Tiger Global verdict: India’s tax sovereignty on trial

The Tiger Global deal and the legal controversy surrounding it have put the spotlight on the “Mauritius route”, that is, tax-dodging strategies involving the India-Mauritius Double Taxation Avoidance Agreement (DTAA) signed between the two countries. The verdict examined the implications of the General Anti-Avoidance Rules (GAAR), which came into effect in 2017 under the Income Tax Act, 1961.

Courts have repeatedly tried to tighten the screws on tax havens, such as in the Azadi Bachao Andolan case in 2002, which held that Mauritius-issued tax-residency certificates were sufficient to claim exemptions from Indian revenue authorities. The Vodafone acquisition case, in which Indian authorities claimed a sovereign right to tax the Rs.20,000-crore deal inked for the firm’s entry into India in 2007, went from the Bombay High Court to the Supreme Court, before being settled in favour of the British telecom giant by the permanent arbitration court in The Hague, Netherlands, and multiple courts in Singapore. More on these legal twists and turns later.

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The Tiger Global verdict has multibillion-dollar repercussions for many investors based in the US, Canada, and Europe who are eyeing a larger share of the Indian market with their Indian collaborators. Whether the ruling government succeeds in taxing the $16 billion deal will be closely watched. It is the first such attempt of its kind since the GAAR came into play, and the Organisation for Economic Co-operation and Development (OECD), the inter-governmental economic association of some of the richest countries in the world, launched a new global tax reform initiative in 2021 to address tax “base erosion and profit shifting” (BEPS) by multinational corporations to low-tax or no-tax jurisdictions.

Several developed countries are moving to safeguard their tax bases from shell companies incorporated in a labyrinth of tax havens. As trade tensions rise and powerful economies push for greater investor protections, the question of whether developing countries can defend their tax base has taken on renewed political urgency.

Will ruling dispositions in the Global South also push back against transnational investors, corporations, and a litany of bilateral agreements that seek a world without any barriers to the free movement of capital? India faces this important test.

Nationalist credentials are not as straightforward as they appear in a globalised economy of interlinked firms and cross-holdings. An important node in this network is the tax haven—usually a small, less-populated country, often an island, that offers low tax rates, easy terms for tax residency, and a policy of non-intervention in lifting the corporate veil to reveal the ultimate beneficial owners of a corporate entity.

There are 80-odd tax havens across the globe, some of them within countries (for example, Delaware State in the US) or are micro-states (San Marino in Europe). A large part of the income of these tax havens derives from legal and financial services offered to multinational companies attracted by their tax regime and protected by bilateral agreements with other countries.

For example, the German-speaking constitutional monarchy of Liechtenstein is 160 square kilometres in size, has no airport or army, and manufactures no remarkable goods other than false teeth, yet it has among the highest per capita incomes in the world as a European tax haven. The reliance on such tax havens to route investments worldwide raises serious challenges to national sovereignty, where capital has no borders, but people do.

Flipkart Walmart deal

Tiger Global Management LLC was founded in 2001 by the hedge fund billionaire Chase Coleman III, a distant descendant of the last Dutch governor of New York. The firm bets aggressively on emerging startups outside Europe and North America, and its portfolio includes over 100 deals in India. There are stories of Tiger Global offering term sheets to company founders after a 30-minute phone call. (A term sheet is a non-binding, preliminary document that outlines the terms and conditions of a business agreement.)

In 2009, Tiger Global evinced interest in Flipkart, an online commerce platform founded two years earlier by Sachin Bansal and Binny Bansal, Indian Institute of Technology (IIT) Delhi alumni who had worked with Amazon. Flipkart was touted as India’s answer to Amazon, the US-based “big tech” conglomerate founded by Jeff Bezos in 1994 that is the world’s biggest online retailer of a wide range of products and services.

The Tiger Global case involves the August 2018 sale of shares in Flipkart Private Limited, a company headquartered in Bengaluru but incorporated in Singapore, which, at the time, owned India’s largest e-commerce platform (by the same name) and associated group companies such as fast-fashion delivery portals Myntra and Jabong and the online payments application PhonePe.

The transfer was part of a $16 billion deal by which Walmart Inc., incorporated in Delaware, acquired around 77 per cent stake in Flipkart from various investors. The brick-and-mortar retailer’s entry into direct-to-customer retail in India has been blocked by restrictions on foreign direct investment, but the Flipkart deal marked the company’s first significant foray into online retailing.

“Web of entities”Fit Holdings SARL, a Luxembourg-incorporated holding company owned by Walmart, bought 74 per cent of Flipkart’s shares that were held by a “web of entities” linked to Tiger Global. While these companies claim to be autonomously functional, the fact is that three companies, namely Tiger Global International Holdings II, III, and IV, which are incorporated in Mauritius, are owned by two holding companies, namely Tiger Global Holdings Five and Six Percent. These, in turn, are held by two parent companies, Tiger Global PIP Management Limited V and VI, based in Mauritius and the Cayman Islands.

India has signed DTAAs relinquishing taxation rights with each of the low-tax jurisdiction destinations mentioned, including Singapore (1994), Delaware, US (1989), Luxembourg (2008), and Mauritius (1982).

The GAAR are a set of statutory rules for revenue authorities to scrutinise the commercial substance of transactions and deny tax exemptions if it is found to be an “impermissible avoidance arrangement” with the main purpose of obtaining tax benefits. The GAAR was first proposed in 2010 by the then Union Finance Minister Pranab Mukherjee in the draft Direct Taxes Code Bill, and later in the 2012 Finance Act, but its rollout was deferred until the 2017-18 financial year fearing pushback from foreign portfolio investors.

The three Tiger Global holding firms in 2018 sought “no-dues clearance” from the Central Board of Direct Taxes (CBDT) in the Ministry of Finance for the sale, referred to as “certification of nil”, under Section 197 of the Income Tax Act. This was denied on August 17 that year.

The CBDT imposed taxes at the rates of 6.05 per cent, 6.92 per cent, and 8.47 per cent on the three firms respectively on the net transaction of around Rs.14,440 crore, as it found that the firms did not exercise any independent decision-making.

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The companies then approached the Authority for Advance Rulings (AAR), a quasi-judicial body that can issue legally binding rulings on tax matters, which upheld the CBDT’s conclusions on March 26, 2020, that these transactions were “prima facie designed for the avoidance of income tax”.

The companies then approached the Delhi High Court seeking relief. The Court, on August 28, 2024, quashed the AAR’s proceedings, holding that the three entities were eligible for treaty benefits under the India-Mauritius DTAA. The revenue authorities appealed this verdict before the apex court.

India-Mauritius DTAA

The AAR had used a “head and brains” test, finding that no Mauritius-based director on the board of Tiger Global’s holding companies exercised any meaningful control, which was upheld by the Supreme Court. (A “head and brains” test is a legal principle used in tax law to determine the corporate residency of a company by identifying where its controlling management resides and is often used to check evasion of taxes through shell companies set up for this purpose.)

Any transaction over $2,50,000 required the approval of Chase Coleman III, a US citizen, who was also on the board of their parent companies. While the Board of Directors formally approved these decisions, the AAR found that Coleman exercised actual control through a non-resident director named Steven Boyd. He was the signatory for the Mauritius bank account and the “ultimate beneficial owner” under a specific Global Business Licence (GBL 1) issued by the Mauritian government used by corporations operating outside the country to avail themselves of its favourable tax regime.

The companies’ financial statements indicated they had invested exclusively in Flipkart between 2011 and 2015, and the AAR concluded they were “mere conduit companies” and “see-through entities” created to avoid paying taxes in India.

The AAR discussed at length the interpretation of Article 13(4) of the India-Mauritius DTAA, which governs the taxation of capital gains arising from the sale, exchange, or transfer of residuary property, including shares. This clause allowed the state of residence to decide the taxability of gains under the original DTAA.

Because capital gains are not taxable in Mauritius, this provided a way for companies incorporated in Mauritius and trading shares in an Indian company to be exempt from paying taxes in both countries. This was the key link in the “Mauritius route” for tax avoidance—the small clutch of islands in the Indian Ocean has accounted for roughly 40 per cent of all foreign investment inflows into India since the early 1990s.

Some of India’s richest billionaires have used the Mauritius route for round-tripping profits, that is, routing one’s own money through offshore entities into group companies to artificially inflate share prices.

For instance, an April 2021 Morning Context investigation found that a few foreign portfolio investors (FPIs) were buying shares in Adani Group companies, while it identified seven Mauritius-based FPIs as investing exclusively in Adani shares. They almost never sold, even when share prices peaked.

The reporter Jayashree Upadhyay said that “such fund structures… give rise to suspicion of round-tripping—i.e. that it is the promoters of the company who have routed their own money through overseas jurisdictions and tax havens into funds that invest in their own companies.”

While the higher valuation helped the Adani Group raise fresh capital, in June 2021 National Securities Depository Limited (NSDL) froze the accounts of three FPIs holding stakes in Adani group companies.

Source-based test

By upholding the AAR’s “head and brains” test in the Tiger Global verdict, the Supreme Court moved away from a residence-based to a source-based test for assessing taxability, elaborating a three-tier framework for denying DTAA benefits.

First, tax authorities must prove that a revenue stream or capital gain made in another resident country is taxable under India’s domestic laws.

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Second, it must apply the “head and brains” test to prove that the firm being assessed is not genuinely owned and controlled in the resident country.

Lastly, the GAAR can be invoked to lift the corporate veil if the structure lacks commercial substance.

The Supreme Court’s Tiger Global judgment is a departure from precedent and may have wider repercussions, including for DTAAs with Singapore, France, Luxembourg, and the Netherlands, which contain pari materia (similar) provisions to Article 13(4) of the India-Mauritius DTAA.

In March 2000, the CBDT under the Union Finance Ministry then headed by Yashwant Sinha issued tax notices to 24 Mauritius-based foreign institutional investors for claiming DTAA benefits despite not being “bona fide and genuine residents of Mauritius”.

The move triggered a strong backlash from the Mauritian government and influential investors. As Sinha recalled to one of these writers many years later: “The result was panic and a sudden withdrawal of funds by the FIIs [foreign institutional investors].”

Faced with capital flight, the government invoked provisions of the Income Tax Act that allow the CBDT to issue clarificatory circulars. The board issued a circular confirming that entities from Mauritius would not be liable to pay capital gains tax in India.

This was CBDT Circular No. 789, which stated that a Tax Residency Certificate (TRC) issued by Mauritian authorities would be sufficient proof of residency for claiming DTAA benefits.

The circular was challenged in the Delhi High Court by Azadi Bachao Andolan, a non-governmental organisation, with former tax official Shiva Kant Jha among the petitioners. Jha argued that accepting Mauritian TRCs at face value prevented Indian authorities from curbing revenue losses through treaty abuse.

A Mauritius-based company called Global Business Institute Limited impleaded itself to defend the circular. It was represented by Arun Jaitley, who would go on to serve as Union Finance Minister between 2014 and 2019, and the then Solicitor General Harish Salve.

The Delhi High Court struck down the circular, holding that treaty shopping through shell companies in Mauritius amounted to tax evasion. However, a Supreme Court bench led by Justices Ruma Pal and B.N. Srikrishna overturned the ruling on technical grounds and upheld Circular No. 789. While acknowledging that billions of dollars had gone untaxed because of the India-Mauritius DTAA, the apex court held that correcting such flaws was the responsibility of the Executive and the Legislature. Possession of a valid Mauritian TRC was sufficient to claim capital gains tax exemption.

Mauritius tightens conditions

After prolonged negotiations, Mauritius tightened conditions for issuing TRCs. Companies must now meet at least one of several criteria, such as maintaining assets of at least $1,00,000 in Mauritius, listing shares on a licenced exchange, or maintaining significant local expenditure. Additionally, at least two directors must be Mauritian residents with appropriate qualifications, and the company must maintain its principal bank account in Mauritius.

The Tiger Global verdict has clarified that possessing a TRC is merely an “eligibility condition” under the Income Tax Act and the TRC relied on in the Flipkart deal was “non-decisive, ambiguous and ambulatory’. The Court has ruled that circulars are only binding within the legal regime in which they were issued. Since the introduction of GAAR and other statutory amendments, CBDT’s Circular No. 789 on tax residency is no longer a blanket protection against investigation.

The Supreme Court verdict on Tiger Global clarifies several aspects of the retrospective application of tax laws in India, addressing questions raised by the 2012 Vodafone tax case and subsequent revenue law changes introduced by the Union Finance Ministry.

The British telecom company Vodafone entered the Indian airwaves in 2007 by acquiring a 67 per cent stake in Hutchison Essar Limited (HEL) for $11.2 billion. The transfer took place through a complex offshore manoeuvre involving the transfer of a single share in a Cayman Islands-based company called CGP Investments from Hong Kong-based Hutchison Telecommunications International Limited (HTIL) to a Dutch entity named Vodafone International Holdings (VIH). The single share constituted the entire issued share capital of CGP, which, in turn, directly and indirectly owned approximately 52 per cent of the share capital of HEL, an Indian entity.

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The sale of a single share shifted the company’s ownership in favour of Vodafone, away from HTIL’s control. The Income Tax Department issued a notice to VIH in September 2017 for defaulting on tax liabilities of roughly $2 billion (then Rs.12,000 crore). The dispute went through various courts before reaching the Supreme Court, which, in January 2012, accepted Vodafone’s view that the transaction was entirely outside the purview of Indian authorities.

The apex court held that the transfer of sales in an offshore entity between two non-resident companies was legal, even if the entity held assets in India. It stated that revenue officers should adopt a “look at” principle, holistically assessing transactions as a structured arrangement rather than dissecting tax saveable components. It reaffirmed the Azadi Bachao Andolan judgment’s precedent that a tax residency certificate was sacrosanct and could not be “pierced” by tax authorities except in proven cases of fraudulent and sham transactions.

In the Tiger Global verdict, the Supreme Court has now clarified that the “grandfather clause” does not protect the indirect sale of shares between two foreign entities that derive value from Indian assets, thereby overruling the precedent set in the Vodafone case. A grandfather clause is a legal provision that exempts particular entities from new regulations, permitting them to operate under the old rules to ensure continuity, and prevent abrupt disruption, or to “grandfather” in existing conditions and not retrospectively apply new rules.

The transaction between Tiger Global Management and Walmart group companies involved the sale of shares in Flipkart, a Singaporean company. Such transactions cannot claim protection from the taxman under the India-Mauritius DTAA, the Supreme Court ruled, casting doubts on the sufficiency of the TRC as a company’s proof of residence.

Taken together, the court has set aside the “look at” principle for assessing taxation and relied on a “look through” approach to evaluate the substance of the transaction, as outlined in a three-tier framework.

The Azadi Bachao Andolan judgment had recommended that India incorporate Limitations of Benefit (LoB) clauses in future DTAAs to curb the abuse of double taxation avoidance treaties. For instance, under India’s DTAA with the United Arab Emirates (UAE), a company qualifies as a permanent establishment only if it is incorporated, managed, and controlled wholly in the UAE.

Under the Singapore DTAA, a company must either be listed on a recognised Singapore exchange or spend at least $2,00,000 annually on its operations there. The US DTAA requires that more than half of beneficial ownership be held by residents of the contracting states.

LoB provisions were introduced in the DTAA with Mauritius in 2016, deeming a company a “shell” or a “conduit” if its annual operational expenditure in Mauritius was less than 15 lakh Mauritian rupees (Rs.27 lakh) in the 12 months immediately before the capital gain accrues.

After the India-Mauritius DTAA was amended in 2016, gains from alienation of all types of property outlined in Article 13 of the agreement remain taxable at the state of residence, with the important exception of the residuary category, including shares acquired on or after April 1, 2017, mentioned in Article 13(4), which would be taxed at the source. This is the grandfather clause, meaning shares acquired before the cut-off date will not be taxable when sold, and those bought between April 1, 2017, and March 31, 2019, will be taxed at half the domestic tax rate in India.

The apex court has now emphasised that while “passive” investments are grandfathered, “arrangements” are not. This means that if a pre-2017 investment is part of an ongoing arrangement that yields a tax benefit after April 1, 2017, it can still be subjected to GAAR scrutiny.

‘Principal purpose test’

A 2024 amendment to the India-Mauritius DTAA had introduced a “principal purpose test”, which denies treaty benefits if obtaining them was one of the principal purposes of an arrangement.

For treaty relief under the DTAA’s Article 13 to apply, a taxpayer must prove the transaction is taxable in the state of residence. This represents a change from the Vodafone precedent, which had held that “liability to tax,” a legal status, was sufficient, regardless of whether tax was actually paid. In Mauritius, which does not have capital gains tax, most such transactions were left untaxed.

The OECD is closing in on some tax havens. In an effort to retain capital in the Global North, the new BEPS rules have targeted longstanding low-tax jurisdictions.

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The senior economist Biswajit Dhar, who headed the think tank Research and Information System for Developing Countries, has a different interpretation. He says: “It was perfect for [the developed countries] to look the other way when foreign banks were creating havoc in developing countries because they knew that the burden of adjustment would have to be borne by developing countries. But today, you know that the problem is at your doorstep or in your bedroom… It’s us, developing countries like India, who are taking big strides in implementing those norms set by developed countries, who themselves are way behind.”

Writing for Project Syndicate, the economist Jayati Ghosh, who is an advocate for international tax reform, welcomed the Supreme Court’s Tiger Global verdict as a rare instance of an Indian institution standing up to foreign investors. “The question now is whether Modi’s government will stand by this sensible outcome or undermine it through new tax concessions. India’s recent trade deals with the European Union and the US offer little cause for optimism.”

However, BMR Legal Advocates, a boutique law firm specialising in international taxation, holds a contrary viewpoint. “The Supreme Court’s findings overturn decades of settled jurisprudence in India and reinstate the environment of uncertainty that was sought to be dispelled by earlier rulings. The Court’s approach of testing treaty residence by invoking domestic GAAR casts doubt on India’s commitment to honour treaties in good faith and its constitutional obligations.”

It added: “The observation that evolving law warrants deviation from precedent regarding the binding force of circulars increases uncertainty, especially when circulars remain in force. While the Supreme Court’s clarification on GAAR applicability to pre-2017 transactions introduces uncertainty for audits, it does provide certainty regarding the grandfathering clause’s interpretation.”

According to the firm, “although the Supreme Court’s wisdom must be respected, it might have been preferable to invoke Judicial Anti-Abuse rules, a concept well recognised in Indian jurisprudence, to preserve the sanctity of prior Supreme Court rulings and maintain consistency with India’s treaty obligations.”

Trade talks and sovereignty

Indian lawmakers have repeatedly made U-turns when pushed by investor sentiment, be it by backtracking on the investigation into Mauritius-based firms through the CBDT’s Circular No. 789 or putting tax liabilities on the Vodafone deal on the back burner for years in the face of controversy.

At the time of writing, India was negotiating a bilateral “deal” with the US, seemingly at gunpoint. From the few joint statements in the public domain so far, it appears that US President Donald Trump’s tariffs will likely continue on several Indian exports, while key tariff and non-tariff import protections in agricultural products, defence, and services are bulldozed during the negotiations.

On March 6, the US Treasury Secretary threw aside all doublespeak about India’s economic sovereignty, announcing a 30-day “waiver” from sanctions on India for buying Russian oil as a “short-term measure” to ease oil flows during the ongoing war with Iran.

As the US fashions itself as the world’s cowboy, the ongoing trade negotiations and investor protections are likely to strain India’s sovereignty. This demands greater political grit in the face of aggressive demands from billionaires for more corporate tax cuts, new concessions for global tech firms, and trade agreements that may embed rules limiting India’s ability to tax multinational digital monopolies. This would be a radical departure from four decades of Indian taxation policy.

The writers are independent journalists who have collaborated on writing several articles and authoring two books, Loose Pages: Court cases that could have shaken India – Recalling the Birla-Sahara papers and Kalikho Pul’s suicide note and An Unflattering Story About Ola’s Bhavish Aggarwal – Behind the incredible rise and impending fall of an Indian unicorn.

This article has drawn from the book, Thin Dividing Line – India, Mauritius and Global Illicit Financial Flows by Paranjoy Guha Thakurta with Shinzani Jain.