NEW DELHI: In a ruling with far-reaching implications for foreign investors, the Supreme Court on Friday denied tax treaty benefits to Mauritius-based entities of Tiger Global on capital gains arising from the sale of unlisted Flipkart shares in 2018. The verdict marks a clear shift towards a substance-over-form approach in treaty interpretation and strengthens the tax department’s hand in probing alleged conduit structures.
Allowing the Revenue’s appeal, the apex court set aside a Delhi High Court judgment that had held the Tiger Global transactions to be protected under the grandfathering provisions of the India–Mauritius tax treaty. The High Court had ruled that possession of a Tax Residency Certificate (TRC) and compliance with Limitation-of-Benefits (LOB) conditions were sufficient to claim treaty protection in the absence of fraud or sham transactions.
The Supreme Court, however, held that a TRC by itself cannot preclude a detailed inquiry where intermediary entities are alleged to have been interposed primarily to avoid tax. Tax experts say the ruling represents a significant recalibration of the court’s earlier approach to tax treaties and could introduce greater uncertainty for foreign investors using offshore holding structures.
Sandeepp Jhunjhunwala, Partner at Nangia Global, said the ruling reinforces the principle that treaty benefits are available only to genuine tax residents and not to layered structures created to secure unintended tax advantages.
The case relates to Tiger Global International II, III and IV Holdings—Mauritius-based entities set up to undertake investment activities for Tiger Global Management LLC, a US-based fund manager. Between 2011 and 2015, these entities acquired shares in Flipkart Singapore, whose value was substantially derived from assets located in India. In 2018, they sold certain shares to Luxembourg-based Fit Holdings SARL, generating capital gains.
Despite holding valid TRCs and Category 1 Global Business Licences issued by Mauritius, the Indian tax department denied treaty benefits under the India-Mauritius taxation treaty, alleging that the Mauritius entities functioned as mere conduits and that real control and beneficial ownership rested with the US parent. The tax authorities directed Tiger Global to withhold tax at 10% on the share sale.
Tiger Global approached the Authority for Advance Rulings (AAR), which declined to admit the application. The Delhi High Court, in its August 28, 2024 judgment, had overturned the AAR’s decision, prompting the Revenue’s appeal to the Supreme Court.
Placing its ruling in a broader context, the Supreme Court referred to treaty abuse and round-tripping, noting that amendments to the India-Mauritius DTAA were made against a “hostile backdrop” in which several international corporations and Indian nationals routed investments through Mauritius to exploit treaty benefits and the jurisdiction’s tax-friendly regime. Such practices, the court observed, had become a favoured mechanism for tax avoidance.
“The judgment is likely to have an overriding impact even on investments that were earlier considered grandfathered under the India-Mauritius treaty, as these may now be tested on economic substance,” said Amit Maheshwari, managing partner at AKM Global. “It has far-reaching consequences for private equity, venture capital and offshore investment structures,” he said.
L Badri Narayanan, executive partner at Lakshmikumaran & Sridharan Attorneys, said the verdict raises critical questions on what constitutes sufficient commercial substance, adding to uncertainty for global investors. “Multinational enterprises must urgently revisit their holding structures and governance frameworks to mitigate tax risks,” he said.
Tax department officials, meanwhile, welcomed the ruling. “This has been our position from the beginning. The judgment is a game changer,” said a senior official, while adding that the department does not intend to reopen old cases indiscriminately.