Vedanta moves Delhi high court against taxman’s ₹1,308-cr avoidance allegation under India–Mauritius treaty

The tax department’s general anti-avoidance rules (GAAR) approving panel had, on 28 November, also allowed imposing a tax liability of ₹138 crore on the group.

The writ petition was heard on Thursday (4 December) by a division bench led by Justice Prathiba M. Singh, which restrained the tax department from taking coercive action or issuing an assessment order until the next hearing on 18 December.

According to court filings reviewed by Mint, Vedanta challenged the order of the GAAR approving panel that classified its Mauritius-based holding structure as an “impermissible avoidance arrangement."

The panel concluded that the group secured treaty benefits by routing promoter shareholding through Mauritius to access the 5% dividend withholding tax rate under the India–Mauritius double taxation avoidance agreement (DTAA), instead of the applicable 10–15%.

It held that the structure lacked commercial substance and was engineered primarily for tax savings.

Mint’s emailed queries to Vedanta seeking comments remained unanswered until press time.

What the dispute is about

The dispute centres on whether Vedanta created and used VHML principally to secure a concessional treaty tax rate after its 2020 delisting attempt.

The tax department argues that VHML was incorporated soon after India abolished dividend distribution tax (DDT) in April 2020, and that intra-group share transfers were arranged to push VHML’s stake above 10%, the threshold required to qualify for a 5% treaty rate under the India–Mauritius DTAA.

The department alleges VHML had no real commercial purpose and was used merely to route promoter share ownership through Mauritius.

It says promoter shareholding in Vedanta Ltd never changed in substance and that the arrangement enabled an unjustified tax benefit of about ₹1,308 crore, making it an impermissible avoidance arrangement under GAAR.

The GAAR order states that VHML reported tax of ₹116.12 crore for assessment year 2022–23, whereas applying GAAR would result in a liability of ₹337.15 crore, implying a ₹221-crore benefit. Benefits of ₹672 crore (AY 2023–24) and ₹415 crore (AY 2024–25) were also cited.

GAAR, introduced through the Finance Act, 2012 and implemented from 1 April 2017, empowers tax authorities to disregard or recharacterise transactions designed mainly to avoid tax, even if compliant in legal form.

The GAAR approving panel is a three-member independent authority, headed by a retired high court judge, that must approve any move to apply GAAR provisions.

Vedanta’s arguments

Vedanta denied any tax-avoidance 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’s stock was languishing.

“The objective behind the delisting, apart from corporate simplification, was to streamline the flow of dividends from VEDL to VRL and reduce dividend leakage to minority shareholders, which would enable more efficient debt servicing by VRL and improve the credit rating of the Vedanta Group as a whole," the petition stated.

“Another objective was to provide a fair exit opportunity to public investors at a value much higher than the prevailing share price."

It contended that VHML raised funds through commercial borrowings, that capital-gains tax was paid on share transfers, and that the entity maintains genuine substance, including a tax residency certificate in Mauritius. Vedanta also alleged procedural unfairness, stating that key documents, including satisfaction notes, were withheld by the GAAR panel.

Background

The dispute dates back to Vedanta’s 2020 bid to delist Vedanta Ltd. and consolidate promoter holdings through Sebi’s reverse book-building mechanism, aimed at improving liquidity.

This was prompted by Vedanta Resources Ltd.'s $7 billion debt dependence on dividend inflows. The delisting offer at ₹87.50 per share failed in October 2020 due to insufficient public tendering.

Vedanta subsequently incorporated VHML on 29 June 2020, raised $1.4 billion, and acquired a 13.26% stake in Vedanta Ltd across five tranches between December 2020 and December 2021 from public shareholders and group entities Finsider (UK) and Westglobe (Mauritius).

VHML later received ₹1,543 crore in dividends and paid withholding tax at 5% under the DTAA.

The India–Mauritius DTAA, signed in 1983, has long been a preferred route for global investment due to concessional tax rates—historically including capital-gains exemptions and a reduced 5% dividend tax rate when shareholding exceeds 10%.

A closely watched parallel is the Tiger Global–Flipkart dispute, where Mauritius-based funds claimed treaty protection against capital-gains tax. The Delhi high court initially upheld treaty benefits, but the matter reached the Supreme Court, which has stayed that order and reserved judgment. The eventual ruling is expected to have major implications for treaty-based tax benefits.