[Samridhi Singh is a student at National Law University, Patna]
On January 15, 2026, the Supreme Court of India pronounced its judgment in Authority for Advance Rulings (Income Tax) (“AAR”) v. Tiger Global International II Holdings (“Tiger Global”), creating a further knot in the rope of predictable taxation when it comes to double taxation avoidance treaties (“DTAA”). While the differing stances adopted by the judicial pronouncements in cases of taxation have been observed for quite some time now, this battle for supremacy between the legislatively imposed anti-avoidance provisions (“GAAR”) and judicially proposed provisions (“JAAR”) has risked foreign investments. With Mauritius accounting for a 17% share of India’s USD 81.04 billion foreign direct investment (“FDI”) inflow in 2024-25, the likelihood of India imposing taxes on capital gains of foreign entities settled in Mauritius would definitely have a considerable impact on future investment volumes.
The question of taxation has always highlighted some pivotal questions around hierarchy in the administrative structure with reference to the legislature and the judiciary, and the lack of predictability in judicial reasoning. Apart from what consequences might follow the judgment in terms of foreign investment, there are several interesting notes highlighted by this judgment. The evidentiary value of tax residency certificates, the presence of substantial commercial business in Mauritius, the management of funds, and the centre of executive decision-making are some of the parameters that the Court looked into when deciding the applicability of the treaty provisions. Overall, the Court took a stance against treaty shopping for tax avoidance by companies belonging to third-party states. While theoretically this sounds like the ideal stance, its impact on foreign investments pouring into the country can be adverse, a fact that the Supreme Court did acknowledge in its previous judgments.
Factual Background to the Case
Tiger Global, a company incorporated in Mauritius, invested in Indian companies, including Flipkart, through Mauritius-based entities. While selling these shares, the company earned substantial capital gains on which it claimed tax exemption under the India-Mauritius DTAA. The AAR denied the treaty benefit while examining grounds such as place of effective management (“POEM”), commercial business, and beneficial ownership. The authority observed that although the company had a Mauritius-based board, the ultimate call above a certain threshold (USD 250,000) rested with the US-based resident founder, as he was the authorised bank signatory as well as the beneficial owner. Further, the US representatives of Tiger Global Management (“TGM”) were present in all key board meetings to advise the Mauritius-based board members, denoting a certain authority above them.
It is not difficult to discern the intention behind treaty shopping, given that there was no pooling of funds at the Mauritius level and that Flipkart Singapore was the sole investment held by the company. In the ruling pronounced by AAR, even though the authority cited treaty abuse and an attempt at tax avoidance, it did not invoke General Anti-Avoidance Rules (domestic law). When this decision went in appeal to the High Court of Delhi, the Court granted the tax exemption by invoking the previous judgment of the Supreme Court in Union of India v. Azadi Bachao Andolan. While deciding the issue of treaty abuse, the High Court paid consideration to the tax residency certificate and the fact that the transaction satisfied the Limitation of Benefits (“LOB”) Test under the tax treaty. The Court also granted relief under the grandfathering protection as the transaction was a pre-2017 investment.
The Supreme Court overturned the High Court’s decision holding the transaction to be prima facie impermissible for the treaty benefit. Upholding the observation of AAR without taking into consideration the reasoning presented by the High Court, the Supreme Court declared that Tax Residency Certificate’s (“TRC’s”) evidentiary value was not sufficient to claim the DTAA benefit. The company must prove substantive residency over form, existence of a substantial commercial purpose, and where the actual control of the funds resides. Contrary to the stance observed by courts in previous judgments on TRC, the Supreme Court here declared it to be ‘non-decisive, ambiguous and ambulatory, merely recording futuristic assertions without any independent verification.’ Interestingly, the Court observed the difference between an ‘arrangement’ and ‘investment’ while denying a grandfathering exemption under GAAR as the exit or transfer took place post-2017. This cleared the air and narrowed down the grandfathering protection to not just the date of investment but also the date of exit/transfer.
Overlap between GAAR and the Limitation of Benefits Clause
This case witnessed an intertwined play between the LOB clause and the GAAR provisions, both of which aim at curbing tax avoidance but through different means. With the 2016 amendment, the LOB clause was introduced in the treaty to prevent tax avoidance. Four years before that, the GAAR provisions were already introduced via the Finance Act, 2012, but were made applicable from April 1, 2017. With both of these legislating on similar lines, it is quite pertinent to establish a hierarchy to ensure smooth administrative functioning. It is important to note that, contrary to GAAR, the LOB clause was introduced as a result of Supreme Court’s ruling in the Azadi Bachao Andolan case, where the Court observed that if the executive’s will was to prevent treaty shopping, the LOB clause was the way to go.
Considering the basic rule of interpretation lex specialis derogat legi generali, a law specifically or specially made should have an overriding effect over a general law. By this rule, whenever there is a case of tax avoidance in a DTAA that has an LOB clause, the GAAR provisions should be kept at bay, which, in reality, is the case with a lot of other jurisdictions with similar frameworks. In Garron Family Trust v. R. (2009 TCC 450), the Canadian Tax Court held that simply the fact that the treaty was chosen cannot be the basis of declaring a transaction as abusive. Contrary to this, in the Indian scenario, the GAAR provisions presume against the assessee as soon as a treaty is selected to avail the benefit, and these provisions are attracted regardless of whether the transaction is permitted by the terms of the treaty or not. The broad nature of the domestic law loops in the transaction covered under the treaty into its own purview.
The Canadian courts have categorically held that even if there is no provision pertaining to tax avoidance in the treaty, the same cannot be read into the treaty if there was no explicit LOB clause. What is interesting to note is that when there was no inherent anti-avoidance principle in the treaty, the courts in the Azadi Bachao Andolan case held that the duty to decipher the abuse of the treaty and its continuation should be left to the executive. The court observed this in light of the status of a developing economy in the foreign investment markets, which is true, as the threat of unpredictable taxation can severely dent investor confidence and hamper foreign investment, even investors they do not end up being taxed at the end of the scrutiny. Mauritius, being a no-tax zone, will continue to attract foreign investments and companies to establish subsidiaries and investment vehicles in the form of variable capital companies or protected cell companies; however, these investments flowing into India depend on the predictability and reliability of the Indian regulatory framework.
Doctrine of Substance Over Form and Evidentiary Value of Tax Residency Certificates
This confusion between the applicability of GAAR provisions with the LOB clause essentially permits the assessors to probe further, even if a legitimate TRC has been produced by the company. The question raised on the evidentiary value of a TRC is an old one. Prior to the judgment, even though the assessing officers had the power to perform the quasi-judicial administrative function of assessing the residential status of the investors, there was nothing to denote as to what they were supposed to do post such an assessment. A bare reading of the provision providing for the submission of a TRC nowhere mandates that mere submission is sufficient evidence. In light of this, the TRC becoming subject to verification by the tax authorities is a natural extension. The resident trying to claim the benefit has to establish residence and beneficial ownership, i.e., to prove that the resident owns the beneficial income involved. Even in jurisdictions like Canada, the evidentiary value of the certificate of residency is considered weak, as the document presents a mere conclusion with no substantial reasoning as to how the authorised person arrived at this conclusion. Contrary to the principle of comity, it is relatively common among countries signing DTAAs to include tiebreaker rules to ensure that one country is not bound by another’s evaluation of residency, thereby lowering the stance of TRCs.
A precise evaluation of the judgment would not be possible without understanding the executive’s stand on the issue. Courts have declared cases that are prima facie those of tax avoidance as abusive of the treaty previously as well, but consecutive executive action has practically made these judgments redundant. In the Natwest case, the AAR declared that the British bank investing through two newly formed companies in Mauritius to cash in on the 10% reduction in tax rate was a relief strategy on face. When the AAR applied the doctrine of substance over form, the CBDT Circular 789 was issued, essentially declaring that a certificate of residency issued by Mauritian authorities is sufficient proof of residence. The powers that the assessing authority had under the tiebreaker rules under article 4(3) of the DTAA were rescinded.
With the judgment in Tiger Global, this question has been reopened. To ascertain residency, which is the pre-requisite condition for availing tax benefits under the treaty, the assessors will ascertain the presence of substantial commercial business. Residency, however, is established differently under the treaty provisions and the domestic law. As per article 4(1) of the DTAA, a person ‘liable to taxation’ under the Mauritian law will be considered a resident under the treaty. Whether Mauritius as a state is imposing taxes or not is immaterial, under the head ‘liable for taxation’, what needs to be considered is whether the person is under the purview of comprehensive taxation under the contracting state’s laws or not.
On evaluation, this is a far more relaxed parameter as opposed to an entity having substantial commercial activity and effective management in the state of Mauritius. The stringent criteria are likely to oust several subsidiary companies investing in India which might qualify as residents under the treaty.
Conclusion: Demand for Executive Certainty
In another case on taxation, the Supreme Court observed that “maintaining predictability in taxation law is of utmost importance.” Predictable taxation is important for stability, equity, and strategic financial planning. Denying investors adequate information to make an informed choice is a double-edged sword, as it would not just hamper any future investments but also create an environment of distrust.
The ruling in the case of Tiger Global stands at the neck of this understanding in the global regulatory framework. Although the intention of curbing treaty abuse is ideal, it is also quite utopian considering the overall structure, which is trying to ease the route for investments. The executive’s intention, as reflected in its counsel’s submissions, assumes considerable significance here. Subsequent to the pronouncement, the Additional Solicitor General of India stated at a conference that the executive would adhere to the “golden rule of honouring treaties”.
It is difficult to ascertain the extent of the applicability of the judgment, considering the expected executive action in the future and the rule of stare decisis. The decision in Azadi Andolan, rendered by a larger Bench, continues to hold precedential value and therefore prevails over the decision in Tiger Global on overlapping issues. One of the persisting criticisms of the judgment is the lack of consideration given by the courts to the reasoning provided in the High Court’s decision, even though that was consistent with the erstwhile judgments.
In the meantime, the onus is on the investors to ensure effective management and substantial commercial purpose. Executive inaction on taxation can unnecessarily hamper the foreign investments pooling in the country. However, the long-standing dispute inadvertently requires legislative action. The question that needs to be answered is that of policy- whether India wants to provide this indirect leverage at the risk of volatility or curb the speed of global capital.
– Samridhi Singh