The Supreme Court's recent ruling in the Tiger Global-Flipkart share sale case has brought India's tax treaties under renewed scrutiny, creating significant implications for foreign portfolio investors and private equity funds operating in the Indian market. The landmark decision challenges long-held assumptions about tax treaty benefits and introduces new considerations for overseas investment structures.

Key Supreme Court Ruling

The Supreme Court delivered a decisive judgment that foreign investors cannot rely exclusively on a Tax Residency Certificate to claim tax benefits under Double Taxation Avoidance Agreements. The court established that tax authorities possess the authority to examine the commercial substance of overseas investment structures when assessing treaty claims.

The ruling clarified that such examination is not prohibited merely because investments were made before April 1, 2017, when India's General Anti-Avoidance Rules formally came into force.

Understanding Key Tax Concepts

The ruling centers around several critical tax concepts that foreign investors must understand. Double Taxation Avoidance Agreement represents a tax treaty between two countries that determines taxation rights and prevents income from being taxed twice. Commercial substance requires investment structures to demonstrate real business activity in their claimed country of tax residence, including employees or operations, rather than existing solely for tax benefits.

General Anti-Avoidance Rule empowers the Indian tax department to deny tax benefits when structures are created primarily for tax avoidance and lack commercial substance.

Impact on Foreign Portfolio Investors

The ruling fundamentally changes the comfort level that foreign investors previously enjoyed regarding tax treaty benefits. The court emphasized that while a Tax Residency Certificate remains necessary, treaty protection can be denied if underlying structures lack commercial substance.

Private equity exits routed through Mauritius, Singapore, and Cyprus face particular scrutiny, as these jurisdictions have historically served as preferred investment routes for foreign entities. This proves especially relevant for legacy investments where tax authorities may dispute the commercial substance of overseas holding entities.

Broader Market Implications

The concerns extend beyond private equity firms to encompass foreign portfolio investors trading in Indian equity derivatives through Mauritius and Singapore. Even after treaty amendments, FPIs currently remain exempt from tax on derivative profits. However, the Tiger Global ruling introduces potential concerns that FPIs lacking substance could face taxation on derivative earnings.

Tax experts note that the India-Mauritius DTAA amendment currently covers only capital gains on share sales, not derivatives transactions. However, the Supreme Court's observations regarding Tax Residency Certificates and substance requirements may influence future tax positions.

Treaty Evolution and Grandfathering

The India-Mauritius DTAA underwent significant changes in 2016, transitioning from residence-based to source-based taxation. Under the current framework, investments made after April 1, 2017, face taxation in India upon exit, while pre-2017 investments received grandfathering protection, remaining exempt from capital gains tax in India.

Market Response and Future Outlook

The market has shown limited reaction to this ruling because it doesn't automatically alter the taxation framework for foreign portfolio investors. Capital gains taxation continues to apply similarly to domestic investors, with no changes to the post-2017 regime where capital gains on direct transfers of listed shares remain taxable in India regardless of treaty provisions. The primary concern centers on potential questioning of commercial substance in treaty jurisdictions and possible denial of treaty benefits, creating uncertainty rather than immediate tax implications.

The Supreme Court delivered a watershed judgment on January 15 that could fundamentally reshape how foreign capital structures investments into India. In a ruling that denied Tiger Global's capital gains tax exemption claim, the apex court held that the company's share sale routed through Mauritius constituted an impermissible tax avoidance arrangement under the India-Mauritius Double Taxation Avoidance Agreement.

The court allowed the Revenue's appeal and ruled that capital gains arising from the transaction are taxable in India, establishing a clear precedent that treaty benefits are reserved for genuine entities with demonstrable commercial substance rather than conduit or paper companies designed primarily for tax optimization.

Court Reinforces Tax Sovereignty Principles

The Supreme Court delivered strong observations emphasizing that the power to tax income arising within a country represents an inherent aspect of sovereignty. The court cautioned against arrangements that dilute this fundamental power, noting that allowing treaty benefits to entities lacking commercial substance poses a direct threat to economic sovereignty.

The judgment specifically acknowledges amendments made to the India-Mauritius DTAA that were introduced to curb treaty shopping and round-tripping practices, which had become widespread tools for tax minimization strategies.

Tax Residency Certificate Loses Protective Status

One of the most significant implications of this ruling concerns the treatment of Tax Residency Certificates. The court has fundamentally altered the evidentiary value of TRCs, departing from earlier jurisprudence including the Azadi Bachao Andolan ruling that accorded near-conclusive value to such certificates.

Amit Maheshwari, Managing Partner at AKM Global, emphasized that the ruling recalibrates two decades of settled understanding. The court has categorically established that a TRC does not constitute conclusive evidence of treaty entitlement when surrounding facts demonstrate lack of commercial substance. Treaty benefits cannot be claimed mechanically or in isolation from economic reality.

Maheshwari noted that the court's endorsement of the Revenue's position could have implications even for investments previously considered grandfathered under the amended India-Mauritius treaty, if found lacking in substance.

GAAR and Grandfathering Implications

Tax experts are closely analyzing the ruling's implications for General Anti-Avoidance Rules applicability, particularly regarding capital gains on investments made prior to April 1, 2017. Pranav Sayta, National Leader for International Tax and Transaction Services at EY India, highlighted several interpretational questions arising from the judgment.

Sayta emphasized that while the case specifically relates to the India-Mauritius treaty, the principles established could extend to other treaties, including the India-Singapore DTAA, potentially affecting a broader spectrum of cross-border investment structures.

Private Equity and Venture Capital Sector Impact

The judgment represents both a warning and a turning point for the private equity and venture capital industry. Investment structures that rely primarily on treaty residency without demonstrable economic substance or independent decision-making in the treaty jurisdiction will likely face heightened scrutiny from tax authorities.

Sandeepp Jhunjhunwala, Partner at Nangia Global, noted that the ruling reinforces the global shift towards substance-based taxation. The verdict signals a stricter approach to treaty interpretation, emphasizing 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.

However, Jhunjhunwala cautioned that the ruling could dampen foreign investment sentiment in the short term, particularly affecting inbound mergers and acquisitions transactions and exit planning strategies.

Industry Implications and Future Outlook

From a policy perspective, the judgment strengthens India's anti-abuse framework and aligns the country with global standards under the Base Erosion and Profit Shifting regime. It provides tax authorities with greater confidence to challenge aggressive structures while reducing opportunities for round-tripping and treaty shopping.

Ajay Rotti, Founder of Tax Compaas, emphasized that the ruling raises the bar but does not completely eliminate India-Mauritius structures. The judgment should be interpreted as a caution against aggressive, factually weak structures rather than a wholesale dismantling of the India-Mauritius DTAA. The real test will be how the court addresses the continuing relevance of CBDT Circular 789, which historically provided comfort on treaty availability based on TRC possession.

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 authority in the treaty jurisdiction.