Revisiting Grandfathering under GAAR: The Rule 10U Amendment and Its Impact on Tiger Global
Introduction
The Central Board of Direct Taxes (CBDT), through its notification dated 31 March, 2026, has amended Rule 10U of the Income-tax Rules, 1962, along with corresponding Rule 128 of the Income-tax Rules, 2026, to expand the scope of grandfathering. In essence, the amendment clarifies that all investments made before 1 April 2017 will continue to fall within the grandfathering framework. This specific date is significant since it marks the commencement of General Anti-Avoidance Rules (GAAR). These provisions are aimed at addressing tax avoidance through arrangements and treaty shopping, as recognized in the Tiger Global International II Holdings v. Union of India [2026]. However, this very amendment significantly dilutes the operational effect of the recent landmark judgement in Tiger Global without formally overriding it, as the Hon’ble Supreme Court had held that the Grandfathering benefit would only be available where the pre-2017 investments do not form part of arrangements lacking ‘commercial substance’. The notification effectively blunts this impact by clarifying that all grandfathered investments shall continue to be shielded from GAAR.
Background to the Rule 10U Interpretation
According to Rule 10U(1)(d) of the Income-Tax Rules, 1962, the provisions of GAAR do not apply to the investments made before 1 April 2017. However, the Hon’ble Supreme Court interpreted Rule 10U in conjunction with sub-rule (2) to suggest that GAAR may extend to arrangements generating tax advantages after 1 April 2017, irrespective of when the underlying investment was made. The Hon’ble Court further clarified that where a tax benefit arises upon an exit after 1 April 2017, the investment may still be subjected to GAAR scrutiny, even if it was originally made before the cut-off date of 1 April 2017. It also observed, on a reading of Section 90(2A) of the Income-Tax Act, 1961, that treaty protection would not be available where a commercial arrangement is primarily designed as a tax avoidance arrangement. The Supreme Court, in the Tiger Global case, also clarified that a Tax Residency Certificate (TRC) shall not be conclusive proof to avoid GAAR scrutiny, and that TRCs in themselves cannot establish treaty privileges where the arrangement lacks commercial substance. It was further recognized that anti-avoidance rules may, in certain situations, prevail over treaty-based claims where tax avoidance arrangements are identified, even where the benefit arises after 1 April 2017.
Tiger Global Judgement Interpretation
The Hon’ble Supreme Court analyzed Rule 10U to hold that arrangements lacking commercial substance would be subject to scrutiny of GAAR. The Bench highlighted that the use of the phrase “without prejudice to the provisions of clause (d) of sub-rule (1)” indicates that Chapter X-A, i.e., the GAAR provisions, would apply to any arrangement, irrespective of the date on which the investment was made. Consequently, the Court observed that the “cut-off date of investment under Rule 10U(1)(d) stands diluted by Rule 10U (2)”. Essentially, where a tax benefit is obtained through an arrangement lacking commercial substance, the duration of the arrangement becomes irrelevant. Rule 10U (2), which is phrased “without prejudice” to the grandfathering rule, allows GAAR to be applied in cases where a tax benefit is received on or after April 1, 2017. This interpretation includes exits such as the 2018 transaction, and covers any tax benefit arising after the cut-off date, notwithstanding the time at which the investment was made.
Investments vs. Arrangements
The Hon’ble Supreme Court also created a key distinction between ‘investments’ and ‘arrangements’, and recognized that Rule 10U operates in a manner that grandfathered only genuine commercial investments made prior to 1 April 2017, and not tax avoiding arrangements created solely for obtaining tax benefits. This is the exact point at which the 31 March amendment departs from the Supreme Court’s interpretation of Rule 10U. This position was further fortified by an analysis of the Shome Committee Report dated 30 September 2012, wherein, the Committee recommended that all investments existing on date of the commencement of the GAAR provisions should be grandfathered, so that GAAR provisions do not apply to deny such benefits. However, the committee strictly referred to existing investments and not arrangements, as including the latter would diminish the effectiveness of GAAR provisions. This is precisely what the Hon’ble Supreme Court interpreted; however, the amendment de-emphasizes the distinction for GAAR purposes, without doctrinally eliminating it.
Practical Impact of the Tiger Global Judgement
The issue with the approach adopted in the Tiger Global case is that it creates a sense of uncertainty by effectively rendering the purpose of grandfathering clause redundant and significantly narrowing the practical utility of the grandfathering clause, as it targets legacy investments to GAAR scrutiny which the clause intended to avoid by including “investments made before 1 April 2017” in Rule 10U(1)(d). Tiger global, through its distinction between ‘investments’ and ‘arrangements’, creates a retrospective impact on pre-cut off investments by subjecting them to GAAR scrutiny, which was introduced after these investments were made, thereby imposing a subsequent tax liability on these legacy investments. On a practical level, this creates uncertainty, as an existing investment no longer guarantees protection from tax liability. The concept of grandfathering under GAAR was always understood to mean that India would not tax capital gains on legacy investments made before April 2017, and business strategies and company decisions were structured on this very basis. However, Tiger Global creates ambiguity by application of subsequently enacted GAAR provisions to previously guaranteed tax benefits. The concept of Grandfathering continues to subsist, however the protection it guarantees now stands limited to genuine commercial investments, which were in any case protected under GAAR, while excluding arrangements that Rule 10U(1)(d) originally intended to protect.
What Does the Amendment do?
The amendment to Rule 10U (2) deletes the phrase “without prejudice to the provisions of clause (d) of Rule 10U (1)”, and explicitly excludes tax benefits obtained from investments made before 1 April 2017. Further, Rule 10U(1)(d) specifically indicates investments made prior to 2017 through insertion of the phrase “such investments”. Both these alterations indicate that GAAR provisions shall not apply to capital gains arising from investments made before the cut-off date. This amendment limits GAAR from operating as an overriding provision across all situations; consequently, all investments made before the cut-off date shall be grandfathered.
Does the Amendment Override Tiger Global?
The insertion of the expression “such investments” can be categorically read as a reference to all the investments made before 1 April 2017 without adopting any differentiation based on nature of such investments, whether commercial investments or an arrangement. Fundamentally, even an arrangement undertaken for treaty shopping in order to obtain a tax benefit may be construed as an “investment”. The amendment removes the need to distinguish between investments and arrangements for GAAR applicability, but does not necessarily recharacterize arrangements as genuine investments. Any income arising from the transfer of such arrangements undertaken before the cut-off date shall be excluded from the application of GAAR, and no tax liability under GAAR shall arise in respect of them. This amendment differentiates from the interpretation adopted in Tiger Global regarding Rule 10U. In that judgment, the distinction between an arrangement and investment was central, and any income arising from arrangements after 1 April 2017 that lacked commercial substance was brought within GAAR scrutiny.
However, the phrase “irrespective of the date on which it has been entered into” continues to remain in Rule 10U (2) and has not been removed by this amendment. This aligns with the approach envisaged in Tiger Global, wherein grandfathering protects legitimate investments but Tax Arrangements remain subject to GAAR scrutiny. This indicates that there is still no absolute bar on application of GAAR in the cases of arrangements undertaken for tax benefits. It is important to note that the Supreme Court has also clarified that mere non-applicability of GAAR does not shield treaty interpretations from scrutiny, and even in the absence of GAAR, the Judicial anti-avoidance rule (JAAR) remains applicable to check tax avoidance.
It is evident from the said amendments that they are not intended to override the Tiger global judgement; however, they operate as a corrective measure to allow GAAR and Grandfathering provisions to function as originally intended. The amendment retains the overall framework, while clarifying that all pre-2017 investments shall be grandfathered as originally intended, and that investments made after 2017 shall fall under GAAR scrutiny in line with the approach adopted by the Hon’ble Supreme Court in Tiger Global.
Further, it is pertinent to note that the Tiger Global Judgement is not limited to applicability of GAAR, its impact is much broader, as the Hon’ble Supreme Court also held that mere possession of a Tax Residency Certificate alone does not automatically establish entitlement to treaty benefits, particularly where the underlying activity lacks genuine commercial substance.
Conclusion and Present Scenario
The CBDT’s notification dated 31 March 2026, regarding amendments to Rule 10U and Rule 128, presents a more certain and stable application of grandfathering within India’s GAAR regime. By excluding income from investments made prior to 1 April 2017 from the ambit of GAAR, India creates a more secure environment for investors by avoiding any retrospective application of tax liability. By deleting the expression “without prejudice” in Rule 10U (2), the amendment expressly indicates an intention to provide clarity to all the pre-2017 investors in regard to GAAR applicability.
India adopts an approach that prioritizes the date of investment over the time of receiving actual tax benefit, thereby providing certainty to investors and companies, while still ensuring the proper application of GAAR to investments made after 2017. The amendment does dilute the impact of the Tiger Global International Judgement with respect to GAAR application; however, it does not override the judgment, but rather operates as a limited course correction in relation to pre-cut-off investments.
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