Tiger Global Vs Revenue Department: Decoding the India -Mauritius Tax Treaty

Recently, the Supreme Court denied tax relief to Tiger Global on capital gains from its exit from Flipkart.

Key Terms

• About DTAA (Double Taxation Avoidance Agreement): An agreement between two countries so that an investor does not pay tax twice on the same income.
• Tax Havens: Countries like Mauritius that offer zero capital gains tax, leading companies to set up shell entities there to route investments into India.
• Tax Residency Certificate (TRC): Previously, a TRC from Mauritius was considered sufficient proof of residency, exempting companies from Indian tax questions.
  • It was called the Golden Pass because it was sufficient to claim DTAA benefits.
• Grandfathering Clause: A grandfathering clause protects past transactions or investments from new laws or policy changes.
• Treaty shopping: It is the practice of routing investments through a third country only to take advantage of favourable tax treaty benefits, without having real business operations there.

History: Why Did India Allow the Mauritius Route?

• 1991 Balance of Payments Crisis: India was facing a severe foreign exchange shortage. The country urgently needed foreign capital inflows.
• Policy Response: The government deliberately chose to keep the India–Mauritius DTAA liberal. The objective was to attract Foreign Direct Investment (FDI) into India.
• Investment Signal: The policy effectively conveyed the message: “Invest in India, and we will not tax your capital gains.”
• Outcome: The strategy succeeded in attracting billions of dollars of foreign investment over several years through the Mauritius route.

The Case

• Use of Treaty Shopping via Mauritius Entity: Tiger Global (a US firm) used a Mauritius-based shell company to invest in Flipkart (then headquartered in Singapore). 
• Tax Authority’s Allegation: When Tiger Global sold its shares to Walmart for a profit of ₹14,500 crore, the Indian Tax Department demanded tax, arguing the Mauritius entity was merely a “shell” to avoid Indian taxes.
• Nature of Dispute: The dispute was whether India could levy capital gains tax on these exits or whether the investor was protected under the India–Mauritius tax treaty and grandfathering provisions.

Legal Basis of Tiger Global’s Claim

• India–Mauritius DTAA: Under the earlier treaty, capital gains were taxable only in Mauritius. 
  • Since Mauritius did not levy capital gains tax, no tax was payable in India.
• Tax Residency Certificate (TRC): Tiger Global possessed a TRC showing that its investment vehicle was a tax resident of Mauritius. 
  • Earlier government policy treated TRC as sufficient proof to claim treaty benefits.
• Grandfathering under 2016 Amendment: In 2016, India amended the treaty to tax capital gains in India, but investments made before 1 April 2017 were exempt. 
  • Tiger Global’s investments were made between 2011 and 2015 and were therefore deemed protected.

Recent Supreme Court Decision

• Outcome: The court rejected Tiger Global’s claim and allowed India to tax the capital gains.
• Substance over Form: The court held that treaty benefits cannot be claimed solely on the basis of legal paperwork if the economic reality shows otherwise.
• Key Finding: Although the investment entity was incorporated in Mauritius, the real control and decision-making, described as the “head and brain,” were located in the United States. The Mauritius entity was treated as a conduit or signboard arrangement.

Departure from Earlier Treaty Practice

• Government Circular Ignored: CBDT Circular No. 789 (2000) had stated that TRC would be sufficient proof for claiming treaty benefits and that no further inquiry was required.
• Judicial U-turn: In 2003, the Supreme Court upheld the “Mauritius route” as a “necessary evil” for investment, but the recent judgment supports the Tax Department, creating a “crisis of credibility.
  • Lord Bingham (on the “Rule of Law”): “The law must be accessible and predictable.”
• Present Position: The present ruling permits authorities to look beyond TRC and examine economic substance, marking a shift from earlier certainty-based treaty interpretation.
• Tax planning and tax avoidance: The court also set out how it draws the line between tax planning and tax avoidance. 
  • Tax planning may be legitimate if it operates “within the framework of law”.
  • But when a structure involves “colourable devices, deceptive or indirect methods to deliberately avoid paying tax, it becomes illegal and unacceptable.

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Implications of the Supreme Court Decision

• Credibility of Grandfathering: Ignoring protection for pre-2017 investments undermines confidence that policy changes will not affect past investments.
• Investor Confidence: When past promises, circulars, and judicial interpretations are set aside, it creates uncertainty for long-term investors.
• Comparison with Past Experience: The judgment revives fears associated with earlier retrospective tax disputes, which had damaged India’s investment reputation.

Conclusion

While the judgment strengthens anti-tax-avoidance enforcement through substance-based scrutiny, it also raises concerns about predictability, legal certainty, and the credibility of government assurances in international taxation.

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