Precedent in Tax Law - from Azadi Bachao Andolan to Tiger Global Holdings

I was an English student (and also every English teacher’s pet, but teacher’s pet is a part of the overall identity I’m trying to scrub out, so we don’t speak of it). In every sense of the term. I was an early reader, a self-important writer, and I nurtured an avarice for the riches of the well-read. My essays were distributed as specimen answers. I designed my own summer school program and studied poetry because ‘Elective English’ was not offered in high school. Until the time-sink of studying and being employed, I measured my virtue by how many books I read in a year. I’ve spent days on end trying to conceive of the intent of long-dead men in the poems they left behind. A well-constructed sentence still ranks top of the list of things I’d sell my soul for — even above a checked drive down the ground and a Neapolitan pizza. In hindsight, then, outside of a pursuit of the English language itself, the study of law seems like the natural choice. It was not.

None of my choices are natural or cohesive, after all. But this course enabled it, if it was the only good thing that came of it. Over three years of articleship, the infinite breadth of tax scenarios and the post-facto attempts of the judiciary to reconcile them to the law grew to become essential to a ‘productive’ (strictly by my own definition) day. I enjoyed nothing more than to forage and to harmonize (and to disclaim of course, occupational hazard and all that) — well perhaps not nothing else, making Excel tables look pretty is still a Grade A task, but this comes a close second. The (odd?) satisfaction that I derived from those assignments unfortunately translated into an absolutist, purist approach to preparing for the Final exams — for the large part, I prepared by reading through the bare Act — but with Academic Anxiety TM at the table, it was not half as rewarding. And so, with a mixed motives (to learn, but also to compensate / redeem) I enrolled for the Advanced Diploma in International Taxation. I wrote the India option in June. I read through a fair few case laws in preparation. It was the best use of my time, in a long, long while. The finest testament to that is perhaps the fact that I yapped my way through the Azadi Bachao Andolan case to my mother (read yap victim) enroute to office. And then a couple weekends ago, I bumped into a series of entries in the Stanford Encyclopedia of Philosophy (reading random entries from there is my small protest of the anti-intellectualism wave facing us) on law, language and interpretation. This essay / series (TBD!) is how I … well, harmonize my learnings from those case laws and those from the encyclopedia. Of course, a lot of it comes back to reading in and reading down, but in those seemingly small acts lies a country’s entire (well, almost) history of international tax jurisprudence.

Disclaimer: This is not intended to be exhaustive or accurate. It is alarmingly easy to be humbled by this subject, and I will be a fool to not take cognizance of that.

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I started my preparation with the Azadi Bachao Andolan judgement ([2003] 132 Taxman 373 (SC) Supreme Court of India, Union of India v. Azadi Bachao Andolan*) — as one does. I ended it with the Tiger Global judgement ([2026] 182 taxmann.com 375 (SC) Supreme Court of India, Authority for Advance Rulings (Income-tax) v. Tiger Global International II Holdings*) — as one does. While not intended to be that way, they were, I suppose, ideal bookends. Taken together, they demonstrate the full range of the court’s interpretation of intention — not just of the legislature, but also of the taxpayer — in the span of 23 years. It seemed like the Court had come full circle on the moralisation — and by extension, legalisation — of treaty-enabled avoidance. (What I read to be, at least) The overly magnanimous position established in the PIL was rendered nugatory — or rather, it was clarified that it had already been rendered nugatory by the introduction of GAAR in 2017. Take these two paragraphs, side by side, and the contrast is unsettling:

2003: “There are many principles in fiscal economy which, though at first blush might appear to be evil, are tolerated in a developing economy, in the interest of long term development. Deficit financing, for example, is one; treaty shopping, in our view, is another. Despite the sound and fury of the respondents over the so called ‘abuse’ of ‘treaty shopping’, perhaps, it may have been intended at the time when Indo-Mauritius DTAC was entered into. Whether it should continue, and, if so, for how long, is a matter which is best left to the discretion of the executive as it is dependent upon several economic and political considerations. This Court cannot judge the legality of treaty shopping merely because one section of thought considers it improper. A holistic view has to be taken to adjudge what is perhaps regarded in contemporary thinking as a necessary evil in a developing economy. […] The respondents strenuously criticized the act of incorporation by FIIs under the Mauritian Act as a ‘sham’ and ‘a device’ actuated by improper motives. They contend that this Court should interdict such arrangements and, as if by waving a magic wand, bring about a situation where the incorporation becomes non est. It would not be permissible for the Court to treat the intervening legal steps as non-est based upon some hypothetical assessment of the ‘real motive’ of the assessee. In our view, the court must deal with what is tangible in an objective manner and cannot afford to chase a will-o’-the-wisp. We are unable to agree with the submission that an act which is otherwise valid in law can be treated as non-est merely on the basis of some underlying motive supposedly resulting in some economic detriment or prejudice to the national interests, as perceived by the respondents.

2026: The commercial motive behind a transaction often reveals its true nature. In the present case, the respondents seek exemption from the Indian Income tax while, at the same time, contending that the transaction is also exempt under Mauritian law, which runs contrary to the spirit of the DTAA and presents a strong case for the Revenue to deny the benefit as such an arrangement is impermissible. In the case at hand, there is clear and convincing prima facie evidence to demonstrate that the arrangement was designed with the sole intent of evading tax, and the assessees have failed to furnish sufficient material to rebut this presumption. Though it is permissible in law for an assessee to plan his transaction so as to avoid the levy of tax, the mechanism must be permissible and in conformity with the parameters contemplated under the provisions of the Act, rules, or notifications. The Revenue has proved that the transactions in the instant case are impermissible tax-avoidance arrangements, and the evidence prima facie establishes that they do not qualify as lawful. Consequently, Chapter X-A becomes applicable. Accordingly, capital gains arising from the transfers effected after the cut-off date, i.e., 01.04.2017, are taxable in India under the Income Tax Act read with the applicable provisions of the DTAA.

Where in 2003 the Court refused to seek out, investigate or illegalise the intent of Mauritian incorporation, in 2026, it upheld Revenue’s contention that when control and management was located outside, in the United States, Mauritian incorporation could be little else but a sham. The change is, of course, plausibly explained away in the judgement by the introduction and existence of Chapter X-A of the Act in 2017 but what really underlies stare decisis, and can that rug be pulled out from under you, the taxpayer? Both of these judgements are long and exhaustive reads, addressing and reconciling several different aspects of domestic law, treaty interpretation and the messy overlap of both. Again, it would be an unduly ambitious — if not foolhardy — exercise to attempt to analyse all of them. And so, this essay shall stop at the doctrine of precedent, and why the rug might be pulled out from under.

Sidebar: for the uninitiated, this is an oversimplification of the cases at hand: The Azadi Bachao Andolan case examined and upheld a Circular which a) provided for the validity of a Mauritian tax residency certificate as sufficient evidence for claim of treaty benefits, and resultantly b) discouraged going behind the veil to examine ‘true’ residency. The Tiger Global case did a 180, ruled that a tax residency certificate was not, in fact, sufficient evidence, and backed an Advance Ruling that looked through the residency certificate and deemed the arrangement avoidant. In doing that 180, the Supreme Court relied heavily on the invocation of a set of anti-avoidance rules codified in law (GAAR) — the invocation in itself was questionable, which is perhaps why the Court also hedged the position by invoking judicial anti-avoidance rules (those that are not in law, but recognized because of jurisprudence).

All references to ‘SEP’ are to the Stanford Encyclopaedia of Philosophy.

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When I read Azadi Bachao Andolan for the first time, among the more startling sentences was this:

Paragraph 32: … even if the High Courts have consistently taken an erroneous view, (though we do not say that the view is erroneous) it would be worthwhile to let the matter rest, since large numbers of parties have modulated their legal relationship based on this settled position of law.

The Latin term for the practice is stare decisis. Over time, it is something you grow accustomed to — much of the confidence in issuing advisory, at least for me, stems from a faith in the riches of litigation history. Surely, someone, somewhere in the distant past, was faced with a situation that shares at least a few of the features? But as a practice in itself, viewed in isolation, it is at stark contrast with how we make choices as individuals:

“In individual reasoning we do not normally regard the fact that we decided one way in the past as raising some presumption that we should decide the same way in the future. It is always open to us to reconsider a decision and change our minds if we no longer think our original judgement was correct.” - SEP

But it is a contrast that makes sense: changing your mind about something is a concession that can be afforded within the tiny boundaries of an individual’s existence — not within a larger ecosystem where the stakes are exponentially higher. The essence of precedent in legal reasoning stems from a vested ‘practical authority’ of the precedent — i.e., the view that a court’s decision in itself forms law. Every judicial decision reads itself into law, and becomes law. And the law, of course, must be followed. The extreme manifestation of stare decisis —where even ‘erroneous’ decisions become law — has a genesis that goes something like this: a ‘correct’ decision was already reconciled to the law and has no incremental value; a doctrine requiring its application would therefore be redundant. (courts were anyway bound to apply the law.) It would serve us well to examine why the doctrine exists in the first place: ‘why it is justifiable for the decisions of courts to be treated in this way at all, i.e., for them to help constitute the law’ — SEP proposes four reasons:

1. Consistency — “in favour of ‘formal justice’, that two cases which are the same (in relevant respects) should be treated in the same way. It would simply be inconsistent to treat them differently. The claim of consistency is also sometimes put in terms of ‘equality’: to treat the later case differently to the first would be to fail to treat the parties before the courts equally.”
2. Expectations — “if an institution has dealt with an issue in one way in the past, then that creates the expectation that it will do so in the future—an expectation which people use to plan their lives and enjoy some control over their situations.” This is a view that was echoed by the attorneys, and accepted by the Court in the Azadi Bachao Andolan hearing: The learned Attorney General contended that the interpretation given to section 90 of the Income-tax Act, a Central Act, by several High Courts without dissent has been uniformally followed; several transactions have been entered into based upon the said exposition of the law; that several tax treaties have been entered into with different foreign Governments based upon this law, hence, the doctrine of stare decisis should apply or else it will result in chaos and open up a Pandora's box of uncertainty. We think that this submission is sound and needs to be accepted.
3. Replicability — “Replicability means that decisions are more predictable than if they were made de novo each time. This, in turn, allows individuals to make plans that are consistent with the law and to avoid falling foul of it, and hence allows them to be guided by the law.”
4. It is desirable to give Courts the power to make law — “The assumption underlying this justification is that the law is sometimes incomplete and in need of being given greater specificity, or that it is erroneous and needs to be corrected. On this view the courts are analogous to delegated legislators: they have limited powers to make law within a broader framework of doctrine.”

Now all of these can certainly be captured in one (less/more?) eloquent turn of phrase — we did it once, might as well do it again — but the reason I’ve presented them separately is because each of these reasons also outline the resulting constraints of applying the precedent: stare decisis can perpetuate error (‘If the earlier decision was wrong then the person subject to it may have been treated more or less favourably than they should have been treated. […] that a mistake was made in the earlier case is not—in itself—an argument for repeating the mistake in the later case’), and must therefore make room for consideration of ‘moral desirability’ (“The concern for predictability needs to be weighed against the moral desirability of the law in question. This would suggest that (a) in some circumstances lower courts should be allowed to depart from the decisions of higher courts where their view is that the earlier decision was (in the context of the relevant law) clearly morally undesirable, (b) giving greater freedom to courts to overrule their own decisions on the basis that there was a morally preferable decision.”)

Apart from ‘moral desirability’ (more below), at the risk of stating the obvious, there are two exceptions to the application of the doctrine: 1) ‘distinguishing’ later cases on the basis of facts and 2) a change in law. Both came up in Tiger Global Holding, to prevent application of Azadi Bachao Andolan. Facts first:

On facts, Revenue: “Paragraph 7.22 - Regarding Azadi Bachao Andolan(supra), the learned Additional Solicitor General submitted that the said decision concerned the legality of investments made by FIIs and mutual funds and did not involve cross-border transactions relating to the direct or indirect transfer of shares constituting business investments. Moreover, the decision was rendered in the context of the Mauritius Offshore Business Activities Act, 1992, and not the later Financial Services Act regime. The factual and statutory context of the present case was thus asserted to be materially distinct. It was emphasised that these measures were directed exclusively at portfolio investments by SEBI-registered FIIs and mutual funds operating in Indian capital markets. At the time, large-scale indirect transfers of shares constituting business reorganisations were neither prevalent nor contemplated. Consequently, Circular No. 789 cannot be extended by implication to such transactions.”

On facts, cross-objection: The learned Senior Counsel submitted that the appellant's contention that Circular No. 789 applies only to FIIs or NRIs and not to GBL holders is liable to be rejected as being contrary to the language of the Circular, which extends to “other investment funds, etc.” Paragraph 2 refers broadly to “investors from Mauritius”, and no artificial distinction between classes of Mauritian residents can be introduced. It was further pointed out by the learned Senior Counsel that the judgment in Azadi Bachao Andolan(supra) dealt with “Overseas Business Corporations”, and the Court rejected the argument that such entities were not residents of Mauritius merely because they lacked business operations there. GBLs have existed since 2001, and the Indian legislature has never drawn any distinction between GBL holders and other Mauritian investment vehicles. In fact, the regulatory framework under the Financial Services Act, 2007 is more stringent than the earlier regime.

While the Court did not make an explicit comment on the factual distinguishing sought by the Revenue — it eventually ruled out application of Circular 789 on grounds of a change in the statutory regime — if for nothing else but the sake of an academic exercise, I’d want to evaluate if there was any merit at all in the proposed distinguishing.

“[…] one of the peculiarities of distinguishing is that it cuts across the normal justifications for having rules, namely to have a class of cases treated in a certain way despite individual variation between them, with attendant gains in predictability and transparency in the decision-making process. Instead, the later court is free to avoid the result indicated by the earlier ratio so long as it can find some difference in facts between the two cases that narrows the earlier ratio while still supporting the result in the earlier case.

Two ways in which distinguishing can be made less idiosyncratic are these: (a) to argue that the later court is restricted to making a modification which the earlier court would have made if confronted with the current facts (cf. Raz 1979, 187–8), i.e., that distinguishing is a form of reinterpretation of the original ratio; or (b) to argue that there is a presumption against distinguishing (Schauer 1989, 469–71; 1991, 174–87). Each of these approaches echo forms of legal reasoning found in statutory construction. The first, in asking what the earlier court would have done, assimilates the task of distinguishing to that of determining the law-maker's intent behind their ruling. This is parallel to the practice of interpreting statutes in terms of legislative intent.” - SEP

The first of these — a reinterpretation — is what the Revenue is asking of the Court. That Circular No. 789 was affirmed in Azadi Bachao Andolan for a certain class of investments, and at a point in time when the subject class of investments was not prevalent or contemplated; and that therefore its interpretation warranted a revisit. In asking for a reinterpretation, the Revenue is imputing an intention to the Circular — that the Circular sought to provide relief to ‘exclusively portfolio investments by SEBI-registered FIIs and mutual funds operating in Indian capital markets’, and not to other forms of business investment, despite what one might read quite plausibly as expansive language: ‘and other investment funds, etc.’ On plain reading, that seems like an artificial distinction created by the attorneys, for the convenience of their argument — but that they were able to make that distinction at all in the first place goes back to a peculiar problem with the legal language: its dependence on context, and the resulting enabling of … well, linguistic creativity. When law in itself is something of an evolving, mutating creature — delegated legislation on part of the executive and the judiciary are a constant — to make an argument that a Circular is an artefact of a different, irrelevant time seems like a stretch. This considering also both a) the explicit affirmation of the Circular, through Clarification dated 1/Mar/2013 (“In the case of Mauritius, circular no. 789, dated 13-4-2000 continues to be in force, pending ongoing discussions between India and Mauritius”), and b) the absence of an explicit suppression of the Circular. But that’s just it, isn’t it? Two people can look at the same sentence, and read it entirely differently, simply because they’re sitting at different ends of the table. And that’s why we have Courts. Because we need a third person, at the head of the table, to pick one:

“The special feature that distinguishes the legal use of language from ordinary conversation is not that participants in a legal system act strategically while participants in an ordinary conversation act cooperatively; the special feature is that in order to attain the ideal of the rule of law, legal systems need institutions and processes for resolution of the disputes about the effect of law-making uses of language that arise as a result of its context-dependence, and as a result of other pragmatic aspects of communication.” - SEP

(In all of this, of course, I’m recharacterizing circulars as legislation — and that’s not ideal, but hey.)

And now on the change in law. This was the Court’s conclusion:

“Circulars issued earlier, though binding on the Revenue at the time of their issuance, operate only within the legal regime in which they were issued and cannot override subsequent statutory amendments. It is equally settled law that Parliament is well within its right to bring in a law, either by amendment, substitution, or introduction so as to remove the basis of a judicial decision.

After the amendment has come into effect, there can be no doubt whatsoever that a TRC alone is not sufficient to avail the benefits under the DTAA, and reliance upon earlier judgments dealing with circulars issued in the pre-amendment regime cannot ipso facto come to the aid of the respondents.”

Now of course, we could go back and forth about whether GAAR applies to Tiger Global at all in the first place, but it is indisputable that the law changed. The government did retract its 2001 generosity to reckon with the increasing sophistication of avoidance schemes. And if we acknowledge that the law has changed, we acknowledge also that the Circular deserves a second look, at the very least. But beyond all of it — the purported change in fact, the plausible change in law — what really, really, convincingly justifies overruling Azadi Bachao Andolan is moral desirability. And hence also the hedging measure: reliance on JAAR. Tax avoidance is not morally desirable. And if a Circular from 2001 must be struck down to make it so, then stare decisis be damned.

“Once the mechanism is found to be illegal or sham, it ceases to be “a permissible avoidance” and becomes “an impermissible avoidance” or “evasion”. The Revenue is, therefore, entitled to enquire into the transaction to determine whether the claim of the assessees for exemption is lawful.”

But this is a decision that leaves behind a landmine in its wake. Disrupting a position settled for twenty-five years will open up the same Pandora’s box that we were warned of twenty-five years back by the PIL attorneys. People enjoy control. Businesses are neurotic about it. The very last thing they want to be told is that their expectation of consistency was, at the end of the day, misplaced.

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If you’ve made it all the way to this sentence, thank you. I thought this was the most audacious thing to take up, when I started writing it. The Word file is still called “Tax, lol”, afterall. Through all the very real difficulties of navigating this history, I enjoyed writing it — and I hope I made some sense as well, along the way.