Background: Azadi Bachao Andolan (ABA) is a non-governmental organization based in India that focuses on issues related to trade, economics, and taxation. The case arose from a dispute over the interpretation and application of the Double Taxation Avoidance Agreement (DTAA) between India and Mauritius.
The dispute centered around a transaction involving the sale of shares of an Indian company by a Mauritian company. The Mauritian company, which held the shares, didn’t pay capital gains tax in India, citing the provisions of the India-Mauritius DTAA.
Legal Dispute: The primary issue in this case was whether the Mauritian company, being a resident of Mauritius and benefiting from the DTAA, was liable to pay capital gains tax in India on the sale of shares in the Indian company. The Indian tax authorities contended that the transaction was an abuse of the DTAA, alleging that the Mauritian company was used solely for the purpose of avoiding taxes.
Court Proceedings: The case was heard by the Supreme Court of India. The central question before the court was whether the doctrine of “substance over form” should be applied to disregard the legal structure of the transaction and assess its economic substance and purpose.
Supreme Court’s Decision: In its judgment delivered on August 8, 2003, the Supreme Court of India ruled in favor of the taxpayer, Azadi Bachao Andolan. The court held that the transaction should be respected according to its legal form and that the Indian tax authorities couldn’t disregard the benefits of the DTAA.
The court’s decision highlighted the importance of adhering to the legal form of transactions, particularly when the transaction’s purpose was not solely tax avoidance. The court indicated that if the transaction had a genuine commercial or economic purpose beyond tax avoidance, the tax benefits of the DTAA should be available to the taxpayer.
The court also noted that tax avoidance strategies could be scrutinized if they were purely for the purpose of evading taxes and didn’t have any legitimate business purpose.
Impact: The Azadi Bachao Andolan case had implications for the interpretation of tax treaties and the application of the “substance over form” principle. The decision underscored that while tax planning is legitimate and taxpayers are entitled to structure their transactions to minimize taxes, transactions must have a legitimate commercial or economic purpose beyond tax benefits.
It’s important to note that tax laws and interpretations can evolve over time, and subsequent developments may have influenced the approach to assessing transactions involving tax treaties and cross-border structures.
Please note that my information is based on the state of knowledge as of September 2021, and there may have been further developments or changes since that time.
