Tax Residency Certificates No Longer Sacred After Supreme Court's Tiger Global Verdict

"Every country deserves its fair share of tax from economic activity within its borders" – OECD BEPS Core Principle. 

The Supreme Court's Tiger Global verdict decisively dismantles treaty shopping, tax evasion, and abuse. Justice Pardiwala warned round-tripping/laundering practices "undermine national strength," demanding strict enforcement for tax sovereignty. The Supreme Court ruled against Mauritius entities propagating tax residency certificate, or TRC, as a key tool while intensifying scrutiny on its applicability. This heightened examination extends treaty benefit verification beyond Mauritius to all Double Taxation Avoidance Agreements. Offshore investors will closely monitor this.

A TRC is a vital document issued by a taxpayer's resident country's tax authority, confirming their tax residency status for a specific period. It plays a critical role in enabling non-residents to claim benefits under tax treaties, such as reduced withholding tax rates on incomes like dividends etc sourced in another country. As per section 90(4) of the Income Tax Act (ITA), non-residents must furnish a valid TRC /Form 10F if needed to avail tax treaty benefits, such as lower treaty rates thereby ensuring that only genuine residents avail treaty benefit. The Supreme Court in Tiger Global decision reinterpreted the earlier decisions and circulars.

The facts and litigation matrix show that Mauritius entities, holding pre-2017 investments in Flipkart Singapore, and deriving value substantially from India, sold shares to Luxembourg entity during Walmart's $16 billion acquisition, triggering S.9(1)(i) indirect transfer tax. Despite valid TRCs, they claimed Article 13 Mauritius treaty benefits and sought S.197 nil withholding which was denied by authorities citing US conduit control. The Authority for Advanced Ruling dismissed applications as "prima facie tax avoidance". However, HC reversed, upholding economic substance/TRCs for exemption. Consequently, Revenue appealed to Supreme Court.

The Supreme Court held that Section 90(4) casts TRC as an 'eligibility condition' and not sufficient evidence of residency being a higher threshold. Hence, the TRC is not binding on any statutory authority or Court unless it enquires into it and comes to its own independent conclusion. In the present case, the TRC relied upon by the taxpayers was non-decisive, ambiguous, and ambulatory, merely recording futuristic assertions without independent verification, lacking qualities of binding proof of residency. The Supreme Court delved into applicability of landmark decisions like Azadi Bachao Andolan and Vodafone.

The Supreme Court held that section 90(4) casts TRC as 'eligibility condition,' not sufficient evidence of residency which is a higher threshold. TRC not binding unless authority/Court independently verifies it. Taxpayers' TRC was non-decisive, ambiguous, ambulatory—lacking verification, binding proof qualities. Hence, Supreme Court analysed Azadi Bachao Andolan, Vodafone applicability.

In Azadi Bachao Andolan, the Supreme Court held that a TRC from Mauritius authorities serves as conclusive evidence of residency and beneficial ownership under the Mauritius treaty. It clarified that the Mauritius treaty overrides domestic law via Section 90, barring Indian courts from "lifting the veil" to deny benefits once TRC is present. It upheld CBDT Circular 789 (13.4.2000), which clarified that a TRC issued by Mauritian authorities constitutes sufficient evidence of both residency status and beneficial ownership for claiming tax treaty benefits.

Vodafone International Holdings BV v. UOI, though not centrally addressing TRC, peripherally affirmed TRCs cannot be pierced except in sham/fraud cases, upholding the Mauritius route via Azadi Bachao/Circular 789 for legitimate planning.

The Supreme Court in Tiger Global analyzed these decisions along with Circular 789. It ruled that the Circular functioned solely within the pre-GAAR legal framework and stood superseded by ITA amendments in Section 90 and inclusion of GAAR. Post this decision, the TRC—once considered conclusive proof of fiscal domicile—can no longer suffice in isolation to establish treaty entitlement.

The Supreme Court established a timeline with respect to amendments in Section 90 and insertion of GAAR, holding that where treaty abuse is suspected, residency would be determined via substance over form—looking beyond TRC to verify place of effective management and control—emphasizing substantive requirements beyond mere legal form wherever necessary. This aligns broadly with Azadi Bachao and Vodafone, though Tiger Global emphasizes substance over form to address treaty abuse and revenue protection concerns.

Practitioners must prove economic substance beyond residency for treaty benefits. TRCs must demonstrate genuine substance to withstand "substance over form" scrutiny under GAAR/section 90(4), beyond mere procedural issuance. Taxpayers should rigorously self-assess to avoid conduit/sham classifications via these key tests: Where is "place of effective management"? Are board decisions, strategies, operations genuinely exercised in treaty country? Does entity have physical employees, office, bank accounts, decision infrastructure? Where is cheque signing authority? Are audited accounts prepared locally? Is structure legitimate business (FDI/long-term investment) or tax avoidance (round-tripping/zero-tax pairing)? Does TRC specify tax year, confirm comprehensive tax liability (not minimal rates), detail verification, apostille status, beneficial ownership, and disprove third-country control via contracts/emails/minutes?

Supreme Court held that treaties only allocate taxing rights between nations, not surrender tax sovereignty. Justice Mahadevan clarified that treaty override remains conditional on anti-abuse laws (as in Canada/UK model). Justice Pardiwala warned that round-tripping/conduits weaken nations. Hence, robust safety guards such as LOB clauses, MFN exclusions, GAAR overrides should be there for revenue protection.

The Supreme Court decision is needed, but starkest revelation is the timelines: Delhi HC's pro-taxpayer verdict of August 2024 upheld TRC supremacy; Supreme Court reversed it later despite identical facts/law, redefining TRC dynamics. Judicial U-turn creates commercial dilemma whether to implement HC wins immediately or await Supreme Court certainty? The latter is impractical amid 5-10 year AAR→HC→Supreme Court litigation cycles. Investors adopt "wait-and-watch," chilling cross-border investment flows. Authorities must clarify this via dialogue.