Mining giant Vedanta Ltd has approached the Delhi High Court to contest a significant tax demand from the income tax department, which alleges the company improperly gained a tax advantage of approximately ₹1,308 crore by using the India-Mauritius tax treaty.
Court Halts Coercive Action as Legal Battle Begins
The legal challenge was filed through the promoter entity, Vedanta Holdings Mauritius II Ltd (VHML). A division bench led by Justice Prathiba M. Singh heard the writ petition on 4 December and issued an interim order restraining the tax department from taking any coercive measures or issuing a final assessment order. The next hearing in the case is scheduled for 18 December.
The dispute stems from an order passed by the General Anti-Avoidance Rules (GAAR) approving panel on 28 November. The panel not only upheld the tax avoidance allegation but also sanctioned an additional tax liability of ₹138 crore on the Vedanta group.
The Core of the Tax Department's Allegations
Central to the conflict is whether VHML was established primarily as a vehicle to secure a lower tax rate following Vedanta's failed delisting attempt in 2020. The tax authorities argue that VHML was incorporated soon after India scrapped the Dividend Distribution Tax (DDT) in April 2020.
The department contends that intra-group share transfers were orchestrated to increase VHML's stake in Vedanta Ltd above the 10% threshold. This threshold is crucial under the India-Mauritius Double Taxation Avoidance Agreement (DTAA), as it qualifies the holder for a concessional 5% withholding tax rate on dividends, compared to the standard domestic rate of 10-15%.
The GAAR panel classified this arrangement as an "impermissible avoidance arrangement," stating it lacked commercial substance and was engineered mainly for tax savings. The panel's calculations indicated VHML derived benefits of ₹221 crore in Assessment Year (AY) 2022-23, ₹672 crore in AY 2023-24, and ₹415 crore in AY 2024-25.
Vedanta's Defence and the Broader Context
In its petition, Vedanta has strongly denied any tax avoidance motive. The company asserts that VHML was created as a financing vehicle to support its 2020 delisting plan during the COVID-19 crisis, a time when the promoter group faced severe financial pressure.
Vedanta stated the objectives were corporate simplification, streamlining dividend flow to service debt, and offering a fair exit to public shareholders. The company emphasized that VHML raised $1.4 billion through commercial borrowings, paid capital gains tax on share transfers, and holds a valid tax residency certificate in Mauritius. Vedanta also raised concerns about procedural fairness, alleging key documents were withheld by the GAAR panel.
This case is being closely watched as it touches upon the sensitive interpretation of tax treaties. A parallel and pivotal matter involving Tiger Global and Flipkart, concerning treaty protection for Mauritius-based funds, is currently awaiting judgment in the Supreme Court. The outcome of these cases could have far-reaching implications for international investment structures and treaty-based tax benefits in India.
