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TMI Blog2024 (9) TMI 26X X X X Extracts X X X X X X X X Extracts X X X X ..... of the petitioner is wholly erroneous. The petitioners have consistently taken the unvacillating position with respect to the shareholding position of the writ petitioners and of TGM LLC being the investment manager of the petitioner and not the holding or parent company. None of the funds invested in the petitioner originated from TGM LLC, there has been no equity participation or investments made by TGM LLC in the writ petitioners or any evidence put forth with respect to any monies being repatriated to TGM LLC from the writ petitioners. As a result, we find that the AAR erred when it concluded that TGM LLC is the parent or holding company and has incorrectly observed that the said contention was uncontroverted by the petitioners. This incorrect and misconceived finding of fact by the AAR has thus sullied the impugned order and rendered it riddled with manifest and patent errors. The facts as they emanate from the record categorically establish that the petitioner cannot be said to be an entity lacking in economic substance. The petitioners were intended to operate as pooling vehicles for investments, held a Category 1 GBL, had aggregated funds from more than 500 investors locate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n based directors. Moreover, the members of the BoD were also signatories to the Constitution document. In view of the aforesaid facts, the BoD of the writ petitioners cannot be said to be deprived of decision-making powers or reduced to a subservient status. Treaty Benefits under India-Mauritius DTAA - The mere factum of an entity being situated in Mauritius and of investments in Mauritius being routed through that nation cannot result in a default adverse inference or raise a presumption of illegality or of such an entity being a colourable device, nor are Mauritian entities required to satisfy any separate standard of legitimacy or stricter standard of proof. Thus Mauritius is one of the more favourable jurisdictions for FII s seeking to invest in India as a result of its proximity to India as well as the wide array of agreements that it had entered into with various nations across the globe. Liberalized exchange controls, favourable investment climates and the prevailing socio-political stability appears to have additionally favoured facilitation of Mauritius as a gateway for investments flowing into the Asian and African continent and accordingly lead to Mauritius becoming the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orks. The creation of new investment pathways ought not be halted by skepticism or mistrust except on the basis of well-established parameters. The principles of substance over form must be considered to be the prevailing norm and the Revenue entitled to doubt the bona fides of a transaction only in those situations where it be found that the transaction involves a sham device intended to achieve illegal objectives or formulated based on illegal motives. In light of the decisions rendered in Azadi Bachao Andolan and Vodafone, treaty shopping in itself cannot be rendered abhorrent unless it were categorically established that the device was incorporated with a view to evade tax and in a manner contrary to the intent of the Contracting States to the treaty. Therefore, it is only in those situations where no other conclusion can be drawn other than the entity being a conduit or lacking in commercial substance and intending to perpetuate fraud that the Revenue would be justified in doubting the nature and character of that transaction. The issuance of a TRC by the competent authority must be considered to be sacrosanct and due weightage must be accorded to the same as it constitutes ce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ight and bearing in mind decisions rendered by foreign Courts in Cadbury Schweppes and Burlington, it would be erroneous to characterise legitimate business activities undertaken by entities as constituting treaty shopping, merely because it was situated in a favourable tax jurisdiction. Therefore, both Indian and International authorities have taken the consistent position that treaty benefits may be denied only in those cases where the transaction is a sham, where fraud is sought to be committed or where entities are incorporated as mere conduits and in a manner contrary to the schema of the treaty itself. The incorporation of LOB provisions in a taxation convention will result in those provisions being determinative of allegations of treaty abuse and purported illegitimate claims of treaty benefits. The right of the Revenue to cast aspersions on the validity or legitimacy of a transaction would be constrained by the requirements of exacting and compelling standards of proof with the onus placed squarely in the domain of the Revenue to establish that a transaction in question would be disentitled to the benefits of a treaty being a sham, a colourable device and imputed with illeg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansaction undertaken by the writ petitioners from the ambit of capital gains tax. Domestic tax legislation cannot be interpreted in a manner which brings it in direct conflict with a treaty provision or with an overriding effect over the provisions contained in a DTAA since the same would in effect amount to accepting the right of the Legislature of one of the Contracting States to unilaterally amend or override the provisions of a treaty and would result in the elevation of a domestic subordinate legislation over that of the provisions embodied in a treaty entered into between sovereign nations. The argument that the transaction undertaken by the petitioners would not be grandfathered in light of Rule 10U is sans merit, as is the claim that sub-rule (2) takes away from the preceding provision of clause (d) of sub-rule (1), since the term without prejudice is intended to mean that sub-rule (2) would operate in contingencies not contemplated by sub-rule (1)(d) of Rule 10U. The imputation of beneficial ownership of TGM LLC over the writ petitioners is manifestly erroneous in light of the principles governing attributability of beneficial ownership. Notwithstanding that on facts it ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in, CGSC along with Mr. Gaurav Kumar and Ms. Neha Narang, Advs. for R-2. Mr. Sunil Agarwal, Sr.SC with Mr. Shivansh Pandya, Jr. SC along with Mr. Utkarsh Tiwari, Adv. JUDGMENT YASHWANT VARMA, J. S.NO. SUB-HEADING PARAGRAPH NOS. A. INTRODUCTION 1 to 3 B. THE FACTUAL NARRATIVE 4 to 23 C. IMPUGNED ORDER-SALIENT FINDINGS 24 to 33 D. SUBMISSIONS OF THE PETITIONERS 34 to 60 E. ARGUMENTS OF THE RESPONDENTS 61 to 92 F. THE PRELIMINARY OBJECTIONS 93 to 106 G. ORGANISATIONAL STRUCTURE OF THE PETITIONERS 107 to 115 H. THE MAURITIUS ROUTE 116 to 119 I. DECISIONS RENDERED BY THE SUPREME COURT 120 to 143 J. THE HIGH COURT DECISIONS 144 to 155 K. TAX AVOIDANCE AND TREATY ABUSE 156 to 182 L. FAVOURABLE TAX JURISDICTIONS 183 to 193 M. TAX RESIDENCY CERTIFICATES 194 to 200 N. INTERNATIONAL PERSPECTIVES ON TREATY SHOPPING 201 to 204 O. LOB PROVISIONS IN THE DTAA 205 to 209 P. THE ECONOMIC SUBSTANCE QUESTION 210 to 211 Q. CHAPTER X-A AND GAAR 212 to 231 R. BENEFICIAL OWNERSHIP 232 to 246 S. OUR SUMMATION 247 to 268 T. CONCLUSIONS AND TAKEAWAYS 269 U. OPERATIVE DIRECTIONS 270-271 A. INTRODUCTION 1. These three writ petitions impugn the order dated 26 March 2020 of the Authority for Advanced Rulings [AA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt income. As per the disclosures made in the writ petition, the immediate shareholders of the petitioner are also Mauritian companies whose shareholders in turn are private equity funds who had raised funds from several investors across the globe. According to the petitioner, the indirect shareholders of the petitioner consisted of almost 500 investors residing in an as many as 30 jurisdictions spread across the globe. Tiger Global Management LLC [TGM LLC] , a company incorporated in terms of the laws of Delaware USA was asserted to be the petitioner s Investment Manager and has thus at various places of these proceedings also been referred to as the management company. 5. The Investment Manager, TGM LLC, according to the petitioners, had not placed any investments with them and it is categorically asserted in this regard that neither TGM LLC nor any of its affiliates have either invested in the petitioner or the private equity funds that had indirectly invested with them. The petitioner has been granted a Category 1 Global Business License [Category 1-GBL] and is also a tax resident of Mauritius. In evidence of the aforesaid, the petitioners have also placed on the record the Tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... %, Tiger Global Seven Parent Holdings owns 14.7%, Tiger Global Eight Holdings owns 8.5%, and Tiger Global Principals owns 3.2% of the Company. Tiger Global Five Parent Holdings is majority owned by Tiger Global Private Investment Partners V, L.P.. a Cayman Islands exempted limited partnership. Tiger Global Six Parent Holdings is majority owned by Tiger Global Private Investment Partners VI, L.P. a Cayman Islands exempted limited partnership. Tiger Global Seven Parent Holdings is majority owned by Tiger Global Private Investment Partners VII, L.P., a Cayman Islands exempted limited partnership. Tiger Global Eight Holdings is majority owned by Tiger Global Private Investment Partners VIII, L.P., a Cayman Islands exempted limited partnership. Tiger Global Management, LLC is the management company of Tiger Global Private Investment Partners V, L.P, Tiger Global Private Investment Partners VI, L.P., Tiger Global Private Investment Partners VII, L.P and Tiger Global Private Investment Partners VIII. L.P. Tiger Global Principals is wholly owned by Tiger Global Side Fund LLC, a Delaware Limited Liability Company. All members of Tiger Global Side Fund, LLC are afflicted with Tiger Global Ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich is resident of a Contracting State may be taxed in that State. 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. 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;] 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.] 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. 11. The Notes to the Financial Statement submitted for the period ending on 31 December 2017 acknowledged the amendments in the DTAA and declared that capital gains a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al gains on sale of shares acquired in an Indian tax resident company post March 31, 2019 will be taxed in India. Capital gains on sale of shares in a foreign company which is not a tax resident of India and which derives its value substantially from the assets situated in India may not be taxable in India under the India-Mauritius treaty subject to fulfilment of certain conditions. However, the sale of shares, in respect of investments made directly or indirectly in Indian entities on or after April 1, 2017, will be subject to General Anti Avoidance Rules under Indian domestic tax laws. Under the treaty between Mauritius and Singapore, subject to certain conditions, an entity which is a tax resident in Mauritius, but has no branch or permanent establishment in Singapore, is not subject to tax on its Singaporean source dividend, interest income, or royalties and should not be subject to capital gains tax in Singapore on the sale of securities. The Company is subject to tax in Mauritius at the rate of 15% on its net income. However, on the basis that the Company is a Global Business Category I company, the Company should be entitled to a deemed tax credit equivalent to the higher of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... W.P.(C) 6764/2020], Tiger Global International IV Holdings [TG IV] [the petitioner in W.P.(C) 6766/2020] and the present petitioner having considered to sell 74% of their stake in Flipkart Singapore and close that transaction. 14. These facts are also taken note of in the impugned order passed by the AAR and which captures details of the shareholding of the petitioner, TG III and TG IV as well as the number of shares sold and the gross consideration received. The shareholding pattern of the petitioner, TG III and TG IV was set forth in a tabular form in the impugned order and which is reproduced hereinbelow:- S. No. Applicants Number of shares acquired Period/ date of acquisition 1. Tiger Global International II Holdings, Mauritius 23,670,710 October, 2011 to April, 2015 2. Tiger Global International III Holdings, Mauritius 2,282,825 23rd June 2014 3. Tiger Global International IV Holdings, Mauritius 105,928 24th April, 2012 15. The number of shares sold and gross consideration received was additionally captured in the following table:- S. No. Applicants Number of shares sold Gross consideration received 1. Tiger Global International II Holdings, Mauritius 14,754,087 USD 1,893,510, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lower/NIL deduction certificate u/s 197 of the Income Tax Act, 1961. 4. As per your submission dated 13.8.2018, you have that the proposed transaction is expected to close on 17.8.2018 (i.e) today. Hence, the capital gains shall be taxed as per the Income Tax Act, 1961 and certificate u/s: 197 shall be issued requiring the payer to deduct tax, accordingly at the rate of 10% plus surcharge and health and education cess as applicable. In this regard, considering the time limit of closure of the transaction, it is requested that your reply shall reach this office by way of email/fax within 1 PM today, i.e 17.8.2018 Yours faithfully, (M.P. DWIVEDI) Dy. Commissioner of Income Tax InetrnationaITaxation-4(1)(2),Mumbai 18. It becomes pertinent to note that on 18 August 2018, the petitioners transferred their shareholding in Flipkart Singapore to Fit Holdings SARL, a Luxembourg entity. The total number of shares forming subject matter of this transaction were 1,47,54,087 and at a transaction value of around INR 131,22,02,50,194/-. 19. It is thereafter that the petitioner along with TG III and TG IV moved the AAR on 19 February 2019 seeking its opinion on the taxability of the transaction i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3.2% of the Company. Tiger Global Five Parent Holdings is majority owned by Tiger Global Private Investment Partners V, L.P., a Cayman Islands exempted limited partnership. Tiger Global Six Parent Holdings is majority owned by Tiger Global Private Investment Partners VI, L.P., a Cayman Islands exempted limited partnership. Tiger Global Seven Parent Holdings is majority owned by Tiger Global Private Investment Partners VII, L.P., a Cayman Islands exempted limited partnership. Tiger Global Eight Holdings is majority owned by Tiger Global Private Investment Partners VII, L.P., a Cayman Islands exempted limited partnership. Tiger Global Management, LLC is the management company of Tiger Global Private Investment Partners V, L.P., Tiger Global Private Investment Partners VI, L. P., Tiger Global Private Investment Partners VII, L.P and Tiger Global Private Investment Partners VIII, L.P. Tiger Global Principals is wholly owned by Tiger Global Side Fund, LLC, a Delaware Limited Liability Company. All members of Tiger Global Side Fund, LLC are affiliated with Tiger Global Management, LLC. 7.5 From the date of inception to the financial year ending 31.12.2017, the applicant is part of Tiger ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ources of investment in Flipkart P Ltd have been capital contributions from the shareholders. The applicant has no income of its own and the sources of fund for investment and expenses are capital contributions from the entities based out of Mauritius, which are held by entities based out of Cayman Islands and ultimately controlled by the entity, Tiger Global Management LLC, USA. The source of investment and instructions for a specified amounts given by a person, ie. Mr. Charles P Coleman, who is not in the board of directors and the top executives of the Tiger Global management LLC, i.e. Justin Horan present in the minutes of the meeting clearly shows that the applicant is only a conduit for the investment of US Based Entity, Tiger Global Management LLC, through a web of other conduit companies based out of Mauritius and Cayman Islands. 10.9 The above facts prima facie indicates that the applicant is not acting INDEPENDENTLY but as a conduit for the real beneficial owners based out the USA. Further, the facts of the case are squarely covered by the observations made by the Hon'ble AAR in its ruling in the case of AB Mauritius in AAR No, 1128 of 2011 dated 8.11.2017 . Therefore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so be noted that Courts have consistently held that a prima facie finding must be arrived at based on the evidence and material available on record, and mere pleading would not be sufficient. In the present case, it can be seen that as far as the allegations regarding beneficial ownership are concerned, the CIT has not submitted any basis or material to justify the allegation the beneficial ownership of shares sold as part of the Transfer does not lie with the Applicant. The CIT has merely referred to the case of Tiger Global International III Holdings in support of his allegation. The Applicant submits that this reference is wholly inappropriate and legally unsustainable for several reasons: first, the bars to admission under section 254R (2) of the Act have to determined on a case by case basis, for each individual applicant. It is not legally permissible or appropriate for the CIT to argue against admissibility with reference to the case of any other person. In the present case, not a single finding of fact in relation to the Applicant has been put forth by the CIT to justify his unsubstantiated allegation that the beneficial ownership of the shares does not lie with the Applica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t any real and genuine business purpose. By contrast, the CIT has not identified or proved even a single fact that contradicts the assertions made in the Application or establishes even a single element of artificiality in the transaction undertaken by the Applicant. In fact, the sole basis for the allegations made in the R2 Report is that the Applicant is owned by intermediate entities in Mauritius and the Cayman Islands, and ultimately owned by one or more entities resident in the United States. It is submitted that this holding structure of the Applicant is of no relevance if the transaction is not prima facie found to be designed for the avoidance of income-tax. In the present case, the CIT has deemed the holding structure of the Applicant to be ipso facto determinative of whether the transaction is designed for the avoidance of income-tax, which is not the standard to be applied to invoke clause (iii) of the proviso to section 245R (2). Instead, it must be proven that the transaction itself (and not the structure of the entity undertaking the transaction) is designed for the avoidance of income-tax in order to invoke clause (iii). The CIT has failed to discharge this burden of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e proviso to be attracted, it must be shown that the transaction was 'designed' specifically for tax avoidance which is apparent prima facie i.e., with a premediated object of tax avoidance that is evident from the record. The CIT has not identified or proved even a single fact that contradicts the assertions made in the Application or establishes even a single element of artificiality in the transaction undertaken by the Applicant. (iv) The transaction entered into by the Applicant is commercially driven and has been undertaken within the four corners of the law. In such circumstances, Courts including the Hon'ble Supreme Court and this Hon'ble Authority have held that a transaction of this nature is legal and permissible and is neither illegal or improper. (v) The Applicant's claim for exemption from tax is predicated solely on the allocation of tax to Mauritius under the provisions of the Mauritius Treaty. It is settled law that in such circumstances, clause (iii) of the proviso to section 245R (2) is not attracted. 23. Subsequent to the submission of the aforesaid replies, written submissions appear to have been tendered by respective sides and whereafter th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ord, the fact that the applicants were set up for making investment in order to derive benefit under the DT AA between Mauritius and India is an inescapable conclusion. 25. It proceeded further to find that apart from Mr. Charles P Coleman, who was, according to it, representing TGM LLC on the Board, all other members were mere puppets . This becomes evident from a reading of paragraph 36, which is extracted hereinbelow: 36. The Revenue has pointed out, by citing evidences from the Minutes of the Meeting of Board of Directors of the applicants, that the key decisions were taken by Mr. Steven Boyd, the non-resident Director, who was also General Counsel of Tiger Global Management LLC and that the other Directors were not independent but mere puppets. It is found that Mr. Steven Boyd was the non-resident Director of the applicant companies. Under the circumstance no adverse inference can be drawn if he was privy to the crucial decisions taken in the Board meetings. Further, the Supreme Court has held in the case of Vodafone (supra) that there was nothing wrong if the funds for making FDI by Mauritius companies/individuals had not originated from Mauritius but had come from investors ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to sign the cheques of Mauritius bank account. In this regard it is relevant to consider that Mr. Charles P. Coleman was the beneficial owner as disclosed by the applicants in the application form for Category I Global Business Licence filed with Mauritius Financial Services Commission. Mr. Coleman was also the authorized signatory for the immediate parent company of the applicants viz. Tiger Global Five Percent Holdings and Tiger Global Six Percent Holdings and was also the sole Director of ultimate holding company Tiger Global PIP Management V Limited and Tiger Global PIP Management VI Limited. In view of these facts the appointment of Mr. Charles P. Coleman as authorized signatory of bank cheques above a limit can't be considered as a mere coincidence. 39. The applicants have contended that authorization to certain person to operate its bank account doesn't ipso facto mean that the applicants had no control over its funds. It must be considered that authorization given by the applicants to operate its bank account was not to certain person but to Mr. Charles P. Coleman, whose influence over the group has been described in the preceding para. Mr. Charles P. Coleman and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accordance with the provisions of Article-13 of India-Mauritius treaty. It was contended that under the circumstances, it cannot be said that the question raised in the application related to a transaction or issue designed prima facie for avoidance of income-tax. 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 preamble and annexure including agreement, subsequent agreement regarding interpretation of terms of the treaties, relevant international rules applicable to the agreement etc. The Circular No. 682 dated 30.03.1994 issued by the CBDT had clarified that any resident of Mauritius deriving income from alienation of shares of Indian companies will be liable to capital gains tax only in Mauritius as per the Mauritius tax law and will not have any capital gains tax liability in India. It was imperative from this Circular that what was exempted for a resident of Mauritius was the capital gains derived on alienation of shares of Indian company. In the present case capital gains has not been derived by alienation of shares of any Indian company rather the applicants have come before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the tax treaty benefits in suitable cases. It was further held that the Department is entitled to look at the entire transaction of sale as a whole and if it is established that the Mauritian company was interposed as a device, it was 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. It is relevant to consider here that though the tax residency is stated to be established to take benefit of Mauritius tax treaty network with various countries and not just India, in effect the entire investment made by the applicants was with Singapore company only, in respect of which the benefit of India-Mauritius DTAA is being claimed. As is evident from their financial statements filed with the application, all the three applicants had not made any other investment other than in the shares of Flipkart. Thus, the real intention of the applicants was to avail the benefit of India-Mauritius treaty, whatever be the stated objective. 30. In paragraph 44, the AAR distinguished a decision rendered by it in the case of Moody s Analytics Inc. USA, In re (AAR) [(2012) 348 ITR 205 (AAR)] observ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... neration 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 they ever generated any taxable revenue in India. In the absence of any direct investment in India one can only conclude that the arrangement was a pre-ordained transaction which was created for tax avoidance purpose. 48. In view of the foregoing, we are of the considered opinion that the issue involved in the question raised in the present applications was designed prima facie for avoidance of tax. The applicants have contended that shares of the Singapore Company derived their value substantially from assets located in India and, therefore, it was eligible to take benefit of Article 13 (4) of India - Mauritius Treaty. Even if the Singapore Company derived its value from the assets located in India, the fact remains that what the applicants had transferred was shares of Singapore Company and not that of an Indian company. The objective of India-Mauritius DTAA was to allow exemption of capital gains on transfer of shares of Indian company only and any such exemption on trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CBDT Circulars as well as the concept of TRCs which came to be adopted in the Convention. Mr. Kaka firstly drew our attention to CBDT Circular No. 789 dated 13 April 2000 and which reads as follows: 734. Clarification regarding taxation of income from dividends and capital gains under the Indo-Mauritius Double Tax Avoidance Convention (DTAC) 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. Prior to 1-6-1997, dividends distributed by domestic companies were taxable in the hands of the shareholder and tax was deductible at source under the Income-tax Act, 1961. Under the DTAC, tax was deductible at so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contrast, our attention was drawn to Article 24 of the Indo-US Treaty on Avoidance of Double Taxation which specifically provides the limitations subject to which the benefits under the Treaty can be availed of. One of the limitations is that more than 50% of the beneficial interest, or in the case of a company, more a than 50% of the number of shares of each class of the company, be owned directly or indirectly by one or more individual residents of one of the contracting States. Article 24 of the Indo-US DTAC is in marked contrast with the Indo-Mauritius DTAC. The appellants rightly contend that in the absence of a limitation clause, such as the one contained in Article 24 of the Indo-US Treaty, there are no disabling or disentitling conditions under the Indo-Mauritius Treaty prohibiting the resident of a third nation from deriving benefits thereunder. They also urge that motives with which the residents have been incorporated in Mauritius are wholly irrelevant and cannot in any way affect the legality of the transaction. They urge that there is nothing like equity in a fiscal statute. Either the statute applies proprio vigore or it does not. There is no question of applying a f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tted that a huge furore arose in light of the proposed insertion of sub-section (5) in Section 90 and which had stipulated that while a TRC would be necessary, it would not be a sufficient condition for claiming relief under a DTAA. On account of the vociferous objections which were raised with respect to the proposed amendments, a Press Release came to be issued on 01 March 2013 and which carried the clarification tendered by the Finance Ministry that Section 90(5) was not intended to be utilized as a tool for the Income Tax authorities in India to question the validity of a TRC. The Finance Ministry clarified that since that was never the intention behind the proposed introduction of sub-section (5) in Section 90, a TRC produced by a resident of a contracting State would be accepted as evidence and that Income Tax authorities would not be entitled to question or go behind the said certificate. It was additionally clarified that Circular No. 789 dated 13 April 2000 would continue to hold the field. 39. The aforenoted Press Release is reproduced hereinbelow: FINANCE MINISTRY'S CLARIFICATION ON TAX RESIDENCY CERTIFICATE (TRC) PRESS RELEASE, DATED 1-3-2013 Concern has been expres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion (2), the provisions of Chapter X-A of the Act shall apply to the assessee even if such provisions are not beneficial to him. : (c) in sub-section (4), for the words a certificate, containing such particulars as may be prescribed, of his being a resident , the words a certificate of his being a resident shall be substituted (d) after sub-section (4) and before Explanation I, the following sub-section shall be inserted, namely: (5) The assessee referred to in sub-section (4) shall also provide such other documents and information, as may be prescribed . As would be manifest from the above, the proposed clause (5) to Section 90 which formed part of Finance Bill 2013 does not appear to have been tabled and in any event failed to find passage. 41. Insofar as the validity and conclusiveness of a TRC is concerned, Mr. Kaka drew our attention to the following pertinent observations as rendered by the Punjab and Haryana High Court in Serco BPO P. Ltd. v. Authority For Advance Ruling and Ors. 2015 SCC OnLine P H 20324: 30. In view of the circular, it is incumbent upon the authorities in India to accept the certificates of residence issued by the Mauritian authorities. Circular No. 789 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate to consider provisions of article 14 (5) as permitting a see through . The provision, on a true, fair and non-manipulative interpretation, does not accommodate reckoning of the inherence of control by an intermediary/interpositioned joint venture company (ShanH), of the affairs, management and assets of its subsidiary (SBL), as alienation of shares by or of the control over the affairs, management and assets of the subsidiary (SBL), by one or all of the distinct participants of the interpositioned joint venture, i.e., by MA/GIMD, who are distinct and French resident corporate entities themselves. 44. It was then submitted by Mr. Kaka that the unilateral amendments which came to be introduced in Section 9 by virtue of Finance Act, 2012, and which incorporated principles of indirect transfer tax, cannot be interpreted or enforced so as to have the effect of overriding existing tax treaties. It was Mr. Kaka s submission that Parliament itself had not intended those amendments having the effect of depriving an assessee of benefits which could otherwise be claimed under a DTAA. This, according to Mr. Kaka, would clearly emerge from the speech of the Finance Minister made during the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liance on domestic law. Under these, a reference is made to the domestic law of the Contracting States. Article 3 (2) of both double taxation avoidance agreements state that in the course of application of the treaty, any term not defined in the treaty, shall, have the meaning which is imputed to it in the laws in force in that State relating to the taxes which are the subject of the Convention. xxxx xxxx xxxx The treaties therefore, create a bifurcation between those terms, which have been defined by them (i.e the concerned treaty), and those, which remain undefined. It is in the latter instance that domestic law shall mandatorily supply the import to be given to the word in question. In the former case however, the words in the treaty will be controlled by the definitions of those words in the treaty if they are so provided. 46. Though this has been the general rule, much discussion has also taken place on whether an interpretation given to a treaty alters with a transformation in, or amendments in, domestic law of one of the State parties. At any given point, does a reference to the treaty point to the law of the Contracting States at the time the treaty was concluded, or relate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . held that (page 333 of 310 ITR): The ratio of the judgment, in our opinion, would mean that by a unilateral amendment it is not possible for one nation which is party to an agreement to tax income which otherwise was not subject to tax. Such income would not be subject to tax under the expression 'laws in force'.. . While considering the Double Tax Avoidance Agreement the expression 'laws in force' would not only include a tax already covered by the treaty but would also include any other tax as taxes of a substantially similar character subsequent to the date of the agreement as set out in article I (2). Considering the express language of article I (2) it is not possible to accept the broad proposition urged on behalf of the assessee that the law would be the law as applicable or as define when the double taxation avoidance agreement was entered into. . xxxx xxxx xxxx 52. Thus, an interpretive exercise by Parliament cannot be taken so far as to control the meaning of a word expressly defined in a treaty. Parliament, supreme as it may be, is not equipped, with the power to amend a treaty. It is certainly true that law laid down by Parliament in our domestic conte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reaty provisions without amending the treaty itself. 46. Learned senior counsel submitted that the aforesaid issue in any case has been rendered a quietus in light of the following principles propounded by the Supreme Court in Engineering Analysis Centre of Excellence Pvt. Ltd. v. Commissioner of Income Tax and Another (2022) 3 SCC 321: 31. That such transaction may be governed by a DTAA is then recognised by Section 5(2) read with Section 90 of the Income Tax Act, making it clear that the Central Government may enter into any such agreement with the Government of another country so as to grant relief in respect of income tax chargeable under the Income Tax Act or under any corresponding law in force in that foreign country, or for the avoidance of double taxation of income under the Income Tax Act and under the corresponding law in force in that country. What is of importance is that once a DTAA applies, the provisions of the Income Tax Act can only apply to the extent that they are more beneficial to the asses see and not otherwise. Further, by Explanation 4 to Section 90 of the Income Tax Act, it has been clarified by Parliament that where any term is defined in a DTAA, the defi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etween India and Colombia, Fiji, and Indonesia: AGREEMENT BETWEEN THE GOVERNMENT OF THE REPUBLIC OF INDIA AND THE REPUBLIC OF COLOMBIA FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME ARTICLE 13 CAPITAL GAINS 1. Gains derived by a resident of a Contracting State from the alienation of immovable property referred to in Article 6 and situated in the other Contracting State may be taxed in that other State. 2. Gains derived 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 with the whole enterprise) or of such fixed base, may be taxed in that other State. 3. Gains derived from the alienation of ships or aircraft operated in international traffic, or movable property pertaining to the operation of such ships or aircraft shall be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of a Contracting State may be taxed in that State. 6. Gains from the alienation of any property other than that referred to in paragraphs 1, 2, 3, 4 and 5, shall be taxable in accordance with the domestic tax law of the Contracting State in which such gains arise. xxxx xxxx xxxx AGREEMENT BETWEEN THE GOVERNMENT OF THE REPUBLIC OF INDIA AND THE GOVERNMENT OF THE REPUBLIC OF INDONESIA FOR THE AVOIDANCE OF DOUBLETAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME ARTICLE 13 CAPITAL GAINS 1. Gains derived by a resident of a Contracting State from the alienation of immovable property referred to in Article 6 and situated in the other Contracting State may be taxed in that other State. 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 with the whole ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd was notified on 6-12-1983. In respect of India, the Convention applies from the assessment year 1983-84 and onwards. 2. Article 13 of the convention deals with taxation of capital gains and it has five paragraphs. The first paragraph gives the right of taxation of capital gains on the alienation of immovable property to the country in which the property is situated. The second and third paragraphs deal with right of taxation of capital gains on the alienation of movable property linked with business or professional enterprises and ships and aircrafts. 3. Paragraph 4 deals with taxation of capital gains arising from the alienation of any property other than those mentioned in the preceding paragraphs and gives 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 by alienation of shares of companies shall be taxable only in Mauritius according to Mauritius tax law. Therefore, any resident of Mauritius deriving income from alienation of shares of Indian companies will be liable to capital gains tax only in Mauritius as per Mauritius tax law an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fide business activities shall be covered by Article 27A (1) of the Convention. 54. It was submitted that the writ petitioners clearly qualify Paragraph 4 of Article 27A since the expenditure incurred for a period of twelve months immediately preceding the date when gains accrued qualified the criteria as prescribed. It was pointed out with reference to the facts as obtaining in the case of the petitioner that it had incurred an expenditure of USD 1,063,709 and the converted expenditure thus amounting to approximately MUR 36,436,182. This according to learned senior counsel was sufficient to dispel any notion of the petitioner, TG III and TG IV being conduit companies. 55. More fundamentally, according to Mr. Kaka, once the DTAA itself came to incorporate LOB conditions it would be wholly impermissible for taxing authorities of Contracting States to conjure up additional grounds of disqualification and which may then be used for the purposes of denial of treaty benefits. According to learned senior counsel, once the prescriptions of Paragraph 4 of Article 27A were met, it was wholly impermissible for AAR to treat the petitioners as shell or conduit companies. Mr. Kaka also laid emp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ltimately controlled by Mr. Coleman or that the invested funds belonged to the said individual, is factually incorrect and contrary to the record. It was submitted that Mr. Coleman does not even have a controlling equity interest in the petitioner or any of its shareholders quite apart from it being the consistent stand of the writ petitioners that TGM LLC neither held equity nor had invested in them. 59. It was submitted that the conclusions of the AAR are rendered wholly erroneous and unsustainable since they have come to be rendered in complete ignorance of the fact that the funds which the petitioner ultimately deployed were obtained from aggregated investments received from various investors spread across different jurisdictions. 60. It was then submitted that the AAR while adopting a wholly erroneous approach has sought to impute principles of beneficial ownership ignoring the fact that the said concept is not even adopted by Article 13 of the DTAA. It was highlighted that although the concept of beneficial ownership finds mention in Articles 10, 11 and 12A of the DTAA, the same is not adopted in Article 13. Articles 10, 11 and 12A of the DTAA are reproduced hereinbelow: ARTI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other State may not impose any tax on the dividends paid by the company, except insofar as such dividends are paid to a resident of that other State or insofar as the holding in respect of which the dividends are paid is effectively connected with a permanent establishment or a fixed base situated in that other State nor subject the company's undistributed profits to a tax on the company's undistributed profits, even if the dividends paid or the undistributed profits consist wholly or partly of profits or income arising in such other State. ARTICLE 11 INTEREST 1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. [2. However, subject to provisions of paragraphs 3, 3A and 4 of this Article, such interest may also be taxed in the Contracting State in which it arises, and according to the laws of that State, but if the beneficial owner of the interest is a resident of the other Contracting State, the tax so charged shall not exceed 7.5 per cent of the gross amount of the interest ;] 3. Interest arising in a Contracting State shall be exempt from tax in that State provided it is derived and beneficiall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stablishment in connection with which the indebtedness on which the interest is paid was incurred, and such interest is borne by that permanent establishment, then such interest shall be deemed to arise in the Contracting State in which the permanent establishment is situated. 8. Where, by reason of a special relationship between the payer and the recipient or between both of them and some other person, the amount of the interest paid, having regard to the debt-claim for which it is paid, exceeds the amount which would have been agreed upon by the payer and the recipient in the absence of such relationship, the provisions of this article shall apply only to the last-mentioned amount. In that case, the excess part of the payments shall remain taxable according to the law of each Contracting State, due regard being had to the other provisions of this Convention. xxxx xxxx xxxx [ARTICLE 12A FEES FOR TECHNICAL SERVICES 1. Fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such fees for technical services may also be taxed in the Contracting State in which they arise, and accordin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntracting State, due regard being had to the other provisions of this Convention.] In any case, according to Mr. Kaka, CBDT Circular No. 789 is itself a complete answer to the aforesaid conclusion, since once a Mauritius resident were to produce a TRC, the test of beneficial ownership would be fully satisfied. E. ARGUMENTS OF THE RESPONDENTS 61. Appearing for the respondents, Mr. Srivastava, learned special counsel, commenced his submissions by raising the following preliminary objections with regard to the maintainability of the challenge as mounted. 62. Mr. Srivastava firstly contended that undoubtedly the jurisdiction of the AAR stands circumscribed by virtue of the Proviso to Section 245R. According to learned counsel, it was thus incumbent upon the AAR to evaluate whether the transaction is one which is prima facie designed for the avoidance of tax. Bearing the aforesaid in mind, Mr. Srivastava contended that the AAR has essentially come to form a prima facie opinion on the issue of avoidance of tax which can neither be said to be manifestly erroneous or perverse. Mr. Srivastava submitted that bearing in mind the principles which inform the exercise of power under Article 226 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stee respectively. The said chart is accordingly reproduced hereinbelow: 67. Learned counsel accordingly submitted that it is the case of the respondent that the petitioner, TG III and TG IV were mere facades of the US based parent , TGM LLC. Learned counsel contended that limited partnerships or for that matter legally exempted partnerships are by default viewed as flow through entities for the purposes of taxation in USA. Viewed in that light, it was his submission that the investee companies constitute the head and brains of the funds which were held by the petitioners. 68. Mr. Srivastava pointed out that Flipkart Online had been incorporated in 2008 in India as a start up. Referring us to the counter affidavit, it was submitted that Tiger Global Five FK Holdings [TG Five FK Holdings] which was incorporated on 22 October 2009 had originally made direct investments through the FDI route in Flipkart Online. Significantly, Mr. Srivastava submitted TG Five FK Holdings was admitted by the petitioners as an associate when they came to be incorporated in 2011. It was then asserted that the petitioner created a private company in the shape of Flipkart Singapore on 04 October 2011 and wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t petitioners is evident from the fact that Mr. Coleman was disclosed as the beneficial owner of the shareholding in TG III namely Tiger Global Five FK Parent Holdings [TG Five FK Parent Holdings] . It was contended that Mr. Coleman and other senior employees of TGM LLC were also entrusted with control over the bank accounts of the petitioners and vested with signing powers. This, according to learned counsel, is evident from the indisputable fact that the Mauritian Directors could issue instructions to banks and execute cheques for a maximum of USD 250,000/- and that too when co-signed by either Mr. Coleman or Mr. Anthony Armenio, neither of whom were on the BoD of the writ petitioners. 73. It was further asserted that the writ petitioners have failed to show any administrative expenses that they may have borne in the course of any activity undertaken in Mauritius and that they also do not appear to have engaged any employees. The submission essentially was that no substantial expenditure appears to have been incurred by the petitioners in Mauritius. It was in the aforesaid backdrop that Mr. Srivastava sought to support the ultimate conclusion reached by the AAR of the Mauritian D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e petitioner, TG III and TG IV were ultimately ratified by a single stroke in this meeting is a clear indication of the petitioners being bereft of any independent decision making power. This, according to learned counsel, is evident from the petitioners being totally unaware of the entities which would be ultimately providing funds for the proposed investments or the level of their individual capital contribution. 79. Insofar as the aspect of management of funds held or standing in the name of the petitioners is concerned, Mr. Srivastava drew our attention to the meeting of the Board held on 03 November 2014 and where signatories to the bank accounts held with HSBC Bank Mauritius Limited came to be altered. Learned counsel submitted that in terms of the resolutions passed in this meeting, it becomes apparent that Mr. Coleman or Mr. Anil Castro, both of whom were connected to TGM LLC, had to necessarily sign off on all cheques and instructions. According to learned counsel, the aforesaid resolution establishes the complete control that TGM LLC exercised over the petitioners. Our attention was then drawn to the meeting of the Board held on 13 August 2018 and which records the Board ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... holistic view has to be taken to adjudge what is perhaps regarded in contemporary thinking as a necessary evil in a developing economy. xxxx xxxx xxxx 148. We may also refer to the judgment of the Gujarat High Court in Banyan and Berry v. CIT where referring to McDowell, the Court observed: (ITR p. 850 E-H) The court nowhere said that every action or inaction on the part of the taxpayer which results in reduction of tax liability to which he may be subjected in future, is to be viewed with suspicion and be treated as a device for avoidance of tax irrespective of legitimacy or genuineness of the act; an inference which unfortunately, in our opinion, the Tribunal apparently appears to have drawn from the enunciation made in McDowell case. The ratio of any decision has to be understood in the context it has been made. The facts and circumstances which lead to McDowell decision leave us in no doubt that the principle enunciated in the above case has not affected the freedom of the citizen to act in a manner according to his requirements, his wishes in the manner of doing any trade, activity or planning his affairs with circumspection, within the framework of law, unless the same fall i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent companies, that are part of the same group, will be totally or partly ignored as a device or a conduit (in the pejorative sense). 85. Mr. Srivastava then contended that it would be wholly incorrect for the Court to hold that a TRC is conclusive and restrains income tax authorities from undertaking any further inquiries where fraud is suspected. He sought to draw sustenance for the aforenoted contention from the observations appearing in the following paragraphs forming part of the decision in Vodafone:- 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 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the report in Vodafone and which are reproduced hereinbelow:- 74. However, where the subsidiary's executive Directors' competences are transferred to other persons/bodies or where the subsidiary's executive Directors' decision making has become fully subordinate to the holding company with the consequence that the subsidiary's executive Directors are no more than puppets then the turning point in respect of the subsidiary's place of residence comes about. Similarly, if an actual controlling non-resident enterprise (NRE) makes an indirect transfer through abuse of organisation form/legal form and without reasonable business purpose which results in tax avoidance or avoidance of withholding tax, then the Revenue may disregard the form of the arrangement or the impugned action through use of non-resident holding company, recharacterise the equity transfer according to its economic substance and impose the tax on the actual controlling non-resident enterprise. Thus, whether a transaction is used principally as a colourable device for the distribution of earnings, profits and gains, is determined by a review of all the facts and circumstances surrounding the tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 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. 87. Insofar as conclusivity of a TRC is concerned, Mr. Srivastava also sought to draw sustenance from the following observations as rendered by the Bombay Hig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e into in the assessment proceedings. 97. TIL cannot be said to be unaware of the fact that the shares of ICL held by AT T, Mauritius did not belong to AT T, Mauritius because TIL was party to the shareholders agreement, wherein all rights in respect of the shares of JVC to be issued after the shareholders' agreement was to vest in AT T, USA and not with AT T, Mauritius . In the share purchase agreement, it is recorded that the sale of shares of AT T, Mauritius in favour of TIL would take place only after the sale of shares of ICL in favour of Indian Rayon takes place so that on the date of transfer of shares of AT T, Mauritius, only 50 per cent. of the ICL shares remain in the name of AT T, Mauritius. Therefore, the prima facie opinion of the Revenue that the transaction between TIL and NCWS/MMMH for sale and purchase of shares of AT T, Mauritius was a colourable transaction and in fact the transaction was for sale and purchase of ICL shares by NCWS to TIL cannot be said to be devoid of any merit. 88. Mr. Srivastava then proceeded to explain the significance of various amendments which came to be introduced in the Act by virtue of Finance Act, 2012. According to learned counse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded that Rule 10U which came to be introduced with effect from 01 April 2016 in the Income Tax Rules 1962 [Rules], clearly provides added support to the contention of the respondents that the provisions of Chapter X-A would apply, notwithstanding the grandfathering clause which was relied upon by the petitioners. The submission in this respect proceeded along the following lines. 90. Mr. Srivastava contended that Rule 10U (2) in unequivocal terms declares that the provisions of Chapter X-A would apply to any arrangement irrespective of the date on which it may have been entered into and in relation to any tax benefit obtained from that arrangement on or after 01 April 2017. Since elaborate submissions were addressed in the context of the aforesaid Rule, the same is reproduced hereinbelow:- 10U. Chapter X-A not to apply in certain cases (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) a Foreign Institutional Investor- (i) who is an assessee under the Act; (ii) who has not taken benefit of an agreem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Mr. Srivastava that even though an arrangement may have been entered into prior to 01 April 2017, any benefit obtained from that arrangement on or after 01 April 2017 would be subject to the provisions contained in Chapter X-A. To buttress the arguments addressed on this score, Mr. Srivastava took us through Sections 97 and 98 and which read as under:- Arrangement to lack commercial substance 97. (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- (i) round trip financing; (ii) an accommodating party; (iii) elements that have effect of offsetting or cancelling each other; ог (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 provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... :- (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 nature 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 m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ima facie opinion. According to learned counsel, similar would be the position which would emerge in the context of the orders framed by the respondents with reference to Section 197. It was in the aforesaid backdrop that Mr. Srivastava had contended that since all aspects relating to the transaction in question would be open to be examined and evaluated in the course of a regular assessment, no justification exists for this Court to invoke its powers of judicial review and interdict that process. We find ourselves unable to sustain the aforenoted contention bearing in mind the following facts. 96. While it is true that ordinarily an order framed with reference to Section 197 does not constitute a final determination on the issue of taxability, we find ourselves unable to ignore or gloss over the position which emerges upon a consideration of the stand as expressed and taken by the respondents before the AAR and connected to the Section 197 proceedings which had preceded the filing of the applications before that authority. The CIT (International Transaction) in its report which was submitted to the AAR and referable to Section 245(R) (2) had understood the scope and outcome of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing for advance ruling on the same transaction. As per Applicant, it is not liable for capital gains tax on the sale of shares as above. As the department has already decided the chargeability of capital gains on the sale of shares and the stand of the remains the same on the basis of the facts, therefore, on this ground itself, the Hon'ble AAR is requested to reject the application of the applicant. Further, the applicant has filed its Return of Income for the AY 2019-20, with a refund claim of Rs. 866.91 Crores and therefore, the case may be selected under Computer Assisted Scrutiny Selection(CASS) and the department shall determine the chargeability of capital gains once again. Therefore, the Hon'ble AAR is requested to reject the application of the applicant on this ground as well. 97. The CIT (International Transaction) after referring to the detailed examination which was undertaken by the Department with reference to the application for grant of certification under Section 197 as moved by the petitioners had observed that they had already decided the taxability of capital gains and identified the beneficial owner of the shares upon piercing the corporate veil. It pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r to be just name lenders. 100. That report additionally embodied the following observations: 10.5 COMPANY WITH NO INCOME On perusal of the financial statements of the applicant, it is observed that the applicant does not have any income from the date of inception and the sources of fund for the investment in Flipkart Private Limited has been from the entities based out of Mauritius, which are controlled by entities based out of Cayman Islands and ultimately controlled by Tiger Global Management, LLC, USA. 10.8 On analysis of the financial statements of the applicant, it is found that the initial source of investment and subsequent sources of investment in Flipkart P Ltd have been capital contributions from the shareholders. The applicant has no income of its own and the sources of fund for investment and expenses are capital contributions from the entities based out of Mauritius, which are held by entities based out of Cayman Islands and ultimately controlled by the entity, Tiger Global Management LLC, USA. The source of investment and instructions for a specified amounts given by a person, ie. Mr. Charles P Coleman, who is not in the board of directors and the top executives of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the absence of any change in facts, the AAR should reject the applications made by the writ petitioners. Coming then to the impugned order itself the aforesaid stand of the respondents in the said report stands duly reflected in paragraphs 5, 6 and 13 and which are extracted hereunder: 5. The Revenue has raised objections on the admissibility of the application in all the three casesin respect of all the three conditions as stipulated in provisos to Section 245R (2) of the Income-tax Act, 1961 ( the Act ). The first condition of the said proviso is regarding pendency of proceeding before any Income-tax Authority or the Appellate Tribunal. In the report dated 03.01.2020, the Commissioner of Income-tax (IT)-4, Mumbai has admitted that as on date of application no proceeding was pending against any of the three applicants. However, it has been pointed that the issue of chargeability of capital gains on the sale proceeds of shares held by the applicants in Flipkart Private Limited, Singapore to Fit Holdings, S.A.R.L. Luxembourg was examined by the Department in detail in the course of proceeding under Section 197 of the Act. The applicants had filed an application on 02.08.2018 for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. ITO and by the Kerala High Court in the case of InfoparksVs. DCIT wherein it was held that the assessee's tax liability cannot be decided in the proceeding under section 197 of the Act but can only be subject matter of assessment proceeding. 103. The AAR while proceeding to render its findings has firstly in paragraph 34 taken the view that the inquiry would have to take a broad overview of the entire transaction as opposed to restricting its consideration to the sale of shares alone as suggested by the writ petitioners. It thereafter and in paragraph 35 significantly observes that from the evidence forming part of its record it was apparent that the writ petitioners had been set up only for making investment in order to derive benefit under the DTAA between Mauritius and India and the same being an inescapable conclusion . 104. Proceeding further although in paragraph 36 the AAR holds that merely because the funds for the investment may have come from promoters in the USA, the same would not lead one to a conclusion that the arrangement was one of tax avoidance, it ultimately proceeded to categorically hold that the head and brain of the petitioners was not situate in Mauri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss which pervades the impugned orders. Subordinate authorities administering the provisions of the Act would find it difficult to ignore the conclusions that have come to be recorded by both the CIT (International Taxation) as well as the AAR. There is nothing tentative or prima facie in the AAR holding that the transaction was not only designed for avoidance of tax, benefits if extended would be violative of the objective underlying the DTAA. The AAR has further held that the transfer of shares of Flipkart Singapore would not be covered under the Convention. Regard must also be had to the fact that the AAR while framing the impugned orders has categorically held that the petitioners ..have no case on merits and fall on the ground of treaty eligibility as well. Those and other observations appearing in both the report of the CIT as well as in the impugned order can clearly not be countenanced as being either the expression of a preliminary view or a decision which may be said to be provisional in character. The petitioners would in any case stand gravely prejudiced if those decisions continued to exist and were to be read as having already decided all aspects of the impugned transa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... observership services, are subject to review and final approval by the Board of Directors of the Applicant. TGM does not have the right to contract on behalf of or bind the Applicant or take any decision on behalf of the Applicant without the approval of thc Applicant s Board of Directors. 109. Similar recitals appear in the applications made to the AAR by TG III and TG IV relevant parts whereof are reproduced hereinbelow: TG III: 1.4. The Applicant is a tax resident of Mauritius under the laws of Mauritius and under the provisions of the Agreement between India and Mauritius for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Foreign Countries ( Mauritius Treaty ). The Applicant holds a valid Tax Residency Certificate ( TRC ) issued by the Mauritius Revenue Authority ( MRA ) certifying it to be a tax resident in Mauritius for the period between 18 June 2018 and 17 June 2019 for income tax purposes. A copy of the TRC dated 20 June 2018, along with a duly completed Form No. 10F is attached herewith as Exhibit 6. The Applicant has also been issued a TRC for all periods commencing from the incorporation of the Applicant. 1.5. The Applicant has engaged Tiger ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or was it entitled to take any decision without the approval of the BoD of the writ petitioners. 111. Along with the rejoinder affidavit the writ petitioners have placed on our record a structural chart which is reproduced hereinbelow: Petitioner : TG III: TG IV: 112. The positioning of the petitioner, TG III and TG IV carry similar declarations with respect to the rule of TGM LLC and relevant parts whereof have been extracted hereinabove. As is manifest from those declarations, there too TGM LLC was described as the management company. We also bear in consideration the unwavering position which has been taken by the petitioners with it being categorically asserted that TGM LLC was neither an equity partner nor did the funds for the investment originate from that entity. 113. It was in the aforesaid backdrop that Mr. Kaka in his rejoinder submissions had contended that all assertions, namely of TGM LLC being the ultimate parent, were erroneous and factually incorrect. 114. We also take note of the counter affidavit which has been filed in these proceedings and where too in the schematic holding structure reproduced in paragraph 7.5 to 7.7, the position of TGM LLC is understood to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fault/files/FDI_Factsheet_30May2024.pdf] :- QUARTERLY FACT SHEET FACT SHEET ON FOREIGN DIRECT INVESTMENT (FDI) IN FLOW FROM APRIL, 2000 to MARCH, 2024 (Updated up to March, 2024) I. CUMULATIVE FDI FLOWS INTO INDIA (2000-2024): A. TOTAL FDI INFLOW (from April, 2000 to March, 2024): 1 CUMULATIVE AMOUNT OF FDI INFLOW (Equity inflow + Re-invested earnings + Other capital ) USD 9,90,972 Million 2 CUMULATIVE AMOUNT OF FDI EQUITY INFLOW (excluding, amount remitted through RBI s NRI Schemes) INR USD 43,47,001 6,78,864 Crore Million B . FDI INFLOW DURING FOURTH QUARTER OF FINANCIAL YEAR 2023-24 (JANUARY TO MARCH 2024): 1 TOTAL FDI INFLOW INTO INDIA (Equity inflow + Re-invested earnings + Other capital ) (as per RBI s Monthly bulletins) USD 19,046 Million 2 FDI EQUITY INFLOW INR USD 1,02,869 12,386 Crore Million C . FDI EQUITY INFLOW (MONTH-WISE) DURING THE FINANCIAL YEAR 2023-24: Financial Year 2023-24 Amount of FDI Equity inflow (April March) (In INR Crore) (In USD mn) 1 April, 2023 41,877 5,106 2 May, 2023 22,055 2,678 3 June, 2023 25,999 3,162 4 July, 2023 20,917 2,546 5 August, 2023 24,071 2,908 6 September, 2023 33,957 4,089 7 October, 2023 52,755 6,338 8 November, 2023 23,628 2,837 9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7,899 43,47,001 USD Million 58,773 46,034 44,423 6,78,864 - * Includes inflow under NRI Schemes of RBI. Note : i. Cumulative country-wise FDI equity inflow (from April, 2000 to March, 2024) are at Annex-'A . ii. FEDAI (Foreign Exchange Dealers Association of India) conversion rate from rupees to US dollar applied, on the basis of monthly average rate provided by RBI (DEAP), Mumbai. %age worked out in USD terms FDI inflow received through Government Route + Automatic Route +Acquisition of existing shares only. Figures are provisional. 118. Mauritius, as would be evident from the data and material publicly available, appears to have been identified as one of the more favoured jurisdictions for FIIs desirous of investing in India. In fact and as was noted by the Supreme Court in Azadi Bachao Andolan, out of the total investment from FIIs in 2012 pegged at INR 45,00,000 million, INR 7,00,000 million came from Mauritius. This appears to have coincided with the liberalization measures which were adopted by India commencing from 1991. The Mauritius route appears to owe its genesis to the proximity of the island nation to India as well as a wide bouquet of bilateral and multilateral tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icle 13(4) the DTAA. Of equal significance were some of the proposed amendments to the Act and which we propose to notice in the subsequent parts of this decision. I. DECISIONS RENDERED BY THE SUPREME COURT 120. Proceeding chronologically, we then take note of the seminal decision handed down by the Supreme Court in Azadi Bachao Andolan. The said decision emanated from a challenge laid before this Court to Circular No. 789. It appears to have been contended before our Court that the Circular was ultra vires Sections 90 and 119 of the Act and clouded the discretion and powers of inquiry and investigation which could otherwise be wielded by assessing authorities under the Act. The High Court had proceeded to quash Circular No. 789 holding that the said directive essentially compelled authorities under the Act to accept a TRC as conclusive evidence with respect to status of residence and beneficial ownership. The Court thus came to the conclusion that Circular No. 789 was ultra vires the powers otherwise vested in the CBDT. It further proceeded to hold that an Income Tax Officer is entitled in law to pierce the corporate veil in order to ascertain whether a company is actually a resid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . But making of 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 the citizens or others which are justiciable are not affected, no legislative measure is needed to give effect to the agreement or treaty. 122. Azadi Bachao Andolan then proceeded to explain the scope of the power conferred upon the Union by virtue of Section 90 and of taxing conventions prevailing in the event of a conflict by virtue of Sections 4 and 5 of the Act themselves being made subject to the other provisions of the statute. This becomes evident from a reading of paragraphs 20 and 22 of the report which are reproduced hereinbelow:- 20. The purpose of Section 90 becomes clear by reference to its legislative history. Section 49-A 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 supertax) under the Act and income tax in that country, under the Income Tax Act and the corresponding law in force in that country, had been paid. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions of the Act which means that they are subject to the provisions of Section 90. By necessary implication, they are subject to the terms of the Double Taxation Avoidance Agreement, if any, entered into by the Government of India. Therefore, the total income specified in Sections 4 and 5 chargeable to income tax is also subject to the provisions of the agreement to the contrary, if any. 123. The aforesaid aspects were reemphasized in paragraph 28 which reads thus:- 28. A survey of the aforesaid cases makes it clear that 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 implementation of the terms of a Double Taxation Avoidance Agreement. When that happens, the provisions of such an agreement, with respect to cases to which they apply, would operate even if inconsistent with the provisions of the Income Tax Act. We approve of the reasoning in the decisions which we have noticed. If it was not the intention of the legislature to make a departure from the general principle of chargeability to tax under Section 4 and the general principle of ascertainment of total income und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te such a circular. 125. As is manifest from the above, the Supreme Court took note of the consistent stand of the Union and which flowed right from the time when Circular No. 682 had come to be issued of Mauritius residents being absolved and exempt from a capital gains tax liability in India. It pertinently observed that the circular was a clear enunciation of the legal position which would flow from the DTAA and which would prevail by virtue of Sections 4 and 5 of the Act. The decision in Azadi Bachao Andolan also carries the following pertinent observations with respect to fiscal residence. This becomes evident from a reading of the following observations appearing in paragraphs 62 to 64 of the report: 62. The concept of fiscal residence of a company assumes importance in the application and interpretation of the Double Taxation Avoidance Treaties. 63. In Cahiers De Droit Fiscal International it is said that under the OECD and UNO Model Conventions, fiscal residence is a place where a person, amongst others a corporation, is subjected to unlimited fiscal liability and subjected to taxation for the worldwide profit of the resident company. At paragraph 2.2 it is pointed out: The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... worldwide profit at the place of residence of the company considered. South Korea, India and Japan in Asia, Australia and New Zealand in Oceania follow this principle. 126. Of equal significance are the principles which came to be propounded with respect to treaty shopping and the allegation of Mauritius being used as a base for establishment of shell or conduit companies. Dealing with the aforesaid aspect, the Supreme Court held:- 111. The respondents vehemently urge that the offshore companies have been incorporated under the laws of Mauritius only as shell companies, which carry on no business there, and are incorporated only with the motive of taking undue advantage of DTAC between India and Mauritius. They also urged that treaty shopping is both unethical and illegal and amounts to a fraud on the Treaty and that this Court must be astute to interdict all attempts at treaty shopping. 112. Treaty shopping is a graphic expression used to describe the act of a resident of a third country taking advantage of a fiscal treaty between two contracting States. According to Lord McNair, provided that any necessary implementation by municipal law has been carried out, there is nothing to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... question of applying a fiscal statute by intendment, if the expressed words do not apply. In our view, this contention of the appellants has merit and deserves acceptance. We shall have occasion to examine the argument based on motive a little later. 115. The decision of the Chancery Division in F.G. (Films) Ltd., In re was pressed into service as an example of the mask of corporate entity being lifted and account be taken of what lies behind in order to prevent fraud . This decision only emphasises the doctrine of piercing the veil of incorporation. There is no doubt that, where necessary, the courts are empowered to lift the veil of incorporation while applying the domestic law. In the situation where the terms of DTAC have been made applicable by reason of Section 90 of the Income Tax Act, 1961, even if they derogate from the provisions of the Income Tax Act, it is not possible to say that this principle of lifting the veil of incorporation should be applied by the court. As we have already emphasised, the whole purpose of DTAC is to ensure that the benefits thereunder are available even if they are inconsistent with the provisions of the Indian Income Tax Act. In our view, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deriving benefits thereunder is totally eliminated. That may be an academic approach to the problem to say how the law should be. The maxim judicis est jus dice re, non dare pithily expounds the duty of the Court. It is to decide what the law is, and apply it; not to make it. 127. It becomes pertinent to note that Azadi Bachao Andolan had come to be pronounced at a time when the DTAA did not incorporate a LOB provision. While noticing this aspect, the Supreme Court observed that unlike other tax treaties which embodied Articles which regulated or constituted limitations with respect to treaty benefits being availed, the India-Mauritius DTAA contained no disabling conditions. It proceeded to hold that where the terms of a taxing convention were applicable, notwithstanding courts being otherwise empowered to peer through the veil of incorporation, the said principle would be inapplicable. The Court thus proceeded to negate the submission of the incorporation of entities in Mauritius being liable to be doubted or frowned upon. This becomes evident from the following observations which came to be entered:- 133. Many developed countries tolerate or encourage treaty shopping, even if it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... use of treaty shopping , perhaps, it may have been intended at the time when the lndo-Mauritius DTAC was entered into. Whether it should continue, and, if so, for how long, is a matter which is best left to the discretion of the executive as it is dependent upon several economic and political considerations. This Court cannot judge the legality of treaty shopping merely because one section of thought considers it improper. A holistic view has to be taken to adjudge what is perhaps regarded in contemporary thinking as a necessary evil in a developing economy. 128. While concluding, the Supreme Court pertinently observed as under:- 166. We are unable to agree with the submission that an act which is otherwise valid in law can be treated as non est merely on the basis of some underlying motive supposedly resulting in some economic detriment or prejudice to the national interests, as perceived by the respondents. 167. In the result, we are of the view that the Delhi High Court erred on all counts in quashing the impugned circular. The judgment under appeal is set aside and it is held and declared that Circular No. 789 dated 13-4-2000 is valid and efficacious. 129. While one would have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sides. 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. 74. However, where the subsidiary's executive Directors' competences are transferred to other persons/bodies or where the subsidiary's executive Directors' decision making has become fully subordinate to the holding company with the consequence that the subsidiary's executive Directors are no more than puppets then the turning point in respect of the subsidiary's place of residence comes about. Similarly, if an actual controlling non resident enterprise (NRE) makes an indirect transfer through abuse of organisation form/legal form and without reasonable business purpose which results in tax avoidance or avoidance of withholding tax, then the Revenue may disregard the form of the arrangement or the impugned action through use of no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erment/saving device but that it should apply the look at test to ascertain its true legal nature [see Craven v. White (Stephen) which further observed that genuine strategic tax planning has not been abandoned by any decision of the English Courts till date]. 130. As is manifest from the principles enunciated by the Supreme Court, the position of holding or parent companies exercising due oversight was duly acknowledged. This becomes evident from the Supreme Court noting that a group or parent company would invariably be involved in providing principled guidance to other entities forming part of that conglomerate and the same being in exercise of the right of the principal or the major shareholder itself. It was pertinently noted that merely because a parent company were to issue such a directive or formulate a policy of guidance, the same would not compel one to hold that the subsidiary was liable to be deemed to be a resident of a State in which the parent company resided. 131. Kapadia C.J. proceeded further to hold that one would be justified in ignoring the principles of separate entity only if it were found that the subsidiary stood completely denuded of independent decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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. 134. As was noted by us in the preceding parts of this decision, the judgment in Vodafone had come to be pronounced prior to Explanation 5 coming to be incorporated in Section 9 (1) of the Act. Section 9 as it stood at that point in time did not incorporate principles pertaining to taxation of indirect transfers. The Supreme Court was thus called upon to examine whether a transfer of shares which were asserted to derive value from assets situated in India would fall within the dragnet of Section 9 (1) (i). While negativing the contention of the Revenue in this respect, the Supreme Court pertinently observed as follows:- 91. For the above reasons, Section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovided for in the treaty. Such clauses cannot be read into the section by interpretation. For the foregoing reasons, we hold that Section 9 (1) (i) is not a look through provision. 135. Proceeding then to reiterate the limited extent to which the Revenue may be entitled to doubt the source of investment, the Supreme Court rendered the following significant observations:- 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. xxxx xxxx xxxx 101. A company is a separate legal persona and the fact that all its shares are owned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty of its own executive Directors. 136. K.S.P. Radhakrishnan J., while penning a concurrent opinion, firstly observed that the burden of establishing that the incorporation of an entity was aimed solely to subserve a fraudulent or dishonest purpose lies entirely on the Revenue. This becomes evident from paragraphs 241 and 242 of the report:- 241. Corporate structures created for genuine business purposes are those which are generally created or acquired: at the time when investment is being made; or further investments are being made; or the time when the group is undergoing financial or other overall restructuring; or when operations, such as consolidation, are carried out, to clean defused or over-diversified. Sound commercial reasons like hedging business risk, hedging political risk, mobility of investment, ability to raise loans from diverse investments, often underlie creation of such structures. In transnational investments, the use of tax neutral and investor-friendly countries to establish an SPV is motivated by the need to create a tax efficient structure to eliminate double taxation wherever possible and also plan their activities attracting no or lesser tax so as to giv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting up such offshore companies in their jurisdiction. Demand for offshore facilities has considerably increased, in recent times, owing to high growth rates of cross-border investments and to the increased number of rich investors who are prepared to use high technology and communication infrastructures to go offshore. Removal of barriers to cross-border trade, the liberalisation of financial markets and new communication technologies have had positive effects on the developing countries including India. 248. Investment under the Foreign Direct Investment Scheme (FDI Scheme), investment by foreign institutional investors (FIIs) under the Portfolio Investment Scheme, investment by NRIs/OBCs under the Portfolio Investment Scheme and sale of shares by NRIs/OBCs on non-repatriation basis; purchase and sale of securities other than shares and convertible debentures of an Indian company by a non-resident are common. Press notes are announced by the Ministry of Commerce and Industry and the Ministry issued Press Note 2 of 2009 and Press Note 3 of 2009, which deal with calculation of foreign investment in downstream entities and requirement of ownership or control in sectoral cap companie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... advantages for multinational companies and individuals for investments and also for legitimate financial planning and risk management. It is often said that insufficient legislation in the countries where they operate gives opportunities for money laundering, tax evasion, etc. and, hence, it is imperative that that the Indian Parliament would address all these issues with utmost urgency. 138. As is evident from the aforesaid observations, Radhakrishnan J. acknowledged the paradigm shift in global commerce of companies being desirous of overcoming trade barriers and bureaucratic obstacles while choosing investor friendly shores. It was significantly observed that many of such entities which may be seated in jurisdictions such as Mauritius or the Cayman Islands may in fact be premised on sound commercial and legitimate tax planning purposes without any intent to conceal income or assets. The learned Judge then held that merely because an offshore jurisdiction was chosen to establish a subsidiary or a holding entity, the same would not necessarily lead one to adversely presume that such an activity was motivated by tax evasion or a criminal purpose. The opinion penned by Radhakrishna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... holding company does not own the assets of the subsidiary and, in law, the management of the business of the subsidiary also vests in its Board of Directors. In Bacha F. Guzdar v. CIT, this Court held that shareholders only right is to get dividend if and when the company declares it, to participate in the liquidation proceeds and to vote at the shareholders meeting. Refer also to Carew and Co. Ltd. v. Union of India and Carrasco Investments Ltd. v. Directorate of Enforcement. 258. Holding company, of course, if the subsidiary is a WOS, may appoint or remove any Director if it so desires by a resolution in the general body meeting of the subsidiary. Holding companies and subsidiaries can be considered as single economic entity and consolidated balance sheet is the accounting relationship between the holding company and subsidiary company, which shows the status of the entire business enterprises. Shares of stock in the subsidiary company are held as assets on the books of the parent company and can be issued as collateral for additional debt financing. Holding company and subsidiary company are, however, considered as separate legal entities, and subsidiary is allowed decentralised ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tters 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. 140. Of equal significance is the following discussion on LOBs and the presumptions which may flow from a TRC:- Limitation of benefit clause (LOB) 309. The Indo-Mauritius Treaty does not contain any limitation of benefit (LOB) clause, similar to the Indo-US Treaty, wherein Article 24 stipulates that benefits will be available if 50% of the shares of a company are owned directly or indirectly by one or more individual residents of a controlling State. The LOB clause also finds a place in India-Singapore DTA. The Indo-Mauritius Treaty does not restrict the benefit to companies whose shareholders are non-citizens/residents of Mauritius, or where the beneficial interest is owned by non-citizens/residents of Mauritius, in the event where there is no justification in prohibiting the residents of a third nation from incorporating companies in Mauritius and deriving benefit under the treaty. No presumptio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any 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, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, unlike courts following common law. That was a case where a Danish company was interposed to hold all the shares in a Swiss company and there was a clear finding of fact that it was interposed for the sole purpose of benefiting from the Swiss-Denmark DTA which had the effect of reducing a normal 35% withholding tax on dividend out of Switzerland down to 0%. The court in that case held that the only reason for the existence of the Danish company was to benefit from the zero withholding tax under the tax treaty. On facts also, the above case will not apply to the case in hand. 141. Insofar as tax havens, treaty shopping and shell companies are concerned, Radhakrishn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is liable to taxation therein by reason of his domicile, residence, place of business or any other similar criteria. An Indian company, with the idea of tax evasion can also incorporate a company offshore, say in a tax haven, and then create a WOS in Mauritius and after obtaining a TRC may invest in India. Large amounts, therefore, can be routed back to India using TRC as a defence, but once it is established that such an investment is black money or capital that is hidden, it is nothing but circular movement of capital known as round-tripping; then TRC can be ignored, since the transaction is fraudulent and against national interest. 322. The facts stated above are food for thought to the legislature and adequate legislative measures have to be taken to plug the loopholes; all the same, a genuine corporate structure set up for purely commercial purpose and indulging in genuine investment is to be recognised. However, if the fraud is detected by the court of law, it can pierce the corporate structure since fraud unravels everything, even a statutory provision, if it is a stumbling block, because the legislature never intents to guard fraud. Certainly, in our view, TRC certificate t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the petitioner therein to be an assessee in default in respect of payments made by it to MA and GIMD regarding the aforenoted acquisition. The AAR had in its impugned order observed that the transaction was designed for avoidance of tax in India and that the transfer of shares of the JVC effectively amounted to the transfer of assets of an India based company since the sequence of events pertaining to the said transfer involved a transfer of the underlying assets and control of the Indian company, SBL. Accordingly, it was determined that the transaction of sale of shares was in fact taxable in India in terms of Article 14 (5) of the DTAA between India and France. The AAR had additionally declined to rule on the questions posed since it was determined that sub-clause (iii) to Section 245R (2) was applicable. 146. The Court in Sanofi observed that the JVC was a resident of France and was a distinct entity having commercial substance which was incorporated to serve as an investment vehicle and accordingly had commercial substance and a legitimate business purpose of also facilitating FDI in India. It accordingly observed as follows:- 82. ...This court is of the considered view that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be relied upon by the Revenue in the present case (Explanation 2 to section 2(47)) ; and Explanations 4 and 5 to section 9) are not fortified by a non obstante clause expressed to override tax treaties. There is a presumption against a repeal by implication and the reason underlying this principle is premised on the theory that the Legislature while enacting a law has a complete knowledge of the existing laws on the same subject matter, and, therefore, when it does not provide a repealing the provision it signals an intention not to repeal the existing legislation-Municipal Council, Palai v. T. J. Joseph, AIR 1963 SC 1561; Tansukh Rai v. Nilratan Prasad Shaw, AIR 1966 SC 1780, Northern India Caterers (P.) Ltd. v. State of Puniab. AIR 1967 SC 1581: Municioal Corooration of Delhi v. Shiv Shanker, AIR 1971 SC 815; Ratan Lal Adukia v. Union of India, AIR 1990 SC 104 ; R.S. Raghunath v. State of Karnataka, AIR 1992 SC 81 ; Union of India v. S.Venkateshan, AIR 2002 SC 1890 ; State of M. P. v. Kedia Leather and Liquor Ltd., AIR 2003 SC 3236; xxxx xxxx xxxx 109. In the case on hand, therefore, the meaning and the trajectory of the retrospective amendments to the Act (by the Finance Act, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... themselves. xxxx xxxx xxxx 140. Qua article 14 (5), where shares of a company which is a resident of France are transferred, representing a participation (shareholding see Vodafone) of more than 10 per cent. in such entity, the resultant capital gain is taxable only in France. Even where the underlying value of such shares is located in the jurisdiction of the other contracting State (India), this fact is irrelevant under the DTAA provisions ; except where the alienation is of shares of a company the property of which consists principally (whether directly or indirectly) of immovable property and in the later circumstance the entitlement to tax stands allocated under article 14 (4) to the contracting State within whose jurisdiction such property is situate. To reiterate, the fact that the value of the shares alienated comprise underlying assets located in the other contracting State is irrelevant in the context of article 14 (5). 141. The creative interpretation by the Revenue of provisions of article 14 (5) on the substrate of its underlying assets theory (premised on its MA/ GIMD are the legal and beneficial owners of SBL shares assumption); and in the context of SBL assets comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly a bargaining process, with each side seeking concessions from the other. The final agreement would often represent several compromises and it may be uncertain as to 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 were unintended, improper or unjustified, for other and non-tax reasons, unless it leads to significant loss of tax revenue ; and allow the use of treaty network 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. 120. Developing countries need foreign investments and treaty shopping opportunities could be an additional factor to attract them. There are many principles in a fiscal economy which, though may facially appear inequitable, are tolerated in a developing economy in the interest of long-term development. 121. The principles relevant to treaty interpretation are not the same as those pertaining to interpretation of municipal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scernible and lend to an uncontestable comprehension on good faith interpretation, no further interpretive exertion is authorized ; for that would tantamount to usurpation (by an unauthorized body-the interpreting agency/tribunal), intrusion and unlawful encroachment into the domain of treaty-making under article 253 (in the Indian context), an arena off-limits to the judicial branch and when the organic charter accommodates no participatory role, for either the judicial branch or the executors of the Act. 151. It was on the aforesaid basis that the Court declined to entertain the contention of the Revenue commending the Court to purposively construe Article 14 (5) and derive the interpretation of the terms emanating therefrom as per the provisions of the Act, observing that treaties must be interpreted in accordance with the ordinary meaning given to it in terms of the treaty and in light of the objects and purpose of the latter. The Court went on to observe that the proposition of the Revenue to adopt a see through approach towards Article 14 (5) rested on an assumption that the JVC is an entity of no commercial substance and is not the beneficial owner of shares. The aforenoted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and Barclays are residents of Mauritius within the meaning of article-1. 30. In view of the circular, it is incumbent upon the authorities in India to accept the certificates of residence issued by the Mauritian authorities. Circular No. 789 is a statutory circular issued under section 119 of the Act. It is obviously based upon the trust reposed by the Indian authorities in the Mauritian authorities. Once it is accepted that the certificate has been issued by the Mauritian authorities, the validity thereof cannot be questioned by the Indian authorities. This is a convention/treaty entered into between two sovereign States. A refusal to accept the validity of a certificate issued by the Contracting States would be contrary to the convention and constitute an erosion of the faith and trust reposed by the Contracting States in each other. It is for the Government of India to decide whether or not such a certificate ought to be accepted. Once it is established that it has been issued by the contracting State i.e. Mauritius, a failure to accept the residence certificate issued by the Mauritian authorities would be an indication of break down in the faith reposed by the Government of I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no capital gains tax was payable by the Mauritian entity in regard to the sale of shares to the petitioner therein. K. TAX AVOIDANCE AND TREATY ABUSE 156. Elaborate submissions were addressed by respective sides on tax avoidance and treaty abuse and insofar as the respondents are concerned, it was alleged that the petitioner, TG III and TG IV are merely conduit companies of TGM LLC and thus disentitled from claiming benefits under the DTAA. Apart from the above, Mr. Srivastava, learned special counsel had also adverted to the GAAR provisions which now stand statutorily embodied in Chapter X-A. However, and before we evaluate the submissions which were addressed basis the provisions contained in the aforenoted Chapter, this would be an appropriate juncture to examine and understand the concept of tax avoidance and treaty abuse which were emphasized by the respondents and was an aspect which also appears to have weighed upon the AAR. 157. Tax Conventions owe their importance in today s time in light of the expansion of cross-border trade and investment. While they are principally aimed at seeking to eliminate or reduce source-based taxation, these conventions also aim to strike a ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsider before deciding to enter into a tax treaty with another country. The work will be co-ordinated with the work on hybrids. 160. The paper identified the three principal areas pertaining to Action 6 as requiring: (a) the development of model treaty provisions to prevent the grant of treaty benefits in inappropriate circumstances; (b) clarification of tax treaties elaborating that they were not intended to generate double non-taxation; and (c) to identify tax policy considerations in general to be considered by countries before finalizing taxing conventions. It was in the course of the aforesaid study that a recommendation came to be formulated for treaties to incorporate specific anti-abuse rules and which in turn resulted in the formulation of LOB principles and the Principal Purpose Test [PPT]. 161. The OECD in its Sixth-Year review report on treaty shopping and the progress made with respect to Action 6, takes note of the significant increase in the number of compliant agreements and records that over 1,120 out of the 1,270 compliant agreements had been brought in accord through the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e benefits whilst recognising that in some cases, persons who are not residents of a Contracting State may establish an entity in that State for legitimate business reasons. Although these provisions apply regardless of whether or not a particular structure was adopted for treaty-shopping purposes, the Article allows the competent authority of a Contracting State to grant treaty benefits where the other provisions of the Article would otherwise deny these benefits but the competent authority determines that the structure did not have as one of its principal purposes the obtaining of benefits under the Convention. 6. The Article restricts the general scope of the other provisions of the Convention, including those of Article 1 according to which the Convention applies to persons who are residents of a Contracting State. Paragraph 1 of the Article provides that a resident of a Contracting State shall not be entitled to the benefits of the Convention unless it constitutes a qualified person under paragraph 2 or unless benefits are granted under the provisions of paragraphs 3, 4, 5 or 6. Paragraph 2 determines who constitutes a qualified person by reference to the nature or attributes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich are not part of the Commentary on the OECD Model Tax Convention, have been inserted in order to provide additional explanations and to reflect the differences between the provisions of the OECD Model Tax Convention and those of this Model): 68. Paragraph 3 of both the simplified and detailed versions sets forth an alternative test under which a resident of a Contracting State may receive treaty benefits with respect to certain items of income that are connected to an active business conducted in its State of residence. This paragraph recognises that where an entity resident of a Contracting State actively carries on business activities in that State, including activities conducted by connected persons, and derives income from the other Contracting State that emanates from, or is incidental to, such business activities, granting treaty benefits with respect to such income does not give rise to treaty-shopping concerns regardless of the nature and ownership of the entity. The paragraph will provide treaty benefits in a large number of situations where benefits would otherwise be denied under paragraph 1 because the entity is not a qualified person under paragraph 2. 165. In order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tivity in the host member state: R v Secretary of State for Transport, Ex p Factortame Ltd (No 3) (Case C-221/89) [1992] QB 680, para 20, and Commission of the European Communities v United Kingdom of Great Britain and Northern Ireland (Case C-246/89) [1991] ECR I-4585, para 21. As stated by Advocate General Darmon in para 3 of his opinion in R v Her Majesty's Treasury, Ex p Daily Mail and General Trust plc (Case 81/87) [1989] QB 446: Establishment means integration into a national economy . It is therefore the exercise of an economic activity in the host member state which is the raison d tre of freedom of establishment. xxxx xxxx xxxx 49. For the purposes of the present case, it can be inferred from that case law that as long as there is genuine and actual pursuit of an activity by the controlled subsidiary in the member state in which it was established, the reasons for which the parent company decided to establish the subsidiary in that host state cannot call into question the rights which that company derives from the Treaty. (Conversely, when the objectives of freedom of establishment have not been fulfilled, the company cannot rely on the provisions of article 43 EC: see ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chord when it held that mere establishment of a subsidiary in another member State cannot ipso facto amount to an abuse of freedom of establishment. The Advocate General in his opinion pertinently observes that the right to establish an enterprise is principally concerned with the motive to genuinely and actively pursue an economic activity in a member State. It was thus held that the reasons which may have weighed upon the parent company to establish or domicile a subsidiary cannot be called into question since the right to establish would flow from the treaty itself. It was further observed that the mere establishment of a subsidiary would not give rise to a general presumption of tax evasion or avoidance. 168. The Advocate General in his opinion thereafter proceeded to observe as follows: 88. The use of that formula, whose language reproduces that of the A doctrine of abuse of rights'' (see, in particular, Emsland-St rke GmbH v Hauptzollamt Hamburg-Jonas (Case C-110/99) [2000] ECR I-11569, para 56), may be understood as intended to prevent the counteraction of tax avoidance from being used as a pretext for protectionism. Application of Community law may be refused only w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ven if payment for those services leads to a reduction in the taxable profits of the parent company in the state of origin. 107. Having regard to the objective of freedom of establishment, as long as the subsidiary carries on a genuine economic activity in the host state, there is no difference between the provision of services to third parties and the provision of those services to companies belonging to the same group as the subsidiary. 170. The Advocate General ultimately came to the following conclusions: 151. In the light of all of the foregoing considerations, I am of the opinion that the answer to the question referred for a preliminary ruling is that articles 43 and 48 EC do not preclude national tax legislation which provides for inclusion in the tax base of a resident parent company of profits of a CFC established in another member state where those profits are subject in that state to a much lower level of taxation than that in effect in the state of residence of the parent company, if that legislation applies only to wholly artificial arrangements intended to circumvent national law. Such legislation must therefore enable the taxpayer to be exempted by providing proof t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd justifiable economic considerations as would be evident from the following passages: 50. It is also apparent from case law that the mere fact that a resident company establishes a secondary establishment, such as a subsidiary, in another member state cannot set up a general presumption of tax evasion and justify a measure which compromises the exercise of a fundamental freedom guaranteed by the Treaty: see, to that effect, Imperial Chemical Industries plc v Colmer (Case C-264/96) [1999] 1 WLR 108, para 26; Commission of the European Communities v Kingdom of Belgium (Case C-478/98) [2000] ECR I-7587, para 45; X v Riksskatteverket (Case C-436/00) [2002] ECR I-1o829, para 62, and Commission of the European Communities v French Republic (Case C-334/02) [2004] ECR I-2229, para 27. 51. On the other hand, a national measure restricting freedom of establishment may be justified where it specifically relates to wholly artificial arrangements aimed at circumventing the application of the legislation of the member state concerned: see to that effect Imperial Chemical Industries, para 26; Lankhorst-Hohorst GmbH v Finanzamt Steinfurt (Case C-324/00) [2002] ECR I-11779, para 37; De Lasteyvie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 74. The CJES in Cadbury ultimately held as under: 75. In the light of the preceding considerations, the answer to the question referred must be that articles 43 and 48 EC must be interpreted as precluding the inclusion in the tax base of a resident company established in a member state of profits made by a CFC in another member state, where those profits are subject in that state to a lower level of taxation than that applicable in the first state, unless such inclusion relates only to wholly artificial arrangements intended to escape the national tax normally payable. Accordingly, such a tax measure must not be applied where it is proven, on the basis of objective factors which are ascertainable by third parties, that, despite the existence of tax motives, that CFC is actually established in the host member state and carries on genuine economic activities there. 175. Closer to the present cause, is a more recent judgment rendered by the Upper Tribunal (Tax And Chancery Chamber) in Burlington Loan Management DAC v Revenue and Customs Commissioners [(2024) UKUT 152 (TCC)]. The respondent before the Court was a resident in Ireland and subject to the UK-Republic of Ireland Double Taxa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... [19] made it clear that: (1) double tax treaties had to be interpreted in accordance with arts 31 and 32 of the Vienna Convention on the Law of Treaties; and (2) consequently, a double tax treaty had to be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose (see art 31(1)). 178. While seeking to identify the scope and ambit of Article 12 (5) that Tribunal also took note of the Commentary on the OECD Model Convention as would be evident from the following passages of that decision: [47] A provision similar to art 12 (5) of the UK-Ireland treaty is not included in the OECD model convention. But the commentary on the OECD model convention (the 2015 version which was the one in force at the material time) does contain material that, in our view, should be taken into account in determining the object and purpose of art 12 (5) of the UK-Ireland treaty. [48] In the commentary on art 1 of the OECD model convention, paras 7 to 26 contain material under the heading Improper use of the Convention . The commentary notes that: 7.1 Taxpayers may be tempted to abuse the tax laws of a S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that a taxpayer is entering into the type of abusive transactions referred to above. A guiding principle is that the benefits of a double taxation convention should not be available where a main purpose for entering into certain transactions or arrangements was to secure a more favourable tax position and obtaining that more favourable treatment in these circumstances would be contrary to the object and purpose of the relevant provisions. (our emphasis) [49] The commentary then goes on to observe that where specific avoidance techniques have been identified or are especially problematic, it will often be useful to include provision directly addressing the concern. At para 11, the commentary refers to a particularly prevalent form of improper use of the OECD model convention discussed in the Conduit Report. It notes that there has been a growing tendency towards the use of conduit companies to obtain treaty benefits not intended by the Contracting States and how this has led to an increasing number of member countries to implement treaty provisions (both general and specific) to counter abuse . The commentary then discusses a wide number of examples of possible solutions open to m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m, is to be taxed only in Ireland on the Post-Administration Interest. The question, therefore, is whether there is something abusive, in the particular circumstances of this case, for Ireland alone to tax interest beneficially owned by a company resident in its territory. 181. The Tribunal then proceeded to observe: [67] We accept that a tribunal of fact considering art 12 (5) may well consider it relevant to determine the extent of a person s knowledge of the treaty, including whether a party has taken steps to disguise their knowledge or avoid obtaining specific knowledge of its provisions. But those matters would simply form part of the factual enquiry to determine whether a person concerned in the creation or assignment of a debt claim has a main purpose of improperly taking advantage of the art 12(1) of the UK-Ireland treaty. We respectfully consider that the FTT went too far in saying, at [150], that a necessary condition for art 12 (5) to apply was that SICL knew that the purchaser of the SAAD Claim would be relying on art 12(1) specifically. We consider that to be an unjustified gloss on the actual words chosen by the contracting States in concluding the treaty. [68] Howev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ur country originates from Mauritius and which takes the pole position amongst the top ten nations which contribute to the FDI inflow into the country. 185. As was noticed by us hereinabove, Mauritius perhaps became the preferred destination for various investors who were desirous of routing investments towards the South East Asian economies and with India post the liberalization measures adopted in 1991 becoming one of the more favored and preferred destinations. Of equal significance appears to have been of Mauritius having positioned itself as being investment friendly, freed of bureaucratic red-tapeism and having adopted various ease of business measures much before that phrase became ubiquitous with nations vying amongst themselves to earn that title. Mauritius also appears to have entered into various bilateral and multilateral trade agreements and thus constructing a framework of advantageous tax treaties enabling investors to tap the potential of various emerging economies by setting up pooling investment entities in that nation. Out of the bulk of the FDI headed towards India in 2012, as was noted in Azadi Bachao Andolan, almost fifty per cent of the same originated from M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... standard and quality of life of their citizenry. Not only do these sentiments find resonance in paragraphs 247 to 249 of the report, the learned Judge pertinently observes that the mere establishment of an offshore company would not justify an assumption that they are involved in the activities of tax evasion or other criminal activities . It was held that the establishment of such entities or the creation of a holding structure straddling jurisdictions may in fact be motivated by sound commercial and legitimate tax planning reasons .. . The opinion also took note of the OECD report titled Harmful Tax Competition: An Emerging Global Issue and which had taken note of the important role discharged by offshore entities and whose fiscal residence may be driven by the economic need to penetrate different markets around the world or as part of legitimate financial planning. 188. Both Azadi Bachao as well as Vodafone then proceeded to identify the contingencies where courts or tax authorities would be justified in questioning the character of the investment or the originating entity. While repelling the argument of entities in Mauritius being mere shells and of treaty shopping being unet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lines the imperative of the look at doctrine being applied based on an evaluation of the transaction as a whole. Radhakrishnan J. while expounding on the extent of applicability of the lifting of the corporate veil principle pertinently observed that corporate structures would be liable to be ignored where it is misused for the accomplishment of a wrongful purpose or where it be found to be a mere fa ade. His Lordship observed that the aforenoted doctrine would be attracted where the transaction itself be found to be fraudulent, a sham, a circuitous device aimed at tax evasion. However, and notwithstanding these caveats, Radhakrishnan J. held that in the absence of a LOB clause coupled with the presence of Circular No. 789 of 2000 and the TRC, a Mauritian entity could not be denied benefits merely on the ground that the investment originated from that jurisdiction. His Lordship proceeded to hold that the mere establishment of a wholly owned subsidiary in Mauritius by principals having a genuine or substantially long-term investments in India can never be considered to have been set up for tax evasion . Proceeding to speak of TRC, his Lordship held that the same would not prevent th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 682 of 1994. The Union Government clarified that any gains derived by a Mauritian resident from alienation of shares would be taxable only in that country. Many years before the introduction of sub-section (4) in Section 90 and Rule 21AB in the Income Tax Rules 1962, the Union Government clarified vide Circular No. 789 of 2000 that a TRC would constitute sufficient evidence for accepting status of residence and beneficial ownership. Of seminal import were the amendments which were sought to be pushed through by virtue of Finance Bill 2013 and which sought to insert a provision in Section 90 intending to proclaim that while a TRC would be necessary to avail of treaty benefits, it would not constitute a sufficient basis for claiming benefits. As noticed hereinbefore, the said amendment was ultimately withdrawn as a consequence of a huge furore and the resounding negative clamour and opposition which came to be voiced in connection therewith. 193. More importantly we find that the position of the Union Government does not appear to have been opposed to what the Supreme Court ultimately held in Azadi Bachao Andolan and Vodafone. The Union as well as the Revenue appear to have accepte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 196. Then came the Finance Bill of 2013 which sought to introduce a provision which provided that a TRC would not be sufficient to claim benefits under a treaty. This proposed amendment was ultimately abandoned. The proposed amendment itself was sought to be explained away with the Press Release of 01 March 2013 in unequivocal terms explaining that proposed sub-section (5) was not intended to enable authorities to question the validity of such a certificate when produced. It was thus announced that TRCs would be duly accepted and that the tax authorities would not go behind that certification and question resident status. 197. The position of a TRC and the extent to which it would be conclusive was succinctly explained by the Bombay High Court in Bid Services Division (Mauritius) Ltd. v. Authority for Advance Rulings (Income-tax) and Others 2023 SCC OnLine Bom 2758 when it held: - 45. No doubt mere holding of a tax residency certificate cannot prevent an enquiry if it can be established that the interposed entity was a device to avoid tax. However, the decisions of the apex court cited above have clearly upheld the conclusivity of the tax residency certificate absent fraud or ill ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich is sufficient proof of its residence in Mauritius, which as noted above, cannot be enquired into unless there is a fraud or illegal activity, which in this case, has neither been alleged nor demonstrated. Even if as observed by the authority that the entire value creation activities are happening in India leading to rise in share valuations, in our view absence of any element of fraud or illegality that cannot be a reason to hold the petitioner's investment as a device to evade tax. The suggestions/findings with respect to shell company/conduit, in our view, would apply only in accordance with article 27A of the Mauritius Double Taxation Avoidance Agreement which is applicable for investment with effect from April 1, 2017 and not prior to that, and therefore, the same would have to be reconsidered in that light. 54. True that there may have been abuse of tax treaty laws and Contracting States have taken corrective measures to prevent abusive transactions by amending the bilateral conventions, however, as noted above, the amendments to the Mauritius Double Taxation Avoidance Agreement for plugging such transactions have been made effective from April 1, 2017, unless there i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t a TRC once found to have been issued by the competent authority must be accorded due weightage and its sanctity duly acknowledged. The TRC represents the first level of certification of the holder being a bona fide business entity domiciled in the Contracting State. The issuance of a TRC constitutes a mechanism adopted by the Contracting States themselves so as to dispel any speculation with respect to the fiscal residence of an entity. It therefore can neither be cursorily ignored nor would the Revenue be justified in doubting the presumption of validity which stands attached to that certificate bearing in mind the position taken by the Union itself of it constituting sufficient evidence of lawful and bona fide residence. Taking any other view would clearly be destructive of what Serco BPO aptly described as resulting in an erosion of faith and the trust reposed by the parties to the convention in each other. 200. Regard must also be had to the fact that when Vodafone was rendered, the DTAA was yet to incorporate provisions regulating entitlement of benefits. The TRC concept came to be adopted subsequently followed by the incorporation of a specific LOB clause in the Treaty itse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties as constituting treaty shopping. Cadbury Schweppes is yet another decision which holds that the mere establishment of a subsidiary in a favourable tax location would not in itself or per se amount to treaty shopping. It cautions against the adoption of a test which may amount to a general presumption of tax evasion or avoidance. Cadbury Schweppes lays emphasis on the charge of abuse or fraudulent conduct being based on objective evidence that may obtain in the facts of a particular case. 202. This decision, too thus reinforces our view that there cannot be an assumption of treaty shopping or abuse merely because a subsidiary or a related entity is established in a tax friendly jurisdiction. An allegation of abuse or fraudulent conduct would ultimately depend upon cogent material and evidence that may be found to exist in a particular case. In any case, the Revenue would be wholly unjustified in basing that view on a hypothetical and initial presumption. Each case would thus have to be tested on the basis of facts which obtain and which require the Revenue to examine and ascertain whether actual and tangible business activity was undertaken by such an entity. What treaties abho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efines a shell/conduit company as being one with negligible or nil business operations or one which fails to exhibit the carrying on of a real and continuous business. Paragraph 3 of Article 27A then specifies the empirical standards on the basis of which the status of an entity is liable to be ascertained based upon the extent of its expenditure on operations. Of significant import is Paragraph 4 and which specifies the circumstances in which it would be impermissible to assume that the entity is a shell or a conduit company. Article 27A thus not only lays in place a criterion where an entity would be deemed to be a shell or a mere conduit as well as contingencies in which a negative legal fiction would operate and dispel any assumption of that entity being a shell or a mere artifice. The DTAA thus specifically adopts provisions concerned with entitlement to benefits and thus embodies standards and tests which both Contracting States chose to adopt for the purposes of tackling instances of treaty shopping and abuse. 206. In our considered opinion, once LOB provisions come to be incorporated in a convention, it would be those provisions which would govern and be determinative of an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and narrow confines of fraud, illegal activity or where the transaction be contrary to the underlying objective and purpose of the treaty itself. Such conclusions would have to additionally meet the stringent degree of proof that we have spoken of in the preceding parts of this decision. We arrive at this conclusion bearing in mind the various Circulars issued by the Union from time to time, the roll back of the proposed 2013 amendment as well as the fact that despite the treaty having been renegotiated and amended in 2016, the Contracting States chose to carefully articulate the contingencies in which benefits could be denied and specified the qualification standards. 209. It is also pertinent to recall that Article 27A came to be included in the DTAA at a time when Chapter X-A had already come to exist on the statute book in terms of Finance Act, 2013 and with effect from 01 April 2016. The Contracting States being aware of the aforesaid as well as other significant amendments, including those pertaining to taxation of indirect transfers, made to the Act chose to grandfather all transactions pertaining to alienation of shares and which had been consummated prior to 01 April 2017. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cember 2011. The petitioners transferred their holding in Flipkart Online to Fit Holdings SARL, a company incorporated under the laws of Luxembourg on 18 August 2018. The petitioner is also stated to have incurred expenditure amounting to USD 1,063,709 roughly translating to MUR 36,436,182 as against the threshold of MUR 1,500,000 as prescribed in Article 27A. From the Financial Statement [P/12] for the period ending 31 December 2017 of Tiger Global II we further find that its total liabilities and shareholders equity stood at USD 1,764,819,299. The net increase in shareholders equity resulting from operations was pegged at USD 267,633, 593. Based on the aforesaid facts and which have remained uncontested or questioned, we find ourselves unable to hold that the petitioners lacked economic substance, had not undertaken any economic activity or were domiciled in Mauritius solely for the purposes of treaty abuse. Q. CHAPTER X-A AND GAAR 212. At this juncture, we deem it appropriate to briefly recapitulate the arguments made by learned counsels in relation to the applicability of the provisions of GAAR. To recall, Mr. Srivastava had submitted that Chapter X-A which came to be introduce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prescribed, such as those appearing in CBDT Circular No. 7 of 2017 and which we propose to advert to in greater detail in subsequent parts of this decision. Mr. Kaka had also argued that GAAR cannot be invoked once anti-abuse rules such as LOB clauses within taxation treaties are satisfied. 215. Prior to examining the correctness of the rival submissions addressed on this score, we deem it appropriate to provide a brief background pertaining to the formative history behind the enactment of the GAAR provisions. GAAR was first introduced on 16 March 2012 in the Finance Bill 2012 and draft guidelines to GAAR came to be released on 28 June 2012. Subsequent to the release of the said guidelines, an Expert Committee came to be constituted on 17 July 2012 consisting of Dr. Parthasarathi Shome and three others, to undertake consultations with myriad stakeholders, provide clarity on the legal conundrum arising as a result of the introduction of the said provisions and thereby finalize guidelines for application of GAAR. Accordingly, the Expert Committee submitted its report on 30 September 2012 and which came to be referred to as the Shome Committee Report . We find that the said report ren ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... following observations thus came to be rendered in the Indian context: - In the Indian case, GAAR has, therefore, been enacted as a codification of the proposition that, while interpreting the tax legislation, substance should be selected over a legal form. Transactions have to be real and are not to be looked at in isolation. The fact that they are legal, does not imply that they are acceptable with reference to the underlying meaning embedded in the fiscal statute. Thus, where there is no business purpose except to obtain a tax benefit, the GAAR provisions would not allow such a tax benefit to be availed through the tax statute. These propositions have comprised part of jurisprudence in direct tax laws as reflected in various judicial decisions. The GAAR provisions codify this substance over form basis of the tax law. It is, therefore, necessary and desirable to introduce a general anti-avoidance rule which will serve as a deterrent against such practices 219. The Shome Committee Report contemplated tax mitigation to be an intended consequence of the legislation and to be an attempt to minimize tax liability by the taxpayer as per existing law . Therefore, it was suggested that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thered 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. 222. Speaking specifically on Circular 789 of 2000, the Committee pertinently observed: - 3.15 Status of Circular 789 of 2000 with reference to Mauritius Treaty 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ligibility 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 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. xxxx xxxx xxxx Question no. 4: Will GAAR provisions apply where the jurisdiction of the FPI is finalised based on non-tax commercial considerations and such FPI has issued P-notes referencing Indian securities? Further, will GAAR be invoked with a view to denying treaty eligibility to a Special Purpose Vehicle (SPV), either on the ground that it is located in a tax friendly jurisdiction or on the ground that it does not have its own premises or skilled professional on its own roll as employees. Answer : For GAAR application, the issue, as may be arising regarding the choice of entity, location, etc., has to be resolved on the basis of the main purpose and other conditions provided under Section 96 of the Act. GAAR shall not be invoked merely on the ground that the entity is located in a tax efficient ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h Article 13 (3A) of the DTAA, it was submitted that sub-section (2A) of Section 90 is a clear indicator of the intent of the Legislature to accord an overriding effect upon the provisions contained in Chapter X-A and the Revenue thus being entitled to test a transaction on principles laid out in that section of the Act. Mr. Srivastava had also based his submissions on Rule 10U (2) to submit that the determinate date of 01 April 2017 stands overridden and would not save the transaction in question. Although the AAR has not alluded to GAAR or the various provisions comprised in Chapter X-A, since lengthy arguments were addressed on this score, we deem it appropriate to render the following observations. 226. However, and before we proceed down this path, it would be pertinent to note that it was the conceded position of parties of Article 13 (3A) being of critical importance for the purposes of adjudging whether the transaction stood grandfathered and placed in a safe harbour. This since undisputedly the shares in question were acquired prior to 01 April 2017. Our observations are thus not intended to constitute a broad enunciation on the scope of applicability of Chapter X-A and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Telstra Singapore Pte Ltd. 2024 SCC OnLine Del 5016 would be wholly impermissible. We had in that judgment held that adoption of such a line of reasoning would amount to accepting the right of the Legislature of one of the States to unilaterally amend or override provisions of a treaty. While rejecting such a contention we had in Telstra ultimately held as follows: - 69. Once we recognise the Convention as the constant, it becomes apparent that changes in domestic legislation cannot, principally speaking, override the treaty provisions. If a contrarian position were to be accepted, it would lead us to hold that treaty provisions could be amended or overcome based upon the will of Legislatures of independent nations to amend domestic legislation unilaterally and without being bound by the Convention. That is clearly not the position which merits acceptance from either a constitutional or statutory point of view. It is this fundamental position which appears to have weighed upon the Court in New Skies Satellite to observe that a treaty cannot be overridden by independent legislative amendments that a contracting nation may choose to introduce. The fact that treaty provisions superve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he paid interest at the rate of 5% per annum offered by him. What is important however, is that sub-section (3) is not independent of sub-section (2) but is interconnected with it. The words without prejudice to the provisions contained in sub-section (2) clearly show that any order passed by the Income Tax officer under sub-section (3) must neither be inconsistent with nor prejudicial to the provisions contained in sub-section (2). In other words, the Position is that although sub-section (3) is an independent provision the power under this sub-section has to be exercised subject to the terms and conditions mentioned in sub-section (2) so far as they apply to the facts mentioned in sub-section (3). Thus if sub-section (2) of Section 220 provided that the rate of interest chargeable would be four per cent per annum any order passed under sub-section (3) could not vary that rate, and if it did, then the order to that extent would stand superseded. The argument of the assessee is that sub-sections (2) and (3) of Section 220 were independent provisions which operated in fields of their own. We are, however, unable to accept this somewhat broad proposition of law. Sub-sections (2) and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s update in 2014, the OECD Model Commentary now states when someone cannot be regarded as the beneficial owner, namely when the recipient's right to use and enjoy the dividend is constrained by a contractual or legal obligation to pass on the payment received to another person . However, prior to this addition to the Model Commentary (2014), various courts had already applied this forwarding approach. Nevertheless, the manner in which such an obligation may arise so that beneficial ownership is denied was not answered uniformly. In general, there are two different lines of reasoning; First, the legal approach that asks whether there is a legal obligation to forward the received payment. Second, the economic approach according to which a factual obligation to forward the income is also harmful to beneficial ownership. For example, in the Canadian Pr vost case, the court followed the legal approach. It found that a Netherlands holding company, which had no employees and no assets other than the shares of a Canadian subsidiary (Pr vost) could be regarded as the beneficial owner of the received dividends since there was no predetermined or automatic flow of these dividends to its s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yment on the basis of facts and circumstances . Jim nez (2011) also notes that one of the major problems of host of the decisions studied (with the exception of Pr vost) is their tendency to resort to economic interpretation , when all that was needed in the cases they considered was probably no more than legal interpretation 236. Proceeding further to explain beneficial ownership on a more fundamental plane, the learned author makes the following pertinent observations:- 4.5 Beneficial ownership as a basic principle As stated by Arnold (2011), the concept of beneficial ownership is a basic principle of income taxation: the beneficial owner of income is the person who should be taxed on the income. Accordingly, this basic principle of taxation on the basis of beneficial ownership is implicit in all of the distributive articles of the tax treaty and, to that extent, the explicit reference to beneficial owner in Arts. 10, 11, and 12 of the OECD Model does not add anything . Accordingly, the term beneficial owner has no normative meaning on its own. Similarly, Lang (2008) also takes the view that the term has no normative meaning, but is merely an indication that one has to apply an e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le similar to a GAAR will probably be halted, especially due to the recent introduction of the PPT into the OECD Model (2017). Indeed, it will be interesting to observe how courts will assess the relationship between these two provisions. Maybe the PPT will be regarded as the sole means of tackling conduit company situations, which will eventually render the discussion on the meaning of beneficial ownership insignificant. 238. Angelika Meindl Ringler, in her work titled Beneficial Ownership in International Tax Law [Chapter 4, Scholarly Discussion , Beneficial Ownership in International Taxation Law, Angelika-Meindl Ringler] offers the following insights. Referring firstly to Klaus Vogel s work on double taxation conventions, Meindl Ringler observes:- 1. KLAUS VOGEL Klaus Vogel in his book on Double Taxation Conventions states that the reason for the inclusion of beneficial ownership in the OECD Model was to prevent treaty shopping by the use of intermediaries. Beneficial ownership should not be interpreted with reference to domestic law, as precise definitions cannot be found in the domestic tax systems in question. Rather, beneficial ownership should be interpreted taking into ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the beneficial owner of the income. However, Vogel links the power to decide on the use of the asset to the income in question because the decision to use the asset for generating income is a necessary prerequisite for the income flow. Vogel's approach has a strong substance-over-form focus, which becomes even clearer when he talks about the factual and legal restrictions of control over the assets or income. 239. Noticing the explanation of the precept of beneficial ownership as explained by Philip Baker, the learned author observes as under:- According to Philip Baker, the OECD uses beneficial ownership to exclude agents, nominees and any other conduit who has very narrow powers over the income which render the conduit a mere fiduciary or administrator of the income on behalf of the beneficial owner from claiming treaty benefits. Simply being a conduit is, thus, not sufficient to be excluded under the beneficial ownership test. Even a trustee can qualify as the beneficial owner of income as long as he is not an agent, nominee or conduit with very narrow powers. Baker finds the OECD's approach focusing on a binding obligation to forward the income to another person approp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed on the facts available (not taking into account the economics of an arrangement) and should exclude agents, nominees and conduits with very narrow powers over the income from treaty benefits. Also, beneficial ownership is not a matter of ultimate ownership but of who receives the income for one's own benefit. Based on these conclusions, De Broe proposes a two-step test for determining beneficial ownership. In a first step, the focus should be on whether the state of residence attributes income to the intermediary (i.e., on the liability to tax). If so, in a second step, the ownership attributes of the intermediary should be taken into account. The question is whether (1) the intermediary has the fructus, i.e., whether it can claim the income for its own account and benefit (hereby. Baker's insolvency scenario can be of assistance). Also, it is relevant whether (2) the conduit has the usus of the income and of the assets or the claim on the income and the potential of abusus of the income and of the assets or the claim . It is, thus, necessary that the conduit is able to freely avail of the income and that it is not contractually obligated to forward the income to another ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, attributes-of-ownership and forwarding approach can be found. The best example in that regard is the approach taken by De Broe 242. As is manifest from the aforesaid passages and the views expressed by leading authorities on international tax planning, emphasis is essentially laid on the facet of ownership attributes. The views so expressed thus bid us to discern a legal obligation which binds the recipient to forward the income to another person. The views expressed commends the question to be posed being whether the intermediary could claim the income for its own account and benefit. It thus proposes that if it were found that the conduit was able to avail the income itself, and was not contractually obligated to forward that income to another person, it would clearly be incorrect to impute the principles of beneficial ownership in such a contextual setting. The core of the aforesaid precepts would appear to be aspects of ownership and control over the income, a right of disposal or a contractual obligation to pass on the same to another. 243. Both Vogel and Baker thus bid us to ascertain and discern the true controller of the income, the entity which decides the use of the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve weighed upon that High Court on facts was the RBI approval to the transaction itself proceeding on the basis of the JVA and which had contemplated the shares allotted to the Mauritian entity ultimately vesting in the US principal. It was in the aforesaid facts that the High Court came to hold that the Mauritian entity was a permitted transferee of AT T USA. It ultimately came to hold that the TRC held by AT T Mauritius would be of no avail. 246. It would be pertinent to recall that Mr. Srivastava had argued that the petitioners had not disclosed the identity of the entity who may have received the sale consideration. However, and in the absence of any material or evidence on which the assertion of beneficial ownership was sought to be founded, we are constrained to observe that the submission noticed above proceeded on mere surmises and conjectures. This, since the respondents have not pointed to any evidence of the revenue obtained by the petitioner, TG III and TG IV having been forwarded to a third party. The search for the ultimate recipient too proceeds on the conjecture and premise that the revenue may have been transmitted to a third party. Quite apart from such a course b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h structuring as being motivated by ulterior motives or a design to reap illegitimate benefits. The precept of piercing the corporate veil owes its genesis to striking at illegality, attempts to perpetuate fraud and abuse of benefits. Unless it be found and established that such structuring is designed to obtain illegitimate or illegal gains, abuse the underlying objective of conventions, it would be wholly erroneous to place such entities under an initial or negative burden of proof. 250. Those precepts when juxtaposed with the favourable foundation which Mauritius laid in place for businesses to base themselves in that island nation leads us to hold that the Revenue would be clearly obliged to meet a high standard of proof when alleging avoidance and abuse. Our view in this regard stands further fortified from the various clarificatory directives issued by the Union from time, the roll back of the 2013 amendments and the amending Protocols which came to be signed from time to time. Those executive actions were clearly aimed at allaying and squashing any preconceived notions that may have been harboured. 251. As the Supreme Court explained in Azadi Bachao Andolan and Vodafone, tre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter X-A may apply needs no further elaboration. 254. Subsidiaries are ordained by law to have a distinct and independent legal persona and which is liable to be ignored only in rare contingencies. Absent apparent and evident attempts at sustaining or perpetuating fraud, camouflaging sham transactions, shroud an illegality, the said precept is not liable to be readily or lightly invoked. It is only in cases where it is found that the entity so created has no apparent or real economic substance that one would be justified in imputing that precept. As our Supreme Court lucidly explains, the sheen of corporate personality is liable to be ignored where the entity be found to have been created to perpetuate an illegality or where it is found to have no real personality having been merely interposed to overcome legal requirements and barriers. It is in the aforesaid context that the Supreme Court spoke of entities being puppets and lacking in economic substance. 255. When tested on the aforenoted basic principles and viewed in light of the facts of our case, the position which emerges is as follows. The petitioner, III and IV clearly appear to have been incorporated to act as pooling inve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is also pertinent to recall that the petitioner, TG III and TG IV made the investments in Flipkart Singapore on the strength of funds which were provided by its equity shareholders. It was their categorical case that those funds did not originate from TGM LLC and that in fact, the said entity was not even an equity partner in any of the petitioners. The charts and the holding structure as depicted by the respondents proceeded on the unsubstantiated allegation that the said entity was the parent or the holding entity. This assumption was not only contrary to the stand of the petitioners, namely, of TGM LLC merely being the investment manager, it also proceeded in ignorance of their categorical stand that the said entity held no shareholding or other investment interest in the pooling vehicles. It was also not shown to have invested through the 500 investors who had entrusted funds for deployment with the petitioner, TG III and TG IV. 259. Although elaborate submissions were addressed by Mr. Srivastava doubting the independence and authority of the BoD of the petitioners, those submissions have left us unimpressed for the following reasons. It must at the outset be noted that it wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etings having used the expression noted and ratified , we find that the submission is firstly based on a selective reading of parts of the minutes. The contention also fails to bear in mind that the resolutions as ultimately drawn when read in their entirety would unerringly point towards the decisions being ultimately taken by the Board collectively. Those minutes speak of the BoD of the petitioner, TG III and TG IV having resolved to take the various decisions which stood recorded therein. 263. Equally misconceived was the argument which proceeded on the basis of the signing power which came to be granted to Mr. Charles P Coleman, where remittances over USD 250 million were involved. It must at the outset be noted that the petitioners had firstly explained that the power conferred on certain individuals to operate the bank accounts was a decision taken by the Board as a whole. The placement of those individuals was itself explained to be on account of the fiduciary duty which stood placed on the investment manager. We also bear in mind the resolution passed on 03 November 2014 and when the Board resolved that all payments and wire instructions would be necessarily countersigned b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in mind that it was the stated case of the petitioners that those shares derived their value from underlying assets situate in India. If the aforesaid flawed reasoning of the AAR were to be accepted, the transaction itself would have been freed of any tax implications under the Act. The AAR clearly failed to bear in mind that the sale transaction had been undertaken at a time by which the Act had brought indirect transfers within the realm of taxation under Section 9. This thus does not even appear to have been an issue of disputation. In fact if the respondents had doubted this proposition, their very authority to tax or for the subject transaction being exigible under the Act would have been rendered unsustainable. The AAR has thus essentially built a case which was neither urged nor canvassed by either side. 268. The AAR has also drawn adverse inference from the role assigned and conferred upon Mr. Coleman ignoring the asserted case of the petitioners that he did not hold any shares in the three Mauritian entities let alone a controlling equity interest in them. It also appears to have doubted the commercial wisdom of placing non-Mauritius residents on the BoD. The petitioners h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,000 as prescribed in Article 27A and additionally had its total liabilities and shareholders equity at USD 1,764,819,299 with its net increase in shareholders equity resulting from operations being pegged at USD 267,633,593. Therefore, and in view of the aforenoted facts the petitioner cannot be said to be lacking in economic substance or that it was domiciled in Mauritius with a sole view of engaging in treaty abuse. E. A parent or a holding company would have a legitimate right to exercise oversight and broad supervision over the affairs of its subsidiaries which could conceivably take the form of seats on the BoD, appointment of key managerial personnel, auditing of affairs of the subsidiary and so on. Subsidiaries are also recognised in law to have a distinct and independent legal persona which is liable to be ignored only in the event of apparent fraud, being interposed with a view to camouflage sham transactions or of being created to perpetuate an illegality and of being a mere puppet and lacking in economic substance. F. Merely because a parent entity may exercise shareholder influence over its subsidiary that would not lead to an assumption that the subsidiary in question ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the facts and data available on the record, we are of the view that it would be wholly erroneous to presume that investments originating from Mauritius are inherently suspect or that fiscal residence of an entity in Mauritius would require viewing such entities through a tainted prism. J. The establishment of investment vehicles in tax friendly jurisdictions cannot be considered to be an anomaly or give rise to a presumption of being situate in those destinations for the purpose of evading tax or engaging in treaty abuse. The decision of Azadi Bachao Andolan acknowledged how nations seek to compete with each other by highlighting treaty benefits that could be obtained by investors from its treaty networks, because of which there was nothing inherently objectionable about treaty shopping but that any concerns surrounding the practice of treaty shopping is best left for the consideration of the executive which may examine the political and economic implications of any measures taken by it to combat treaty shopping, particularly in light of the changing world order requiring nations to adopt measures to attract capital and technological inflows. K. In a similar vein the decision o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eil of a TRC holding entity is restricted to extremely narrow circumstances of tax fraud, sham transactions, camouflaging of illegal activities and the complete absence of economic substance and the establishment of those charges would have to meet stringent and onerous standards of proof and the Revenue being required to base such conclusions on cogent and convincing evidence and not suspicion alone. It is only when the Revenue is able to meet such a threshold that it can disregard the presumption of validity which would be attracted the moment the TRC is produced and LOB conditions are fulfilled. O. Treaties are entered into by Contracting States in exercise of their sovereign powers and based on economic and political considerations. In view of the same, such reciprocal arrangements cannot be subjected to aspersions cast on its validity. It would accordingly be erroneous for courts to manufacture grounds of disqualification from treaty benefits over and above those as formulated by the Contracting States. Section 90 of the Act itself formulates the legislative intent to lend primacy to treaty enactments. Courts have accordingly taken the consistent stand that treaty benefits oug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e contrary would amount to privileging domestic legislation over and above the enactments in the treaty provisions adopted by Contracting States and would amount to holding that jurisdiction inheres in taxing authorities to question the validity of transaction on parameters alien to the negotiated terms of the treaty. U. Furthermore, the LOB clause in the India-Mauritius DTAA came to be included when Chapter X-A had already come to exist and Article 27A accordingly chose to grandfather all transactions relating to alienation of shares acquired prior to 01 April 2017. This further lends credence to the position that the Contracting States formulated LOB provisions bearing in mind the enactments in the domestic legislation because of which the Revenue is not entitled to erect additional barriers towards the receipt of treaty benefits by parties. V. In view of the aforesaid we find that LOB provisions and the TRC comprehensively and adequately addresses concerns in relation to potential treaty abuse and it would be impermissible for the Revenue to manufacture additional roadblocks or standards that parties would be required to meet in order to avail of DTAA benefits, subject to caveat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hed that the holder of income had no control over the income and merely holds the same till such time it be instructed to deploy that income to another entity or if the income is controlled or regulated by a third party with the holder having no real or substantive control over that income. BB. Tested on those precepts, it is apparent that TGM LLC cannot be said to be the beneficial owner of shares since no evidence has been rendered to suggest that the writ petitioners are under a contractual or legal obligation to transmit revenue to TGM LLC or that the revenue obtained from transfer of shareholding was as a result of actions undertaken by the writ petitioners at the behest of TGM LLC. As a result, and in the absence of any material or evidence underlying the claims made with respect to beneficial ownership, we are of the view that such submissions are based on mere surmises and conjectures. U. OPERATIVE DIRECTIONS 270. We consequently and for all the aforesaid reasons come to the firm conclusion that the impugned order of the AAR dated 26 March 2020 suffers from manifest and patent illegalities. The impugned order takes a wholly untenable and unsustainable view with respect to t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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