Supreme Court Holds AAR Was Right To Reject Treaty-Benefit Ruling; Capital Gains From Post-2017 Transfers Taxable In India

A bench of Justice R. Mahadevan and Justice J.B. Pardiwala heard appeals by the Authority for Advance Rulings (Income Tax) and the Revenue against a Delhi High Court judgment which quashed AAR orders refusing to entertain advance rulings sought by Mauritius-incorporated investment vehicles. The appeals raised questions on the maintainability of AAR applications under proviso (iii) to Section 245R(2) of the Income-tax Act, the evidentiary value of Tax Residency Certificates (TRCs), the reach of the Indo‑Mauritius DTAA (Article 13 and the 2016 Protocol), and the applicability of GAAR/JAAR to indirect transfers deriving substantial value from Indian assets.

The Supreme Court allowed the appeals and set aside the High Court’s judgment. The Court held that where a transaction prima facie constituted an impermissible tax‑avoidance arrangement, the AAR was entitled to reject an application under proviso (iii) to Section 245R(2). The Court held that domestic taxability under Section 9(1)(i) (and Explanations 4–5) had to be tested first and that treaty relief did not automatically follow from production of a TRC after the legislative amendments and the insertion of Chapter XA and Section 90(2A). The Court emphasised the State’s sovereign right to tax income arising in India and observed that statutory anti‑abuse rules and the Rule 10U safeguards could bring post‑2017 benefits within GAAR scrutiny. The Court, in its reasoning, observed: “In our view, 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. The Revenue has 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. Consequently, Chapter X‑A becomes applicable. The applications preferred by the assessees relate to a transaction designed prima facie for tax avoidance and were rightly rejected as being hit by the threshold jurisdictional bar to maintainability, as enshrined in proviso (iii) to Section 245R(2). Accordingly, 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.”

Background The respondents were three Tiger Global–related companies incorporated in Mauritius which held shares in a Singapore holding company that in turn derived substantial value from Indian operations (Flipkart). They obtained Mauritian TRCs and sought certification under Section 197 for nil/low withholding on sale proceeds. Tax authorities issued provisional certificates prescribing withholding rates and the AAR, after fact‑finding, concluded that the applicants’ structure and conduct indicated that control and management did not lie in Mauritius and that the transactions were prima facie designed for avoidance of tax; accordingly the AAR rejected the applications under proviso (iii) to Section 245R(2). The High Court allowed writ petitions, held the TRCs and CBDT circulars (notably Circular No. 789) entitled the applicants to treaty protection and that the transactions were grandfathered under Article 13(3A)/13(4) as amended. The Revenue challenged that judgment before the Supreme Court.

The Supreme Court reviewed the legislative and treaty matrix — including the 2012–13 amendments to Section 9, insertion of Explanations 4–5, the GAAR code in Chapter XA, the Rule 10U grandfathering and anti‑abuse architecture, Section 90(4)/(5) and Section 90(2A) and the 2016 Protocol to the India–Mauritius DTAA (including Article 13(3A)/13(3B) and the Limitation‑of‑Benefits provision). The Court noted AAR findings that the “head and brain” of the companies arguably lay outside Mauritius and recorded that Section 90(4) post‑amendment treated a TRC as an eligibility condition but “it does not state that a TRC is ‘sufficient’ evidence of residency.” After a detailed statutory and precedential survey (including Azadi Bachao Andolan and Vodafone), the Court held that once domestic taxability and prima facie avoidance were made out, treaty benefits could be denied and Chapter X‑A would apply; the High Court’s quashing of the AAR order was therefore set aside. The Court allowed the appeals and directed that capital gains arising from transfers effected after 01.04.2017 were taxable in India in the facts of the case; there was no order as to costs.

Case No.: Civil Appeal Nos. 262–264 of 2026 (Arising out of SLP (C) Nos. 2640/2025, 2565/2025 and 5987/2025) Case Title: The Authority for Advance Rulings (Income‑Tax) and Others v. Tiger Global International II/III/IV Holdings Appearances: For the Petitioner(s): Mr. N. Venkataraman, Additional Solicitor General of India (on behalf of the Revenue / AAR) For the Respondent(s): Mr. Harish Salve, Senior Counsel (for the assessees)

(This report summarised the court’s order and the factual matrix as recorded in the judgment dated 15 January 2026.)