22 Jan 2026
The ruling of the Supreme Court of India in Tiger Global marks a shift in India’s jurisprudence on tax treaty interpretation and application. The Supreme Court’s decision requires holding companies to demonstrate commercial substance to claim capital gains tax benefits, overriding grandfathering provisions for investments made prior to 1 April 2017 in India’s tax treaties and the Income Tax Rules. The ramifications of this ruling reach far beyond Tiger Global and trigger a deeper scrutiny into the economic substance and commercial rationale for all taxpayers claiming benefits under India’s tax treaties.
Partners: Himanshu Sinha and Komal Dani, Senior Associate: Arijit Ghosh, Associate: Niraj Chowdhury
The use of intermediate holding companies in Mauritius to hold investments in India has been a widely prevalent and accepted practice from the early 1980s to 2017, primarily due to the beneficial tax treaty between India and Mauritius (Tax Treaty). Under the Tax Treaty at that time, capital gains arising from the sale of shares of an Indian company by a Mauritius resident were taxable only in the investor’s country of residence (i.e., Mauritius) and not in India. During this intervening period, tax authorities challenged the tax benefit on the ground that it involved treaty shopping, alleging the use of shell companies lacking commercial substance and established primarily for holding investments in India. The issue then reached the Supreme Court for adjudication.
Supreme Court’s decision in Azadi Bachao Andolan and Vodafone
The Supreme Court (Court) settled this issue in Union of India v Azadi Bachao Andolan1 (Azadi Bachao) where the Court held that treaty shopping cannot be treated as illegal per se, and it is for the government to decide whether to permit treaty shopping to promote foreign investments in India.
Subsequently, in another high-profile tax avoidance case of Vodafone International Holdings BV v Union of India,2 (Vodafone) the Supreme Court reiterated the view taken in Azadi Bachao. In this decision the Court did not permit the taxation of capital gains arising from an indirect transfer of Indian business by sale of shares of a holding company in an offshore tax haven.
Post Vodafone changes
To overcome the impact of the Vodafone decision, the income tax statute was amended retrospectively in 2012. A broad General Anti Avoidance Rule (GAAR) was also introduced in the statute, but the provisions were deferred multiple times (eventually coming into effect from 1 April 2017, as discussed below). However, these changes in domestic law did not impact the capital gains tax exemption under the Tax Treaty, and investors continued to rely on Tax Residency Certificates (TRC) issued by the Mauritius authorities as conclusive evidence for claiming treaty benefits.
India and Mauritius bilaterally amended the Tax Treaty in 2016, to remove the capital gains tax benefit with effect from 1 April 2017 and prospectively allow India to tax capital gains from the sale of Indian shares by a Mauritian holding entity. However, a residuary provision under Article 13(4) of the Tax Treaty was retained, denying India taxing rights in respect of capital gains from all assets other than certain specified assets such as shares of an Indian company acquired by a Mauritius resident on or after 1 April 2017, properties of a permanent establishment and certain movable assets (like aircrafts and ships). It was accordingly understood that any indirect transfer of ownership of an Indian company effected through transfer of securities of another offshore entity would not be taxable in India. For Indian shares acquired prior to 1 April 2017, it was agreed that the treaty benefit would be retained, regardless of when the exit occurred and the gains accrued. The government of India issued express clarifications to this effect stating, “investments made before 1.4.2017 have been grandfathered and will not be subject to capital gains taxation in India.”
Additionally, GAAR which was earlier introduced in the income tax statute in 2012, was also made effective on the same date, i.e. 1 April 2017. GAAR allowed tax authorities to disregard any arrangement (or any part thereof) which were entered into primarily to obtain tax benefits, including cases of treaty abuse and any improper use of tax treaties. However, the grandfathering of existing investments was preserved under GAAR as reflected in Rule 10U(d)(1) of the Income-tax Rules, 1962 (Rule 10U(d)(1)). This rule clarifies that tax benefits claimed on exits from pre-existing (‘grandfathered’) investments made prior to 1 April 2017 under agreed treaty terms were not intended to be affected by GAAR.
In 2018, Tiger Global, a well-known private equity firm, made a high-profile exit from its highly profitable investment in Flipkart, the Indian e-commerce company. It sold its ownership in Flipkart to Walmart at a gain of more than USD 1 billion. In the Walmart-Flipkart transaction, Flipkart was owned by a Singapore holding company, whose shares were held by a Mauritius-based holding company. The transaction was structured as sale of shares of the Singaporean holding company by the Mauritius holding company.
Since the investment was made before the cut-off date of 1 April 2017, the capital gains were claimed to be free from Indian tax under Article 13(4) of the Tax Treaty. At the first stage, the Authority for Advance Ruling, who had been called upon to deliver a ruling on the taxability of this transaction, held that the transaction was prima facie designed for tax avoidance and on that basis, held that the application was not maintainable. This order was challenged before the Delhi High Court, which overturned the authority’s decision, ruling that the capital gains tax benefit under Article 13(4) of the Tax Treaty would continue to apply to grandfathered investments in line with prior declarations.
On an appeal filed by the tax authorities,3 the Supreme Court reversed the Delhi High Court decision, holding that, regardless of the grandfathering provided in the Tax Treaty and the Income Tax Rules, 1962, for investments made before 1 April 2017 (where transfer takes place post 1 April 2017), holding companies must demonstrate commercial substance to obtain the capital gains tax benefit. Since the Mauritius holding entity had been found to be lacking in substance by the Authority for Advance Ruling (primarily because the bank account control was with a US-based fund manager), the Court held the capital gains to be taxable under the Indian law and denied the benefit of the Tax Treaty. The Court noted that changes in the law post the Vodafone decision and the 2016 amendment to the Tax Treaty have resulted in a radical shift in how treaty entitlements are applied requiring careful consideration of investment structures.
The key propositions laid down by the Court in Tiger Global are:
The Court has diluted the protection of grandfathering under Rule 10U(1)(d), which was meant to shield investments made in India prior to 1 April 2017 from the applicability of GAAR.
It has held that this rule cannot be read to mean a blanket protection from a challenge of treaty abuse and can only be claimed if the investments were genuine and did not arise from arrangements that lacked substance. The Court held that once the anti-abuse provisions within GAAR are validly invoked, the burden of proof then shifts to the taxpayer to demonstrate the genuineness of the transaction. Additionally, the Court did not take into account the Indian government’s express declaration that the Limitation of Benefits article agreed with Mauritius in 2024 to prevent treaty abuse (by restricting benefits to qualifying entities with genuine commercial activity) (LOB Clause), was intended to apply only to future transactions and has not yet been officially notified for implementation.
As noted earlier, the residual clause in Article 13(4) of the Tax Treaty restricts India from taxing any gains arising from assets other than those that are explicitly covered under other provisions of Article 13 of the Treaty (i.e., Article 13(1) to Article(3B)). Since the taxation of gains derived from the indirect transfer of Indian shares in two-tier structures is not covered under any of the provisions of Article 13(1) to (3B), the argument made by Tiger Global was that such gains should not be taxable in India.
However, the Supreme Court has held that gains derived from the indirect transfer of Indian shares (regardless of whether the investment was made prior to or post 2017) is not covered by the residual clause of Article 13(4) and such gains should be taxable exclusively in India as per domestic law.
The Supreme Court has, referring to the broader object of a treaty (being to prevent double taxation, and not allow tax avoidance, or double non-taxation), held that it must be proved that the tax is paid on the relevant gains in the state of residence to be eligible for any treaty benefit. This is a significant departure from the principles laid down in Azadi Bachao (and subsequently upheld in Vodafone), which held that there was no requirement to prove that taxes were actually paid in Mauritius to claim treaty eligibility.
Previously, as per Circular 789 of the Central Board of Direct Taxes (CBDT), and the jurisprudence of the Supreme Court in Azadi Bachao and Vodafone, the TRC sufficed as adequate evidence to prove one’s residency in the contracting state to claim treaty benefits. Section 90(4) of the Income Tax Act states that a taxpayer is not entitled to claim relief under a treaty unless they are able to procure a valid TRC from their resident jurisdiction. Section 90(5), introduced by the Finance Act of 2013, added an additional requirement to file (under Form 10F) other “documents and information” as may be prescribed by the CBDT to avail treaty benefits.
Referring to the introduction of Section 90(5) to the Income Tax Act which prescribes other documents and information to be submitted in addition to the requirement of the TRC in Section 90(4), the Supreme Court found that the requirement to submit TRC is not “sufficient” to claim treaty eligibility, and such TRCs are not binding on Indian tax authorities or courts.
The Court has emphasised that treaty relief hinges on demonstrating real economic and commercial substance—i.e., the purpose, functions, people, risks, and nexus—in addition to producing a TRC or Form 10F.
Judicial anti-avoidance rules (JAAR) refer to the principle developed by courts to look beyond the legal form of a transaction to its real substance and deny tax benefits in limited instances of ‘sham’ transactions, conduit arrangements, or arrangements lacking genuine commercial purpose, even if it technically complies with the form of the law. Such JAARs are not codified and do not have any statutory grounding.
In Tiger Global, while the Court has not recorded or catalogued the principles under JAAR, it has nonetheless endorsed the view that courts can apply JAAR to deny treaty benefits for arrangements or investments that are otherwise not subject to the GAAR thresholds under the Income Tax Act or specific anti-avoidance rules (SAAR) within the treaty (also referred to as Limitation of Benefits clauses).
Further, the Court has also noted that GAAR, JAAR, and specific anti-avoidance rules (SAAR) operate in parallel; and to this extent, can be used by tax authorities in conjunction or separately and are not mutually exclusive.
While several aspects of the judgment are likely to be retested in future litigation before the Supreme Court itself, its most immediate impact is the uncertainty this creates not just for funds and cross-border M&A transactions seeking treaty benefits on exits, but also availability of treaty benefits more generally.
Treaty protection will now depend on the claimant’s ability to demonstrate genuine economic substance in the other state, reflected in a real local presence and meaningful control and decision-making. This must be supported by a clearly articulated commercial rationale that goes beyond tax efficiency in the choice of both the structure and the jurisdiction. For fund structures, such commercial substance may include considerations such as ease of pooling investments, ring-fencing of investor liabilities, enhanced governance requirements, or genuine regulatory and operational considerations.
Looking ahead, even grandfathered investments may face closer scrutiny at the time of exit, with treaty claims susceptible to challenge. In this environment, obtaining tax indemnities or insurance may become more complex and expensive.
Media reports indicate that tax authorities have reassured investors that past cases will not be reopened to preserve tax certainty, but a formal clarification has yet to be issued. The upcoming Union Budget is widely expected to address these concerns and provide guidance. Such an announcement will help allay stakeholder concerns and will be consistent with the Indian Government’s earlier statements regarding the prospective application of the LOB Clause of the Tax Treaty (which is yet to be brought into force).
[Additionally, to read our Tax Team’s perspectives on this judgement in the Forbes India newsletter, please click here.]
[1] UOI v Azadi Bachao Andolan (2003) 263 ITR 706
[2] Vodafone International Holdings B.V. v UOI (2012) 341 ITR 1
[3] Civil Appeal No. 262 of 2026 (Arising out of SLP (C) No. 2640 of 2025)
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