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  • Sharun Salvi

Beyond the Transaction: (Mis)application of the Principle Purpose Test

[Sharun is a student at NALSAR University of Law.]

Bilateral tax treaties and double taxation avoidance agreements (DTAA) are widely used to negotiate taxing rights between treaty partners. They offer tax benefits and exemptions to parties and are increasingly utilized to redirect tax jurisdiction from one country to a tax haven through base erosion and profit shifting. To address this issue, India has approved the OECD Action Plan 15, providing for a multilateral instrument (MLI) to counteract such abuse. According to Article 7 of the MLI, if it is clear from the facts and circumstances of the case that obtaining tax benefits was one of the primary reasons of the transaction, the transaction would not be covered by the treaty. Moreover, India has implemented General Anti-Avoidance Rules (GAAR) under domestic law, targeting impermissible avoidance arrangements (IAA) with the primary goal of obtaining a treaty benefit.

The article analyzes the confrontational approach of the tax authority towards foreign investment in India through the examination of relevant cases, focusing on the threshold for the principle purpose test (PPT) and the inconsistent standard for judgment. The author aims to examine the misapplication of these standards to the Adani-Holcim transaction in light of contemporary precedents.

Understanding the Threshold

The Tiger Global case

Tiger Global LLC is a private equity firm registered in Mauritius that held shares of Flipkart Private Limited in Singapore from 2011 to 2015. In 2018, Tiger Global sold its 162,43,010 shares in Flipkart Singapore to a Luxembourg corporation, S.A.R.L. However, the tax authorities ruled that the transaction was not eligible for tax benefits under the Indo-Mauritius DTAA as it was determined that the company was merely a front for tax evasion and true control was exercised in the United States.[1]

It is important to note that the SC, through the Azadi Bachao Andolan case in 2000, gave its blessing to such corporate structures. It upheld the validity of the Circular 789, which stated that a tax residency certificate (TRC) issued by the Government of Mauritius was sufficient proof of a company's eligibility for DTAA benefits. Despite possessing a TRC, the Indian tax authority did not issue a nil withholding certificate for Tiger Global.

The Authority for Advance Rulings (AAR) disregarded precedents and Circular 789, opting to establish its own standards instead. It pierced the corporate veil, ruling that Tiger Global was merely a "see-through" entity for tax benefits, as the "head and brain" of the company was not in Mauritius. Additionally, the AAR considered the absence of other investments by Tiger Global as evidence of its intention to take advantage of the DTAA.

This case shows how the AAR has disregarded the TRC and considered other factors.

The Bidvest Holdings case

The AAR in the case of Bid Services Division (Mauritius) Ltd, In re, demonstrated a comparable line of reasoning to that in the Tiger Global case but went further. The Bid Services (Mauritius) was a subsidiary of the Bid Services Division Ltd, held by the South Africa-incorporated Bidvest Group. The TRC was issued by the Mauritian authorities, and the assessee had its place of effective management in Mauritius. The issue arose in 2011 when the assessee sold 13.5% of its shares in Mumbai International Airport Private Limited. The AAR upheld its "substance over form" argument and considered the following:

  1. The timeline of the original purchase was important. The assessee was incorporated two weeks before the submission of the bid and was not originally a part of the bid.

  2. The special purpose vehicle (SPV) of the Bidvest Group. Its incorporation in Mauritius indicates a lack of commercial substance or business purpose.

  3. The funding source for the shares was the holding parent entities.

In addition to these points, the AAR rejected the assessee's argument that the SPV was used in Mauritius as it is a common commercial practice in an efficient investment jurisdiction.

Based on the aforementioned cases, several key elements can be gleaned for evaluating the principle purpose of a transaction. These considerations include:

  1. the corporate structure and location of effective management;

  2. the timing and establishment of the assessee and its commercial viability; and

  3. the legitimacy of the entity including its employees, funds and investments.

Different Standards for Adani?

The author demonstrated how the PPT standards have been framed for cross-border transactions in the previous section. The paper will now examine the uniform applicability of these principles by evaluating the Adani-Holcim deal.

Ownership structure

In 2022, the Adani group acquired Ambuja Cements and ACC from the Holcim group for $6.38 billion and this has been completely tax free. On one side we have the Holcim Group which is incorporated in the Netherlands. It holds Holderfin B.V., which in turn holds Holderind Investments. The latter is incorporated in Mauritius, holding 63.20% and 4.48 shares in Ambuja Cements Limited and ACC Limited, respectively. Ambuja Cements Limited further holds 50.05% shares in ACC Limited. On the other side, we have the Adani Group that owns Acropolis Trade and Investment Limited, which in turn owns Xcent Trade and Investment Limited, which is further owned by Endeavour Trade and Investment Limited. The latter entity has acquired Holderind Investments Limited.

Application of MLI and GAAR

The litigants maintain that, in light of the Indo-Netherlands DTAA, Article 13(5) of the treaty comes into effect and absolves the seller from any liabilities in regards to capital gains tax. Additionally, they posit that the DTAA takes precedence over national tax legislation.

An evaluation of Articles 6 and 7 of the MLI and the provisions of GAAR in the Income Tax Act, 1961 (Act) reveals that if the primary aim of the transaction is to gain tax benefits, the tax authorities are empowered to examine the underlying substance of the transaction, as has been upheld in the judgements cited above. Furthermore, Section 90(2A) of the Act stipulates that the provisions of Chapter X-A of the Act, including GAAR, shall be enforceable, thereby overriding the DTAA.

In accordance with Section 96(1) of the Act, the tax authorities have the discretion to take action against anything that could be classified as an IAA. As per Section 96(1)(c), one of the grounds for this action is a lack of commercial substance, as defined in Section 97 of the Act.

Assessing the commercial substance under Section 97

Under Section 97, a transfer lacks commercial substance, if it involves a transaction or place of residence of a party that has no substantial commercial benefit other than receiving a tax incentive. The author shall demonstrate this through the following considerations:

The corporate structure

The Adani Group's organizational architecture is structured in a hierarchical fashion, characterized by multiple layers of subsidiary corporations and a special purpose vehicle, but without any substantive commercial connection to the operations of the enterprise. Furthermore, the Hindenberg Report disclosed that the three subsidiary firms are nominal entities bereft of any corporate essence. Upon examination, it was found that these entities are devoid of both web presence and publicly disclosed personnel, including managers and employees. By utilizing the criterion established in the Tiger Global case, one can infer that these entities lack any tangible presence in the transaction, thereby providing the Taxman with a cogent basis to take enforcement action.

Legitimacy of the entity

The purchaser, Endeavour Investments and Trades, was established on 29 April 2021, a mere two weeks prior to the acquisition. Furthermore, the transaction will not be funded by Endeavour Investments' own resources, but rather by capital infused by Adani and debt obtained from overseas banks. In light of the principles regarding temporal considerations established in the Bidvest case, it is manifest that the tax authorities have the discretion to examine the legitimacy and participation of this entity in the bidding process.

Common commercial practices

Moreover, the employment of an SPV and the execution of a commercial transaction in a tax-haven jurisdiction ought to be scrutinized in accordance with the precedential norms.

Thus, this part accentuates the labyrinthine taxation quandaries posed by this transaction. Through this critical analysis, it is clear that the norms imposed upon other cases have not been adhered to in the Adani-Holcim acquisition.


The primary aim of this paper is to analyze the criteria established by the tax authority for evaluating the PPT in cross-border transactions. Through the examination of the cases of Tiger Global and Bidvest Holdings, the paper highlights some recurring considerations utilized by the AAR.

It delves deeper into the Adani-Holcim deal to reveal deficiencies in its corporate structure and the purpose of the assessee's incorporation. The deal raises issues similar to the concerns raised in the Tiger Global case regarding its corporate structure. Additionally, it raises questions about the temporal aspects of the deal and provides strong evidence of it being a mere vehicle for tax avoidance. These actions are comparable to those of Bidvest Holdings, yet the latter transaction has managed to evade scrutiny.

It is evident from these cases that the tax authority's approach to determining the substance of a transaction is subjective, leading to selective enforcement and increasing the likelihood of litigation. This subjectivity will also discourage foreign investment, and the government must act promptly to bring clarity to the law and end this arbitrary approach by the tax authority.

[1] Tiger Global International II Holdings, In re, (2020) 116 878 (AAR) (New Delhi).


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