Supreme Court’s Interpretation of General Anti-Avoidance Rule (GAAR) in Tiger Global Case

The recent Supreme Court ruling on GAAR in the Tiger Global case underscores its pivotal role in India's tax enforcement framework. This interpretation is expected to significantly impact tax treaties and cross-border transaction structuring. Taxpayers are advised to reassess existing and future transactions based on this decision.

Key Takeaways from the Ruling

• The Supreme Court has positioned GAAR as complementary to the judicial doctrine of "substance over form". This implies that tax authorities can focus on the real economic purpose of a transaction rather than just its legal structure.
• The ruling affects treaty benefits and weakens the protection offered by grandfathering provisions, necessitating a reevaluation by taxpayers.
• GAAR can apply when the main objective of an arrangement is to gain tax benefits, particularly if it involves: 
  1. Misuse of law
  2. Lack of commercial substance
  3. Non-arm’s-length dealings
  4. Absence of bona fide purpose
• The broad framing of these tests raises concerns about certainty, suggesting a need for comprehensive guidelines and examples to mitigate subjectivity.

Impact on Tax Residency Certificates (TRCs)

• The ruling diminishes the role of TRCs in claiming treaty benefits. A TRC alone does not guarantee tax-treaty benefits, especially for arrangements yielding benefits from April 1, 2017, onwards.

Broader Implications of the Ruling

• Experts note a shift towards using GAAR as a principal anti-avoidance tool, not just a last resort.
• This approach is also seen in domestic cases involving demergers and restructurings.
• The ruling reinforces GAAR’s applicability from a direct tax perspective and emphasizes the insufficiency of TRCs in isolation for protection against domestic scrutiny.

Expert Opinions

• The ruling is expected to influence future applications of tax treaties and cross-border arrangements.
• Taxpayers may need to evaluate their existing arrangements in light of this decision.
• GAAR's operation alongside the doctrine of substance over form has broad implications for transactions where treaty benefits are claimed.