Tiger Global: SC says ‘tax sovereignty comes first’ but verdict raises questions

This year opened with a significant tax law ruling from the Supreme Court in the Tiger Global case. However, the verdict raises more questions than it answers. It reopens scrutiny of the “Mauritius route”—shorthand in finance and investment circles for capital routed through Mauritius since the 1990s to take advantage of favourable treaty provisions. 

While the tax department has indicated that there is “no intention to dig out old cases”, reports suggest notices have already been sent to “at least” seven overseas venture capital and private equity funds in the wake of the ruling. Tax lawyers, too, have noted that investors are nervous about their past investments and potential exits.

Key facts 

Paring back from the finer details, the facts are reminiscent of the Vodafone dispute: two non-resident entities transacting shares of another non-resident company, the Indian connection arising from the fact that the shares derived substantial value from assets located in India.

The transacting entities are the seller, Tiger Global International II, III and IV Holdings (assessees)—all incorporated in Mauritius—and the buyer, Fit Holdings S.A.R.L., incorporated in Luxembourg and owned by retail giant Walmart. The assessees sold their shares in Flipkart Private Limited incorporated in Singapore, which substantially derived value from Indian assets. This transaction resulted in an indirect transfer of Indian shares with the assessees receiving approximately USD 1.6 billion as consideration. 

There are two crucial dates—the investment in the Singapore entity was carried out prior to 1 April 2017 (between 2011 and 2015) and the sale transaction was approved by the assessees’ boards after 1 April 2017 (in 2018), as part of the global acquisition of Flipkart by Walmart. The ‘1 April 2017’ date is significant because it marks the coming into force of the General Anti-Avoidance Rules (GAAR), a set of provisions aimed at addressing tax avoidance.

The assessees claimed that pursuant to Article 13(4) of the India–Mauritius tax treaty (DTAA), its capital gains were taxable only in Mauritius. They relied on Mauritian Tax Residency Certificates (TRCs) to prove Mauritian residence. The tax department denied relief citing that the transaction was orchestrated from the United States by Charles P. Coleman, founder and partner of the ultimate holding company of the assessees: the US-incorporated Tiger Global Management LLC. 

The aggrieved assessees approached the Authority for Advance Rulings (AAR) which rejected the application as it appeared to be prime facie designed for tax avoidance—Section 245R(2)(iii) of the Income-tax Act, 1961 (IT Act) stipulates that the AAR cannot hear applications designed prima facie for the avoidance of income tax. On appeal, the Delhi High Court ruled in favour of the assessees. The tax department appealed to the Supreme Court, where the central issue was whether the assessees were entitled to relief under the DTAA in respect of capital gains from the indirect transfer. 

What the Supreme Court said

The most convenient way to read the 152-page verdict is to start with the concurring opinion of Justice J.B. Pardiwala. While the opinion does not comment on substantive law, it emphasises the primacy of tax sovereignty “in times of global uncertainty”, which helps pre-empt the holding in favor of the tax department.  

The Bench of Justices Pardiwala and R. Mahadevan relied on multiple reasons to support its holding that the transaction amounted to tax avoidance, a diametrically opposite outcome from the Vodafone dispute. In Vodafone, the Supreme Court ruled that the indirect share transfer transaction was a bona fide Foreign Direct Investment transaction, not contemplated as taxable under the IT Act, as it then stood. 

After the verdict in Vodafone, Parliament had amended the IT Act retrospectively to tax indirect transfers of shares whose value came mainly from Indian assets. As a consequence, the only way assessees could avoid taxation in India was through the DTAA. 

In Tiger Global, the assessees relied on Article 13(4) which states that gains from property not covered in the earlier paragraphs “shall be taxable only in the Contracting State of which the alienator is a resident.” They argued that as the alienator is Mauritian, gains could only be taxed in Mauritius. Further, owing to exemptions on capital gains tax for companies holding a Global Business Licence in Mauritius, the assessees would not have been taxed there either. 

The Supreme Court considered this double non-taxation to be objectionable. The Bench seems to have considered three cumulative conditions for DTAA relief: the assessee companies must a) directly hold the transferred shares, b) pay taxes in Mauritius; and c) effectively be controlled and managed from Mauritius. None of these were fulfilled.  

The second reason for the Bench’s holding in Tiger Global was based on TRCs. The Bench held that although a Central Board of Direct Taxes’ Circular 789 from the year 2000 effectively stated that TRCs are conclusive proof of residence under Article 13(4), this was no longer good law. The IT Act had been amended to clarify that while a TRC is a necessary condition for claiming treaty benefits, it is not by itself conclusive: a clause (5) was added to Section 90 in 2013 to say that the assessee “shall also provide such other documents and information, as may be prescribed.” Subsequent amendments also introduced GAAR, which empowers tax authorities to deny treaty relief in cases of impermissible avoidance.

Third, on GAAR, the rules stated that “without prejudice to” the grandfathering of income from pre-2017 investments, arrangements on or after 1 April 2017 can be subject to scrutiny. The Bench read this to mean that arrangements yielding the tax benefit such as the indirect share transfer could be scrutinised as it was approved in 2018. In the alternative, courts would fall back on the judicial anti-avoidance rule (JAAR). This refers to the ‘substance-over-form’ doctrine developed in the pre-GAAR era to assess avoidance.

Several open questions

The Bench’s emphasis on tax sovereignty marks a significant shift in language. In earlier landmark rulings—such as Azadi Bachao Andolan v Union of India (2004)—the Supreme Court acknowledged the benefits of the Mauritius route, observing that any gaps enabling treaty shopping reflected a deliberate policy choice to facilitate the inflow of foreign investment.  In a paper published in 2013, Eduardo Baistrochhi, a professor of international tax law, had hypothesised that countries on the path of economic ascendency such as India may increase the “entry fee” to treaty benefits. Tiger Global may be indicative of this tone. 

Yet, several open questions remain. Article 13 of the DTAA allocates taxing rights over capital gains between India and Mauritius and was renegotiated in 2016. Paragraph 4 of Article 13 reads as follows: “Gains from the alienation of any property other than that referred to in paragraphs 1, 2, 3 and 3A shall be taxable only in the Contracting State of which the alienator is a resident.” 

Paragraphs 1 to 3A deal with transfers of other kinds of property and direct share transfers of investments acquired on or after 1 April 2017. Hence, the assessees sought relief under the residual paragraph. From a textual reading—especially the words “any property”—this paragraph does not oust indirect transfers. The Supreme Court’s narrow reading, arrived at without engaging established principles of treaty interpretation, may raise concerns about good faith compliance and could have spillover effects for other treaties, such as the one with Singapore, which contains a similarly worded residual clause.

Next: the Supreme Court ruled that treaty relief is contingent on having paid taxes to the other country. However, treaty relief is based on a taxpayer being a resident in at least one of the treaty countries. A person is resident if they are “liable to tax” in that country. In Azadi Bachao, the Court held that even exempt entities are “liable to tax” as actual liability to pay is not required. Thus, the finding in Tiger Global may be contrary to the dicta in Azadi Bachao. 

Further, TRCs, though backed by the CBDT circular from 2000, have been routinely contested as evidence of residency by departmental officers. This has led to a lack of clarity about their legal position. The emphatic message coming out of Tiger Global is that TRCs are inconclusive. One waits to see if the circular will be formally withdrawn. 

Finally, on GAAR, construing the phrase “without prejudice to” in Rule 10U(2) of the Income Tax Rules, 1962 as an overriding clause risks defeating the purpose of grandfathering, reducing the protection available for pre-2017 investments to a hollow assurance. The uncertainty is compounded by the Judgement’s limited engagement with the facts: beyond referring to AAR’s prima facie observations, it offers little explanation of how avoidance was established. Even in invoking JAAR, the Bench did not articulate why the transaction lacked commercial substance. 

This case illustrates the complexity of tax law in action. Treaties, primary legislation, myriad forms of delegated legislation (rules and circulars), and competing interests are all at play. Even within the executive, one arm negotiates treaties while another seeks to expand revenues. The simplification process of the IT Act currently underway has already contemplated changes to primary law and rules, but it could also benefit from taking stock of other forms of delegated legislation.

In tax law, however, the buck does not always stop with a Supreme Court verdict. Time will tell whether the Tiger Global ruling is reinforced with clearer reasoning or reduced to a paper tiger through executive or judicial action.

Dr. Ashrita Prasad Kotha, an Assistant Professor at National Law School of India University Bengaluru (NLSIU), specialises in international tax law. She would like to thank Prakriti Singh (Assistant Professor, NLSIU) for insightful discussions on the judgement.