Substance vs form:
All eyes now on Tiger Global case after SC's verdict on global hospitality leader Hyatt International
Mumbai, Jul 28, 2025
Synopsis
Following the Hyatt International ruling, the Tiger Global case has garnered significant attention, potentially reshaping foreign investment strategies in India. The Supreme Court's emphasis on 'substance over form' in the Hyatt case raises questions about its applicability to Tiger Global, particularly regarding the validity of tax residency certificates from Mauritius. The verdict could impact tax benefits claimed by overseas investors.
After the Supreme Court verdict last week on the global hospitality leader Hyatt International, all eyes are on the high-stake Tiger Global case, whose outcome, expected in August, could sway the fortunes of many foreign investors and force them to change the way they run their shops to bet on India.
But, can the Hyatt ruling have a rub-off on the verdict on Tiger?
With the same bench of judges that ruled on Hyatt to decide on Tiger-the question has cropped up among legal eagles, tax experts, and MNCs as the battle between Tiger, an offshore investor, and India's tax office nears a closure.
The question stems from the court's observation that "legal form does not override economic substance". This single observation, according to several practitioners, may link the two cases, even though they pertain to different issues.
THE COMMON LINK
The Hyatt feud was over whether the foreign firm, acting as a consultant to an Indian hotel group, had a 'permanent establishment' (PE) in India. The court-while observing that "legal form does not override economic substance" -said it did as Hyatt was not a typical consultant but was deeply involved in running the hotel in India, thanks to the terms of the deal. A 'PE' status means the foreign party would pay tax here on the portion of its global earnings attributable to India - and not just the tax deducted from its fees.
The Tiger case, on the other hand, relates to 'capital gains' on sale of stocks - whether a Mauritius entity could escape tax in India merely on the back of the 'tax residency certificate' (TRC) it obtained from the Mauritian authorities under the treaty the country has with India.
Here is how the 'substance versus form' argument comes up: is TRC, a piece of paper, good enough to avoid tax by a shell entity which has no office, hires few or no employees, and has no power to make decisions? While the TRC gives it 'legal form', in reality, it may just be a paper outfit lacking 'substance'.
"The Hon'ble SC regarded utmost importance to 'substance over form principle' and in doing so did a deep dive into the documents to ascertain 'control of operations', actual activities of employees and commercial agreements (like revenue linked service fees) in the Hyatt International matter. Substance over form, control and management and commercial substance are important factors that take centre stage even in treaty eligibility cases and a ruling in the case of Tiger Global is expected soon," said Ashish Mehta, partner at the law firm Khaitan & Co.
A COURT REMINDS
It's widely believed that armed with TRCs, many overseas private equity houses save tax on sale of shares (acquired before 2017) while foreign portfolio investors avoid tax on profits from equity derivatives as their investing arms are incorporated in treaty jurisdictions like Mauritius and Singapore. Many such arrangements would come unstuck, if the SC points at inadequate substance to rule against Tiger.
"Recent rulings, from Formula One to Nestle SA to Hyatt International, demonstrate a consistent judicial approach: for any tax structure, the legal framework must align with the actual, factual substance of the arrangement. If not, the court may not grant tax relief in such cases," said Ashish Karundia, founder of the CA firm Ashish Karundia & Co. He feels that post Hyatt, chances are that non-residents may also be required to satisfy a 'substance' test in addition to holding a TRC when seeking treaty benefits. "Considering the greater scrutiny faced nowadays, it is essential to understand that the degree of reliability assigned to TRC is that of sufficient evidence rather than an irrebuttable evidence. It is sufficient, to begin with, but neither sacrosanct nor infallible!," said Karundia.
The tax office had questioned Tiger Global's stand of not paying tax when it sold shares of Flipkart Singapore (holding shares of an Indian company) to another foreign investor (linked to Walmart) on the grounds that Tiger's Mauritius arm (the actual seller owning the Singapore entity) was only a vehicle used to avoid tax.
Agreeing on the possibility of the court putting matters under the 'substance' lens, Rahul Garg, managing partner of Asire Consulting, which advises MNCs on tax, finance, assurance, and regulatory matters, said, "The court examined the commercial and operational realities to evaluate the degree of control and supervision by the foreign entity. It reiterated that legal form does not override economic substance. Since it's a fundamental requirement that tax treaties need to be availed in good faith, these observations could further support the Revenue's case if it can prove that the parent was an active participant with significant control and supervision in the decision making on investments by the entity which recorded the capital gains."
It isn't the first time the court held substance over form. But that it chose to give a subtle reminder in the Hyatt ruling is lending itself to interpretation.
[The Economic Times]
