NEW DELHI: In a ruling with far-reaching implications for foreign investors, the Supreme Court has allowed the tax department’s appeal in the Tiger Global matter, signalling a tougher stance on treaty interpretation and greater scrutiny of offshore holding structures used for India-bound investments.
While the detailed judgment is awaited, tax experts say the verdict underscores the court's emphasis on economic substance over legal form, making it clear that possession of a Tax Residency Certificate (TRC) alone will not shield investors from deeper inquiry if intermediary entities are alleged to be conduits for tax avoidance.
"The Supreme Court has held that the mere possession of a TRC does not preclude a detailed enquiry where an interposed entity is alleged to be a conduit," said Sandeepp Jhunjhunwala, Partner at Nangia Global.
"This reinforces the principle that treaty benefits are available only to genuine tax residents and not to layered structures created to secure unintended tax advantages," he said.
The case relates to Tiger Global International II, III and IV Holdings, Mauritius-based entities set up to carry out investment activities for Tiger Global Management LLC, a US-based fund manager.
Between 2011 and 2015, the Mauritius entities acquired shares of Flipkart Singapore, whose value was substantially derived from assets located in India.
In 2018, the entities sold certain shares to Fit Holdings SARL, Luxembourg, generating capital gains.
Despite holding valid TRCs and Category 1 Global Business Licences from Mauritius, the Indian tax department denied treaty benefits under the India–Mauritius Double Taxation Avoidance Agreement (DTAA), alleging that the Mauritius entities were mere conduits and that real control and beneficial ownership rested with the US parent.
The tax authorities consequently issued an order under Section 197 of the Income-tax Act, prescribing a 10% withholding tax on the share sale. The assessees moved the Authority for Advance Rulings (AAR), which refused to admit the applications, holding that the "head and brain" of the entities were located in the US and that the transactions were prima facie designed for tax avoidance.
The Delhi High Court, in its August 28, 2024 judgment, had overturned the AAR ruling, holding that the transactions were protected under the grandfathering provisions of the India–Mauritius DTAA.
The HC ruled that TRCs and satisfaction of Limitation-of-Benefits (LOB) conditions were sacrosanct in the absence of fraud or sham transactions, and that the Revenue had failed to establish that the Mauritius entities were obligated to pass income to the US parent.
However, the SC's decision to side with the Revenue marks a departure from that approach, potentially reopening scrutiny of similar offshore structures.
"This verdict sets out a clear prompt for investors to reassess holding structures and exit strategies," Jhunjhunwala said, adding that it could alter how future India-inbound M&A transactions are structured and may have a dampening effect on foreign investment appetite.