In 2018, when Walmart acquired Indian e-commerce giant Flipkart for $16 billion—one of the largest deals in India’s startup history—Tiger Global, an early investor, booked massive profits running into billions of dollars. Normally, such capital gains on Indian shares would attract significant tax liability in India. However, Tiger Global routed its investment through Mauritius-based entities, claiming complete exemption under the India-Mauritius Double Taxation Avoidance Agreement (DTAA), supported by Tax Residency Certificates (TRCs). Initial authorities, including the Authority for Advance Rulings, questioned the arrangement, and the dispute eventually reached the Supreme Court of India, culminating in a landmark January 2026 ruling that reshaped the landscape for foreign investments.
In a landmark ruling delivered on January 15, 2026, in Authority for Advance Rulings (Income Tax) v. Tiger Global International II Holdings, the Hon’ble Supreme Court of India resolved the pivotal question of whether the Authority for Advance Rulings (AAR) was justified in rejecting advance ruling applications on grounds of maintainability, by holding that the proposed transaction—capital gains arising from the 2018 sale of shares in a Singapore company (deriving substantial value from Indian assets) by Mauritius-based entities ultimately controlled by a U.S. parent—constituted a prima facie impermissible arrangement for tax avoidance. Overturning the Delhi High Court’s 2024 decision in favour of the taxpayers, the Court reasoned that the Mauritius entities lacked genuine commercial substance, functioning as mere “see-through” conduits with effective control, decision-making, and “head and brain” residing in the United States, rather than independent operations in Mauritius. Applying the doctrine of substance over form, the Court held that a Tax Residency Certificate (TRC) is merely an eligibility condition and not conclusive proof of residency or beneficial ownership for claiming benefits under the India-Mauritius Double Taxation Avoidance Agreement (DTAA); further, the General Anti-Avoidance Rules (GAAR) prevail over treaty provisions in cases of abuse, with no grandfathering protection for tax benefits obtained after April 1, 2017, even if investments pre-dated this threshold. Consequently, the Court concluded that the capital gains from the indirect transfer were taxable in India under the Income Tax Act, 1961, read with the DTAA, affirming the AAR’s threshold rejection and reinforcing robust scrutiny against treaty shopping and artificial structures.
The Supreme Court’s (SC) ruling on January 15, 2026, has fundamentally redefined how “Grandfathering” and “GAAR” interact in India.
The Supreme Court’s landmark ruling on January 15, 2026, fundamentally redefined the interaction between “Grandfathering” and “GAAR” (General Anti-Avoidance Rule) by establishing that tax protection is a conditional privilege reserved for genuine investors rather than an absolute immunity for conduit structures. While Grandfathering was intended to keep capital gains tax-exempt for shares bought before April 1, 2017—such as Tiger Global’s acquisitions between October 2011 and April 2015—the introduction of GAAR in April 2017 empowered the tax department to “look through” arrangements deemed to be impermissible tax avoidance lacking commercial substance. In this case, the Court narrowed the grandfathering protection by ruling that the Tiger Global Mauritius (TGM) entities were “conduits” with their “head and brain” (actual control and management) situated in the USA under the control of beneficial owner Mr. Charles P. Coleman, thereby allowing authorities to prioritize “substance over form” and treat the Tax Residency Certificate (TRC) as rebuttable evidence rather than an absolute “magic pass”.
Most significantly, the Court held that GAAR serves as a “sovereign override” that can be applied to any “step” in an avoidance arrangement occurring after its implementation date; because Tiger Global’s sale of shares to Walmart happened in 2018, the exit itself was scrutinized as a tax-saving step regardless of when the shares were initially purchased. Furthermore, the ruling highlighted an “Indirect Transfer” trap, clarifying that Article 13(3A) of the India-Mauritius treaty specifically protects direct transfers of shares in Indian companies and does not explicitly cover indirect transfers of shares in third-country entities like Flipkart Singapore. Consequently, because the 2018 exit was deemed part of a preordained arrangement designed for tax avoidance, the transaction triggered domestic indirect transfer tax rules and was stripped of its treaty-based grandfathering benefits, making the gains fully taxable in India.
“The power of an independent Republic to levy and collect tax forms part of its inherent sovereign functions, and such power is circumscribed only by the requirement of being within the authority of law. Article 265 of the Constitution of India envisages the same.”
These words from the Hon’ble Supreme Court bench in the Tiger Global case capture the judgment’s deepest essence. The ruling has understandably raised several legitimate questions that warrant clear regulatory or judicial guidance:
- What conditions and factors will constitute adequate “substance”? In the absence of a statutory framework, reliance on evolving judicial precedents inevitably introduces an element of uncertainty.
- How should indirect transfers be viewed and taxed in light of this judgment?
- Clear guidelines are needed to distinguish genuine non-taxability under treaties from mere non-payment.
- What additional diligence will investors and authorities are expected to undertake when a Tax Residency Certificate (TRC) is no longer treated as conclusive?
Yet, beyond these practical concerns, a broader narrative has emerged—one that treats the judgment almost as taboo, warning that it will deter foreign investment, restrict capital flows, and stifle future entrepreneurship. What this narrative overlooks is the ruling’s fundamental reasoning: a principled defence of legal and tax sovereignty that transcends short-term profits or gains. At its core, the decision reaffirms that no nation can allow its fiscal authority—the very foundation of its independence and identity—to be undermined by arrangements designed primarily to circumvent its laws. Sovereignty of law is not negotiable; it is the bedrock on which sustainable economic progress, fair competition, and genuine investment ultimately rest.
As Aristotle wisely observed over two millennia ago:
“In all well-balanced governments there is nothing which should be more jealously maintained than the spirit of obedience to law, more especially in small matters; for transgression creeps in unperceived and at last ruins the state, just as the constant recurrence of small expenses in time eats up a fortune.”
This means laws must be held supreme, and obedience to them is an absolute necessity—even in small matters, let alone big ones. This timeless principle underscores a fundamental truth: the sovereignty of law depends not merely on grand declarations, but on unwavering adherence to its spirit—even in seemingly minor details. Small, unchecked violations erode the foundation of justice, fairness, and public trust, much like insidious leaks that eventually sink a ship. In the context of taxation and international treaties, allowing “minor” evasions through formal compliance without genuine substance risks undermining the fiscal integrity of the nation, distorting economic equity, and inviting broader abuse that ultimately burdens legitimate taxpayers and the state itself.
Critics of the Supreme Court’s January 15, 2026, ruling in the Tiger Global case have raised valid concerns: that by allowing tax authorities to “look behind” a Tax Residency Certificate (TRC) and re-characterise long-standing investment structures as conduits or shams, the judgment erodes tax certainty, breaches earlier “grandfathering” commitments, and creates a trust deficit. This, they argue, risks capital flight as global funds seek more predictable jurisdictions, ultimately harming Indian startups that depend on foreign venture capital in an already high-risk environment.
These fears, while understandable, overstate the ruling’s disruptive impact and overlook both its legal foundation and the broader regulatory context. The decision does not introduce retrospective taxation or abruptly rewrite rules. It applies existing frameworks—the 2016 India-Mauritius DTAA protocol (which already ended automatic capital gains exemptions for investments made after April 1, 2017) and the General Anti-Avoidance Rule (GAAR, effective since 2017)—to insist on“substance” rather than mere form. Grandfathering protections for pre-2017 investments remain intact for genuine structures; the Court simply held that a TRC alone is not conclusive proof of entitlement when evidence suggests treaty shopping or lack of economic substance. Indian authorities have possessed this scrutiny power for years—this ruling clarifies and reinforces it, rather than inventing it.
Far from signalling hostility or unpredictability, the judgment brings India squarely in line with long-established global anti-abuse standards that major economies have enforced without deterring investment. The United States has required Limitation on Benefits (LOB) tests in its treaties for decades (e.g., denying conduit structures in the 1971 Aiken Industries case), yet remains the world’s largest FDI recipient. The United Kingdom rejected similar Mauritius routing in the 2006 Indofood case, and Singapore routinely applies the Principal Purpose Test (PPT) and its domestic GAAR to block arrangements whose primary motive is tax avoidance. None of these jurisdictions suffered sustained capital flight; instead, their clear, substance-based rules enhanced investor confidence by creating a level playing field and reducing arbitrary abuse.
India is sending the same balanced message. While the ruling closes loopholes for opportunistic routing, simultaneous regulatory reforms emphatically welcome genuine capital. The Reserve Bank of India’s forthcoming 2026 FEMA overhaul will unify and simplify export-import and remittance rules, while SEBI’s proposed changes enable easier KYC, profit netting, and relaxed security requirements for foreign portfolio investors. These steps demonstrate proactive liberalisation, not retrenchment. Investors seeking predictability should view this combination as a maturing of the ecosystem: rules are now clearer, fairer, and more resistant to abuse, reducing the risk of future disputes over sham structures.
In the long run, this enhances rather than erodes trust. Global funds prize jurisdictions that align with OECD BEPS standards, offering transparency and stability over short-term tax arbitrage. Short-term reassessment of deal structures—exit planning, valuations, and indemnity clauses—may be required, but genuine investors face no new retrospective burden. The alternative—continuing to tolerate treaty shopping—would have invited greater uncertainty through endless litigation and international pressure. By choosing substance over shell entities, India is positioning itself as a mature, reliable destination that attracts sustainable, high-quality capital rather than transient flows. For Indian startups, this ultimately strengthens the ecosystem by ensuring foreign funding competes on merit, not tax gimmicks.
In the end, the balance between welcoming global capital and preserving national integrity is delicate yet essential. As I reflect on this interplay:
“Capitalism thrives as an essential vine in today’s interconnected world, its expansive canopy intertwining investments, foreign capital, and global trade to shelter prosperity; yet let it not strangle the sovereign trunk of national laws, especially tax sovereignty, where it must remain pruned by the unyielding blade of justice—for a nation’s identity and will are fundamentally based on its laws, meaning the loss of legal sovereignty erodes that very identity and will, a wound that bleeds deeper than any lost harvest of economic deals or fleeting monetary setbacks.”
This prudent pruning ensures that India’s economic garden flourishes sustainably—yielding enduring prosperity for generations to come.
Author Name- Yash Johari, (A Final Year BBA-LLB Law Student from Jaipur, Rajasthan.)
