The Supreme Court’s verdict marks a structural change in India’s international tax jurisprudence and this will be debated by the global tax fraternity.
India’s treaty architecture with Mauritius and Singapore rested on the trifecta of residence-based taxation, certainty to taxpayers with the tax-residency certificate (a test that received the Delhi High Court’s approval), and judicial restraint supported by landmark verdicts of the apex court in Azadi Bachao (2003) and Vodafone (2012) against importing the “substance over form” principle. The Tiger Global ruling upends all three.
A striking feature of the ruling is the Supreme Court’s view that Gaar and judicial anti-avoidance rules (Jaar) coexist and may apply simultaneously. Historically, judicial doctrines have been applied in egregious cases. The court concluded that the Tiger Global structure did not meet the standards. This ratio decidendi (the reason for deciding) will now add to taxpayers’ risk, with a coexistential application of statutory and judicial doctrines. Unlike Gaar, which has procedural safeguards such as approval by an independent panel, Jaar has no such safeguards. This does not necessarily expand judicial powers as courts retain inherent anti-avoidance powers. An overzealous Income Tax Department may, however, invoke both regimes — statutory and judicial — resulting in a labyrinthine scrutiny environment.
Another vexatious interpretation is that the 2017 “protocols” to both the treaties with Mauritius and Singapore entailed long-drawn negotiation processes to facilitate cross-border investment. The clause that received most debate (in negotiations) was continuity in tax benefits (for the transitional two-year period at a 50 per cent concessionary rate) and that investment made prior to the amendment could be grandfathered. This meant that only for investment made after 2017 will the new treaty apply without tax benefits. The grandfathering of “investment”, a term used in the protocol, was distinguished by the court as not grandfathered in the Tiger Global case. Essentially, the court holds that exit-year substance matters more than entry-year investment.
The term used in the law is “transaction”, and hence the court thrust on domestic Gaar sounds like a drafting error rather than what was intended by the legislature! This clearly appears to be a case of domestic law overriding the treaty — the ratio decidendi that a series of apex court judgments has consecutively frowned upon. The judgment did not dwell adequately on this principle, which is the crux of a treaty’s “good faith” principle. Not that I am questioning the court’s inherent powers. But a plain reading of the law shows it proscribes invoking Gaar to override a treaty. To this extent the judgment overrides the law expounded by the same court in Azadi Bachao and hence, the jury is out if the court could have referred the matter to a larger Bench. The court was unperceptive that the drafting of Gaar, the renegotiation of treaties, and India’s signature to the multilateral conventions were integrated events, with April 2017 as the trigger date. This means that the treaty negotiators in 2017 were aware of this intersection. Why this examination was not within the court’s purview seems confabulating. The court could have accessed Gaar and treaty-negotiation drivers to arrive at a discrete outcome.
Conversely, the court’s reading, in importing the substance tests and effective management analysis, exceeds the rudiments of treaty interpretation. At best, it’s a judgmental view though the court could have tasked the Authority for Advance Ruling (AAR) to re-examine the factual matrix. Quintessentially, the AAR had labelled the transaction to be “prima facie” a tax-avoidance structure and refused to issue the ruling. This left the taxpayer with no option but to seek a writ remedy from the Delhi High Court, which merely examined the primacy of the tax-residency certificate and followed the superior court’s judgement in terms of judicial discipline. Could the apex court have confirmed the AAR order and not dealt with the merits of the case before attenuating the law?
Tax treaties entail not just the interpretation of complex terms such as “resident” and “property” but they must be interpreted in the context of political bargains. It is not merely a legal text but it reflects the interplay of two sovereigns and entails purpose beyond revenue considerations, with a chain of secret exchanges between governments. Equally interesting is to note that the “preamble” to the treaty with Mauritius includes the “avoidance of double taxation” and “mutual trade and investment”. In 2024, the new preamble included “non-taxation through tax evasion, including treaty shopping” as a key change. Did the apex court debate on the preamble that existed at the time of the transaction? In my view, the judgment marks a methodological shift from text-centric interpretation to purpose-centric interpretation; a retrospective application of the preamble, anchored in anti-avoidance objectives rather than the mast-and-harbour of treaty language.
In the coming days, jurists will debate if the Tiger Global judgment meets the holy grail of public international law at the Vienna Convention on the Law of Treaties (VCLT), particularly Article 26 (pacta sunt servanda, meaning treaties must be upheld by their signatories) and Article 31 (“good-faith” principle), setting the expectations for predictability and respect for “text and objectives” of the treaty.
The vital concern is predictability because the judgment is bound to unsettle investors, who otherwise had reason to believe in the adequacy of the tax-residency certificate. They will now have to live with a conditional grandfathering, with the domestic law overriding the treaty and with courts reinterpreting treaties through an anti-avoidance lens, without respecting assurances in administrative circulars, which now have diminished persuasive value. Is this an opportunity for lawmakers to intervene and set right what seems like an interpretation investors would not have imagined!
The writer is managing partner at BMR Legal Advocates. Views are personal
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