Vedanta moves Delhi high court against taxman’s ₹1,308-cr avoidance allegation under India–Mauritius treaty
The panel that approves the tax authority’s general anti-avoidance rules (GAAR) also said on November 28 that: ₹138 crore in the group.
The writ petition was heard by a division bench headed by Justice Prathiba M. Singh on Thursday, December 4, which restrained the tax department from taking coercive action or issuing an assessment order till the next hearing on December 18.
According to the court files examined Mint, Vedanta appealed the GAAR approval panel’s decision classifying its Mauritius-based holding structure as an “impermissible avoidance arrangement”.
The panel concluded that the group secured treaty benefits by routing promoter shares through Mauritius to access the dividend withholding tax rate of 5% instead of the 10-15% applicable under the India-Mauritius double taxation avoidance agreement (DTAA).
He argued that the structure lacked commercial content and was designed primarily for tax saving purposes.
mint Emailed questions to Vedanta seeking comment remained unanswered by press time.
What the dispute is about
The dispute centers on whether Vedanta created and used VHML primarily to secure a preferential treaty tax rate following its delisting attempt in 2020.
The tax department argues that VHML was formed soon after India abolished dividend distribution tax (DDT) in April 2020 and that intra-group share transfers were arranged to increase VHML’s stake above 10%, the threshold required to qualify for a 5% treaty rate under the India-Mauritius DTAA.
The Ministry claims that VHML has no real commercial purpose and is only used to route entrepreneurial share ownership through Mauritius.
The promoter shares in Vedanta Ltd have never substantially changed and the arrangement is approx. ₹1,308 crore, which becomes an impermissible avoidance arrangement under GAAR.
The GAAR order states that VHML reported taxes by: ₹116.12 crore for the assessment year 2022-23, while implementation of GAAR will result in a liability of 116.12 crore. ₹337.15 crore, i.e. ₹221 crore benefit. Benefits ₹672 crore (AY 2023–24) and ₹415 crore (AY 2024–25) is also quoted.
GAAR, introduced through the Finance Act 2012 and implemented from 1 April 2017, gives tax authorities the power to ignore or redefine transactions designed primarily for the purpose of avoiding tax, even if they comply with statutory form.
The GAAR approval panel is a three-member independent authority headed by a retired high court judge, which must approve any move to implement the provisions of the GAAR.
Arguments of Vedanta
Vedanta has denied any tax evasion motive and said VHML was created as a financing vehicle to support the company’s delisting plan during the covid-19 crisis, when the promoter group faced severe leverage pressure and Vedanta shares weakened.
“The intention behind delisting as well as corporate simplification was to facilitate the flow of dividends from VEDL to VRL and reduce dividend leakage to minority shareholders, which will enable more efficient debt servicing by VRL and improve the credit rating of the Vedanta Group as a whole,” the petition said. The statement was included.
“Another goal of ours was to provide public investors with a fair exit opportunity at a value well above the current share price.”
The court argued that VHML raised funds through business borrowings, that capital gains tax was paid on share transfers, and that the entity had genuine substance, including a certificate of tax residence in Mauritius. Vedanta also alleged procedural injustice, stating that important documents, including satisfaction notes, were withheld by the GAAR panel.
Background
The dispute dates back to Vedanta’s proposal in 2020 to delist Vedanta Ltd. and consolidate promoter assets through Sebi’s reverse book-building mechanism aimed at enhancing liquidity.
This was driven by Vedanta Resources Ltd.’s $7 billion debt dependence on dividend inflows. Delisting offer ₹87.50 per share failed in October 2020 due to inadequate public tenders.
Vedanta later acquired VHML on June 29, 2020, raising $1.4 billion and acquiring a 13.26% stake in Vedanta Ltd in five tranches from public shareholders and group entities Finsider (UK) and Westglobe (Mauritius) between December 2020 and December 2021.
VHML was later retrieved ₹1,543 crore dividends and 5% withholding tax under DTAA were paid.
The India-Mauritius DTAA, signed in 1983, has long been a preferred route for global investment due to its historically capital gains exemptions and preferential tax rates, including a reduced 5% dividend tax rate when shareholding exceeds 10%.
A closely watched parallel is the Tiger Global-Flipkart dispute, in which Mauritius-based funds sought treaty protection against capital gains tax. The Delhi high court initially upheld the merits of the agreement, but the matter reached the Supreme Court, which stayed it and reserved the order. The final decision is expected to have significant impacts on treaty-based tax benefits.
