In Tiger Global Case, Supreme Court Explains Distinction Between 'Tax Planning' & 'Tax Evasion'

The Supreme Court has held that while an assessee is permitted in law to plan transactions to avoid tax, such planning must strictly conform to the framework of the Income Tax Act, the applicable rules, and notifications.

The Court said that once a transaction structure is found to be illegal, sham, or lacking commercial substance, it ceases to be permissible tax avoidance and becomes impermissible avoidance or tax evasion, entitling the Revenue to closely examine and tax the transaction.

“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”, the Court held.

A bench of Justice JB Pardiwala and Justice R Mahadevan made these observations while deciding appeals arising from the capital gains tax dispute linked to the sale of shares connected with Flipkart, where non-resident assessees had claimed exemption under the India–Mauritius Double Taxation Avoidance Agreement.

The Court said that the object of a tax treaty is to prevent double taxation and not to facilitate tax avoidance or evasion.

The Court noted that the applicability of treaty benefits depends on Article 4 of the DTAA, which defines a “resident of a Contracting State” as a person liable to taxation in that State by reason of domicile, residence, place of management, or similar criteria. Where a person other than an individual is treated as a resident of both Contracting States, the DTAA deems such person to be a resident of the State in which its place of effective management is situated.

The Court observed that treaty protection under Article 13(4) of the DTAA is available only where the resident entity directly holds the shares or movable property that is transferred. Indirect transfers of shares do not, at the threshold, qualify for treaty protection. In such cases, the capital gains are taxable in India if they arise from the disposition of assets that derive their value substantially from India.

The Court relied on its earlier Constitution Bench ruling in McDowell & Company Ltd v. Commercial Tax Officer in which it was held that that tax planning is legitimate only if it is within the confines of law, and colourable devices cannot form part of tax planning and that courts should not encourage the belief that avoiding tax through dubious methods is acceptable. The Court had underlined that every citizen has an obligation to pay taxes honestly, without resorting to subterfuges.

The Court noted that Parliament has, over time, strengthened anti-avoidance measures to deal with sophisticated structures designed to escape tax. The introduction of Chapter X-A of the Income Tax Act, dealing with the General Anti-Avoidance Rule, and amendments to treaty provisions were intended to empower tax authorities to pierce artificial arrangements and deny benefits where the main purpose of the transaction is to obtain a tax benefit, the court said.

A taxpayer seeking treaty protection must therefore establish that the income in question is taxable in the State of residence. The Court observed that amendments to the DTAA and to domestic law were introduced to prevent revenue loss caused by abuse of treaty provisions, particularly through structures designed to shift taxing rights away from the source State.

“Therefore, for the treaty to be applicable, the assessee must prove that the transaction is taxable in its State of residence. The amendments to the Agreement as discussed above, 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 documents.”

The Court then outlined the analytical framework for deciding treaty eligibility in cases of indirect transfers. The first step is to determine whether the income is taxable under domestic law, particularly Section 9(1)(i) of the Income-tax Act, which deems income arising from the transfer of a capital asset situated in India to accrue in India. Explanation 5 to this provision extends the deeming fiction to shares of a foreign company if such shares derive their value substantially from assets located in India.

Once domestic taxability is established, the second step, the Court said, is to examine whether such taxability is curtailed by the DTAA, which requires an assessment of residence, the applicability of Article 13, and the operation of the limitation of benefits clause.

The Court noted that, after the statutory amendments, assessing officers are empowered to examine where entities are actually resident by investigating the place of effective management and control. The authorities are entitled to scrutinise whether the assessees are, in substance, residents of a third country rather than Mauritius.

The Court stressed that the mere existence of a Tax Residency Certificate is no longer sufficient to establish treaty eligibility. Such a certificate is only an eligibility condition and not conclusive proof of residence or entitlement to treaty benefits, the Court observed, adding that tax authorities are entitled to independently examine the real place of effective management, control, and commercial substance of the entity claiming the benefit.

The Court highlighted that the 2016 Protocol to the India–Mauritius DTAA introduced changes to the taxation of capital gains and inserted a limitation of benefits clause. Under this framework, capital gains on shares acquired after April 1, 2017 are taxable in India, subject to transitional relief for a limited period and compliance with the LOB conditions.

The Court explained that even investments made before April 1, 2017 can be scrutinised under the General Anti-Avoidance Rules if the arrangement results in a tax benefit after that date.

On facts, the Court noted that although the assessees appeared to have acquired the capital gains before the cut-off date, the proposal for transfer or shares arose only in May 2018. The Share Purchase Agreement with Walmart International Holdings Inc. was executed after that date, following board approvals and negotiations. The Court therefore held that the transaction fell squarely within the post-2017 regime.

The Court accepted the Revenue's reliance on judicial anti-avoidance principles, including the doctrine of substance over form. It held that judicial anti-avoidance rules continue to operate alongside GAAR and permit the authorities to deny treaty benefits where the structure lacks genuine commercial substance. The Court noted that the respondents themselves had taken steps in the Share Purchase Agreement to address potential scrutiny regarding control and management, which undermined their claim that a TRC alone was sufficient.

The Court also highlighted that Indian tax law now places the burden on the taxpayer to rebut a presumption of tax avoidance once a prima facie case is established. It said that where an arrangement is primarily designed to obtain a tax advantage and is not ordinarily employed for bona fide purposes, it can be declared an impermissible avoidance arrangement. In such cases, the Revenue is justified in denying treaty benefits and taxing the income in India.

“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”, the Court observed.

Applying these principles, the Court concluded that although it is legally permissible for an assessee to plan transactions to reduce tax liability, the planning must be genuine and lawful. If the mechanism adopted is found to be artificial or sham, it crosses the line into tax evasion. The Court held that in the present case, there was clear prima facie evidence that the structure was designed solely to evade tax, and therefore, the assessees were not entitled to claim exemption under the tax treaty.

Case no. – Civil Appeal No. 262 of 2026

Case Title – Authority for Advance Rulings (Income Tax) and Others v. Tiger Global International II Holdings and connected cases

Citation: 2026 LiveLaw (SC) 50

Click Here To Read/Download Judgment

Also from the judgment- 'Tax Sovereignty Must Not Be Compromised' : Supreme Court Suggests Safeguards While Entering Into International Tax Treaties