Tax Residency Certificate No Longer Guarantees Treaty Protection, ETCFO
The Supreme Court’s ruling in the Tiger Global case has fundamentally altered the tax treatment of offshore investment structures routed through Mauritius holding that possession of a Tax Residency Certificate does not guarantee treaty protection where arrangements lack commercial substance.
Setting aside the Delhi High Court’s August 2024 judgment the apex court ruled that capital gains arising from indirect transfers effected after April 1 2017 are taxable in India under the Income tax Act 1961 read with the India Mauritius Double Taxation Avoidance Agreement even where investors claim grandfathering under the treaty.
The verdict significantly widens the scope of scrutiny for foreign portfolio investors private equity and venture capital funds and allows the General Anti Avoidance Rules to override treaty benefits and legacy Central Board of Direct Taxes circulars.
Treaty abuse and round tripping backdrop cited
Sandeepp Jhunjhunwala M&A Tax Partner at Nangia Global said the Court has explicitly linked the treaty amendments to concerns around round tripping and tax avoidance.
The verdict notes that the India Mauritius treaty amendments were introduced against a hostile backdrop of widespread round tripping whereby Indian and multinational investors routed investments through Mauritius to exploit residence based exemptions and tax haven benefits Jhunjhunwala said.
He added that the Court has emphasised that post Vodafone legislative measures were designed to prevent treaty abuse and ensure exemptions are available only to genuine residents with real commercial substance underscoring India’s intent to preserve tax sovereignty.
TRC not a guaranteed gateway to treaty relief
Richa Sawhney Tax Partner Grant Thornton Bharat said the ruling ends the automatic reliance on TRCs and taxpayer friendly circulars.
The Supreme Court has made it clear that a Tax Residency Certificate is no longer a guaranteed gateway to treaty relief and that circulars previously invoked for such claims are no longer applicable Sawhney said.
She added that tax authorities retain full authority to independently examine facts and assess treaty eligibility after proper investigation reiterating that while taxpayers may structure their affairs such arrangements must be supported by law and commercial rationale.
Azadi Bachao Andolan jurisprudence reshaped
Amit Maheshwari Managing Partner AKM Global said the ruling recalibrates the long standing understanding of the Supreme Court’s Azadi Bachao Andolan judgment which for nearly two decades treated the TRC as sacrosanct.
In the Tiger Global judgment the Court has categorically held that mere possession of a TRC does not by itself preclude scrutiny where the entity is alleged to be a conduit for tax avoidance Maheshwari said.
He said the Court has acknowledged that the 2016 amendments to the India Mauritius DTAA were specifically designed to curb treaty abuse and treaty benefits cannot be claimed mechanically or in isolation from economic reality.
The judgment is also likely to have overriding effect on investments claimed to be grandfathered and has far reaching consequences for private equity venture capital and offshore investment structures he said.
GAAR can override grandfathering
CA Nitin Bansal President Bharatiya Janata Party Chartered Accountants Cell Haryana said the ruling strengthens enforcement of anti avoidance provisions.
The decision underscores that possession of a TRC or reliance on legacy circulars cannot by itself guarantee treaty protection By reaffirming the overriding application of GAAR even in cases involving grandfathered investments the Court has empowered tax authorities to examine real commercial intent economic substance and beneficial ownership Bansal said.
He said CFOs and multinational investors must reassess existing holding and investment structures to mitigate tax and litigation risks.
Foreign investors face higher capital gains tax risk
Hemen Asher Partner Direct Tax Bhuta Shah and Co LLP said the ruling is a major setback for foreign investors who relied on treaty certainty.
The overriding validity of the TRC which courts have upheld all these years is no longer available Global investors will now need to factor capital gains tax costs into their exit models and litigation risk in India may rise Asher said.
He added that the judgment could reopen scrutiny of treaty claims involving indirect transfers and income claimed as exempt by foreign portfolio investors under various tax treaties.
Case background 15000 crore Flipkart gains
The case relates to Tiger Global International II III and IV Holdings Mauritius based entities established to make investments on behalf of Tiger Global Management LLC a United States based investment manager.
Between 2011 and 2015 the Mauritius entities acquired shares of Flipkart Singapore which derived substantial value from assets located in India In 2018 they transferred certain shares to Fit Holdings SARL a Luxembourg based buyer generating capital gains of about 15000 crore.
Despite holding valid TRCs and Category 1 Global Business Licences issued by Mauritian authorities the assessees’ applications for nil withholding tax certificates under Section 197 of the Income tax Act were rejected by the tax department which alleged that the Mauritius entities were mere conduits controlled from the United States.
Supreme Court overturns Delhi High Court
The Authority for Advance Rulings refused to admit the assessees’ applications citing prima facie tax avoidance While the Delhi High Court later overturned the ruling and upheld treaty benefits the Supreme Court has now reversed the High Court decision.
On a detailed analysis of the DTAA CBDT circulars earlier Supreme Court rulings in Azadi Bachao Andolan and Vodafone GAAR provisions Finance Act amendments and the 2016 treaty changes the apex court held that CBDT circulars stand superseded by statutory law.
The Court further ruled that GAAR applies to tax benefits obtained on or after April 1 2017 irrespective of when the underlying investment was made rendering the grandfathering cut off date irrelevant where an arrangement is found to be impermissible.
Concluding that the Tiger Global transaction constituted an impermissible avoidance arrangement the Supreme Court held that capital gains arising from transfers effected after April 1 2017 are taxable in India and accordingly set aside the Delhi High Court judgment.
