India vs SC Lowy P.I. (Lux): CASE SUMMARY
Case Information
- Court: Income TaxIncome Tax is a direct levy imposed by governments on the income generated by individuals, corporations, and other entities within a specific jurisdiction. It serves as a major source of revenue for governments and funds various public expenditures, such as infrastructure projects, healthcare, education, national security, and welfare programs. The tax is generally calculated as a percentage of the taxable... Appellate Tribunal, Delhi Bench ‘D’, New Delhi
- Case No: ITA No. 3568/DEL/2023
- Applicant: SC Lowy P.I. (Lux) S.A.R.L., Luxembourg
- Defendant: Assistant Commissioner of Income TaxIncome Tax is a direct levy imposed by governments on the income generated by individuals, corporations, and other entities within a specific jurisdiction. It serves as a major source of revenue for governments and funds various public expenditures, such as infrastructure projects, healthcare, education, national security, and welfare programs. The tax is generally calculated as a percentage of the taxable..., International TaxationFOR MORE INSIGHT ON INTERNATIONAL TAXATION, PLEASE READ THIS ARTICLE: Introduction to International Taxation: Key Concepts & Guidelines International Taxation encompasses the framework of laws, principles, and treaties that govern the tax obligations of individuals and entities engaged in economic activities that span multiple jurisdictions. This field addresses how income, profits, and gains are taxed when operations or investments extend..., Circle 3(1)(2), Delhi
- Judgment Date: 30 December 2024
- Download the FULL JUDGMENT
Judgment Summary
The judgment in SC Lowy P.I. (Lux) S.A.R.L. vs Assistant Commissioner of Income TaxIncome Tax is a direct levy imposed by governments on the income generated by individuals, corporations, and other entities within a specific jurisdiction. It serves as a major source of revenue for governments and funds various public expenditures, such as infrastructure projects, healthcare, education, national security, and welfare programs. The tax is generally calculated as a percentage of the taxable... (ACIT) revolved around the denial of treaty benefits under the Double TaxationDouble Taxation occurs when the same income or financial transaction is taxed twice, typically in different jurisdictions. It can arise in two primary contexts: economic double taxation, where the same income is taxed twice in the hands of different taxpayers, and juridical double taxation, where the same taxpayer is taxed on the same income in more than one country. Double... Avoidance Agreement (DTAA) between India and Luxembourg. The central issue was whether the appellant, a Luxembourg-based entity, was entitled to these benefits, given allegations by the tax authorities of treaty shopping, lack of economic substanceEconomic substance is a foundational principle in taxation and business law, ensuring that transactions and corporate structures reflect genuine economic reality beyond their legal form. The concept aims to prevent tax avoidance by evaluating whether a transaction or arrangement has a real business purpose and economic effect other than merely achieving a tax benefit. It ensures that taxpayers cannot exploit..., and non-beneficial ownership.
The applicant, a Category II Foreign Portfolio Investor (FPI) registered with the Securities and Exchange Board of India (SEBI), declared income from various Indian investments for the 2021–22 assessment year. These included capital gainsCapital gains refer to the profit earned when an asset, such as real estate, stocks, bonds, or even a collectible, is sold or exchanged for a price that exceeds its original purchase cost. These gains are a critical component of personal and corporate finance, as they influence investment strategies and tax obligations. Capital gains are realised when an asset is..., business income, and interest income. The tax officer denied the claimed exemptions under the DTAA, asserting that the appellant was a conduit entity with no significant commercial presence in Luxembourg. Key claims included that the appellant was controlled by shareholders in other jurisdictions (notably the Cayman Islands), lacked commercial rationale for being based in Luxembourg, and failed to demonstrate sufficient substance or beneficial ownership.
The tax authorities recharacterised the income and applied higher tax rates, citing provisions under domestic Indian tax lawsTax laws form the backbone of any nation’s revenue system, setting the rules that govern how individuals and corporations contribute financially to support government functions. These laws define the types of taxes, the applicable rates, and the regulations regarding payment and compliance. They also outline the rights and obligations of taxpayers, ensuring a balanced and fair approach to funding public... instead of the DTAA. The core contentions included:
- Business income from securitisation trustsA comprehensive look at trusts in international tax law, including definitions, practical examples, key cases, and synonyms. being taxable as interest income.
- Denial of capital gains taxCapital Gains Tax (CGT) is a tax imposed on the profit an individual or entity earns from the sale or disposal of a capital asset. This tax is not levied on the total sale price of the asset but rather on the capital gain, which is the difference between the asset’s acquisition cost (or “base cost”) and its sale price.... exemptions on securities sales.
- Recharacterisation and higher taxation of interest income from investment funds.
The appellant argued that it was a bona fide tax resident of Luxembourg, supported by a valid Tax Residency Certificate (TRC) and compliance with Luxembourg’s tax regime. It contended that treaty benefits could not be denied based on unsubstantiated assumptions of tax avoidanceTax avoidance refers to the practice of legally structuring financial activities to minimise tax liability, reducing the amount of tax owed without violating laws. Unlike tax evasion, which is illegal and involves concealing income or misreporting, tax avoidance operates within the framework of the law. Multinational enterprises (MNEs) and individuals often engage in tax planning strategies that reduce tax liabilities.... Citing judicial precedents, it challenged the Revenue’s stance, highlighting a lack of evidence for fraud, sham transactions, or absence of economic substanceEconomic substance is a foundational principle in taxation and business law, ensuring that transactions and corporate structures reflect genuine economic reality beyond their legal form. The concept aims to prevent tax avoidance by evaluating whether a transaction or arrangement has a real business purpose and economic effect other than merely achieving a tax benefit. It ensures that taxpayers cannot exploit....
The Tribunal analysed the appellant’s corporate structure, tax residency, and compliance with DTAA provisions. It considered whether the Principal Purpose Test (PPT), introduced via the Multilateral Instrument (MLI), applied. The Tribunal also reviewed whether the appellant demonstrated genuine economic activity in Luxembourg and beneficial ownership of the income.
Ultimately, the Tribunal upheld the Revenue’s decision, denying treaty benefits. It concluded that the appellant’s setup lacked commercial rationale, primarily facilitating tax avoidanceTax avoidance refers to the practice of legally structuring financial activities to minimise tax liability, reducing the amount of tax owed without violating laws. Unlike tax evasion, which is illegal and involves concealing income or misreporting, tax avoidance operates within the framework of the law. Multinational enterprises (MNEs) and individuals often engage in tax planning strategies that reduce tax liabilities... through treaty shopping. The ruling also emphasised that a TRC alone does not conclusively establish treaty eligibility, particularly under the PPT framework introduced by the MLI.
This judgment underscores the critical importance of demonstrating substance, commercial purpose, and beneficial ownership in cross-border investments. It serves as a cautionary tale for multinationals relying on treaty benefits without robust tax structures and compliance frameworks.
