Tiger Global SC ruling to prompt fgn investors to reassess holding structures: Tax experts

New Delhi, Jan 15 (PTI) The Supreme Court's ruling on Thursday, upholding Indian tax authorities' demand for capital gains tax on Tiger Global's exit from e-commerce company Flipkart in 2018, signals a stricter approach to tax treaty interpretation, which could dampen foreign investment as they will reassess holding structures and exit strategies, tax experts said.

The Supreme Court reversed the 2024 Delhi High Court judgement and ruled that the transaction of the Tiger Global Mauritius entity selling shares (indirect transfer) of Flipkart Singapore is exigible to tax in India.

Tiger Global International II, III, and IV Holdings (TGI) are Mauritius-based private companies established to conduct investment activities on behalf of Tiger Global Management LLC (TGM), a US-based company.

TGI had acquired shares in Flipkart Singapore between 2011 and 2015, which derived substantial value from assets located in India. Tiger Global exited from Flipkart in 2018, when Walmart Inc. acquired a controlling stake in the Indian e-commerce company.

Nangia Global Partner Sandeepp Jhunjhunwala said the Supreme Court verdict signals a stricter approach to tax treaty interpretation and a heightened emphasis on economic substance over legal form.

The Supreme Court, while allowing the tax department's appeal in the Tiger Global matter, held that the mere possession of a Tax Residency Certificate (TRC) does not preclude a detailed enquiry where an interposed entity is alleged to be a conduit for tax avoidance.

"It sets out a clear prompt for investors to reassess holding structures and exit strategies, potentially dampening foreign investment appetite and altering how future M&A transactions involving India inbound are structured. This approach reinforces the principle that treaty benefits are available only to genuine tax residents, not to layered structures created to secure unintended tax advantages.

"Where the evidence demonstrates that intermediary entities function merely as conduits, lacking real economic purpose, decision-making authority, or business activity, the Revenue could pierce the structure and deny treaty protection," Jhunjhunwala said.

Grant Thornton Bharat Tax Partner Richa Sawhney said the landmark verdict in the Tiger Global case makes it clear that a Tax Residency Certificate is no longer a guaranteed gateway to treaty relief. The SC ruling stresses that the structuring of business arrangements must be anchored in law and supported with commercial rationale.

"The ruling reinforces the significance of the anti-avoidance framework and substance-driven treaty interpretation. Taxpayers should re-assess their existing arrangements in light of the principles laid down by this decision," Sawhney said.

Lakshmikumaran and Sridharan attorneys Executive Partner L Badri Narayanan said the SC judgment marks a significant shift toward substance over form in India's tax regime and also raises critical questions about what constitutes adequate commercial substance, creating uncertainty for global investors.

"Multinational enterprises must urgently revisit their holding structures and governance frameworks to mitigate tax risks. Clear guidance will be essential to maintain investor confidence and ensure India remains an attractive destination for cross-border investments," he said.

BTG Advaya Head (Tax) Amit Baid said the SC ruling has serious implications for private equity funds, hedge funds and FPIs using Mauritius and Singapore-based structures, including for pre-2017 investments. While it does not automatically reopen closed cases, it significantly strengthens the tax department's hand in reassessment proceedings where permitted by law.

EY India, National Leader, International Tax and Transaction Services, Pranav Sayta, said while the SC Judgement relates to capital gains arising to a taxpayer seeking the benefit of the India Mauritius Treaty, the principles laid down in the judgment are likely to impact taxpayers from various jurisdictions, including, for instance, taxpayers seeking relief under the India Singapore treaty.

The Tiger Global case concerns the US investment firm's exit from Flipkart in 2018, following Walmart's buyout. Following the Walmart purchase in 2018, TGI transferred certain shares to Tiger Global Fit Holdings S.A.R.L. (a Luxembourg-based buyer) and recognised capital gains. TGI held valid Tax Residency Certificates and Category 1 Global Business License issued by Mauritian authorities.

TGI filed applications with tax authorities in India for the issuance of a 'Nil' withholding tax certificate prior to the consummation of the transfer of shares.

However, the tax department denied benefits under the Double Taxation Avoidance Agreement (DTAA) between India and Mauritius.

Subsequently, TGI filed applications before the Authority for Advance Rulings (AAR) to determine the taxability of capital gains on the sale of shares under the Income-tax Act, 1961, read with the DTAA.

The AAR refused to admit the applications, holding that the 'head and brain' of TGI was not situated in Mauritius but in the USA, and the transactions were prima facie designed for tax avoidance. The Delhi High Court, by its judgment dated August 28, 2024, overturned the AAR's ruling and upheld the assessee's entitlement to DTAA benefits, holding that the transaction is protected by the DTAA's grandfathering provisions.

The HC observed that the TRCs and satisfaction of the Limitation-of-Benefits (LOB) provisions are sacrosanct in the absence of demonstrable fraud, sham transactions or other indicia of treaty abuse. PTI JD DRR