OPINION | From Form to Substance: A reset in M&A and cross-border taxation 

The continuing challenge lies in ensuring that the emphasis on substance strengthens the integrity of the tax system

For decades, India’s M&A and cross-border transaction landscape has operated within a delicate balance. While tax litigation has never been entirely predictable, investors and dealmakers broadly relied on settled statutory interpretations, treaty positions and judicial principles to assess risk and price transactions.  

Recent rulings point to a more substantive evaluation of tax outcomes. The underlying shift is clear: Legal form, by itself, is no longer sufficient; commercial substance, intent, and economic reality have assumed greater significance in determining tax consequences.

Tiger Global Ruling: Treaty protection and substance

The Supreme Court’s ruling in the Tiger Global case arose from the sale of shares of an offshore holding company that ultimately derived value from an Indian business. The investor relied on treaty protection, supported by a tax residency certificate from a treaty jurisdiction, to claim exemption from Indian capital gains tax. While such certificates were traditionally treated as strong evidence of treaty entitlement and provided a degree of certainty in structuring India exposure, the Court clarified that treaty protection is not automatic and may be denied where the overall arrangement lacks sufficient commercial substance or is viewed as primarily tax-driven.

This reasoning has direct relevance for inbound M&A and indirect transfer structures. Earlier, offshore sales through multi-layer holding structures were often regarded as falling outside India’s tax net where treaty protection was claimed, even if substantial value was derived from Indian assets. The ruling clarifies that an offshore sale, by itself, does not preclude Indian taxation where the intermediary structure lacks real economic presence, and that India’s indirect transfer provisions may apply notwithstanding treaty language allocating taxing rights to the state of residence.

The implications extend beyond share sales. The same analytical approach may apply to instruments that historically fell within residual taxing provisions under treaties and were therefore generally taxable only in the investor’s country of residence. These include units of mutual funds, AIFs, REITs and InvITs, derivatives traded in the F&O segment, and other financial instruments that have relied on treaty allocation for tax efficiency. Non-share instruments such as compulsorily convertible debentures, commonly used in private equity and structured investments, may also warrant re-examination where treaty protection is claimed without corresponding commercial substance.

For funds and market participants operating through offshore pooling vehicles with limited operational presence, the ruling raises important considerations. While the objective of addressing treaty abuse is well recognised, the breadth of potential exposure highlights the need for clarity on how substance thresholds will be applied across asset classes. The reasoning also has forward-looking relevance for India’s evolving financial ecosystem, including GIFT City. Although GIFT City offers tax incentives under domestic law rather than treaties, the emphasis on substance suggests that exemption-driven regimes will likewise need to be supported by genuine commercial activity and decision-making.

Binny Bansal Ruling: Individual tax residency and transactions: The Binny Bansal ruling relates to the tax residency of an individual promoter in the context of a high-value cross-border exit. The taxpayer claimed non-resident status and treaty relief, arguing that he had relocated overseas, which the Tribunal rejected.

In reaching its conclusion, the Tribunal applied legal tests: physical presence in India, centre of vital interests, and continuity of economic and personal ties. The ruling reiterates that relocation, by itself, is not conclusive. Residential status is assessed holistically, based on facts and circumstances.

For M&A transactions, particularly promoter-driven and private equity-backed deals, this has practical implications. Where promoter-level gains form a significant part of the transaction economics, individual tax residency directly affects tax incidence and cash flows. As a result, such issues increasingly need to be factored into transaction planning, representations and risk allocation mechanisms, rather than being treated as personal compliance matters after closing.

Hinduja Case: GAAR and NCLT-approved restructurings: The Hinduja Group case involved a demerger that had complied with statutory requirements and received approval from the National Company Law Tribunal. Despite this, the tax authorities invoked the General Anti-Avoidance Rules (GAAR), alleging that the arrangement resulted in significant tax benefits without sufficient commercial justification.

While interim relief has been granted, the case highlights an important point: company law approval does not, by itself, preclude tax authorities from examining a transaction under GAAR. Where restructurings rely on provisions permitting tax-neutral treatment or carry-forward of losses, GAAR introduces an additional layer of scrutiny focused on purpose and commercial rationale.

For large group restructurings, especially those undertaken ahead of listings, spin-offs or private equity exits, this underscores the importance of aligning transaction steps with clear business objectives and maintaining robust documentation to support commercial intent.

Jindal Equipment Ruling: Business Income on Amalgamation, if Shares held as Stock-in-Trade: In Jindal Equipment, the Supreme Court examined whether shares received on amalgamation could be taxed where the original shares were held as stock-in-trade. Although the share substitution arose as part of a NCLT-approved scheme and not an independent or conventional transfer, the Court held that receipt of shares of the amalgamated company would constitute business income since the shares were held as stock-in-trade and not as capital asset. The focus was on commercial realisation, including the determinable value of the substituted shares and the taxpayer’s ability to monetise them.

From a transaction perspective, the ruling is relevant for amalgamations and similar reorganisations involving investment entities, NBFCs, AIFs and share-trading businesses. It highlights that asset characterisation remains relevant even within a statutory scheme, and that assumptions of tax neutrality in NCLT-approved amalgamations may warrant closer examination where the substituted consideration is capable of immediate realisation.

A broader recalibration

Taken together, these rulings reflect a shift from relatively settled interpretative positions towards a more contextual assessment of purpose, substance and economic effect, broadly aligned with global anti-avoidance trends. At the same time, they place greater emphasis on consistency and clarity in application, particularly where established principles have historically guided transaction structuring and pricing.

For M&A and cross-border transactions, the implications are practical. Structures must be defensible not only in legal form but also in commercial rationale. Tax modelling increasingly needs to account for interpretative variability, while documentation, intent and sequencing assume greater importance. In high-value transactions, evolving tax positions can influence risk allocation, including indemnities, escrows and deal timelines.

India remains an attractive investment destination, and the direction of reform is aligned with international best practices. The continuing challenge lies in ensuring that the emphasis on substance strengthens the integrity of the tax system while preserving the predictability that remains important for long-term capital formation and sustainable deal-making.

(Binoy Parikh, Partner, Katalyst Advisors.)

Views are personal and do not represent the stand of this publication.