Union of India v. Azadi Bachao Andolan

Facts

• Various public interest litigants challenged the India-Mauritius DTAA on the ground that it was being misused for treaty shopping
• Foreign investors were routing investments through Mauritius shell companies to avoid capital gains tax in India
• Under the DTAA, capital gains on Indian shares by Mauritius residents were taxable only in Mauritius (which levied no capital gains tax)
• The petitioners argued this constituted revenue loss to India and facilitated round-tripping of Indian money

Issues

1. Whether the India-Mauritius DTAA is valid and can be used for treaty shopping
2. Whether India can look behind a Tax Residency Certificate issued by Mauritius

Held

• Treaty shopping is legal and a legitimate tax planning tool; it is not tax evasion
• The India-Mauritius DTAA is a valid exercise of sovereign power under S.90
• A TRC issued by the Mauritius government is conclusive proof of residence; India cannot go behind it to deny treaty benefits
• Economic substance requirements cannot be read into the DTAA where the treaty itself does not impose them
• The remedy for perceived misuse lies in renegotiating the treaty, not in judicial rewriting

Ratio Decidendi

DTAAs are sovereign agreements between nations and must be honoured in letter and spirit. A Tax Residency Certificate issued by a treaty partner is conclusive evidence of residence. India cannot unilaterally deny treaty benefits by looking behind the TRC or questioning the economic substance of the entity. Treaty shopping is a legitimate consequence of the treaty framework.