(2024) 464 ITR 1 (Del)
Income deemed to accrue or arise in India; double taxation relief; applicability of the General Anti-Avoidance Rule
No. Grandfathering under the protocol protects investments acquired before the cut-off date and cannot be withheld by characterising the structure as designed for treaty benefit. A valid residency certificate cannot be brushed aside, and avoidance must be established through the proper statutory route.
Can treaty grandfathering for investments made before 1 April 2017 be denied on the footing that the Mauritius holding structure was designed to obtain treaty benefits, and may the authority look behind a valid tax residency certificate to do so?
Mauritius-incorporated entities within the Tiger Global group held shares in a Singapore company which in turn held the Indian operating business. In 2018 those shares were sold as part of the acquisition of the group by a large retailer. The entities applied to the Authority for Advance Rulings for a determination that the gains were exempt, relying on the capital gains article of the India–Mauritius treaty together with the protocol grandfathering investments acquired before 1 April 2017. They held valid tax residency certificates issued by the Mauritius authorities. The Authority declined relief, taking the view that the Mauritius entities were interposed without commercial substance, that real control lay with the group's United States management, and that the arrangement was designed prima facie for the avoidance of tax.
The applicants challenged the Authority's ruling by writ petition before the Delhi High Court, which set the ruling aside and held the applicants entitled to the treaty benefit.
For the assessee
The shares had been acquired well before the cut-off date and the protocol expressly grandfathers such investments; that protection was the very assurance on which the investment was made. Valid residency certificates had been issued, and the Board's own circulars direct that such certificates be accepted. If the Revenue considers the arrangement abusive, the statute supplies a general anti-avoidance mechanism with its own safeguards and approval process, which was not invoked.
For the Revenue
The Mauritius entities had no employees, no independent decision-making and negligible presence, and every commercial decision was taken by the group's principals abroad. Treaty benefits are intended for genuine residents, and an arrangement whose only purpose is to access the treaty may be denied relief on the footing that it is prima facie designed for avoidance.
The Court held that the Authority had approached the matter incorrectly at several levels. On grandfathering, it held that the protocol's protection for investments acquired before the cut-off date is a deliberate and negotiated assurance, extended so that investors who committed capital under the earlier regime would not be affected by the renegotiation. To deny that protection by reasoning that the structure exists to obtain treaty benefits would deprive the grandfathering clause of content, since every investment it protects was made through the treaty jurisdiction. On the residency certificate, the Court applied the established line of authority holding that such a certificate is sufficient evidence of residence and beneficial ownership, that Board circulars to that effect bind the Revenue, and that an authority cannot go behind it on an impressionistic assessment of substance. On avoidance, the Court held that where the Revenue considers an arrangement impermissible, the statute provides a general anti-avoidance mechanism subject to defined conditions, a specified approval process and prescribed safeguards; a finding of avoidance cannot be arrived at outside that framework merely by invoking the language of design and purpose. The ruling was accordingly quashed.
The leading recent authority on Mauritius and Singapore treaty structures holding grandfathered investments, which remain substantial in Indian private equity and venture capital. Under the IT Act 2025 the analysis runs through Section 9 for the indirect transfer charge, Section 159 for treaty relief, and Sections 178 to 184 for the general anti-avoidance rule. Its most practically important holding is the insistence that avoidance be pursued through the statutory anti-avoidance machinery rather than asserted at large. Read with Azadi Bachao and Blackstone Capital on residency certificates.