Tax Treaty Benefits Cannot Be Claimed Merely based on Tax Residency Certificate and Legal Form and can be Denied based on lack of Economic Substance under Indian GAAR

The assessees viz., Tiger Global International II Holdings, Tiger Global International III Holdings, and Tiger Global International IV Holdings (Assessees), are private companies limited by shares, incorporated under the laws of Mauritius which were set up with the primary objective of undertaking investment activities with the intention of earning long-term capital appreciation and investment income. Such entities were  regulated by Financial Services Commission in Mauritius and granted a Category I Global Business License. Shareholdings in Flipkart Pvt Ltd (Singapore Co.)  a Singapore entity which indirectly held significant investments in India acquired between 2011–2015, and subsequently shares of Singapore Co. were sold to Luxembourg buyer (Fit Holdings SARL) for substantial as part of acquisition by Walmart Inc. The Assessees sought Section 197 orders which prescribed withholding rates (6.05%, 6.92%, 8.47%) and were characterized as provisional.

Assessees filed applications before Authority for Advance Rulings (AAR) on chargeability of gains under ITA read with India–Mauritius Double Taxation Avoidance Agreement (DTAA). AAR rejected applications at the threshold treating transaction as prima facie tax‑avoidance‑driven citing effective control and management of the applicants was not in Mauritius and was, in fact, with Mr. Charles P. Coleman in the USA and the real intention behind obtaining the TRCs was to avail the benefit of the DTAA based on various findings, viz, Assessee companies were held through its affiliates via a web of entities based in the Cayman Islands and Mauritius, the overall control and management of the respondent companies did not lie with their Board of Directors in Mauritius, the authority to operate bank accounts for transactions above USD 2,50,000 was vested with Mr. Charles P. Coleman, no investment was held other than in the shares of Flipkart. The Assessees preferred Writs before Delhi High Court which quashed AAR order and held gains were not chargeable in India.

The Supreme Court overturned the Delhi High Court’s decision and upheld the AAR’s order that the arrangement was, prima facie, for tax avoidance and consequently no treaty benefit can be claimed:

1. All that is required for the AAR, in the case of an application by a non-resident, is to see whether the contents of the application and the documents disclose a transaction by which an attempt is made to avoid payment of tax, if it is otherwise taxable under law. The use of the term “prima facie” implies that it is sufficient if the AAR, on an initial examination of the documents, is satisfied that the transaction is for avoidance of income tax and can reject the application. The level of satisfaction required to arrive at a prima facie conclusion is much less when compared to a case where a fact has to be proved.

2. The Supreme Court laid down a three-tier framework for ascertaining taxability: To examine whether the transaction falls within the scope of the Act and once domestic taxability is established, of the analysis considers whether such taxability is curtailed or overridden by the DTAA including treaty entitlement and limitations to deny treaty protection. Thereafter, General Anti-Avoidance Rules (GAAR)/Judicial Anti-Avoidance Rules (JAAR) are invoked to pierce the structure and deny treaty benefits where the transaction lacks genuine commercial substance.

3. TRC not sacrosanct: TRC lacks the qualities of a binding order issued by an authority. The TRC relied upon by the applicant is non decisive, ambiguous and ambulatory, merely recording futuristic assertions without any independent verification. The mere holding of a TRC cannot, by itself, prevent an enquiry.

4. Treaty benefits contingent on taxation in the state of residence: The Court observed that treaty benefits cannot be claimed where an arrangement results in double non-taxation, i.e., where the taxpayer simultaneously contends that the source state does not have taxing rights and the income is also non-taxable in the resident state.

5. Binding nature of pre-GAAR circulars and precedents: The Court held that circulars and judicial precedents rendered before the introduction of GAAR and related statutory changes cannot be mechanically relied upon to claim treaty benefits. Once the legislature has fundamentally altered the legal regime through express amendments, earlier judicial interpretations must yield to the new statutory framework.

6. On the GAAR applicability to even grandfathered (pre- April 1, 2017) investments, the Supreme Court observed pre-2017 investments are exempt from GAAR only if not designed for tax benefits post-2017. Rule 10U(2) enforces this distinction and GAAR applies to arrangements with tax benefits after April 1, 2017, regardless of investment timing, emphasizing commercial substance over form.

• • • GAAR provisions place the onus on the taxpayer to disprove the presumption of tax avoidance. This represents a significant shift in the burden of proof. 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.

• • • Once it is factually found that the unlisted equity shares, on the sale of which the assessees derived capital gains, were transferred pursuant to an arrangement impermissible under law, the assessees are not entitled to claim exemption under DTAA by virtue of the GAAR override.

Conclusion:

The Supreme Court’s decision in Tiger Global marks a paradigm shift in India’s international tax jurisprudence highlighting substance-based tax treaty entitlement and anti-avoidance enforcement. Treaty entitlement can no longer be assumed on the basis of legal form and must be demonstrated through genuine commercial substance in the relevant jurisdiction. It is also important to note that the, the Government vide the notifications dated March 31, 2026 amended the tax rules to clearly state that India’s anti‑avoidance provisions will not apply to investments made before April 1, 2017 in order to protect past investments, reduce uncertainty, and reassure international investors that earlier commitments will be respected. However, the other aspects of the Supreme Court verdict and observations would continue to have a greater impact on the other cases pending at various judicial forums and India investment structures.