In a landmark judgment reshaping the landscape of international taxation and treaty benefits, the Supreme Court of India has set aside the Delhi High Court’s order which had granted relief to Tiger Global International Holdings. The Apex Court held that the sale of shares of Flipkart Private Limited (Singapore) by Mauritius-based Tiger Global entities to Walmart’s Luxembourg entity was prima facie designed for the avoidance of income tax, thereby attracting the General Anti-Avoidance Rule (GAAR).
The Division Bench comprising Justice J.B. Pardiwala and Justice R. Mahadevan allowed the appeals filed by the Revenue, ruling that the mere possession of a Tax Residency Certificate (TRC) is not conclusive proof of residence or beneficial ownership if the structure is found to be a colourable device for tax evasion.
The core legal issue was whether capital gains arising from the sale of shares of a Singapore company (deriving substantial value from Indian assets) by Mauritian entities are exempt from tax in India under Article 13(4) of the India-Mauritius Double Taxation Avoidance Agreement (DTAA). The key contention involved the applicability of the “grandfathering” clause for investments made prior to April 1, 2017, versus the applicability of GAAR under Chapter X-A of the Income Tax Act, 1961.
The Supreme Court held that the transaction constituted an “impermissible avoidance arrangement.” The Court ruled that under Rule 10U(2) of the Income-tax Rules, 1962, the grandfathering of investments under Rule 10U(1)(d) stands diluted if a tax benefit is obtained from an “arrangement” on or after April 1, 2017. Consequently, the Court restored the order of the Authority for Advance Rulings (AAR) which had rejected the assessees’ application at the threshold.
Background of the Case
The respondents—Tiger Global International II, III, and IV Holdings—are companies incorporated in Mauritius holding Category I Global Business Licenses. They held shares in Flipkart Private Limited, a company incorporated in Singapore. Between 2011 and 2015, these entities acquired shares in Flipkart Singapore. In 2018, as part of Walmart Inc.’s acquisition of Flipkart, the respondents sold their shares to Fit Holdings S.A.R.L (Luxembourg) and received significant capital gains.
The assessees claimed that since the shares were acquired prior to April 1, 2017, the gains were exempt from tax in India under Article 13(4) of the India-Mauritius DTAA read with the Protocol of 2016. The Revenue rejected the application for a nil withholding tax certificate, arguing that the “head and brain” of the companies was not in Mauritius but in the USA, with Mr. Charles P. Coleman.
The assessees approached the Authority for Advance Rulings (AAR). The AAR rejected the application under Section 245R(2)(iii) of the Act, holding the transaction to be prima facie designed for tax avoidance. The assessees then moved the Delhi High Court, which quashed the AAR order and held that the TRC was sufficient evidence of residence and that the transaction was grandfathered. The Revenue appealed to the Supreme Court.
Arguments of the Parties
On Behalf of the Revenue: The Additional Solicitor General, Mr. N. Venkataraman, argued that the AAR had correctly expressed a prima facie view. He submitted that:
- The “head and brain” of the companies lay with Mr. Charles P. Coleman in the USA, rendering the Mauritius residency a sham.
- A TRC is not conclusive proof of residence, especially after the amendment to Section 90(5) of the Act.
- The transaction was an “indirect transfer” taxable under Section 9(1)(i) read with Explanation 5.
- Under Rule 10U(2), GAAR applies to any “arrangement” where the tax benefit is obtained on or after April 1, 2017, irrespective of when the underlying investment was made.
On Behalf of the Respondents: Senior Counsel Mr. Harish Salve argued that:
- Article 4 of the DTAA provides an exclusive rule for determining residence, and a TRC issued by Mauritius is conclusive proof (Circular No. 789).
- Domestic anti-avoidance rules cannot override the DTAA unless explicitly provided.
- The transaction was a genuine sale of shares acquired before April 1, 2017, and thus stood grandfathered under Article 13(3A) of the DTAA and Rule 10U(1)(d).
- The structure was commercially rational and not a preordained device.
Court’s Analysis and Findings
Justice R. Mahadevan, writing the primary judgment, delivered a detailed analysis of the interaction between Treaty provisions and domestic anti-avoidance rules.
1. TRC Not Conclusive Post-Amendment The Court observed that reliance on Union of India v. Azadi Bachao Andolan and Circular No. 789 was misplaced in light of subsequent legislative amendments, specifically the introduction of Sections 90(2A), 90(4), and 90(5).
The Court held:
“Section 90(4) of the Act only speaks of the TRC as an ‘eligibility condition’. It does not state that a TRC is ‘sufficient’ evidence of residency… The TRC relied upon by the applicant is non-decisive, ambiguous and ambulatory… Thus, the TRC lacks the qualities of a binding order issued by an authority.”
2. Applicability of GAAR and Grandfathering The Court analyzed Rule 10U of the Income-tax Rules. While Rule 10U(1)(d) grandfathers income from the transfer of “investments” made before April 1, 2017, Rule 10U(2) states that GAAR shall apply to any “arrangement” irrespective of the date it was entered into, if the tax benefit is obtained on or after April 1, 2017.
The Court observed:
“Therefore, the prescription of the cut-off date of investment under Rule 10U(1)(d) stands diluted by Rule 10U(2), if any tax benefit is obtained based on such arrangement. The duration of the arrangement is irrelevant.”
The Court noted that the sale transaction was approved in May and June 2018, well after the GAAR cut-off date.
3. Substance Over Form The Court upheld the AAR’s finding regarding the control of the entities. It noted that the effective management was not in Mauritius but with Mr. Charles P. Coleman in the USA.
“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.”
4. Treaty Abuse and Section 245R(2) The Court held that the AAR was justified in rejecting the application at the threshold.
“The applications preferred by the assessees relate to a transaction designed prima facie for tax avoidance and were rightly rejected as being hit by the threshold jurisdictional bar to maintainability, as enshrined in proviso (iii) to Section 245R(2).”
Concurring Opinion by Justice J.B. Pardiwala
Justice Pardiwala added a separate opinion focusing on “Tax Sovereignty.” He emphasized that in an era of geo-economic uncertainty, a nation must assert its sovereign right to tax income arising from its soil.
Justice Pardiwala observed:
“Taxing an income arising out of its own country is an inherent Sovereign right to that country. Any application of filters or diffusers to this is a direct attack or threat to its sovereignty which can affect a Nation’s long-term interest.”
He further stated that treaty shopping and tax abuse weaken a nation’s security and economic fabric.
Decision
The Supreme Court allowed the appeals, set aside the judgment of the Delhi High Court dated August 28, 2024, and restored the order of the Authority for Advance Rulings. The Court concluded that the capital gains arising from the transfers are taxable in India under the Income Tax Act read with the applicable provisions of the DTAA.
Case Details:
- Case Title: The Authority for Advance Rulings (Income Tax) and Others v. Tiger Global International II Holdings
- Case Number: Civil Appeal No. 262 of 2026
- Bench: Justice J.B. Pardiwala and Justice R. Mahadevan
