In a significant development, Supreme Court on Thursday ruled in favour of the Income Tax Department by setting aside the Delhi High Court’s judgment quashing the tax demand of Tiger Global. Experts say this ruling will have serious implications for private equity funds, hedge funds and FPIs using Mauritius and Singapore based structures.
“In our view, once it is factually found that the unlisted equity shares, on the sale of which the assessees derived capital gains, were transferred pursuant to an arrangement impermissible under law, the assessees are not entitled to claim exemption under Article 13(4) of the DTAA (Double Taxation Avoidance Agreement),” a division bench of Justices J B Paradiwala and R Mahadevan said while disposing an appeal filed by the Authority for Advance Rulings (Income Tax).
Further, the bench said that the Revenue has proved that the transactions in the instant case are impermissible tax-avoidance arrangements, and the evidence prima facie establishes that they do not qualify as lawful. Consequently, “Chapter X-A becomes applicable”, it said. Also, the applications preferred by the assessees relate to a transaction designed prima facie for tax avoidance and were rightly rejected as being hit by the threshold jurisdictional bar to maintainability, as enshrined in proviso (iii) to Section 245R(2) of the Income Tax act.
Accordingly, “capital gains arising from the transfers effected after the cut-off date, i.e., 01.04.2017, are taxable in India under the Income Tax Act read with the applicable provisions of the DTAA. The judgment of the High Court, therefore, deserves to be set aside,” the bench ruled.
Amit Baid, Head to Tax at BTG Advaya feels this ruling marks a major, 180-degree shift in how DTAA benefits have been claimed so far, with the Supreme Court holding that GAAR (General Anti Avoidance Rule) can override treaty grandfathering. The Court clarified that GAAR can apply to any arrangement where a ‘tax benefit’ is claimed on or after April 1, 2017, making both the investment cut-off date and the longevity of the structure irrelevant if it lacks commercial substance.
“The ruling has serious implications for private equity funds, hedge funds and FPIs using Mauritius and Singapore based structures, including for pre-2017 investments. While it does not automatically reopen closed cases, it significantly strengthens the tax department’s hand in reassessment proceedings which were permitted by law,” he said.
According to Amit Maheshwari, Managing Partner at AKM Global, the ruling recalibrates the long-standing understanding of Azadi Bachao Andolan, which has established the TRC (Tax Residency Certificate) as a sacrosanct document since the last two decades and allowed foreign investors to claim exemption on capital gain taxes. “The judgement is also likely to have an overriding effect on investments which were grandfathered through India-Mauritius treaty amendment and the same may be questioned on the economic reality,” he said.
Further, it signals the end of mechanical treaty benefit claims based solely on TRCs and formal residency and reinforces India’s alignment with global anti-abuse standards. Going forward, “investors will need to demonstrate genuine economic substance, autonomous decision-making, and bonafide commercial rationale in treaty jurisdictions,” said Maheswari.
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