SC Rejects Tiger Global's Tax Avoidance, Rules Mauritius Structure Impermissible

A Bench of Justices R Mahadevan and J B Pardiwala held that the Revenue authorities had successfully established that the transfer of shares by Tiger Global International II, III and IV Holdings Mauritius entities was carried out pursuant to an arrangement lacking commercial substance and designed primarily to obtain treaty benefits under the India-Mauritius Double Taxation Avoidance Agreement (DTAA).

As a result, the Court ruled that Chapter X-A (GAAR) of the Income Tax Act was attracted and that the applications before the Authority for Advance Rulings (AAR) were rightly rejected as barred under proviso (iii) to Section 245R(2).

The Court further held that capital gains arising from transfers effected after April 1, 2017, are taxable in India, notwithstanding that the shares were acquired prior to that date, rejecting the claim of grandfathering under Article 13 of the DTAA.

It concluded that the High Court had erred in interfering with the AAR's order and in holding that the transactions were not designed for tax avoidance.

The appeals arose from the sale of shares of Flipkart Singapore, which derived substantial value from assets located in India, by Tiger Global's Mauritius entities to a Luxembourg-based buyer as part of Walmart Inc.'s acquisition of Flipkart. While the Delhi High Court had held that the assessees were entitled to treaty protection and that the gains were not chargeable to tax in India, the Supreme Court disagreed, finding that the overall structure and manner of control pointed to an abusive arrangement rather than a genuine commercial transaction.

Commenting on the ruling, Gouri Puri, Partner at Shardul Amarchand Mangaldas & Co., said the decision would have wide-ranging implications for cross-border investments.

"Tiger Global's case will impact all current and prior M&A deals where tax treaty benefits have been claimed. Private equity players and FPIs need to review their investment structures and rethink their returns. Tax litigation related to tax treaty claims may increase and affect the tax insurance market. The fine print of the Supreme Court's decision will give a better sense of the factual nuances in the holding company structure that were relied upon to rule against Tiger. But the big takeaways are the dilution of the tax residency certificate and the use of GAAR. This is a key landmark in the evolution of India's tax treaty jurisprudence," she said.

The apex court observed that while tax planning is permissible, once a mechanism is found to be sham or impermissible under law, it ceases to be legitimate avoidance and becomes evasion, entitling the Revenue to deny treaty benefits and invoke GAAR.

Allowing all the appeals, the Supreme Court set aside the impugned Delhi High Court judgment and restored the Revenue's position.

- ANI