Apex Court Verdict on Tiger Global–Flipkart Exit and Its Ripple Effects on Startup Investments

Why in News ?

The Supreme Court of India has ruled that venture capital firm Tiger Global’s $1.6-billion stake sale in Flipkart to Walmart is taxable in India. The verdict, closely watched by foreign investors, is considered a landmark judgment with the potential to reshape cross-border deal structures and influence India’s startup investment landscape.

Background: India’s Treaty-Based Investment Route and Rising Scrutiny

• For decades, foreign investors have routed investments into India through treaty jurisdictions such as Mauritius and Singapore to avail tax benefits under Double Taxation Avoidance Agreements (DTAAs).
• However, as India has strengthened anti-avoidance rules and prioritised tax certainty, courts and tax authorities have increasingly focused on the economic substance of offshore investment structures rather than their legal form.
• The Tiger Global–Flipkart case represents a critical test of this evolving tax enforcement approach.

Dispute Over India–Mauritius Tax Treaty

• The case arose from Tiger Global’s 2018 exit from Flipkart, executed through its Mauritius-based entities.
• Tiger Global claimed exemption under the India–Mauritius Double Taxation Avoidance Agreement (DTAA).
• A DTAA is a bilateral treaty designed to prevent the same income from being taxed in both the source country (where income is earned) and the residence country (where the investor is based).
• However, the Supreme Court ruled that the DTAA benefit could not be extended in this case.

Court Rejects Treaty Benefits, Overturns High Court Order

In denying DTAA protection, the Supreme Court overturned an August 2024 ruling of the Delhi High Court, which had earlier set aside a 2020 decision of the Authority for Advance Rulings (AAR).

The AAR had concluded that the transaction was prima facie structured to avoid tax, and therefore did not merit treaty protection.

Broader Implications for Startup Investments

Mauritius had long been a favoured investment route into India due to the non-taxability of capital gains until 2016.

The judgment comes at a time when startup funding is slowing, as investors increasingly prioritise profitability, regulatory clarity, and tax certainty—potentially reshaping how foreign capital approaches Indian startup exits.

Background: Tiger Global’s Flipkart Investment

After acquiring a stake in Flipkart, Mauritius-based entities of Tiger Global—Tiger Global International II, III, and IV Holdings—went on to invest in several Indian companies.

Claim for Tax Exemption

• Following the stake sale, the Tiger Global entities sought a “nil” withholding tax certificate from Indian tax authorities.
• They argued that capital gains were exempt under the India–Mauritius DTAA due to the “grandfathering” clause for shares acquired before April 1, 2017.
• Grandfathering means exempting an activity or transaction from a new law or regulation.

Tax Authorities’ Rejection

• Indian tax authorities rejected the request, concluding that the Mauritius entities lacked independent decision-making authority.
• They held that real control over share purchases and sales did not rest with these entities.

Authority for Advance Rulings (AAR) Decision

The matter was taken to the Authority for Advance Rulings, which in 2020 dismissed Tiger Global’s claim.

The AAR found that the investment structure was primarily designed to obtain DTAA benefits and that effective control lay outside Mauritius, particularly in the United States, through a complex web of entities.

Delhi High Court Intervention

On appeal, the Delhi High Court overturned the AAR ruling, holding that the conclusion of tax avoidance was arbitrary and unsustainable.

Supreme Court’s Final Word

• The Supreme Court of India reversed the High Court’s decision.
• It held that DTAA protection applies only where assets are directly owned by a Mauritian entity’s permanent establishment.
• The Flipkart transaction, the Court ruled, fell outside this scope—rendering the capital gains taxable in India.

Implications of the Verdict for Indian Startups and Investors

End of Automatic Treaty Benefits

• Tax experts warn that the ruling weakens automatic reliance on the India–Mauritius DTAA.
• Merely holding a Tax Residency Certificate (TRC) will no longer guarantee capital gains tax exemption.
• A TRC is an official document from a country’s tax authority proving that an individual or entity is a tax resident there for a specific period, enabling claims under a DTAA.

Substance Over Form Becomes the Test

The judgment reinforces a shift toward examining economic substance.

Investors must now demonstrate:

• Genuine commercial rationale
• Autonomous decision-making
• Real operations in treaty jurisdictions

Higher Tax Uncertainty and Litigation Risk

The ruling increases uncertainty for venture capital and private equity exits.

Exit planning, valuations, and indemnity clauses may require reassessment amid higher scrutiny and litigation risk.

Impact on Offshore Investment Structures

• Investment structures routed through Mauritius or Singapore, especially for pre-2017 investments, may face closer examination.
• While closed cases may not automatically reopen, reassessments are now more likely where legally permissible.

Costlier Risk Management

Tax insurance and indemnity mechanisms are expected to become scarcer and more expensive, raising compliance costs and complicating deal-making for startups and foreign investors.

Startup Funding Slowdown Amid Investor Caution

The Supreme Court ruling coincides with a broader slowdown in India’s startup funding.

In 2025, Indian tech startups raised $10.5 billion, representing:

• A 17% decline from 2024
• A 4% decline from 2023

While seed-stage funding fell sharply, early-stage investments showed relative resilience, indicating selective but continued investor confidence.