The Authority For Advance Rulings (Income-tax and Others) v Tiger Global International II Holdings [2026] 182 taxmann.com 375 (SC)

In what is being regarded as a watershed moment in Indian tax jurisprudence, the Supreme Court has rendered a landmark decision concerning applicability of tax treaty benefits. This landmark judgment touches upon an arena of critical tax concepts such as tax sovereignty, tax residence, indirect transfer, treaty shopping, anti-abuse provisions etc.

Background

The much-awaited decision relates to capital gain exemption under the famed India-Mauritius tax treaty (‘tax treaty’). The said tax treaty provided a capital tax neutral exit option to downstream investments into India and thus, was widely popular for both Foreign Institutional Investment as well as Foreign Direct Investment. However, this tax treaty had a checkered history given its rampant misuse by treaty shopping, leading to protracted litigation.

The last decade has witnessed a growing dissent towards base erosion at the global level. India has kept pace with global developments such as BEPS, Multilateral Convention, Two pillar approach etc. In the same direction, the tax treaty itself was amended whereby, the exemption from capital gains tax was withdrawn in respect of investments made on or after April 1, 2017. However, gains from sale of investments made prior to April 1, 2017 were grandfathered and continued to enjoy exemption.

Parallelly, at the domestic front, the legislative framework underwent a series of changes to align the tax law with the broader goal to counter tax abuse. Resultantly, provisions relating to taxation of indirect transfers, prescription of additional documents to supplement tax residency certificate were etc were introduced. More particularly, General Anti Avoidance Rules (GAAR) were introduced which had an overriding effect over tax treaty provisions.

The Supreme Court was dealing with the question of whether capital gains tax exemption under the tax treaty is available in respect of an investment structure which existed even prior to 2017. The Supreme Court, while overturning the decision of the High Court of Delhi, held that the arrangement was prima facie, conceived to avoid tax, when viewed from the prism of both GAAR as well as JAAR (i.e. Judicial anti abuse rules). As such the Court held that the arrangement is not eligible for treaty benefits or for grandfathering from domestic anti abuse provisions. Thus, the Supreme Court held that the sale of shares is liable to tax in India under the Indian domestic tax law.

Brief Facts and decisions of lower forums

Tiger Global International III Holdings, Mauritius as well as certain Mauritian entities (collectively referred to as “assessees”) operated as pooling vehicles for investments. Such entities held a Category – 1 Global Business License in Mauritius and had aggregated funds from many investors. These entities acquired the shares of Flipkart, Singapore during the period 2011 to 2015. The shares held by the assessees drew their value from the downstream investments in several Indian companies. Thereafter, in pursuance of a takeover scheme with Walmart, the asseessees sold their stake in Flipkart Singapore to Fit Holdings SARL, Luxembourg in May, 2018.

The assessee approached the Authority for Advance Ruling (AAR) to seek a ruling on whether any incidence of capital gains tax arises on the aforesaid sale in view of Article 13 of the India-Mauritius tax treaty. However, the AAR refused to admit the application at the threshold, as it held that entire arrangement was conceived prima facie, for tax avoidance purposes.

Thereafter, the High Court of Delhi decided the matter in favour of the assessee. The Court dispelled the argument of the revenue that the structure lacked economic substance. The court stated that one cannot presume a tax abuse motive merely on the premise that investments were routed through a special vehicle in a tax friendly jurisdiction. The High Court, upon analyzing Article 13 of the tax treaty, observed that it was the conscious position of the treaty partners not to deny treaty benefits to investments made prior to April 1, 2017. Thus, the High Court held that provisions of General Anti Avoidance Rules (which were effective from April 1, 2017) had no application. Accordingly, the Court held that the sale of shares of the Singaporean entity shall not be liable to tax in India. [An Article based on the said High Court decision was published in the Corporate Update for September, 2024]

Supreme Court’s Verdict

During the course of arguments before the Apex Court, discussions revolved primarily around the evolution of treaty shopping, anti-abuse provisions as well as earlier landmark decisions of the Supreme Court in McDowell & Company ltd, Azadi Bachao Andolan and Vodafone International Holdings BV. The key observations of the Supreme Court are enunciated hereunder:

• Indirect transfers not protected by tax treaty: The Supreme Court held that transfers of shares of an overseas company deriving value from Indian downstream investments is not protected by the tax treaty. Here, it may be mentioned that Article 13(4) of the tax treaty is a residual clause which grants the state of residence exclusive rights to tax capital gains not covered under sub articles 1, 2, 3 and 3A. This has raised ambiguities as hitherto it was widely accepted that indirect transfers fall within such residual clause and ought to be taxed in the country of residence. This observation has significant ramifications, as tax authorities are likely to deny treaty benefits in case of indirect transfers.

• Sufficiency of TRC and treaty override: Tax Treaty eligibility hinges upon substantiating residence in one of the treaty partner countries. Usually, a valid TRC from the concerned authorities of the resident state would be acceptable proof of residence. In the context of tax havens such as Mauritius, tax authorities have often rejected TRCs of intermediary entities registered in Mauritius, treating them as empty shells created for treaty shopping. In the year 2000, the Government had issued a Circular no 789 (applicable for FIIs etc) to reiterate its stand that such TRC from Mauritian authorities would be sufficient for the purpose of treaty eligibility. This circular was a key element in the landmark decision of Azadi Bachao Andolan.

In the present case, the assessees relied on the decision of Azadi Bachao Andolan to contend that they were eligible for exemption from capital gains tax. On the other hand, the revenue argued that such circular was issued only in the context of FIIs and not for foreign direct investment. The Apex Court noticed that the law has significantly been amended since the issuance of the aforesaid circular and earlier decisions in Azadi Bachao and Vodafone. The Apex Court noted that Section 90(4) (which was inserted by the Finance Act, 2012) TRC is only an ‘eligibility condition’ rather than a ‘sufficient’ condition. The Court also casted doubts on the TRC produced by the asseessees and held that the same cannot bind tax authorities.

Moreover, the Court also relied heavily upon Section 90(2A) of the Act, (effective from April 1, 2016) which permits treaty override where GAAR is pressed into service. The Court observed that pursuant to the aforesaid provision, mere holding of a TRC cannot prevent inquiry into the genuineness of the arrangement.

• Whether the investment / arrangement was eligible for grandfathering:The provisions of GAAR and rules framed thereunder were effective from April 1, 2017. Rule 10U(1)(d) of the Income-tax Rules, 1962 does grandfather ‘investments’ made prior to April 1, 2017. However, Rule 10U(2) states that GAAR provisions shall apply to ‘arrangements’, irrespective of the date when it was entered into, if tax benefit (exceeding INR 30 Million) was obtained on or after April 1, 2017.

The revenue highlighted the distinction between the expressions’ ‘investment’ and ‘arrangement’. It was argued that even if an investment was made prior to the cutoff date (April 1, 2017), the subject structure would be regarded as an ‘arrangement’ for the purpose of GAAR and therefore ineligible for grandfathering. The Apex Court, finding force in this argument, held that arrangements that are characterized as ‘impermissible’ shall not be afforded grandfathering protection regardless of when the investments were made.

In the facts of the case, the Apex Court agreed with the finding of the AAR that the arrangement was prima facie, preordained for tax avoidance. The fact that the assessee was not taxable in Mauritius also weighed heavily for the Court to deny benefits of the tax treaty. As such, the Apex Court held that the assessee wouldn’t be entitled to capital gains exemption under the tax treaty.

• Substance over Form:The Supreme Court held that it is permissible for an assessee to plan its transaction to avoid levy of tax, only if it is permissible and within the parameters of the law. However, where an asseessee    employs colourable devices, tax authorities are entitled to question the legitimacy of the assessee’s claim. The Court also noted that the ‘substance over form’ principle is deeply ingrained in Indian tax jurisprudence and judicially recognized. Thus, even in the absence of GAAR, JAAR may be invoked to pierce the structure to deny treaty benefits.

In this backdrop, the Supreme Court held that the assessee was not entitled to capital gains exemption under the tax treaty, while reiterating the substance over form principle. It may be mentioned that in deciding the matter, the concept of tax sovereignty weighed heavily in the analysis of the Apex Court. The Court has laid down an extensive exposition of concept of tax sovereignty and its interplay with the international tax ecosystem. The Court opined that it is the inherent sovereign right of a country to tax an income which ought to be retained and not compromised. This decision indicates a shift in judicial perspective of foreign investments, especially, considering the Court’s observations regarding supremacy of the country’s sovereign right to tax.

	Anuj Mathur Director Tax Advisory Tel : +91 11 47102200 Email : anuj@mpco.in

American Express Bank Limited [TS-1655-SC-2025]

Recently, the Apex Court in the above case, while examining the applicability of Section 44C of the Act to the expenditure exclusively incurred by the head office for its Indian branch, has held that deductibility of head office expenditure is subject to the limitation prescribed under Section 44C, irrespective of whether such expenditure is common in nature or exclusive to the Indian branch. 

Section 44C governs the quantum of admissible expenditure in respect of head office expenditure, while computing profits taxable in India in the hands of a non-resident assessee (for instance, profits of an Indian branch/ permanent establishment). The allowable deduction is restricted to the lessor of an amount equal to 5% of the ‘adjusted total income’, or the amount of head office expenditure ‘attributable’ to the business of the assessee in India. As per the Explanation to Section 44C, an expense qualifies as ‘head office expenditure’ if it is incurred outside India and is in the nature of ‘executive and general administration’ expense including those specified in clauses (a) to (c) of the Explanation or as may be prescribed under clause (d) of the Explanation. The clauses (a) to (c) include expenses towards rent, insurance, etc. of premises outside India, salary, wages, travelling etc. paid to employees outside India.

On facts, the assessee is a non-resident banking company, claimed certain expenses incurred at the head office which were directly related to its Indian branches. The assessee contended that such expenses were exclusively incurred for the purpose of its Indian branches and therefore, outside the ambit of Section 44C and as such, admissible under the general provisions of the Income tax law. However, the assessing officer took a different view and invoked Section 44C, thereby restricting the deduction to 5% of the adjusted total income under section 37 of the Act.

While the assessee’s appeal before the first appellate authority was dismissed, the second appellate authority decided in favour of the assessee by relying upon the Bombay High Court’s decision in CIT v. Emirates Commercial Bank Ltd. (2004) 134 Taxman 682 (Bombay)wherein it was held Section 44C applies only to common allocated expenditure and not expenditure exclusively incurred for the Indian branch. The High Court of Bombay, on further appeal by the assessee, also decided the matter in favour of the assessee.

The matter travelled to the Supreme Court, wherein, the question before the Court was whether the scope of Section 44C also extends to expenditure exclusively incurred for an Indian branch. The Supreme Court observed that taxation statutes require strict interpretation. Where the words are plain and unambiguous, the Court is bound to give effect to their plain meaning. Reference to the object and purpose becomes relevant only in those situations where the language is capable of multiple interpretations. The Supreme Court held that under ordinary circumstances, it is impermissible for the Court to add or read words into the statute on the notion that such words would better serve the legislative object or purpose.

The Supreme Court also examined the object of introduction of Section 44C of the Act. The Court noted that the concern revolved around the mischief of claiming excessive expenditure by ‘inflating’ head office expenditure relating to Indian branches and the difficulty in its verification by the tax office. The Court opined that this merely reinforces the conclusion that Section 44C must be given the plain meaning to remedy the very mischief the legislature sought to address.

The Supreme Court held that on a plain reading of Section 44C, it is clear that the head office expenditure is not limited to cover only common expenditure incurred by the head office for the benefit of various branches, including those in India. The plain language of Section 44C, when viewed against the backdrop of the specific mischief it sought to curtail, is unambiguous. The statutory definition is broad and inclusive, containing no indication that ‘exclusive expenditure’ does not fall within its purview.

Furthermore, the Supreme Court held that the term ‘attributable’ does not create a statutory distinction between ‘common’ and ‘exclusive’ expenditure. The Supreme Court rejected assessee’s contention that there is a conceptual difference between ‘attributable’ expenditure and ‘exclusive’ expenditure and held that the expenditure which is incurred exclusively for the business in India is, by its very nature, attributable to the business in India. The Court held that if the Parliament had intended to restrict the scope of Section 44C only to common or shared expenses, it would have employed specific language to that effect.

The Supreme Court noted that the Bombay High Court in Emirates Commercial Bank (supra) provided no basis whatsoever as to how it concluded that the expenditure which is covered by Section 44C is of a common nature. Consequently, it held that the view expressed by the Bombay High Court in Emirates Commercial Bank (supra) regarding the applicability of Section 44C is incorrect and does not declare the position of law correctly.

The Supreme Court thus concluded that Section 44C applies to ‘head office expenditure’ regardless of whether it is common expenditure or expenditure incurred exclusively for the Indian PEs.

The Supreme Court also dealt with the assessee’s ancillary contention that the definition of ‘head office expenditure’ in the Explanation to Section 44C is inclusive and the expenses listed/ prescribed in clauses (a) to (d) are merely illustrative. The Supreme Court rejected assessee’s interpretation and observed that if the Explanation were to be interpreted as broadly inclusive, covering all kinds of executive and general administration expenses without restriction, it would render the words “as may be prescribed” in clause (d) redundant. The Supreme Court thus held that Section 44C covers those executive and general administration expenditure which fall within the specific kind enumerated in clauses (a), (b), or (c), or expressly prescribed under clause (d), whether incurred exclusively or not.

The Hon’ble Supreme Court while laying down the above law in the matter, remanded the matter to the Income-Tax Appellate Tribunal, Mumbai, for the purpose of verifying whether the disputed expenditures satisfy the tests laid down above so as to qualify as “head office expenditure under the Explanation to Section 44C of the Act.

	Ritu Theraja Director - Tax Advisory Tel : +91 11 47102200 Email : therajaritu@mpco.in