The Supreme Court on Thursday set aside a Delhi High Court order that was in favour of Mauritius-based Tiger Global International (TGI), and ruled that the capital gains arising out of its $1.6 billion-worth of stake sale in Flipkart, in 2018, is taxable by Indian authorities.
The top court noted that the tax authorities have 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".
Tax experts are calling this a "landmark ruling", as Indian tax authorities can now deny any bilateral "treaty benefits" to foreign entities, who use layered structures or shell companies to avoid paying tax on their India-based transactions.
Thanks to the judgement, the Indian tax authorities shall fetch a revenue of about Rs 14,500 crore from the Mauritius based company. And going forward, they are likely to scrutinize other cases as well–of similar nature–which have the potential to fetch significantly more revenue for the authorities, possibly to the tune of over Rs 20,000 core, a government source privy to the development said.
“The SC judgment has far-reaching consequences for private equity, venture capital, and offshore investment structures. It signals the end of mechanical treaty benefit claims based solely on tax residency certificates (TRCs), and reinforces India’s alignment with global anti-abuse standards,” Amit Maheshwari, Managing Partner, AKM Global said.
A TRC is an official document, which certifies the residency of the taxpayer. It’s a crucial document to claim treaty benefits, and avoid paying double taxation in two different countries for the same transaction. In the case of India and Mauritius, the TRC issued by the latter will allow the Mauritius-based entity to pay nil tax on capital gains from transactions in India generally.
The Tiger Global Case Explained
Tiger Global International II, III and IV Holdings are Mauritius based entities – set up by US based private equity firm Tiger Global Management. Between 2011 to 2015, the Mauritius based entities bought stakes in Flipkart, which were eventually sold to Walmart in 2018 at a value of $1.6 billion.
Before closing the deal, these entities requested permission from Indian tax authorities to receive the stake sale amount without any deduction of capital gains tax. This was because the India-Mauritius tax treaty – signed in 1983 – allowed companies based out of Mauritius to pay nil capital gains tax on any transactions of this kind. The authorities, however, refused any permission, and imposed a 10 percent tax on the stake sale gains. This is because in 2016, India had changed the treaty provisions to prevent tax avoidance.
The new provisions of the treaty applied prospectively, and exempted old investments (from Mauritius) from tax levy in India. This was subject to certain conditions, such as, ensuring (on scrutiny from authorities) that the investments made in India were for “economic reasons”, and not purely to attain tax benefits from the treaty.
The authorities, however, contested that Mauritius entities were mere conduit and that the real control and beneficial ownership lied with Tiger Global Management LLC, USA – which means, routing investment through Mauritius was meant to take treaty benefits only. This view was upheld by the Authority of Advance Rulings ruled in favour of tax authorities, in 2020.
Tiger Global International then moved to Delhi High Court, which in 2024 overturned the AAR ruling, and said that the transactions pertaining to 2011-2015 are protected by the India-Mauritius treaty.
The Supreme Court on Thursday reversed the Delhi High Court judgement on this matter, and ruled in favour of tax authorities.
What the Supreme Court Observed?
On Tax Residency Certificate - Mere possession of a Tax Residency Certificate does not bar tax authorities from examining whether the Mauritius entity was only a shell or pass-through entity created to avoid tax. The Supreme Court said that mere holding of a Tax Residency Certificate cannot prevent an enquiry if the interposed entity -- a company inserted in the transaction chain -- is a device to avoid tax.
On treaty abuse - The amendments to the India–Mauritius tax treaty were meant to tackle round-tripping and treaty abuse, not to protect artificial structures. The court noted that amendments to the India–Mauritius Double Taxation Avoidance Agreement were brought in to tackle treaty abuse, and that the assessee is not entitled to benefits under the DTAA.
On genuine residency - Treaty benefits are available only to genuine resident entities with real commercial substance, not to “front” entities controlled from elsewhere.
On "grandfathering" - The top court noted that India’s tax department has proved that "the transaction in the instant case is an impermissible tax avoidance arrangement and the evidence prima facie establishes that it does not qualify as lawful." Once a transaction is found to be an impermissible tax avoidance arrangement, no treaty or grandfathering protection can apply. An impermissible tax avoidance arrangement is a structure created mainly to avoid tax, without real commercial purpose.
On taxability - Capital gains arising from transfers effected after April 1, 2017 are taxable in India. April 1, 2017 is when the amended India–Mauritius tax treaty and India’s anti-avoidance rules came into force, giving India the right to tax such capital gains.
Experts’ take
Tax experts say that the verdict signals a stricter approach to tax treaty interpretation and a heightened emphasis on economic substance over legal form. As a result, foreign investors’ sentiment may be dampened, which may lead to low inflow of FDI and FPIs in India, they say.
“The Supreme Court verdict sets out a clear prompt for investors to reassess holding structures and exit strategies, potentially dampening foreign investment appetite and altering how future M&A transactions involving India inbound, are structured,” said Sandeepp Jhunjhunwala, Partner at Nangia Global.
Vinod Joseph, Partner, Economic Laws Practice, says: “This verdict may lead to increased scrutiny of past deals routed through Mauritius, Singapore, or similar jurisdictions, including IPOs and M&As. We may see more litigation and a shift toward substance-based structures, such as those in GIFT City.”
Sherry Goyal, Associate Partner, DMD Advocates, says that the verdict comes right in time of the Budget “where amidst a weakening rupee and weaning interest from foreign investors, it was anticipated that the government is considering measures, including some kind of tax relief for foreign portfolio investors as a possible sweetener to boost sentiments. Instead, stringent interpretations of treaties with invocation of General Anti-Avoidance Rule (GAAR) would deflate the FPI/FII in India."
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