Transfer Of Shares Under Impermissible Arrangement Bars DTAA Capital Gains Exemption: Supreme Court Declines Relief To Tiger Global In Walmart–Flipkart Transaction
The Supreme Court held that where the transfer of unlisted equity shares is effected pursuant to an arrangement impermissible under law, the assessees are not entitled to claim capital gains exemption under Article 13(4) of the Double Taxation Avoidance Agreement.
Justice J.B. Pardiwala, Justice R. Mahadevan, Supreme Court
The Supreme Court declined relief to Tiger Global International II Holdings in connection with the Walmart–Flipkart transaction, holding that the exemption under Article 13(4) of the Double Taxation Avoidance Agreement cannot be claimed where the transfer of unlisted equity shares is carried out pursuant to an arrangement impermissible under Indian law.
The Court was hearing appeals arising from a judgment of the Delhi High Court, which had set aside the rulings of the Authority for Advance Rulings granting capital gains tax exemption to Tiger Global in respect of gains arising from the transfer of shares linked to Walmart’s acquisition of Flipkart.
A Bench comprising Justice J.B. Pardiwala and Justice R. Mahadevan, while allowing the appeals, observed: “once it is factually found that the unlisted equity shares, on the sale of which the assessees derived capital gains, were transferred pursuant to an arrangement impermissible under law, the assessees are not entitled to claim exemption under Article 13(4) of the DTAA.”
N Venkatraman, A.S.G., represented the appellants, while Senior Advocate Harish Salve represented the respondents.
Background
Tiger Global International II Holdings, a foreign investor, held unlisted equity shares in an offshore investment structure connected with Flipkart. As part of Walmart’s acquisition of Flipkart, Tiger Global transferred its unlisted equity shares and derived capital gains from the transaction.
Tiger Global approached the Authority for Advance Rulings seeking a determination that the capital gains arising from the transfer of shares were exempt from taxation in India under Article 13(4) of the applicable Double Taxation Avoidance Agreement.
The Authority for Advance Rulings ruled in favour of Tiger Global, holding that the gains were not taxable in India. The Delhi High Court affirmed the ruling. Aggrieved, the Revenue carried the matter to the Supreme Court, contending that the transfer of shares was effected pursuant to an arrangement impermissible under Indian law, disentitling the assessee from treaty protection.
Court’s Observation
The Supreme Court examined the scheme and application of the Double Taxation Avoidance Agreement in the context of domestic law compliance. The Court held that entitlement to treaty benefits presupposes that the underlying transaction is lawful and permissible under the governing legal framework.
The Court noted that the transfer of unlisted equity shares by Tiger Global was not an isolated commercial transaction but formed part of a composite arrangement culminating in Walmart’s acquisition of Flipkart. The Court observed that the factual findings on record established that the manner in which the transfer was structured and executed rendered the arrangement impermissible under Indian law.
The Court held that once such a factual finding is recorded, the assessees cannot invoke Article 13(4) of the Double Taxation Avoidance Agreement to claim exemption from capital gains tax. It clarified that treaty provisions do not operate independently of domestic law and cannot be used to legitimise transactions that are otherwise impermissible.
"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", the Bench remarked.
The Court observed that the Double Taxation Avoidance Agreement must be applied in harmony with domestic law and that treaty protection is not intended to shield gains arising from arrangements contrary to statutory or regulatory requirements.
The Court further held that allowing treaty exemption in such circumstances would amount to granting protection to an impermissible arrangement, thereby defeating the object of both domestic tax law and the treaty framework.
The Court rejected the contention that the form of the transaction could be determinative and held that where the substance of the arrangement is impermissible, treaty benefits must necessarily be denied.
"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", the Court concluded.
Conclusion
The Supreme Court concluded the revenue had proved that "the transactions in the instant case are impermissible tax-avoidance arrangements, and the evidence prima facie establishes that they do not qualify as lawful".
Accordingly, the Court held that "capital gains arising from the transfers effected after the cut-off date, i.e., 01.04.2017, are taxable in India under the Income Tax Act read with the applicable provisions of the DTAA".
Consequently, the appeals filed by the Revenue were allowed, and the rulings granting treaty exemption were set aside.
Cause Title: The Authority for Advance Rulings (Income Tax) & Others v. Tiger Global International II Holdings (Neutral Citation: 2026 INSC 60)
Appearances
Appellant: N Venkatraman, A.S.G, Senior Advocate Nisha Bagchi, with Advocates Raj Bahadur Yadav, AOR, Shashank Bajpai, Padmesh Mishra and Others
Respondent: Senior Advocates Harish Salve and Porus Kaka, with Advocates Dr Shashwat Bajpai, Parul Jain, Arijit Ghosh, Manish Kanth and Others
