Treaty grandfathering and economic substance protected Mauritius investment vehicles; conjecture could not defeat DTAA benefits or advance ruling jurisdiction.

Delhi HC held that advance ruling jurisdiction could not be barred on a mere assertion of tax avoidance; cogent material was required to show that the transaction was a sham or device, and that was not established. It further found that the Mauritius investment vehicles had demonstrated economic substance, pooled investor funds, and were not mere conduits or puppets of TGM LLC. The court also held that shares acquired before 1 April 2017 remained protected by the India-Mauritius DTAA grandfathering regime, and Rule 10U could not override that treaty protection. Beneficial ownership could not be attributed to TGM LLC on conjecture, so treaty benefits could not be denied.

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Issues: (i) Whether the petitioners' transaction was prima facie designed for avoidance of tax so as to attract the bar under the proviso to section 245R(2); (ii) whether the petitioners lacked economic substance or were mere conduits / puppets of TGM LLC; (iii) whether the benefit of Article 13(3A) of the India-Mauritius DTAA and the related LOB provisions and Rule 10U was unavailable to the petitioners; and (iv) whether beneficial ownership could be attributed to TGM LLC so as to deny treaty benefits.

Issue (i): Whether the petitioners' transaction was prima facie designed for avoidance of tax so as to attract the bar under the proviso to section 245R(2).

Analysis: The transaction had to be tested as a whole, but the material on record did not justify treating the shareholding structure or the treaty-based claim itself as conclusive proof of tax avoidance. The competent authority could deny advance ruling jurisdiction only where the transaction itself was shown, on cogent material, to be a sham or a device aimed at evasion. The impugned order proceeded on erroneous assumptions and treated treaty eligibility as equivalent to avoidance without adequately establishing the requisite factual foundation.

Conclusion: The bar under section 245R(2) was not made out against the petitioners.

Issue (ii): Whether the petitioners lacked economic substance or were mere conduits / puppets of TGM LLC.

Analysis: The petitioners were incorporated in Mauritius, held Category 1 Global Business Licences, pooled funds from numerous investors across jurisdictions, invested over a long period, and incurred substantial expenditure. The record did not show that the board was denuded of real decision-making power or that the petitioners were mere dummies. A parent entity may exercise oversight, but that does not by itself destroy separate corporate personality. The findings that TGM LLC was the parent or holding company, and that the board members were puppets, were found to be factually unsustainable.

Conclusion: The petitioners did not lack economic substance and were not mere conduits or puppets.

Issue (iii): Whether the benefit of Article 13(3A) of the India-Mauritius DTAA and the related LOB provisions and Rule 10U was unavailable to the petitioners.

Analysis: The shares were acquired before 1 April 2017 and the treaty amendment inserted a grandfathering regime for such acquisitions. The Contracting States intended to exclude pre-1 April 2017 acquisitions from the new source-based capital gains regime. Rule 10U could not be read to override that treaty protection, and domestic legislation or delegated rules could not be construed to defeat the treaty's express grandfathering scheme. The LOB provisions in the amended treaty also supported the view that the transaction fell within the protected category.

Conclusion: The petitioners were entitled to the benefit of the grandfathering protection and the treaty-based relief.

Issue (iv): Whether beneficial ownership could be attributed to TGM LLC so as to deny treaty benefits.

Analysis: Beneficial ownership requires a legal or contractual obligation to pass on income, or facts showing that the recipient has no real right to use and enjoy it. No material established that the petitioners were obliged to remit the sale proceeds to TGM LLC or that the consideration was received on its behalf. The allegation rested on conjecture and an unproved assumption of control by TGM LLC.

Conclusion: Beneficial ownership could not be attributed to TGM LLC and treaty benefits could not be denied on that basis.

Final Conclusion: The impugned AAR order was legally unsustainable, the writ petitions succeeded, and the transaction was held to be protected by the treaty grandfathering regime rather than being an avoidance arrangement.

Ratio Decidendi: Where a Mauritius-resident investment vehicle with demonstrated economic substance holds shares acquired before the treaty's cut-off date, and no cogent material shows sham, fraud, or a legal obligation to forward income, the treaty's grandfathering and LOB framework cannot be displaced by conjecture, corporate-veil assumptions, or a domestic rule read to override the DTAA.

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