ON January 15, 2026, the Supreme Court of India - 2026-TII-01-SC-INTL seems to have finally laid the ghost of Azadi, Vodafone and CBDT circular 789 to rest. It was a very comforting world for India's tax planning community - form a company in Mauritius, get a GBL-1 licence from the Mauritian authorities, get a tax residency certificate based on whatever the company chose to declare and voila, no further questions could be asked by Indian tax authorities and the benefits under the India-Mauritius tax treaty will start to flow and how dare the Indian Revenue question that!

The latest Supreme Court judgement seems to have put paid to this cozy world. It is as if the judgement has set the proverbial cat among the pigeons and the reaction from the enabling community has been vociferous - with the usual prediction of doom and gloom for foreign investors in India.

It is therefore important to discern what the Supreme Court actually decided and not rely on varying interpretations. But before that a brief recapitulation of the case will be in order. Helpfully, the top Court has divided its order in VII sections - Introduction, Brief Facts, Findings of the lower courts, contentions of the parties, Analysis containing issues for consideration, legal background followed by discussion and findings, conclusion, and Result.

The litigants in this case are three unlisted companies - Tiger Global International II Holdings, Tiger Global III Holdings and Tiger Global IV Holdings, all registered in Mauritius, holding GBL-1 Licence issued by Mauritius Financial Services Authority. The companies were set up for undertaking long term investments activities for the purpose of earning long term capital appreciation and investment income. It was contended that the business of the Mauritian companies was controlled and managed by a Board of Directors comprising two Mauritian residents and one from the USA and as required by the Mauritian Financial Services Authority (FSA), they maintain principal bank account in Mauritius, prepare their financial statements in Mauritius, have an office premise in Mauritius, and even employ two local persons. In other words, all the conditions of the FSA are satisfied. Besides, they hold the all-important Tax Residency Certificate (TRC) issued by Mauritius Revenue Authority certifying them as residents of Mauritius for income tax purposes thereby entitling them to avail of the benefits of the tax treaties of Mauritius.

All the three holding companies apparently engaged an American company - Tiger Global Management LLC to provide services in relation to their investment activities. All the three held shares of Flipkart Private company then registered in Singapore, which company invested in companies in India. As is well known, Flipkart was acquired by Walmart through the acquisition of the shares of different shareholders including from the Mauritius registered Tiger Global Holding Companies.

Naturally the question of capital gains and their taxability arose and the Tiger Global holding companies approached tax officer under section 197 for certificate of nil withholding tax. The tax department as usual played spoilsport and refused to grant such a certificate on the ground that the Mauritius companies were not independent in their decision making and the control over the decision making of the purchase and sale of the shares did not lie with them but rested with one Charles P Coleman of the USA, the sole director of the ultimate holding company. It was Mr Coleman who was named as the beneficial owner of the Mauritian companies in the filings with the Mauritius FSA. He along with another US based person had the signing authority of cheques of any substantial amounts. The revenue therefore asked the applicant companies to withhold tax at varying rates from ~ 6-8%. Thereupon, these companies approached the AAR with the following question:

"Whether, on the facts and circumstances of the case, gains arising to the assessees (private companies incorporated in Mauritius) from the sale of shares held by them in Flipkart Pvt. Ltd (a private company incorporated in Singapore) to Fit Holdings S.A.R.L. (a company incorporated in Luxembourg) would be chargeable to tax in India under the Act read with the DTAA between India and Mauritius?"

Section 245R lays down the procedure to be followed by the AAR on receipt of an application for advance ruling. Sub-section 2 of the said section is relevant for our discussion and states as follows:

245R (2)

The Authority may, after examining the application and the records called for, by order either allow or reject the application:

Provided that the Authority shall not allow the application where the question raised in the application:

(i) is already behind before any income-tax authority or Appellate Tribunal except in case of a resident applicant falling in sub-clause (iii) of clause (b) of Section 45N or any court;

(ii) involves market value of any property

(iii) relates to a transaction or issue which is prima facie for the avoidance of income tax except in case of a resident applicant falling under sub-clause (iii) of clause (b) of Section 245N or in case of an applicant falling in sub-clause (iiia) of clause (b) of Section 245N.

The AAR on consideration of the submissions of the taxpayers and considering the report by the CIT and based on facts brought on record by the parties and more particularly the CIT who produced the records submitted by the taxpayers before the Mauritian authorities for obtaining the GBL License, came to a prima-facie conclusion that the structure put in by the taxpayers were for the purpose of tax avoidance and hence declined to entertain the application with the result that the taxpayers were required to withhold taxes at the rates specified by the tax authorities.

Thereafter, the taxpayers approached the Delhi High Court in a writ petition and the Delhi High Court by its order dated 28th August 2028 quashed the ruling of the AAR and allowed the writ. The High Court principally relying on the old CBDT circular no 789 of 2000 held that the taxpayers were entitled to the treaty benefits. The High court also held that the TRC issued by the Mauritian authorities could not be challenged by the Indian revenue and that the GAAR provisions introduced in 2012 and effective from 2017 would not also apply, the investments in question having been grandfathered by the revised India-Mauritius tax treaty and that domestic legislation cannot override a tax treaty. In my analysis of the High Court order, (The Delhi High Court decision in the case of Tiger Global-An analysis ) in the concluding part, I had mentioned the following:

		This finding is also obviously problematic as it calls into question the sovereign powers of a State to legislate and the explicit mandate of section 90(2A). Besides, such an interpretation will render Rule 10U (2) nugatory.
		That apart, there are other aspects like lifting of corporate veil of a subsidiary when the actions of the holding companies themselves indicate that the separate corporate existence was not respected. One more troubling aspect is the status given to the TRC as a conclusive proof of both beneficial ownerships as also of entitlement to treaty benefits. The matter is already before the Supreme Court in another case. It is very likely that this case will also end up in the Supreme Court since important questions of law indeed arise.

As we have seen earlier, the case indeed went up to the Supreme Court and it is heartening to see that the Supreme Court, in its order has also considered these concerns.

The question that the Supreme Court framed for adjudication was as follows:

"Whether the AAR was right in rejecting the applications for Advance Ruling on the ground of maintainability, by treating the capital gains arising out of a transaction of sale of shares of a Singapore Co., which holds the shares of an Indian company, by a Mauritian company controlled by an American company, to be prima facie an arrangement for tax avoidance, and hence, whether it can be enquired into to ascertain whether the capital gains would be taxable in India under the Income Tax Act read with the relevant provisions of the Mauritius Treaty or not?" (Emphasis added)

The AAR had concluded as follows:

"The applicants have contended that shares of the Singapore Company derived their value substantially from assets located in India and, therefore, it was eligible to take benefit of Article 13 (4) of India - Mauritius Treaty.

Even if the Singapore Company derived its value from the assets located in India, the fact remains that what the applicants had transferred was shares of Singapore Company and not that of an Indian company.

The objective of India-Mauritius DTAA was to allow exemption of capital gains on transfer of shares of Indian company only and any such exemption on transfer of shares of the company not resident in India, was never intended by the legislator. (Emphasis added)

Further, as discussed earlier the actual control and management of the applicants was not in Mauritius but in USA with Mr. Charles P. Coleman, the beneficial owner of the entire group structure.

Therefore, we have no hesitation to conclude that the entire arrangement made by the applicants was with an intention to claim benefit under India - Mauritius DTAA, which was not intended by the lawmakers, and such an arrangement was nothing but an arrangement for avoidance of tax in India. Therefore, the bar under clause (iii) to proviso to Section 245R (2) of the Act is found to be squarely applicable to the present cases. Accordingly, the applications are rejected."

It was a prima facie determination by the AAR that the transactions were for the avoidance of tax. The taxpayers could have disproved the same in the regular proceedings but chose to rely on the extraordinary writ jurisdiction of the High Court.

The Supreme Court in its order deliberated on the nature of a prima-facie determination by the AAR. In particular, the Court referred to its decision in Martin Burn Ltd. v. R.N. Banerjee MANU/SC/0081/1957: AIR 1958 SC 79, following Buckingham and Carnatic Co., Ltd. Case 1952 L.A.C. 490.", while considering whether a prima facie case is made out or not. In that case, inter-alia, it was held:

"A prima facie case does not mean a case proved to the hilt but a case which can be said to be established if the evidence which is led in support of the same were believed. While determining whether a prima facie case had been made out the relevant consideration is whether on the evidence led it was possible to arrive at the conclusion in question and not whether that was the only conclusion which could be arrived at on that evidence. It may be that the Tribunal considering this question may itself have arrived at a different conclusion. It has, however, not to substitute its own judgment for the judgment in question. It has only got to consider whether the view taken is a possible view on the evidence on the record. (Emphasis added)

The use of the term "prima facie" implies that it is sufficient if the AAR, on an initial examination of the documents, is satisfied that the transaction is for avoidance of income tax and can reject the application. The provision is couched in such a way that the burden lies on the person claiming a particular fact, and such prima facie opinion is sufficient to reject the application. The level of satisfaction required to arrive at a prima facie conclusion is much less when compared to a case where a fact has to be proved."

Regarding the determination by the AAR, the SC observed:

In the present case, the AAR invoking Section 245R (2), rejected the applications of the non-resident applicants on the ground that the transaction was prima facie for the avoidance of income tax. The AAR relied upon the method of operation to ascertain the effective control and management of the applicants to hold that the effective management was not in Mauritius and was, in fact, with Mr. Charles P. Coleman in the USA. Having coming to this conclusion, the emphasis then shifts to the identity of the assessees in the transaction for the purpose of exemption, and the enquiry of the AAR into whether the shares sold were those of an Indian company pale into insignificance. Once taxability has been established on the basis that the shares sold derive their value from shares or assets in India, the AAR, basing its reasoning for rejection of exemption to the assessees only on the ground that the sale of shares was not that of an Indian company, may be an enquiry in the wrong direction. The validity of such rejection must be examined in the light of the statutory threshold prescribed under Section 245R (2).( para.33)

Naturally, therefore, the Supreme Court had also to go into all these aspects including analysis of tax treaty provisions, the earlier Supreme Court rulings and their continued applicability after various legislative amendments including the amendments to overcome the Vodafone decision, the introduction of GAAR and changes in section 90 etc. In the process, the Supreme Court cleared the accumulated cobwebs that had gathered in course of the years and restated the basic international tax jurisprudence. The order of the Supreme Court touches almost every area of international taxation and cannot be covered in a single post. However, some of the most salient issues discussed therein are as follows:

The object of a DTAA is not facilitating tax avoidance

The object of the DTAA is to prevent double taxation and not to facilitate avoidance or evasion of tax. The amendments to the India-Mauritius Double taxation avoidance Agreement, were introduced precisely to prevent revenue loss to the State where the gains actually arise, by abuse of the Treaty. The assessee, hence, has to establish that it is a resident of the Contracting State covered by the DTAA by producing all relevant document (para. 19)

Enquiry regarding residence of a contracting state

As the provisions have undergone a sea change by amendments to Chapter IX, Chapter XA of the Act and Rule 10U, the assessing officers under the Indian Income-tax Act, 1961 are now empowered to determine where taxable entities are really resident by investigating the centre of their management, and thereafter to apply the provisions of the Act to the global income earned by them by reason of Sections 4 and 5. The amendments to the Act, the Rules, and the terms of the agreement which have enabled strict scrutiny, cannot be ignored, and relief cannot be ipso facto granted (para.29)

The blind reliance on earlier Circulars and TRC.

No doubt, the provisions of Sections 4 and 5 of the Act are expressly made subject to the provisions of the Act, which would include Section 90. The judicial consensus in India has been that Section 90 is specifically intended to enable and empower the Central Government to issue a notification for the implementation of the terms of a DTAA. However, the amendments subsequent to the Vodafone to Chapter IX, the insertion of Chapter XA, the amendments to Rule 10U, and the DTAA have completely changed the scenario. Circulars issued earlier, though binding on the Revenue at the time of their issuance, operate only within the legal regime in which they were issued and cannot override subsequent statutory amendments. It is equally settled law that Parliament is well within its right to bring in a law, either by amendment, substitution, or introduction so as to remove the basis of a judicial decision. (para.27)

After the amendment has come into effect, there can be no doubt whatsoever that a TRC alone is not sufficient to avail the benefits under the DTAA, and reliance upon earlier judgments dealing with circulars issued in the pre amendment regime cannot ipso facto apply in every case. Rather, the facts will have to be independently analysed to decide on the applicability of Chapter XA. (para.27)

Can a TRC prevent an enquiry?

Undoubtedly, the mere holding of a TRC cannot, by itself, prevent an enquiry subsequent to the amendments brought into the statute, particularly by the introduction of Section 90 (2A) and Chapter XA to the Act and the Rules, if it is established that the interposed entity was a device to avoid tax. We do not find the terms of the DTAA to be contrary to the provisions of the Income-tax Act and the Rules. We also do not find the terms of the DTAA, as amended, to be contrary to the provisions of the Income-tax Act and the Rules. It is reiterated that the circulars, having since been superseded by statutory amendments, will not come to the aid of the respondents (para.43)

Is TRC an order of any authority? Is it binding on courts?

Section 90(4) of the Act only speaks of the TRC as an "eligibility condition". It does not state that a TRC is "sufficient" evidence of residency, which is a slightly higher threshold. The TRC is not binding on any statutory authority or Court unless the authority or Court enquires into it and comes to its own independent conclusion. 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. (para.37)

Applicability of Article 13(4) of the India-Mauritius tax treaty to indirect sale

On a combined reading, it seems clear that for the benefit under Article 13(4), the person claiming treaty protection must not only qualify as a "resident" of the other State i.e., Mauritius, but also establish that the movable property or shares forming the subject matter of the transaction are directly held by such resident entity. In all other cases, the transaction is taxable in India, where the capital gains arise out of the disposition of movable property, including movable property forming part of the business property held by a permanent establishment in India. Thus, an indirect sale of shares would not, at the threshold, fall within the treaty protection contemplated under Article 13. (para 18)

Distinction between investment and arrangement

There is no dispute that GAAR is applicable to the assessment year under consideration, empowering the Revenue to declare the subject transaction to be an impermissible arrangement, which means "an arrangement, the main purpose of which is to obtain a tax benefit, and which, inter alia, is entered into or carried out by means or in a manner which is not ordinarily employed for bona fide purposes."

As seen earlier, two important conditions are prescribed under Rule 10U of the Income tax Rules, 1962, to seek exemption from the applicability of Chapter XA, in addition to the exemption applicable to an FII which does not seek any benefit under Section 90 or Section 90 A, as the case may be.

Notably, these provisions which were brought into effect after the judgment of the Supreme Court in Vodafone, were introduced to prevent treaty abuse and to ensure that exemptions or concessions are available only to genuine entities resident in the Contracting State with commercial interest and without tax avoidance as their main object.

Rule 10U(1)(a) reads as under:

"An arrangement where the tax benefit in the relevant assessment year arising in aggregate, to all the parties to the arrangement, does not exceed a sum of Rs. 3 crores"

Further, Rule 10U(1)(d) provides: "Any income accruing or arising to, or deemed to accrue arise to, or received or deemed to be received by, any person from transfer of investments made before the first day of April, 2017 by such person."

This is where Section 96 (2) and Rule 10U(2) become significant. By the use of the words "without prejudice to the provisions of clause (d) of sub-rule (1)", Chapter XA is made applicable to any arrangement, irrespective of the date on which it was entered into, in respect of a tax benefit obtained from such arrangement on or after 01.04.2017.

Therefore, the prescription of the cut-off date of investment under Rule 10U(1)(d) stands diluted by Rule 10U (2), if any tax benefit is obtained based on such arrangement, the duration of the arrangement is irrelevant. (para.46)

Double non-taxation is against the spirit of a tax treaty

The Vodafone judgment provides crucial insight into this issue. It implies that business intent behind a transaction serves as strong evidence of whether the transaction is deceptive or an artificial arrangement. The commercial motive behind a transaction often reveals its true nature. In the present case, the respondents seek exemption from the Indian Income tax while, at the same time, contending that the transaction is also exempt under Mauritian law, which runs contrary to the spirit of the DTAA and presents a strong case for the Revenue to deny the benefit as such an arrangement is impermissible. Here again, it may be stated that this stand would again strengthen the reasoning that whether the sale is of shares of an Indian company then, will not be germane for consideration because only if the assessee is liable to pay tax in Mauritius, he can derive benefit under the provision under Article 13(c) of the DTAA as amended. (para.49)

Some commentators have mentioned that the Supreme Court has made payment of tax in the residence jurisdiction a pre-condition for availing the treaty benefits. In truth, the Court has used the expression ‘liable to tax' which has different connotation.

Legitimate tax planning

Section 96(2) places the onus on the taxpayer to disprove the presumption of tax avoidance. This represents a significant shift in the burden of proof. In the case at hand, there is clear and convincing prima facie evidence to demonstrate that the arrangement was designed with the sole intent of evading tax, and the assessees have failed to furnish sufficient material to rebut this presumption. Though it is permissible in law for an assessee to plan his transaction so as to avoid the levy of tax, the mechanism must be permissible and in conformity with the parameters contemplated under the provisions of the Act, rules, or notifications. Once the mechanism is found to be illegal or sham, it ceases to be "a permissible avoidance" and becomes "an impermissible avoidance" or "evasion". The Revenue is, therefore, entitled to enquire into the transaction to determine whether the claim of the assessees for exemption is lawful. (para.49)

Tax sovereignty

Justice Pardiwala agreed with Justice Mahadevan in the main judgement delivered by the Supreme Court. Justice Pardiwala however added his own thoughts on tax sovereignty considering that the same has assumed significance in times of global uncertainty. This is an excellent analysis by the Hon'ble Judge. He has surveyed the current international scenario and merely cautioned against ceding tax sovereignty through badly balanced tax treaties and offered some suggestions. Some Commentators have suggested that this impinges upon the domain of the executive. I do not agree.

There is nothing wrong for the Hon'ble Justice to make these observations. In fact, there is very little discussion about the dynamics of treaty making. Even IMF has urged caution while entering into tax treaties by developing countries since many a times, such treaties lead to loss of revenue without bringing commensurate benefit through increased foreign investment. But this is a separate topic on which I hope to write in future.