The Supreme Court affirmed that tax treaties cannot be exploited for avoidance, emphasizing that tax residency claims must be substantiated by proof of genuine commercial activities, and transactions structured solely to avoid tax may be reclassified for tax purposes.

JUDGMENT :

R. MAHADEVAN, J.

1. Delay condoned.

2. Leave granted. The present appeals arise from a final judgment and common order dated 28.08.2024 passed by the High Court of Delhi at New Delhi¹[Hereinafter referred to as “the High Court”] in W.P. (C) Nos. 6764, 6765 and 6766 of 2020 and are, therefore, disposed of by this common judgment.

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

I. INTRODUCTION

4. The power of an independent Republic to levy and collect tax forms part of its inherent sovereign functions, and such power is circumscribed only by the requirement of being within the authority of law. Article 265 of the Constitution of India envisages the same. In a world where nations must necessarily engage with each other for mutual economic growth through trade, commerce and business, and for reasons of economic policy, international cooperation, and diplomatic balance, the power of each nation is often exercised in tune with such bilateral or multilateral agreements, which do not take away such inherent power but which now stand shaped by the legal framework agreed to between the parties. Having said this, it is for the legislatures to employ their discretion to innovate through the empirical process and in line with treaty obligations, evolve new ways of tapping revenue and placing checks on new methods and devices of tax evasion that may have arisen by abuse of beneficial provisions based on treaties. Here, the Court will have to tread carefully and cautiously to ascertain whether the action of the Revenue is within the contours of law – meaning constitutional, statutory and treaty obligations – in order that fiscal difficulties are addressed by the State in line with its own fiscal wisdom and policy.

4.1. India has developed an extensive network of DOUBLE TAXATION AVOIDANCE AGREEMENT s. Among these, its treaty with Mauritius has been particularly significant, shaping patterns of foreign investment since the early 1980s, and is germane to the present case. The India – Mauritius DOUBLE TAXATION AVOIDANCE AGREEMENT ²[For short, “DTAA”], signed in Port Louis on 24 August 1982 and effective in both jurisdictions from 1983, soon gave rise to what became known as the Mauritius Route. Investors favoured this structure for the beneficial provisions of the treaty combined with Mauritius’ domestic tax regime. While this significantly helped foreign capital inflows, it also attracted mounting scrutiny. Concerns were raised that the treaty, entered into with the intent to prevent double taxation, was being used to achieve non-taxation, particularly in respect of capital gains. Entities were incorporated in Mauritius solely to take advantage of treaty benefits. This created serious issues of treaty shopping, tax avoidance, and the integrity of the international tax system.

4.2.