countries into India directly). Those investors had decided to use the Indo-Mauritius tax treaty because of its advantageous tax features (tax treaty shopping). A scheme was structured via a conduit company based in Mauritius to channel investment from, say, the Netherlands to India in such a way so that capital gains were not taxed in either country (double non-taxation). For example, the alienation of shares of companies based in India controlled from a conduit company based in Mauritius was not subject to capital gains either in India or in Mauritius under the India-Mauritius tax treaty. Moreover, that flow
was not taxed by Netherlands domestic law either. The main issue before the Indian
Supreme Court was whether this scheme was valid under the India-Mauritius tax treaty, considering that the only justification for channelling the investment in that way was tax avoidance. The Indian Supreme Court described the term "tax treaty shopping" as "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." The Indian Supreme Court decided the case in favour of the taxpayer. It argued that the tax treaty shopping at issue in this case was lawful and reversed the lower court decision. The Supreme Court elaborated two independent arguments for backing its decision. The first argument is based on law and economics, and the second on legal considerations. The Indian Supreme Court elaborated its law-and-economics analysis as follows. It focused on the
cost/benefit implications of tax treaty shopping as a vehicle for attracting FDI to India.
Vodafone Hutchinson Controversy This case technically was about withholding tax but the underlying argument that arose was whether overseas M&A transactions, with
underlying Indian assets, are taxable in India? The Honorable Bombay High Court held that,
“When the dominant purpose of entering into agreements between the two foreigners is to acquire the controlling interest which one foreign company held in the Indian company, by other foreign company, the transaction would certainly be subject to municipal laws of India, including the Indian Income Tax Act as per Effects Doctrine. Therefore Any profit
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