Supreme Court Draws Clear Line on Treaty Benefits and Tax Dues in Tiger Global Case
The Supreme Court delivered a significant ruling last week, denying tax relief to Tiger Global on capital gains from its exit from Flipkart. The bench, comprising Justice J B Pardiwala and Justice R Mahadevan, set aside a previous Delhi High Court order that had favored the investment firm.
Court Rejects Automatic Treaty Protection
The court made it clear that treaty benefits are not automatic. Even when paperwork appears in order, authorities can deny protection if an investment structure exists mainly on paper. The bench held that Tiger Global's investment arrangement lacked commercial substance.
This structure could not claim protection under the India-Mauritius tax treaty or its grandfathering clause. The ruling establishes that foreign investors cannot rely on complex offshore structures when those entities do not conduct real business activities.
Background of the Dispute
The case originated from Tiger Global's 2018 sale of its Flipkart stake during Walmart's acquisition of the e-commerce giant. Tax authorities argued that the Mauritius route was primarily used to avoid taxes, while Tiger Global maintained it represented legitimate tax planning permitted under the treaty.
Three Mauritius-incorporated companies served as investment vehicles: Tiger Global International II, III, and IV Holdings. These entities held valid tax residency certificates from Mauritian authorities and owned shares in Flipkart Private Limited.
Although Flipkart was incorporated in Singapore, most of its value derived from operations in India. Before the 2018 sale, the Mauritius companies applied to Indian tax authorities for certificates allowing the transaction to proceed without withholding tax.
The tax department rejected this request, arguing the companies were not genuinely controlled from Mauritius. The companies then approached the Authority for Advance Rulings, which declined to hear the matter, stating the transaction appeared designed to avoid tax.
The Delhi High Court later overturned this decision, ruling that the companies were not mere puppets since their boards exercised independent decision-making. The court held that a valid Tax Residency Certificate served as sacrosanct evidence of residency and beneficial ownership.
Legal Framework and Court's Reasoning
The Supreme Court adopted what it called a "look at" approach, examining the transaction as a whole rather than isolating individual steps. The court focused on whether the formal steps reflected the real substance of the arrangement.
Applying the principle of substance over form, the court conducted what is known as a "head and brain" test. This examination determined where actual control and decision-making originated.
The court found that for transactions above certain thresholds, decision-making authority rested with an individual based in the United States, not with Mauritian directors. Additionally, no local person in Mauritius was authorized to sign cheques for large amounts.
Based on these findings, the court described the entities as "see-through entities" lacking independent control. The companies had no investments other than Flipkart and were established with the prime objective of obtaining benefits under the Double Taxation Avoidance Agreement.
Tax Residency Certificate Status Clarified
The court addressed the significance of Tax Residency Certificates, which Mauritian authorities had issued. While previous Central Board of Direct Taxes circulars described TRCs as sufficient evidence of residence and beneficial ownership, the Supreme Court noted the legal position has changed.
Following amendments to the Income Tax Act and the introduction of the General Anti-Avoidance Rule, the TRC now serves only as an eligibility condition rather than conclusive proof of residency. The court described it as a "ticket to enter" the treaty framework.
Statutory authorities may "go behind the TRC" when material suggests an entity was interposed as a device for tax avoidance. The mere holding of a TRC cannot prevent an enquiry if it is established that the interposed entity served as a tax avoidance mechanism.
Grandfathering Clause and GAAR Application
Tiger Global argued that its investment was made before April 2017 and therefore protected by grandfathering provisions introduced when India amended its tax treaty with Mauritius. The revenue department countered that GAAR applies to arrangements, not just investments, and the tax benefit arose after GAAR came into force.
The Supreme Court accepted the revenue's reasoning, distinguishing between an "investment" and an "arrangement." The court noted that Rule 10U(2) of the Income Tax Rules allows GAAR to apply to arrangements even if the investment predates April 2017, provided the tax benefit was obtained later.
Since the share sale occurred in 2018, the timing of the original investment did not bar anti-avoidance scrutiny. The court stated that "the duration of the arrangement is irrelevant" once it is found to be a sham.
Distinguishing Tax Planning from Tax Avoidance
The court clarified the line between tax planning and tax avoidance. Tax planning may be legitimate if it operates within the legal framework. However, when a structure involves colourable devices, dubious methods, or subterfuges designed to eliminate tax liability, it becomes impermissible.
In this case, the lack of commercial substance, concentration of control outside the treaty jurisdiction, and dominant purpose of obtaining treaty benefits led the court to conclude the arrangement was designed for tax avoidance. Once that determination was made, treaty protection fell away.
The court emphasized that tax treaties allocate taxing rights but do not result in a surrender of tax sovereignty. The state retains inherent power to tax income connected to its territory under Article 265 of the Constitution.
In a concurring opinion, Justice Pardiwala described tax sovereignty as a "golden rule," warning that tax abuse carried out under complex financial structures weakens a nation. He noted that anti-abuse laws must be enforced, and any leniency represents another form of compromising tax sovereignty.
This landmark ruling establishes important precedents for cross-border investments and treaty interpretations, potentially affecting how foreign investors structure their Indian investments going forward.
