In a recent ruling with potentially significant implications for foreign investors, the Supreme Court of India addressed the taxability of capital gains arising from Tiger Global's stake sale in Flipkart to Walmart. While Justice R. Mahadevan authored the main judgment, Justice J.B. Pardiwala added a concurring opinion emphasizing national sovereignty in international taxation, going beyond the specific facts of the case. The court ruled that capital gains from Tiger Global's 2018 stake sale in Flipkart are taxable in India. It asserted India's sovereign right to tax income generated within its territory and stated that benefits under the India–Mauritius Double Taxation Avoidance Agreement (DTAA) cannot be automatically claimed if there are indications of treaty abuse.
Justice Pardiwala's note highlights that a nation's right to tax income originating within its borders is an inherent sovereign power. He stated that any attempts to dilute this right pose a threat to a nation's sovereignty and long-term interests. The Supreme Court emphasized that while tax planning is permissible, it must adhere to the legal framework. Mechanisms found to be illegal or a sham cannot be considered permissible avoidance but rather impermissible avoidance or evasion. This gives the Revenue the right to investigate transactions to determine the lawfulness of exemption claims.
Tax experts believe this ruling is a watershed moment in India's international tax jurisprudence. The decision raises concerns about tax certainty for foreign investors and may cause a re-evaluation of investment structures routed through treaty jurisdictions like Mauritius. The court clarified that a Tax Residency Certificate (TRC) is not conclusive evidence of entitlement to treaty benefits if the surrounding facts suggest a lack of commercial substance.
The ruling could have implications beyond the Tiger Global case, potentially affecting investments previously considered "grandfathered" under the India-Mauritius tax treaty. These structures may face closer scrutiny regarding their economic reality, rather than relying solely on treaty protection. One analyst noted the judgment appears to disturb settled law and views of a larger bench, while cautioning that the ruling could heighten investor concerns around tax certainty, a key factor in cross-border capital flows. Another analyst said that applying GAAR to transactions that were explicitly grandfathered raises serious questions.
Experts say that the Tiger Global case will impact current and past M&A transactions where treaty benefits have been claimed. Private equity investors and FPIs may need to reassess their structures and rework return expectations, which could lead to increased tax litigation and demand for tax insurance. According to another analyst, this is a decisive shift in India's treaty interpretation, particularly for Mauritius-based structures. The court has made it clear that merely possessing a tax residency certificate does not shield transactions from scrutiny if there is a lack of commercial substance.
The Supreme Court's ruling sets a precedent for investors using tax treaties. It reinforces the principle that tax planning cannot override the law and must be within statutory provisions. The court's observations regarding TRCs and tax sovereignty are of great interest. The judgment is also likely to have an overriding effect on investments which were grandfathered through India-Mauritius treaty amendment and the same may be questioned on the economic reality, with far-reaching consequences for private equity, venture capital, and offshore investment structures.
