Tax Hotline: Tiger Global Investment: Rewriting the Rules of India’s International Tax Regime

Tiger Global Investment: Rewriting the Rules of India’s International Tax Regime

• Prima facie tax avoidance may be inferred wherever a transaction seeks to avoid a tax otherwise payable under law.
• Considering the introduction of the GAAR, a tax residency certificate, by itself, is no longer sufficient to establish residence under the Mauritius Treaty and the Indian tax authorities may independently examine the residence of treaty claimants.
• Circular 789 and Azadi operate only within the legal regime in which they were issued and cannot override subsequent statutory amendments.
• The GAAR may apply to pre-1 April 2017 investments sold post-1 April 2017.
• Relief from Indian taxation otherwise available under the Mauritius Treaty may be denied where the relevant item of income is not taxable in Mauritius.
• Article 13 of the Mauritius Treaty does not extend treaty protection to gains arising from ‘indirect transfers’, i.e., transfers of shares of a foreign company deriving substantial value from Indian assets.

In a concerning ruling¹ with far-reaching ramifications for cross-border investments into India, the Indian Supreme Court has upheld the dismissal of applications filed by three Tiger Global Investment entities before the Authority for Advance Rulings (“AAR”) on the ground that the transactions in respect of which a ruling was sought involved a prima facie arrangement for the avoidance of tax and was therefore not maintainable.

The Court held that a tax residency certificate (“TRC”) is not sufficient by itself to claim treaty benefits under the India-Mauritius tax treaty (“Mauritius Treaty”) and that taxation in Mauritius is necessary to access treaty benefits. It also invokes judicial anti-avoidance doctrines and the GAAR to declare that the transactions undertaken by the Tiger Global Investment entities were impermissible avoidance arrangements and therefore ineligible to claim treaty benefits.

The Court also held that treaty protection under Article 13 of the Mauritius Treaty does not extend to indirect transfers of Indian shares by Mauritian residents and that such gains are taxable in India.

The Court’s reasoning, such as it is, materially alters the assumptions underpinning the legitimacy of treaty-based investment structures. The judgment is likely to have a widespread and systemic impact on cross-border investment into India, including on how India is viewed as an investment destination, the manner in which transactions are structured, and the approach taken by parties in deal negotiations.

Background

The structure.

Beginning in October 2011 and continuing through April 2015, several funds (the “Funds”) managed by Tiger Global Management, a U.S.-based investment firm, invested in the Singapore parent company of Flipkart (“Flipkart Singapore”), an Indian e-commerce company. The Funds were organised as limited partnerships in the Cayman Islands and pooled capital from a broad base of several hundred investors worldwide. Tiger Global Management LLC provided advisory and portfolio management services to the Funds.

To facilitate their investments in Flipkart Singapore, each Fund set up a special-purpose vehicle (“SPV”) in Mauritius. These Mauritian SPVs, in varying combinations, invested into three Mauritius-based holding entities i.e., Tiger Global International II Holdings, Tiger Global International III Holdings, and Tiger Global International IV Holdings (together, the “Taxpayers”), which invested in Flipkart Singapore.

The transactions.

In 2018, in connection with Walmart Inc.’s acquisition of Flipkart Singapore, the Taxpayers sold their shareholdings in Flipkart Singapore to a Luxembourg-based subsidiary of Walmart, Fit Holdings S.à r.l.

In connection with the transactions, the Taxpayers applied for nil or lower withholding tax certificates under section 197 of the Income-tax Act, 1961 (“ITA”), on the basis that they were residents of Mauritius, had been issued valid TRCs by the Mauritius tax authorities for the relevant assessment years, and were therefore entitled to exemption from Indian capital gains tax under the Mauritius Treaty. However, alleging that the Taxpayers were not controlled or managed from Mauritius, the Indian tax department (the “Department”) declined to grant nil withholding and instead issued certificates directing tax to be withheld (at a discounted rate), on the basis that the Taxpayers were not entitled to benefits under the Mauritius Treaty.

The Taxpayers withheld tax but filed applications before the AAR under section 245Q(1) of the ITA seeking an advance ruling on whether the capital gains arising from the sale of shares of Flipkart Singapore to a Luxembourg-based purchaser were chargeable to tax in India under the ITA read with the Mauritius Treaty.

Proceedings before the AAR

The AAR held that the question before it involved transactions that related prima facie to the avoidance of tax and rejected² the Taxpayers’ applications on grounds of maintainability³.

In support of its decision, the AAR found that the real control and management of the Taxpayers lay outside Mauritius, principally with Tiger Global Management, LLC; that the Taxpayers lacked independent commercial substance and functioned as mere conduit or “see-through” entities; and that their incorporation in Mauritius was primarily motivated by the objective of availing treaty benefits.⁴ The AAR further held that their TRCs were not conclusive and could be looked behind to examine issues of real control, beneficial ownership, and substance. Despite holding the applications to not be maintainable, the AAR nonetheless also proceeded to record findings on the merits and took the view that that benefits under the Mauritius Treaty did not extend to transfers of shares of a non-Indian company by Mauritian residents.

Aggrieved, the Taxpayers filed writ petitions against the order of the AAR in the Delhi High Court.

Proceedings before the Delhi High Court

The Delhi High Court allowed⁵ the writ petitions and set aside the AAR’s orders, holding that the transactions could not be regarded as prima facie designed for the avoidance of tax and that the rejection of the applications under proviso (iii) to section 245R(2) was unsustainable. The High Court observed that the AAR’s findings were not tentative but conclusive and therefore travelled beyond the limited prima facie inquiry contemplated under the proviso.

The High Court rejected the AAR’s premise that Tiger Global Management LLC was the “parent” company, of the Taxpayers, finding that it functioned only as an investment manager and that the Taxpayers were not shell or sham companies but legitimate pooling vehicles with real economic substance and autonomous boards.⁶ The High Court held that mere supervisory influence did not establish transfer of control to Mr. Coleman and that their TRCs were sacrosanct and binding on the Department. Relying on Azadi Bachao Andolan⁷ and Vodafone⁸, the High Court held that treaty shopping is not per se impermissible and that investment through a foreign holding company is commercially legitimate.

The High Court also chose to enter judgement on the merits, and held that Article 13 of the Mauritius Treaty, as amended by the 2016 Protocol, applies to indirect transfers, that the investments (having been made prior to 1 April 2017) were grandfathered under Article 13(3A), and that CBDT Circulars Nos. 682⁹ and 789¹⁰ were binding on the Department. On this basis, it quashed the AAR’s orders and held that the Taxpayers were entitled to the benefits of the Mauritius Treaty in respect of the capital gains arising from the transaction.

Aggrieved, the Department filed a special leave petition before the Supreme Court.

Proceedings before the Supreme Court

Admitting the special leave petition, the Supreme Court framed the following question¹¹ for decision:

“whether the AAR was right in rejecting the applications for Advance Ruling on the ground of maintainability, by treating the capital gains arising out of a transaction of sale of shares of a Singapore Co., which holds the shares of an Indian company, by a Mauritian company controlled by an American company, to be prima facie an arrangement for tax avoidance, and hence, whether it can be enquired into to ascertain whether the capital gains would be taxable in India under the Income Tax Act read with the relevant provisions of the Mauritius Treaty or not?”

On whether the AAR was correct in declining to entertain the advance ruling applications on the basis that the transactions were prima facie tax-avoidant, the Court held that the transaction in issue was, on its face, one undertaken for the avoidance of tax. The Court held that, for the purposes of proviso (iii) to section 245R(2) of the ITA, a transaction relates prima facie to the avoidance of tax wherever it is structured to avoid a tax that would otherwise be payable under law. On this basis, the Court concluded that the AAR was justified in declining to admit the applications on grounds of maintainability.

Then, taking note of the 2016 amendments to the Mauritius Treaty¹² and the entry into effect of the GAAR¹³, the Court held that that a TRC is only an eligibility condition and not conclusive proof of residence or treaty entitlement. In doing so, the Court expressly confined CBDT Circular No. 789 of 2000¹⁴ and the decision in Azadi Bachao Andolan¹⁵ to the legal and treaty framework prevailing at the time they were rendered. It held that both were premised on a materially different statutory landscape – one that pre-dated the introduction of the GAAR and the amendment of the Mauritius Treaty through the 2016 Protocol. According to the Court, neither Circular 789 nor Azadi could be read as foreclosing an inquiry into residence, control, or abuse in the post-amendment regime, nor as elevating a TRC to conclusive status in disregard of subsequent legislative developments. The Court also laid down a new additional requirement for treaty benefits i.e., that the transaction in question be taxable in Mauritius.

The Court then went on to hold that the transactions were impermissible avoidance arrangements. While acknowledging that investments made prior to 1 April 2017 are grandfathered under the 2016 Protocol, the Court held such protection is available only where the taxpayer qualifies as a genuine resident and satisfies domestic anti-abuse requirements, that grandfathering does not operate as a blanket immunity from the GAAR scrutiny, and that the GAAR applies to post-2017 exits even where the underlying investment predates the GAAR, with Rule 10U preserving the Department’s ability to examine abusive arrangements.

The Court also held that Article 13 of the Mauritius DTAA protects only direct transfers of shares held by a Mauritian resident and does not extend to sales of shares in a foreign i.e., non-Indian company.

For all these reasons, the Supreme Court set aside the judgement of the High Court.

Analysis

How the question framed by the Supreme Court is understood is critical to determining the precedential reach of the judgment. If the Court intended to confine itself to the narrow issue of maintainability – namely, whether the AAR was justified in rejecting the advance ruling applications at the threshold on the ground of prima facie tax avoidance – then much of the judgment may fall outside the ratio and operate only as obiter dicta. If, on the other hand, the Court intended to rule on the substantive taxability of the transaction under the ITA read with the Mauritius Treaty, its observations on indirect transfers, treaty residence, and the GAAR would ordinarily assume binding force.

It is unclear whether the latter limb of the question was intended merely to test the propriety of the AAR or the Delhi High Court having ventured into the merits despite rejecting the applications on maintainability grounds, or whether it was framed so as to permit the Supreme Court itself to rule on the substantive taxability of the gains under the ITA read with the Mauritius Treaty. The judgment does not expressly resolve this ambiguity.

This distinction matters because Article 141 of the Indian Constitution accords binding force only to the “law declared” by the Supreme Court. While judicial discipline suggests that even obiter dicta of the Supreme Court deserve respect – particularly where they reflect a considered view on a question of law¹⁶ – the Court has repeatedly emphasised that not every observation in a judgment constitutes binding precedent. As clarified in Jayant Verma v. Union of India¹⁷, a precedent is not created by the ultimate conclusion or by findings of fact, but by the principle of law that was necessary for deciding the issue before the Court. Only that principle forms the “law declared”.

To preserve this distinction, the Supreme Court has endorsed what is often described as the “inversion test”, articulated in State of Gujarat v. Utility Users’ Welfare Association¹⁸ and reaffirmed in Career Institute Educational Society v. Om Shree Thakurji Educational Society¹⁹. Under this test, a proposition constitutes the ratio decidendi only if the final outcome of the case would have been different had that proposition not been adopted. If the conclusion would remain unchanged even after excising a particular observation, that observation is, by definition, obiter and lacks binding force.

Any assessment of the precedential impact of this decision – particularly on issues such as treaty protection for indirect transfers, the conclusiveness of tax residency certificates, and the scope of the GAAR – will therefore depend on the scope of the question the court set out to address. However, irrespective of the ultimate classification of the Court’s observations as ratio or obiter, the substantive issues the judgement engages with merit careful examination and are analysed in detail below.

1. Indirect Transfers and Article 13

A preliminary difficulty with the Court’s conclusion that ‘an indirect sale of shares would not, at the threshold, fall within the treaty protection contemplated under Article 13’ is that, as written, it is susceptible to a reading that renders it largely ineffectual. If, as the Court says, Article 13(4) applies wherever the transferred property is “directly held” by a transferor resident in Mauritius²⁰, then it would, by definition, apply to every case not expressly covered by the preceding paragraphs of Article 13. After all, Indian tax liability – whether arising under ordinary source rules or through the deeming fiction in section 9(1)(i) – always attaches to the person who directly alienates an asset, and it is that very person who seeks treaty protection.²¹ On this reading, when the Court states that an “indirect sale of shares” does not fall within Article 13(4), the proposition is substantively empty: every so-called “indirect transfer” necessarily involves a direct alienation of shares by the transferor, and that direct alienation could still be tested under Article 13. Read this way, the Court’s conclusion adds little to the treaty analysis and does not meaningfully limit the scope of Article 13(4).

The Court’s conclusion acquires operative content only if its references to “directly held” property are understood as references to property “directly held in India”, and its exclusion of “indirect sales of shares” is read as referring to “indirect sales of shares of an Indian company”. On this reading, Article 13(4) is confined to assets directly situated in India but not otherwise covered by Articles 13(1), (2) or (3A) – for example, debt instruments or other movable property of an Indian entity – and does not extend to gains arising from the transfer of shares of a foreign company (i.e., non-Indian), whether domestic law deems them situated in India or not. Interpreted thus, the Court’s conclusion effectively denies treaty protection for offshore share transfers altogether and treats Article 13(4) as incapable of accommodating India’s indirect transfer regime. However, this interpretation suffers from some fundamental inconsistencies; primarily, the premise that on a combined reading of Article 13(2) and Article 13(3A), Article 13(4) applies only to gains arising to a resident of one contracting State from a transfer of property directly held in the other contracting State.

In support of this flawed premise, the Court relies on Articles 13(1), (2), and (3A), which it reads as conferring taxing rights on the other Contracting state only where the property whose alienation gives rise to the gain is situated in that State.²²

The Court’s reading is correct in so far as it relates to Article 13(1), which makes gains arising from the transfer of immovable property situated in the other contracting State taxable in that State. It is also correct vis-à-vis Article 13(3A) which makes gains arising from the transfer of shares of a company resident in the other contracting State taxable in that State.

However, when it comes to Article 13(2), the Court’s logic begins to break down. Article 13(2), which the Court incorrectly interprets as applying only to scenarios involving the transfer of property ‘directly owned… in the other State’²³, is not limited only to gains that arise from property situated in the other contracting State. To the contrary, Article 13(2), correctly interpreted, applies to gains arising from the transfer of any property, within or without the other contracting State, provided that such property forms part of the business property of a permanent establishment in the other contracting State.²⁴ In other words, it is possible for property situated outside India to form part of a permanent establishment of a foreign entity in India.

On this construction of Article 13(2), even a combined reading of Article 13 yields no uniform basis to conclude that Article 13(4) applies only to direct transfers of property situated in India. The interpretation therefore difficult to reconcile with the expansive language of Article 13(4)and unduly narrows the residual scope that Article 13(4) was designed to preserve.

This interpretation would also produce an anomalous result. While treaty protection is preserved for gains arising from the transfer of directly held shares acquired prior to 1 April 2017, the same protection is denied for gains arising from economically equivalent indirect transfers involving those very investments. It is difficult to discern a principled basis for such a distinction, or to attribute it to any deliberate choice on the part of the treaty drafters, particularly when viewed in the context of India’s treaty practice.

In a significant number of its treaties, India has expressly negotiated provisions conferring source-State taxing rights over capital gains arising from the transfer of shares of a company situated anywhere in the world, provided that such shares derive substantial value from immovable property located in the source-State. If, as the Court suggests, Article 13 (including its residual clause in Article 13(4)) is concerned only with direct transfers of property situated in the source State, then indirect transfers would fall outside Article 13 altogether. In that event, India would, in principle, be free to assert taxing rights over such indirect transfers under its domestic law, whether by deeming the gains to arise in India under section 9(1)(i) and allocating taxing rights through another treaty article (such as the “Other Income” article)²⁵, or otherwise. On the Court’s logic, therefore, treaty protection would not extend to indirect transfers in the first place and there would have been no necessity for India to negotiate specific treaty provisions expressly conferring taxing rights over such transactions.²⁶

This interpretation also sits uneasily with the prevailing international consensus on the treatment of offshore indirect transfers. A multilateral discussion paper²⁷ prepared by the IMF, OECD, UN and World Bank recognises that, as a matter of treaty interpretation, capital gains arising from the alienation of shares of a foreign company may still fall within Article 13, and that source-State taxation of such gains generally requires specific and express treaty language allocating taxing rights over indirect transfers, typically through provisions akin to Article 13(4) of the UN Model Tax Convention. Absent such language, the default position under the Models is that gains from the alienation of shares are covered by Article 13 and allocated in accordance with the Article 13’s residuary clause, rather than falling entirely outside it.

Given the complexity of the issue and the far-reaching consequences of its holding, the Court may have been better served by exercising restraint (given its ultimate conclusion that treaty benefits were not available to the Taxpayer rested on the finding that the transactions were impermissible avoidance arrangements, and not because those treaty benefits did not exist) or examining the issue with the thoroughness it deserved.  Its one-page analysis does little to engage with the structure of Article 13, India’s treaty practice, or the implications of its construction for settled cross-border investment arrangements.

2. Residence, ‘liable to tax’, and the role of the TRC under the Mauritius Treaty

The Court’s determination that a TRC is no longer sufficient, by itself, to claim benefits under the Mauritius Treaty marks a clear departure from its own long-standing precedent²⁸ and from the framework that has historically governed the determination of tax treaty residence in India. However, the Court’s reasons for departing from this settled position are unpersuasive. While the judgment invokes subsequent legislative and treaty developments, including the introduction of the GAAR, it does not adequately explain why those changes necessitate a wholesale re-examination of residence in cases where the statutory conditions for invoking the GAAR are not satisfied.

While it is correct that the law as written allows for the GAAR to override treaty benefits, that override operates only where the statutory conditions for invoking the GAAR are satisfied. The GAAR is not a general or background qualification on treaty residence. The judgment does not explain why the mere existence of the GAAR on the statute book – particularly in cases where it is plainly inapplicable, such as grandfathered transactions – should render a TRC insufficient as a matter of course. In effect, the Court places the cart before the horse: it invites residence to be questioned first, in order to assess whether GAAR might apply, rather than permitting GAAR-based scrutiny only where its statutory preconditions are met. This inversion is difficult to reconcile with the carefully calibrated structure of Chapter X-A, which treats GAAR as an exceptional override, not a default lens through which treaty residence is to be examined.

By inviting Indian tax authorities to examine whether treaty claimants are “really resident” in the other contracting State, the Court departs from its own precedent and long-standing administrative guidance, which recognise residence as a matter to be determined by the authorities of the residence State. The judgment offers no guidance on how Indian authorities are to interpret foreign residence laws, how conflicts with foreign tax administrations are to be resolved, or any explanation for why determinations made by the residence jurisdiction should not be respected.

The Court also departs from precedent in another crucial respect. Established international tax treaty practice recognises that a person may qualify as a resident of a State even where no tax is ultimately payable, so long as the person remains subject to the tax laws of that State and would be taxable but for the application of an exemption. Yet the Court upends this settled treaty jurisprudence by suggesting that treaty applicability depends on whether the transaction itself is taxable in the State of residence, thereby recasting “liable to tax” – status-based test tied to personal connecting factor into a transaction-contingent requirement.

This interpretation of “liable to tax” is deeply problematic and, unless clarified by the tax administration, is likely to introduce significant uncertainty into India’s treaty network and cross-border investment framework. Many jurisdictions, as a matter of policy, exempt certain categories of income, operate territorial or remittance-based systems, or provide participation exemptions and tax holidays. Under the Court’s reasoning, entities resident in such jurisdictions could be regarded as not being “liable to tax” and therefore as being disentitled to treaty benefits, notwithstanding that they are otherwise tax residents and within the general charge to tax in those jurisdictions.

The implications extend further to widely used fund and holding structures involving fiscally transparent or hybrid entities, which are not taxed at the entity level but only in the hands of their members/ investors. A literal application of the Court’s test could place a very large universe of internationally accepted structures at risk. The consequences are particularly acute for pension funds, sovereign wealth funds and other exempt or quasi-exempt institutional investors, which are commonly accorded special tax status in their home jurisdictions but are nevertheless universally regarded as treaty-eligible residents.

More fundamentally, this approach departs from the internationally accepted understanding, reflected in the OECD Commentary and longstanding jurisprudence, that “liable to tax” refers to being subject to the taxing jurisdiction of a State, and not to the actual incidence of tax on a particular item of income. Nothing in the treaty text supports such a requirement. Where contracting States intend to condition treaty benefits on actual taxation, they do so explicitly, as reflected for example in the approach adopted under BEPS Action 2, which expressly makes treaty benefits for hybrid and transparent entities contingent on the income being subject to tax.²⁹ The Mauritius Treaty contains no such language. Moreover, domestic law points in the opposite direction: the ITA defines “liable to tax” as a status-based concept and expressly includes persons who are exempt from tax.

3. GAAR, judicial anti-avoidance doctrines, and ‘prima-facie’ tax avoidance

On the question the Court expressly set out to address, it concluded that the transaction was, on its face, one undertaken for the avoidance of tax. In reaching this conclusion, the Court characterised the arrangement as prima facie tax-avoidant by invoking both judicial anti-avoidance doctrines and the statutory GAAR framework. However, having acknowledged that it was operating at only a prima facie threshold, the Court nevertheless proceeded to categorically declare the Transaction to be an impermissible avoidance arrangement, thereby collapsing the distinction between a tentative, threshold view and a final determination and effectively pre-empting the statutory GAAR process, including the taxpayer’s right to be heard before the Approving Panel. The Court’s articulation of a markedly lowered threshold for identifying tax avoidance, its reliance on GAAR notwithstanding recognised statutory constraints, and its unqualified declaration that an impermissible avoidance arrangement exists – despite acknowledging the limited evidentiary standard applicable to a prima facie finding – warrant closer scrutiny both on substantive and procedural grounds.

First, the Court, without explanation, dramatically lowers the threshold for identifying tax avoidance, effectively erasing the distinction between legitimate tax planning and impermissible avoidance, by holding that prima facie avoidance exists wherever a transaction attempts to avoid tax that is otherwise payable under law. This approach effectively collapses the distinction between legitimate tax planning and impermissible avoidance. Even at a prima facie stage, however, a finding of avoidance ought to be anchored in at least some indicia of a sham, colourable device, or abuse – factors that have historically defined the boundary between lawful planning and impermissible avoidance. By dispensing with any such limiting criteria, the Court adopts a conception of prima facie avoidance that is untethered from established anti-avoidance principles.

Having adopted this diluted threshold, the Court then proceeds to invoke GAAR despite the express grandfathering of pre-1 April 2017 investments under Rule 10U(1)(d). In accepting the Revenue’s argument that Rule 10U(2) nevertheless permits GAAR to apply where post-2017 tax benefits arise, the Court misreads “without prejudice” as “notwithstanding”, thereby nullifying the very grandfathering Parliament enacted. As the Supreme Court explained in ITO v. Gwalior Rayon Silk³⁰, a “without prejudice” clause operates as a constraint, not a trump: it preserves the primacy of the provision to which it refers and forbids any exercise of power that would be inconsistent with, or destructive of, that provision. Properly understood, Rule 10U(2) could not be invoked to undermine the categorical grandfathering effected by Rule 10U(1)(d). By reading Rule 10U(2) as diluting the temporal cut-off expressly enacted by Parliament, the Court reverses the legislative design and deploys a preservative clause to negate the very protection it was intended to safeguard.³¹

The gravity of this error is compounded by the Court’s failure to explain how the main purpose of the transaction, or of any step therein, was to obtain a tax benefit. The judgment does not engage with several material factors that point in the opposite direction. The limitation-of-benefits expenditure test was satisfied; the Mauritian entities functioned as pooling vehicles for multiple Tiger funds rather than as single-investment conduits; and the underlying investment was in a Singapore entity, such that comparable treaty protection would have been available under most of India’s other tax treaties, where indirect transfers are generally protected. Even on the Court’s own diluted conception of tax avoidance, if no treaty benefit were available for indirect transfers and indirect transfers are taxable under the ITA, it is unclear it is unclear why the Court considered it necessary to examine whether the transaction was liable to be tested under the GAAR.

Instead, the Court rests its conclusion almost entirely on a narrow set of facts—namely, that executives of the fund manager sat on the boards of the Mauritian entities, participated in board meetings (including remotely), and shared bank signatory authority with Mauritian resident directors. These are commonplace features of global fund governance and, without more, should be insufficient to establish avoidance. In contrast, the Court largely disregards a substantial body of countervailing evidence indicative of commercial substance, including Mauritian resident directors, office premises, locally incurred expenditure, bank accounts, and the maintenance of books and records in Mauritius.

Rather than require the Department to discharge its burden of proof under Section 96(1), the Court also improperly shifts the burden of proof to the taxpayer under section 96(2) – even though that provision applies only within the statutory GAAR framework and even then requires the Department to establish that a step in the arrangement has been carried out with the main purpose of obtaining a tax benefit.

In recognising that judicial anti-avoidance doctrines and GAAR may coexist, the Court fails to address whether judicial doctrines can be invoked as a substitute for GAAR – thereby allowing the tax administration to bypass GAAR’s statutory thresholds and procedural safeguards altogether. By lowering the avoidance threshold while dispensing with GAAR’s discipline, the judgment exposes ordinary tax planning to challenge without clear statutory authority, prejudges the assessment proceedings, and undermines the balance Parliament deliberately struck between anti-avoidance enforcement and taxpayer protection.

Finally, instead of limiting its analysis to a determination of prima facie avoidance, the Court’s categorical declaration that the transaction is an impermissible avoidance arrangement prejudges the assessment proceedings and prejudices the taxpayer.

Conclusions and takeaways

The Department’s conduct in this litigation reflects a willingness to push logic beyond its outer limits in order to establish tax avoidance and deny treaty benefits, including by advancing plainly untenable statutory interpretations (reading “without prejudice” in Rule 10U(2) as “notwithstanding”), positions that sit uneasily with established Supreme Court precedent and international treaty practice (reading a generalized “subject-to-tax” requirement into the Mauritius Treaty), and opportunistic recharacterizations of its own administrative guidance (confining Circular No. 789 to foreign institutional investors – a distinction unsupported by the text of the Circular).

Taken together, these positions suggest an enforcement approach driven less by coherent principle than by revenue outcomes, with treaty commitments treated as flexible instruments rather than binding constraints. Implicit in this stance is a reinvigorated assertion of tax sovereignty and an apparent belief that India should largely be is largely unconstrained by international norms in this space. What this approach risks overlooking, however, is that certainty is the foundation of sustainable capital inflows. India remains dependent on foreign capital, and international tax cooperation is not a zero-sum game: where rules are predictable and consistently applied, both taxpayers and the exchequer benefit. The erosion of treaty certainty, by contrast, may deter precisely the long-term investment that the tax system ultimately seeks to support.

The Supreme Court’s willingness to accept and endorse several of these arguments risks entrenching an era of interpretive opportunism. If statutory text, treaty language, and even the tax administration’s own circulars can be re-read, confined, or neutralised through semantic manoeuvring whenever their application becomes inconvenient, the practical value of such guidance is substantially diminished.

In such an environment, taxpayers are left to shoulder the risk that settled positions may be retrospectively unravelled through creative reinterpretation, undermining both predictability and trust in the tax system. Over time, this uncertainty may prove more damaging to India’s investment climate than any short-term revenue gains secured through aggressive enforcement.

From a practical perspective, the immediate impact of the judgment should be viewed with some nuance. Transactions where both the investment and the exit occurred prior to 1 April 2017 should, in principle, remain protected by the statutory grandfathering regime, save in cases where assessments or proceedings are pending and the controversy remains live. However, for transactions where exits occur post-2017, the judgment is likely to embolden the tax authorities to subject treaty-based structures to materially increased scrutiny, making it imperative for investors to revisit both their holding structures and the underlying documentation through which commercial and governance substance is evidenced.

Mauritius-based structures are likely to face the greatest pressure in the near term, given the specific factual and treaty context of the case. By contrast, Singapore structures – particularly those used as genuine Asia-Pacific hubs with senior management presence and operational substance – are likely to be more defensible. Claims for treaty protection in respect of income arising from transfer of non-equity instruments such as debt, derivatives and other structured exposures – particularly post-2017 transfers – are also likely to be tested against the logic of this decision, further widening the zone of uncertainty.

In the M&A context, the judgment is likely to reinforce already conservative tendencies. More transactions can be expected to adopt withholding-first or escrow-based approaches, and in cases where buyers are willing to proceed without withholding, negotiations around representations, warranties and indemnities are likely to become more exacting, with deeper tax due diligence and heavier contractual risk allocation becoming the norm.

In sum, while the legal soundness of the judgment is open to serious question, its commercial consequences are likely to be real and immediate. Unless tempered by careful administrative checks or future judicial course-correction, the decision risks accelerating a shift towards defensive structuring, more friction in deal-making, and a higher cost of capital for inbound investment into India.

Disclaimer: Nishith Desai Associates represented the taxpayers in the proceedings discussed in this Hotline. This Hotline is intended to provide an academic and analytical discussion of the judgment based on publicly available information. The views expressed herein reflect our interpretation of the judgment and its implications and should not be construed as legal advice.