Devarshi Mukhopadhyay writes on the operation of GAAR provision after DIT v. Copal Research Ltd. case.


The grey areas around liability of Capital Gains Tax in context of indirect transfers has caused much tussle between the law makers and the judiciary when it comes to interpretation, or examination, of international transactions. The addition of Explanation 5 to Section 9(1) (i) of the Income Tax Act, 1961, which deems a company to be situated in India as long as it derives a “substantial” amount of its value from assets situated within the territory of India, has triggered concerns of uncertainty and pessimism from the international investor community.

By deconstructing the judicial pronouncement in the recent judgment of the Delhi High Court in the matter between DIT V. Copal Research and Others, the author first examines the implications of this judicial reasoning on the “main purpose test” envisaged by the currently dormant GAAR provisions and then examines the likely consequences of this pronouncement on the pending special leave petition in the Supreme Court of India in the matter between Sanofi Holdings vs. Department of Revenue. The author also analyses the impact of this judgment on the scope of “badges of indicia” test in the draft GAAR.

The author argues that the rare judicial analysis carried out by the Court in deciding the validity of the “commercial rationale” in the transaction in question, through the implicit application of the New Zealand model of assessment in such circumstances, significantly limits the territory of Section 96 of the Income Tax Act, 1961. Further, the author explores the scope of abuse through subjective interpretation by the Revenue, considering that phrases such as “main purpose” are left undefined within the text of the law. In the end, the author establishes that the “bona fide” test contained in Section 96 of the Act will be significantly controlled by this judicial pronouncement considering that the Court has read commercial substance and bona fide means into one mode of examination.