Income Tax Act | TRC Not Conclusive; GAAR Overrides Treaty Abuse in ‘Prima Facie’ Avoidance Arrangements: Supreme Court

“The TRC relied upon by the applicant is non-decisive, ambiguous and ambulatory, merely recording futuristic assertions without any independent verification. Thus, the TRC lacks the qualities of a binding order issued by an authority.”— In a seminal ruling the Supreme Court of India, comprising Justice J.B. Pardiwala and Justice R. Mahadevan, has allowed the Revenue’s appeal against Tiger Global, holding that the mere possession of a Tax Residency Certificate (TRC) does not prevent an enquiry into tax fraud or avoidance, particularly in the post-GAAR regime.

The Controversy: The Flipkart Share Sale

The dispute arose from the sale of shares of Flipkart Private Limited (Singapore) by Mauritius-based entities (Tiger Global International II, III, and IV Holdings) to Walmart (Luxembourg). The shares derived substantial value from assets located in India. The assessees sought an Advance Ruling on the non-taxability of capital gains in India, claiming exemption under Article 13(4) of the India-Mauritius Double Taxation Avoidance Agreement (DTAA).

The Authority for Advance Rulings (AAR) rejected the application at the threshold under the proviso to Section 245R(2) of the Income Tax Act, 1961, terming the transaction as prima facie designed for tax avoidance. The AAR found that the "head and brain" of the companies lay not in Mauritius, but in the USA with Mr. Charles P. Coleman. The Delhi High Court subsequently reversed the AAR’s decision, holding the transaction was "grandfathered" and that the TRC was conclusive proof of residency.

“The object of the DTAA is to prevent double taxation and not to facilitate avoidance or evasion of tax.”

The Paradigm Shift: GAAR and the Dilution of TRC Sanctity

In a judgment that effectively recalibrates the principles laid down in Azadi Bachao Andolan and Vodafone, the Supreme Court held that the legislative landscape has undergone a "sea change" with the introduction of Chapter X-A (General Anti-Avoidance Rule - GAAR) and the 2017 amendments to the DTAA.

Justice Mahadevan, writing for the Bench, clarified that while Circular No. 789 of 2000 made TRC conclusive in the pre-amendment era, the introduction of Section 90(2A) and Section 90(5) has altered the position. The Court held that a TRC is merely an eligibility condition, not sufficient evidence to preclude scrutiny. If the "substance over form" test reveals that the Mauritius entity is a mere conduit with no commercial substance, treaty benefits can be denied.

Grandfathering under Rule 10U: The "Arrangement" Trap

A critical aspect of the ruling is the interpretation of Rule 10U of the Income Tax Rules. The assessees argued that since the shares were acquired prior to April 1, 2017, the investments were grandfathered under Rule 10U(1)(d).

Rejecting this, the Supreme Court drew a distinction between "investments" and "arrangements." The Court relied on Rule 10U(2), holding that the grandfathering clause stands diluted if a tax benefit is obtained from an "arrangement" on or after April 1, 2017. Since the sale to Walmart occurred in 2018, the Court held that the transaction fell within the GAAR scrutiny net, rendering the duration of the holding irrelevant if the structure was impermissible.

“The circulars, having since been superseded by statutory amendments, will not come to the aid of the respondents.”

Prima Facie Avoidance and the "Head and Brain" Test

The Court upheld the AAR’s finding that the effective control and management of the Tiger Global entities were exercised from the USA, not Mauritius. The Court noted that the Mauritius entities were "see-through" vehicles with no independent decision-making power, established primarily to avail treaty benefits. Consequently, the bar under Section 245R(2)(iii)—which mandates rejection of an application if the transaction is prima facie designed for tax avoidance—was squarely applicable.

Justice Pardiwala’s Concurrence: A Manifesto on Tax Sovereignty

In a powerful concurring opinion, Justice J.B. Pardiwala emphasized the concept of "Tax Sovereignty." He observed that in an era of geo-economic uncertainty, nations must retain the sovereign right to tax income generated within their territory.

Justice Pardiwala cautioned against "treaty shopping" and "round-tripping," stating that tax evasion under the guise of international agreements weakens a nation’s security. He advocated for a dynamic interpretation of treaties that matches progressive global business dynamics, rather than being fenced by archaic interpretations. He concluded that India’s right to tax the "real" transaction cannot be compromised by artificial structures.

“Tax evasion and tax abuse resulting in economic disorder is itself a huge sign of weakness for a Nation.”

The Supreme Court set aside the Delhi High Court’s judgment and restored the AAR’s order rejecting the application. The ruling establishes that post-2017, the Department is empowered to look through corporate structures to ascertain the "beneficial owner" and apply domestic law to global income if the arrangement lacks commercial substance, regardless of the existence of a TRC.

Date of Decision: January 15, 2026