Foreign Tax Residency Certificate Not Conclusive for Obtaining Tax Treaty Benefit

Foreign Tax Residency Certificate Not Conclusive for Obtaining Tax Treaty Benefit

Lira Goswami (lira@ala-india.com) and Subhash Bhardwaj, Associated Law Advisers

The Indian Supreme Court’s recent decision in the case of Tiger Global International II, III, and IV[1] (collectively, the “Mauritius Companies”) emphasizes that after the introduction of General Anti-Avoidance Rules (“GAAR”) in the (Indian) Income-tax Act[2], a Tax Residency Certificate (“TRC”) issued by the Mauritius authorities, is no longer conclusive to avail of capital gains tax benefit under the Indo-Mauritius Tax Treaty (“Mauritius Treaty”) and Indian tax authorities (and the courts) can independently ascertain if the transaction is intended to avoid tax.

In this case, the Mauritius Companies sold their shares in a Singapore company, which substantially derived its value from underlying shares owned by it in an Indian company. Explanation 5 to section 9 of the Income-tax Act, 1961 (“ITA”) clarifies that if there is a transfer of shares in a company incorporated outside India which derives its value substantially from assets located in India, the same shall be deemed to be situated in India. Further, section 195 of the ITA mandates deduction of tax at source if the payment represents income chargeable to tax in India in the hands of a non-resident. Accordingly, in respect of the indirect transfer, the Mauritius Companies claimed the benefit of capital gains tax exemption under the Mauritius Treaty based on the TRC issued by the Mauritius authorities.

The Indian tax authorities denied the request for capital gains tax exemption and insisted on tax being deducted at source. The Mauritius Companies sought an advance ruling from the Authority for Advanced Rulings, which was rejected on the ground that the transaction was “prima facie for the avoidance of income-tax”. This was successfully challenged in the Delhi High Court, which held that as the shares derived substantial value from underlying Indian assets, it was an “indirect transfer” and since the Mauritius Companies were granted TRC (by the Mauritius authorities), the TRC constituted conclusive evidence of their tax residency, giving rise to a presumption of beneficial ownership and entitling the Mauritius Companies to capital gains tax benefit under the Mauritius Treaty.

On appeal, the Supreme Court set aside the Delhi High Court’s judgment. The Court held that after the (2016) amendment to Article 13 (Capital Gains) of the Mauritius Treaty, the person claiming treaty benefit must not only qualify as ‘resident’ of the other State (i.e. Mauritius) but also establish that the shares forming subject matter of the transaction are directly held by such resident. Thus, it was held that “an indirect sale of shares would not, at the threshold, fall within the treaty protection contemplated under Article 13”[3] and to avail of treaty benefits, it must be demonstrated that “the transaction is taxable in its State of residence[4]”.

The Supreme Court also held that after the introduction of (the anti-avoidance provisions of) GAAR (with effect from the assessment year 2018-2019), TRCs are no longer conclusive and “there can be no doubt that a TRC alone is not sufficient to avail the benefits…..” relying upon earlier judgements or circulars issued under the ITA[5]. Instead, the Court held that under the changed scenario, the facts would need to be independently analysed (to decide on the applicability of GAAR) and the Indian tax authorities are “now empowered to determine where taxable entities are really resident by investigating the centre of their management….”[6]. The Court also held that a request for an advance tax ruling can be rejected at the threshold, if the “transaction appears prima facie tax avoidant” [7]. Furthermore, double tax treaties no longer have primacy over domestic law since section 90(2A) of the ITA (inserted with effect from 1^st April, 2016) created an exception to the ‘treaty override principle’ by making the (anti-avoidance) provisions of GAAR applicable even if they are not beneficial to the assessee and result in tax consequences that take away any benefit under a double taxation treaty[8].

Consequently, the Court held that the TRC is only an “eligibility condition” but not a “sufficient evidence of residency”[9] and mere existence of a TRC does not prevent subsequent enquiry (by the Indian tax authorities or court), to ascertain if the transaction is to avoid tax[10].

The Court also found that the sale of shares in the Singapore Company occurred in the assessment year 2019-20 (after the introduction of GAAR) and the transaction was prima facie to avoid tax. In coming to this conclusion, the Court was influenced by the following:

• Effective control and management of the Mauritius Companies was not in Mauritius but with one Mr. Charles P. Coleman in the USA, who was declared as a “beneficial owner” in the application for GBL -1 license filed with the Mauritius authorities;
• Although, the principal bank account was in Mauritius, Mr. Charles P. Coleman, based in the US was the signatory for the bank account;
• The share purchase agreement was executed (after the ‘cut-off date’ of April 1, 2017 in the Mauritius Treaty) between Walmart International Holdings Inc, a Delaware, US Corporation (described as purchaser) and the shareholders of the Singapore Company (described as sellers)[11];
• The shareholders of the Mauritius Companies not only sought capital gains tax exemption in India but also contended that the transaction is exempt from capital gain tax in Mauritius, “which runs counter to the spirit “of the Mauritius Treaty”[12]; and
• Section 96 (2) of the Income-tax Act places the onus on the Mauritius Companies to disprove the presumption of tax avoidance, which they have failed to rebut.

The Supreme Court’s decision is significant for several reasons:

• It emphasizes that to avail of the Mauritius Treaty benefit, there must be real operations and independent decision making (in Mauritius);
• The TRC (issued by the Mauritius authorities) is merely an eligibility requirement to avail of Mauritius Treaty benefits but it is not conclusive;
• Indian tax authorities (and courts) can independently ascertain if the transaction is solely intended to avoid tax; and
• As Supreme Court’s decisions constitute ‘law’, this judgement will serve as a precedent in other pending cases, notably the Blackstone case[13] (where, in the context of the Indo-Singapore tax treaty, the Delhi High Court held that a TRC is conclusive and an appeal against this decision is pending the Supreme Court)[14].

While the Government of India is treading cautiously in order not to ‘spoil’ the investment climate in India, it remains to be seen whether the Supreme Court will apply this decision in the pending Blackstone case (or refer the case to a larger bench) and also how aggressive the tax authorities will be in re-opening past transactions in other (similar) cases, which, no doubt, is a cause for tax uncertainty.

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[1] MANU /SC /0061/2026 dated January 15, 2026.

[2] From Assessment Year 2018–2019.

[3] supra paragraph 18.

[4] supra paragraph 19.

[5] supra paragraph 27.

[6] supra paragraph 29.

[7] supra paragraph 32 (in view of section 245R(2) of the ITA).

[8]  supra paragraph 12.24.

[9]  supra paragraph 37. Section 90(4) of the ITA makes submission of a residency certificate is necessary to claim relief under any double tax treaty agreement. Additionally, section 90(5) provides that “other documents and information as may be prescribed” may be requested by the India tax authorities.

[10] supra paragraphs 43 & 37.

[11] supra paragraph 47.

[12] supra paragraph 49. 

[13] Blackstone Capital Partners (Singapore) Vi Fdi Three Pte. Ltd. (2023) 146 taxmann.com 569 (Delhi) dated January 30, 2023.

[14] On January 12, 2024, the Supreme Court stayed the Delhi High Court’s order but directed the tax authorities not to collect tax. Blackstone Capital Partners (Singapore) Vi Fdi Three Pte. Ltd. (2024) 159 taxmann.com 386 (SC).