The Supreme Court of India (“Court”) ruled in favour of the tax authority holding that General Anti Avoidance Rules (“GAAR”) provisions become applicable to the Mauritius‑incorporated investment entities within the Tiger Global group as the impugned transactions are impermissible tax‑avoidance arrangements and thus not eligible for India‑Mauritius Double Tax Treaty (“DTT”). The dispute arose from an indirect transfer chain (Mauritius → Singapore → India) and concerned whether Article 13(4) of the India‑Mauritius Double Tax Treaty (“DTT”) exempted the capital gains. The Court considered key legal developments including the indirect‑transfer source rule, General Anti Avoidance Rules (“GAAR”) and grandfathering under Rule 10U, statutory Tax Residency Certificate (“TRC”) requirements, and past administrative Circulars and rulings. The decision emphasized substance over form and the Authority of Advance Rulings authority to reject advance rulings at the threshold where tax avoidance is prima facie evident.
Background
Recent development
The Court held that possession of a TRC is not conclusive for treaty relief since it alone will not automatically confer DTT benefits where the tax authority can demonstrate lack of commercial substance or that central management and control are exercised outside the treaty jurisdiction. Circular No. 789 and related pre‑amendment guidance were treated as superseded by statutory changes, removing the basis for blanket reliance on those Circulars. The advance‑ruling authorities may reject applications if the transaction appears prima facie designed for tax avoidance and gets covered under section 245R(2) proviso (iii). GAAR grandfathering protects certain “investments” made before 1 April 2017 but does not categorically shield “arrangements,” which are made prior to 1 April 2017 but yielding tax benefits even beyond this date. This can leave many structures exposed. Even where GAAR is inapplicable, Judicial Anti‑Avoidance Rules (JAAR) may be invoked to pierce conduit arrangements on substance‑over‑form principles and deny treaty benefits. The ruling affirms the tax authority’s power to examine board composition, bank and accounting locations, premises, and other indicia when assessing residence and substance. The Court also observed that Article 13 of the DTT applies only to direct transfer of shares of an Indian entity and does not cover indirect transfer. The decision immediately increases the risk that treaty benefits may be denied for non‑substantive conduit entities, with heightened exposure to Indian source taxation. Below a graph on the structure addressed by the court ruling:
For further detail you can find here a Tax Alert published by KPMG India.
KPMG comment
Investment funds claiming DTT benefits using Mauritius or similar treaty jurisdictions as holding or conduit vehicles should promptly inventory affected entities and transactions and assess whether governance, operations and documentation demonstrate real commercial substance and decision‑making autonomy in the treaty residence jurisdiction. TRCs should be treated as necessary but not sufficient evidence of residence; taxpayers must retain contemporaneous records of board meetings, bank accounts, local functions, financial reporting and other indicia to support treaty claims.
KPMG Luxembourg with the collaboration of KPMG India, would be available to assist you.
