Supreme Court Ruling on Tiger Global-Flipkart Share Sale Case
A recent Supreme Court ruling has brought attention to India's tax treaties by deciding on the reliance on a Tax Residency Certificate (TRC) for tax benefits under a Double Taxation Avoidance Agreement (DTAA).
Court Ruling
- The Supreme Court stated that foreign investors cannot solely rely on a TRC to claim tax benefits.
- Tax authorities can examine the commercial substance of investment structures when assessing treaty claims.
- This examination applies even to investments made before April 1, 2017, when GAAR formally came into effect.
Key Terms Explained
- DTAA: A tax treaty preventing income from being taxed twice by deciding which country can tax an investor's income.
- Commercial Substance: The requirement for a real business activity in the claimed country of tax residence.
- GAAR: Allows tax benefits denial if a structure is mainly to avoid tax without commercial substance.
Implications of the Ruling
- Invalidates the notion that a TRC alone secures treaty benefits.
- Impacts private equity exits via Mauritius, Singapore, and Cyprus due to scrutiny on commercial substance.
- Concerns extend beyond PE firms to FPIs trading in derivatives through Mauritius and Singapore.
Treaty History and Changes
- India-Mauritius DTAA shifted in 2016 to a source-based taxation system from residence-based.
- Pre-2017 investments are grandfathered and exempt from capital gains tax in India.
Current Market Reaction
- Ruling does not change the taxation framework for FPIs.
- Concerns exist about potential denial of treaty benefits based on commercial substance questions.
