MC EXPLAINER Tiger Global ruling: How the Supreme Court ruling changed India’s tax treaty playbook

Supreme Court

The Supreme Court’s ruling in the Tiger Global case has major implications for how foreign investors rely on tax treaties while investing in and exiting India. By placing economic reality above legal form, the court has said treaty benefits cannot be claimed through shell or pass-through entities that lack genuine commercial substance, even if they hold valid Tax Residency Certificates.

For more than two decades, investors structured deals around the comfort that treaty residency, backed by a certificate, was enough to secure capital gains tax protection. That assumption no longer holds.

The case arose from Tiger Global’s stake sale in Flipkart, which was routed through a Mauritius entity. The structure relied on the India–Mauritius Double Taxation Avoidance Agreement, which allowed capital gains on shares acquired before April 1, 2017 to be exempt from tax in India under a grandfathering clause. The Mauritius entity used its Tax Residency Certificate to claim this benefit.

Indian tax authorities challenged the structure, saying the Mauritius company did not operate as an independent business and existed mainly to route investments, while real control rested with Tiger Global in the US. A lower court had earlier accepted Tiger Global’s position. The Supreme Court has now reversed that finding.

What the Supreme Court said

In its judgment, the court examined the tax treaty, earlier government circulars on residency certificates, its own past rulings in Azadi Bachao Andolan and Vodafone, the General Anti-Avoidance Rules (GAAR), and the 2016 amendment to the India–Mauritius treaty.

It said paperwork alone cannot determine tax outcomes. What matters is where decisions are taken, who controls the entity, and whether it carries out real commercial activity. If a company merely exists to channel investments, it can be treated as a conduit and denied treaty benefits.

The court also held that older CBDT circulars that once gave near-absolute importance to Tax Residency Certificates cannot override later changes in law and treaty policy aimed at preventing abuse.

Grandfathering is no longer automatic

One of the most significant consequences of the ruling concerns grandfathering protection.

The court has made it clear that this protection is conditional. Before claiming any treaty benefit, including exemption for pre-2017 investments, an entity must establish that it is a genuine resident with real commercial substance. If the structure is artificial or designed mainly to avoid tax, the protection disappears altogether, regardless of when the investment was made.

This means even old investments can lose their tax shield if the structure itself is held to be a sham.

Diminished role of TRC

The judgment also weakens the status of the Tax Residency Certificate.

For years, investors treated the TRC as conclusive proof that treaty benefits could not be questioned. The Supreme Court has rejected this approach, saying the certificate is not a “magic wand”. Authorities are free to examine who actually runs the company and where strategic decisions are made.

A TRC remains necessary documentation, but it is no longer sufficient on its own.

GAAR in spirit

Hemen Asher, Partner, Bhuta Shah & Co. LLP, said the court appears to have applied General Anti-Avoidance Rules (GAAR) logic while reaching its conclusion. He also pointed out that the Income Tax Act lays down a detailed process for invoking GAAR, making it important to see how the court reconciles this approach in the full text of the judgment.

Although GAAR was not formally invoked in the case, the reasoning closely mirrors anti-avoidance principles built into those rules, Asher added.

Impact on past deals and exits

The ruling is likely to reopen uncomfortable questions around earlier private equity and venture capital exits routed through treaty jurisdictions such as Mauritius.

Where structures were thinly staffed, lightly capitalised, or existed mainly for tax reasons, authorities may now seek to re-examine them using the reasoning laid down by the Supreme Court. The certainty that treaties and grandfathering once provided in such cases has been weakened.

What this means for investors

For foreign investors, the decision changes how India’s risk profile is calculated.

“This judgement is a huge setback for foreign investors who have invested in India under the FDI and FPI route. The tax certainty and the overriding validity of the TRC, which the courts have upheld all these years, is no longer available,” Asher said. He added that global investors would now need to factor potential capital gains tax costs directly into their financial models.

This is expected to influence startup exit valuations, deal negotiations, and the design of investment structures, with tax risk becoming an explicit commercial variable rather than a remote legal possibility. The ruling also puts complex holding structures under pressure.

“This judgment reinforces the primacy of substance over form and forces companies to re-examine layered structures, whether built in the past or planned for the future, to ensure they are based on genuine commercial purpose,” Ritika Nayyar, Partner, Singhania & Co., told Moneycontrol.

She added that it expands the ability of tax authorities to look through even deep corporate layers and strengthens India’s capacity to tax gains that arise from a direct or indirect economic link with the country.