Grandfathering is not a Shield: Tiger Global Case and the Conditional Protection of Legacy Investments

[Sreevibhavan is a student at School of Excellence in Law, Tamil Nadu Dr Ambedkar Law University.]

Foreign investors previously relied on Rule 10U(1)(d) of the Income-tax Rules 1962 under the belief that it shielded pre-2017 investments from the General Anti-Avoidance Rules (GAAR). However, the recent judgment of the Supreme Court in Authority for Advance Rulings (Income Tax) v. Tiger Global International II, III & IV Holdings (Tiger Global) clarified that this protection is not absolute. The Supreme Court has held that Rule 10U (2) overrides the protective clause of Rule 10U(1)(d) whenever a tax benefit accrues on or after 1 April 2017. Consequently, all the investors, who had entered India through treaty jurisdictions before 2017, would be bound by the holding in the Judgment.

What Grandfathering was Understood to Promise

GAAR was introduced in the Income Tax Act 1961, in Chapter X-A, effective from 1 April 2017. It was, however, recognised that it would not be fair to impose a new anti-avoidance code on investments made prior to the introduction of GAAR. Hence, Rule 10U(1)(d) was introduced as a safeguard measure, stating that Chapter X-A of the Income Tax Act 1961, shall not apply in respect of any income arising or accruing, or deeming to be accruing or arising, received or deemed to be received by any person from the transfer of investments made prior to 1 April 2017 by such person. The legislative intent behind the introduction of Rule 10U(1)(d) was that investments prior to introduction of GAAR would not be challenged. 

The Tiger Global LLC relied on this provision. The Mauritian entities acquired shares in Flipkart Private Limited (a Singapore company with Indian assets) between 2011 and 2015, long before 1 April 2017. When the Tiger group exited in 2018 as part of the Walmart acquisition of Flipkart, they claimed “NIL” withholding on the basis that their capital gains were exempt under the India-Mauritius Double Taxation Avoidance Agreement (DTAA) and were grandfathered (since acquired before 1 April 2017) and not subject to GAAR.

The Rule 10U(2) Override

The court dismissed the argument on grandfathering by construing Rule 10U(1)(d) in conjunction with Rule 10U (2). While Rule 10U(1)(d) applies to investments prior to 1 April 2017, Rule 10U (2), on the other hand, states that “the GAAR shall apply to any arrangement, notwithstanding when such arrangement was entered into, if the tax benefit from that arrangement is obtained on or after 1 April 2017” (emphasis supplied). The Supreme Court’s interpretation of the term “without prejudice to the provisions of” in Rule 10U(1)(d) is that it acts as ‘notwithstanding’, and therefore Rule 10U(2) takes precedence. This is particularly relevant since generally, the term “without prejudice to” is read as a saving clause, which implies that it maintains the existence of the provision referred to, instead of making it inferior to another provision. In interpreting the term “without prejudice to” as “notwithstanding”, the Supreme Court essentially changed its meaning, and Rule 10U (2) was allowed to prevail over the grandfathering provision of Rule 10U(1)(d) whenever a tax advantage was realized on or after 1 April 2017.

The essential finding of the court is that “the cut-off date of investment under Rule 10U(1)(d) is diluted by Rule 10U(2), when a tax benefit is obtained post-April 2017.” The court has been clear that the length of the arrangement is not relevant. The taxpayer “simply cannot walk away by citing that the investments were made prior to 1 April 2017”, as held by the court, “if the tax benefit, i.e., exemption on capital gains, is available on sales taking place after that date.”

The underlying logic is that the tax benefit is not available at the time of investment, but rather at the time of exit. The act of selling in 2018 confers a tax benefit in the financial year 2018-19, which is squarely within the period of operation of GAAR. The date of entry is not relevant to determining whether or not GAAR is applicable, but rather when the exemption is claimed.

The above logic has been subject to criticism. The argument that has been put forward by various practitioners is that the court erred in not following the distinction drawn in Rule 10U(1)(d), which speaks in terms of investment, as opposed to Rule 10U (2), which speaks in terms of arrangements. It has also been observed by practitioners that the legislature was cognisant of the possibility that the grandfathering provisions under GAAR may, in effect, extend protection even to transactions lacking commercial substance. Notwithstanding this, the legislature consciously introduced such grandfathering provisions with the objective of fostering certainty and promoting foreign investment into India.

From this perspective, the pre-2017 acquisition of shares by the investor is an “investment” that is protected by Rule 10U(1)(d), and the subsequent sale/transfer is simply the realisation of that investment, rather than another “arrangement” that is subject to GAAR. The problem with the Court’s analysis, according to this argument, is that it analysed the entire structure of holding as one single “arrangement” that commenced with the incorporation of the Mauritius company and continued through to the 2018 exit, when in reality, the grandfathering rule is intended to protect the investment leg irrespective of when the exit occurred. In other words, the court’s analysis, interpreted Rule 10U(1)(d) wrongly by stating that the cut-off date of 1 April 2017 is to be read with respect to transfer of investment and not investment. Whether this argument succeeds remains to be seen in how the ITAT and High Courts apply Tiger Global in future cases, but as things currently are, the Supreme Court’s formulation is applicable, and the distinction between investment and arrangement cannot be relied on by taxpayers as a defense.

The Burden of Proof: A Two-Stage Process

The treatment of the burden of proof by the court also has significant ramifications for legacy investors. Legacy investors, for this purpose, refers to foreign investors who made investments in Indian assets prior to 1 April 2017, and who sought to rely on the grandfathering protection under Rule 10U(1)(d) to shield their exits from GAAR scrutiny. Revenue need only establish a prima facie case of tax avoidance, a low threshold based on a “first impression” of documents. Once established, Section 96(2) presumes the arrangement’s main purpose was a tax benefit unless the taxpayer proves otherwise.

Once the prima facie case has been established by the Revenue, Section 96(2) states that there is a statutory presumption that the arrangement was entered into for the main purpose of obtaining a tax benefit unless the taxpayer can prove otherwise. Judgment shows that this is “a significant shift in the burden of proof.”

What Makes a Legacy Structure Survive

A legacy structure, in the context of Indian tax law, typically involves a foreign holding company, usually registered in Mauritius or Singapore, that had invested in the shares of an Indian corporation or its parent company abroad prior to 1 April 2017. The legacy structure was very popular among PE / VC funds as it allowed for optimal tax benefit in exit scenarios but is now severely restricted. For example, a US based PE fund that has established a Mauritius entity in 2014 in order to acquire shares in a start-up in India, using the India-Mauritius DTAA to claim a NIL capital gains tax regime at the time of its exit, could be termed as a legacy structure.

The court was not saying that all pre-2017 structures in Mauritius are per se not permissible. It affirmed that, “genuine strategic tax planning has not been abandoned” and that “a structure which has a genuine commercial rationale is distinguishable from a colourable device or sham.” The question, of course, is what “genuine” really means.

The court, relying on paragraph 97 of the Vodafone International Holdings BV v. Union Of India, and applying it to the post-GAAR scenario, has set out six factors that are determinative of whether or not an FDI structure is a “bona fide commercial arrangement.” Those factors are:

• Participation of the entity in the investment process not being a passive conduit- whether the entity actually makes investment decisions, or is merely a shell channelling funds from its parent: form says “investor,” substance asks “who really decides?”

• Longevity of the holding- A genuine investor holds for commercial reasons over time. A short holding period suggests the structure was created purely for treaty access;

• Longevity of actual business operations in India- whether the entity has a real, continuing commercial presence, or existed only on paper to claim treaty benefits;

• Whether taxable revenues have been generated in India- A genuine business generates income beyond capital gains. If the only "income" is a tax-exempt exit gain, the substance of the entity is questionable.;

• Timing of exit- if the exit is structured to coincide with a treaty benefit window, then it raises a doubt that the timing is linked to tax avoidance rather than commercial judgement;

• Continuity of business- if the entity immediately winds up after exit then it suggests that the entity existed solely for the transaction and never meant to exist as a going concern enterprise.

The foregoing is based on the principle of substance over form, a well-established canon of tax jurisprudence which states that the nature of the transaction is determined by the true economic and legal substance of the activity rather than its form. Thus, the question that the court needs to determine is not whether the transaction is legally valid in form but in substance.

The Tiger Global entities also failed on the most basic of the above factors. The Authority for Advance Rulings held that the overall control and management did not vest in the Mauritius boards as the authority to operate bank accounts exceeding USD 250,000 was vested in the US-based individual, no local Mauritius director was authorized to, and the investment decisions were made by the Tiger Global Management LLC in the US. The presence of two resident directors of Mauritius and two employees, an office, and a bank account was deemed insufficient to establish that the “head and brain” of the entities was in Mauritius.

The court dismissed the tax residency certificate (TRC) as non-decisive, ambiguous and ambulator. While necessary for Section 90(4) eligibility, a TRC alone cannot establish substance or beneficial ownership; tax authorities remain free to look behind it.

The Position of Investors Who Have Not Yet Exited

In the case of Tiger Global, it was dealing with a completed exit in 2018. However, the reasoning given by the court can apply as general terms, not specifically related to the facts in the case. Paragraphs 12.28-12.31 and paragraph 46, which deal with the grandfathering issue, are related in a general way that is applicable to any exit after April 2017 of an investment made before 2017.  

The construction of the grandfathering rule in Rule 10U by the court is ratio decidendi, not obiter dicta. In order to reverse the decision of the High Court, the Supreme Court had to conclusively determine the relationship between Rule 10U(1)(d) and Rule 10U(2). It therefore follows that the decision given in paragraph 46 that GAAR applies regardless of the date on which the arrangement is made, provided the tax benefit accrues after April 2017, is binding precedent.

The six-factor test set out in the judgment as the ratio decidendi is the applicable criteria that stands for future interpretational conflicts of this sort. Investors whose structures qualify under this test entities with genuine boards, genuine decision-making authority in treaty jurisdiction, substantive business activity, and a track record of taxable revenues will be more able to withstand scrutiny under GAAR. Investors whose structures are thin nominee directors, no independent signing authority, all meaningful decisions taken by US or UK parent – are in the direct firing line.

The India-Mauritius protocol of 2024 has incorporated the LOB clause in the DTAA but as per the declaration of the Indian Government, it would be applicable on further notification in the future. Therefore, the current judgment in Tiger Global does not discuss this LOB clause. The protection of the investors who invested prior to the declaration of the LOB clause is uncertain.

Conclusion

Tiger Global fundamentally changes the scope of grandfathering protection in a way that will come as a surprise to many investors. The grandfathering protection was always understood as being available based on date of investment. The court has confirmed that it is, at best, a conditional grandfathering. It is conditional upon the exit not being after April 2017 and conditional upon having commercial substance. Neither of these conditions was reflected in the original text of Rule 10U(1)(d), but both conditions now follow as a matter of reading that rule together with Rule 10U (2) and the GAAR framework as a whole.

The message for investors with pending exits is clear. Date of entry before 2017 will not be enough for an exit without commercial substance. The time for checking for control, management, and commercial substance is before the exit notice is given, not after the Revenue has raised a prima facie case and shifted the burden.

On 31 March 2026, the CBDT promulgated Notification Number 54/2026, revising Rule 10U to provide that GAAR would not be invoked against income arising from the sale of investments made prior to 1 April 2017, irrespective of whether the arrangement itself falls within the purview of grandfathering or not. This modification brings back the original protection given to the investors in the Government's press statement dated January 2013 as well as in CBDT Circular Number 7/2017, which states that the crucial date would be the date of investment, and not the date of exit, for determining grandfathering status of the income from the transfer of the investment. The article should be understood accordingly, and the effect of the Tiger Global decision should be seen in light of the CBDT notification.

An important issue which needs further clarification is whether the clarification will have any retroactive effect in order to provide protection to the investors in cases where the proceedings are already initiated or under process in relation to prior years. This creates an element of uncertainty for those investors who are currently being scrutinized in connection with their exit plans from the period 2017 up to 31 March 2026.