Supreme Court on Value of TRC, Grandfathering & GAAR Provisions: A Shift in How Treaty Claims Are Tested

Introduction

The Hon'ble Supreme Court’s ruling in AAR (Income-tax) v. Tiger Global International II Holdings[i] is not merely another decision on the Indian-Mauritius tax treaty (‘DTAA’). At its core, the judgment examines three interconnected questions: the legal weight of a Tax Residency Certificate (‘TRC’), the scope of treaty grandfathering under a. 13(3A), and the role of anti-avoidance principles, both statutory, i.e. general anti-avoidance rules (‘GAAR’), and judicial, i.e. judicial anti-avoidance rules (‘JAAR’), in testing DTAA claims.

While the immediate issue before the Court was narrow, whether the Authority for Advance Rulings (‘AAR’) was justified in refusing to admit the applications under proviso (iii) to s. 245R(2) of the Act, the reasoning travels much further. By permitting a prima facie avoidance enquiry at the admission stage, and by emphasizing substance over form despite the existence of TRCs and treaty protections, the Court has effectively recalibrated how DTAA claims may be scrutinized in India. The decision, therefore, sits at the intersection of treaty certainty, GAAR framework, and the relevance of JAAR in a post-GAAR regime.

Brief Facts

• The Respondents/Assessees were Tiger Global International II Holdings, III Holdings, and IV Holdings (‘Assessees’), private companies incorporated in Mauritius and regulated by the Mauritian Financial Services Commission under a Category I Global Business Licence. The Assessees held shares in Flipkart Pvt. Ltd., Singapore, which derived substantial value from its India-linked business and underlying assets. The Assessees proposed to sell these shares to Fit Holdings S.A.R.L., Luxembourg.

• Before completing the transfer, the Assessees applied under s. 197 of the Income-tax Act, 1961 (‘Act’) for certificates authorizing nil withholding of tax. The Indian tax authorities rejected the claim for treaty benefit at that stage and, by certificates dated 17.08.2018, prescribed withholding rates of approximately 6.05%, 6.92% and 8.47% (entity-wise). The Assessees thereafter approached the AAR under s. 245Q(1) of the Act, seeking a ruling on whether the gains arising from the proposed sale of shares of the Singapore company would be chargeable to tax in India under the Act read with the India-Mauritius DTAA.

• The AAR refused to admit the applications at the threshold, invoking proviso (iii) to s. 245R(2) of the Act, on the ground that the transaction was prima facie designed for the avoidance of income tax. On facts, the AAR recorded that the effective control and management of the Assessees did not genuinely lie in Mauritius. It noted, inter alia, that authority to operate bank accounts above a specified threshold was vested in Mr. Charles P. Coleman and concluded that the ‘head and brain’ of the Assessees was situated outside Mauritius, in the United States.

• The Assessees challenged the AAR’s refusal before the Delhi High Court. The High Court allowed the writ petitions and quashed the AAR’s order. It held that the Assessees, being valid tax residents of Mauritius and satisfying the treaty conditions, including the limitation of benefits clause, were entitled to invoke the India-Mauritius DTAA. The High Court further held that a. 13(3A) of the DTAA grandfathered gains arising from shares acquired prior to 01.04.2017, and that domestic provisions, including r. 10U could not be interpreted in a manner that diluted or overrode the treaty’s grandfathering protection. On this basis, it concluded that the gains were not chargeable to tax in India. Aggrieved by the High Court’s judgment, the Revenue preferred appeals before the Supreme Court.

  
  

Held

• The Supreme Court set aside the High Court’s decision.  It allowed the Revenue’s appeals, treating the matter primarily as one concerning the AAR’s power to refuse admission under proviso (iii) to s. 245R(2) of the Act. It approached the TRC issue through that lens and held that, even where TRCs existed, the AAR could still examine, at least prima facie, whether the arrangement was designed for tax avoidance for the limited purpose of maintainability.

• The Court relied heavily on the AAR’s factual findings on control and management, which, in its view, supported the inference that the Mauritius entities were not genuinely taking independent investment decisions and were being used mainly as treaty vehicles. In effect, the Court treated the TRC as relevant, but not decisive, where the surrounding facts suggested that residence and decision-making were only on paper.

• In doing so, the Apex Court substantially diluted the force of the earlier TRC-based approach reflected in Azadi Bachao Andolan[ii] and the broader substance-form analysis in Vodafone[iii]. The Court reasoned that those decisions could not be read as granting blanket immunity to treaty claims merely because a TRC was available, particularly in the post-amendment regime where domestic anti-avoidance provisions, including s. 90(2A), the GAAR provisions, and related rules, expressly permit scrutiny of abusive arrangements. It also noted that the treaty framework had evolved through later amendments and anti-abuse measures.  Therefore, the Assessees could not rely on the above decisions as conclusive authorities to shut out an enquiry at the threshold.

• With respect to impermissible avoidance arrangements (‘IAA’), the Court upheld AAR’s reliance on proviso (iii) to s. 245R(2) and accepted that it operates as a threshold gatekeeping provision. The Court accepted the AAR’s ‘substance’ indicators as sufficient at the prima facie stage – such as the group structure ultimately linking back to Tiger Global (USA), operational control over larger transactions (including bank operations above USD 2,50,000) being outside Mauritius, and the Assessees’ limited investment footprint (essentially confined to Flipkart) being consistent with a treaty-driven holding structure. On that reasoning, the Court concluded that the AAR was justified in refusing to entertain the applications at all and, accordingly, restored the AAR’s refusal by setting aside the High Court’s judgment.

• A key part of the High Court’s reasoning had been that a. 13(3A) of the India-Mauritius DTAA grandfathered gains arising from shares acquired before 01.04.2017, and that domestic rules such as r. 10U could not be used to dilute or override that treaty protection. The Supreme Court took the opposite direction in substance. It accepted the Revenue’s position that domestic anti-avoidance provisions, including the GAAR framework and, in the alternative, JAAR and substance-over-form principles, could still be relevant even where treaty benefits were claimed, and that treaty grandfathering could not be considered as an absolute immunity if the structure itself appeared to be avoidance-driven.

• The Supreme Court also accepted the Revenue’s argument that the relevant transfer arrangement commenced only in 2018, including the share purchase process and Board approvals, i.e., after the GAAR cut-off date. In that context, it held that the AAR was entitled to examine whether the arrangement, as actually implemented, was prima facie structured to obtain an impermissible tax benefit.

• Notably, the Supreme Court reached this conclusion without determining the capital gains taxability on the merits. Instead, it treated grandfathering and treaty entitlement as part of the overall picture while deciding maintainability: if the arrangement was prima facie designed for tax avoidance, the AAR could refuse to admit the case, and the taxpayer could not insist on a full treaty-entitlement adjudication at the AAR stage.

• The Court also indicated that the AAR’s narrow view, namely, that the treaty exemption applies only where shares of an Indian company are sold, was not the best direction of enquiry. In other words, the Supreme Court did not endorse every aspect of the AAR’s treaty interpretation. However, it still upheld the result because the applications were barred at the threshold by the prima facie avoidance proviso.

  
  

Our Analysis

Even though this judgment is being described as a landmark in international taxation, what actually makes it significant is not just that the Supreme Court adopted a stricter anti-avoidance approach. The deeper issue is the route through which the dispute was resolved. The AAR was statutorily empowered to reject an application at the threshold where the question relates to a transaction or issue ‘designed prima facie’ for the avoidance of income-tax[iv]. The Supreme Court’s decision, therefore, cannot be criticised for recognizing that such a power exists. The more pointed concern is that the Court upheld the AAR’s refusal on the reasoning that, in substance, tracks a GAAR-style enquiry – without the matter ever entering the prescribed GAAR framework in the normal course of assessment proceedings.

Ch. X-A (ss. 95 to 102), read with s. 144BA of the Act was enacted to ensure that allegations of an IAA are addressed through a structured process and with specific safeguards. In broad terms, the Assessing Officer forms a view; the Commissioner issues reasons and hears the assessee; and, if objections survive, the matter goes to the Approving Panel. This Panel is headed by a current or former High Court Judge, with senior tax and academic members, and the Panel’s directions are binding. This design shows that Parliament intended a specialized decision-making filter before an arrangement is finally treated as an IAA and treaty benefits are denied on that basis.

In this decision, however, the matter ended at the AAR admission stage under s. 245R(2) proviso (iii). Yet the reasoning accepted by the Supreme Court moved through concepts of commercial substance, conduit structures, and control and management outside Mauritius – concepts that sit very close to a ch. X-A analysis. This is where the discomfort arises: the decision effectively permits a prima facie avoidance bar at the AAR stage to carry consequences that resemble a GAAR merits outcome, even though the statutory GAAR procedure, with its institutional safeguards, was never triggered.

This concern becomes sharper when one reads s. 97 because this provision does not support a broad conclusion merely because a structure is tax efficient. It lays down a detailed test for when an arrangement lacks commercial substance, such as a mismatch between form and substance, accommodating parties, disguised ownership or control, or residence without a substantial commercial purpose other than tax benefit. It also contains an inbuilt caution in s. 97(4): factors like duration, payment of tax, or an exit route may be relevant, but are not sufficient by themselves. The Supreme Court’s emphasis on offshore control, the Charles Coleman signatory findings, and the see-through nature of the entities speak to the vocabulary of ss. 96 and 97.

The Delhi High Court’s approach appears more disciplined on this. It examined the Board materials, the role of the investment manager, and the evidence of Mauritian operations and decision-making. It also analysed the TRC, limitation of benefits clause, and a. 13(3A) grandfathering within the treaty framework, instead of collapsing everything into a threshold avoidance conclusion. In that sense, the High Court’s reasoning was treaty-text driven and institutionally coherent. The concern with the Supreme Court decision is therefore not that anti-avoidance scrutiny is impermissible, but that a prima facie AAR bar was permitted to do much of the work of a full GAAR adjudication, while also substantially narrowing the comfort earlier associated with Azadi Bachao Andolan (supra) and, to an extent, Vodafone (supra).

End Notes

[i] 2026 SCC OnLine SC 86 dated 15.01.2026

[ii] Union of India v. Azadi Bachao Andolan, [2003] 263 ITR 706 (SC)

[iii] Vodafone International Holdings B.V. v. Union of India, [2012] 341 ITR 1 (SC)

[iv] Proviso (iii) to s. 245R(2), Income-tax Act, 1961

Authored by Srishty Jaura, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.