The Supreme Court's recent ruling against Tiger Global in a tax dispute related to its 2018 Flipkart stake sale has far-reaching implications for foreign investors in India and could potentially influence a similar dispute involving Blackstone. The court overturned a previous Delhi High Court ruling, asserting that Tiger Global's transaction, routed through Mauritius, constituted an "impermissible tax avoidance arrangement" and that capital gains from the sale are taxable in India.
The crux of the Tiger Global case revolved around the India-Mauritius Double Taxation Avoidance Agreement (DTAA). Tiger Global had argued that its Mauritius-based entities, holding Tax Residency Certificates (TRCs), were exempt from Indian capital gains tax under the treaty. However, the Indian tax department contended that these entities were mere "conduits" with no real economic substance, designed primarily to avoid tax, with the actual control and decision-making residing in the U.S..
The Supreme Court sided with the tax authorities, clarifying that a TRC is necessary but not conclusive proof of treaty entitlement. The court emphasized that Indian tax authorities have the right to look beyond formal paperwork and examine the "substance" of a transaction, strengthening their ability to investigate alleged "treaty shopping". This ruling signals a stricter approach to enforcing "substance-over-form principles" in cross-border investments. The court stated that the arrangement amounted to "impermissible tax avoidance".
This landmark judgment has significant implications. It clarifies that merely possessing a TRC does not guarantee treaty protection if the investment structure lacks commercial substance. It empowers tax authorities to scrutinize offshore investment structures more rigorously, potentially impacting private equity and venture capital sectors. Legal experts suggest the ruling lowers the barrier for reopening or sustaining tax demands in cases involving layered offshore structures. The ruling also diminishes the protective value of Tax Residency Certificates.
The Blackstone case, while distinct, shares similarities with the Tiger Global dispute. It also centers on tax residency and treaty benefits claimed by a foreign investor. The revenue department has claimed that Blackstone underpaid tax to the tune of ₹108 crore. Like Tiger Global, Blackstone's case involves the validity of TRCs in availing benefits from double tax avoidance agreements. The Supreme Court had previously stayed a Delhi High Court ruling in favor of Blackstone, which stated that TRCs were sufficient for availing DTAA benefits.
The Supreme Court's Tiger Global ruling could influence the Blackstone case by setting a precedent for how India applies tax principles in future cross-border deals. The emphasis on "substance over form" and the scrutiny of conduit entities could be applied to the Blackstone case, potentially leading to a similar outcome. The ruling reinforces the enduring principle that aggressive tax planning may face stringent countermeasures from revenue authorities.
The verdict has raised concerns among foreign investors, who fear increased tax uncertainty and potential challenges to existing investment structures. However, it also signals India's commitment to tax sovereignty and its determination to prevent treaty abuse. The ruling impacts private equity and venture capital sectors and raises questions about the applicability of General Anti Avoidance Rules (GAAR) and grandfathering provisions. Some experts believe the ruling may deter foreign investors. It remains to be seen how the Blackstone case will unfold in light of this new precedent, but the Tiger Global ruling has undoubtedly cast a long shadow over the tax landscape for foreign investments in India.
