The Introduction: In a landmark ruling (Tiger Global verdict) this month with far-reaching consequences to India’s efforts to raise global capital, the Supreme Court of India held that investment vehicles are liable to pay Capital Gains Tax on their stake sales even when the deals are routed through Mauritius-based entities and backed by Tax Residency Certificates (TRC). By invoking General Anti Avoidance Rules (GAAR) and looking through what it viewed as a low‑substance offshore structure, the apex court has signalled a decisive pivot towards substance-over-form in treaty interpretations, resetting expectations for private equity, venture investors, and cross-border dealmakers who have long relied on the India – Mauritius route for tax-efficient exits.
Enter The New Economic Order: Tiger Global Management (Tiger Global for short) is a New York-based investment firm founded in 2001 by Chase Coleman III, a protégé of hedge fund legend Julian Robertson. It focuses on long-term investments in public and private companies, particularly in technology, internet, software, consumer and fintech sectors. The firm manages two main strategies with roughly equal capital allocations. Public Equity including long/short and long-only funds like Tiger Global Investments targeting high-growth public companies and Private Equity where it invests from early to late-stage ventures of about thirty countries with over ninety portfolio IPOs, led historically by Scott Shleifer until 2023. Tiger Global employs a concentrated, high – conviction style with global reach, active engagement in portfolio companies and adaptability to market movements. It has backed over 1,300 investments including notable tech unicorns, while rebounding strongly in 2024 clocking about 24% returns amid tech stock gains. Recently, the Supreme Court of India delivered a landmark judgment when Tiger Global approached it, that will have far reaching consequences while dealing with capital gains on share transfers in international transactions. The apex court came to interpret the provisions of recently enacted General Anti Avoidance Rules. (GAAR for short). In 2018 Tiger Global sold its stake in Flipkart to Walmart for about $1.6 billion. It routed the deal through Mauritius based entities to claim exemption under the India – Mauritius Double Taxation Avoidance Agreement (DTAA). It avoided the GARR route to avoid Indian taxes. That, as the subsequent events proved, was a move too clever by half. According to the apex court, these transactions are required to be brought under GARR and dealt with under that Act. Thus evolves a new bouquet of jurisprudence. Let us see how the Supreme Court dealt with the consequential issues involved. In Tiger Global, the Supreme Court applied Chapter X‑A GAAR provisions – primarily sections 95 to 98 – by first characterising the Flipkart exit structure as an “impermissible avoidance arrangement” under section 96 of GARR. The Court noted that GAAR is attracted where obtaining a tax benefit is the main or one of the main purposes of a deal and at least one of the statutory tests is satisfied, such as lack of commercial substance in the transaction. On facts, the Court found clear prima facie evidence that the Mauritius entities were pure conduit vehicles lacking independent control and management, thereby failing the commercial‑substance test. The apex court felt that this arrangement constituted a device to avoid Indian tax. Relying on section 96(2) of GARR, the Court stressed that once the Revenue shows indicia of avoidance, the burden shifts to the taxpayer to disprove this presumption, a burden Tiger Global failed to discharge. Consequently, GAAR was held applicable enabling the authorities under sections 97–98 to disregard the intermediary Mauritius entities and recharacterise the gains as taxable in India notwithstanding DTAA and the grandfathering provisions with the Court emphasising that treaty benefits are unavailable when GAAR is validly invoked. Thus, the Supreme Court held that capital gains from Tiger Global’s 2018 Flipkart exit are taxable in India and as it happened, Treaty protection are also denied in India. Consequently, the court implied that GAAR can and would override DTAA benefits whenever structures lacked commercial substance. Let us now dive in to understand the issues involved in granular details.
The Background: In 2018, three Mauritius entities of Tiger Global (including Tiger Global International II, III and IV Holdings) sold shares of Flipkart Singapore Pte Ltd to a Walmart group buyer earning about USD 1.6 billion in capital gains. Tiger Global claimed exemption under Article 13 of the India – Mauritius DTAA, relying on valid Mauritius Tax Residency Certificates and backed by the “grandfathering” provisions for the investments made before 1st April 2017. However, the Authority for Advance Rulings (AAR) when approached, denied this treaty benefits, treating the Mauritius entities as mere conduit vehicles lacking substance and terming the arrangement a prima facie tax‑avoidance structure. The Delhi High Court, however, had earlier reversed this ruling, holding that the transaction was bona fide, commercially substantive and protected by DTAA’s grandfathering clause.
Arguments for Tiger Global: Valid Tax Residency Certificates (TRC) and residence in Mauritius entitled them to DTAA benefits; once residence is accepted, India cannot tax capital gains on alienation of shares covered by Article 13. Investments in Flipkart were made before 1 April 2017 and hence capital gains were “grandfathered” and insulated from later treaties and changes in GAAR. There was strong commercial rationale – long‑term investment in India’s leading e‑commerce company, exit through a strategic sale to Walmart, and use of Mauritius as a legitimate, globally accepted holding jurisdiction. According to the appellants, GAAR should not apply retrospectively or in a manner that nullifies grandfathering and legitimate treaty expectations.
Arguments for the Revenue: The Revenue argued that the Mauritius entities were mere “shell” or “conduit” vehicles. Real control and management of transactions (especially over USD 250,000) lay with a US‑based fund manager, not the Mauritius boards. Banking operations, decision‑making, and key documentation showed that effective control was outside Mauritius, making the entities “see‑through” for tax purposes. Thus, structure was an “impermissible avoidance arrangement” under section 96 of GARR, designed principally to avoid Indian taxes. Hence GAAR applied squarely and it could override DTAA provisions. The Revenue further argued that grandfathering and TRCs do not confer an absolute shield; they cannot and should not protect abusive, low‑substance structures or treaty shopping.
THE SUPRME COURT UPHELD THE TAX DEPARTMENT’S STAND
Reasons and Rationale of the Supreme Court: The Court adopted a clear substance‑over‑form approach: it examined control, management and economic reality behind the Mauritius entities rather than their legal form and TRCs. It held that where effective control and management are elsewhere, the mere existence of a local board and TRC in Mauritius does not establish genuine residence or commercial substance. The Court read the India–Mauritius DTAA in light of post‑Vodafone statutory changes and anti‑abuse standards, emphasising that treaty benefits are conditional on genuine, non‑abusive structures. It held that GAAR, once validly triggered, can override DTAA provisions and also the grandfathering protection if the arrangement is primarily designed for tax avoidance. The Court highlighted Section 96(2) of GARR that says, once the Revenue shows that an arrangement is prima facie avoidance‑oriented (e.g., through absence of substance, external control, and conduit features), the burden shifts to the taxpayer to disprove that presumption. Applying these principles, the Court found that Tiger Global’s Mauritius vehicles lacked real commercial substance and mainly served to channel investments and exit gains through Mauritius to avoid Indian taxes.
The Legalese Behind the Judgment:
- GAAR vs DTAA: The judgment clarifies that GAAR is a domestic anti‑abuse rule that can override DTAA benefits, including capital‑gains allocation rules where arrangements are “impermissible avoidance arrangements.”
- Role and limits of TRC: A valid TRC is necessary but not sufficient; it does not provide blanket immunity from inquiries into substance or treaty abuse.
- Grandfathering of pre‑2017 investments: The Court held that grandfathering is not an unconditional amnesty. It protects genuine investments but does not insulate abusive conduit structures from GAAR scrutiny.
- “Commercial substance” and “conduit” analysis: The Court unpacked “commercial substance” by looking at factors like independent decision‑making, local directors’ role, risk assumption, banking control, and whether the entity had any real economic purpose beyond tax saving.
- Burden of proof under section 96(2): Once Revenue establishes indicia of avoidance, the onus moves to the taxpayer to prove genuine business purposes and substance, marking a notable shift from earlier treaty‑centric jurisprudence.
- Impact of post‑Vodafone legislative changes: The Court explicitly acknowledged that the statutory landscape has changed since the Vodafone era and that earlier treaty‑friendly precedents cannot be read in isolation from subsequent GAAR and treaty amendments.
The Last Word: The Supreme Court set aside the Delhi High Court’s 2024 judgment and restored the AAR’s view. It held that capital gains arising from Tiger Global’s Flipkart exit are taxable in India and that the India – Mauritius DTAA exemption under Article 13 is not available to the assessee. The Court held that the transaction formed part of an “impermissible avoidance arrangement” under GAAR and treaty benefits could be denied despite valid TRCs and pre‑2017 investments. As a consequence, the approximately ₹14,500 crore tax demand linked to the Flipkart takeover stands upheld, subject only to any limited review that may be permissible.
The Economic Consequences of the Judiciary’s Change in Stand:
- Foreign investment structures: Offshore holding structures using Mauritius, Singapore or similar jurisdictions now face heightened scrutiny on substance, governance and business purpose; paper-thin SPVs are at significant risk.
- Tax certainty vs revenue protection: The ruling strengthens India’s ability to tax large digital, and startup exits and is likely to bolster revenue, but it also raises concerns among foreign investors about retrospective exposure and subjective GAAR application.
- Deal‑making and exits: M&A deals, secondary sales and PE/VC exits may need more time and cost for tax diligence, advance rulings, and robust structuring; some investors may also shift to onshore or “hybrid” models balancing treaty use and substance.
- Signal to startup ecosystem: While the judgment may initially unsettle late‑stage investors in Indian startups, it nudges the ecosystem towards transparent, substance‑backed holding vehicles and clearer documentation of commercial rationale.
- Macro perception: Experts feel that, although the verdict is tough it is unlikely by itself to derail foreign investment opportunities in India, given the market’s underlying growth story and the global move towards anti‑avoidance norms (BEPS, MLI, etc.).
Judiciary’s Prescient Take: This case was heard by a Bench consisting of Js R Mahadevan and Js J B Pardiwala. The main judgment was authored by Js R Mahadevan and there was a separate judgment, albeit a concurring one, by Js J B Pardiwala. The latter focussed on some important tenets on the issue in his separate but concurring Order. Justice Pardiwala had opined that the objective behind the judgment was to protect India’s right to tax income linked to its economy while continuing to welcome genuine foreign investments to its shores. He had emphasised the need to strike a careful balance, safeguarding the tax base without undermining stability for long term investors and noted that clear guidance and consistent application of anti-avoidance rules will be important in sustaining investor confidence. The “golden rule” in this context would mandate taxing residents on worldwide income and non-residents on income sourced from India overriding DTAA if GAAR applies and no automatic grandfathering shields for sham structures. He warned businesses against “legal fictions” like TRCs without economic reality and urging them to employ the substance tests to prevent “tax haven tourism.”
Impact of Judiciary’s Pivot: The judgment marks a shift from form‑driven, treaty‑centric reasoning (as seen in earlier cases like Vodafone) to a substance‑driven, anti‑avoidance‑centric approach that integrates GAAR and global BEPS principles. The Court is more willing to “look through” holding companies and disregard mere legal form where control, management, and economic exposure lie elsewhere. There is a visible move from deference to TRCs and treaty text alone, toward a balanced reading that incorporates preambles, anti‑abuse clauses and domestic GAAR. The explicit reliance on section 96(2) and shifting of burden of proof indicates a more assertive stance of the Court – once the Revenue plants the red flags, the taxpayer must affirmatively prove substance and genuineness of purpose. Overall, the decision signals a maturing jurisprudence that aligns with international anti‑avoidance trends while consciously re‑calibrating the country’s stance from obeisance to a tax payer to attract investments to businesses who are statutorily compliant.
The Takeaways for the Professionals:
Re‑evaluate existing Mauritius and other treaty‑based structures for genuine substance: independent boards, local management, economic functions, risk assumption and demonstrable commercial purpose. Treat TRCs and grandfathering as starting points, not end‑points; build contemporaneous documentation explaining why a particular jurisdiction and structure were chosen beyond tax impact. Incorporate GAAR analysis as a standard work‑stream in major exits and M&A deals, including alternative structure comparisons, purpose tests, and management‑control mapping. Anticipate possible revenue challenges on past exits routed through low‑substance vehicles and consider proactive risk management – disclosures, settlements, or restructuring where appropriate. Draft transaction documents and board minutes to reflect real decision‑making at the entity claiming treaty benefits; avoid templates that reveal centralised offshore control. In litigation, be prepared to deal with GAAR as a central plank, not a peripheral issue. The strategy angle must integrate with DTAA text, domestic anti‑avoidance provisions and international standards. Use this ruling to emphasise that “treaty shopping by design” is no longer defensible: structures must withstand a “look‑through” test on governance, economics and intent. Closely track future cases where GAAR is invoked with treaty claims. This judgment will likely be the leading precedent on how courts balance treaty protection with anti‑avoidance in India. GAAR has truly “arrived” in Indian tax jurisprudence. Treat Tiger Global’s Flipkart exit into a cautionary tale on the cost of under estimating substance and over‑relying on treaties.
Thank you.
