Treaties are contracts, not shields for abuse: ASG N Venkataraman on Tiger Global judgment

In a significant judgment, the Supreme Court recently held that tax sovereignty is an essential attribute of national sovereignty and must not be diluted through international treaties..While the judgment stated that tax treaties must not become instruments to legitimise tax abuse, critics opined that the verdict comes with an economic cost in terms of foreign investment in India, and that it calls for India to unilaterally abdicate its obligations under international law..In an interview with Bar & Bench's S N Thyagarajan, Additional Solicitor General (ASG) N Venkataraman explains the revenue’s case in Tiger Global, the limits of treaty protection, the role of tax sovereignty and how Indian tax law has evolved to address abusive cross-border structures. Edited excerpts follow..The Tiger Global judgment opens by reaffirming the power to tax as a sovereign function. From the revenue’s perspective, what was the larger concern before the Court in this case?.Sovereignty means inalienable power. When nations enter into treaties, they are essentially entering into contracts. In any contract, there will be bargains, yields, accommodations and areas where the interests of both parties are served.Nations across the world have begun expressing is this: when taxing rights are allocated through treaties, does that also mean conceding the power to examine treaty abuse or tax abuse?Treaties are entered into on the assumption of good faith - that transactions will be honourable. Globally, three principles have evolved. First, the source state has the sovereign right to tax. Second, states may allocate taxing rights through treaties. Third, this does not mean that tax abuse is also allocated as part of those rights.When abuse is found, it traces back to the source state. This judgment makes that position very clear..A key issue was whether the Mauritian entities were genuinely independent or structured primarily to claim treaty benefits. Why was this distinction critical for the revenue?.If one looks at how global taxation evolved, there were periods when treaty shopping was consciously permitted as a policy choice. A typical example is the use of the Mauritius route by foreign institutional investors investing in India nearly three decades ago.Under Mauritian law, such entities were prohibited from earning income in Mauritius and were intended to function only as investment vehicles. At that stage, India consciously chose not to tax capital gains arising from those investments in order to encourage foreign capital inflows.The difficulty arises when the same route is later used for transactions beyond what was originally contemplated or permitted as a matter of policy. Where structures are deployed not to facilitate genuine investment, but to obtain unintended tax advantages, they cross the line into abuse.Once that line is crossed, the governing principle is that tax abuse falls within the domain of the source state. Over time, nations and international bodies recognised that excessively porous regimes not only facilitate tax avoidance, but also create pathways for broader economic and social harms. Policies that once served national interest can, with changed circumstances, begin to undermine it.It was against this backdrop that India began recalibrating its tax framework through legislative measures from 2012 onwards..The Court examined where the real decision-making authority lay — “head and brain” of the structure. Why was identifying this so important?.Substance over form is a well-recognised principle. Lifting the corporate veil to identify the real structure is also well established. From a corporate income tax perspective, the concept of control and management, commonly referred to as the “head and brain” test, has long been accepted.Justice Chagla’s judgment of the Bombay High Court from several decades ago, which was recently reaffirmed in the Manasarovar case, articulated this principle clearly. These doctrines - piercing the corporate veil, substance over form, control and management - are settled principles of law.The Constitution Bench in McDowell upheld these principles. Any perceived divergence among the judges was later clarified; all five spoke in one voice. This established that judicial anti-avoidance is part of Indian tax jurisprudence.Where an entity exists merely for fiscal nullity - essentially a dummy structure - tax authorities are entitled to examine its substance. Justice Kapadia, speaking for himself and Justice Swatanter Kumar in Vodafone, made it clear that these principles were available to tax authorities and questioned why they should not be legislatively codified. This laid the foundation for the General Anti-Avoidance Rule, GAAR, introduced in 2012..How did the revenue approach the question of taxing rights in relation to the transaction structure?.This principle was articulated in the Vodafone judgment. A share may be held outside India, but its intrinsic value may lie entirely within India.In Vodafone, a single share held in the Cayman Islands derived its value from Indian assets - including employees, customers, income and infrastructure. The Supreme Court held that, at that time, the Income Tax Act did not contain a look through provision, which led parliament to amend the law.In Tiger Global, the Mauritian entity held shares in a Singapore entity, which in turn held Indian assets. The Singapore entity functioned merely as an investment vehicle. The intrinsic value of the share was, therefore, derived from Indian assets, making it an indirect transfer.Whether the transfer is direct or indirect, when the underlying asset is located in India, the source country has the right to tax..How should courts distinguish between legitimate treaty use and abusive structures? .Courts lay down principles. The actual examination must be carried out by the tax authorities.In Tiger Global, the Supreme Court clarified that India is the source state. While taxing rights may be allocated to another country through a treaty, that allocation cannot extend to abusive or artificial structures.Where an entity lacks real substance, where decisions are taken outside the jurisdiction of residence and where multiple layers exist solely to obtain tax benefits, the substance test, the head and brain test, and fiscal reality must apply.These are time-tested principles. The Tiger Global judgment did not introduce anything novel. It clarified that tax abuse can never form part of treaty allocation. It remains within the domain of sovereignty..The High Court placed significant reliance on tax residency certificates. Why did the revenue argue that such certificates should not be treated as conclusive?.Tax residency certificates emerged in a very specific context, namely foreign institutional investments governed by SEBI, not foreign direct investment. They were never intended to address complex cross-border business structures.Following Vodafone, ambiguity arose. Parliament responded in 2012 by introducing GAAR and amending Sections 92, 94 and 95 of the Income Tax Act. The legislative intent was clear. Anti-abuse provisions would override treaty benefits.This approach is not unique to India. While treaties cannot be overridden arbitrarily, when they are used as instruments of abuse, unilateral legislation may intervene. Consequently, tax residency certificates cannot be conclusive where GAAR applies..Justice Pardiwala authored a separate opinion on tax sovereignty. How significant is that opinion in the present global context?.It is extremely significant. The core question before the Court was whether tax abuse falls within treaty allocation or within sovereignty. Justice Pardiwala answered that decisively. It traces back to sovereignty.He situated this analysis within the context of tariff wars, re globalisation, emerging global powers and national interest. He emphasised that geopolitical power and geoeconomic power cannot be separated.He also observed that disputes arising from treaties should ideally be resolved by the sovereigns who sign them, rather than being outsourced to third party arbitration. The opinion is nuanced and explains decades of legal development with clarity..Some critics argue that judgments of this nature discourage investment. How do you respond?.That argument does not withstand scrutiny. In Tiger Global, the parties themselves contemplated tax liability in their contract. They approached the tax authorities and paid tax provisionally.If India were genuinely anti-investment, they would have exited. They did not. Business understands tax risk. Litigation is often an attempt to reduce that risk.Describing such judgments as anti-investment is simplistic. Since 2012, the law has been clear and investors enter the market with full awareness of the legal framework..Have you seen a shift in how courts engage with economic and commercial realities over time?.Yes. The shift from Azadi Bachao Andolan to Vodafone was significant. The shift from Vodafone to Tiger Global is another.Treaty shopping belonged to an earlier era. Tax abuse belongs to a different one. India cannot be expected to revert to a legal regime from two decades ago. That attempt was made and rejected by the Supreme Court..Follow Bar and Bench channel on WhatsAppDownload the Bar and Bench Mobile app for instant access to the latest legal news.