‘Tax Planning Cannot Override Law’: Supreme Court says Planning must be within Statutory Provisions [Read Judgment]

The Supreme court, in its landmark tax ruling held that assessees can do their tax plan, but the same shall be within the limits of the law.

Justice R. Mahadevan and Justice J.B. Pardiwala observed that “Though it is permissible in law for an assessee to plan his transaction so as to avoid the levy of tax, the mechanism must be permissible and in conformity with the parameters contemplated under the provisions of the Act, rules, or notifications.”

The court was entertaining the appeal filed by the Authority for Advance Ruling (income tax) against Tiger Global International Holdings. The assessee in this case, Tiger Global sold their shares of Flipkart to Walmart. The company claimed income tax relief under India - Mauritius DTAA by submitting TRC issued by Mauritius.

The revenue rejected the claim of the assessee. The company opted for the advance ruling, where the AAR held that the sale of shares is taxable in India. However, the Delhi High Court, on the appeal of the company, overturned the AAR ruling just based on the TRC.

Therefore the revenue opted to appeal before the apex court.

The Court noted that legislatures are empowered to evolve mechanisms to address treaty shopping, tax avoidance and abuse of beneficial provisions, and the judiciary must evaluate whether the Revenue’s action is legally justified within those boundaries.

The bench also noted that due the issues of treaty shopping and abuse of the provisions, India’s discussions with Mauritius ended in amendment of the DTAA in 2016. In the amended version, DTAA would shift away from a residence-based system for the taxation of capital gains to a source-based system, to restore balance and prevent abuse.

The court in its analysis observed the decision In McDowell, Justice Ranganath Mishra writing for its majority held that:

“Tax planning may be legitimate provided it is within the framework of law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by resorting to dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges.”

Justice Pardiwala observed that a nation’s right to tax income arising within its own country is an inherent sovereign power. “Any application of filters or diffusers to this is a direct attack or threat to its sovereignty which can affect a Nation’s long-term interest” , said the court.

While concluding its order, the apex court said that “Once the mechanism is found to be illegal or sham, it ceases to be “a permissible avoidance” and becomes “an impermissible avoidance " or "evasion”. The Revenue is, therefore, entitled to enquire into the transaction to determine whether the claim of the assessees for exemption is lawful.”

Accordingly, the Supreme Court held that any arrangement for tax planning should pass through the taxation laws. The same cannot be overridden.

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates