Supreme Court: In a batch of civil appeals arising from a common judgment dated 28-08-2024 passed by the Delhi High Court, whereby the High Court set aside a common order dated 26-03-2020 passed by the Authority for Advance Rulings (Income Tax) (“AAR”) and held that the respondents were entitled to the benefits of the India—Mauritius Double Taxation Avoidance Agreement (“DTAA”) in Tiger Global in Flipkart Share Sale case, a Division Bench of R. Mahadevan* and J.B. Pardiwala,** JJ., upheld the AAR’s order and set aside Delhi High Court’s judgment. The Court held that capital gains arising from the sale of shares of Flipkart Singapore are taxable in India under the Income Tax Act read with the applicable provisions of the DTAA.
Factual Matrix
In the instant matter, the respondents, namely Tiger Global International II Holdings, Tiger Global International III Holdings and Tiger Global International IV Holdings, are private companies incorporated under the laws of Mauritius. Each respondent holds a Category I Global Business Licence issued under the Financial Services Act, 2007 of Mauritius and is regulated by the Financial Services Commission, Mauritius. The respondents were issued valid Tax Residency Certificates (“TRCs”) by the Mauritius Revenue Authority for the relevant period.
The Respondents’ Boards of Directors comprised Mauritian resident directors along with one non-resident director. The respondents maintained office premises, bank accounts, accounting records, audited financial statements, and employees in Mauritius. Investment advisory and portfolio management services were rendered by Tiger Global Management LLC, USA, under contractual arrangements, subject to final approval by the Boards of the respondent companies.
Between 2011 and 2015, the respondents acquired shares in Flipkart Private Limited, a company incorporated in Singapore. Flipkart Singapore held investments in Indian operating companies, and the value of its shares was derived substantially from assets situated in India. In 2018, the assessees transferred their shares in Flipkart Singapore to Fit Holdings S.A.R.L., Luxembourg, as part of a larger transaction whereby Walmart Inc. acquired a controlling stake in Flipkart Singapore. The gross consideration received by the assessees exceeded USD 2 billion.
Procedural History
Prior to completion of the transaction, the respondents applied under Section 197 of the Income Tax Act, 1961 seeking certificates for nil withholding of tax. The Revenue rejected the claim and issued certificates prescribing withholding at specified rates, on the ground that the respondents were not entitled to DTAA benefits. The respondents thereafter approached the AAR under Section 245-Q(1) seeking a ruling on whether capital gains arising from the sale of shares of Flipkart Singapore were chargeable to tax in India under the Act read with the India—Mauritius DTAA.
The AAR, vide dated 26-03-2020, declined to entertain the applications, and held that the transaction was prima facie designed for avoidance of tax and was barred by clause (iii) of the proviso to Section 245-R(2). The AAR further held that the respondents lacked commercial substance, were effectively controlled from outside Mauritius, and functioned as conduit entities created to avail treaty benefits.
Aggrieved, the respondents filed writ petitions before the Delhi High Court. The High Court, vide an impugned judgment dated 28-08-2024, quashed the AAR’s order, and held that the transaction was bona fide, commercially substantive, and ‘grandfathered’ under Article 13(3A) of the DTAA. Aggrieved, the Revenue has challenged the said judgment before the Supreme Court.
Moot Points
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Whether the capital gains arising from the transfer of shares of Flipkart Singapore, deriving substantial value from Indian assets, are taxable in India under Section 9(1)(i) of the Income Tax Act?
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Whether the respondents are entitled to claim treaty benefits under the India—Mauritius DTAA on the basis of TRCs?
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Whether the transaction constitutes an impermissible avoidance arrangement attracting the bar under proviso (iii) to Section 245R(2) and the applicability of Chapter X-A of General Anti Avoidance Rules (GAAR)?
Court’s Analysis
The Court reiterated that “the power of an independent Republic to levy and collect tax forms part of its inherent sovereign function” and must be exercised strictly within the authority of law as mandated by Article 265 of the Constitution.
The Court observed that while DTAA are entered into to prevent double taxation and promote cross-border investment, they cannot be permitted to be used as instruments for achieving non-taxation through artificial arrangements. The India—Mauritius DTAA, which once facilitated significant foreign inflows through what came to be known as the “Mauritius Route”, had also attracted “serious issues of treaty shopping, tax avoidance, and the integrity of the international tax system”.
The Court noted that the 2016 Protocol fundamentally altered the character of the treaty by shifting capital gains taxation from a residence-based regime to a source-based regime, clearly signalling the intention of the contracting States to curb abuse.
The Court undertook an exhaustive examination of the transaction structure, treaty framework and the domestic anti-avoidance regime. At the outset, the Court reiterated that “though it is permissible in law for an assessee to plan his transaction so as to avoid the levy of tax, the mechanism must be permissible and in conformity with the parameters contemplated under the provisions of the Act, rules or notifications. Once the mechanism is found to be illegal or sham, it ceases to be “a permissible avoidance” and becomes “an impermissible avoidance” or “evasion”.” The Court emphasised that the Revenue is fully entitled to enquire into the transaction in order to determine whether the claim for exemption is lawful.
Nature of the Transaction
The Court noted that the assessees were part of a multi-layered investment structure controlled by Tiger Global Management LLC, USA, operating through a web of entities incorporated in Cayman Islands and Mauritius.
Although the assessees claimed that their Boards in Mauritius exercised real control, the Court accepted the AAR’s findings that the authority to operate bank accounts for transactions exceeding USD 2,50,000 vested with Mr. Charles P. Coleman, the beneficial owner in the application for the Global Business Licence. He was also the authorised signatory for the parent entities and the sole Director of the ultimate holding companies.
The Court noted that the Mauritian Boards merely formalised decisions already controlled from outside Mauritius. The Court further noted that all three assessees had made no investment other than in Flipkart Singapore, and that the entire investment structure was routed through a web of entities based in Cayman Islands and Mauritius, ultimately controlled by Tiger Global Management LLC, USA. Therefore, the real intention behind their incorporation and the obtaining of Tax Residency Certificates (TRCs) was to avail treaty benefits.
The Court found that the assessees had transferred unlisted equity shares of a Singapore company whose value was derived substantially from assets located in India. The transfers were effected after 01-04-2017 pursuant to a composite and pre-arranged transaction.
Rejecting the assesses’ contention that the transaction was a simple sale of shares between two unrelated parties. On facts, the Court held that the structure was not a simple sale of shares, but part of a larger arrangement designed to obtain treaty benefits while escaping taxation both in India and Mauritius.
The Court affirmed the AAR’s finding that the assessees were merely “see-through entities” and that the arrangement was a preordained transaction created for the purpose of tax avoidance. The Court reiterated AAI’s finding that
“In the mechanism of capital gains computation, what is relevant is not only the sale of shares but also the purchase of shares. Thus, the entire transaction of acquisition as well as sale of shares, as a whole, is required to be examined, and a dissecting approach by examining only the sale of shares cannot be adopted.”
The Court noted that the respondents were seeking exemption from Indian income-tax while simultaneously contending that the transaction was also exempt under Mauritian law, and found the same to be “contrary to the spirit of the DTAA and presents a strong case for the Revenue to deny the benefit as such an arrangement is impermissible.”
Treaty Framework and Article 13 of the DTAA
The Court rejected the contention that Article 13 of the India—Mauritius DTAA granted blanket exemption merely because the seller was a Mauritian resident. The Court held that treaty protection is available only when the assessee is liable to tax in Mauritius. The Court observed that —
“Whether the sale is of shares of an Indian company then, will not be germane for consideration because only if the assessee is liable to pay tax in Mauritius, he can derive benefit under the provision under Article 13 of the DTAA as amended.”
The Court held that the assessees failed to establish that the gains were liable to tax in Mauritius. Consequently, the treaty benefit could not be invoked.
GAAR and Impermissible Avoidance Arrangement
The Court noted that Section 96(2) places the onus on the taxpayer to disprove the presumption of tax avoidance. In the present case, there was clear and convincing prima facie evidence to demonstrate that the arrangement was designed with the sole intent of evading tax.
The Court applied Chapter X-A (GAAR) and held that the assessees failed to rebut the statutory presumption and could not establish that the structure had genuine commercial substance independent of tax benefit.
“The transactions in the instant case are impermissible tax-avoidance arrangements, and the evidence prima facie establishes that they do not qualify as lawful.”
AAR’s Approach
The Court found that the transaction was found to be prima facie designed for avoidance of income tax and therefore attracted the bar under proviso(iii) to Section 245R(2) of the Income Tax Act. The Court affirmed AAR’s approach and held that the applications were rightly rejected at the threshold stage. Accordingly, the Court held that the AAR was justified in refusing to render a ruling on merits.
Court’s Decision
The Court held that the assessees were conduit entities lacking commercial substance; the investment structure was created with the prime objective of obtaining treaty benefits; the transaction constituted an impermissible tax avoidance arrangement; Chapter X-A (GAAR) was clearly attracted and the AAR had rightly invoked the jurisdictional bar under proviso (iii) to Section 245R(2).
“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 Article 13(4) of the DTAA.”
The Court held that capital gains arising from the transfers effected after 01-04-2017 are taxable in India under the Income Tax Act read with the applicable provisions of the DTAA. The Court allowed all the appeals and set aside the Delhi High Court’s order.
[Authority for Advance Rulings (Income Tax) v. Tiger Global International II Holdings, 2026 SCC OnLine SC 86, Decided on 15-01-2026]
*Judgment by Justice R. Mahadevan
**Concurring Judgment by Justice J.B. Pardiwala
Very nicely summarized article by SCC on the Tiger Global ruling