New Delhi | In a ruling with far-reaching implications for foreign investors, the Supreme Court has made it clear that tax relief cannot be claimed merely on the basis of treaty structures or offshore arrangements. In its decision relating to the 2018 sale of stake in Flipkart, the court has directed that capital gains tax be levied on the US-based investment firm Tiger Global Management, clearing the way for the tax authorities to initiate recovery proceedings.
The verdict is being seen as a key precedent in matters involving cross-border investments and tax planning. Legal and tax experts say the ruling reinforces India’s position that substance, not just structure, will determine tax liability in offshore transactions.
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The case relates to the sale of shares held in Indian e-commerce major Flipkart, which were sold in 2018 to global retail giant Walmart as part of its acquisition of the company. The apex court held that gains arising from this transaction are taxable under Indian law and cannot be automatically exempted through treaty claims.
Earnings, Tax Demand and Refund Claim
According to records examined during the proceedings, the stake sale yielded proceeds of around ₹14,500 crore (approximately $1.6 billion). Capital gains tax will now be computed on this amount. In addition, a refund claim of nearly ₹970 crore filed earlier by the investor will also fall under scrutiny.
Tax authorities are expected to factor the refund claim into the final demand, with indications that any refund entitlement may be adjusted against the tax liability arising from the transaction. The ruling effectively removes the key legal obstacle that had stalled recovery efforts for several years.
DTAA and ‘Grandfathering’ Argument Rejected
The investment had been routed through Mauritius-based entities, with the argument that benefits under the India–Mauritius Double Taxation Avoidance Agreement (DTAA) and the ‘grandfathering’ clause should apply, as the shares were acquired prior to April 1, 2017.
However, the court ruled that treaty benefits are not available in cases where the investment structure lacks genuine economic substance in the treaty jurisdiction. It observed that tax treaties are meant to prevent double taxation, not to facilitate tax avoidance through paper entities. Where effective control and decision-making lie outside the treaty country, treaty protection cannot be claimed.
Delhi High Court Ruling Set Aside
With this judgment, the Supreme Court has overturned an August 2024 ruling of the Delhi High Court, which had granted relief to the investor. The apex court emphasised the distinction between legitimate tax planning and impermissible tax avoidance, stating that authorities are entitled to examine the real nature of transactions rather than relying solely on their legal form.
The court underlined that offshore structures created solely to obtain tax advantages cannot override domestic tax law where the underlying economic reality points elsewhere.
Timeline of the Case
- 2018: Sale of Flipkart stake to Walmart.
- 2019–20: Application for a ‘nil’ withholding tax certificate.
- 2020: Advance ruling authority rejects tax exemption claim.
- 2024: Delhi High Court grants relief.
- 2026: Supreme Court reverses High Court ruling, tax held payable.
Impact on Investment Climate
Tax professionals say the ruling sends a strong message to foreign funds investing in India that treaty benefits will be closely scrutinised. Cross-border transactions involving private equity, venture capital and startup exits are likely to face more rigorous tax assessments, particularly where investments are routed through low-tax jurisdictions.
While the decision could create short-term uncertainty among overseas investors, experts believe it will strengthen long-term tax certainty by clarifying the rules of engagement. Going forward, investors may place greater emphasis on advance tax rulings, robust economic substance, and transparent ownership structures when structuring India-focused investments.
About the author — Suvedita Nath is a science student with a growing interest in cybercrime and digital safety. She writes on online activity, cyber threats, and technology-driven risks. Her work focuses on clarity, accuracy, and public awareness.
