MC EXCLUSIVE Tiger Global verdict bolsters India's indirect transfer provisions framed after retrospective tax disputes 

The Supreme Court’s ruling shifts the focus to substance, including where the decision-making authority actually rests

• SC's Tiger Global ruling could expand India's tax scope for foreign investors.
• Funds using multi-layer structures face new tax demands on indirect transfers
• Ruling prioritizes substance over residency in offshore investment exits.

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The Tiger Global verdict could widen India’s tax net for foreign investors by giving teeth to a little-known law framed following high-profile retrospective tax disputes involving companies such as Vodafone Group Plc and Cairn Energy Plc, tax experts said. The ruling could expose foreign portfolio funds, buyout firms, and overseas investors in Indian companies to billions of dollars in new tax demands.

The verdict will especially impact funds who have used two or more layers to invest in India. In 2018, following the Vodafone Group and Cairn retrospective tax cases, the government introduced a law on taxation of indirect transfers, under which an offshore entity selling shares of an Indian company that derive substantial value from Indian assets can be taxed in India, even if the transaction takes place outside Indian shores.

However, many funds were using multi-layer investment structures to avoid triggering the indirect transfer provisions, but now the tax department can deny treaty benefits based on the substance argument that the apex court upheld.Funds will have to justify their presence in a jurisdiction based on the commercial substance.

“The Supreme Court’s Tiger Global ruling materially recalibrates India’s indirect transfer landscape. Offshore exits involving Indian assets will now be judged on where real control, governance and economic risk sit, not merely on treaty residency. For investors, this shifts deal planning from jurisdictional optimisation to substance engineering, with holding structures, decision-making protocols and exit mechanics needing to withstand scrutiny well before the transaction stage,” said Binoy Parikh, partner, Katalyst Advisors.

In a typical stucture, a US based fund may set up a special purpose vehicle (SPV) in Mauritius, which in turn buys shares in an Indian company. Now, the US entity can indirectly sell shares of the Indian entity by selling the Mauritius SPV. For tax purposes, this would be sale of Mauritius shares held by a US entity and hence India tax angle doesn’t arise.

The Supreme Court’s ruling shifts the focus to substance, including where the decision-making authority actually rests. If the Mauritius SPV is just an additional layer without substance, Indian tax department can go up one more layer (to the US entity), triggering India’s indirect transfer tax provisions.

“This judgement will bring the spotlight back on tax treaty cases in the context of capital gains income. Under most tax treaties, the indirect transfer cases are not taxable even after the amendment introduced under DTAA with effect from 1 April 2017,” said Hemen Asher, Partner – Direct Tax, Bhuta Shah & Co.