Supreme Court Ruling on Tax Treaties
A Supreme Court ruling has redefined the limits of India’s tax treaties, with implications for foreign portfolio investors (FPIs) and major conglomerates, including the Adani Group. The decision clarifies the scope of the Mauritius route and reinforces India’s tax sovereignty. The ruling has the potential to reshape cross-border capital flows.
The Supreme Court's ruling centered on the interpretation of the India-Mauritius Double Taxation Avoidance Agreement (DTAA) and its implications for capital gains tax exemptions. The case involved Tiger Global, which sought tax exemption on a ₹14,500 crore transaction (approximately $1.6 billion) from a 2018 deal where they sold their shares in Flipkart to Walmart. The Indian tax department had withheld ₹967 crore at source, leading to a legal battle. The court denied the tax exemption to Tiger Global, asserting that treaty benefits are applicable only to direct transfers, whereas the 2018 transaction qualified as an indirect transfer. It emphasized that Tax Residency Certificates (TRCs) do not prevent scrutiny of an agreement's true nature, reinforcing the Tax Authority's stance that the Mauritius entities were merely conduits for tax avoidance. This decision underscores India's "substance over form" approach, requiring investors to demonstrate genuine commercial substance to avail treaty benefits. This ruling has potentially far-reaching implications for foreign investors using special purpose vehicles in treaty-favored jurisdictions like Mauritius. Experts recommend reassessing existing investment structures and pending exits in light of the decision. The Supreme Court's stance reflects a stricter application of the General Anti-Avoidance Rules (GAAR) and challenges the long-standing reliance on TRCs for treaty eligibility.
