Dispute Resolution & ADR Monthly Newsletter - February 2026

• GAAR overrides Treaty protection despite Tax Residency Certificates.
• A defaulting party cannot rely on 'no-claim' clauses to avoid damages.
• An application for extension of the arbitration timeline must be filed before the Principal Civil Court, not the Referral Court.
• Commercial wisdom of CoC governs the mode of sale of non-core assets.
• Plausible, contractual damages awarded by a Court under Section 34 cannot be re-quantified in appeal under Section 37.
• Forgery allegations against a contract containing an arbitration clause render the dispute inarbitrable.

GAAR overrides Treaty protection despite Tax Residency Certificates

AAR (Income Tax) v. Tiger Global International II Holdings

Supreme Court of India | 2026 SCC OnLine SC 86123

In a significant decision reshaping the landscape of cross-border tax structuring into India, the Supreme Court has held that treaty entitlement to tax benefits/exemption cannot rest on documentation alone, and that commercial substance will prevail over formal compliance.

The ruling marks a clear shift from the earlier era, where Tax Residency Certificates (TRCs) and grandfathered treaty provisions were often treated as strong shields against Indian taxation. By affirming that General Anti-Avoidance Rules (GAAR) can override treaty benefits under Section 90(2A) of the Income Tax Act, 1961 (Act), and that even investments made prior to April 1, 2017, are not immune where the exit occurs post-GAAR, the Court has recalibrated the balance between certainty and anti-avoidance.

For investors, the decision underscores that treaty protection is no longer a structural default but a fact-intensive determination. Governance, decision-making authority, banking control, board independence, and demonstrable economic purpose will now be central to defending treaty claims. The Court's endorsement of examining the 'entire lifecycle' of an arrangement, from acquisition through exit, materially widens the scope of scrutiny, particularly for private equity and venture capital funds operating through intermediary jurisdictions.

The judgment also narrows the comfort historically derived from Circular 789 of 2000(sup)1(/sup) and earlier precedents such as Azadi Bachao(sup)2(/sup) and Vodafone(sup)3(/sup), signalling that post-GAAR jurisprudence operates in a different statutory environment. Grandfathering preserves tax treatment for genuine legacy investments, but does not immunise arrangements that lack substance at the time of exit.

On a practical note, this ruling may trigger reassessment of legacy Mauritius and Singapore holding structures, increased audit intensity, and greater emphasis on contemporaneous documentation of commercial rationale. Investors contemplating exits must now factor GAAR exposure into deal modelling, indemnity negotiations, and tax provisioning. Ultimately, the message is clear: alignment between structure and substance is no longer advisable – it is indispensable.

SUMMARY OF FACTS

Tiger Global group entities, incorporated in Mauritius, made indirect investments between 2011 and 2015 in Flipkart India Pvt Ltd (Flipkart India) through a Singapore-incorporated holding company, Flipkart Pvt Ltd (Flipkart Singapore), which, in turn, owned the Indian operating subsidiaries that carried on the core business.

In 2018, as part of Walmart's global acquisition of a majority stake in Flipkart, Tiger Global exited a portion of its investment by selling shares of Flipkart Singapore, realising capital gains of approximately USD 1.6 billion, which became the subject matter of Tiger Global's tax liability in India.

Although the shares transferred were legally those of the Singapore entity, the economic value of those shares was substantially derived from Indian assets and operations, given that the Singapore holding company had no material business or asset base outside India and the operations, customers, workforce, and revenue-generating activities of Flipkart were located almost entirely in India.

This triggered the indirect transfer provisions under Explanation 5 to Section 9(1)(i) of the Act, which deem offshore share transfers taxable in India where the foreign company derives substantial value from Indian assets (asset value exceeds INR 10 crore and represents at least 50% of all assets owned by the foreign entity).

The Mauritius entities claimed exemption from Indian capital gains tax on the basis that:

• They were tax residents of Mauritius under the India-Mauritius Double Taxation Avoidance Agreement (DTAA), which had historically allocated taxing rights over capital gains to the state of the transferor's residence and prevented India from taxing such gains under Article 13(4) of the DTAA.
• The 2016 amendment to the DTAA, which reversed the aforementioned position and shifted the capital gains taxation from a residence-based regime to a source-based regime under Article 13(3A), was applicable for shares acquired after March 31, 2017. As the investments had been made prior thereto, they were therefore covered by the DTAA's 'grandfathering provisions'.
• They held valid TRCs issued by the Mauritian tax authorities, which entitled them to invoke treaty benefits by establishing fiscal residence in Mauritius.

The Indian tax authorities rejected this position, asserting that the GAAR may be invoked to deny DTAA benefits where the foreign entity lacked genuine commercial substance and independent decision-making authority

The dispute progressed through an adverse ruling for Tiger Global by the Authority for Advance Rulings (AAR) in 2020, followed by a favourable judgment by the Delhi High Court in 2024, and a final appeal by the Revenue before the Supreme Court of India.

DECISION OF THE COURT

The Supreme Court overturned the Delhi High Court's judgment and upheld the position taken by the Indian tax authorities. Capital gains arising from Tiger Global's exit from Flipkart were taxable in India, notwithstanding the offshore nature of the share transfer.

The Court noted that tax treaties are intended to prevent double taxation and not to facilitate double non-taxation. As capital gains are not taxable in Mauritius, treaty benefits could not be invoked to legitimise arrangements that eliminate taxation in both jurisdictions.

The Court accepted the Revenue's view that the Mauritius entities lacked real commercial substance and functioned as conduit entities established primarily to obtain treaty benefits based on the following factors:

• Control outside Mauritius: Key financial and strategic decisions, including authority over large bank transactions, rested with non-Mauritius individuals, indicating that the 'head and brain' of the entities was not in Mauritius.
• Centralised group ownership: The same individual exercised control across multiple holding layers, suggesting group-level command rather than independent Mauritian management.
• Single-asset profile: The Mauritius entities had no meaningful investments apart from Flipkart, reinforcing their role as holding vehicles.
• Limited commercial footprint: Minimal operational presence in Mauritius, disproportionate to the scale of gains realised.

Lifecycle analysis: The structure was examined as a whole (acquisition through exit) and viewed as a pre-arranged mechanism facilitating a tax-efficient exit.

A TRC, while a mandatory procedural requirement under Indian law, is not conclusive proof of entitlement to treaty benefits and does not bar an inquiry into the substance and purpose of the arrangement.

While Section 90(2) of the Act allows a taxpayer to claim the benefit of an inter-State treaty if it is more beneficial than domestic law, GAAR overrides such treaty benefits by virtue of Section 90(2A), which provides that the provisions of Chapter X-A (containing the GAAR framework) shall apply notwithstanding Section 90(2), thereby permitting denial of DTAA benefits where an arrangement qualifies as an 'impermissible avoidance arrangement'.

To determine the existence of an impermissible avoidance arrangement, Indian tax authorities are entitled to examine whether an entity claiming treaty protection has real economic substance, commercial purpose, and autonomous decision-making, or merely operates as a conduit.

While the grandfathering provisions under Article 13(3A) of the DTAA were applicable, they did not confer immunity from GAAR, as the grandfathering provisions were limited to preserving pre-2017 residence-based capital gains tax treatment and did not restrict the operation of domestic anti-avoidance rules.

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Footnotes

1 The Circular clarified that a TRC issued by Mauritius would suffice for determining both fiscal residence and beneficial ownership, including for capital gains

2 Union of India v. Azadi Bachao Andolan, (2004) 10 SCC 1

3 Vodafone International Holdings BV v. Union of India, (2012) 6 SCC 613

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