The Corporate & Commercial Law Society Blog, HNLU

Tag: International Taxation

  • Judicial Shift in Treaty Taxation: The Tiger Global Judgment

    Judicial Shift in Treaty Taxation: The Tiger Global Judgment

    BY CHEENAR SHAH, VANSHIKA BANSAL, THIRD- YEAR STUDENT AT GUJARAT NATIONAL LAW UNIVERSITY

    The Supreme Court (‘the Court’) on January 15, 2026, delivered a landmark judgment in the case of The Authority for Advance Rulings (Income Tax) and Others v. Tiger Global International II Holdings (‘Tiger Global case’). The Court determined that the General Anti-Avoidance Rule (‘GAAR’) can supersede treaty benefits and ‘grandfathered’ investments if the exit arrangement lacks any commercial substance. By ruling that a Tax Residency Certificate (‘TRC’) is no longer a conclusive proof of eligibility, the judgement breaks down the classic Mauritius Route and investors must now demonstrate real economic control and management to claim benefits under the India- Mauritius Double Taxation Avoidance Agreement (‘DTAA’).

    BACKGROUND

    Tiger Global invested in Flipkart, Singapore, between October 2011 and April 2015. Flipkart generates a significant part of its revenue through assets in India. In 2018, Tiger Global sold its stake to Walmart Inc. as part of a bigger acquisition of a majority stake in Flipkart.  

    Tiger Global sought to obtain a capital gains tax exemption under Article 13(4) of the DTAA, as it held a valid TRC of Mauritius, and accordingly, filed an application under Section 197 of the Income Tax Act, 1961 (‘IT Act’) to issue a nil withholding tax certificate. However, the Indian tax authorities stated that the exemption cannot be claimed, as Tiger Global lacked independent decision-making control and management.   

    Aggrieved by the decision, the Appellant approached the Authority for Advance Rulings (‘AAR’), which ruled in favour of the Tax Authorities’ decision. However, the decision was overturned by the Delhi High Court on grounds of arbitrariness. The matter was thereafter challenged before the Supreme Court.  

    JUDICIAL PERSPECTIVE

    The Court determined on three major issues: firstly, whether the GAAR could supersede capital gains exemptions under the treaty despite grandfathering of investments made before 2017; secondly, whether the Limitation of Benefits (‘LOB’) provision of the DTAA precluded application of the GAAR; and thirdly, whether the possession of a TRC continued to be appropriate evidence of entitlement to claim relief under the treaty in the post-GAAR regime.  

    The Court deviated from the deferential approach and placed Indian tax adjudication under the post Base Erosion and Profit Shifting (‘BEPS’) international anti-abuse standards that emphasise on the economic substance of a treaty rather than the form. The advantages under the treaties were recharacterized as qualified privileges that depend on commercial presence and control rather than mere residence.

    ANALYSIS

    Why ‘Grandfathering’ is Not a Shield 

    The core of the legal dispute hinges on the interpretation of the GAAR, codified in Chapter XA of the IT Act. Tiger Global argued that their investments were protected by the ‘grandfathering’ provisions of Rule 10U(1)(d), which excludes income from the transfer of investments made before April 1, 2017. They contended that since their shares were acquired between 2011 and 2015, the gains were immune from GAAR scrutiny. Nevertheless, the Court took a more sophisticated mode of analysis and made a distinction between an investment and an arrangement. While the investment occurred prior to the cut-off date, the arrangement of the specific share-sale transaction took place in 2018. The result of Rule 10U (2) is that the provisions of GAAR will apply to an arrangement regardless of the date of its entering into, provided the tax benefit will be obtained on or after April 1, 2017. 

    This points to the fact that grandfathering is not an anti-tax avoidance license. In case the Revenue can show that an arrangement does not have commercial substance or the arrangement was entered into with a major purpose of receiving a tax benefit, then the age of the original investment will not rescue the arrangement as an impermissible avoidance arrangement. Over the years, international investment has been flowing into India, thinking that any old investments were not subject to modern anti-avoidance regimes through grandfathering. The Court, however, found that GAAR could be used in relation to exits that could be regarded as impermissible avoidance arrangements under Section 96 of the IT Act.  

    Such a jurisprudential change will presumably require the re-pricing of Indian assets, with investors now having to add a treaty risk premium to the assets to reflect latent capital gains liabilities. This shift also demonstrates that domestic anti-abuse provisions have become more prevalent than treaty concessions. Additionally, the ruling exposes prevailing offshore investments to the risk of long litigation. The onus of proof has changed, and when the Revenue proves a prima facie case that the investor is engaged in tax avoidance, it is incumbent upon the latter to prove that the motive was genuine. Tax neutrality in this new environment cannot be considered an unchanging part of an investment strategy. 

    The Coexistence of SAAR and GAAR 

    The DTAA 2016 Protocol added a LOB provision that specifically targets so-called shell or conduit companies. This clause provides a quantitative threshold where a company is not considered a shell if its total expenditure on operations in Mauritius is at least 1.5 million Mauritian Rupees. Tiger Global argued that because they satisfied these objective LOB criteria, the Revenue was precluded from invoking GAAR. 

    This either-or analysis was opposed by the Court, and it was held that Specific Anti-Abuse Rules (‘SAAR’), like the LOB clause, and GAAR can and do coexist. LOB clause is a transitional objective filter, but GAAR is a supervening subjective code that is meant to address aggressive tax planning. It may also be disqualified under GAAR, even when an entity meets the spending requirements of the LOB, the primary purpose of the arrangement being to claim a tax benefit. 

    This change has far-reaching consequences for international tax planning. Through its focus on the main purpose of the test, the Court has indicated that even transactions which technically meet all the requirements of SAAR may be disqualified in case their purpose is mainly tax-oriented. This causes a shift of emphasis from box-ticking compliance to the creation and documentation of an effective, authentic business point behind each tier of an investment structure. 

    Substance over Form and Piercing of the Corporate Veil 

    Further, the Court emphasised on the reality of the corporate structure under the tax system in India rather than the formal adherence to the treaty. The legislative effect of the Central Board of Direct Taxes (‘CBDT’) Circular No. 789 of 2000, which considered a TRC as adequate evidence of residence to claim benefits, was further emphasized in Union of India v. Azadi Bachao Andolan. However, the present case recalibrates on that jurisprudence in the light of the contemporary legislative framework and limits its application. The court affirmed that the circulars are binding on the tax authorities, but it is important to note that they are supposed to be applied within the legal environment in which they are issued. The amendments implemented by the Finance Act, 2012, Chapter X-A GAAR incorporation, and changes to Rule 10U have essentially changed this situation by mandating an evaluation of effective control and management. Therefore, the Court ruled that though a TRC is a requirement, it is not a conclusive requirement under Section 90(4) of the IT Act. 

    Additionally, the doctrine of substance over form as applied in the case of McDowell and Co. Ltd. v. Commercial Tax Officer was referred to emphasize that colourable instruments that aim to evade tax cannot be justified as tax planning and that cross-border structure should be evaluated based on the actual economic nature of the arrangement and not the legal structure. 

    The Court affirmed the findings of the AAR and approved functional piercing of the corporate veil, observing that the real control and power of decision-making of Tiger Global was not in Mauritius, but in the United States. The use of the ‘Head and ‘Brain’ test,  along with the Place of Effective Management described the Mauritian entities as a see-through structure, which did not have an independent existence. This decision, therefore, confirms that real commercial substance is required of treaty benefits and tax authorities are permitted to ignore intervening corporate levels where control is evidently exercised in other areas. 

    CONCLUSION

    The case of Tiger Global is an important judgment that indicates India’s attitude towards how the advantages of the tax treaty can be construed concerning the cross-country corporate arrangements. The Court not only simplified confusion about the India- Mauritius DTAA but also suggested a gradual change in the attitude to rely only on the formal treaty residence to the tactical review of the investment and control structure of the corporate management. It demands a change in the box-ticking compliance to ex-ante accounting of the presence of a strong commercial justification. In addition, the Court has distinguished investments and arrangements, which means that the exit structuring will now be evaluated irrespective of the entry date; even the grandfathered investments made before April 2017 will be taxed according to GAAR when the exit arrangement is defined as a tax avoidance measure. Thus, PE/VC frameworks must clarify their geography of control and verify expenditure limitations as per the LOB provision.

  • Taxing the Non-existent: Transfer Pricing of AMP Expenses

    Taxing the Non-existent: Transfer Pricing of AMP Expenses

    BY YARABHAM AKSHIT REDDY, THIRD- YEAR STUDENT AT HNLU, RAIPUR
    Introduction

    The treatment of Advertising, Marketing and Promotion (‘AMP‘) expenditure has been a contentious issue under the Transfer Pricing (TP) Regulations as outlined in sections 92 to 92F of the Income Tax Act, 1961 (‘ITA‘). The debate centers on whether such expenses constitute transactions between Associated Enterprises (AEs) requiring compensation or qualify as ordinary business expenses. Recently, in the case of PCIT v Beam Global Spirits & Wine (India) Pvt Ltd, the Delhi High Court ruled that the existence of an International Transaction must be established before proceeding with the benchmarking analysis of AMP expenses and rejected the application of Bright Line Test (‘BLT‘) for inferring the International Transaction. As per section 92B (1) of ITA, an International Transaction is “a transaction entered into between two or more AE where at least one of them is a non-resident by way of agreement, arrangement or action – whether formalized in writing or otherwise. Since, there is no statutory framework governing the AMP expenses, the concept has evolved through a series of judicial pronouncements. This ruling came as a relief to the taxpayers who are engaged in marketing intangibles and could claim deductions for such expenses under section 37 of ITA.

    In light of the above, the article critically analyzes the judgement in two prongs, viz, firstly, by understanding the concept of the BLT for determining the existence of International Transactions, and Secondly, through exploring the alternatives in determining the TP adjustments of AMP expenses and prevent unfair tax assessments by revenue authorities.

    Behind the Judgement: Key Legal Takeaways

    In the present case, the assessee (Beam India Holding Ltd) is one of the companies of Beam Global Group which is engaged in the manufacture, sale, marketing and trading of Indian Made Foreign Liquor (‘IMFL‘). This IMFL is sold under the brand name and license given by Fortune Brands which is stated to be the ultimate parent company. The core issue before the Transfer Pricing Officer (‘TPO‘) was whether AMP expenses incurred by the assessee constitute an International Transaction as per section 92B of ITA.

    The TPO applied the BLT and determined that the excessive expenditure constitutes an International Transaction as the same has benefited the legal owner as a result of brand building and commenced benchmarking analysis. As a result, the assessee filed an appeal before the Income Tax Appellate Tribunal (‘ITAT‘) which ruled in his favour by establishing that before initiating a TP Adjustment, the TPO must establish the presence of an International Transaction with tangible and concrete evidence. Aggrieved by the same, the revenue authorities challenged the decision before the Delhi High Court (HC).

    The Delhi HC upheld the decision given by ITAT by stating that a mere relationship between two AEs cannot be satisfactory evidence for the presence of an International Transaction and relied on Maruti Suzuki India Pvt Ltd v. CIT, which established that mere rendering of service by one party to another would not constitute a transaction unless the same is based on mutual arrangement or agreement as per Section 92B (1) of ITA. Further, the court relied on Sony Ericsson Mobile Communication India Private Limited v. CIT (‘Sony Ericsson‘) and rejected the BLT as an objective criterion for establishing AMP expenses as International Transactions.

    From Acceptance to Rejection: Tracing the path of BLT

    The concept of BLT originated in the case of DHL Corporation & Subsidiaries v. Commissioner of Internal Revenue before the US Tax Court. According to this test, if a subsidiary AE incurs significant costs in the exploitation of an intangible brand name and that expenses exceed the bright line limit of routine expenditure (costs incurred by the other comparable entities), then such entity is deemed to have economic ownership over that brand name. It then becomes an obligation for the parent AE to reimburse the subsidiary AE for non-routine expenditures incurred in brand building. In the absence of any statutory provision to compensate the subsidiary AE for the benefits drawn by foreign AE, the need for transfer pricing adjustment arises. The revenue authorities apply this test in determining the arms’ length price of this perceived transaction.

    In the Indian Context, the test was first applied in the case of Maruti Suzuki India Ltd v ACIT wherein the Delhi HC determined that AMP Expenses would constitute an International Transaction if they exceed the expenses incurred by comparable independent entities placed in similar circumstances. Further, in LG Electronics India Private Limited vs. ACIT (‘LG Electronics‘), the ITAT ruled that proportionately higher expenses incurred in the creation of marketing intangibles would constitute an International Transaction.

    Subsequently, LG Electronics was overruled to the extent that excessive AMP expenses incurred by domestic AEs would constitute an International Transaction in Sony Ericsson case. The court held that BLT would not be an appropriate method as it lacks statutory mandate and was not envisioned in ITA or Income Tax Rules. Moreover, the Supreme Court has dismissed the Special Leave Petition challenging the Delhi HC judgment in CIT v. Whirlpool of India Ltd which invalidated the BLT test, thereby establishing it as a binding precedent.

    It is contended that the application of the BLT method would risk undermining statutory framework of ITA. Such an approach would introduce a novel concept that lacks any formal recognition, thereby creating interpretative inconsistencies and potential conflicts with the established methodologies. section 92C of ITA outlines an exhaustive list of methods for the computation of AMP and must not lay down any other guidelines. The existence of International Transactions must be established based on actual or concrete evidence and such a qualitative determination cannot serve as the basis for their recognition. Despite subsequent High Court rulings rejecting BLT, Revenue Authorities are increasingly relying on BLT for a regressive analysis of AMP expenses to determine an International Transaction.

    Critical Analysis
    • Prima Facie establishment of International Transaction:

    The judgement is a step in the right direction as it places the burden of proof on the revenue authorities to prove the existence of International Transactions based on tangible or concrete evidence between the domestic AE and its foreign AE. This position has been affirmed in CIT v EKL Appliance Enterprise Ltd, wherein the TPO has been directed to “examine the International Transaction as he finds it and not to make its existence a matter of surmises.” This would reduce arbitrary assessments faced by Indian AEs and force the Revenue authorities to reassess their approach towards transfer pricing of AMP Expenses.

    • BLT cannot be an appropriate method for AMP Expenses:

    The level and nature of AMP spending depend on a variety of business factors like market share, market environment, contractual mechanisms, management policies, etc. It varies across industries and also differs within the same industry as it could be company-specific. In the absence of a clear statutory scheme, reliance cannot be placed on BLT to decide AMP expenses by mere comparison with other similarly situated entities. Such fact-specific cases necessitate careful consideration of multiple factors- whether the AE operates a licensed manufacturer, distributor or marketing agent, the duration of contracts whether long-term or short-term, extent of risk undertaken. The Delhi ITAT in BMW Motors India Pvt. Ltd v. DCIT, established that there is no straightjacket formula to determine transfer pricing matters of AMP expenses and such a fact-extensive exercise requires a detailed Functional Analysis to characterize transactions appropriately and understand the business models.

    Avoiding TP Adjustment of AMP Expenses: Assessing the Possible Alternatives

    Until the legislature lays down clear guidelines for determining International Transactions or the Supreme Court resolves the ambiguity, BLT cannot be used as it is inherently susceptible to arbitrariness and operational challenges. In due time, revenue authorities must mandate Indian entities and their foreign AEs to maintain detailed documentation of Functions performed, assets employed and risk undertaken (‘FAR Analysis’) while performing AMP functions. This would help in keeping track of purposes for which expenditure is undertaken, reasons for excessive expenses and the existence of any implicit arrangement or agreement.

    OECD and the Australian Tax Office (‘ATO’) also lay down guidelines for preventing profit shifting due to excessive AMP expenditure. It prescribes that any assessment undertaken by the revenue authorities must look for reduced product/service prices or lower royalty rates paid by domestic AE to foreign AE, profit splitting agreements between them and any provision for compensation for excessive AMP by foreign AE. Since, these guidelines concern distributors or marketers, any legislature enacting these rules must also lay down for licensed manufacturers.

    Another alternative would be Advance Pricing Agreements (‘APAs’). These are pre-negotiated agreements between revenue authorities and the assessee, providing for fixed methods of transfer pricing over a specific period and decides the ALP. These APAs will determine what kind of transactions will be covered by them and what methods would be used for TP Adjustments. AMP Expenses could be covered under these APAs which would help in reducing tax litigations and boost foreign investments in India. Since this issue requires a thorough analysis of fact-specific cases, it must be carried out with a fixed/standardized methods for a fair and accurate determination.

    Conclusion

    This judgement reinforces that excessive AMP expenses incurred by the assessee could not qualify as International Transaction as the creation of marketing intangibles increases his own sales and benefits his business. The burden of proof is on revenue authorities to prove the presence of International Transactions with tangible or concrete evidence. Rejection of BLT emphasizes the need for a more objective/ standardized methods to ensure fair TP Assessments, thereby protecting companies from arbitrary and unwarranted tax adjustments. Until legislative clarity is provided in this regard, proper and detailed documentation, APAs and FAR Analysis could bring clarity and consistency in handling AMP-related TP issues. Such a fair and balanced approach will go a long way in reducing litigations and create a predictable tax environment in India.