is within the contours of law –
meaning constitutional, statutory and treaty obligations – in order that fiscal
difficulties are addressed by the State in line with its own fiscal wisdom and
policy.
4.1. India has developed an extensive network of Double Taxation Avoidance
Agreements. Among these, its treaty with Mauritius has been particularly
significant, shaping patterns of foreign investment since the early 1980s, and is
germane to the present case. The India – Mauritius Double Taxation Avoidance
2
Agreement , signed in Port Louis on 24 August 1982 and effective in both
jurisdictions from 1983, soon gave rise to what became known as the Mauritius
Route. Investors favoured this structure for the beneficial provisions of the

2
For short, “DTAA”

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treaty combined with Mauritius’ domestic tax regime. While this significantly
helped foreign capital inflows, it also attracted mounting scrutiny. Concerns
were raised that the treaty, entered into with the intent to prevent double
taxation, was being used to achieve non-taxation, particularly in respect of
capital gains. Entities were incorporated in Mauritius solely to take advantage of
treaty benefits. This created serious issues of treaty shopping, tax avoidance,
and the integrity of the international tax system.
4.2. Over time, judicial and legislative responses were developed to address
these challenges. After deliberations, in 2016, India and Mauritius signed a
protocol providing that the DTAA would shift away from a residence-based
system for the taxation of capital gains to a source-based system, to restore
balance and prevent abuse. However, as global investment structures grow
increasingly complex, with multi-country reach, interpretational issues continue
to surface.
4.3. These issues have once again come before this Court in the present
matter, arising out of the taxation of capital gains from the sale of shares of a
Singapore-based entity deriving substantial value from its Indian operations.
The transactional involvement of the relevant investment entities based in
Mauritius raises significant questions as to the reach of treaty protections, the
relationship between treaty provisions and domestic tax law, and the principles
that must guide the grant or denial of treaty benefits. It is in this legal,

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economic, and policy backdrop that the dispute relating to Tiger Global needs to
be considered.

II. BRIEF FACTS
5. The respondents – assessees viz ., Tiger Global International II Holdings,
Tiger Global International III Holdings, and Tiger Global International IV
Holdings, are private companies limited by shares, incorporated under the laws
of Mauritius. They were set up with the primary objective of undertaking
investment activities with the intention of earning long-term capital appreciation
and investment income. The assessees are regulated by the Financial Services
3
Commission in Mauritius and have been granted a Category I Global Business
4
License under Section 72(6) of the Financial Services Act, 2007, enacted by the
Parliament of Mauritius.
5.1. The business of the assessees, according to them, is wholly controlled and
managed by their Board of Directors in Mauritius. The assessees claim to have
satisfied all the requirements laid down by the FSC in Section 3 of Chapter 4 of
the Guide to Global Business, thereby establishing commercial substance in
Mauritius. The assessees had three Directors on the Board of Directors, of
whom two are Mauritian residents and one is a resident of the United States.
They have maintained, and continue to maintain, their principal bank account
and accounting records in Mauritius. They have caused their statutory financial

3
In short, "FSC"
4
In short, "GBL-I"

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statements to be prepared and audited in Mauritius and continue to do so. They
have held and continue to hold, office premises in Mauritius since incorporation
and have two employees at the same.
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5.2. Further, the assessees hold valid Tax Residency Certificates issued by the
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Mauritius Revenue Authority , certifying them to be tax residents in Mauritius
for the income tax purposes. On the basis of the same, they claim to be tax
residents of Mauritius under the laws of Mauritius and under the DTAA
between India and Mauritius for the avoidance of double taxation and the
prevention of fiscal evasion.
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5.3. The assessees engaged Tiger Global Management , LLC, a company
incorporated in the United States of America, to provide services in relation to
their investment activities. All services provided by TGM, including but not
limited to investment sourcing, portfolio stewardship, and observership
services, are subject to review and final approval by the Board of Directors of
the assessees. TGM does not have the right to contract on behalf of, or bind, the
assesses, or take any decisions on their behalf without the approval of the Board
of Directors. The assessees also hold valid Permanent Account Numbers issued
by the Indian income tax authorities.

5
In short, "TRC"
6
In short, "MRA"
7
For short, “the TGM"

8

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5.4. The assessees held shares of Flipkart Private Limited , a private company
limited by shares, incorporated under the laws of Singapore. The total number
of shares of Singapore Co. acquired by the assessees is tabulated below:

5.5. Thereafter, Singapore Co. invested in multiple companies in India, and
the value of its shares was derived substantially from assets located in India.
The assessees transferred shares of Singapore Co. ("Sale Shares") held by them
to Fit Holdings S.A.R.L ("Buyer"), a company incorporated under the laws of
Luxembourg. These transfers were undertaken as part of a broader transaction
involving the majority acquisition of Singapore Co. by Walmart Inc., a company
incorporated in the United States of America, from several shareholders,

8
For short, “Singapore Co.”

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including the assessees. The details of shares transferred by the assessees and
the gross consideration received are as under:

5.6. Thereafter, the assessees approached the Indian tax authorities by filing
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applications under Section 197 of the Income Tax Act, 1961 , seeking
certification of nil withholding prior to consummation of the transfer. By notices
dated 17.08.2018, the tax authorities informed that the assessees would not be
eligible to avail the benefits under the DTAA on the ground that they were not
independent in their decision-making and that control over the decision- making
relating to the purchase and sale of shares did not lie with them. The tax
authorities, accordingly, issued certificates dated 17.08.2018, prescribing a
withholding rate in respect of the sale of shares by the assessees as under:


9
In short, “the Act”

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5.7. Hence, the assessees approached the Authority for Advance Rulings by
filing applications under Section 245Q(1) of the Act, seeking an advance ruling
on the common question that “Whether, on the facts and circumstances of the
case, gains arising to the assessees (private companies incorporated in
Mauritius) from the sale of shares held by them in Flipkart Pvt. Ltd (a private
company incorporated in Singapore) to Fit Holdings S.A.R.L. (a company
incorporated in Luxembourg) would be chargeable to tax in India under the Act
read with the DTAA between India and Mauritius?”
5.8. The AAR, after providing opportunities to the assessees and upon
considering the materials gathered by the Assessing Officer, came to the
conclusion that the applications preferred by the assessees relate to a transaction
or issue which is prima facie designed for the avoidance of income tax and
therefore, rejected the same as being hit by the threshold jurisdictional bar to
maintainability, as enshrined in proviso (iii) to Section 245R(2).

10
In short “the AAR”

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5.9. Challenging the order dated 26.03.2020 passed by the AAR, the assessees
filed W.P.(C) Nos. 6764, 6765 and 6766 of 2020 before the High Court.
5.10. The High Court, vide the final judgment and common order dated
28.08.2024, allowed the writ petitions and quashed the AAR’s order dated
26.03.2020, after holding that the assessees were entitled to treaty benefits and
that their income would not be chargeable to tax in India. Aggrieved by the
same, the Revenue has preferred the instant appeals.

III. FINDINGS OF THE AAR AND THE HIGH COURT
6. Before turning to the rival submissions, it would be appropriate to outline
the findings of the AAR and the High Court, which culminated in orders
favourable to the Revenue and the respondents / assessees respectively.
(A) AAR
6.1. After noting the organisational structure of the Respondents, the AAR
held that they were part of Tiger Global Management LLC, USA, and were held
through its affiliates via a web of entities based in the Cayman Islands and
Mauritius. On facts, the AAR found that the overall control and management of
the respondent companies did not lie with their Board of Directors in Mauritius,
and that the authority to operate bank accounts for transactions above USD
2,50,000 was vested with Mr. Charles P. Coleman. Although the principal bank
account of the respondents was maintained in Mauritius, no local person based
in Mauritius was authorised to sign cheques on behalf of the Directors.

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According to the AAR, Mr. Coleman, who was not based in Mauritius, was
appointed as the signatory for the Mauritius bank account, and he was declared
as the beneficial owner in the application for a GBL-I filed with the Mauritius
FSC. He was also the authorised signatory for the immediate parent companies,
Tiger Global Five Percent Holdings and Tiger Global Six Percent Holdings. He
was further noted to be the sole Director controlling the ultimate holding
companies, Tiger Global PIP Management V Limited and Tiger Global PIP
Management VI Limited. Though the decisions for investment or sale were
formally taken by the Boards of Directors of the respondent companies, the
AAR concluded that real control over transactions exceeding USD 2,50,000 was
exercised by Mr. Coleman through the non-resident Director, Mr. Steven Boyd.
On this basis, it was held that the “head and brain” of the companies, was not in
Mauritius and, therefore, their control and management were situated outside
Mauritius, in the USA. Referring to the financial statements filed with the
applications, the AAR found that the respondents had made no investment other
than in the shares of Flipkart, and therefore concluded that the real intention
behind obtaining the TRCs was to avail the benefit of the DTAA.
6.2. The AAR further observed that the exemption granted to a resident of
Mauritius applied only to capital gains arising from the alienation of shares of
an Indian company. In the present case, however, the capital gains arose from
the sale of shares of a Singapore Co., and hence, the transaction did not qualify
for exemption under the Mauritius Treaty. The AAR also held that the objective

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of the DTAA was to provide exemption only for gains arising from the transfer
of shares of an Indian company, and that such exemption was never intended for
the transfer of shares of a company not resident in India. Furthermore, the AAR
held that there was no foreign direct investment made by the respondent
companies in India and, therefore, no question of participation in investment
arose. As there was neither any business operation in India nor any taxable
revenue generated, the AAR concluded that the transaction was a preordained
arrangement created for the purpose of tax avoidance. It was therefore held that
the transaction was prima facie designed for avoidance of tax and qualified as
an “arrangement” under the law. Accordingly, the bar under clause (iii) of the
proviso to Section 245R(2) of the Act was found to be applicable.
6.3. The AAR found that though the assessees contended that the transaction
involved in the present case was a sale of shares simpliciter undertaken between
two unrelated independent parties, which could not be considered as being
designed for avoidance of tax, the same was too simplistic to be accepted. The
precise question raised in the applications was the chargeability of capital gains
on the sale of shares under the Act read with the DTAA between India and
Mauritius. Capital gain is not dependent on the mere sale of shares. As per the
mechanism of computation of capital gains, the cost of acquisition of shares is
to be reduced from the sale price of shares. Therefore, in the mechanism of
capital gains computation, what is relevant is not only the sale of shares but also
the purchase of shares. Thus, the entire transaction of acquisition as well as sale

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of shares, as a whole, is required to be examined, and a dissecting approach by
examining only the sale of shares, as suggested by the assesses, cannot be
adopted. The AAR observed that the design for avoidance of tax may be a long-
drawn process. The AAR also noted from the Notes to Financial Statements that
the principal objective of the assessees was to act as investment holding
companies for a portfolio investment domiciled outside Mauritius. The
investment made by the assessees in the Singapore Co., with an Indian
subsidiary, was with a prime objective of obtaining benefits under the DTAA
between Mauritius and India, and between Mauritius and Singapore. The AAR
further noted that the assessees were part of Tiger Global Management LLC,
USA, and were held through its affiliates via a web of entities based in the
Cayman Islands and Mauritius. Though the holding subsidiary structure might
not be conclusive proof of tax avoidance, the purpose for which the subsidiaries
were set up does indicate the real intention behind the structure.
6.4. According to the AAR, the fact that the assessee companies were set up
for making investments in order to derive benefits under the DTAA between
Mauritius and India was an inescapable conclusion. The assessees had not
explained why Mr. Charles P. Coleman, who was not based in Mauritius, was
appointed to sign the cheques on the Mauritius bank account. Further,
Mr. Charles P. Coleman was the beneficial owner, as disclosed by the assessees
in the application form for a GBL-I filed with the Mauritius FSC. Mr. Coleman
was also the authorised signatory for the immediate parent companies of the

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assessees viz. , Tiger Global Five Percent Holdings and Tiger Global Six Percent
Holdings, and was the sole Director of the ultimate holding companies, Tiger
Global PIP Management V Limited and Tiger Global PIP Management VI
Limited. Thus, the appointment of Mr. Charles P. Coleman as the authorised
signatory of bank cheques above the prescribed limit could not be considered a
mere coincidence. While the decisions for investment or sale were taken by the
Boards of Directors of the assessees, the real control over decisions involving
any transaction over USD 2,50,000 was exercised only by Mr. Charles P.
Coleman. He was thus controlling the decisions of the Boards of Directors of
the assessees through the non-resident Director, Mr. Steven Boyd, who was
accountable to him. Therefore, the AAR concluded that the head and brain of
the companies and, consequently, their control and management were situated
not in Mauritius but outside, particularly in the USA.
6.5. Though the assessees contended that the holding structure of the
applicants has no relevance in determining whether the transaction was prima
facie designed for avoidance of tax, the AAR held that it was not the holding
structure alone that was relevant; rather, the holding structure coupled with the
prima facie management and control of the holding structure, including the
management and control of the applicants, were relevant factors for determining
the design for avoidance of tax. Further, the real management and control of the
assessees were not with their respective Boards of Directors, but with
Mr.Charles P. Coleman, the beneficial owner of the entire group structure. The

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assessee companies were only "see-through entities" to avail the benefits of the
DTAA.
6.6. The AAR also pointed out that it is a settled principle that a treaty is to be
interpreted in good faith. The context and purpose of the treaty must be
determined on the basis of the preamble and annexures, including the
agreement, subsequent agreements regarding the interpretation of the terms of
the treaties, and relevant international rules applicable to the agreement.
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Circular No.682 dated 30.03.1994 issued by the Central Board of Direct Taxes
had clarified that any resident of Mauritius deriving income from the alienation
of shares of Indian companies would be liable to capital gains tax only in
Mauritius, as per the Mauritius tax law, and would not have any capital gains
tax liability in India. It was evident from this Circular that what was exempted
for a resident of Mauritius was capital gains derived from the alienation of
shares of an Indian company. In the present case, capital gains had not been
derived from the alienation of shares of any Indian resident; rather, the assessees
sought relief in respect of capital gains arising from the sale of shares of a
Singapore Co. The Protocol for Amendment of the Convention for Avoidance of
Double Taxation between India and Mauritius was signed on 10.05.2016, which
provided that taxation of capital gains arising from the alienation of shares
acquired on or after 01.04.2017 in a company resident in India would be on a
source basis with effect from the financial year 2017-18. At the same time,

11
For short, “CBDT”

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investments made before 01.04.2017 were grandfathered and not subject to
capital gains tax in India. Thus, even under the amended DTAA between India
and Mauritius, what was not taxable was capital gains arising from the sale of
shares of a company resident in India.

6.7. Therefore, the AAR found that exemption from capital gains tax on the
sale of shares of a company not resident in India was never intended under
either the original or the amended DTAA between India and Mauritius. In view
of the clear stipulations in the DTAA, the assessees were not entitled to claim
the benefit of exemption of capital gains on the sale of shares of a Singapore
Co. and hence, failed on merits as well as on the ground of treaty eligibility. The
assessees disputed the contention of the Revenue that tax residency in Mauritius
was established only to take advantage of the DTAA. They submitted that
Mauritius’ comprehensive tax treaty network with various countries, and not
just India, facilitated efficient asset management and competitive returns for
their investors. According to them, the mere fact of obtaining a TRC to avail
treaty benefits does not render the transaction a colourable device for tax
avoidance. It had been held by this Court in Vodafone International Holdings
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BV v. Union of India that the DTAA and Circular No.789 dated 13.04.2000
would not preclude the Income Tax Department from denying treaty benefits in
suitable cases. It was further held that the Department is entitled to examine the

12
(2012) 6 SCC 613 (3 Judge Bench)

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entire transaction as a whole, and if it is established that the Mauritian company
was interposed as a device, it would be open to the Department to discard the
device and subject the real transaction to tax.
6.8. The AAR further found that though tax residency was claimed to have
been established to take advantage of Mauritius’ treaty network with various
countries and not just India, in effect, the entire investment made by the
assessees was only in the Singapore Co. in respect of which the benefit of the
DTAA was being claimed. All three assessees had made no investment other
than in the shares of Flipkart. Thus, the real intention of the assessees was to
avail the benefit of the DTAA. Accordingly, the AAR concluded that the
assessees failed to satisfy the yardsticks laid down by this Court in Vodafone .
There was no foreign direct investment made by the assessee companies in
India, and therefore, no participation in investment arose. The assessees had
invested in shares of Flipkart, a Singapore Co., and thus, the immediate
investment destination was Singapore and not India. Consequently, the
assessees also failed on other parameters, viz ., the period of business operation
in India, generation of tax revenue in India, timing of exit, and continuity of
business on such exit. In the absence of any strategic foreign direct investment
in India, there was neither any business operation in India nor any taxable
revenue generated. Thus, the arrangement was held to be a preordained
transaction created for the purpose of tax avoidance.


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6.9. Ultimately, the AAR held that the question raised in the applications filed
under Section 197 was prima facie designed for avoidance of tax. Though the
assessees contended that the shares of the Singapore Co. derived their value
substantially from assets located in India and that they were eligible to claim
benefit under Article 13(4) of the DTAA, the fact remained that what was
transferred were shares of the Singapore Co. and not of an Indian company. The
objective of the DTAA was to allow exemption of capital gains only on the
transfer of shares of an Indian company, and any such exemption in respect of
shares of a company not resident in India was never intended by the legislature.
Further, the actual control and management of the assessees were not in
Mauritius but in the USA with Mr. Charles P. Coleman, the beneficial owner of
the entire group structure. Accordingly, AAR Nos. 04/2019, 05/2019 and
07/2019 were dismissed, with the AAR holding that the transaction in respect of
which the ruling was sought was prima facie designed for avoidance of tax and
fell within clause (iii) of the proviso to Section 245R(2) of the Act. In view
thereof, the AAR held that it was not obliged to render findings on the merits of
the question whether the assessees were entitled to the benefits of the DTAA
between India and Mauritius in respect of the sale of shares of Flipkart, a private
company incorporated under the laws of Singapore, or on the taxability of
capital gains arising therefrom. The assessees had sought to derive benefit from
Article 13(3A) of the DTAA, contending that acquisitions of shares prior to
01.04.2017 stood grandfathered and that gains arising therefrom were exempt

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from taxation. As the shares of Flipkart, Singapore, had been admittedly
acquired prior to 01.04.2017, the assessees claimed exemption from capital
gains tax. The AAR rejected the claim, holding that the assessees were mere
conduit companies, lacking commercial substance, and were disentitled to claim
DTAA benefits.
6.10. In conclusion, the AAR held that the entire arrangement entered into by
the assessees was intended to claim benefits under the DTAA in a manner not
contemplated by the lawmakers and constituted an arrangement for avoidance
of tax in India. Consequently, the bar under clause (iii) of the proviso to Section
245R(2) of the Act was held to be squarely applicable, and the applications filed
by the assessees were rejected.

(B) HIGH COURT
6.11. On the preliminary objections raised by the Revenue, the High Court
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found that the Commissioner of Income Tax , after referring to a detailed
examination conducted by the Department during the Section 197 certification
process, had concluded that the question of chargeability of capital gains and the
identification of the beneficial owner, upon piercing the corporate veil, had
already been determined. In light of the same, and in the absence of any change
in factual circumstances, the CIT had urged the AAR to reject the applications
made by the respondents. The High Court observed that the tone and tenor of

13
For short, “CIT”

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the observations and findings of the AAR that the respondents were set up only
for making investments in order to derive benefits under the DTAA, that the
head and brain were not situated in Mauritius, that Mr. Charles P. Coleman
exercised control over the respondents, etc., did not appear to be tentative or
based on a preliminary or prima facie examination. Rather, they reflected a
conclusive determination. It also noted that both the CIT and the AAR had
reached definitive findings, the effect of which would constrain subordinate
authorities from ignoring or bypassing such conclusions.
6.12. The High Court further found error in the AAR’s conclusion that TGM
LLC was the holding or parent company of the respondents. It held that neither
the CIT nor the AAR had succeeded in rebutting the consistent stance of the
respondents that TGM LLC functioned merely as an investment manager and
had no equity participation in the respondents. No evidence was presented to
show that TGM LLC had contributed any funds or that monies were repatriated
to TGM LLC from the respondents. The High Court further held that the
respondents could not be dismissed as entities lacking economic substance.
They were structured to operate as pooling vehicles for investments and held
GBL-I under Mauritian law. Their investor base comprised more than 500
investors from over 30 jurisdictions, and their assets and liabilities reflected
significant economic activity, with total liabilities and shareholders’ equity
amounting to over USD 1.76 billion, and a net increase in shareholders’ equity
from operations exceeding USD 267 million. The High Court further observed

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that the transfer of shareholding in question took place in 2018 as part of a
broader global transaction involving Walmart Inc. The strategy of pooling
investments through the respondents was found to be a prudent commercial
decision, as it allowed efficient capital deployment rather than requiring each
investor to act individually. The High Court concluded that the period of
investment in the Flipkart Singapore holding entity exceeded a decade and
when viewed in conjunction with the expenditure incurred in Mauritius, these
factors collectively dispelled any notion that the respondents lacked economic
substance.
6.13. On the question of control and decision-making, the High Court observed
that while a parent or holding company may exercise supervisory functions over
its subsidiaries, including by appointing directors or authorising key decisions,
such influence does not render the subsidiary a mere puppet unless there is
evidence of fraud, sham, or complete lack of independence. The mere presence
of Directors connected with the TG Group, such as Mr. Charles P. Coleman and
Mr. Steven Boyd, did not justify an inference of subservience or loss of
independent agency. After taking note of the Board resolutions in detail, the
High Court found that they reflected decisions taken collectively by the full
Board. Though Mr. Coleman was authorised to approve expenditures exceeding
USD 250 million, such authority was conferred by a collective decision of the
Board and required countersignature by Group C Mauritian-based Directors.
The key Directors, such as Mr. Moussa Taujoo, Mr. Mohammad Akshar

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Maherally, and Mr. Steven Boyd, were also signatories to the constitutional
documents, akin to memoranda of association. The High Court further found
that the minutes of Board meetings, when read holistically, evidenced
deliberative and collective decision-making rather than unilateral action. The
fiduciary role of the investment manager was also noted as a legitimate basis for
certain Board placements. Thus, the High Court held that the respondents’
Boards could not be said to have been deprived of autonomy or reduced to
subservient bodies.
6.14. On the issue of beneficial ownership, the High Court reiterated the
principle of “substance over form,” holding that beneficial ownership
presupposes a scenario where the ostensible recipient or holder of income has
no control or discretion over such income and merely acts as a conduit or
administrator for another. The High Court further held that in the present case,
no evidence had been led by the Revenue to demonstrate that the respondents
were contractually or legally obligated to pass on the gains from the share
transfer to TGM LLC, or that they acted on its behalf. The argument that the
respondents lacked beneficial ownership was therefore found to be baseless,
resting solely on conjecture and not supported by material evidence.
6.15. The High Court, relying on the decisions of this Court in Union of India
14
v. Azadi Bachao Andolan and Vodafone reiterated that the mere fact that an
entity is located in Mauritius, or that investments were routed through that

14
(2004) 10 SCC 1

24

jurisdiction, cannot by itself lead to an adverse inference. The High Court
further found that Mauritius has long been recognised as a favourable
investment destination and that “treaty shopping” per se is not impermissible
unless it is clearly shown to be a device for tax evasion or contrary to the intent
of the treaty. The issuance of a TRC by the Mauritian authorities was held to be
sacrosanct and to establish a presumption of legitimate tax residency and
beneficial ownership. The High Court held that such certification is to be
respected by the Revenue, and any attempt to pierce the corporate veil must be
grounded in compelling evidence of tax fraud, sham transactions, or complete
absence of economic substance. It is only when the Revenue is able to meet
such a threshold that it can disregard the presumption of validity that arises the
moment a TRC is produced and the Limitation of Benefits conditions are
fulfilled.
6.16. The High Court further noted that both Azadi Bachao Andolan and
Vodafone were decided before a statutory framework on tax residency had been
formally enacted. Circular No. 789 of 2000 had clarified that a TRC issued by
Mauritius would suffice for determining both fiscal residence and beneficial
ownership, including for capital gains. Noting that a subsequent attempt to
dilute this position via the Finance Bill, 2013, by proposing that a TRC would
not be sufficient to claim treaty benefits, was abandoned, and that a press
release dated 01.03.2013 reaffirmed that tax authorities were not to go behind

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the TRC, the High Court held that this reiterated the legal sufficiency of the
TRC.
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6.17. As far as the Limitation of Benefits clause introduced in the DTAA is
concerned, the High Court held that such clauses are specifically designed to
address treaty abuse and are determinative in such inquiries. Once LOB
provisions are satisfied, the Revenue cannot erect additional barriers or invoke
vague suspicions. Any challenge to treaty benefits in the face of a satisfied LOB
clause must meet an extremely high threshold and be based on evidence of
fraud, sham, or intent to defeat the Treaty. The High Court further held that the
LOB clause had been inserted into the DTAA in the backdrop of the
introduction of Chapter XA in the Indian Income Tax Act, and Article 27A of
the DTAA expressly grandfathered all transactions relating to shares acquired
prior to 01.04.2017. This demonstrated a clear intent by both Contracting States
to align treaty protections with domestic legislation while preserving the benefit
of grandfathering. The High Court also noted that in Azadi Bachao Andolan , it
was held that once the DTAA was recognised as intended to override the
provisions of the Act, it would be impermissible for national courts to lift the
veil of incorporation.
6.18. With regard to Article 13(3A) of the DTAA, the High Court concluded
that the said Article represented the intent of the Contracting States to ring-fence
and exempt capital gains arising from the sale of shares acquired prior to

15
For short, “LOB”

26

01.04.2017. Article 13(3B) introduced separate tax rates for gains arising from
shares acquired after that date. The absence of a tax rate for pre-2017
transactions under Article 13(3B) strongly evidenced the intention to exclude
such gains from tax, aligning with the Treaty’s overarching purpose. Domestic
rules, such as Rule 10U under Chapter XA, could not override or dilute this
treaty protection. In particular, the Revenue’s reliance on Rule 10U(2) to defeat
grandfathering under Article 13(3A) was rejected. The High Court held that the
phrase “without prejudice” in Rule 10U(2) signified that it would apply only in
scenarios not already addressed by Rule 10U(1)(d), and thus could not be used
to nullify the grandfathering clause.
6.19. Lastly, the High Court found the AAR’s interpretation of Article 13(3A)
to be legally unsound and held that the AAR had erroneously concluded that the
sale of shares in a Singapore company would not fall under Article 13(3A), on
the premise that it applied only to shares of Indian companies. The High Court
rejected this view, noting that the shares sold derived substantial value from
underlying Indian assets, thereby satisfying the test for indirect transfers.
Accepting the AAR’s view would nullify the treaty protections and defeat the
purpose of the grandfathering clause, especially since the acquisition occurred
prior to the critical date. The High Court thus concluded that the respondents’
transactions were grandfathered under the DTAA, and the Revenue could not
circumvent these provisions through domestic law or administrative
reinterpretation. In effect, the High Court held that the transaction was not

27

designed for avoidance of tax and stood grandfathered by virtue of Article
13(3A) of the DTAA. Accordingly, the High Court allowed the Writ Petitions
filed by the respondents and quashed the AAR’s Order.
6.20. The High Court also found that investments emanating from Mauritius
are not a recent phenomenon. The first DTAA was signed at Port Louis on
24.08.1982 and came into effect from 01.04.1983 and 01.07.1983 in the two
countries, respectively. The last Protocol for amending the provisions of that
treaty was signed on 10.05.2016, as could be seen from the data available on the
portal of the Department for Promotion of Industry and Internal Trade, which
captures foreign direct investment into the country between April 2000 and
March 2024. The High Court further found that Circular No. 682 constituted the
first significant clarification rendered by the Board in the context of Article 13
of the DTAA and the taxation of capital gains. Paragraph 3 of Circular No. 682
unequivocally declared that gains derived by a resident of Mauritius from the
sale or transfer of shares would be taxable only in that country. Circular No. 682
further proclaimed that even if a resident of Mauritius were to derive income
from the alienation of shares of Indian companies, such income would be liable
to capital gains tax only in Mauritius, in accordance with the tax laws prevalent
in that country. Therefore, it was held that such an entity would not face a
capital gains tax liability arising or accruing in India.
6.21. The High Court further considered that the above Circular was followed
by Circular No. 789 which clarified the position of the Revenue with respect to

28

TRCs issued by authorities in Mauritius, such certificates constituting sufficient
evidence for the purposes of ascertaining the status of residence as well as the
application of principles of beneficial ownership. Circular No. 789 clarified that
the test of residence flowing from a TRC would also apply in respect of income
from capital gains on the sale of shares. Circular No. 789 reiterated the stand
taken in Circular No. 682, holding that a resident of Mauritius would not be
subjected to capital gains tax arising in India consequent to the sale of shares
under Article 13(4) of the DTAA. Of equal significance were certain proposed
amendments to the Act.
6.22. After hearing the parties and placing reliance on the judgment in
Vodafone, the High Court held that the order of the AAR dated 26.03.2020
suffered from manifest and patent illegalities. The view taken therein with
respect to the transaction in question was found to be wholly untenable and
unsustainable. Consequently, its conclusion that the impugned transaction was
designed for tax avoidance was held to be arbitrary and incapable of being
sustained. In the opinion of the High Court, the transaction stood duly
grandfathered by virtue of Article 13(3A) of the DTAA. Accordingly, the High
Court allowed the writ petitions, quashed the AAR’s order dated 26.03.2020,
and affirmed the assessees’ contention that the transaction was not designed for
avoidance of tax, thereby entitling them to all consequential reliefs.



29

IV. CONTENTIONS OF THE PARTIES
(A) ON BEHALF OF THE APPELLANTS
7. Mr. N. Venkataraman, learned Additional Solicitor General appearing on
behalf of the appellants – Revenue, submitted that both the TDS Officer and the
AAR had expressed only a prima facie view of the matter. The order dated
17.08.2018 passed under Section 197 of the Act merely prescribed a tentative
and provisional rate of deduction of tax at source and did not amount to a
conclusive determination of tax liability. Likewise, the AAR while observing
that the transaction appeared prima facie to involve tax avoidance, expressly
refrained from rendering any final determination. Despite this, the High Court
proceeded to adjudicate the issue on merits, which was impermissible.
7.1. The learned Additional Solicitor General further submitted that under
Article 4(1) of the DTAA, Indian tax authorities are entitled to examine whether
the assessee is a resident of the other Contracting state, namely, Mauritius, by
applying the domestic law of that State. As the source State vested with
sovereign taxing powers, India retains the authority to determine taxability
under its domestic law.
7.2. It was further urged by the learned Additional Solicitor General that a
DTAA merely allocates taxing rights between Contracting States and does not
involve abdication or surrender of sovereign taxing power. Reliance was placed
rd
on Klaus Vogel on Double Taxation Conventions (3 Edition) , which clarifies
that residence under a DTAA must be determined according to the domestic law

30

of the alleged State of residence, and such determination may be independently
examined by the tax authorities of the other Contracting State.
7.3. The learned Additional Solicitor General contended that the source
country, having the primary right to tax income arising within its jurisdiction,
must retain authority to examine treaty abuse. The authority to grant treaty
benefits and the power to examine abuse operate in distinct legal spheres. Grant
of treaty benefits does not divest the source State of its power to examine
whether the transaction is abusive or lacking in commercial substance.
7.4. It was submitted by the learned Additional Solicitor General that the
transaction involves sale of shares of a Singapore company deriving substantial
value from assets located in India, thereby rendering India the source State. The
transaction constitutes an indirect transfer taxable under Section 9(1) read with
Explanations 4 and 5, introduced by the Finance Act, 2012, which codify the
“look-through” principle. Once taxability under domestic law is established, the
question of availability of DTAA relief arises, including whether production of a
TRC is conclusive and whether the substance test operates independently as an
anti-abuse principle.
7.5 The learned Additional Solicitor General submitted that a TRC
constitutes only prima facie evidence of residence and cannot override the
principle of “substance over form.” The test of control and management is
central to examining genuineness of residence and the bona fides of the
transaction. Reliance was placed on commentaries of the Organisation for

31

16
Economic Cooperation and Development and Klaus Vogel as well as the
decisions of this Court in Azadi Bachao Andolan and Vodafone .

7.6. It was further contended by the learned Additional Solicitor General that
the “substance” test is not a test for treaty entitlement per se , but an independent
anti-abuse safeguard. Reference was made to Sections 73(2)(b) and 73A of the
Mauritius Income Tax Act, which recognise control, management, and the Place
17
of Effective Management as determinative of residence, even prior to October
2018.

7.7. The learned Additional Solicitor General pointed out that the Mauritian
statutory regime mandates control and management within Mauritius, which is
pari materia with Section 6(3) of the Indian Income Tax Act. Section 71 of the
Financial Services Act, 2007 also requires a Global Business Licence holder to
be managed and controlled from Mauritius, with the criteria being non-
exhaustive.

7.8. Further, it was contended by the learned Additional Solicitor General that
issuance of a TRC does not foreclose inquiry into actual control and
management or application of “substance over form”. Treaty benefits may be
denied where capital gains arise in India but escape taxation elsewhere due to
absence of capital gains tax. Reliance was placed on Vodafone , particularly its

16
For short, “OECD”
17
For short, "POEM”

32

recognition of Judicial Anti-Avoidance Rules and the distinction between
“influencing power” and “persuasive power”.

7.9. The learned Additional Solicitor General submitted that Circular No. 789
was a policy measure intended to provide certainty to FIIs and similarly placed
investors. It does not extend to business investments or indirect transfers.
Circular No. 1 dated 10.02.2003 is also silent on indirect transfers.

7.10. It was submitted by the learned Additional Solicitor General that Sections
90(4) and 90(5), inserted by the Finance Act, 2012, do not render a TRC
conclusive. This interpretation ignores the simultaneous introduction of GAAR
under Chapter X-A. Rule 10U notified in 2013 further operationalised GAAR.

7.11. The learned Additional Solicitor General also referred to Section 97(1)(c)
and Rule 10U to demonstrate that only limited categories of FII-related
investments are excluded from GAAR scrutiny. Business investments and
indirect transfers are not insulated.

7.12. It was further contended by the learned Additional Solicitor General that
Sections 90(4) and 90(5) do not confer immunity from GAAR. Section 90(2A)
expressly provides that GAAR overrides DTAA benefits where impermissible
avoidance arrangements are found.


33

7.13. The learned Additional Solicitor General pointed out that the scheme of
the Act demonstrates a cohesive and deliberate framework to ensure that treaty
benefits are extended only to genuine arrangements and not to those designed
solely to obtain tax advantages. Circular No. 789 cannot override GAAR or
Section 90(2A). Azadi Bachao Andolan and Vodafone both affirm that while a
TRC is relevant, it is not conclusive, and authorities may examine the real
nature of the transaction. According to the learned Additional Solicitor General,
if a transaction is genuine, taxing rights vest in Mauritius. If abusive, treaty
protection stands denied and the transaction is taxable under Indian domestic
law.

7.14. Further, it was contended by the learned Additional Solicitor General that
after the 2017 amendment to Article 13, direct transfers are governed by Articles
13(3A) and 13(3B), while indirect transfers fall under Article 13(4), which
contains no LOB or grandfathering. The present transaction involves an indirect
transfer and thus falls outside Articles 13(3A), 13(3B) and Article 27A.

7.15. With regard to the question whether tax avoidance ought to be addressed
under the DTAA or under domestic law, the learned Additional Solicitor General
submitted that the LOB clause introduced with effect from 01.04.2017, operates
in a narrow and specific field. The LOB clause denies the benefit of Article
13(3B) to shell or conduit companies by prescribing objective criteria for such
determination. It constitutes a Specific Anti Abuse Rule (SAAR) incorporated

34

within the Treaty itself to counter treaty abuse. However, it was urged that the
said provision has no application to the present case, as it applies only to direct
transfers, whereas the transaction in question involves an indirect transfer.
Consequently, neither Article 27A nor Articles 13(3A) or 13(3B) are attracted.
Upon the 2017 amendment, direct transfers are governed by Article 13(3A),
while indirect transfers fall exclusively within Article 13(4). As Article 13(4) is
not subject to any LOB provision, it was contended that once treaty abuse is
established in respect of such transaction, the DTAA ceases to govern the
transaction and the matter must necessarily be tested under the Income Tax Act,
1961.

7.16. Proceeding on the premise that treaty benefits may be denied in cases of
treaty abuse, the learned Additional Solicitor General next addressed the
independent applicability of GAAR under Chapter XA post 01.04.2017,
irrespective of when the underlying investment was made. It was submitted that
Chapter XA is deliberately framed as an overreaching anti-abuse regime.
Section 95 opens with a non-obstante clause empowering the Revenue to
declare an arrangement as an impermissible avoidance arrangement
notwithstanding anything contained elsewhere in the Act. This overriding
character is further reinforced by Section 100, which provides that the
provisions of Chapter XA shall apply “in addition to, or in lieu of, any other
basis for determination of tax liability.” These provisions, it was urged,

35

demonstrate that GAAR operates as a supervening anti-abuse code whose
efficacy cannot be diluted by interpretative carve-outs.
7.17. It was further submitted by the learned Additional Solicitor General, that
the transaction under consideration, according to the Respondents themselves,
took place during FY 2018–19 relevant to AY 2019–20 well after GAAR came
into force. In this context, reference was made to Section 97(1)(b)(iv) which
deems an arrangement to lack commercial substance if it is structured through
one or more persons in a manner that disguises the value, location, source,
ownership or control of funds. Similarly, Section 97(1)(c) treats as lacking
substance an arrangement involving the location of an asset, transaction, or
residence of a party primarily for obtaining a tax benefit. Reliance was placed
on Vodafone wherein this Court recognised the continued applicability of
JAAR. It was submitted that these doctrines have since been statutorily codified
through GAAR which is precisely why GAAR was not accorded blanket
grandfathering. Had GAAR been wholly grandfathered, it would have
immunised transactions that were, even under pre-existing jurisprudence, open
to scrutiny for tax avoidance. Hence, the plea that all investments stand
insulated from GAAR merely by reason of temporal precedence was
characterised as unsustainable.

7.18. Addressing Rules 10U(1) and 10U(2), the learned Additional Solicitor
General contended that the argument that every purchase of shares prior to

36

01.04.2017 constitutes an “investment” immune from GAAR, even where the
transfer occurs thereafter, is fundamentally flawed. It was submitted that
Chapter XA is not confined to passive investments but extends to business
structures and arrangements lacking commercial substance. Section 97
enumerates arrangements that are deemed to lack substance. Acceptance of the
Respondents’ interpretation would enable abuse structures put in place before
01.04.2017 to escape scrutiny by the simple expedient of labelling themselves
as “investments”– a result expressly cautioned against by the Shome
Committee.
7.19. It was therefore, submitted by the learned Additional Solicitor General
that once GAAR came into effect with effect from 01.04.2017, any income-
earning transaction forming part of an arrangement must undergo scrutiny under
Chapter X-A, regardless of whether the underlying investment or structure
originated prior to that date. Rule 10U is intended to give legislative expression
to this position. While Rule 10U(1) enumerates four categories of exclusions
from GAAR, Rule 10U(2) specifies the circumstances in which GAAR would
apply even to arrangements linked to pre-2017 investments. Thus, where a
transaction is found to be an impermissible avoidance arrangement, Rule
10U(2) operates to attract GAAR notwithstanding the vintage of the initial
investment. Conversely, if the assessee successfully rebuts the statutory
presumptions under Sections 96 and 97, the exclusion under Rule 10U(1)(d)
would apply.

37

7.20. The learned Additional Solicitor General further highlighted that the
deliberate use of distinct expressions in Rule 10U, namely “arrangement” in
Rule 10U(1)(a) and Rule 10U(2), and “investment” in Rule 10U(1)(d), cannot
be ignored. The differentiation is purposeful. Rule 10U(1)(a) excludes small-
value arrangements falling below the monetary threshold, even if they are
otherwise impermissible avoidance arrangements. In contrast, Rule 10U(1)(d)
concerns genuine investments, while Rule 10U(2) targets abusive arrangements
irrespective of their historical origin. Any interpretation collapsing these distinct
concepts would render portions of the Rule otiose and defeat legislative intent.

7.21. As regards the Shome Committee Report and the CBDT Circular dated
27.01.2017, the learned Additional Solicitor General submitted that they are
confined to the treatment of “investments” and do not extend to complex
“arrangements” lacking commercial substance. The Finance Minister’s Budget
Speech of 2012, it was argued, primarily addressed the retrospective
amendments to Section 9(1) introduced in response to Vodafone . These
amendments, later made prospective, had no bearing on the operation of GAAR.
The speech thus clarified that GAAR would apply prospectively, which
implementation was ultimately deferred to 01.04.2017. Accordingly, GAAR
became applicable from AY 2018–19, and the transaction in the present case,
pertaining to AY 2019–20, squarely falls within its ambit.


38

7.22. Regarding Azadi Bachao Andolan , the learned Additional Solicitor
General submitted that the said decision concerned the legality of investments
made by FIIs and mutual funds and did not involve cross-border transactions
relating to the direct or indirect transfer of shares constituting business
investments. Moreover, the decision was rendered in the context of the
Mauritius Offshore Business Activities Act, 1992, and not the later Financial
Services Act regime. The factual and statutory context of the present case was
thus asserted to be materially distinct.

7.23. The learned Additional Solicitor General referred to the issuance of show
cause notices to FIIs in the year 2000, the resulting market volatility, and the
subsequent Press Note dated 04.04.2000 and Circular No. 789, which were
issued to restore investor confidence and reaffirm treaty commitments. It was
emphasised that these measures were directed exclusively at portfolio
investments by SEBI-registered FIIs and mutual funds operating in Indian
capital markets. At the time, large-scale indirect transfers of shares constituting
business reorganisations were neither prevalent nor contemplated.
Consequently, Circular No. 789 cannot be extended by implication to such
transactions.

7.24. Turning to Vodafone , it was submitted by the learned Additional Solicitor
General that while the case involved an indirect transfer of shares constituting a
business investment, it neither concerned the DTAA nor Circular No. 789.

39

Nevertheless, the judgment affirmed that doctrines such as substance over form,
piercing the corporate veil, lack of commercial substance, and the concept of
sham or conduit entities are part of Indian tax jurisprudence and capable of
legislative codification as GAAR. Emphasis was placed on the recognition that
a TRC is not conclusive and that the tax authorities may examine the real nature
of the transaction notwithstanding formal documentation.

7.25. It was further submitted by the learned Additional Solicitor General that
paragraph 311 of Vodafone forms part of a concurring opinion and must be read
harmoniously with the majority judgment. The observations therein, particularly
in relation to Circular No. 789 and the control and management test, were
characterised as obiter dicta and not the ratio decidendi. Treating them as
overriding the conclusions of the majority would, it was urged, be legally
impermissible.

7.26. The learned Additional Solicitor General also emphasised that Circular
No. 789 applies to “residents” of Mauritius under Article 4 of the DTAA and
that the categorisation of an entity as an FII or investment fund is a creation of
Indian law, without relevance under Mauritian law. Further, the Circular
predates the introduction of GBLs, which were brought in only under the
Financial Services Act, 2001. By the time, the 2007 Act came into force, all
entities were required to obtain GBLs, a development not contemplated by the
Circular.

40


7.27. It was contended by the learned Additional Solicitor General that even
where an entity holds a TRC and is incorporated in Mauritius, the Indian tax
authorities retain the power to examine the substance of the transaction for
treaty abuse, including issues of control and management and financial
substance. This position, it was submitted, is consistent with international tax
principles and OECD guidance recognising the right of the source State to deny
treaty benefits in cases of abuse.
7.28. Finally, the learned Additional Solicitor General submitted that while
Mauritius authorities may regulate licensees, the power to deny treaty benefit
rests with India where treaty abuse is established.
7.29. On the aforesaid grounds, the learned Additional Solicitor General prayed
that the appeals be allowed and the impugned judgment of the High Court be set
aside.

(B) ON BEHALF OF THE RESPONDENTS
8. Per contra , Mr. Harish Salve, learned Senior Counsel for the respondents
– assessees submitted that Article 4 of the DTAA begins with the words “For
the purposes of this Convention, the term ‘resident of a Contracting State’
means…” , thereby establishing that the Article prescribes a mandatory and
exclusive rule for determining residence. The succeeding phrase “any person
who, under the laws of that State, is liable to taxation therein” makes it explicit
that the Treaty permits each Contracting State to apply its own domestic tests of

41

residency, and that such State alone is competent to determine whether a person
is “liable to tax” within its jurisdiction. The term “person” must therefore be
understood as referring to an entity treated as a taxable unit under the domestic
law of the Contracting State.
8.1. It was submitted by the learned Senior Counsel that the DTAA further
recognises the right of a Contracting State to impose tax liability “ by reason of
his domicile, residence, place of management or any other criterion of similar
nature” . Accordingly, a State may adopt one or more criteria for creating tax
liability. By way of illustration, it was submitted that a company incorporated in
India – even if wholly owned by foreign shareholders and managed and
controlled outside India – is nonetheless “liable to tax” in India in respect of its
global income by virtue of Section 6 of the Act. Likewise, India cannot refuse to
treat as a resident of Mauritius a company which is “liable to taxation” in
Mauritius under Mauritian law. The only situation in which residence
determination by both States arises is where a person is simultaneously a
resident of both Contracting States.
8.2. The learned Senior Counsel further submitted that the enquiry initiated by
the Indian Tax Department into the “head and brain” of the respondent
companies was not on the footing that their corporate existence should be
disregarded or that they should be treated as mere conduits – an argument that
could arise only if the Department had sought to tax the Cayman holding
companies instead of the respondents. The respondents’ corporate structures are

42

wholly consistent with those typically adopted by FIIs and investment funds.
The enquiry into “head and brain” was directed solely at challenging the
validity of the TRC and proceeded on the flawed premise that Indian authorities
are entitled to interpret the Financial Services Act, 2007 of Mauritius and other
Mauritian laws to determine whether the respondents are “liable to tax” in
Mauritius. Such an approach, it was submitted, is contrary to the express
language of Article 4 of the DTAA.
8.3. Reliance was placed on Section 90(4) of the Act, which makes it clear
that the question whether a person is a resident of a foreign State must be
determined by that State alone. The provision requires the assessee to obtain a
certificate from the Government of the foreign State, and such certificate
constitutes evidence of residence. Section 90(5) further stipulates that the
assessee must provide any additional prescribed documents. Thus, the
documentation required to claim DTAA benefits is exhaustively enumerated.
8.4. Learned Senior Counsel referred to Circular No.789, which remains in
force and explicitly states that “wherever a certificate of residence is issued by
the Mauritian authorities, such certificate will constitute sufficient evidence for
accepting the status of residence as well as beneficial ownership for applying
the DTAC accordingly.” Paragraph 3 of the Circular clarifies that this applies to
capital gains arising from the sale of shares.


43

8.5. According to the learned Senior Counsel, the Revenue’s arguments are an
attempt to circumvent the plain terms of Circular No. 789. The Circular was
expressly upheld by this Court in Azadi Bachao Andolan , where it was observed
that had the Contracting States intended to restrict treaty benefits for nationals
of third countries, a suitable limitation clause would have been inserted. In the
absence of such a clause, no disabling condition can be judicially introduced.
8.6. It was submitted by the learned Senior Counsel that domestic law
doctrines such as “lifting the corporate veil” or “substance over form” cannot be
invoked to deny treaty benefits in the absence of express treaty language to that
effect. Treaty provisions operate as a self-contained code; unilateral domestic
doctrines cannot override them.
8.7. The learned Senior Counsel submitted that treaty abuse concerns were
comprehensively addressed through the 2016 Protocol to the DTAA, which
came into effect from 01.04.2017. The amended provisions operate
prospectively and do not affect gains arising from investments made prior
thereto. This demonstrates that exclusive taxing rights over capital gains vested
in Mauritius prior to 01.04.2017.
8.8. It was argued by the learned Senior Counsel that the Treaty constitutes a
complete code, and unless the Treaty expressly incorporates domestic law,
changes in domestic law cannot alter Treaty interpretation. Accordingly, the
principles governing residence and allocation of taxing rights must be
ascertained strictly within the Treaty framework. On this basis, learned Senior

44

Counsel outlined the following sequence for determining tax residence under
the DTAA:
• First, for the purposes of assessment under Indian law, the Department
must examine whether the entity is a resident of India under Section 6 of
the Act;
• If the entity is not a resident under Indian law, it is to be assessed as a
non-resident;
• Where a non-resident claims the benefit of a DTAA, the Department must
examine whether the entity possesses a valid TRC issued by the other
Contracting State, in this case, Mauritius. Under a Treaty such as the
DTAA, the determination of whether a person is a resident of Mauritius
must be made by the Mauritian authorities in accordance with their
domestic law;
• Only in cases of dual residency – i.e., where the person is found to be a
resident of both India and Mauritius – does the question of applying the
tiebreaker clause arise;
• In such a case, it is for Indian tax law to define the standard by which a
person is considered a tax resident of India, and for the Indian tax
authorities to decide whether such a person has its “place of effective
management” situated in India. These are questions of Indian law and
administration of Indian laws. If, in this enquiry, the Indian tax authority

45

holds that under Indian law the place of effective management is situated
in India, it could not apply the DTAA; and
• Moreover, the tiebreaker clause is not concerned with whether the person
is (or is not) a resident of a particular State under its laws; the enquiry is
whether, under Indian law, the person is a resident of India because its
place of effective management is situated in India – the test for
determining place of effective management in India being those
established by Indian law. It is an enquiry under domestic law by a
domestic forum, and such an enquiry is expressly provided for by the
DTAA.

8.9. It was submitted by the learned Senior Counsel that the respondents form
part of an alternative investment fund structure established at the time of initial
investment. They were incorporated in Mauritius, obtained GBLs, complied
with Mauritian law, and were issued TRCs after examination of control and
management.
8.10. According to the learned Senior Counsel, the respondents are the legal
owners of the income. Having furnished valid TRCs, Circular No. 789 and the
Press Release dated 01.03.2013 preclude the Department from going behind the
TRC. The proposal to treat TRC as “necessary but not sufficient” was
consciously abandoned.

46

8.11. On the appellants’ submission that observations in Azadi Bachao Andolan
and Vodafone were obiter , it was argued by the learned Senior Counsel that this
is untenable. In Vodafone , the principal contention of the Revenue was that the
offshore structure was created solely to avoid capital gains tax on the sale of
shares of the Indian operating companies. The assessees countered that the
structure afforded treaty protection under the DTAA; thus, the correctness of
Azadi Bachao Andolan directly arose. The Court reaffirmed Azadi Bachao
Andolan and clarified the limited scope of McDowell & Company Ltd v.
18
Commercial Tax Officer , holding that corporate structures may be disregarded
only when used as artificial or colourable devices. No such allegation exists in
the present case. Vodafone also reaffirmed the “look at” principle, requiring the
Court to view the transaction holistically rather than through a dissecting lens.
The respondents’ investment structure was long-standing, commercially
rational, and had generated taxable revenues; thus, characterising it as a
preordained tax avoidance scheme contradicts Vodafone.
8.12. It was argued by the learned Senior Counsel that applying JAAR- or
GARR-inspired principles to determine Mauritian residence is impermissible.
Under the Treaty, residence must be determined exclusively under Mauritian
law by Mauritian authorities. Treaty shopping and sham transactions are distinct
concepts; the Department has conflated them. If Treaty abuse existed, it was for
the Contracting States to amend the Treaty, which they have done prospectively.

18
(1985) 3 SCC 230

47


8.13. It was also submitted by the learned Senior Counsel that the Government
of India has notified the Mauritius Treaty under Section 90 of the Act, and under
Section 90(2), the Treaty prevails to the extent more beneficial to the assessee.
Therefore, the charge of tax under the Income Tax Act will be overridden by a
more beneficial provision under a tax treaty and vice versa. Domestic doctrines
like JAAR, which are not more beneficial, cannot be superimposed onto treaty
interpretation. Section 90(2A), which provides GAAR override, cannot be
judicially extended to JAAR.
8.14. The learned Senior Counsel submitted that without prejudice to the
applicability of Explanation 7 to Section 9(l)(i) in relation to the transfer, gains
arising to the assessees from the transfer may not be deemed to accrue / arise in
India in light of Section 9 of the ITA. According to the learned Senior Counsel,
a plain reading of Section 90 establishes that the only requirement that needs to
be satisfied in respect of treaty eligibility under Section 90(2) is the satisfaction
of the criteria laid out under Section 90(4) and Section 90(5). It meets the said
criteria in light of the TRC issued by the MRA and Form 10F issued by it. Thus,
as long as the assessees qualify as a person to whom the Treaty applies under
the provisions of the DTAA, the provisions of the ITA and more specifically,
Section 5 read with Section 45 read with Section 9 will have no application if
the Treaty is more beneficial to the assessees. This, according to the learned

48

Senior Counsel, is a well-established proposition in law and has been upheld by
this Court in several decisions, including Vodafone and Azadi Bachao Andolan .
8.15. On grandfathering under GAAR, it was submitted by the learned Senior
Counsel that only income from transfer of pre-2017 investments is protected.
Rule 10U(2) does not dilute Rule 10U(1)(d). The appellants’ interpretation
would render Rule 10U(1)(d) redundant – an interpretation contrary to settled
principles.
8.16. Reliance was placed on the Shome Committee Report, the Finance
Minister’s 2015 Budget Speech, the 2016 Protocol, CBDT Circulars, and FAQs
to emphasise that GAAR applies only prospectively to investments made on or
after 01.04.2017. Pre-2017 investments are fully grandfathered.
8.17. The learned Senior Counsel submitted that the appellant’s contention that
Circular No. 789 applies only to FIIs or NRIs and not to GBL holders is liable
to be rejected as being contrary to the language of the Circular, which extends to
“other investment funds, etc.” Paragraph 2 refers broadly to “investors from
Mauritius”, and no artificial distinction between classes of Mauritian residents
can be introduced.
8.18. It was further pointed out by the learned Senior Counsel that the
judgment in Azadi Bachao Andolan dealt with “Overseas Business
Corporations”, and the Court rejected the argument that such entities were not
residents of Mauritius merely because they lacked business operations there.
GBLs have existed since 2001, and the Indian legislature has never drawn any

49

distinction between GBL holders and other Mauritian investment vehicles. In
fact, the regulatory framework under the Financial Services Act, 2007 is more
stringent than the earlier regime.
8.19. It was submitted by the learned Senior Counsel that the Ministry of
Finance Press Release dated 01.03.2013 reaffirmed that Circular No. 789
“continues to be in force” without carving out any exception for GBL holders.
8.20. On GAAR applicability, it was clarified by the learned Senior Counsel
that Rule 10U(1)(b) exempts only those FIIs who (a) are assesses under the Act,
(b) do not avail DTAA benefits, and (c) invest under SEBI approval. FIIs
claiming treaty benefits remain subject to GAAR; therefore, the supposed
distinction between FIIs and GBL entities is illusory.
8.21. Accordingly, the learned Senior Counsel submitted that Indian authorities
are precluded from going behind the TRC issued to GBL holders except in cases
where dual residence triggers Article 4(3).
8.22. Ultimately, the learned Senior Counsel contended that the CIT failed to
establish prima facie tax avoidance; reference made by the CIT to the case of
Tiger Global International III Holdings was misplaced; the statutory bar under
Section 245R(2)(iii) requires clear evidence of a premeditated tax avoidance
design, which is absent; the transaction was commercially driven and lawful;
and exemption was claimed solely on treaty allocation of taxing rights, which
does not attract Section 245R(2)(iii).

50

8.23. Thus, learned Senior Counsel for the respondents submitted that the
impugned judgment of the High Court warrants no interference and prayed for
dismissal of the present appeals.

V. ANALYSIS
9. We have considered the submissions made by the learned senior counsel
on either side and analysed the materials available on record carefully and
meticulously.
10. On 24.01.2025, when the matter was taken up for consideration, this
Court stayed the impugned judgment and order from its operation,
implementation and execution. Subsequently, this Court also stayed the
assessment proceedings initiated against the respondents / assessees, by order
dated 04.02.2025, which is reproduced below for ease of reference:
“1. This matter was notified for admission on 24.01.2025 on that day this Court
issued notice and stayed the operation of the impugned order passed by the High
Court of Delhi.

2. Today Mr. Harish Salve, the learned senior counsel mentioned the matter,
pointing out that no sooner this Court stayed the operation of the judgment of
the High Court the assessment proceedings have started.

3. He would submit that they have succeeded before the High Court and having
succeeded before the High Court till the final disposal of the main matter they
should not be subjected the further assessment proceedings.

4. On the other hand Mr. N Venkataraman, the learned ASG submitted that if the
operation of the impugned judgment is not stayed then most of the notices may
get time barred.

5. With a view to balance the situation, we direct let the main matter come up for
final hearing on 18.03.2025.

51


6. With a view to protect the interest of the revenue and obviate the difficulty of
the notices getting time barred the further proceedings of the assessment shall
remain stayed till 18.03.2025.”

Thereafter, the appeals were taken up and proceeded with for final hearing.

(A) ISSUES FOR CONSIDERATION
11. Evidently, in the present case, the AAR had prima facie found the claim
to be an arrangement to avoid tax and hence, the applications fell under the
proviso to Section 245R(2) of the Act and were not maintainable. However, the
High Court has set aside the order of the AAR and rendered its findings on the
merits of the case, by judgment dated 28.08.2024, the correctness of which is
challenged before us.
11.1. Though the learned Additional Solicitor General appearing for the
appellants – Revenue made elaborate contentions touching all the findings of
the High Court, we are inclined to deal with the core issue alone that revolves
around the present case, viz. ,
“ Whether the AAR was right in rejecting the applications for Advance Ruling on
the ground of maintainability, by treating the capital gains arising out of a
transaction of sale of shares of a Singapore Co., which holds the shares of an
Indian company, by a Mauritian company controlled by an American company,
to be prima facie an arrangement for tax avoidance, and hence, whether it can
be enquired into to ascertain whether the capital gains would be taxable in

52

India under the Income Tax Act read with the relevant provisions of the
Mauritius Treaty or not? ”

(B) LEGAL BACKGROUND
12. At the outset, we deem it apt to deal extensively with the relevant
background and provisions pertaining thereto, to shed light on the issue at hand.

DTAA
12.1. The fulcrum of the DTAA with respect to capital gains taxation lies in
Article 13, which initially contained five paragraphs. Paragraphs 1, 2, and 3
allocated taxation rights to the source State on gains arising from the alienation
of immovable property, movable property forming part of a permanent
establishment/fixed base, and ships and aircraft operating in international traffic,
respectively. Paragraph 4, which is of primary importance, was drafted as a
residuary provision. Unlike the preceding paragraphs, it did not consider situs as
a factor and instead allocated taxation rights over gains derived by a resident
from the alienation of any remaining properties (other than those covered under
Paragraphs 1, 2, and 3) to the resident jurisdiction. Paragraph 5 defined the
concept of alienation. Further, under Article 4, the term ‘residence’ has been
defined as any person who, under the laws of that State, is liable to taxation by
reason of his domicile, residence, place of management, or any other criterion of

53

a similar nature. The clauses as they stood originally are reproduced as
hereunder:
“ ARTICLE 4 - Residents - 1. For the purposes of this Convention, the term
“resident of a Contracting State” means any person who, under the laws of that
State, is liable to taxation therein by reason of his domicile, residence, place of
management or any other criterion of similar nature. The terms “resident of
India” and “resident of Mauritius” shall be construed accordingly.
2. Where by reason of the provisions of paragraph (1), an individual is a
resident of both Contracting States, then his residential status for the purposes
of the Convention shall be determined in accordance with the following rules:
(a) he shall be deemed to be a resident of the Contracting State in which he has
a permanent home available to him; if he has a permanent home available to
him in both Contracting States, he shall be deemed to be a resident of the
Contracting State with which his personal and economic relations are closer
(hereinafter referred to as his “centre of vital interests”);
(b) if the Contracting State in which he has his centre of vital interests cannot be
determined, or if he does not have a permanent home available to him in either
Contracting State, he shall be deemed to be a resident of the Contracting State
in which he has an habitual abode;
(c) if he has an habitual abode in both Contracting States or in neither of them,
he shall be deemed to be a resident of the Contracting State of which he is a
national;
(d) if he is a national of both Contracting States or of neither of them, the
competent authorities of the Contracting States shall settle the question by
mutual agreement.
3. Where by reason of the provisions of paragraph (1), a person other than an
individual is a resident of both the Contracting States, then it shall be deemed to
be a resident of the Contracting State in which its place of effective management
is situated.”


“ ARTICLE 13 - Capital gains - 1. Gains from the alienation of immovable
property, as defined in paragraph (2) of article 6, may be taxed in the
Contracting State in which such property is situated.

2. Gains from the alienation of movable property forming part of the business
property of a permanent establishment which an enterprise of a Contracting
State has in the other Contracting State or of movable property pertaining to a
fixed base available to a resident of a Contracting State in the other Contracting
State for the purpose of performing independent personal services, including
such gains from the alienation of such a permanent establishment (alone or

54

together with the whole enterprise) or of such a fixed base, may be taxed in that
other State.

3. Notwithstanding the provisions of paragraph (2) of this article, gains from the
alienation of ships and aircraft operated in international traffic and movable
property pertaining to the operation of such ships and aircraft, shall be taxable
only in the Contracting State in which the place of effective management of the
enterprise is situated.

4. Gains derived by a resident of a Contracting State from the alienation of any
property other than those mentioned in paragraphs (1), (2) and (3) of this article
shall be taxable only in that State.

5. For the purposes of this article, the term “alienation” means the sale,
exchange, transfer, or relinquishment of the property or the extinguishment of
any rights therein or the compulsory acquisition thereof under any law in force
in the respective Contracting States.”

12.2. Thus, pursuant to Article 13(4), capital gains from the alienation of shares
were taxable only in the resident jurisdiction, if the case did not fall under any of
the preceding clauses. In the context of Mauritius-based investments in India,
the capital gains were treated as taxable only in Mauritius. However, as
Mauritius’ domestic tax law exempted capital gains from share transfers, such
gains were effectively not taxed in either India or Mauritius. This created a
significant tax arbitrage opportunity.
12.3. Notably, it was only from 1992 onwards that a substantial increase in
foreign investment through Mauritius was observed, leading to the emergence of
the Mauritius Route as the dominant investment structure for foreign capital
inflows into India. This shift was primarily driven by the Mauritius Offshore
Business Activities Act, 1992, which established the Mauritius Offshore

55

Business Authority (MOBA) in 1993, thereby creating a favourable regulatory
framework for offshore investments. This development coincided with India’s
economic liberalization policy of 1991-1992, further accelerating foreign capital
inflows through Mauritius.

CBDT Circular No. 682 dated 30.02.1994
12.4. Upon becoming aware that the Treaty was being misused, as the ultimate
beneficiaries of the investments were often residents of third countries,
discussions emerged regarding the potential taxation of such gains in India. This
led to uncertainty in investor sentiment and raised diplomatic considerations. In
response, the CBDT issued Circular No. 682, clarifying that under Article 13(4)
of the DTAA, capital gains derived by Mauritius residents would be taxable
only in Mauritius, thereby reaffirming India’s commitment to the Treaty and
solidifying the Mauritius Route as a preferred investment structure.

12.5. Paragraph 4 of CBDT Circular No.682: Clarification Regarding
Agreement for Avoidance of Double Taxation with Mauritius dated 30.03.1994
deals with taxation of capital gains arising from the alienation of any property
other than those mentioned in the preceding paragraphs and grants the right of
taxation of capital gains only to that State of which the person deriving the
capital gains is a resident. In terms of paragraph 4, capital gains derived by a
resident of Mauritius from the alienation of shares of companies shall be taxable
only in Mauritius according to Mauritius tax law. Therefore, any resident of

56

Mauritius deriving income from the alienation of shares of Indian companies
will be liable to capital gains tax only in Mauritius, as per Mauritius tax law, and
will not have any capital gains tax liability in India.

CBDT Circular No. 789 dated 13.04.2000
12.6. Pursuant to further discussions between India and Mauritius, a Joint
Working Group was constituted in 1995 to renegotiate the DTAA in light of
growing concerns regarding tax avoidance and potential misuse of the Treaty,
including money laundering. The Indian delegation proposed the insertion of a
limitation clause to address treaty abuse, suggesting that if India’s right to tax
income was restricted under the Treaty, but such income was exempt in
Mauritius as foreign-sourced income, then India should have the right to tax it
as if the DTAA did not exist. However, this proposal was rejected by Mauritius
( Thirteenth Lok Sabha, Joint Committee on Stock Market Scam and Matters
Relating Thereto, 2002 – Pg. 182-186, Pg. 297-308 ).
12.7. In the year 2000, Indian tax authorities denied the benefit of Article 13(4)
of the DTAA to certain Foreign Institutional Investors (FIIs) on the ground that
their beneficial ownership was outside both India and Mauritius. This resulted
in capital outflows from India, diplomatic friction with Mauritius, and concerns
over the stability of foreign investments. Mauritius argued that these entities
were legitimately incorporated under its offshore regulatory regime and,
therefore, qualified as residents of Mauritius for tax purposes.

57

12.8. To clarify India’s position, the Indian Finance Minister issued a press note
on 04.03.2000, stating that the actions of certain tax officers were case-specific
assessments and did not reflect the Government’s policy regarding the taxation
of FIIs. Subsequently, the CBDT issued Circular No. 789 reaffirming that FIIs
and investment funds operating from Mauritius were liable to tax in Mauritius.
It further clarified that once such entities obtained a TRC from the Mauritian
authorities, this would constitute sufficient proof of: (i) beneficial ownership
and residence for claiming the concessional rate on dividend income under
Article 10; and (ii) residence for capital gains taxation under Article 13(4). The
relevant portion reads as under:
“CBDT Circular No. 789, Clarification Regarding Taxation of Income from
Dividends and Capital Gains Under the Indo-Mauritius Double Tax Avoidance
Convention (DTAC) dated 13.04.2000:

1. The provisions of the Indo-Mauritius DTAC of 1983 apply to ‘residents’ of
both India and Mauritius. Article 4 of the DTAC defines a resident of one State
to mean “any person who, under the laws of that State is liable to taxation
therein by reason of his domicile, residence, place of management or any other
criterion of a similar nature.” Foreign Institutional Investors and other
investment funds, etc., which are operating from Mauritius are invariably
incorporated in that country. These entities are ‘liable to tax’ under the
Mauritius Tax law and are, therefore, to be considered as residents of Mauritius
in accordance with the DTAC.

2. . . . It is hereby clarified that wherever a Certificate of Residence is issued by
the Mauritian Authorities, such Certificate will constitute sufficient evidence for
accepting the status of residence as well as beneficial ownership for applying
the DTAC accordingly.

3. The test of residence mentioned above would also apply in respect of income
from capital gains on sale of shares. Accordingly, FIIs, etc., which are resident
in Mauritius would not be taxable in India on income from capital gains arising
in India on sale of shares as per paragraph 4 of article 13.”

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CBDT Circular No. 1/2003 dated 10.02.2003
12.9. Thereafter, another Clarification in CBDT Circular No. 1/2003 dated
10.02.2003 was issued upon certain doubts being raised regarding the effect of
Circular No. 789, particularly as to whether the said Circular would also apply
to entities which are residents of both India and Mauritius. It was clarified that
where an assessee is a resident of both the Contracting States in accordance with
paragraph 1 of Article 4 of the Indo-Mauritius DTAC, then his residence is to be
determined in accordance with paragraph 3 of the said Article. The relevant
portion is reproduced hereinbelow:
“CBDT Circular No. 1/2003: Clarification regarding residential status under
Indo-Mauritius Double Taxation Avoidance Convention (DTAC) dated
10.02.2003

…….Certain doubts have been raised regarding the effect of the aforesaid
circular, particularly whether the said circular would also apply to entities
which are resident of both India and Mauritius. In order to remove all doubts on
the subject, it is hereby clarified that where an assessee is a resident of both the
contracting States, in accordance with para 1 of article 4 of Indo-Mauritius
DTAC, then, his residence is to be determined in accordance with para 3 of the
said article, which reads as under :—
"3. Where, by reason of the provisions of paragraph 1, a person other
than an individual is resident of both the Contracting States, then it shall
be deemed to be a resident of the Contracting State in which the place of
effective management is situated."

In view of the above, where an Assessing Officer finds and is satisfied that a
company or an entity is resident of both India and Mauritius, he would be free to
proceed to determine the residential status under para 3 of article 4 of DTAC.
Where it is found as a fact that the company has its place of effective
management in India, then notwithstanding its being incorporated in Mauritius,
it would be taxed under the DTAC in India.”



59

Union of India v. Azadi Bachao Andolan
12.10. While so, Circular No. 789 was challenged by way of a Public Interest
Litigation in Azadi Bachao Andolan. This Court upheld the legal validity of the
Circular and ruled that Article 13(4) of the DTAA did not require the control or
beneficial ownership of shares to be within India or Mauritius. It was further
held that the Union Government is empowered to issue Circulars for Treaty
implementation, and such Circulars would prevail over domestic law in case of
inconsistency. This Court acknowledged concerns over Treaty shopping and
possible abuse but remarked that such practices “may have been intended”. This
Court also noted that if India intended to deny benefits to nationals of third
States, a LOB clause should have been included in the DTAA. Further, this
Court observed that tax treaties are negotiated with multiple considerations in
mind and that developing countries often allow Treaty shopping to attract scarce
foreign capital and technology.

Vodafone International Holdings BV v. Union of India
12.11. Later, the judgment of this Court in Vodafone , prompted significant
changes in India’s tax regime, including retrospective amendments. Though it
did not deal with the DTAA, it nevertheless had a ripple effect on it. Vodafone
International Holdings B.V., a Dutch firm, bought shares of a Cayman Islands-
based business that Hutchison controlled, thereby acquiring a 67% holding in
Hutchison Essar Limited (HEL), an Indian Corporation. The deal, which was

60

executed outside India, was worth about USD 11.2 billion. The Indian tax
authorities issued a show cause notice demanding tax and penalties, claiming
that Vodafone was required to pay capital gains tax under Indian law because
the transaction’s underlying assets were situated in India. The main legal
question was whether the Indian Income Tax Act, 1961 could be used to tax the
transfer of shares of a foreign corporation that indirectly possessed assets in
India. This Court interpreted Section 9(1)(i), which deals with income deemed
to accrue or arise in India, and held that indirect share transfers, such as the
Vodafone–HTIL transaction, are not covered under Section 9(1)(i) of the
Income Tax Act. The Bombay High Court’s “rights and entitlements” theory
was rejected, clarifying that control is merely incidental to share ownership and
not an independent capital asset. Emphasizing a “look at” test over a “look
through” approach, this Court observed that for taxability under Section 9(1)(i),
the capital asset must be situated in India. It also distinguished legitimate tax
planning from tax evasion, aligned with Azadi Bachao Andolan , and upheld
Vodafone’s transaction. This Court reiterated that TRCs cannot be pierced
except in cases involving fraud, sham transactions, etc . , and r eaffirmed the
validity of the Mauritius Route and its inextricable link with foreign investment.
The relevant paragraphs of the judgment are extracted below, for ease of
reference:




61

“ Our analysis

61. Before coming to Indo-Mauritius Double Taxation Avoidance Agreement
(DTAA), we need to clear the doubts raised on behalf of the Revenue regarding
the correctness of Azadi Bachao [(2004) 10 SCC 1] for the simple reason that
certain tests laid down in the judgments of the English Courts subsequent to IRC
v. Duke of Westminster [IRC v. Duke of Westminster, 1936 AC 1 : 1935 All ER
Rep 259 (HL)] and Ramsay (W.T.) Ltd. v. IRC [1982 AC 300 : (1981) 2 WLR 449
: (1981) 1 All ER 865 (HL)] help us to understand the scope of Indo-Mauritius
DTAA.

62. It needs to be clarified that McDowell [(1985) 3 SCC 230 : 1985 SCC (Tax)
391] dealt with two aspects. First, regarding validity of the circular(s) issued by
CBDT concerning Indo-Mauritius DTAA. Second, on the concept of tax
avoidance/evasion. Before us, arguments were advanced on behalf of the
Revenue only regarding the second aspect.

63. The Westminster [IRC v. Duke of Westminster, 1936 AC 1 : 1935 All ER Rep
259 (HL)] principle states that: (Ramsay case [1982 AC 300 : (1981) 2 WLR
449 : (1981) 1 All ER 865 (HL)] , AC p. 323 G)
“Given that a document or transaction is genuine, the court cannot go
behind it to some supposed underlying substance.”
The said principle has been reiterated in subsequent English Courts judgments
as “the cardinal principle”.

64. Ramsay [1982 AC 300 : (1981) 2 WLR 449 : (1981) 1 All ER 865 (HL)] was
a case of sale-lease back transaction in which gain was sought to be
counteracted, so as to avoid tax, by establishing an allowable loss. The method
chosen was to buy from a company a readymade scheme, whose object was to
create a neutral situation. The decreasing asset was to be sold so as to create an
artificial loss and the increasing asset was to yield a gain which would be
exempt from tax. The Crown challenged the whole scheme saying that it was an
artificial scheme and, therefore, fiscally ineffective. It was held that Westminster
[IRC v. Duke of Westminster, 1936 AC 1 : 1935 All ER Rep 259 (HL)] did not
compel the court to look at a document or a transaction, isolated from the
context to which it properly belonged. It is the task of the Court to ascertain the
legal nature of the transaction and while doing so it has to look at the entire
transaction as a whole and not to adopt a dissecting approach. In the present
case, the Revenue has adopted a dissecting approach at the Department level.

65. Ramsay [1982 AC 300 : (1981) 2 WLR 449 : (1981) 1 All ER 865 (HL)] did
not discard Westminster [IRC v. Duke of Westminster, 1936 AC 1 : 1935 All ER
Rep 259 (HL)] but read it in the proper context by which a “device” which was
colourable in nature had to be ignored as fiscal nullity. Thus, Ramsay [1982 AC

62

300 : (1981) 2 WLR 449 : (1981) 1 All ER 865 (HL)] lays down the principle of
statutory interpretation rather than an over-arching anti-avoidance doctrine
imposed upon tax laws.
XXXX XXXX XXXX

68. The majority judgment in McDowell [(1985) 3 SCC 230 : 1985 SCC (Tax)
391] held that: (SCC p. 254, para 45)
“45. Tax planning may be legitimate provided it is within the framework of law.”
In the latter part of para 45, it held that: (SCC pp. 254-55)
“45. … Colourable devices cannot be [a] part of tax planning and it is
wrong to encourage the belief that it is honourable to avoid payment of tax by
resorting to dubious methods.”
It is the obligation of every citizen to pay the taxes without resorting to
subterfuges. The above observations should be read with para 46 where the
majority holds: (McDowell case [(1985) 3 SCC 230 : 1985 SCC (Tax) 391] ,
SCC p. 255)
“46. On this aspect one of us, Chinnappa Reddy, J., has proposed a
separate … opinion with which we agree.”
The words “this aspect” express the majority's agreement with the judgment of
Reddy, J. only in relation to tax evasion through the use of colourable devices
and by resorting to dubious methods and subterfuges. Thus, it cannot be said
that all tax planning is illegal/illegitimate/impermissible. Moreover, Reddy, J.
himself says that he agrees with the majority.

69. In the judgment of Reddy, J. in McDowell [(1985) 3 SCC 230 : 1985 SCC
(Tax) 391] there are repeated references to schemes and devices in
contradistinction to “legitimate avoidance of tax liability” (paras 7-10, 17 &
18). In our view, although Chinnappa Reddy, J. makes a number of observations
regarding the need to depart from Westminster [IRC v. Duke of Westminster,
1936 AC 1 : 1935 All ER Rep 259 (HL)] and tax avoidance—these are clearly
only in the context of artificial and colourable devices.

70. Reading McDowell [(1985) 3 SCC 230 : 1985 SCC (Tax) 391], in the
manner indicated hereinabove, in cases of treaty shopping and/or tax avoidance,
there is no conflict between McDowell [(1985) 3 SCC 230 : 1985 SCC (Tax)
391] and Azadi Bachao [(2004) 10 SCC 1] or between McDowell [(1985) 3
SCC 230 : 1985 SCC (Tax) 391] and Mathuram Agrawal [(1999) 8 SCC 667] .
XXXX XXXX XXXX

72. The approach of both the corporate and tax laws, particularly in the matter
of corporate taxation, generally is founded on the abovementioned separate
entity principle i.e. treat a company as a separate person. The Income Tax Act,
1961, in the matter of corporate taxation, is founded on the principle of the
independence of companies and other entities subject to income tax. Companies

63

and other entities are viewed as economic entities with legal independence vis-à-
vis their shareholders/participants. It is fairly well accepted that a subsidiary
and its parent are totally distinct taxpayers. Consequently, the entities subject to
income tax are taxed on profits derived by them on stand-alone basis,
irrespective of their actual degree of economic independence and regardless of
whether profits are reserved or distributed to the shareholders/participants.
Furthermore, shareholders/ participants that are subject to (personal or
corporate) income tax, are generally taxed on profits derived in consideration of
their shareholding/participations, such as capital gains. Nowadays, it is fairly
well settled that for tax treaty purposes a subsidiary and its parent are also
totally separate and distinct taxpayers.

73. It is generally accepted that the group parent company is involved in giving
principal guidance to group companies by providing general policy guidelines to
group subsidiaries. However, the fact that a parent company exercises
shareholder's influence on its subsidiaries does not generally imply that the
subsidiaries are to be deemed residents of the State in which the parent company
resides. Further, if a company is a parent company, that company's executive
director(s) should lead the group and the company's shareholder's influence will
generally be employed to that end. This obviously implies a restriction on the
autonomy of the subsidiary's executive Directors. Such a restriction, which is the
inevitable consequence of any group structure, is generally accepted, both in
corporate and tax laws.
XXXX XXXX XXXX

76. It is a common practice in international law, which is the basis of
international taxation, for foreign investors to invest in Indian companies
through an interposed foreign holding or operating company, such as a Cayman
Islands or Mauritius-based company for both tax and business purposes. In
doing so, foreign investors are able to avoid the lengthy approval and
registration processes required for a direct transfer (i.e. without a foreign
holding or operating company) of an equity interest in a foreign invested Indian
company. However, taxation of such holding structures very often gives rise to
issues such as double taxation, tax deferrals and tax avoidance.

77. In this case, we are concerned with the concept of General Anti-Avoidance
Rule (GAAR). In this case, we are not concerned with treaty shopping but with
the anti-avoidance rules. The concept of GAAR is not new to India since India
already has a judicial anti-avoidance rule, like some other jurisdictions. Lack
of clarity and absence of appropriate provisions in the statute and/or in the
treaty regarding the circumstances in which judicial anti-avoidance rules
would apply has generated litigation in India.
XXXX XXXX XXXX


64

79. When it comes to taxation of a holding structure, at the threshold, the
burden is on the Revenue to allege and establish abuse, in the sense of tax
avoidance in the creation and/or use of such structure(s). In the application of
a judicial anti-avoidance rule, the Revenue may invoke the “substance over
form” principle or “piercing the corporate veil” test only after it is able to
establish on the basis of the facts and circumstances surrounding the
transaction that the impugned transaction is a sham or tax avoidant. To give
an example, if a structure is used for circular trading or round tripping or to
pay bribes then such transactions, though having a legal form, should be
discarded by applying the test of fiscal nullity. Similarly, in a case where the
Revenue finds that in a holding structure an entity which has no
commercial/business substance has been interposed only to avoid tax then in
such cases applying the test of fiscal nullity it would be open to the Revenue to
discard such interpositioning of that entity. However, this has to be done at the
threshold.

80. In this connection, we may reiterate the “look at” principle enunciated in
Ramsay [1982 AC 300 : (1981) 2 WLR 449 : (1981) 1 All ER 865 (HL)] in
which it was held that the Revenue or the Court must look at a document or a
transaction in a context to which it properly belongs to. It is the task of the
Revenue/Court to ascertain the legal nature of the transaction and while doing
so it has to look at the entire transaction as a whole and not to adopt a
dissecting approach. The Revenue cannot start with the question as to whether
the impugned transaction is a tax deferment/saving device but that it should
apply the “look at” test to ascertain its true legal nature [see Craven v. White
(Stephen) [1989 AC 398 : (1988) 3 WLR 423 : (1988) 3 All ER 495 (HL)]
which further observed that genuine strategic tax planning has not been
abandoned by any decision of the English Courts till date].

81. Applying the above tests, we are of the view that every strategic foreign
direct investment coming to India, as an investment destination, should be
seen in a holistic manner. While doing so, the Revenue/courts should keep in
mind the following factors: the concept of participation in investment, the
duration of time during which the holding structure exists; the period of
business operations in India; the generation of taxable revenues in India; the
timing of the exit; the continuity of business on such exit.

82. In short, the onus will be on the Revenue to identify the scheme and its
dominant purpose. The corporate business purpose of a transaction is
evidence of the fact that the impugned transaction is not undertaken as a
colourable or artificial device. The stronger the evidence of a device, the
stronger the corporate business purpose must exist to overcome the evidence
of a device.
XXXX XXXX XXXX

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96. At the outset, we need to reiterate that in this case we are concerned with the
sale of shares and not with the sale of assets, itemwise. The facts of this case
show sale of the entire investment made by HTIL, through a top company viz.
CGP, in the Hutchison structure. In this case we need to apply the “look at” test.
In the impugned judgment, the High Court has rightly observed that the
arguments advanced on behalf of the Department vacillated. The reason for such
vacillation was adoption of “dissecting approach” by the Department in the
course of its arguments. Ramsay [1982 AC 300 : (1981) 2 WLR 449 : (1981) 1
All ER 865 (HL)] enunciated the look at test. According to that test, the task of
the Revenue is to ascertain the legal nature of the transaction and, while doing
so, it has to look at the entire transaction holistically and not to adopt a
dissecting approach.

97. One more aspect needs to be reiterated. There is a conceptual difference
between a preordained transaction which is created for tax avoidance
purposes, on the one hand, and a transaction which evidences investment to
participate in India. In order to find out whether a given transaction evidences
a preordained transaction in the sense indicated above or investment to
participate, one has to take into account the factors enumerated hereinabove,
namely, duration of time during which the holding structure existed, the
period of business operations in India, generation of taxable revenue in India
during the period of business operations in India, the timing of the exit, the
continuity of business on such exit, etc.

98. Applying these tests to the facts of the present case, we find that the
Hutchison structure has been in place since 1994. It operated during the period
1994 to 11-2-2007. It has paid income tax ranging from Rs 3 crores to Rs 250
crores per annum during the period 2002-2003 to 2006-2007. Even after
11-2-2007, taxes are being paid by VIH ranging from Rs 394 crores to Rs 962
crores per annum during the period 2007-2008 to 2010-2011 (these figures are
apart from indirect taxes which also run in crores). Moreover, the SPA indicates
“continuity” of the telecom business on the exit of its predecessor, namely, HTIL.
Thus, it cannot be said that the structure was created or used as a sham or tax
avoidant. It cannot be said that HTIL or VIH was a “fly by night”
operator/short-time investor.

99. If one applies the look at test discussed hereinabove, without invoking the
dissecting approach, then, in our view, extinguishment took place because of the
transfer of the CGP share and not by virtue of various clauses of SPA. In a case
like the present one, where the structure has existed for a considerable length of
time generating taxable revenues right from 1994 and where the court is
satisfied that the transaction satisfies all the parameters of “participation in

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investment” then in such a case the court need not go into the questions such as
de facto control versus legal control, legal rights versus practical rights, etc.

100. Be that as it may, did HTIL possess a legal right to appoint Directors onto
the board of HEL and as such had some “property right” in HEL? If not, the
question of such a right getting “extinguished” will not arise. A legal right is an
enforceable right. Enforceable by a legal process. The question is what is the
nature of the “control” that a parent company has over its subsidiary. It is not
suggested that a parent company never has control over the subsidiary. For
example, in a proper case of “lifting of corporate veil”, it would be proper to
say that the parent company and the subsidiary form one entity. But barring
such cases, the legal position of any company incorporated abroad is that its
powers, functions and responsibilities are governed by the law of its
incorporation. No multinational company can operate in a foreign jurisdiction
save by operating independently as a “good local citizen”.

101. A company is a separate legal persona and the fact that all its shares are
owned by one person or by the parent company has nothing to do with its
separate legal existence. If the owned company is wound up, the liquidator, and
not its parent company, would get hold of the assets of the subsidiary. In none of
the authorities have the assets of the subsidiary been held to be those of the
parent unless it is acting as an agent. Thus, even though a subsidiary may
normally comply with the request of a parent company it is not just a puppet of
the parent company. The difference is between having power or having a
persuasive position. Though it may be advantageous for parent and subsidiary
companies to work as a group, each subsidiary will look to see whether there are
separate commercial interests which should be guarded.

102. When there is a parent company with subsidiaries, is it or is it not the law
that the parent company has the “power” over the subsidiary. It depends on the
facts of each case. For instance, take the case of a one-man company, where
only one man is the shareholder perhaps holding 99% of the shares, his wife
holding 1%. In those circumstances, his control over the company may be so
complete that it is his alter ego. But, in case of multinationals it is important to
realise that their subsidiaries have a great deal of autonomy in the country
concerned except where subsidiaries are created or used as a sham. Of course,
in many cases the courts do lift up a corner of the veil but that does not mean
that they alter the legal position between the companies.

103. The Directors of the subsidiary under their articles are the managers of the
companies. If new Directors are appointed even at the request of the parent
company and even if such Directors were removable by the parent company,
such Directors of the subsidiary will owe their duty to their companies
(subsidiaries). They are not to be dictated by the parent company if it is not in

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278. This Court in CIT v. Sri Meenakshi Mills Ltd. [AIR 1967 SC 819] held that
the court is entitled to lift the veil of the corporate entity and pay regard to the
economic realities behind the legal facade meaning that the court has the power
to disregard the corporate entity if it is used for tax evasion. In LIC v. Escorts
Ltd. [(1986) 1 SCC 264] this Court held that: (SCC p. 336, para 90)
90. … the corporate veil may be lifted where a statute itself contemplates
lifting [of] the veil, or fraud or improper conduct is intended to be prevented, or
a taxing statute or a [beneficial] statute is sought to be evaded or where
associated companies are inextricably connected as to be, in reality, part of one
concern.

279. Lifting the corporate veil doctrine was also applied in Juggilal Kamlapat v.
CIT [AIR 1969 SC 932 : (1969) 1 SCR 988] , wherein this Court noticed that the
assessee firm sought to avoid tax on the amount of compensation received for
the loss of office by claiming that it was capital gain and it was found that the
termination of the contract of managing agency was a collusive transaction. The
Court held that it was a collusive device, practised by the managed company
and the assessee firm for the purpose of evading income tax, both at the hands of
the payer and the payee.

280. Lifting the corporate veil doctrine can, therefore, be applied in tax
matters even in the absence of any statutory authorisation to that effect. The
principle is also being applied in cases of holding company-subsidiary
relationship, where in spite of being separate legal personalities, if the facts
reveal that they indulge in dubious methods for tax evasion.

B. Tax avoidance and tax evasion
281. “Tax avoidance” and “tax evasion” are two expressions which find no
definition either in the Companies Act, 1956 or the Income Tax Act, 1961. But
the expressions are being used in different contexts by our courts as well as the
courts in England and various other countries, when a subject is sought to be
taxed.

282. One of the earliest decisions which came up before the House of Lords in
England demanding tax on a transaction by the Crown is Duke of Westminster
[IRC v. Duke of Westminster, 1936 AC 1 : 1935 All ER Rep 259 (HL)] . In that
case, the Duke of Westminster had made an arrangement that he would pay his
gardener an annuity, in which case, a tax deduction could be claimed. Wages of
household services were not deductible expenses in computing the taxable
income, therefore, the Duke of Westminster was advised by the tax experts that if
such an agreement was employed, the Duke would get tax exemption. Under the
tax legislation then in force, if it was shown as gardener's wages, then the wages
paid would not be deductible. The Inland Revenue contended that the form of the

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after a reasonable time, the sale proceeds would be received by the Mauritius
company as the registered holder/owner of such shares, such benefits could be
sent back to the foreign principal/100% shareholder of Mauritius company
either by way of a declaration of special dividend by the Mauritius company
and/or by way of repayment of loans received by the Mauritius company from
the foreign principal/shareholder for the purpose of making the investment. Mr
Chinoy is right in his contention that apart from DTAA, which provides for tax
exemption in the case of capital gains received by a Mauritius
company/shareholder at the time of disinvestment/exit and the fact that
Mauritius does not levy tax on dividends declared and paid by a Mauritius
company/subsidiary to its foreign shareholders/principal, there is no other
reason for this quantum of funds to be invested from/through Mauritius.

311. We are, therefore, of the view that in the absence of an LOB clause and
the presence of Circular No. 789 of 2000 and the TRC certificate, on the
residence and beneficial interest/ownership, the Tax Department cannot at the
time of sale/disinvestment/exit from such FDI, deny benefits to such Mauritius
companies of the Treaty by stating that FDI was only routed through a
Mauritius company, by a company/principal resident in a third country; or the
Mauritius company had received all its funds from a foreign
principal/company; or the Mauritius subsidiary is controlled/managed by the
foreign principal; or the Mauritius company had no assets or business other
than holding the investment/shares in the Indian company; or the foreign
principal/100% shareholder of Mauritius company had played a dominant
role in deciding the time and price of the disinvestment/sale/transfer; or the
sale proceeds received by the Mauritius company had ultimately been paid
over by it to the foreign principal/its 100% shareholder either by way of special
dividend or by way of repayment of loans received; or the real
owner/beneficial owner of the shares was the foreign principal company.
Setting up of a WOS Mauritius subsidiary/SPV by principals/genuine
substantial long-term FDI in India from/through Mauritius, pursuant to the
DTAA and Circular No. 789 can never be considered to be set up for tax
evasion.


TRC whether conclusive
312. LOB and look through provisions cannot be read into a tax treaty but the
question may arise as to whether the TRC is so conclusive that the Tax
Department cannot pierce the veil and look at the substance of the transaction.

313. DTAA and Circular No. 789 dated 13-4-2000, in our view, would not
preclude the Income Tax Department from denying the tax treaty benefits, if it
is established, on facts, that the Mauritius company has been interposed as the
owner of the shares in India, at the time of disposal of the shares to a third

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party, solely with a view to avoid tax without any commercial substance. The
Tax Department, in such a situation, notwithstanding the fact that the
Mauritian company is required to be treated as the beneficial owner of the
shares under Circular No. 789 and the Treaty is entitled to look at the entire
transaction of sale as a whole and if it is established that the Mauritian
company has been interposed as a device, it is open to the Tax Department to
discard the device and take into consideration the real transaction between the
parties, and the transaction may be subjected to tax. In other words, TRC does
not prevent enquiry into a tax fraud; for example, where an OCB is used by an
Indian resident for round-tripping or any other illegal activities, nothing
prevents the Revenue from looking into special agreements, contracts or
arrangements made or effected by Indian resident or the role of OCB in the
entire transaction.

314. No court will recognise a sham transaction or a colourable device or
adoption of a dubious method to evade tax, but to say that the Indo-Mauritian
Treaty will recognise FDI and FII only if it originates from Mauritius, not the
investors from third countries, incorporating company in Mauritius, is
pitching it too high, especially when statistics reveal that for the last decade
FDI in India was US $178 billion and, of this, 42% i.e. US $74.56 billion was
through the Mauritian route. Presently, it is known, FII in India is Rs
4,50,000 crores, out of which Rs 70,000 crores is from Mauritius. The facts,
therefore, clearly show that almost the entire FDI and FII made in India from
Mauritius under DTAA does not originate from that country, but has been
made by Mauritius companies/SPV, which are owned by
companies/individuals of third countries providing funds for making FDI by
such companies/individuals not from Mauritius, but from third countries.

315. Mauritius, and India, it is known, have also signed a memorandum of
understanding (MoU) laying down the rules for information exchange between
the two countries which provides for the two signatory authorities to assist each
other in the detection of fraudulent market practices, including insider dealing
and market manipulation in the areas of securities transactions and derivative
dealings. The object and purpose of the MoU is to track down transactions
tainted by fraud and financial crime, not to target the bona fide legitimate
transactions. Mauritius has also enacted stringent “Know Your Clients” (KYC)
regulations and anti-money laundering laws which seek to avoid abusive use of
treaty.

316. Viewed in the above perspective, we also find no reason to import the
“abuse of rights doctrine” (abus de droit) to India. The above doctrine was seen
applied by the Swiss court in A Holdings ApS [A Holdings ApS v. Federal Tax
Administration, (2005) 8 ITLR 536] , unlike courts following common law. That
was a case where a Danish company was interposed to hold all the shares in a

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share without legislative intervention. Controlling interest of CGP over Array is
an incident of holding majority shares and the control of company vests in the
voting power of its shareholders.

357. Mauritian entities being a WOS of Array, Array as a holding company can
influence the shareholders of various Mauritian companies. Holding companies
like CGP, Array, may exercise control over the subsidiaries, whether a WOS or
otherwise by influencing the voting rights, nomination of members of the Board
of Directors and so on. On transfer of shares of the holding company, the
controlling interest may also pass on to the purchaser along with the shares.
Controlling interest might have percolated down the line to the operating
companies but that controlling interest is inherently contractual and not a
property right unless otherwise provided for in the statute. Acquisition of shares,
may carry the acquisition of controlling interest which is purely a commercial
concept and the tax can be levied only on the transaction and not on its effect.
Consequently, on transfer of the CGP share to Vodafone, Vodafone got control
over eight Mauritian companies which owned shares in VEL totalling to 42%
and that does not mean that the situs of the CGP share has shifted to India for
the purpose of charging capital gains tax.

358. Vodafone could exercise only indirect voting rights in VEL through its
indirect subsidiary CGP(M) which held equity interests in TII, an Indian
company, which held equity interests in VEL. Similarly, Vodafone could exercise
only indirect voting rights through HTI(M) which held equity interests in
Omega, an Indian company which in turn held equity interests in HEL. On
transfer of the CGP share, Vodafone gets controlling interest in its indirect
subsidiaries which are situated in Mauritius which have equity interests in TII
and Omega, Indian companies which are independent legal entities. Controlling
interest, which stood transferred to Vodafone from HTIL accompanies the CGP
share and cannot be dissected so as to be treated as transfer of controlling
interest of Mauritian entities and then that of Indian entities and ultimately that
of HEL. Situs of the CGP share, therefore, determines the transferability of the
share and/or interest which flows out of that share including controlling interest.
Ownership of shares, as already explained by us, carries other valuable rights
like, right to receive dividend, right to transmit the shares, right to vote, right to
act as per one's wish, or to vote in a particular manner, etc; and on transfer of
shares those rights also sail along with them.

359. Vodafone, on purchase of the CGP share got all those rights, and the price
paid by Vodafone is for all those rights, in other words, control premium paid,
not over and above the CGP share, but is the integral part of the price of the
share. On transfer of the CGP share situated in the Cayman Islands, the entire
rights, which accompany stood transferred not in India, but offshore and the
facts reveal that the offshore holdings and arrangements made by HTIL and

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Finance Bill 2012 and Finance Act, 2012
12.12. After the fallout of the Vodafone case, the Indian Government
introduced the Finance Bill, 2012, bringing three significant amendments aimed
at overriding the implications of the judgment by removing its basis and
addressing tax avoidance concerns, viz ., (i) amendment to Section 9 – indirect
transfer provisions; (ii) introduction of the General Anti-Avoidance Rule
(GAAR) provisions; and (iii) amendment to Section 90 – Treaty override and
TRC requirements.

(i) Amendment to Section 9 – Indirect Transfer Provisions
12.13. The definition of “income deemed to accrue or arise in India” under
Section 9(1)(i), which sets out circumstances in which income accruing or

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arising, directly or indirectly, is taxable in India, was retrospectively amended
with effect from 01.04.1962. One of the limbs of clause (i) pertains to income
accruing or arising directly or indirectly through the transfer of a capital asset
situated in India. The amendment clarified that gains from the transfer of shares
or interests in a foreign entity deriving substantial value from assets located in
India would be taxable in India. They are extracted as follows:
“……..Certain judicial pronouncements have created doubts about the scope
and purpose of sections 9 and 195. Further, there are certain issues in respect of
income deemed to accrue or arise where there are conflicting decisions of
various judicial authorities.

It is, therefore, proposed to amend the Income Tax Act in the following manner:-
(i) Amend section 9(1)(i) to clarify that the expression ‘through’ shall mean and
include and shall be deemed to have always meant and included “by means of”,
“in consequence of” or “by reason of”.

(ii) Amend section 9(1)(i) to clarify that an asset or a capital asset being any
share or interest in a company or entity registered or incorporated outside India
shall be deemed to be and shall always be deemed to have been situated in India
if the share or interest derives, directly or indirectly, its value substantially from
the assets located in India.
……..
(v) Amend section 195(1) to clarify that obligation to comply with sub-section
(1) and to make deduction thereunder applies and shall be deemed to have
always applied and extends and shall be deemed to have always extended to all
persons, resident or non-resident, whether or not the non-resident has:-
(a) a residence or place of business or business connection in India; or
(b) any other presence in any manner whatsoever in India.”

12.14. Pursuant to the above, Explanations 4 and 5 were inserted in Section
9(1)(i) as under:
“ Explanation 4. —For the removal of doubts, it is hereby clarified that the
expression "through" shall mean and include and shall be deemed to have
always meant and included "by means of", "in consequence of" or "by reason
of".

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Explanation 5. —For the removal of doubts, it is hereby clarified that an asset or
a capital asset being any share or interest in a company or entity registered or
incorporated outside India shall be deemed to be and shall always be deemed to
have been situated in India, if the share or interest derives, directly or indirectly,
its value substantially from the assets located in India.”

12.15. Through this amendment, the scope and application of Section 9 were
expanded, codifying the principle of source-based taxation, wherein the State
where the actual economic nexus of income exists has the right to tax such
income, irrespective of the place of residence of the entity deriving it. Further,
Section 195, which mandates the deduction of tax at source before making
payments to a non-resident, was also amended. The amendment explicitly
provided that a non-resident person was also required to deduct tax at source
before making payments to another non-resident, if the payment represented
income chargeable to tax in India in the hands of the payee non-resident.

(ii) GAAR
12.16. Keeping in view the increasing prevalence of aggressive tax planning
through complex structures, it was considered necessary to codify the doctrine
of “substance over form”, ensuring that the real intention of the parties, the
actual effect of transactions, and the purpose of an arrangement were taken into
account for determining tax consequences. Accordingly, the Finance Act, 2012,
introduced statutory GAAR to address such aggressive tax planning strategies.

12.17. Under Section 96 of the Act, an ‘impermissible avoidance arrangement’
was defined as an arrangement where the main purpose, or one of the main

80

purposes, was to obtain a tax benefit, and which satisfied at least one of the
prescribed conditions. Likewise, Section 98 prescribed the consequences of
such arrangements. Moreover, Section 100 specifically excluded FIIs from the
applicability of GAAR, provided they had not claimed benefits under a DTAA.
Further, Section 101 empowered the CBDT to issue guidelines for the
implementation of GAAR. The relevant provisions are reproduced hereunder:
“ Chapter XA – General Anti Avoidance Rule
Section 95. Applicability of General Anti-Avoidance Rule. - Notwithstanding
anything contained in the Act, an arrangement entered into by an assessee may
be declared to be an impermissible avoidance arrangement and the consequence
in relation to tax arising therefrom may be determined subject to the provisions
of this Chapter.
Explanation. - For the removal of doubts, it is hereby declared that the
provisions of this Chapter may be applied to any step in, or a part of, the
arrangement as they are applicable to the arrangement.

Section 96. Impermissible avoidance arrangement. - (1) An impermissible
avoidance arrangement means an arrangement, the main purpose or one of the
main purposes of which is to obtain a tax benefit and it -
(a) creates rights, or obligations, which are not ordinarily created between
persons dealing at arm's length;
(b) results, directly or indirectly, in the misuse, or abuse, of the provisions of this
Act;
(c) lacks commercial substance or is deemed to lack commercial substance
under section 97, in whole or in part; or
(d) is entered into, or carried out, by means, or in a manner, which are not
ordinarily employed for bona fide purposes.
(2) An arrangement shall be presumed to have been entered into, or carried out,
for the main purpose of obtaining a tax benefit, if the main purpose of a step in,
or a part of, the arrangement is to obtain a tax benefit, notwithstanding the fact
that the main purpose of the whole arrangement is not to obtain a tax benefit.

Section 97. Arrangement to lack commercial substance. - (1) An arrangement
shall be deemed to lack commercial substance if -
(a)the substance or effect of the arrangement as a whole, is inconsistent with, or
differs significantly from, the form of its individual steps or a part; or
(b)it involves or includes –

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(i)round trip financing;
(ii)an accommodating party;
(iii)elements that have effect of offsetting or cancelling each other; or
(iv)a transaction which is conducted through one or more persons and disguises
the value, location, source, ownership or control of funds which is the subject
matter of such transaction; or
(c)it involves the location of an asset or of a transaction or of the place of
residence of any party which is without any substantial commercial purpose
other than obtaining a tax benefit (but for the provisions of this Chapter) for a
party.
(2)For the purposes of sub-section (1), round trip financing includes any
arrangement in which, through a series of transactions –
(a) funds are transferred among the parties to the arrangement; and
(b)such transactions do not have any substantial commercial purpose other than
obtaining the tax benefit (but for the provisions of this Chapter), without having
any regard to –
(A) whether or not the funds involved in the round trip financing can be traced
to any funds transferred to, or received by, any party in connection with the
arrangement;
(B) the time, or sequence, in which the funds involved in the round trip
financing are transferred or received; or
(C) the means by, or manner in, or mode through, which funds involved in the
round trip financing are transferred or received.
(3)For the purposes of this Chapter, a party to an arrangement shall be an
accommodating party, if the main purpose of the direct or indirect participation
of that party in the arrangement, in whole or in part, is to obtain, directly or
indirectly, a tax benefit (but for the provisions of this Chapter) for the assessee
whether or not the party is a connected person in relation to any party to the
arrangement.
(4)The following shall not be taken into account while determining whether an
arrangement lacks commercial substance or not, namely: -
(i) the period or time for which the arrangement (including operations therein)
exists;
(ii) the fact of payment of taxes, directly or indirectly, under the arrangement;
(iii) the fact that an exit route (including transfer of any activity or business or
operations) is provided by the arrangement.

Section 98. Consequence of impermissible arrangement. - (1) If an arrangement
is declared to be an impermissible avoidance arrangement, then the
consequences, in relation to tax, of the arrangement, including denial of tax
benefit or a benefit under a tax treaty, shall be determined, in such manner as is
deemed appropriate, in the circumstances of the case, including by way of but
not limited to the following, namely: -

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(a)disregarding, combining or recharacterising any. step in, or a part or whole
of, the impermissible avoidance arrangement;
(b)treating the impermissible avoidance arrangement as if it had not been
entered into or carried out;
(c)disregarding any accommodating party or treating any accommodating party
and any other party as one and the same person;
(d)deeming persons who are connected persons in relation to each other to be
one and the same person for the purposes of determining tax treatment of any
amount;
(e) reallocating amongst the parties to the arrangement –
(i) any accrual, or receipt, of a capital or revenue nature; or
(ii) any expenditure, deduction, relief or rebate;
(f) treating –
(i) the place of residence of any party to the arrangement; or
(ii) the situs of an asset or of a transaction, at a place other than the place of
residence, location of the asset or location of the transaction as provided under
the arrangement; or
(g) considering or looking through any arrangement by disregarding any
corporate structure.
(2) For the purposes of sub-section (1), -
(i) any equity may be treated as debt or vice versa;
(ii) any accrual, or receipt, of a capital nature may be treated as of revenue
nature or vice versa; or
(iii)any expenditure, deduction, relief or rebate may be recharacterised.

Section 99. Treatment of connected person and accommodating party. - For the
purposes of this Chapter, in determining whether a tax benefit exists -
(i) the parties who are connected persons in relation to each other may be
treated as one and the same person;
(ii) any accommodating party may be disregarded;
(iii)such accommodating party and any other party may be treated as one and
the same person;
(iv)the arrangement may be considered or looked through by disregarding any
corporate structure.

Section 100. Application of Chapter. - The provisions of this Chapter shall
apply in addition to, or in lieu of, any other basis for determination of tax
liability.

Section 101. Framing of Guidelines. - The provisions of this Chapter shall be
applied in accordance with such guidelines and subject to such conditions and
the manner as may be prescribed.


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Section 102. Definitions. - In this Chapter, unless the context otherwise
requires, -
(1)"arrangement" means any step in, or a part or whole of, any transaction,
operation, scheme, agreement or understanding, whether enforceable or not,
and includes the alienation of any property in such transaction, operation,
scheme, agreement or understanding;
(2)"asset" includes property, or right, of any kind;
(3)"associated person", in relation to a person, means –
(a) any relative of the person, if the person is an individual;
(b) any director of the company or any relative of such director, if the person is a
company;
(c) any partner or member of a firm or association of persons or body of
individuals or any relative of such partner or member if the person is a firm or
association of persons or body of individuals;
(d) any member of the Hindu undivided family or any relative of such member, if
the person is a Hindu undivided family;
(e) any individual who has a substantial interest in the business of the person or
any relative of such individual;
(f) a company, firm or an association of persons or a body of individuals,
whether incorporated or not, or a Hindu undivided family having a substantial
interest in the business of die person or any director, partner, or member of the
company, firm or association of persons or body of individuals or family, or any
relative of such director, partner or member;
(g) a company, firm or association of persons or body of individuals, whether
incorporated or not, or a Hindu undivided family, whose director, partner, or
member have a substantial interest in the business of the person, or family or
any relative of such director, partner or member;
(h) any other person who carries on a business, if –
(i) the person being an individual, or any relative of such person, has a
substantial interest in the business of that other person; or
(ii) the person being a company, firm, association of persons, body of
individuals, whether incorporated or not, or a Hindu undivided family, or any
director, partner or member of such company, firm or association of persons or
body of individuals or family, or any relative of such director, partner or
member, has a substantial interest in the business of that other person;
(4)"benefit" includes a payment of any kind whether in tangible or intangible
form;
(5)"connected person" means any person who is connected directly or indirectly
to another person and includes associated person;
(6)"fund" includes –
(a)any cash;
(b)cash equivalents; and
(c)any right, or obligation, to receive, or pay, the cash or cash equivalent;

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(7)"party" means any person including a permanent establishment which
participates or takes part in an arrangement;
(8)"relative" shall have the meaning assigned to it in the Explanation to clause
(vi) of sub-section (2) of section 56;
(9) a person shall be deemed to have a substantial interest in the business, if –
(a)in a case where the business is carried on by a company, such person is, at
any time during the financial year, the beneficial owner of equity shares carrying
twenty per cent, or more, of the voting power; or
(b)in any other case, such person is, at any time during the financial year,
beneficially entitled to twenty per cent, or more, of the profits of such business;
(10) "step" includes a measure or an action, particularly one of a series taken in
order to deal with or achieve a particular thing or object in the arrangement;
(11)"tax benefit" means –
(a) a reduction or avoidance or deferral of tax or other amount payable under
this Act; or
(b) an increase in a refund of tax or other amount under this Act; or
(c) a reduction or avoidance or deferral of tax or other amount that would be
payable under this Act, as a result of a tax treaty; or
(d) an increase in a refund of tax or other amount under this Act as a result of a
tax treaty; or
(e) a reduction in total income including increase in loss, in the relevant
previous year or any other previous year;
(12)"tax treaty" means an agreement referred to in sub-section (1) of section 90
or sub-section (1) of section 90A.”

12.18. The above provisions sought to introduce a comprehensive mechanism
to deter tax evasion under the guise of FII investments by companies misusing
the DTAA with the Mauritius Government. However, given the wide discretion
and authority conferred upon the tax administration, concerns were raised
regarding the potential for uncertainty and misuse. Consequently, it was deemed
necessary to constitute an expert committee ( the Shome Committee) to review
and analyse the provisions before their implementation. This resulted in the
postponement of the GAAR provisions to the assessment year 2013-14, which
was again deferred to 2015 and eventually, implemented from 01.04.2017.

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12.19. In this regard, the relevant portions of the Finance Minister’s speech
during the discussion on the Finance Bill 2012 are extracted below:
“….In addition, certain provisions relating to General Anti-Avoidance Rules
(GAAR) have also been proposed in the Finance Bill, 2012. After examining the
recommendations of the Standing Committee on GAAR provisions in the DTC
Bill, 2010, I propose to amend the GAAR provisions as follows:

(i) Remove the onus of proof entirely from the taxpayer to the Revenue
Department before any action can be initiated under GAAR.
(ii) Introduce an independent member in the GAAR approving panel to ensure
objectivity and transparency. One member of the panel now would be an officer
of the level of Joint Secretary or above from the Ministry of Law.
(iii)Provide that any taxpayer (resident or non-resident) can approach the
Authority for Advance Ruling (AAR) for a ruling as to whether an arrangement
to be undertaken by is permissible or not under the GAAR provisions.

To provide greater clarity and certainty in the matters relating to GAAR, a
Committee has been constituted under the Chairmanship of the Director
General of Income Tax (International Taxation) to give recommendations for
formulating the rules and guidelines for implementation of the GAAR provisions
and to suggest safeguards so that these provisions are not applied
indiscriminately. The Committee has already held several rounds of discussion
with various stakeholders including the Foreign Institutional Investors. The
Committee will submit its recommendations by 31st May, 2012.

To provide more time to both taxpayers and the tax administration to address all
related issues, I propose to defer the applicability of the GAAR provisions by one
year. The GAAR provisions will now apply to income of Financial Year 2013-14
and subsequent years.”

In the same discussion, the Finance Minister also stated that the clarificatory
amendments pertaining to Section 9(1)(i) would not override the provisions of
the DTAA and would impact only those countries where transactions were
routed through low-tax or no-tax jurisdictions with whom India did not have a
DTAA and it is as under:

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“Hon. Members are aware that a provision in the Finance Bill which seeks to
retrospectively clarify the provisions of the Income Tax Act relating to capital
gains on sale of assets located in India through indirect transfers abroad, has
been intensely debated in the country and outside. I would like to confirm that
clarificatory amendments do not override the provisions of Double Taxation
Avoidance Agreement (DTAA) which India has with 82 countries. It would
impact those cases where the transaction has been routed through low tax or no
tax countries with whom India does not have a Double Taxation Avoidance
Agreement.

The retrospective clarificatory amendments which are now under consideration
of Parliament will not be used to reopen any cases where assessment orders
have already been finalized. I have asked the Central Board of Direct Taxes to
issue a policy circular to clearly state this position after the passage of the
Finance Bill.

Currently, long term capital gain arising from sale of unlisted securities in the
case of Foreign Institutional Investors is taxed at the rate of 10 per cent while
other non-resident investors, including Private Equity Investors are taxed at the
rate of 20 per cent. In order to provide parity to such investors, I propose to
reduce the rate in their case from 20 per cent to 10 per cent on the same lines as
applicable to Foreign Institutional Investors…..”

(iii) Amendment to Section 90 – GAAR override and TRC requirements
12.20. Section 90 of the Income Tax Act empowers the Central Government to
enter into agreements with foreign countries or specified territories for the
purpose of granting relief, particularly in respect of double taxation and tax
avoidance. The Finance Act, 2012 and the Finance Act, 2013 introduced
amendments to Section 90, primarily in light of the introduction of GAAR and
to clarify the requirements concerning TRC.
12.21. It is also pertinent to note that Section 90(4) was amended, and the
words “a certificate containing such particulars as may be prescribed, of his
being a resident” were substituted as follows:

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“(4) An assessee, not being a resident, to whom an agreement referred to in sub-
section (1) applies, shall not be entitled to claim any relief under such agreement
unless [a certificate of his being a resident] in any country outside India or
specified territory outside India, as the case may be, is obtained by him from the
Government of that country or specified territory.”

Further, Section 90(5) was inserted, empowering the Central Government to
prescribe additional conditions for treaty benefits. The amendment was made
retrospectively applicable from 01.04.2013, thereby applying from the
assessment year 2013-14 onwards. For better appreciation, the said provision
reads as follows:
“(5) The provisions of this section shall not be applicable to the assessee unless
he provides such other documents and information, as may be prescribed.”

12.22. As already observed, the Memorandum explaining the provisions of the
Finance Bill, 2012, in the context of the insertion of Section 90(4), had stated
that while a TRC containing prescribed particulars was a necessary condition
for claiming benefits under a DTAA, it was not a sufficient condition. This was
sought to be codified through the insertion of Section 90(5) via the Finance Bill,
2013 and the same is reproduced hereunder:
“The certificate of being a resident in a country outside India or specified
territory outside India, as the case may be, referred to in sub-section (4), shall
be necessary but not a sufficient condition for claiming any relief under the
agreement referred to therein.”

12.23. However, an uproar from the market led the then Finance Minister to
issue a clarification that the proposed amendment would not affect the Mauritius
Route. Further, Section 90(5) stated that the relevant documents and information

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that would have to be provided by an assessee would be prescribed; the
documents and information contemplated therein would have to read as such
documents that establish that the transaction of the assessee is not precluded
under Chapter XA or Rule 10U. Moreover, Section 90(2A) was amended, with
its applicability deferred to 01.04.2016. This amendment aligned the
implementation timeline of Section 90(2A) with the broader framework
governing treaty benefits and GAAR. The Finance Minister clarified in the
Budget Speech that GAAR would apply prospectively to investments made on
or after 01.04.2017. The term “investment” was mentioned and not
“arrangement”. The relevant portion reads as follows:
“109. Implementation of the General Anti Avoidance Rule (GAAR) has been a
matter of public debate. The investment sentiment in the country has now turned
positive and we need to accelerate this momentum. There are also certain
contentious issues relating to GAAR which need to be resolved. It has therefore
been decided to defer the applicability of GAAR by two years. Further, it has
also been decided that when implemented, GAAR would apply prospectively to
investments made on or after 01.04.2017.”

Moreover, GAAR was deferred for another two years. The relevant portion of
the Finance Bill, 2015 reads as under:
“As provided in the Act, GAAR provisions are to come into effect from
1.04.2016. These provisions, therefore, shall be applicable to the income of the
financial year 2015-16 (Assessment Year 2016-17) and subsequent years.

The implementation of GAAR provisions has been reviewed. Concerns have been
expressed regarding certain aspects of GAAR. Further, it has been noted that the
Base Erosion and Profit Shifting (BEPS) project under Organisation of
Economic Cooperation and Development (OECD) is continuing and India is an
active participant in the project. The report on various aspects of BEPS and
recommendations regarding the measures to counter it are awaited. It would,

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therefore, be proper that GAAR provisions are implemented as part of a
comprehensive regime to deal with BEPS and aggressive tax avoidance.

Accordingly, it is proposed that implementation of GAAR be deferred by two
years and GAAR provisions be made applicable to the income of the financial
year 2017-18 (Assessment Year 2018-19) and subsequent years by amendment of
the Act. Further, investments made up to 31.03.2017 are proposed to be
protected from the applicability of GAAR by amendment in the relevant rules in
this regard.
This amendment will take effect from 1st April, 2015.”

12.24. Prior to the Finance Act, 2012, Section 90(2) provided that where a
DTAA exists between India and another country, the provisions of the Act or the
DTAA, whichever is more beneficial to the taxpayer, shall apply. Thus, if the
provisions of the Income Tax Act impose a higher tax burden, the DTAA
provisions will prevail, ensuring a Treaty override in favour of the taxpayer.
However, the Finance Act, 2012, in line with the GAAR provisions, inserted
Section 90(2A), which created an exception to the Treaty override principle
enshrined in Section 90(2). The new provision clarified that GAAR provisions
would apply even if they result in tax consequences that take away any benefit
despite an existing DTAA. By introducing Section 90(2A), the Legislature
curtailed the absolute benefit of Treaty override under Section 90(2) by making
it subject to GAAR provisions, thereby preventing Treaty abuse through
aggressive tax planning structures. In other words, it now ensured that taxpayer-
friendly DTAA provisions would not be available if GAAR is invoked. Further,
Section 90(4) was introduced, making the submission of a TRC necessary.
These amendments took effect from 01.04.2013, applying to Assessment Year

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2013-14 onwards. Section 90(5) mandated that the assessee shall also provide
such other documents and information, implying that the existence of a TRC
alone need not be treated as sufficient to avoid taxation under the domestic law.
This led to ambiguity among investors as to whether a TRC alone was sufficient
to establish tax residency. Further, Section 90(3) also empowered the Central
Government to assign a meaning, by notification, to any term used in a DTAA
that was not defined in either the Act or the Treaty. The Finance Act, 2012
amendment also clarified, by inserting Explanation 3 to Section 90, that such a
notification would have retrospective effect from the date the agreement came
into force. It took effect retrospectively from 01.10.2009.

Shome Committee Report dated 30.09.2012
12.25. The Expert Committee’s recommendations included suggestions for
legislative amendments, formulation of rules, and prescribing guidelines for the
implementation of GAAR. It also gave observations and recommendations
regarding grandfathering of investments and arrangements. The relevant
passage is extracted hereunder:
“Grandfathering an existing arrangement (instead of existing investments) may
inadvertently keep many future advance tax avoidance schemes out of
examination under GAAR since a tax avoidance structure itself would receive
indefinite protection, and diminish the effectiveness of GAAR. In other words, it
would allow an impermissible arrangement to exist in perpetuity if created
before commencement of GAAR and grandfathered under GAAR provisions. For
instance, if a conduit company (says a letter box company) is incorporated in a
favourable jurisdiction in 2008 and this arrangement is grandfathered, then, all
future investments made by it would also enjoy tax exemption for the indefinite

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future. Once this was explained, stakeholders agreed that the intention should be
to grandfather investments rather than arrangements.

It was also suggested to grandfather only those investments which have
remained invested in India for a number of years (say five years or so), this
would be unfair to those who invested within the last five years, considering the
existing law at that point of time. Thus it is important to grandfather all
investments.

In view of the above, the Committee recommends that all investments (though
not arrangements) made by a resident or non-resident and existing as on the
date of commencement of the GAAR provisions should be grandfathered so that
on exit (sale of such investments) on or after this date, GAAR provisions are not
invoked for examination or denial of tax benefit.”
(emphasis supplied)

Moreover, it also recommended that GAAR will not apply wherever Circular
No. 789 is applicable, and the same reads as follows:
“Stakeholders also raised an issue regarding the status of Circular No 789 of
2000 issued by the Govt. The Circular provided that a Certificate of Residence
(TRC) issued by the Govt. of Mauritius would constitute sufficient evidence for
accepting the status of residence of a person as well as beneficial ownership for
applying the tax treaty. Currently, the Revenue cannot look into the genuineness
of residence of a company incorporated in Mauritius based on commercial
substance, or other criteria, once a TRC is issued by the Mauritius authorities.
Thus, the Circular would be in direct conflict with GAAR provisions. Hence,
clarity was sought by stakeholders whether the Circular would be withdrawn
after commencement of GAAR or, if not withdrawn, whether it would still be
applicable to avail treaty benefit.

In view of the above, the Committee recommends that, where Circular No. 789
of 2000 with respect to Mauritius is applicable, GAAR provisions shall not
apply to examine the genuineness of the residency of an entity set up in
Mauritius.
As needed, the Mauritius treaty itself should be revisited if policy so dictates,
rather than challenged indirectly through the use of the GAAR instrument.”
(emphasis supplied)



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However, it is pertinent to point out that no guidance was issued to this effect
thereafter, and the amendments that took away the supremacy of the DTAA were
brought into effect.
Clarification issued by the Finance Ministry on TRC dated 01.03.2013
12.26. As already mentioned, upon concerns being raised regarding Section
90(4), which mandated the production of a TRC as a prerequisite for availing
benefits under a DTAA, the contents of Section 90(5) and the corresponding
Explanatory Memorandum, which stated that while a TRC containing
prescribed particulars was a necessary condition, it was not a sufficient
condition for claiming DTAA benefits, the Finance Ministry issued a
clarification on 01.03.2013, affirming that a TRC issued by the tax authorities of
a contracting State would be accepted as conclusive evidence of the assessee’s
residency in that State. It was explicitly stated that Indian tax authorities would
not look beyond the TRC or challenge the residential status of an individual or
entity in possession of a valid TRC. The relevant portion reads thus:
“…….In the explanatory memorandum to the Finance Act, 2012, it was stated
that the Tax Residency Certificate containing prescribed particulars is a
necessary but not sufficient condition for availing benefits of the DTAA. The
same words are proposed to be introduced in the Income-tax Act as sub-section
(5) of section 90. Hence, it will be clear that nothing new has been done this
year which was not there already last year.
However, it has been pointed out that the language of the proposed sub-section
(5) of section 90 could mean that the Tax Residency Certificate produced by a
resident of a contracting state could be questioned by the Income Tax Authorities
in India. The government wishes to make it clear that that is not the intention of
the proposed subsection (5) of section 90. The Tax Residency Certificate
produced by a resident of a contracting state will be accepted as evidence that

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he is a resident of that contracting state and the Income Tax Authorities in
India will not go behind the TRC and question his resident status.

In the case of Mauritius, circular no. 789, dated 13-4-2000 continues to be in
force, pending ongoing discussions between India and Mauritius.
However, since a concern has been expressed about the language of sub-section
(5) of section 90, this concern will be addressed suitably when the Finance Bill
is taken up for consideration.”
(emphasis supplied)

Finance Bill 2013 and Finance Act, 201 3
12.27. Accepting the majority of the Shome Committee recommendations,
with certain modifications, the Government introduced amendments to Chapter
XA and Section 144BA through the Finance Act, 2013. Pursuant to these
amendments, the applicability of GAAR was deferred, with its provisions
coming into force with effect from 01.04.2016, instead of the earlier date of
01.04.2014, thereby making them applicable from the assessment year 2016-17
onwards. Further, Section 96 was amended to provide that an arrangement
would be considered an impermissible avoidance arrangement if the main
purpose of such arrangement was to obtain a tax benefit, thereby removing the
earlier criterion that included arrangements where obtaining a tax benefit was
merely one of the main purposes. Section 96 (2) also laid down that even if the
main purpose of the arrangement was not to obtain a tax benefit, it would be
presumed to be so if the main purpose of any step in, or part thereof, is to obtain
a tax benefit, implying that a tax benefit cannot, either by direct arrangement or
indirect arrangement or implication, be the object or purpose of the whole

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arrangement, part of the arrangement, or a benefit of any action carried out in
furtherance of such arrangement. Section 97 was inserted to determine the
arrangements which lack commercial substance. The provisions stated the
transactions which would be deemed to lack commercial substance, including
transactions involving or including round-trip financing, an accommodating
party, offsetting or cancelling transactions, transactions conducted through one
or more persons and disguising the value, location, source, ownership or control
of funds, transactions that involve the location of an asset or of a transaction or
of the place of residence without any substantial commercial purpose other than
obtaining a tax benefit, and for that purpose treated certain factors, such as, the
duration of an arrangement, tax payments made by the assessee, and the
presence of an exit route, as inapplicable in determining whether an
arrangement lacked commercial substance. Furthermore, the definition of lack
of commercial substance was expanded to include arrangements that do not
have a significant effect on the business risks or net cash flows of any party,
apart from any effect attributable to the tax benefit. Section 97 (3) made it clear
that if the purpose of participation of any party, directly or indirectly in the
arrangement, in whole or in part, is to obtain, directly or indirectly, a tax benefit
for the assessee, irrespective of him being a third party, such party shall be
treated as an accommodating party. The provisions literally contemplated
stricter scrutiny and took away the unlimited right to avoid tax under the

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domestic law by production of a TRC. Chapter XA was to be applicable from
assessment year 2018-19 onwards.

12.28. With regard to the applicability of GAAR, guidelines were notified vide
CBDT Notification dated 23.09.2013, through the insertion of Rules 10U to
10UC in the Income-tax Rules, 1962, along with the prescription of Forms
bearing Nos. 3CEG, 3CEH, and 3CEI. These were also to come into force from
April 1, 2016. Among these Rules, Rule 10U is paramount as it delineates the
scope of applicability and exclusions under GAAR, including the
grandfathering provisions. Rule 10(U) reads as follows:
“DD. Application of General Anti Avoidance Rule
Chapter X-A not to apply in certain cases

10U. (1) The provisions of Chapter X-A shall not apply to –
(a)an arrangement where the tax benefit in the relevant assessment year arising,
in aggregate, to all the parties to the arrangement does not exceed a sum of
rupees three crore;
(b)Foreign Institutional Investor, –
(i)who is an assessee under the Act;
(ii) who has not taken benefit of an agreement referred to in section 90 or
section 90A as the case may be; and
(iii)who has invested in listed securities, or unlisted securities, with the prior
permission of the competent authority, in accordance with the Securities and
Exchange Board of India (Foreign Institutional Investor) Regulations, 1995 and
such other regulations as may be applicable, in relation to such investments;
(c)a person, being a non-resident, in relation to investment made by him by way
of offshore derivative instruments or otherwise, directly or indirectly, in a
Foreign Institutional Investor;
(d)any income accruing or arising to, or deemed to accrue or arise to, or
received or deemed to be received by, any person from transfer of investments
st
made before the 1 day of April 2017 by such person.

(2) Without prejudice to the provisions of clause (d) of sub-rule (1), the
provisions of Chapter X-A shall apply to any arrangement, irrespective of the

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date on which it has been entered into, in respect of the tax benefit obtained
st
from the arrangement on or after the 1 day of April, 2017.

(3) For the purposes of this rule, -
(i) “Foreign Institutional Investor” shall have the same meaning as assigned to
it in the Explanation to section 115AD;
(ii) “off shore derivative instrument” shall have the same meaning as assigned
to it in the Securities and Exchange Board of India (Foreign Institutional
Investor) Regulations, 1995 issued under Securities and Exchange Board of
India Act, 1992 (15 of 1992);
(iii) “Securities and Exchange Board of India” shall have the same meaning as
assigned to it in clause (a) of sub-section (1) of section 2 of the Securities and
Exchange Board of India Act, 1992 (15 of 1992);
(iv) “tax benefit” as defined in clause (10) of section 102 and computed in
accordance with Chapter X-A shall be with reference to-
(a) sub-clauses (a) to (e) of the said clause, the amount of tax; and
(b) sub-clause (f) of the said clause, the tax that would have been chargeable
had the increase in loss referred to therein been the total income.”

12.29. GAAR was expressly excluded from applying to income arising from
investments made before 30.08.2010, initially. It is necessary to mention that the
Rules dealt with two aspects: one is the period of investment and another is the
income arising from the transfer of the investment. When the investment is
made after the cut-off date, the exemption from the applicability of GAAR is
not available. As Chapter XA itself was introduced much later, the Rules were
notified with effect from 01.04.2017, and the cut-off date was accordingly
amended.
12.30. Further, Rule 10U(2) introduced a crucial distinction wherein an
arrangement was not automatically grandfathered in its entirety. In other words,
irrespective of the date on which the arrangement was entered into, the
provisions of GAAR were to apply if the tax benefit from such an arrangement

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was obtained on or after 01.04.2015, initially, and later substituted to be
effective from 01.04.2017. This ensured that while pre-existing investments
were safeguarded, arrangements that continued to yield tax benefits beyond the
specified date remained within the ambit of GAAR, preventing abuse of the
grandfathering provisions. Therefore, any benefit arising out of any arrangement
that has yielded a benefit of more than Rupees Three Crores after 01.04.2017,
when the amount of tax benefit arising in aggregate to all the parties is above
Rs. Three Crores, can be subject to scrutiny under GAAR, and an assessee
simply cannot walk away by citing that the investments were made prior to
01.04.2017. The use of the word “any arrangement” is exhaustive enough to
include any benefit arising out of the sale of shares.

DTAA Amendment
12.31. To address long-pending issues of Treaty abuse and round-tripping of
funds associated with the DTAA, and to curb revenue loss, prevent double non-
taxation, streamline investment flows, and enhance the exchange of information
between the countries, the DTAA was amended through a Protocol signed on
10.05.2016. The amendments, which came into effect from 01.04.2017,
introduced significant changes to Article 13. More particularly, two new
paragraphs were inserted, effectively vesting the right to tax capital gains
arising from “transfer of investments” acquired on or after 01.04.2017, with the
source jurisdiction. Needless to mention that the sale of shares is a transfer of

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investment. Further, capital gains on such shares, if derived between 01.04.2017
and 31.03.2019, would be eligible for a concessional tax rate, 50% of the
prevailing rate in the source State, subject to the fulfilment of conditions
specified in the LOB clause under the newly introduced Article 27A. At the
same time, it was clarified that existing investments, i.e., those made before
01.04.2017, would be grandfathered and would not be subject to capital gains
taxation in India.

12.32. Further, Press Release dated 10.05.2016 stated that the Protocol for
amendment of the Convention for the Avoidance of Double Taxation and the
Prevention of Fiscal Evasion with respect to taxes on income and capital gains
between India and Mauritius was signed by both countries on 10.05.2016 at Port
Louis, Mauritius. The key features of the Protocol are as under:

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12.33. It is also to be pointed out that the following provisions were inserted in
Article 13 and they are:
“ 3A. Gains from the alienation of shares acquired on or after 1st April 2017 in a
company which is resident of a Contracting State may be taxed in that State.

3B. However, the tax rate on the gains referred to in paragraph 3A of this Article
and arising during the period beginning on 1st April, 2017 and ending on 31st
March, 2019 shall not exceed 50% of the tax rate applicable on such gains in
the State of residence of the company whose shares are being alienated;”

Further, Article 13(4) was amended. However, it still left the taxing rights of
any property, other than that mentioned in paragraphs 1, 2, 3, and 3A, with the
residence State. After Amendment, Article 13(4) reads as under:

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“ 4. Gains from the alienation of any property other than that referred to in
paragraphs 1, 2, 3 and 3A shall be taxable only in the Contracting State of
which the alienator is a resident.”

12.34. The LOB under Article 27A was restricted solely to capital gains and
was only to be in force for two years. It was a transitional provision. The
conditions contained in the LOB stated that the entity should not be (a) arranged
with the primary purpose of taking advantage of the particular provision, or (b)a
shell/conduit company. An entity fulfilling the former criterion appears to also
satisfy the bona fide business activities test. A shell/conduit company is defined
as an entity “with negligible or nil business operations or with no real and
continuous business activities carried out in the Contracting State.” An entity is
deemed to be not a “shell/conduit company” if (a) in the immediately preceding
twelve-month period its expenditure on operations is equal to or more than INR
2.7 million, or (b) the entity is listed on a recognised stock exchange in one of
the Contracting States. It will be useful to refer to Article 27A, which reads as
follows:
“ Article 27A : Limitation of Benefits
1. A resident of a Contracting State shall not be entitled to the benefits of Article
13(3B) of this Convention if its affairs were arranged with the primary purpose
to take advantage of the benefits in Article 13(3B) of this Convention.

2. A shell/conduit company that claims it is a resident of a Contracting State
shall not be entitled to the benefits of Article 13(3B) of this Convention. A
shell/conduit company is any legal entity falling within the definition of resident
with negligible or nil business operations or with no real and continuous
business activities carried out in that Contracting State.


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12.35. Finally, GAAR was to be implemented from AY 2018-19 onwards. The
Ministry of Finance issued a Clarification dated 27.01.2017 regarding
“arrangement” and the “grandfathering” provisions. The relevant portions are
extracted as under:
“……Stakeholders and industry associations had requested for clarifications on
implementation of GAAR provisions and a Working Group was constituted by
CBDT to examine the issues raised. Accordingly, CBDT has issued the
clarifications on implementation of GAAR provisions on 27th January, 2017.

Amongst others, it has been clarified that if the jurisdiction of FPI is finalized
based on non-tax commercial considerations and the main purpose of the
arrangement is not to obtain tax benefit, GAAR will not apply. GAAR will not
interplay with the right of the taxpayer to select or choose method of
implementing a transaction. Further, grandfathering as per IT Rules will be
available to compulsorily convertible instruments, bonus issuances or split /
consolidation of holdings in respect of investments made prior to 1st April 2017
in the hands of same investor. It has also been clarified that adoption of anti-
abuse rules in tax treaties may not be sufficient to address all tax avoidance
strategies and the same are required to be tackled through domestic anti-
avoidance rules. However, if a case of avoidance is sufficiently addressed by

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Limitation of Benefits (LoB) provisions in the tax treaty, there shall not be an
occasion to invoke GAAR.

It has been clarified that if at the time of sanctioning an arrangement, the Court
has explicitly and adequately considered the tax implications, GAAR will not
apply to such an arrangement. It has also been clarified that GAAR will not
apply if an arrangement is held as permissible by the Authority for Advance
Rulings. Further, it has been clarified that if an arrangement has been held to be
permissible in one year by the PCIT/CIT/Approving Panel and the facts and
circumstances remain the same, GAAR will not be invoked for that arrangement
in a subsequent year.

The proposal to apply GAAR will be vetted first by the Principal Commissioner
of Income Tax /Commissioner of Income Tax and at the second stage by an
Approving Panel headed by a judge of High Court. The stakeholders have been
assured that adequate procedural safeguards are in place to ensure that GAAR
is invoked in a uniform, fair and rational manner……”

CBDT press release dated 27.01.2017
12.36. The CBDT issued a Press Release dated 27.01.2017 clarifying the
applicability of GAAR. The relevant portions are as under:
“The provisions of General Anti Avoidance Rule (GAAR) are contained in
Chapter X-A of the Income Tax Act, 1961. The GAAR provisions shall be
effective from assessment year 2018-19 onwards, i.e. financial year 2017-18
onwards. The necessary procedures for application of GAAR and conditions
under which it shall not apply, have been enumerated in Rules 10U to 10UC of
the Income-tax Rules, 1962.

Question no. 1 : Will GAAR be invoked if SAAR applies?
Answer: It is internationally accepted that specific anti avoidance provisions
may not address all situations of abuse and there is need for general anti-abuse
provisions in the domestic legislation. The provisions of GAAR and SAAR can
coexist and are applicable, as may be necessary, in the facts and circumstances
of the case.

Question 2: Will GAAR be applied to deny treaty eligibility in a case where
there is compliance with LOB test of the treaty?
Answer: Adoption of anti-abuse rules in tax treaties may not be sufficient to
address all tax avoidance strategies and the same are required to be tackled

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through domestic anti-avoidance rules, If a case of avoidance is sufficiently
addressed by LOB in the treaty, there shall not be an occasion to invoke GAAR.

Question 5: Will GAAR provisions apply to (i) any securities issued by way of
bonus issuances so long as the original securities are acquired prior to 01 April,
2017 (ii) shares issued post 31 March, 2017, on conversion of Compulsorily
Convertible Debentures, Compulsorily Convertible Preference Shares (CCPS),
Foreign Currency Convertible Bonds (FCCBs), Global Depository Receipts
(GDRs), acquired prior to 01 April, 2017; (iii) shares which are issued
consequent to split up or consolidation of such grandfathered shareholding?
Answer: Grandfathering under Rule 10U(1)(d) will be available to investments
st
made before 1 April 2017 in respect of instruments compulsorily convertible
from one form to another, at terms finalized at the time of issue of such
instruments. Shares brought into existence by way of split or consolidation of
st April
holdings, or by bonus issuances in respect of shares acquired prior to 1
2017 in the hands of the same investor would also be eligible for grandfathering
under Rule 10U(1)(d) of the Income Tax Rules.

Question 6: The expression "investments” can cover investment in all forms of
instrument - whether in an Indian Company or in a foreign company so long as
the disposal thereof may give rise to income chargeable to tax. Grandfathering
should extend to all forms of investments including lease contracts (say, aircraft
leases) and loan arrangements, etc.
Answer: Grandfathering is available in respect of income from transfer of
investments made before 1st April 2017. As per Accounting Standards
"investments” are assets held by an enterprise for earning income by way of
dividends, interest, rentals `and for capital appreciation Lease contracts and
loan arrangements are, by themselves, not 'investments' and hence
grandfathering is not available.

Question 7: Will GAAR apply if arrangement held as permissible by Authority
for Advance Ruling?
Answer: No. The AAR ruling is binding on the PCIT / CIT and the Income Tax
Authorities subordinate to him in respect of the applicant.

Question 8: Will GAAR be invoked if arrangement is sanctioned by an authority
such as the Court, National Company Law Tribunal or is in accordance with
judicial precedents etc.?
Answer: Where the Court has explicitly and adequately considered the tax
implication while sanctioning an arrangement, GAAR will not apply to such
arrangement.”


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(C) DISCUSSION AND FINDINGS
13. Let us first consider and discuss the relevant provisions of the DTAA and
their application to the instant case. Article 1(e) defines the term “person” to
include an individual, a company, and any other entity, corporate or non-
corporate, which is treated as a taxable unit under the taxation laws in force in
the respective Contracting States. Further, the Ministry of Finance (Department
of Revenue) of the Central Government, in the case of India, and the
Commissioner of Income Tax, in the case of Mauritius, are designated as the
“competent authority”. As already stated, the applicability of the DTAA is
determined by Article 4 , which at the cost of repetition, is extracted below:

" Article 4 - Residents :
1. For the purposes of the Convention, the term "resident of a Contracting State"
means any person who under the laws of that State, is liable to taxation therein
by reason of his domicile, residence, place or management or any other criterion
of similar nature. The terms "resident of India" and "resident of Mauritius" shall
be construed accordingly.

2. Where by reason of the provisions of paragraph 1, an individual is a resident
of both Contracting States, then his residential status for the purposes of this
Convention shall be determined in accordance with the following rules:
(a) he shall be deemed to be a resident of the Contracting State in which he has
a permanent home available to him; if he has a permanent home available to
him in both Contracting States, he shall be deemed to be a resident of the
Contracting State with which his personal and economic relations are closer
(hereinafter referred to as his "centre of vital interests");
(b) if the Contracting State in which he has his centre of vital interest cannot be
determined, or if he does not have a permanent home available to him in either
Contracting State he shall be deemed to be a resident of the Contracting State in
which he has an habitual abode;
(c) if he has an habitual abode in both Contracting States or in neither of them,
he shall be deemed to be a resident of the Contracting State of which he is a
national;

105

(d) if he is a national of both Contracting States or of neither of them, the
competent authorities of the Contracting States shall settle the question by
mutual agreement.

3. Where by reason of the provision of paragraph 1, a person other than an
individual is a resident of both the Contracting States, then it shall be deemed to
be a resident of the Contracting State in which its place of effective management
is situated."

14. The Agreement allocates taxing jurisdiction between the Contracting
States with respect to different heads of income. Detailed rules govern the
taxation of dividends (Article 10 ) , interest (Article 11 ) , royalties (Article 12 ) ,
capital gains (Article 13 ) , income from independent personal services (Article
14 ) , income from dependent personal services (Article 15 ) , directors' fees
(Article 16 ) , income of artists and athletes (Article 17 ) , governmental functions
(Article 18 ) , income of students and apprentices (Article 20 ) , income of
professors, teachers and research scholars (Article 21 ) , and other income
(Article 22).

15. At the outset, it is necessary to examine the scope of Article 13 of the
DTAA, which governs the taxation of capital gains. It provides that gains from
the alienation of immovable property may be taxed in the Contracting State in
which such property is situated. Gains derived by a resident of a Contracting
State from the alienation of movable property forming part of the business
property of a permanent establishment, or pertaining to a fixed base for
performing independent personal services, may be taxed in the State in which

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such permanent establishment or fixed base is situated. Gains from the
alienation of ships and aircraft operated in international traffic, and movable
property pertaining thereto, are taxable only in the Contracting State in which
the place of effective management is situated. With respect to capital gains
derived by a resident of a Contracting State from the alienation of any other
property, taxation is confined to the State in which such person is a resident.

16. Notably, a careful reading of Article 13(2) illustrates that it covers cases
where the gain arises from the sale of movable property forming part of a
permanent establishment or fixed base of a Mauritian-resident company in the
other Contracting State. The expression used is “in the other Contracting State”
and not “owned by an establishment in another State”, thereby implying that it
applies only where the sale relates to movable property of a permanent
establishment directly owned by the Mauritian company in the other State.
Transactions such as the present one would not fall within its sweep.

17. Further, Article 13 (3A), which was inserted in 2016, applies to cases
involving the sale of shares of a company in a Contracting State acquired on or
after 01.04.2017, and provides for taxation in the source State. This again
depends upon the situs of the company whose shares are directly held and sold
by the Mauritian entity. Under Article 13(4), all transactions not covered under
Paragraphs 1, 2, 3 and 3A are taxable in the State of residence.


107

18. Thus, on a combined reading, it seems clear that for the benefit under
Article 13(4), the person claiming treaty protection must not only qualify as a
“resident” of the other State i.e., Mauritius, but also establish that the movable
property or shares forming the subject matter of the transaction are directly held
by such resident entity. In all other cases, the transaction is taxable in India,
where the capital gains arise out of the disposition of movable property,
including movable property forming part of the business property held by a
permanent establishment in India. Thus, an indirect sale of shares would not, at
the threshold, fall within the treaty protection contemplated under Article 13.

19. It is now necessary to consider the conditions under which a DTAA may
be invoked, and the extent to which such treaties operate within the framework
of domestic tax law. Pertinently, the cut-off date on the sale of shares
contemplated under the Agreement in Article 13 is restricted only to cases
falling under Paragraph 3A, and transactions falling outside its purview are
governed by Article 13(4), subject to the alienator being a resident. The object
of the DTAA is to prevent double taxation and not to facilitate avoidance or
evasion of tax. Therefore, for the treaty to be applicable, the assessee must
prove that the transaction is taxable in its State of residence. The amendments to
the Agreement as discussed above, were introduced precisely to prevent revenue
loss to the State where the gains actually arise, by abuse of the Treaty. The

108

assessee, hence, has to establish that it is a resident of the Contracting State
covered by the DTAA by producing all relevant documents.

20. Article 25 lays down the Mutual Agreement Procedure. It provides that
where a resident of a Contracting State considers that the actions of one or both
Contracting States result, or will result, in taxation not in accordance with the
Convention, he may, notwithstanding the remedies provided by the national
laws of those States, present his case to the competent authority of the
Contracting State of which he is a resident. The complaint must be lodged
within three years of receipt of the notice giving rise to such taxation. If the
objection appears to be justified, the competent authority shall endeavour to
resolve the matter by mutual agreement with the competent authority of the
other Contracting State so as to avoid taxation inconsistent with the Convention.
Article 25 also provides for continuous communication between the competent
authorities to resolve doubts regarding interpretation or application of the
Convention.

21. At this stage, it is relevant to recall the purpose of a Double Taxation
Treaty or Convention and importantly, to note that such treaties are entered into
pursuant to the enabling provisions of Chapter IX of the Income Tax Act and
must be read harmoniously with other provisions of the Act. Section 4 provides
for the charge of income-tax. Section 5 stipulates the scope of total income. The
total income of a resident includes income received or accrued in India or

109

outside India. In the case of a non-resident, the total income includes all income
received or deemed to be received in India, or accruing or deemed to accrue in
India. A resident is taxable on global income, subject to the exception of persons
“not ordinarily resident” as defined in Section 6. The residence of a company is
determined by the situs of control and management.

22. Indisputably, every country seeks to tax income generated within its
territory on the basis of one or more connecting factors such as the situs of the
transaction, source of income, residence of the taxable entity, maintenance of a
permanent establishment, and so on. The sovereign right to tax, as settled in law,
is in the larger public interest and for the development of the country. A country
might choose to emphasise one or the other of the aforesaid factors for
exercising fiscal jurisdiction to tax an entity. Depending on which factor is
considered the connecting factor in different countries, the same income of the
same entity may become taxable in multiple jurisdictions, resulting in hardship
and impeding economic activity. To avoid such anomalies, States enter into
bilateral treaties for granting relief against double taxation. These are known as
DTAAs.

23. The power to enter into treaties is an incident of the sovereign authority
of the State. Under Article 73 of the Constitution, the executive power of the
Union extends to matters on which Parliament may legislate. However, the
executive power of the Union shall not extend to matters over which the State

110

has authority to legislate, unless expressly provided under the Constitution. The
Executive, qua the State, is competent to represent the State in all international
matters relating to subjects over which it can legislate and may, by agreement,
convention or treaty, incur obligations which, in international law, are binding
upon the State. However, the obligations arising under the agreements or
treaties cannot ipso facto affect the rights of the citizens of the country. The
power to legislate in respect of treaties lies with Parliament under Entries 10
and 14 of List I of the Seventh Schedule. An enactment in the form of a law
under that authority is necessary when the treaty or agreement operates to
restrict the rights of citizens or others, or modifies the law of the State. If the
rights of citizens or others which are justiciable are not affected, no legislative
measure is needed to give effect to the agreement or treaty, because of the
power of judicial review vested in constitutional courts to protect the
fundamental and constitutional rights guaranteed under the Constitution.

24. In cases of fiscal treaties dealing with double taxation avoidance,
different countries have varying procedures. In the United States, such a treaty
becomes a part of municipal law upon ratification by the Senate. In the United
Kingdom, such a treaty would have to be endorsed by an order made by the
Queen in Council. In India, since such a treaty has to be approved by an Act of
Parliament, a special procedure was evolved by enacting Section 90 of the Act.
The purpose of Section 90 becomes clear by reference to its legislative history.

111

Section 49A of the Income-tax Act, 1922 enabled the Central Government to
enter into an agreement with the Government of any country outside India for
the granting of relief in respect of income on which both income-tax (including
super-tax) under the Act and income-tax in that country, under the
corresponding law in force therein, had been paid. The Central Government
could make such provisions as necessary for implementing the agreement by
notification in the Official Gazette. When the Income-tax Act, 1961 was
introduced, Section 90 contained therein was initially a reproduction of Section
49A of the 1922 Act. The Finance Act, 1972 (Act 16 of 1972) modified Section
90 and brought it into force with effect from 01.04.1972. The object and scope
of the substitution were explained by CBDT Circular No. 108 dated 20.03.1973.
The said circular clarified that the purpose was to empower the Central
Government to enter into agreements with foreign countries not only for the
avoidance of double taxation of income but also for enabling tax authorities to
exchange information for the prevention of evasion or avoidance of taxes on
income, for investigation of cases involving tax evasion or avoidance, or for
recovery of taxes in foreign countries on a reciprocal basis. In 1991, the
existing Section 90 was renumbered as sub-section (1), and sub-section (2) was
inserted by the Finance Act, 1991 with retrospective effect from 01.04.1972.
CBDT Circular No. 621 dated 19.12.1991 reads as follows:
"Taxation of foreign companies and other non- resident taxpayers-
43. Tax treaties generally contain a provision to the effect that the laws of the
two contracting States will govern the taxation of income in the respective State

112

except when express provision to the contrary is made in the treaty. It may so
happen that the tax treaty with a foreign country may contain a provision giving
concessional treatment to any income as compared to the position under the
Indian law existing at that point of time. However, the Indian law may
subsequently be amended, reducing the incidence of tax to a level lower than
what has been provided in the tax treaty.

43.1. Since the tax treaties are intended to grant tax relief and not put residents
of a contracting country at a disadvantage vis-à-vis other taxpayers, section
90 of the Income-tax Act has been amended to clarify that any beneficial
provision in the law will not be denied to a resident of a contracting country
merely because the corresponding provision in the tax treaty is less beneficial."

19
25. In K.P. Varghese v. Income-Tax Officer, Ernakulam , this Court held
that not only are the circulars and instructions issued by the CBDT in exercise
of the power under Section 119 binding on the authorities administering the tax
department, but they are also clearly in the nature of contemporanea exposition,
furnishing legitimate aid to the construction of the Act. The rule of
contemporanea expositio is that administrative construction i.e.,
contemporaneous construction placed by administrative or executive officers,
should generally not be overturned unless it is clearly wrong; such a
construction, though non-controlling, is nevertheless entitled to considerable
weight and is highly persuasive. It was further held that the circulars issued by
the CBDT in exercise of its power under Section 119 are legally binding on the
Revenue. Such binding force attaches to these circulars even where they are
found not to be in strict accordance with the correct interpretation of sub-section
(2) or where they depart from the proper statutory construction.

19
AIR 1981 SC 1922

113


26. In Commissioner of Income-Tax v. Anjum M.H. Ghaswala and
20
Others , it was pointed out that the circulars issued by the CBDT under Section
119 of the Act have statutory force and are binding on every income-tax
authority, although such may not be the case with regard to press releases issued
by the CBDT for the information of the public.

27. No doubt, the provisions of Sections 4 and 5 of the Act are expressly
made subject to the provisions of the Act, which would include Section 90. The
judicial consensus in India has been that Section 90 is specifically intended to
enable and empower the Central Government to issue a notification for the
implementation of the terms of a DTAA. However, the amendments subsequent
to the Vodafone to Chapter IX, the insertion of Chapter XA, the amendments to
Rule 10U, and the DTAA have completely changed the scenario. Circulars
issued earlier, though binding on the Revenue at the time of their issuance,
operate only within the legal regime in which they were issued and cannot
override subsequent statutory amendments. It is equally settled law that
Parliament is well within its right to bring in a law, either by amendment,
substitution, or introduction so as to remove the basis of a judicial decision. It
will be useful to refer to the judgment of this Court in Hindustan Construction
21
Company Limited and others v. Union of India and others , on this aspect:

20
2001 INSC 519
21
MANU/SC/1638/2019: 2020 (17) SCC 324

114

“41. Dr. Singhvi has argued, based on a number of judgments of this Court, that
the question of removing the basis of a judgment cannot arise unless and until
the judgment is present to the mind of the legislature. He stated that in all the
major cases in which a judgment of a court is nullified by removing its basis, the
judgment in question has been expressly referred to in the concerned Statement
of Objects and Reasons. We are afraid that we cannot agree with this line of
argument. What is important is to see whether, in substance, the basis of a
particular judgment is in fact removed, whether or not that judgment is referred
to in the Statement of Objects and Reasons of the amending act which seeks to
remove its basis.

42. In Shri Prithvi Cotton Mills Ltd. and Anr. v. Broad Borough Municipality
and Ors. MANU/SC/0057/1969 : (1969) 2 SCC 283, this Court held:
4. ...Granted legislative competence, it is not sufficient to declare merely that the
decision of the Court shall not bind for that is tantamount to reversing the
decision in exercise of judicial power which the Legislature does not possess or
exercise. A court's decision must always bind unless the conditions on which it is
based are so fundamentally altered that the decision could not have been given
in the altered circumstances.

43. In State of Tamil Nadu v. Arooran Sugars Ltd. MANU/SC/0426/1997 :
(1997) 1 SCC 326, this Court after setting out what was held in Shri Prithvi
Cotton Mills (supra) stated:
16. ..The same view was reiterated in the cases of West Ramnad Electric
Distribution Co. Ltd. v. State of Madras MANU/SC/0060/1962 : [(1963) 2 SCR
747 : AIR 1962 SC 1753]; Udai Ram Sharma v. Union of
India [MANU/SC/0154/1968 : (1968) 3 SCR 41 : AIR 1968 SC 1138]; Tirath
Ram Rajindra Nath v. State of U.P. [MANU/SC/0555/1972 : (1973) 3 SCC 585:
1973 SCC (Tax) 300]; Krishna Chandra Gangopadhyaya v. Union of
India [MANU/SC/0143/1975 : (1975) 2 SCC 302]; Hindustan Gum &
Chemicals Ltd. v. State of Haryana [MANU/SC/0254/1985 : (1985) 4 SCC
124]; Utkal Contractors and Joinery (P) Ltd. v. State of
Orissa [MANU/SC/0125/1987 : 1987 Supp SCC 751]; D. Cawasji & Co. v. State
of Mysore [MANU/SC/0254/1984 : 1984 Supp SCC 490: 1985 SCC (Tax) 63]
and Bhubaneshwar Singh v. Union of India [MANU/SC/0844/1994 : (1994) 6
SCC 77]. It is open to the legislature to remove the defect pointed out by the
court or to amend the definition or any other provision of the Act in question
retrospectively. In this process it cannot be said that there has been an
encroachment by the legislature over the power of the judiciary. A court's
directive must always bind unless the conditions on which it is based are so
fundamentally altered that under altered circumstances such decisions could not
have been given. This will include removal of the defect in a statute pointed out
in the judgment in question, as well as alteration or substitution of provisions of
the enactment on which such judgment is based, with retrospective effect.

115


44. Likewise, in Goa Foundation v. State of Goa MANU/SC/0334/2016 :
(2016) 6 SCC 602, this Court held:
24. ..The power to invalidate a legislative or executive act lies with the Court. A
judicial pronouncement, either declaratory or conferring rights on the citizens
cannot be set at naught by a subsequent legislative act for that would amount to
an encroachment on the judicial powers. However, the legislature would be
competent to pass an amending or a validating act, if deemed fit, with
retrospective effect removing the basis of the decision of the Court. Even in such
a situation the courts may not approve a retrospective deprivation of accrued
rights arising from a judgment by means of a subsequent legislation (Madan
Mohan Pathak v. Union of India [Madan Mohan Pathak v. Union of
India, MANU/SC/0253/1978 : (1978) 2 SCC 50 : 1978 SCC (L & S) 103]).
However, where the Court's judgment is purely declaratory, the courts will lean
in support of the legislative power to remove the basis of a court judgment even
retrospectively, paving the way for a restoration of the status quo ante. Though
the consequence may appear to be an exercise to overcome the judicial
pronouncement it is so only at first blush; a closer scrutiny would confer
legitimacy on such an exercise as the same is a normal adjunct of the legislative
power. The whole exercise is one of viewing the different spheres of jurisdiction
exercised by the two bodies i.e. the judiciary and the legislature. The balancing
act, delicate as it is, to the constitutional scheme is guided by the well-defined
values which have found succinct manifestation in the views of this Court
in Bakhtawar Trust [Bakhtawar Trust v. M.D. Narayan, MANU/SC/0390/2003 :
(2003) 5 SCC 298].”

After the amendment has come into effect, there can be no doubt whatsoever
that a TRC alone is not sufficient to avail the benefits under the DTAA, and
reliance upon earlier judgments dealing with circulars issued in the pre-
amendment regime cannot ipso facto come to the aid of the respondents. Rather,
the facts will have to be independently analysed to decide on the applicability of
Chapter XA.

28. Thus, the first step is to examine whether the transaction falls within the
scope of Section 9(1)(i) of the Act, which deems income arising from the

116

transfer of a capital asset situated in India to accrue in India. Explanation 5 to
the said provision extends this deeming fiction to cover shares in a foreign
company if such shares derive, directly or indirectly, their value substantially
from assets located in India. Once domestic taxability is established, the second
limb of the analysis considers whether such taxability is curtailed or overridden
by the DTAA. This enquiry centres on: (a) whether the taxpayer is a “resident”
of Mauritius within the meaning of Article 4(1) of the DTAA; (b) whether the
transaction falls within the scope of Article 13(3A) and 13(3B), introduced via
the 2016 Protocol, or Article 13(4), a residuary rule; and (c) whether the
limitation of benefits clause under Article 27A applies to deny treaty protection.

29. At this juncture, it is important to note that as the provisions have
undergone a sea change by amendments to Chapter IX, Chapter XA of the Act
and Rule 10U, the assessing officers under the Indian Income-tax Act, 1961 are
now empowered to determine where taxable entities are really resident by
investigating the centre of their management, and thereafter to apply the
provisions of the Act to the global income earned by them by reason of Sections
4 and 5. The amendments to the Act, the Rules, and the terms of the agreement
which have enabled strict scrutiny, cannot be ignored, and relief cannot be ipso
facto granted. It is to be borne in mind that the income-tax authorities were
seeking to examine whether the assessees were in fact residents of a third
country on the basis of alleged control and management being exercised from

117

that country. The term “resident of a Contracting State” means any person who,
under the laws of that State, is liable to taxation therein by reason of domicile,
residence, place of management, or any other criterion of a similar nature. The
terms “resident of India” and “resident of Mauritius” are to be construed
accordingly.

30. As already mentioned, Article 13 of the DTAA lays down detailed rules
with regard to taxation of capital gains. As far as capital gains resulting from the
alienation of shares are concerned, Article 13(4) provides that the gains derived
by a “resident” of a Contracting State shall be taxable only in that State. Article
4 declares that the term “resident of Mauritius” means any person who, under
the laws of Mauritius, is liable to taxation therein by reason, inter alia , of
residence. Clause (2) of Article 4 enumerates detailed rules as to how the
residential status of an individual resident in both Contracting States is to be
determined for the purposes of the DTAA. Clause (3) of Article 4 provides that
if, after application of the detailed rules provided therein, a person other than an
individual is found to be a resident of both Contracting States, the benefit under
the DTAA cannot be availed. The benefit of exemption available to a resident by
virtue of the DTAA is not available if the transaction is taxable in the source
State.

31. In McDowell, Justice Ranganath Mishra, writing for the majority, held as
under:

118

“ 25. We may also recall the observations of Viscount Simon in Latilla v. I.R.C.
(1943) 25 T C 107:
Of recent years much ingenuity has been expended in certain quarters in
attempting to devise methods of disposition of income by which those who were
prepared to adopt them might enjoy the benefits of residence in this country
while receiving the equivalent of such income, without sharing in the
appropriate burden of British taxation. Judicial dicta may be cited which point
out that, however elaborate and artificial such methods may be, those who adopt
them are "entitled" to do so. There is, of course, no doubt that they are within
their legal rights, but that is no reason why their efforts, or those of the
professional gentlemen who assist them in the matter, should be regarded as a
commendable exercise of ingenuity or as a discharge of the duties of good
citizenship. On the contrary one result of such methods, if they succeed, is of
course to increase pro tanto the load of tax on the shoulders of the great body of
good citizens who do not desire, or do not know how, to adopt these maneuvers.
Another consequence is that the Legislature has made amendments to our
Income Tax Code which aim at nullifying the effectiveness of such schemes.”

26. Tax planning may be legitimate provided it is within the framework of law.
Colourable devices cannot be part of tax planning and it is wrong to encourage
or entertain the belief that it is honourable to avoid the payment of tax by
resorting to dubious methods. It is the obligation of every citizen to pay the taxes
honestly without resorting to subterfuges.

46. On this aspect one of us, Chinnappa Reddy, J., has proposed a separate and
detailed opinion with which we agree.”

In the same Judgment, O. Chinnappa Reddy, J. while concurring with the
judgment of the five-Judge Bench, observed as follows:
“ 46. We think that time has come for us to depart from the Westminster [1936
AC 1 : 1935 All ER Rep 259] principle as emphatically as the British Courts
have done and to dissociate ourselves from the observations of Shah, J. and
similar observations made elsewhere. The evil consequences of tax avoidance
are manifold. First there is substantial loss of much needed public revenue,
particularly in a Welfare State like ours. Next there is the serious disturbance
caused to the economy of the country by the piling up of mountains of black-
money, directly causing inflation. Then there is “the large hidden loss” to the
community (as pointed out by Master Wheatcroft [18 Modern Law Review 209])
by some of the best brains in the country being involved in the perpetual war
waged between the tax-avoider and his expert team of advisers, lawyers, and
accountants on one side and the tax-gatherer and his perhaps not so skilful,

119

120

121


34. At the outset, it can be seen that the language employed in Section
245R(2) is clear. It uses the word “ prima facie ”. The use of the term “ prima
facie ” implies that it is sufficient if the AAR, on an initial examination of the
documents, is satisfied that the transaction is for avoidance of income tax and
can reject the application. The provision is couched in such a way that the
burden lies on the person claiming a particular fact, and such prima facie
opinion is sufficient to reject the application. The level of satisfaction required
to arrive at a prima facie conclusion is much less when compared to a case
where a fact has to be proved. This Court, in the judgment in Balvir Singh v.
22
State of Uttarkhand , held as under:
“47. The Latin expression prima facie means "at first sight", "at first view", or
"based on first impression". According, to Webster's Third International
Dictionary (1961 Edn.), "prima facie case" means a case established by "prima
facie evidence" which in turn means "evidence sufficient in law to raise a
presumption of fact or establish the fact in question unless rebutted". In both
civil and criminal law, the term is used to denote that, upon initial examination,
a legal claim has sufficient evidence to proceed to trial or judgment. In most
legal proceedings, one party (typically, the Plaintiff or the prosecutor) has a
burden of proof, which requires them to present prima facie evidence for each
element of the charges against the Defendant. If they cannot present prima facie
evidence, or if an opposing party introduces contradictory evidence, the initial
claim may be dismissed without any need for a response by other parties.

23
35. In Martin Burn Ltd. v. R.N. Banerjee , this Court, while considering
whether a prima facie case is made out or not, held as under:
“A prima facie case does not mean a case proved to the hilt but a case which
can be said to be established if the evidence which is led in support of the same

22
MANU/SC/1092/2023: AIR 2023 SC 5551
23
MANU/SC/0081/1957: AIR 1958 SC 79,

122

123

37. Section 90(4) of the Act only speaks of the TRC as an "eligibility
condition". It does not state that a TRC is "sufficient" evidence of residency,
which is a slightly higher threshold. The TRC is not binding on any statutory
authority or Court unless the authority or Court enquires into it and comes to its
own independent conclusion. The TRC relied upon by the applicant is non-
decisive, ambiguous and ambulatory, merely recording futuristic assertions
without any independent verification. Thus, the TRC lacks the qualities of a
binding order issued by an authority.

38. It is a fundamental rule of international taxation that every nation has a
sovereign right to impose tax on the global income of its residents and on
income that accrues or arises within its territorial limits. These twin rights are
referred to as residence-based or source-based taxation. We also do not find that
even in the judgments relied upon by the respondents rendered prior to the
amendment, this Court had totally shut out the case of the Revenue when it
comes to a fraudulent or fictitious transaction. On the facts of the present case,
each case has to be evaluated on its own facts.
39. The DTAA is a treaty. As already noted, treaty provisions are expressions
of sovereign policy of more than one sovereign State, negotiated and entered
into at a political/diplomatic level and having several explicit and/or subliminal
and unarticulated considerations as their bases. A tax treaty must be seen in the
context of aiding commercial relations between treaty partners and as being

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essentially a bargain between Contracting States as to the division of tax
revenues between them in respect of income falling to be taxed in both
jurisdictions. As Azadi Bachao Andolan has noticed, treaty negotiations are
essentially a bargaining process, with each side seeking concessions from the
other. The final agreement would often represent several compromises, and it
may be uncertain whether a full and sufficient quid pro quo is obtained by both
sides. Many developed countries tolerate or encourage even treaty shopping,
even if it is unintended, improper or unjustified, for other and non-tax reasons,
unless it leads to a significant loss of tax revenue, and allow the use of treaty
networks to attract foreign enterprises and offshore activities. Some States
favour treaty shopping for outbound investment to reduce foreign taxes of their
tax residents but dislike their own loss of tax revenue on inbound investment or
trade of non-residents. All these are sovereign policy choices. Developing
countries need foreign investments, and treaty shopping opportunities could be
an additional factor in attracting them. There are many principles in a fiscal
economy which, though they may facially appear inequitable, are tolerated in a
developing economy in the interest of long-term development.
40. Amendments to the DTAA were made through a Protocol signed on
10.05.2016. They were made for the purpose of shutting the back door that was
available to residents of the Contracting Parties to completely evade taxation,
and to residents of foreign countries to have wrongful access to tax advantages
under the treaty through evasive practices such as treaty shopping,

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establishment of conduit structures, round-tripping, hybrid structures, shell
companies, etc . The taxation of capital gains from the sale of shares of Indian
companies by Mauritian residents has set aside the indiscriminate tax exemption
granted to Mauritian residents on all incomes arising in India under Article 13
of the DTAA. This was done against the hostile backdrop of many international
corporations, including Indian nationals, having routed their investment in India
through Mauritius. This phenomenon, technically termed “round tripping”, had
become a favoured tax-dodging business tactic of Indians to exploit the twin
benefit of residence-based tax exemption under the DTAA and the tax haven
regime offered by Mauritius.
41. According to the above amendments, the grandfathering clause under
GAAR will be applied to capital gains from transfers made on or before
01.04.2017, provided the applicant satisfies the test of “resident” as defined
under its State law, particularly under Section 73 of the Mauritius Income Tax
Act and the provisions of the Income-tax Act. Capital gains on acquisition of
shares after 01.04.2017 and transferred before 31.03.2019 will be taxed at 50%
of the domestic tax rate subject to fulfilment of the conditions of the LOB
clause. Transfer of shares after 31.03.2019 will be taxable at the full domestic
tax rate.

42. The LOB clause unequivocally provides that a resident (conduit/shell
company) will be barred from receiving concessional tax benefits if its

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arrangements were meant primarily to obtain such benefits. In this regard, the
Protocol defines a shell or conduit company as an entity which has nil or
negligible business operations or has no real or continuous business activities
being carried out in Mauritius. It further provides that a Mauritian resident will
be deemed a conduit/shell company if its total expenditure on operations in
Mauritius is less than Rs. 1,500,000. Nevertheless, a company will not be
deemed a conduit/shell company if its shares are registered on a recognised
stock exchange in Mauritius or if the expenditure incurred on its operations in
Mauritius is more than Rs. 1,500,000. The changes relating to capital gains and
the insertion of the LOB clause are stated to have had ripple effects on the India
– Singapore DTAA as well, since that treaty provides for tax exemption for
alienation of shares of Indian companies along the lines of the India – Mauritius
treaty. The treaty, complying with international standards, also provides for
sharing of information under Article 26 for effective prevention of tax
avoidance by promoting mutual cooperation. The treaty, as it stands after
amendment, has been made comprehensive by protecting against abuse of tax
advantages through inclusion of anti-avoidance provisions and by reducing
opaqueness through provisions fostering certainty and transparency in treaty
administration.

43. Undoubtedly, the mere holding of a TRC cannot, by itself, prevent an
enquiry subsequent to the amendments brought into the statute, particularly by

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the introduction of Section 90 (2A) and Chapter XA to the Act and the Rules, if
it is established that the interposed entity was a device to avoid tax. We do not
find the terms of the DTAA to be contrary to the provisions of the Income-tax
Act and the Rules. We also do not find the terms of the DTAA, as amended, to
be contrary to the provisions of the Income-tax Act and the Rules. It is reiterated
that the circulars, having since been superseded by statutory amendments, will
not come to the aid of the respondents.

44. The Revenue has contended that mere production of a TRC is not
conclusive in establishing treaty eligibility, particularly post the enactment of
Sections 90(4) and 90(5) of the Act and in light of the anti-abuse objectives
underlying the LOB clause. It further submits that Circular No. 789 and the
decision in Azadi Bachao Andolan dealt with distinct factual scenarios
involving FIIs/NRIs debarred from conducting business in Mauritius and cannot
be extended to Global Business Licence holders who are entitled to carry on
commercial activities. The Revenue also questions the relevance of the
Vodafone ruling in the treaty context, submitting that it involved a challenge to a
domestic law assessment and not a direct ruling on the scope of Article 13 of the
DTAA.

45. Notably, the LOB clause is not applicable as it can be applied only to
cases falling under Clause 3B of Article 13. The application of India’s anti-
avoidance provisions is also relevant to test the applicability of the DTAA.

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Here, the Revenue invokes both statutory and judicial anti-abuse doctrines.
Under the statutory GAAR provisions, the Revenue submits that the present
transaction falls within the scope of an “impermissible avoidance arrangement”
lacking commercial substance. The Revenue distinguishes between mere
“investments” (which are grandfathered under Rule 10U for pre-2017
investments) and “arrangements” (which are not grandfathered if the transfer
occurred post 01.04.2017). It was contended that even if the investment was
made prior to 2017, the subsequent indirect transfer of shares post-2017 brings
the transaction within GAAR scrutiny. This position is fortified by the
distinctions drawn in statutory rules, parliamentary committee reports, and the
Shome Committee recommendations between passive investment activity and
active arrangement-based structuring.

46. There is no dispute that GAAR is applicable to the assessment year under
consideration, empowering the Revenue to declare the subject transaction to be
an impermissible arrangement, which means “an arrangement, the main purpose
of which is to obtain a tax benefit, and which, inter alia , is entered into or
carried out by means or in a manner which is not ordinarily employed for bona
fide purposes.” As seen earlier, two important conditions are prescribed under
Rule 10U of the Income-tax Rules, 1962, to seek exemption from the
applicability of Chapter XA, in addition to the exemption applicable to an FII
which does not seek any benefit under Section 90 or Section 90 A, as the case

129

may be. Notably, these provisions which were brought into effect after the
judgment of this Court in Vodafone , were introduced to prevent treaty abuse and
to ensure that exemptions or concessions are available only to genuine entities
resident in the Contracting State with commercial interest and without tax
avoidance as their main object. Rule 10U(1)(a) reads as under:

47. In the light of the aforementioned provisions and rules, in the case at
hand, though it prima facie appears as if the assessees acquired the capital gains
before the cut-off date, i.e., 01.04.2017, it is to be noted that the proposal for

130

transfer of investments commenced only on 09.05.2018. A Share Purchase
Agreement was executed between Walmart International Holdings Inc., a
Delaware Corporation described as the “purchaser”; the shareholders of Flipkart
Singapore identified in Schedule I thereto and collectively described as the
“sellers”; and Fortis Advisors LLC, a Delaware limited liability company
described as the “sellers' representative”. As per the Share Purchase Agreement,
the sale of shares held by the assessees was approved by the Board in its
meeting held on 04.05.2018. The subject appears to have arisen for discussion
in the meeting held on 12.06.2018, when the Board took note of Walmart’s offer
to purchase a controlling stake in Flipkart Singapore for USD 16 billion, and the
assessees considered selling 74% of their stake therein and closing the
transaction, which occurred after the cut-off date prescribed under Rule
10U(1)(d).

48. In the alternative, even if GAAR is held to be inapplicable, the Revenue
invoked the JAAR, grounded in the doctrine of substance over form,
consistently recognised in Indian jurisprudence, including McDowell and
Vodafone . It was contended that JAAR continues to operate in parallel with
GAAR and empowers Indian authorities to deny treaty benefits in cases
involving treaty abuse or conduit structures. The Revenue further contended that
the respondents themselves acknowledged the applicability of this doctrine by
safeguarding against such scrutiny in the Share Purchase Agreement and by

131

furnishing detailed documentation regarding control and management, thereby
conceding that mere possession of a TRC is not sufficient. Thus, the Revenue’s
position proceeds in a logical sequence. We find force in these contentions and
agree with them for the following reasons: First, taxability is established under
Section 9(1)(i); second, the availability of treaty relief is contested by
challenging the residency claim in view of the prima facie finding that effective
management and control were not in Mauritius, the scope of Article 13, and the
applicability of Circular No. 789 and Azadi Bachao Andolan in the current
factual context; third, GAAR and, in the alternative, JAAR are invoked to
pierce the structure and deny treaty benefits where the transaction lacks genuine
commercial substance. Though several specific questions were raised by the
Revenue, including interpretation of the Mauritius Financial Services Act, the
nature of GBLs, and the role of the LOB clause, these issues merely reinforce
the three-tier framework for determining taxability in the present case.
49. The Vodafone judgment provides crucial insight into this issue. It implies
that business intent behind a transaction serves as strong evidence of whether
the transaction is deceptive or an artificial arrangement. The commercial motive
behind a transaction often reveals its true nature. In the present case, the
respondents seek exemption from the Indian Income tax while, at the same time,
contending that the transaction is also exempt under Mauritian law, which runs
contrary to the spirit of the DTAA and presents a strong case for the Revenue to
deny the benefit as such an arrangement is impermissible. Here again, it may be

132

stated that this stand would again strengthen the reasoning that whether the sale
is of shares of an Indian company then, will not be germane for consideration
because only if the assessee is liable to pay tax in Mauritius, he can derive
benefit under the provision under Article 13(c) of the DTAA as amended.
Section 96(2) places the onus on the taxpayer to disprove the presumption of tax
avoidance. This represents a significant shift in the burden of proof. In the case
at hand, there is clear and convincing prima facie evidence to demonstrate that
the arrangement was designed with the sole intent of evading tax, and the
assessees have failed to furnish sufficient material to rebut this presumption.
Though it is permissible in law for an assessee to plan his transaction so as to
avoid the levy of tax, the mechanism must be permissible and in conformity
with the parameters contemplated under the provisions of the Act, rules, or
notifications. Once the mechanism is found to be illegal or sham, it ceases to be
“a permissible avoidance” and becomes “an impermissible avoidance” or
“evasion”. The Revenue is, therefore, entitled to enquire into the transaction to
determine whether the claim of the assessees for exemption is lawful.

VI. CONCLUSION
50. In our view, once it is factually found that the unlisted equity shares, on
the sale of which the assessees derived capital gains, were transferred pursuant
to an arrangement impermissible under law, the assessees are not entitled to
claim exemption under Article 13(4) of the DTAA. The Revenue has proved

133

that the transactions in the instant case are impermissible tax-avoidance
arrangements, and the evidence prima facie establishes that they do not qualify
as lawful. Consequently, Chapter X-A becomes applicable. The applications
preferred by the assessees relate to a transaction designed prima facie for tax
avoidance and were rightly rejected as being hit by the threshold jurisdictional
bar to maintainability, as enshrined in proviso (iii) to Section 245R(2).
Accordingly, capital gains arising from the transfers effected after the cut-off
date, i.e., 01.04.2017, are taxable in India under the Income Tax Act read with
the applicable provisions of the DTAA. The judgment of the High Court
therefore deserves to be set aside.

VII. RESULT
51. In the result, all the appeals are allowed and the impugned judgment of
the High Court is set aside. There shall be no order as to costs.
52. Pending application(s), if any, shall stand disposed of.


....................................J.
[J.B. PARDIWALA]


.....................................J.
[R. MAHADEVAN]
NEW DELHI
JANUARY 15, 2026.

REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 262 OF 2026
(Arising out of SLP(C) NO. 2640 OF 2025)


THE AUTHORITY FOR ADVANCE ...APPELLANT(S)
RULINGS (INCOME – TAX) & ORS.

VERSUS

TIGER GLOBAL INTERNATIONAL III HOLDINGS ...RESPONDENT(S)

WITH
CIVIL APPEAL NO. 263 OF 2026
(Arising out of SLP(C) 2565 OF 2026)
(Arising out of D. No. 1260 of 2025)

CIVIL APPEAL NO. 264 OF 2026
(Arising out of SLP(C) No. 5987 of 2025)


J U D G M E N T

J.B. PARDIWALA, J.


1


1. Delay condoned.
2. My esteemed brother Justice R. Mahadevan has penned an ineffable judgment.
There is nothing further that I could conceive of adding to the erudite judgment of
my brother Mahadevan. However, I would like to add few words of my own,
focussing on tax sovereignty as the same assumes great significance in times of
global uncertainty.
3. The strength of any Nation depends on its abilities and capabilities to perform
Sovereign functions and to exercise Sovereign powers, subserving the best interest
of its people. This exercise in the modern world is not limited to domestic affairs
or within a Nation but also extends beyond National and geographical territory,
what we call cross-border affairs and transnational affairs or international affairs.
4. Exercising Sovereign functions and powers in the international space is more
dependent on the geo-political climate. Sovereign incursions, threats, or attacks or
even attempts to weaken it are no longer confined only to territorial sovereignty.
Economic sovereignty is gaining importance and in fact occupying centre stage in
geo-political affairs. The existence, creation and the influence sought to be
generated by several world bodies through a combination of Nations and attempts
to dictate a global order on economic and commercial matters through such
organisations and bodies is quite rampant.
2


5. If one looks at the last 7-8 decades, times and periods have indeed changed. The
upmanship of developed Nations over the developing or underdeveloped Nations
in entering into strategic dealings and negotiations is slowly changing. Smaller
Nations, Nations which are heavily import dependent, needing lot of external
resources often compromise or cede many of their Sovereign rights and functions
just to acquire a relationship or to connect with international trade or to somehow
manage to keep their respective Nations as part of the international league and draw
benefits in whatever way they flow and remain unmindful even if the benefits are
in trickles. The choice is between a total neglect or isolation or being the company
however significant or insignificant, based on the powerplay rules exercised by
Nations which wield authority, influence and impact in global affairs.
6. This led to the creation of several leagues of Nations, plural organisations and
bodies to operate as think-tanks to evolve global doctrines of economic,
commercial or trade orders.
7. In the case of our own Nation, each decade has shown better progressive results
from the earlier decade with so much hope and promise to hold geometrical if not
astronomical growth in the decades ahead of it. The respect accorded and the
importance shown to our Nation is increasing by the day. We are becoming an
important element in international power play, more importantly in trade and
commerce. The advantage in terms of the size of the Nation, its population, and the
3


dominating presence of youth (India has the world's largest working-age population.
India will have a skilled labour surplus of 245 million workers by 2030) a
conducive atmosphere for investment and growth, peace and stability are all now
turning out to be the assets of the Nation allowing companies, entities and even
individuals across the globe to come to India as a destination for future growth and
progress thus making India the fourth of the fifth progressive economy in the world.
8. It is in this backdrop that one has to now understand and appreciate what is tax
sovereignty and how important it is to our Nation in an era which is fraught with
trade and tariff wars, building and shielding one’s own economy from any
international economic disorder or disaster and so on. The stability of a Nation is
slowly getting determined and recognised based on the strength and independence
of a Nation’s tax sovereignty. When it comes to a domestic exercise, tax
Sovereignty has to only pass through the filters of Constitutional trust, faith, and
addressing the well-intended objectives of Part III and Part IV. Sovereign exercise
of taxing power within a Nation is amenable to judicial review on the grounds of
being unconstitutional, illegal and arbitrary and the likes of it. Whereas, exercising
tax Sovereignty in the international domain has to pass through several filters which
would include geo-political strengths and equations, diplomacy, making a Nation
attractive for investments and at the same time, not compromising either its
sovereignty or its interest and core objectives of its people.
4


9. Tying up different shades, contrary themes, international compulsions, domestic
priority and beyond all these, a Nation’s passion and aspiration to grow and surge
ahead has to be aligned and therefore tax sovereignty in this space becomes a
tightrope walk. Ability to command, remaining composed and yielding to healthy
compromises and still finding the space and opportunity to grow without external
Nations and entities interfering with the exercise of Sovereign tax powers will be
the ideal combination that every Nation like India will look forward to.
10. Unlike domestic affairs where they are aided by the executive, the legislative builds
the necessary laws into motion and the role of the Judiciary is only to allow
permissible judicial review. Exercise of a tax sovereignty by a Nation and as a
Nation requires the roles of all the three Constitutional bodies to play to its
significance and within the umbrella of doctrine of separation of powers, the reason
being when a Nation front ends its tax policy in an international domain, the role
of all the three Constitutional organs becomes very relevant. Convergence without
dilution to the doctrine of separation of powers would add strength and vitality for
any democratic Nation to exercise its choice of tax sovereignty.
11. Broadly speaking, tax extractions by Sovereign states across the globe is broadly
in the nature of an income tax called as the direct tax which includes international
taxation and corporate taxation and the indirect tax which is a tax on goods and
5


services which is termed as GST in India and VAT by the European Union and a
resale tax in USA.
12. The growth and progress in achieving semblance of unity or unified progress is far
distinct between indirect taxes and direct taxes. The successful experiment by India
in finally ushering the GST era through the Constitutional scheme in 2017 is akin
to what European Nations attempted to do amongst themselves by having a unified
VAT regime. Prior to GST, indirect tax levies were so splintered amongst the several
States and Union territories and each one exercising their right of Sovereign
taxation over their territory resulting in plurality of rates and uncertainty and un-
uniformity in the last mile taxation on goods. The era of GST has ushered in a sense
of uniformity in taxation on goods and services which looked impossible and more
importantly, the federal partners namely Union and States becoming co-equal
partners in the share of taxation and the hallmark in allowing a simultaneous
taxation powers by the union and that respective federal partner on each supply of
goods or services.
13. An asymmetric taxation regime gave way to a symmetric taxation regime through
a Constitutional framework. European Union had achieved a similar milestone
through the introduction of a common VAT regime amongst the European union
partners. What was done at the Union and the State territories level or the sub-
national level under the GST regime was achieved at a National level through
6


essentially a common VAT legislation. This reference is cited here only to highlight
that a common taxation regime amongst Nations is in fact a reality when it comes
to goods and services amongst the European Union. A triumph or a hallmark for a
healthy or a meaningful convergence of tax Sovereignty at an international level.
This is what we call as pooled sovereignty for the mutual benefit of one and all.
14. Surprisingly and on the contrary, such an attempt had not happened or materialised
in the direct tax front across the globe and these are being secured invariably
through bi-lateral treaties and also by trying to create mirror image positions or
provisions of law like the transfer pricing regime but not through a uniform single
statutory legislation or a code and therefore divergent views and interpretations
continue to baffle international trade and commerce. This stark contrast between
the direct and indirect tax regime is compelling and persisting.
15. Of course, even in the indirect tax front, there is no single uniform legislation
covering the entire globe or being accepted by all Nations. There are several
customs protocols and bi-lateral treaties guarding various interests and priorities.
There are apex bodies like the WTO regulating the affairs without interfering into
the Sovereign rights of any Nation. It is impossible, and in any view, very premature
to expect a uniform global protocol or order to be followed by all Nations which
would actually mean convergence of Sovereign rights or pooling of Sovereign
rights for the mutual betterment of one and all. Unless such a situation ripens, it
7


will be more or less bilateral and even any multilateral agreements may not
necessarily be all encompassing.
16. In light of the above, it is but necessary that the Nations assert and protect its
Sovereign rights and should not be compromised.
17. Compromising or ceding sovereignty can be in many forms and ways. External
pressures and compulsions which can interfere or interdict with domestic policy
making. External expectations and pressures demanding a larger than required yield
of Sovereign compromises. There can also be a third factor which is a fast-emerging
scenario. Nations, international bodies or even multinational companies and other
entities trying to influence or force impactful changes in the tax policy choice of a
Nation which may subserve their interest and betterment.
18. Policy choices and exercising bargaining powers are all matters within the realm of
the executive and the ruling governance of the day. But it is important to remind
that the Natural power of sovereignty is independence. Economic independence is
an important rule for a Nation to grow with a vision and embark on a long-term
journey. Therefore, yielding or compromising Sovereignty should not become a
self-defeating interruption.
19. Yet another aspect would be to assert demand and enforce the right share of profits
to be taxed in one’s own soil. It is natural and imperative that it is a right of a Nation
whose soil or source stands used or exploited for generating or earning an income
8


to get the right to tax it. The place, location or the source of earning should also by
default become the place or jurisdiction for taxation. Any arrangement to the
contrary is nothing but a compromise. Past practices and experiences need not
necessarily be carried forward as a legacy if changing times and geo-economic
optics favour a Nation towards a more progressive assertion in the global space.
20. Taxing an income arising out of its own country is an inherent Sovereign right to
that country. Any application of filters or diffusers to this is a direct attack or threat
to its sovereignty which can affect a Nation’s long-term interest.
21. Besides economic independence, a neat power is better expressed if a Nation is
more and more autonomous and can determine, manage, calibrate, align and work
cross-border trade and business embedding its own dimensions and aspirations and
therefore in the neo era of geo-economic uncertainties, it is better prudence to retain
tax Sovereignty to oneself than to yield. It is true that global equations,
balances/imbalance arise out of one’s negotiating power and terms. Tax
Sovereignty should ensure itself to match with the political Sovereignty of the
Nation and need not be either separated or leveraged any less. Push or pull should
be the Sovereign’s choice and should not be dictated, thrusted or compelled and
this is doable only when tax sovereignty is retained and not yielded. Not yielding
one’s tax sovereignty is one form of retention of power. Protecting its sovereignty
from external pressures is yet another form. But a meaningful exercise of choices
9


alone reflects strength and character and in the long run, will help to reap the
required dividends.
22. When world all over believed that business investments can be managed, regulated
and calibrated better only through Business Investments Treaties (BIT), India
understood the downsides of it and made a very strong and forceful decision of a
unilateral revocation in 2016, of course leaving an extending sunset clause for
existing agreements but not renegotiating or inking many fresh agreements,
reflecting its Sovereign duty to protect Nation’s interest.
23. The distinction between business models becoming part of economic policies or
choices of a country and corridors lobbying for legislative changes and
amendments to suit their business interest are totally distinct spheres and it is a
Nation’s duty to protect and shield itself from any such influence in the case of the
latter.
24. A surging Nation like India should take proactive steps to be part of global
institutional frameworks to not only pitch its views, but also take along like Nations
and Nations which are dependent on someone’s bargaining powers. These are all
different aspect of shades in the manner of exercise, exhibiting or even executing
or rolling out future vision maps and doing a positive or constructive role in taking
along smaller developing Nations to pitch a collective bargaining power in the
international scene. This is doable only when tax sovereignty remains intact and a
10


Nation is also able to leverage it in the global space. Genuine exercise of discretion
will indeed inspire smaller Nations to join hands and strengthen the bargaining
power and tax sovereignty is such a powerful tool if not yielded, compromised or
even given away as allocation through treaties.
25. It is seen historically one more angle of exercise or assertion of tax sovereignty is
the power to take or make unilateral moves instead of bilateral and frame tax
policies on cross border transactions which enter a country. Powerful economies in
the world exercise this unilateral power to make their trading partners fall in line to
their priorities. This is one more figment of exercise of tax Sovereignty in the global
space. It proves two things – Tax sovereignty has no inherent limitations and has
only self-imposed limitations and it is indeed doable or achievable to make
unilateral moves to protect or guard or to enhance one’s own Nation’s interest to
bring the trading partners in line to fit or suit their interest.
26. No doubt entering into bilateral treaties has yielded its own good, consistency and
stability. But with newer and newer trade complexities emerging in the global arena,
Nations should rethink very long-term treaties. There is no need to carry the burden
or legacy of formative years of treating making and even more when it comes to
interpretation of such treaties. Interpretations which are more sound and currently
relevant should yield to archaic and behind the scheduled objectives. To assume or
perceive every future possible transaction stands visualised and contemplated and
11


need to be ring fenced within a static dimension may not be an apt or a relevant
approach. When current trade affairs are so dynamic, a contextual and meaningful
interpretation of such instruments would not only make it currently relevant, but
also vibrant matching with the progressive global business dynamics. Any attempt
to widen the gap and push it backwards when trade dynamics surge ahead should
be eschewed. This is yet another dimension on tax sovereignty.
27. When the canvas or bandwidth of tax Sovereignty or spectrum is so wide in its
sweep, having no inherent limitations, the endeavour of a Nation is to preserve,
nurture and promote its Sovereign powers in the global order to the best extent
possible and this is possible only if such a power is retained by a Nation and not
compromised. Retention should be the golden rule, and yielding should be an
exception which is meaningful and not disproportionate and in aby view, not at the
cost of a Nation’s welfare and interest.
28. A long-term compromise leads to erosion, porosity in the ingression, weakening or
even destabilising a Nation’s long term strategic and security interest. It should be
a Nation’s aspiration and desire to avoid even a medium-term compromise and
should endeavour even short-term possibilities as minimal if not, at all.
29. The golden rule of international diplomacy is how best to secure Nation’s interest
and yet be part of the togetherness and reflect the genuine feeling of belonging.
Negotiating power and capacity therefore becomes the most vital aspect. The aspect
12


of possessing the power and its exercise of discretion are again two distinct
elements. Exercise of discretion must be thoughtful, well researched, data driven
projection of a Nation’s strength and what would the counter party get out of it
which would meet the mutual benefit of both the parties instead of the unilateral
benefit at the cost of one’s own Nation.
30. In a fast growing world with recurrent uncertainties, policy framework should not
be for very long term and more importantly policy disputes if any should be
resolved amicably amongst Nations and through their representatives rather than
giving into international dispute resolution process which inevitably goes through
several uncertainties, jurisdictional vagaries and more so when the contesting
parties are not Nations on both sides or not Nations with equal strength.
31. Retaining tax sovereignty becomes an impeccable strength for a Nation to stand up
against cross border tax evasion, money laundering, drug and human trafficking
and round tripping of funds which would result in serious breach of the security
and safety of the Nation. A compromised international agreement, or a tax treaty or
a protocol can pose serious challenges to the safety and security of a Nation
especially when the ability to dissect a good investment from a bad or an evil one
is taken away or compromised. Tax evasion and tax abuse resulting in economic
disorder is itself a huge sign of weakness for a Nation.
13


32. If tax evasion and tax abuse happen under the umbrella or shield or in the guise of
money laundering or trafficking or round tripping, it not only weakens a Nation, it
makes it less powerful or even powerless in given circumstances tearing apart the
social fabric and texture of a Nation and its people. Every anti abuse law must not
only appear to be a deterrent but should be implemented to achieve the underlying
goal of preventing an abuse by anyone against one’s Nation and its people. Any
lenience is yet another form of compromising tax sovereignty.
33. When agreements need to be entered into between Nations either through its
legislative or executive arm, dispute resolution should also be part of the same arm
or process and should not be divorced or outsourced or pushed to mandatory
arbitrations.
34. Tax treaties, international agreements, protocols and safeguards should be very
engaging, transparent and capable of periodical reviews with the power to
renegotiate with strong exit clauses to avoid unfair outcomes safeguarding Nation’s
strategic and security, prevent erosion of tax base and loss or weakening of
democratic control and introduce explicit carve outs safeguarding the Sovereign’s
right of taxation.

35. ⁠ What safeguards should be taken while entering into any International
Treaties?
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When entering into international tax treaties, India must take strong safeguards to
protect its tax sovereignty, ensure fairness, and prevent abuse. These safeguards
should be legal, structural, and strategic in nature.

1. Include a Limitation of Benefits (LOB) Clause

• Purpose: Prevent treaty shopping by shell companies set up only to
exploit treaty benefits.
• Example: The amended India-Mauritius treaty includes an LOB clause
to deny benefits to companies without genuine economic activity.

2. Include a General Anti-Avoidance Rule (GAAR) Override

• Purpose: Ensure India can override treaty benefits if the primary purpose
of an arrangement is tax avoidance.
• The treaty should explicitly allow application of GAAR in cases of
artificial transactions.

3. Ensure Right to Tax Digital Economy


• Treaties must include provisions that:

o Recognize "significant economic presence" (SEP), not just physical
presence.
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o Allow India to impose equalisation levies or digital services taxes on
foreign digital platforms.

4. Preserve Source-Based Taxation Rights


• India must retain the right to tax income arising in its territory,
especially:

o Capital gains on shares of Indian companies
o Interest, royalties, technical fees
o Business profits from Indian operations
• Avoid residence-based taxation-only models, which favour tax havens
and developed countries.

5. Include Tax Credit, Not Exemption


• Treaties should follow the tax credit method (foreign tax credit), not tax
exemption method, to prevent double non-taxation.

6. Include Exit or Renegotiation Clauses

• India must retain the right to renegotiate or withdraw from a treaty if:

o It is being misused
o It no longer aligns with India’s economic goals
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• Example: India renegotiated its tax treaties with Mauritius, Cyprus, and
Singapore when they became problematic.

7. Avoid "Most Favoured Nation" (MFN) Clauses

• MFN clauses can bind India to give better terms to one country if
they are given to another in the future.
• This can undermine India's flexibility in future negotiations.

8. Clearly Define “Permanent Establishment” (PE)


• Ensure a broad and updated PE definition to prevent avoidance
through techniques like:
o Commissionaire arrangements
o Fragmentation of business activities

9. Align with India’s Domestic Laws and Constitution

• Treaty provisions should not conflict with domestic tax laws and
must be in line with:
o Constitutional powers
o Parliament's authority to legislate taxation

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If there’s conflict, Indian courts usually uphold whichever provision is more
beneficial to the taxpayer, so drafting must be precise.

10. Conduct Cost-Benefit Analysis Before Signing


• Evaluate:

o Will India lose revenue?
o How will it affect domestic industry?
o What is the long-term strategic impact?

Treaties should be driven by national interest, not pressure from foreign
governments or corporations.

11. Build Treaty Monitoring and Review Mechanism


• Set up a mechanism to periodically review tax treaties for:

o Abuse
o Relevance
o Changing business and legal trends

12. Consult Stakeholders Before Signing
• Involve:

o Tax experts
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o Legal professionals
o Industry bodies
o Parliament committees

This ensures treaties reflect broader economic and public interest, not just
bureaucratic or diplomatic goals.

……………………………..J.
(J.B. PARDIWALA)




NEW DELHI;
th
15 January, 2026
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