The end of treaty shopping? How India’s Tiger Global judgment is reshaping PE and VC exit structures

Gaurav Arora

JSA, Gurugram

gaurav.arora@jsalaw.com

Garv Arora

HNLU, Raipur

garv.hnlu@gmail.com

Introduction: a turning point in exit taxation

The Supreme Court of India’s (Supreme Court) judgment in Authority for Advance Rulings v Tiger Global International II Holdings[1] (Tiger Global) marks a significant development in the taxation of cross-border private equity (PE) and venture capital (VC) exits. Traditionally, PE and VC investors structured India-bound investments through intermediary holding companies set up in tax-friendly jurisdictions. These structures were widely accepted under earlier jurisprudence and provided meaningful certainty for international tax planning.

Tiger Global departs from this tradition in important respects. It signals a decisive shift toward substance-oriented treaty interpretation, at least where the underlying structure lacks demonstrable commercial substance. The Supreme Court clarified that foreign investors cannot rely solely on tax residency certificates (TRCs) to claim treaty benefits, particularly where general anti-avoidance rules (GAAR) scrutiny is attracted. Further, India’s GAAR may apply to arrangements where the tax benefit arises after 1 April 2017, even if the underlying investment predates that cut-off. The ruling reopens fundamental questions about the limits of treaty shopping, the proper role of GAAR and the permissibility of offshore investment structures.

The traditional treaty-based investment model

Historically, treaty jurisdictions such as Mauritius provided certainty through double taxation avoidance agreements (DTAAs) – such as the India–Mauritius Tax Treaty[2] – in relation to investments in India that were routed through Mauritius. Under the treaty (prior to its 2016 amendment), capital gains arising from the sale of Indian shares were taxable exclusively in the investor’s country of residence, reflecting a residence-based taxation regime. Since Mauritius imposed no tax on such gains,[3] the effective tax burden on exits was substantially reduced.

As a result, many PE and VC investors adopted a two-tier structure wherein the ultimate investor was located in a global financial centre such as the United States, with the Indian investment held through a Mauritius-based holding company. These structures were not merely tax-efficient; they were also considered legally robust, having been endorsed by the Supreme Court in Union of India v Azadi Bachao Andolan.[4] In that case, the Supreme Court held that the mere fact that an entity is located in Mauritius, or that investments were routed through that jurisdiction, cannot by itself justify denial of treaty benefits. This strategy subsequently became a standard framework for international PE and VC investment into India.

The core dispute: substance, control, and indirect transfers

The dispute arose from Tiger Global’s investment structure and its exit during Walmart’s 2018 acquisition of Flipkart. Tiger Global-managed funds, organised in the Cayman Islands, owned Mauritius-based intermediate entities, which in turn owned Tiger Global International II, III and IV Holdings – three Mauritius-incorporated holding companies (the assessees). These assessees held shares in Flipkart Singapore, the immediate parent of the Indian e-commerce business, and held global business licences and tax residency certificates (TRCs) issued by Mauritian authorities.

On Walmart’s acquisition of Flipkart in 2018, the assessees sold their Flipkart Singapore shares to Fit Holdings SARL, a Luxembourg-incorporated entity owned by Walmart. Substantial capital gains resulted, and the assessees claimed an exemption on gains of approximately INR 1.45bn, of which nearly INR 9.67bn had been withheld at source by the Indian Income Tax Department.

The matter first came before the Authority for Advance Rulings (AAR), which rejected the assessees’ application under section 245R(2)(iii) of the Income Tax Act 1961[5] on the threshold ground that the structure was prima facie designed to avoid tax. Following proceedings before the Delhi High Court,[6] the matter was ultimately adjudicated by the Supreme Court, which upheld the AAR’s position and concluded that the arrangement constituted an impermissible avoidance arrangement within the meaning of GAAR.

A critical structural issue concerned Article 13 of the India–Mauritius DTAA. Article 13(3A), which contains the grandfathering and limitation of benefits (LOB) provisions introduced by the 2016 Protocol, was interpreted by the Supreme Court as applying to direct transfers of shares of Indian companies. The assessees’ transaction involved an indirect transfer through Flipkart Singapore, which the Supreme Court analysed under the residuary Article 13(4). On this interpretation, the specific grandfathering protection under Article 13(3A) was held to be unavailable on the facts.

The GAAR overlay: a new layer of scrutiny

Tiger Global brings GAAR to the forefront of treaty analysis in exit transactions. GAAR permits tax authorities to examine the real purpose and commercial substance of an arrangement and to disregard it where it constitutes an impermissible avoidance arrangement.

Under Rule 10U(1)(d) of the Income Tax Rules, 1962,[7] GAAR does not apply to investments made before 1 April 2017. However, the Supreme Court read this together with Rule 10U(2),[8] which provides that GAAR applies to any arrangement in respect of a tax benefit obtained on or after 1 April 2017. The Supreme Court concluded that where the tax benefit – such as exemption of capital gains – arises upon an exit after 1 April 2017, GAAR may be invoked even if the original investment predates that cut-off. This interpretation will probably remain an area of close scrutiny in future cases.

Importantly, the Supreme Court also indicated that judicial anti-avoidance principles (JAAR), including substance-over-form doctrines developed in earlier case law,[9] continue to inform treaty analysis. While GAAR is now the primary statutory framework, the judgment suggests that the grandfathering cut-off under Rule 10U(1)(d) does not operate as an absolute safe harbour against all forms of anti-avoidance scrutiny.

The statutory basis for GAAR overriding treaty benefits is section 90(2A) of the Income Tax Act 1961,[10] which provides that GAAR applies notwithstanding anything contained in a tax treaty. The Supreme Court’s reading of this provision confirms that treaty protections may yield where an arrangement constitutes an impermissible avoidance arrangement.

On TRCs specifically, CBDT Circular No 789 (2000)[11] had earlier treated a TRC as sufficient evidence of residence for treaty purposes. Following the 2013 insertion of section 90(5),[12] assessees are required to furnish prescribed information in addition to a TRC. In Tiger Global, the Supreme Court clarified that a TRC is not conclusive in the face of GAAR scrutiny and cannot by itself establish treaty entitlement where the arrangement lacks commercial substance. To that extent, Circular 789 cannot shield an arrangement from statutory anti-avoidance review.

A structural shift in PE and VC exit planning: key implications

Tiger Global holds significance beyond its immediate facts and is likely to influence future structuring decisions.

Exit taxation risk must be assessed at the outset

Investors must evaluate exit taxation risk – including potential GAAR exposure – at the time of initial structuring, rather than treating exit tax analysis as a later-stage exercise.

Treaty benefits are not automatic

A TRC or incorporation in a treaty jurisdiction is not, by itself, determinative. Treaty-based holding structures must be supported by demonstrable commercial substance, effective management and a defensible business rationale.

Substance over shell structures

Intermediary entities must demonstrate genuine commercial substance. Section 97 of the Income Tax Act 1961[13] defines ‘lack of commercial substance’ to include arrangements that produce no significant effect on business risks or cash flows apart from tax benefits, involve round-trip financing or rely on accommodating parties. These statutory criteria will probably receive increased attention in exit scenarios.

Increased buyer-side tax sensitivity

Acquirers may face withholding exposure if treaty benefits are later denied. This may lead to greater use of indemnities, escrow arrangements and more intensive tax due diligence in acquisition processes.

GAAR as a treaty override mechanism

GAAR can override treaty claims under section 90(2A), and it may apply where the tax benefit arises after 1 April 1 2017. Investors cannot assume that treaty claims based on pre–2017 structures are immune from challenges without examining substance and purpose.

Toward a new paradigm of scrutiny

Tiger Global does not eliminate treaty-based investment structuring. However, it makes clear that treaty entitlement is not automatic and may be denied where arrangements lack commercial substance or are primarily tax-driven. Investors who can demonstrate genuine commercial substance, effective management and control in the treaty jurisdiction, and a credible non-tax business rationale, may still claim treaty benefits.

Open questions remain. The Supreme Court’s interpretation of Article 13(4), and its interaction with the grandfathering regime, may invite further debate in the context of other treaties such as the India–Singapore DTAA. The doctrinal relationship between Tiger Global and Azadi Bachao Andolan, particularly regarding residence and entitlement standards, will probably continue to evolve in future litigation. Additionally, as the principal purpose test under the OECD’s Multilateral Instrument becomes increasingly operational for India, scrutiny of treaty benefit claims may intensify further.

For PE and VC investors, the message is clear: investment structure, exit strategy and GAAR exposure must now be assessed together, at the outset, with demonstrable commercial substance as the foundation.