New Delhi: The Supreme Court Thursday ruled that capital gains from Tiger Global’s $1.6 billion stake-sale in e-commerce firm Flipkart to Walmart was taxable in India—a precedent that could prompt foreign investors to re-examine how deals and their holdings are managed.
At the core of the dispute was the question of how Tiger Global, a US-based investment firm, used an India-Mauritius tax treaty to claim tax exemptions. These exemptions were opposed by the Income Tax Department.
The Supreme Court, in the order, allowed the I-T department’s appeals against three Mauritius-based entities linked to Tiger Global and ruled that the shareholding structure was “prima facie” a tax avoidance arrangement that cannot be exempted under the India-Mauritius treaty.
The SC ruling overturned an August 2024 Delhi High Court decision that had favoured Tiger Global and restored the findings of the Authority for Advance Rulings (AAR), which had rejected the New York firm’s treaty protection claims.
A division bench of Justices J.B. Pardiwala and R. Mahadevan validated the tax department’s power to “look through” shell entities and tax gains from offshore exits where the underlying value comes from Indian assets. In a separate concurring opinion, Justice Pardiwala emphasised that tax sovereignty is crucial for a nation’s economic independence and cannot be compromised by treaty abuse.
Also Read: India’s taxation system needs key reforms. Three suggestions to the Finance Minister
The investment structure
When Walmart acquired a majority stake in Flipkart in 2018, Tiger Global did not hold shares directly in the Indian e-commerce company. Instead, its investment was routed through three Mauritius-based entities, which owned shares in Flipkart Singapore. That Singapore entity, in turn, held the Indian operating companies.
When the Mauritius entities sold their Singapore shares to a Luxembourg-based buyer for over $2 billion in gross consideration, the Income Tax Department argued this amounted to an indirect transfer of Indian assets, making the gains from this sale taxable in India.
Tiger Global disputed this, pointing to the India-Mauritius tax treaty under which capital gains were historically taxable only in Mauritius. The firm relied on valid tax residency certificates (TRC) issued to its Mauritius entities and argued that since the shares were acquired before 1 April 2017, the gains were “grandfathered” — protected from new rules under amended tax laws.
The tax department countered that the Mauritius entities were mere conduits or “see-through entities” and that real control lay with Charles P. Coleman in the US, proving the structure existed primarily to avoid Indian tax.
Tax residency certificates are documents issued by a foreign nation’s tax authority — in this case, Mauritius — to establish tax residence and claim benefits under tax treaties. Tax treaties are agreements between countries that allocate taxing rights to prevent the same income from being taxed twice.
The legal route
In 2020, the AAR rejected Tiger Global’s application and held that the Mauritius entities lacked “head and brain” in Mauritius and that the transaction was designed for tax avoidance.
AAR is a quasi-judicial body that can provide clarity on taxation matters involving cross-border transactions. It can be approached by individuals or companies to obtain advance rulings, which are legally binding, before a deal is carried out.
The case eventually led to the Delhi High Court, which overturned AAR’s decision in August 2024, ruling that tax residency certificates issued by Mauritius were sufficient to claim treaty benefits and that the investment was long-term and commercially substantive.
The Supreme Court has now reversed this High Court verdict.
The top court order
The Supreme Court held that the Delhi High Court had erred in considering exemptions under the treaty as automatic once a tax residency certificate was produced.
“Undoubtedly, the mere holding of a TRC cannot, by itself, prevent an inquiry subsequent to the amendments brought into the statute… if it is established that the interposed entity was a device to avoid tax,” the court observed.
Rejecting the High Court’s view on grandfathering, the bench held that grandfathering does not protect exits (stake sales) that form part of an impermissible tax avoidance arrangement. The court said what was relevant is whether the 2018 deal was structured mainly to obtain a tax benefit, not the date of acquisition.
The court found that the Mauritius entities lacked real commercial substance, and that the evidence prima facie establishes they do not qualify as lawful arrangements. Once that threshold is crossed, the bench held, India’s General Anti-Avoidance Rule (GAAR) applies and treaty protection falls away.
GAAR is a domestic legal framework that empowers tax authorities to disregard arrangements set up primarily to obtain tax benefits.
The top court also rejected the High Court’s assumption that GAAR cannot override a tax treaty, observing that Parliament had expressly provided for this through Section 90(2A) of the Income Tax Act, which makes treaty provisions subject to GAAR.
Far-reaching impact
Gouri Puri, Partner at law firm Shardul Amarchand Mangaldas & Co, said the Thursday ruling would impact both current and past merger and acquisition deals where treaty benefits have been claimed. It could force private equity players and foreign portfolio investors to re-examine their holding structures.
“Tax litigation around tax treaty claims may increase and impact the tax insurance market. The key takeaways include the dilution of the weight accorded to tax residency certificates and the court’s reliance on the General Anti-Avoidance Rule,” Puri said.
L. Badri Narayanan, Executive Partner at law firm Lakshmikumaran & Sridharan, said the judgment marks a decisive shift towards “substance over form” but clearer guidance would be necessary going forward.
“The decision raises critical questions as to what constitutes adequate commercial substance, creating uncertainty for global investors. Clear guidance will be essential to maintain investor confidence and ensure India remains an attractive destination for cross-border investments,” Narayanan said.
(Edited by Prerna Madan)
Also Read: The Budget faces a precarious illusion. Low inflation masks a deeper fragility