ANALYSIS: SC tightens treaty abuse net in Tiger Global case, raises bar for offshore investment structures

In a ruling that could reshape how foreign capital is structured into India, the Supreme Court on Thursday, January 15, held that Tiger Global’s share sale routed through Mauritius was an impermissible

tax avoidance arrangement, denying capital gains tax exemption under the India–Mauritius Double Taxation Avoidance Agreement (DTAA).

Allowing the Revenue’s appeal, the apex court ruled that capital gains arising from the transaction are taxable in India, reinforcing the principle that treaty benefits are available only to genuine entities with real commercial substance, and not to conduit or paper companies created primarily for tax avoidance.

The judgment marks a significant shift in India’s treaty interpretation landscape and sends a strong signal to global investors that economic substance will prevail over legal form, even where formal documentation such as a Tax Residency Certificate (TRC) exists.

Court reasserts tax sovereignty

In strong observations, the Supreme Court underscored that the power to tax income arising within a country is an inherent aspect of sovereignty and cautioned against arrangements that dilute that power. The Court noted that allowing treaty benefits to entities lacking commercial substance poses a threat to economic sovereignty, and that it is prudent for nations to retain their taxing rights.

The ruling also takes cognisance of amendments made to the India–Mauritius DTAA, which were specifically introduced to curb treaty shopping and round-tripping—practices that had become widespread tools for tax minimisation.

TRC no longer a shield

One of the most consequential aspects of the judgment is the Court’s treatment of the Tax Residency Certificate. While earlier jurisprudence, notably the Azadi Bachao Andolan ruling, accorded near-conclusive value to a TRC, the Supreme Court has now clarified that mere possession of a TRC does not bar Indian tax authorities from examining whether an arrangement is a conduit for tax avoidance.

Amit Maheshwari, Managing Partner at AKM Global, said the ruling recalibrates two decades of settled understanding. “The Court has categorically held that a TRC is not conclusive evidence of treaty entitlement when the surrounding facts show lack of commercial substance. Treaty benefits cannot be claimed mechanically or in isolation from economic reality,” he said.

Maheshwari added that the Court’s endorsement of the Revenue’s position could have implications even for investments that were earlier considered grandfathered under the amended India–Mauritius treaty, if found wanting on substance.

GAAR and grandfathering under focus

Tax experts say the ruling will now be studied closely for its implications on the applicability of General Anti-Avoidance Rules (GAAR), particularly in relation to capital gains on investments made prior to April 1, 2017.

Pranav Sayta, National Leader, International Tax and Transaction Services, EY India, said the judgment opens several interpretational questions.

“Stakeholders will closely analyse the observations on GAAR, the scope of grandfathering under the amended India–Mauritius treaty, and the evidentiary value of the TRC. Justice Pardiwala’s remarks on tax sovereignty also add a broader constitutional dimension to the ruling,” Sayta said.

He noted that while the case relates to the India–Mauritius treaty, the principles laid down could extend to other treaties, including the India–Singapore DTAA, affecting a wider set of cross-border structures.

Implications for private equity and venture capital

For the private equity and venture capital industry, the judgment is both a warning and a turning point. Structures that rely primarily on treaty residency, without demonstrable economic substance or independent decision-making in the treaty jurisdiction, are likely to face heightened scrutiny.

Sandeepp Jhunjhunwala, Partner at Nangia Global, said the ruling reinforces the global shift towards substance-based taxation. “The verdict signals a stricter approach to treaty interpretation and emphasises economic substance over legal form. Where intermediary entities function merely as conduits, lacking real business purpose or decision-making authority, the Revenue may pierce the structure and deny treaty protection,” he said.

At the same time, Jhunjhunwala cautioned that the ruling could dampen foreign investment sentiment in the short term, particularly for inbound M&A transactions and exit planning.

Pros and cons for the industry

From a policy perspective, the judgment strengthens India’s anti-abuse framework and aligns the country with global standards under the BEPS regime. It gives tax authorities greater confidence to challenge aggressive structures and reduces the scope for round-tripping and treaty shopping.

However, industry participants warn of potential downsides. Increased litigation risk, uncertainty around grandfathered investments, and the possibility of retrospective scrutiny could make investors more cautious, especially in capital-intensive and long-gestation sectors.

Ajay Rotti, Founder of Tax Compaas, said the ruling raises the bar but does not shut the door on India–Mauritius structures altogether. “The judgment should be read as a caution against aggressive, factually weak structures rather than a wholesale dismantling of the India–Mauritius DTAA. The real inflection point will be how the Court addresses the continuing relevance of CBDT Circular 789, which historically provided comfort on treaty availability based on a TRC,” he said.

What lies ahead

The Supreme Court’s ruling marks a clear departure from form-driven treaty claims and reinforces India’s commitment to substance-based taxation. For investors, the message is unambiguous: treaty benefits will be available only where there is demonstrable commercial rationale, genuine economic presence, and real decision-making in the treaty jurisdiction.

As the detailed reasoning of the judgment is digested, the industry will be watching closely to see how tax authorities apply the principles in practice—and whether clarity emerges on the treatment of grandfathered investments and long-standing CBDT circulars.