The Supreme Court of India’s verdict in the Tiger Global (TG) case this January raises aspects of vital importance for taxation of non-residents in India under the tax treaties as well as domestic law. Debate will continue whether a particular finding by the Court is ratio decidendi, binding legal principle, or obiter dicta, remarks or observations made along the way that are not essential to the decision and have only persuasive authority. Be that as may, there is heavy chance that the tax officer will follow each of these as law laid down by the Supreme Court.
Guidance at the earliest for the Assessing Officers on each of these aspects is therefore need of the day in the interest of tax certainty. First and foremost, the Court has held that a Tax Residency Certificate (TRC) issued by a foreign authority alone is not sufficient to avail the benefits under the tax treaty and it has a limited evidentiary role. Delhi High Court in the same case had held that the TRC must be considered to be sacrosanct and doubting the presumption of validity attached to the TRC would inevitably result in an erosion of faith and trust reposed by the treaty partner countries in each other.
The Delhi High Court, in another case, Blackstone, had held that questioning the TRC is fully contrary to the Government of India’s repeated assurances to foreign investors by way of Central Board of Direct Taxes (CBDT) circulars as well as press releases, legislative amendments and decisions of the court. The Supreme Court has now held that subsequent to the Vodafone decision of the Court, amendments in the domestic law, in particular inserting General Anti Avoidance Rule (GAAR) provisions have completely changed the scenario and the circulars issued earlier by the (CBDT) operate only within the legal regime in which they were issued.
There is urgent need for clarity on the circumstances in which TRC issued by treaty partner countries would be questioned or disregarded by the Assessing Officer. Second, the Court has held that the treaty benefits on capital gains arising from indirect sale of shares is not applicable unless the underlying movable property is directly held. The international understanding is that indirect transfers fall under the paragraph dealing with residuary class of assets in Capital gains article in OECD as well the UN Model Tax Convention, wherein only the country of residence has the exclusive right of taxing gains.
For this precise reason, a new paragraph was inserted in the Capital Gains Article in the 2021 update of the United Nations Model Tax Convention, to allow right to tax gains from indirect transfer or offshore indirect transfers (OITs) by the country from where the transferred shares derived substantial value. There is therefore need for clarity whether OITs fall under the paragraph dealing with residuary class of assets in Capital Gains Article of tax treaties or Double Taxation Avoidance Agreements (DTAAs) of India. Third, is about Court denying grandfathering of investments against General Anti Avoidance Rules (GAAR). The main reason for so holding is that the prescription of cut-off date of investment stands diluted if any tax benefit is obtained based on an “arrangement”.
Grandfathering of existing investments against GAAR was provided in Income Tax Rules on the basis of Shome Committee recommendation that investments and not “arrangements” existing as on the date of commencement of the GAAR provisions should be grandfathered. The Delhi High Court in the Tiger Global case noted that covering grandfathered investments as part of the “arrangement” would make the grandfathering otiose. Intention of the Government is also clear from CBDT Circular No. 1 of 2025 expressly putting the grandfathering provisions under Mauritius, Singapore and Cyprus DTAAs beyond the purview of general anti abuse provisions under tax treaty namely Principal Purpose Test (PPT).
The damage control exercise by CBDT ~ restoring grandfathering of investments from GAAR provisions ~ is applicable with effect from notification date 31 March 2026. Thus, a lack of clarity on applicability of GAAR in respect of transfer of grandfathered investments between 1 April 2017 and 31 March 2026 persists. Fourth, the Court has held that even if GAAR is held to be inapplicable, Judicial Anti Avoidance Rule (JAAR) can be invoked, in the alternative, to pierce the structure and deny treaty benefits where the transaction lacks genuine commercial substance. In the Vodafone case, the Supreme Court had noted that India has lagged behind in taking effective legislative measures such as GAAR. The Court further held that lifting the corporate veil doctrine can be applied in tax matters even in the absence of any statutory authorization to that effect.
This gives rise to an important question as to when GAAR has already been enacted, which is the codified economic substance doctrine, is there still room for applying JAAR and if so, in which situations? Fifth and last, the Court observed that for the treaty to be applicable, tax payer must prove that the transaction is taxable in its state of residence. This is a very significant observation. It is not clear whether the income from transaction liable to tax in the residence state and thereafter exempted under domestic law would be eligible for treaty benefit or not.
Finally, the judicial position at various levels till now mostly endorsed availability of treaty benefit on the basis of TRC. Government itself defending TRC and CBDT’s Circular 789 of 2000 in Azadi Bachao and Government’s own stand on sufficiency of TRC in 2013 conveyed different messages even after GAAR came into being in 2012. Moreover, grandfathering of existing investments was the assurance paving the way for amendments in the Mauritius treaty, resisted fiercely for more than 20 years. Prospect of taxability of grandfathered investments after eight years generates huge tax uncertainty. With so much water having flown under the bridge, with varying judicial and governmental positions, need of the day is perhaps to look ahead and not behind. An assurance or measure in this direction is something to be seriously considered by policy makers.
(The writer is a retired IRS officer who retired as Principal Chief Commissioner of Income Tax (International Taxation). Views expressed are personal)