GAAR Overrides Treaty Benefits – Supreme Court Denies Capital Gains Exemption Despite TRC

Authority for Advance Rulings v. Tiger Global International II Holdings (SC) Civil Appeal No. 262 TO 264 OF 2026 (Flipkart Exit Transaction)

In this recent landmark decision, the Supreme Court (SC) has denied tax treaty benefits to Triger Global on capital gains arising from the Flipkart exit and held that a Tax Residency Certificate (TRC) is not sacrosanct. The SC further held that the General Anti-Avoidance Rule (GAAR) can override treaty benefits where there is a lack of commercial substance.

Brief Background

Tiger Global exited its investment in Flipkart in 2018 as part of Walmart’s global acquisition. The investment was held through Mauritius-based entities that claimed exemption from Indian capital gains tax under Article 13 of the India–Mauritius tax treaty, relying on valid TRCs.

The Revenue denied treaty relief, alleging that the structure lacked commercial substance and was designed primarily for tax avoidance. While the Delhi High Court ruled in favour of Tiger Global, the Revenue appealed to the SC, bringing into focus the interaction between treaty benefits, GAAR and economic substance.

The SC examined whether possession of a valid TRC is conclusive for claiming benefits under the applicable DTAA, whether the GAAR can override treaty protection by virtue of section 90(2A), whether the Mauritius holding entities had sufficient commercial substance and exercised independent control and whether the capital gains arising from the Flipkart exit were eligible for protection under the grandfathering provisions.

SC’s Key Observations and Ruling

The SC reversed the Delhi High Court decision and ruled against Tiger Global, holding that treaty benefits were not available.

Key findings include:

A TRC is merely an eligibility condition, not sufficient proof of residence or entitlement to treaty benefits. Authorities are empowered to look beyond form and examine substance.

By virtue of section 90(2A), GAAR provisions override tax treaties. Where an arrangement is an impermissible avoidance arrangement, treaty benefits can be denied.

The Court noted that strategic decisions, control over bank accounts and exit execution were all exercised outside Mauritius. The Mauritian boards merely ratified decisions taken elsewhere.

Effective management and control did not lie in Mauritius. Mere incorporation or regulatory compliance was insufficient to establish treaty residence.

GAAR applies to arrangements yielding tax benefits post 1 April 2017. The exit transaction itself constituted a post-2017 arrangement, defeating the grandfathering claim.

The Court rejected a narrow, transaction-by-transaction view and examined the entire investment and exit structure as a single, pre-ordained arrangement.

Accordingly, capital gains arising from the Flipkart exit were held taxable in India and treaty protection under the India–Mauritius DTAA was denied.

Key Takeaways / Implications

The SC has clarified that treaty benefits are not automatic merely on the basis of a valid TRC, with GAAR operating as an overriding provision where arrangements lack commercial substance. The ruling underscores the need for real substance, effective governance and independent decision-making, while significantly weakening reliance on grandfathering for post-2017 exits, prompting PE funds, VC investors and multinational groups to reassess holding and exit structures to align legal form and commercial reality.

It sends a clear signal that claiming treaty benefit without economic substance will not survive scrutiny and this application may extend beyond exit transactions to other cross-border remittances, requiring careful evaluation of substance and commercial justification before extending treaty benefits.