Supreme Court's Judgment in 'Tiger Global International III Holdings vs. Authority for Advance Ruling' Case

The Supreme Court's ruling in the case of Tiger Global vs. Authority for Advance Ruling marks a significant shift in the landscape of foreign investments in India. This judgment has implications that extend beyond the immediate tax dispute over a ₹14,000 crore Flipkart stake sale.

Key Highlights of the Judgment

• End of 'Form over Substance' Era: The court has emphasized that a tax residency certificate (TRC) is no longer a guarantee against tax scrutiny.
• TRC Limitations: The Indian Supreme Court has indicated that a mere TRC cannot conceal the true nature of an investment indefinitely.
• Economic Substance over Legal Form: The judgment prioritizes economic substance over merely having the correct legal documentation.
• Conduit Entities: The court recognized Tiger Global's Mauritius entities as conduits or pass-through vehicles with no independent commercial substance, primarily designed for tax avoidance.

Impact on Grandfathered Investments

• Grandfathering Not Absolute: The judgment indicates that even investments made before the treaty amendment on April 1, 2017, are not immune if deemed conduits.
• Pandora’s Box for Historical Holdings: This ruling potentially affects major exits involving historical holdings.

Burden of Proof on Foreign Investors

• Substance Litmus Test: Foreign investors need to demonstrate genuine economic activities and independent decision-making in the treaty jurisdiction.
• Evaluation Criteria: Authorities may assess whether funds are just flowing through from a parent company in a non-treaty jurisdiction.

Broader Implications

• Balancing International Obligations and Fiscal Sovereignty: The judgment aims to respect international treaty obligations while asserting India's fiscal sovereignty.
• Introduction of 'Treaty Risk': Investors now need to consider 'treaty risk' in their valuation models, beyond currency risk and regulatory changes.
• End of Tax-Neutral Routing: The era of low-cost, tax-neutral investment routing through island jurisdictions is over.
• India’s Assertive Tax Administration: India is asserting that fiscal sovereignty cannot be undermined by mere TRC when revenue leakage is suspected.

This judgment signals a paradigm shift in how India handles foreign investments and tax treaties, urging global investors to adapt to this new framework emphasizing economic substance.