Why in News ?
- The Supreme Court of India dismissed the tax plea of Tiger Global, holding its gains taxable in India.
- Court signalled closer scrutiny of treaty-based tax exemption claims, especially via Mauritius/Singapore routes.
- Potential ripple effects for pending cases and M&A structures relying on DTAA benefits.
Relevance
GS III – Economy
- International taxation
- Capital gains tax
- FDI/FPI regulation
- GAAR & treaty shopping
- Investment climate vs tax fairness
GS II – Polity & Governance
- Role of judiciary in economic governance
- Authority for Advance Rulings (AAR)
- Judicial review of quasi-judicial bodies
Case Snapshot
- Transaction: Sale of Indian e-commerce shares (Flipkart) routed via Mauritius/Singapore entities.
- Claim: Capital gains exempt under Double Taxation Avoidance Agreement.
- Tax Dept View: Impermissible tax avoidance—entities lacked commercial substance.
- Outcome: SC upheld taxability; overturned reliance on favourable Authority for Advance Rulings findings.
Legal Principles Clarified
- Substance over Form: Legal structure cannot defeat economic reality.
- Treaty Abuse Doctrine: DTAA benefits denied where arrangement is colourable/sham.
- GAAR Alignment: Reinforces General Anti-Avoidance Rule ethos—tests of commercial substance, principal purpose, round-tripping.
Constitutional & Jurisprudential Angle
- Separation of Powers: Courts checking quasi-judicial overreach (AAR).
- Judicial Consistency: Builds on Vodafone-era jurisprudence while distinguishing bona fide investment from conduit entities.
- International Law Interface: Treaties are not shields for abuse; domestic anti-avoidance applies.
Economic & Investment Implications
Positive
- Enhances tax certainty via clarity (what qualifies for DTAA).
- Strengthens tax base; deters aggressive arbitrage.
- Signals policy credibility to long-term investors.
Concerns
- Short-term investor caution; re-pricing of exits.
- Compliance costs; need for restructuring.
Who Is Affected ?
- Private Equity / FPIs using treaty routes.
- Cross-border M&A and exit planning.
- Pending and future treaty-based exemption claims.
Global Context
- Aligns with OECD-BEPS norms: anti-treaty shopping, Principal Purpose Test (PPT).
- Mirrors global shift from tax competition to tax cooperation.
Way Forward
- Clarity: Issue CBDT guidance on commercial substance thresholds.
- Certainty: Fast-track safe harbours for genuine PE/VC operations.
- Capacity: Strengthen AAR with consistency checks; timelines.
- Treaty Updates: Continue PPT/LOB clauses; periodic review.
- Ease of Doing Business: Advance rulings with binding certainty for bona fide investors.
