What the Supreme Court’s Flipkart tax ruling means for treaty-based exits

India’s Supreme Court has held that Indian tax authorities may scrutinize the substance of offshore investment structures when investors claim tax treaty relief, ruling that a tax residency certificate by itself is not conclusive of eligibility for capital gains exemptions.

The ruling arose from tax claims linked to Walmart’s 2018 acquisition of Flipkart, but the court’s reasoning extends beyond that deal, tightening the conditions under which offshore holding structures can invoke India’s tax treaties at the exit stage.

In overturning a 2024 ruling by the Delhi High Court, the Supreme Court restored an adverse finding of the Authority for Advance Rulings and endorsed the tax department’s position that treaty eligibility cannot be assessed by examining a single transaction in isolation. The court said authorities are entitled to look at an arrangement “as a whole” and deny treaty benefits at the threshold if it appears to be designed primarily to avoid tax.

The dispute centered on the sale of shares in Flipkart’s Singapore holding company, through which Mauritius-based entities linked to Tiger Global held their investment. Those entities sought a nil withholding certificate, arguing that the gains were exempt under the India-Mauritius tax treaty and protected by “grandfathering” provisions applicable to investments made before April 1, 2017.

To be sure, the “grandfathering” clause protects certain investments made before April 1, 2017 from India’s capital gains tax, subject to anti-abuse safeguards.

Tax authorities rejected that claim, contending that the offshore structure lacked commercial substance and that control and decision-making rested outside the treaty jurisdiction. The Supreme Court agreed that a tax residency certificate is relevant but “not conclusive” and does not, by itself, settle entitlement to treaty benefits.

Tax advisers said the ruling marks a turning point in how Indian courts approach treaty abuse and offshore structures.

“The Supreme Court’s ruling…is poised to influence the future application of tax treaties and the structuring of cross-border arrangements,” said Richa Sawhney, tax partner at Grant Thornton Bharat. “Taxpayers may need to evaluate their exiting arrangements in light of the principles laid down by this decision, namely the non-sufficiency of tax residency certificate, substance-over-form parameters guarded by statutory GAAR and judicial anti-avoidance doctrines, and diluted protection under grandfathering provisions.”

GAAR, or the General Anti-Avoidance Rule, empowers tax authorities to look beyond legal form and deny tax benefits if a structure exists mainly to avoid tax.

Others warned the judgment could inject fresh uncertainty into foreign investment planning.

“The ruling raises more questions than it provides answers and is likely to adversely impact investor confidence,” said Meyyappan Nagappan, a partner at Trilegal. “The uncertainty around eligibility for treaty benefits going forward will be a significant concern for investors making investments into India. This can also potentially impact past transactions as well, which may be sought to be reopened by the tax department based on this ruling.”

Beyond private equity and strategic exits, the judgment may also have implications for foreign institutional and proprietary traders active in India’s derivatives markets.

Tax advisers estimate that more than 500 foreign traders executing frequent futures and options trades through Mauritius and Singapore entities could face closer scrutiny, particularly where trading decisions, risk management, and capital allocation are effectively controlled outside the treaty jurisdiction.