Supreme Court of India rules on tax treaty eligibility and taxation of an indirect transfer of shares of an Indian company by a Mauritius based investment fund

 This Tax Alert discusses the recent landmark Supreme Court (SC) ruling in the case of Tiger Global International Holdings ^[1] (Taxpayer) upholding rejection of advance ruling sought by the Taxpayer seeking treaty exemption for indirect transfer. The rejection was on the ground that the application relates to a transaction or issue designed prima facie for the avoidance of income-tax.

The core fact involved was that the Taxpayer, being a Mauritian company and holding a valid Tax Residency Certificate (TRC), sold shares held in a Singapore company which derived substantial value from shares of an Indian company during the tax year 2018-19. The shares of Singapore Company were acquired prior to 1 April 2017.

The Taxpayer claimed exemption from indirect transfer source rule under Income tax Act, 1961 (ITA) on the basis of Article 13(4) of India-Mauritius Double Tax Avoidance Agreement (I-M treaty or I-M DTAA). Upon denial of nil withholding certificate by the Indian Tax Authority, the Taxpayer sought an advance ruling from the Authority for Advance Ruling (AAR) by relying upon, inter alia, the TRC issued by Mauritian Authority, Circular No. 789 dated 13 April 2000 issued by Central Board of Direct Taxes (CBDT) and earlier SC rulings upholding the significance of TRC for treaty eligibility.

However, after examining the facts regarding business operations of the Taxpayer, the AAR rejected the application at threshold on the ground of prima facie tax avoidance. But on Taxpayer’s writ petition, the Delhi High Court reversed the AAR ruling. The Tax Authority appealed further to the SC.

The SC ruled in Tax Authority’s favor and held that the AAR had correctly rejected the application. The SC examined the legal background of I-M Treaty, various Circulars issued from time to time, ratio of earlier SC rulings and legislative developments post such rulings like introduction of indirect transfer source rule, General Anti-Avoidance Rules (GAAR) including grandfathering provisions and its treaty override effect, statutory requirement to furnish TRC and other documents/information as also amendments in I-M treaty expanding source taxing rights of India. On a thread bare analysis of such developments, the SC held that Circular No. 789 is statutorily superseded and, hence, TRC alone is not sufficient to avail treaty benefits. The Tax Authority is now empowered to investigate the actual residential status of taxpayers by investigating the center of their management and deny treaty benefits to residents of third countries by invoking GAAR or Judicial Anti-Avoidance Rules (JAAR).

In the facts of the present case, the SC held that the Tax Authority had proved that the transaction was prima facie an impermissible tax avoidance arrangement; it was not protected by GAAR grandfathering provision; hence, the Taxpayer was not entitled to treaty benefit and the AAR had rightly rejected the advance ruling at threshold.