Vedanta's ₹1,308 Crore Tax Fight: Delhi High Court Steps In!

Vedanta Challenges ₹1,308 Crore Tax Claim in Delhi High Court

Vedanta Limited, through its promoter entity Vedanta Holdings Mauritius II Ltd (VHML), has initiated legal proceedings in the Delhi High Court to contest a substantial tax claim. The income tax department alleges that the conglomerate gained an undue tax advantage of approximately ₹1,308 crore by allegedly misusing the India-Mauritius tax treaty.

GAAR Panel's Decision
The dispute gained traction when the tax department’s General Anti-Avoidance Rules (GAAR) approving panel, on November 28, sided with the tax authorities. The panel classified Vedanta's Mauritius-based holding structure as an “impermissible avoidance arrangement,” concluding it was primarily engineered for tax savings. This decision also allowed for a potential tax liability of ₹138 crore on the group.

Court Intervention and Interim Relief
A division bench of the Delhi High Court, led by Justice Prathiba M. Singh, heard Vedanta's writ petition on Thursday, December 4. The court has since put a temporary halt on the tax department's ability to take coercive actions or issue a final assessment order until the next hearing scheduled for December 18.

Vedanta's Defense and Rationale
Vedanta has denied any tax-avoidance motive. The company argues that VHML was established as a financing vehicle to support its delisting plan during the challenging COVID-19 period. This was necessary when the promoter group faced significant leverage pressures and the company's stock was underperforming. According to Vedanta’s petition, the objective was to streamline dividend flows, reduce leakage, enable efficient debt servicing, and improve the group's credit rating. It also aimed to provide a fair exit to public investors.

Vedanta further contends that VHML raised funds through commercial borrowings, paid capital gains tax on share transfers, and possesses genuine substance, including a tax residency certificate in Mauritius. The company has also raised concerns about procedural unfairness, citing withheld key documents.

The Core of the Dispute
The tax department's argument is that VHML was incorporated shortly after India abolished dividend distribution tax (DDT) in April 2020. It alleges that intra-group share transfers were strategically managed to push VHML's stake above the 10% threshold required to access the lower 5% dividend withholding tax rate under the India-Mauritius Double Taxation Avoidance Agreement (DTAA), instead of the standard 10-15%.

The department views the structure as lacking commercial substance and being solely designed to secure concessional treaty tax rates, thereby enabling unjustified tax benefits. The GAAR order highlighted specific figures for assessment years 2022-23, 2023-24, and 2024-25, indicating significant discrepancies between reported tax and the GAAR-applied liability.

Background and Treaty Context
This dispute stems from Vedanta's failed delisting attempt in 2020, driven by Vedanta Resources Ltd.'s substantial debt reliance on dividend inflows. Following the failed bid, VHML was incorporated, raised funds, and acquired a significant stake in Vedanta Ltd. The company received dividends and paid a 5% withholding tax under the DTAA. The India-Mauritius DTAA has historically been a favored route for investments due to its concessional tax rates.

A similar case involving Tiger Global and Flipkart highlights the potential implications of rulings on treaty-based tax benefits.

Impact
This legal challenge could set a precedent for how the GAAR provisions are applied to treaty-based structures in India. It also highlights the ongoing scrutiny of international tax arrangements by Indian authorities. The outcome may influence investor sentiment and the structuring of investments into India.

Impact Rating: 8/10

Difficult Terms Explained:
Vedanta Holdings Mauritius II Ltd (VHML): A promoter entity of Vedanta Limited, incorporated in Mauritius, used for holding shares and managing finances.
Income Tax Department: The government agency responsible for administering and enforcing tax laws.
General Anti-Avoidance Rules (GAAR): Provisions in tax law that allow authorities to disregard or re-characterize transactions primarily intended to avoid tax, even if they are legally structured.
India-Mauritius Tax Treaty (DTAA): An agreement between India and Mauritius to prevent double taxation and tax evasion, often providing concessional tax rates on certain incomes like dividends and capital gains.
Impermissible Avoidance Arrangement: A transaction or structure deemed by tax authorities to be primarily designed to obtain tax benefits contrary to the treaty or law, lacking commercial substance.
Dividend Distribution Tax (DDT): A tax previously levied on companies in India before its abolition in April 2020.
Commercial Substance: A legal doctrine requiring that a transaction have a business purpose beyond just the tax savings to be recognized by tax authorities.
Writ Petition: A formal written order issued by a court, typically used to seek judicial review of administrative actions or to enforce rights.
Coercive Action: Enforcement measures taken by authorities to compel compliance with legal obligations, such as seizing assets or imposing penalties.