OPINION Tiger Global ruling enhances India’s ability to tax offshore assets deriving value here

(Representative image)

• SC denies Tiger Global capital gains tax exemption under India-Mauritius DTAA
• TRC alone no longer guarantees treaty benefits after GAAR introduction
• Ruling tightens scrutiny on offshore structures, weakens pre-2017 investment protection.

Did our AI summary help?

S Vasudevan, Harshit Khurana and Giridhar Vasudevan

In a landmark ruling with far-reaching implications for foreign investors, the Supreme Court of India has denied capital gains tax exemption to Mauritius-based Tiger Global International Holdings, holding that the investor was not entitled to treaty benefits under the India-Mauritius Double Tax Avoidance Agreement (‘DTAA’).

A shift in stance on perceived treaty abuse

The decision marks a significant shift in India’s approach to interpreting tax treaties in the post-GAAR world and signals a more assertive stance against perceived treaty abuse, conduit structures, and instances of double non-taxation.

The Court has held that post introduction of GAAR, Tax Residency Certificate (‘TRC’) alone no longer guarantees treaty benefits. It further ruled that indirect transfers are not protected under Article 13(4), diluted grandfathering for pre-2017 investments, and reinforced substance over form principles significantly impacting Mauritius and other tax haven structures and future cross border investments.

Controversy involved and the Supreme Court’s judgment

Tiger Global International Holdings (‘Taxpayer’), a Mauritius investment entity, had acquired shares between 2011 to 2015 in Flipkart’s Singapore entity, whose value was derived substantially from Flipkart India’s shares in India. The aforesaid shares were transferred in 2018 to a Luxembourg entity as part of Walmart’s broader acquisition. The taxpayer engaged Tiger Global Management, LLC, a group entity, for investment support functions.

Taxpayer’s application for a nil‑withholding certificate under section 197 of the Income tax Act (‘the Act’) was rejected on the basis that it was allegedly not eligible for DTAA benefits due to lack of independent control. The AAR subsequently rejected the application, calling it to a case of prima facie tax‑avoidance arrangement. The taxpayer succeeded before the Delhi High Court, which quashed the AAR’s decision and held that the capital gains were not taxable in India owing to the grandfathering protection under Article 13(3A) of the DTAA.

The question before the Supreme Court was whether the transfer of shares held by the taxpayer in Flipkart Singapore is taxable in India under the Act read with DTAA.

Indirect transfers not covered by treaty protection

A central element of the ruling is the Court’s interpretation of Article 13(4) of the India-Mauritius DTAA. The Court held that this provision, which assigns taxing rights to the state of residence for gains not covered in earlier paragraphs, applies only where the Mauritian resident directly holds the property or shares being sold.

In Tiger Global’s case, since the sale involved shares of a Singapore holding company which was deriving its value substantially from assets in India, the transaction constituted an indirect transfer. According to the Court, the same is outside the treaty protection provided in Article 13(4). As a result, India retains the right to tax such gains in accordance with its domestic laws.

This marks a departure from the Andhra Pradesh High Court’s ruling in Sanofi Pasteur2, which had interpreted similar treaty language to include indirect transfers.

The Supreme Court’s interpretation significantly narrows treaty protection for multitiered structures and strengthens India’s ability to tax offshore transfers of assets deriving value from India.

Grandfathering diluted under Rule 10U of the Income Tax Rules (the Rules)

Rule 10U(1)(d) grandfathers capital gains from shares acquired before 1 April 2017. However, the Court relying on the provisions of Rule 10U(2) held that this grandfathering does not immunize transactions from General Anti Abuse Rules (GAAR) if the tax benefit from arrangement occurs post-2017.

Although Tiger Global had acquired shares prior to 2017, the sale transaction occurred in 2018. The Court held that because Rule 10U(2) is expressly made applicable to any arrangement, irrespective of the date on which it was entered, GAAR can still apply to investments made before April’ 2017 if the tax benefits are obtained post the said date.

This reasoning significantly expands the applicability of GAAR to long-standing investment structures that were previously considered shielded from anti-avoidance challenges.

TRC not sufficient to prove residency or treaty entitlement

The Court held unambiguously that a Tax Residency Certificate is not conclusive evidence of residency or treaty eligibility. Section 90(4) treats TRC as a minimum requirement but not a decisive one. Even upon production of TRC, authorities are free to independently examine the residential status.

Earlier circulars cannot override statutory amendments

The Court held that CBDT Circular 789, which had earlier stated that TRC is a sufficient proof of residency, cannot apply in the current legal regime shaped by GAAR and subsequent amendments. Circulars operate only within the legislative context in which they were issued and cannot override statutory changes. This observation weakens taxpayers’ reliance on administrative guidance issued before GAAR’s introduction.

GAAR applies and burden of proof lies on the taxpayer

Section 96(2) presumes that an arrangement resulting in a tax benefit is an impermissible avoidance arrangement unless the taxpayer proves otherwise. The Court concluded that Tiger Global failed to discharge this burden. The Court emphasized that the primary purpose of the arrangement appeared to be tax avoidance, and the taxpayer did not furnish sufficient evidence of commercial justification.

Judicial anti-abuse doctrines (JAAR) still apply

Even if GAAR were held inapplicable, the Court stated that judicial anti-abuse principles such as substance over form, transparency and the prohibition on conduit structures remain available to interpret treaties. Citing McDowell3 and Vodafone4, the Court reaffirmed that judicial anti-avoidance rules coexist with GAAR and may independently support the denial of treaty benefits.

Double nontaxation treated as a red flag

The Court held that Tiger Global’s argument that the gains were exempt in Mauritius strengthened the tax authority’s case. According to the Court, a tax structure that results in double non-taxation undermines the object of the DTAA and indicates an impermissible avoidance arrangement.

Observation on tax sovereignty

The Court also emphasized that the right to tax income arising within India is an essential attribute of sovereignty. The Court has stressed the need for renegotiation of treaties, insert robust exit clauses and safeguards against base erosion.

Impact Analysis of Judgment

The ruling marks a significant departure from the well-established approach as laid out in Azadi Bachao Andolan. The Court’s reasoning acknowledges that the global tax environment has shifted dramatically, with BEPS principles and substance requirements now at the forefront. Investors can no longer rely merely on formal documentation like TRCs. They must also demonstrate genuine operational and economic presence in the treaty jurisdiction.

The Court has elevated the threshold for establishing tax residency and treaty entitlement. Substance must be demonstrated through credible evidence of independent decision-making powers, board level control exercised in Mauritius, meaningful operations, and genuine tax liability in the jurisdiction of residence. Entities that primarily rely on offshore advisory entities may face enhanced scrutiny.

The Court’s observation that double non-taxation may indicate avoidance has profound implications. Many international structures rely on legitimate exemptions granted by the residence jurisdiction. By treating double non-taxation as condition to access beneficial provisions of a tax treaty, the ruling may introduce uncertainty for global funds.

The Court’s interpretation of Rule 10U reduces the comfort previously enjoyed by investors with pre2017 holdings. GAAR can now apply even to historical investments if the exit occurs post2017. This has implications for private equity exits, long-term FDI structures, and multilayered global holding arrangements.

The dilution of circulars, broad application of GAAR, and importance placed on substance tests increase discretionary powers of tax authorities. In the absence of detailed guidelines as to application of GAAR by the tax authorities, inconsistencies in application are expected.

Concluding remarks

While the judgment widens India’s tax base, it also signals a new era of heightened scrutiny. Investors may now need to rethink long-standing governance models, reevaluate multijurisdictional holding structures, and maintain far more rigorous documentation to withstand GAAR-driven assessments.

As the traditional comfort of Mauritius structures diminishes, global investors investing in India may increasingly look in increasing substance to their investment structures to justify incidental tax benefits arising out of the arrangements.

(S Vasudevan is Executive Partner, Harshit Khurana, Associate Partner and Giridhar Vasudevan, Principal Associate at Lakshmikumaran & Sridharan Attorneys. Views are personal and do not represent the stand of Moneycontrol.)