Tiger Global case: Treaty protection for grandfathered investments narrow

The Supreme Court's Tiger Global ruling narrows grandfathering protection, allowing tax authorities to scrutinise pre-2017 investments at exit under GAAR and anti-abuse norms

The Supreme Court’s ruling in the Tiger Global tax case has altered the risk calculus for foreign investors holding grandfathered Indian investment, according to experts.

 

The court has permitted tax authorities to scrutinise legacy structures for possible abuse at the time of foreign investors exiting even if the underlying investment was made before April 1, 2017, when the General Anti-Avoidance Rules came into force.

 

While the court has not struck down the grandfathering provisions under the India-Mauritius tax treaty, tax experts are of the view that the judgment narrows their protection by clarifying that treaty benefits cannot be claimed mechanically and must be supported by commercial substance.

 

The ruling is expected to have the greatest impact on private equity and venture-capital funds that hold investments made before 2017, or exited such holdings after the Rules became operational.

 

Placing the dispute in a wider policy and constitutional context, Justice J B Pardiwala said tax treaties must operate with built-in safeguards against abuse and could not be interpreted in a manner that eroded a state’s sovereign taxing powers.

 

He observed the powers to levy and collect tax was an inherent attribute of sovereignty, constrained only by constitutional limits and by the extent to which a country consciously agreed to restrict those powers under international agreements.

 

Tax treaties, he noted, are instruments of economic cooperation meant to avoid double taxation and not devices to facilitate double non-taxation.

 

The judgment highlighted how the experience about the India-Mauritius treaty demonstrated the risks of treaty provisions being exploited in ways not originally contemplated by contracting states.

The judge said evolving global investment structures and increasingly sophisticated cross-border arrangements required legislatures continuously refine both treaty frameworks and domestic laws to counter new forms of tax avoidance.

 

Sounding cautious on a mechanical or literal application of treaty provisions, the court held that treaty interpretation must remain aligned with the object and purpose of the agreement.

 

While treaties must be honoured in good faith, they cannot be applied in a manner that defeats fiscal policy or constitutional principles. 

 

Justice Pardiwala said treaties must leave adequate room for domestic anti-avoidance measures to operate, allowing tax authorities to examine whether arrangements are artificial, contrived, or structured primarily to obtain treaty benefits. Investor certainty, the court noted, is important but cannot come at the cost of undermining the integrity of the tax system.

 

Against this backdrop, advisers say the ruling tightens the practical scope for grandfathering. 

 

Arijit Ghosh of Trilegal said: “Exits before April 1, 2017, should continue to be governed by the unamended India-Mauritius treaty, and the benefit of non-taxability of capital gains under Article 13 remains intact.” However, the position shifts materially for exits after April 1, 2017, even where the investment itself predates the Rules.

 

Ghosh said the court had interpreted Rule 10U(2) to allow the anti-avoidance Rules to apply after April 1, 2017, even if the structure was put in place earlier. As a result, post-2017 exits from pre-2017 investment may now be examined for abuse.

 

According to tax advisers, the ruling draws a distinction between “investment” and “arrangement”. Lokesh Shah of CMS INDUSLAW said grandfathering continued to apply only to genuine investment. “It does not extend to arrangements structured primarily to obtain tax benefits. The Rules can override tax treaties and apply to tax benefits arising from such arrangements after April 1, 2017, irrespective of when they were entered into,” he said.

 

A key element of the ruling is the court’s conclusion that the India-Mauritius treaty does not exempt gains arising from indirect transfers of Indian shares, regardless of when the investment was made. This effectively denies grandfathering protection to two-tier offshore holding structures, even if established before April 2017, and could influence how similar structures under other treaties are assessed where explicit indirect transfer provisions are absent.

 

The judgment also significantly dilutes the evidentiary value of tax residency certificates (TRCs). Reading down Sections 90(4) and 90(5) of the Income Tax Act, the court held that a TRC was only an eligibility condition and not conclusive proof of residency. 

Tushar Jarwal of DMD Advocates said the ruling marked a departure from the Vodafone era, which had relied on Azadi Bachao Andolan to hold that legitimate tax planning was permissible and that a tax-residency certificate was sacrosanct.

 

Gouri Puri of Shardul Amarchand Mangaldas said the application of the Rules to investment predating March 31, 2017, had come as a surprise and was likely to increase litigation. The judiciary, she said, has factored in the policy push to curb treaty shopping, but in doing so had called into question structures set up before the Rules became effective.

 

Amit Maheshwari of AKM Global said genuine investors with demonstrable substance should continue to be protected though a tax-residency certificate “is no longer a shield by itself”.

Ritu Shaktawat of Khaitan & Co said even where the Rules might not strictly apply, courts could still rely on judicial anti-avoidance principles in cases involving sham or conduit structures, though the threshold remained high.

 

For investments routed through Mauritius or Singapore after April 1, 2017, the ruling does not materially alter the tax position, as capital gains exemptions were already withdrawn.

 

However, Amit Baid of BTG Advaya said: “In a post-Tiger Global landscape, scrutiny under the Rules and anti-abuse norms aligned with the Organisation for Economic Cooperation and Development is likely to intensify.”