6 September 2024
Delhi HC reinstates tax exemption for Tiger Global's Flipkart Sale, reversing AAR's tax avoidance claim
 
Recently, the Delhi High Court (HC) delivered a noteworthy judgment1 quashing the ruling2 of the Authority for Advance Rulings (AAR) that denied Tiger Global International III Holdings a capital gains tax exemption on its 2018 sale of Flipkart Singapore shares to Walmart. The AAR had held that the transaction was structured to avoid taxes under the India-Mauritius Double Tax Avoidance Agreement (DTAA). The HC reversed the decision of AAR by upholding the validity of transactions protected by Article 13(3A) of the DTAA, which applies to deals made before major treaty changes. It also reaffirmed that the Tax Residency Certificate (TRC) is valid unless challenged with substantial evidence of fraud.

Brief Facts
  • The taxpayer is a Mauritius-based entity managed by Tiger Global Management LLC (TGM LLC), a Delaware-based investment management firm.
  • In 2018, the taxpayer sold a 74% stake in Flipkart Singapore to Walmart International Holdings, Inc. for approximately USD 16 billion.
  • The taxpayer sought an exemption from capital gains tax on this sale under the India-Mauritius DTAA, asserting that the indirect transfer transaction was grandfathered under Article 13(3A) of the DTAA, as the shares were acquired between October 2011 and April 2015 (i.e., before 1 April 2017).
  • The AAR ruled that the transaction was structured to avoid tax and denied DTAA benefits.
Taxpayer's Contentions
  • The taxpayer contended that the TRC is the primary requirement for claiming treaty benefits and should not be questioned based on the motives for establishing the entity in Mauritius.
  • The taxpayer also argued that despite the 2016 renegotiation of the India-Mauritius DTAA, which occurred after indirect transfer provisions were incorporated into the Act, no corresponding provisions were added to the DTAA.
  • The taxpayer also submitted that they, including Tiger Global International II Holdings (TG II) and Tiger Global International IV Holdings (TG IV), meet the criteria under Article 27A of the DTAA and should not be classified as conduit companies, as their expenditures satisfy the Limitation of Benefit (LOB) clause conditions.
  • The taxpayer argued that the concept of beneficial ownership does not apply to Article 13 (capital gains) of the DTAA. Furthermore, the taxpayer also argued that the entities were independently managed by a Board of Directors in Mauritius, as shown by detailed minutes from 70 meetings. The AAR's claim that the Directors were merely puppets was, therefore, unfounded. Also, the funds were pooled from over 500 investors across 30 jurisdictions and alleged Mr. Coleman (who was considered to be a beneficiary of a transaction) had no controlling interest.
Revenue's Contentions
  • The primary contention of the Revenue was that TGM LLC, a U.S.-based parent company, was the ultimate controlling entity, with TG III, TG II and TG IV as mere facades.
  • The Revenue observed that the applicant has had no income since inception. The funds invested in Flipkart Private Limited originate from Mauritius-based entities, which are in turn controlled by entities in the Cayman Islands and ultimately by TGM LLC, which indicated that the taxpayer was not acting independently but rather as a conduit for the true beneficial owners in the USA.
  • The Revenue stated that authorizing Mr. Coleman and Mr. Anil Castro to manage funds and decisions, despite Mr. Coleman not being on the Board, suggests that control was effective in the USA, not Mauritius.
  • The Revenue contended that the introduction of Chapter X-A in the Finance Act, 2013, and Rule 10U in 2016 supports the argument that tax authorities can investigate arrangements for their commercial substance and tax benefits, irrespective of the date of the arrangement.
  • The Revenue concluded that the control was in the USA and the shares in question were of a Singapore company, not an Indian company. Hence the exemption under DTAA failed and the application for tax exemption was rejected under Section 245R(2) of the Act.
Delhi High Court's Observations
  • The HC noted that the Mauritius entities had significant economic substance. They were not mere conduits but had legitimate business operations and pooled substantial investments from global sources. The involvement of TGM LLC as an investment manager did not diminish the entities' independent legal status or economic substance.
  • The HC stated that shareholder influence by a parent entity does not automatically imply that a subsidiary is merely a puppet or fully subservient. Therefore, the involvement of two board members related to the Tiger Global Group does not in itself establish that the taxpayers were mere puppets.
  • The HC referred to previous judgments in Union of India v. Azadi Bachao Andolan3 and Vodafone International Holdings B.V. v. Union of India4, and International rulings in the case of Cadbury Schweppes5 and Burlington case6, which established that treaty benefits should not be denied based solely on suspicions or the use of tax-friendly jurisdictions. The ruling emphasized that tax treaties are meant to facilitate international trade and investment, not to penalize legitimate investors.
  • The HC ruled that TRCs are sacrosanct and must be accepted unless there is clear evidence of fraud or sham. The HC rejected the notion that investments routed through Mauritius should be inherently suspect or subject to additional scrutiny.
  • The HC analyzed the DTAA provisions and noted that the LOB clause in the India-Mauritius DTAA, introduced after Chapter X-A and Article 27A, grandfathered transactions involving shares acquired before April 1, 2017. This indicates that the LOB provisions were crafted with the existing domestic laws in mind, and thus, the Revenue cannot impose extra barriers to grant DTAA benefits.
  • The HC stated that the domestic tax legislation could not be interpreted in a manner that was in direct conflict with a treaty or with an overriding effect over the provisions contained in the DTAA.
  • The HC emphasized and held that the transaction fell squarely within the scope of Article 13(3A) of the DTAA, which grandfathers transactions involving shares acquired before 1 April 2017.
  1. W.P.(C) No. 6764/2020, 6765/2020 & 6766/2020 and CM Appeal No. 23479/2020, 23481/2020 and 23483/2020
  2. [2020] 116 taxmann.com 878 (AAR - New Delhi)
  3. 7 [(2004) 10 SCC 1]
  4. [(2012) 6 SCC 613]
  5. [(2006) 3 WLR 890]
  6. 3 [(2024) UKUT 152 (TCC)
Our Comments
This is a welcome decision as it emphasizes the importance of the Tax Residency Certificate (TRC), clarifying that its validity can only be contested with substantial evidence of fraud or sham transactions. This judgment provides vital clarity on the interpretation of LOB vs GAAR provisions. In this case, the HC dismissed the 'conduit' argument, emphasizing that a parent company's presence in a favorable tax jurisdiction does not inherently mean its subsidiaries are involved in treaty abuse. While this ruling provides some certainty for private equity investors, its broader implications will vary based on the specific facts and the demonstration of genuine substance and commercial rationale for the investment structures through Mauritius and Singapore.

In our view, it would be interesting to see the application of this case along with upcoming amendments to the India-Mauritius DTAA, such as the introduction of the Principal Purpose Test (PPT) and modifications to the DTAA's preamble. The Supreme Court's forthcoming decision on TRC validity in the case of Blackstone may further clarify how the Apex Court views the sanctity of TRC.

Also, while the judgment is comprehensive and addresses crucial issues around the foreign taxpayers' eligibility for the tax treaty benefit, the ruling intriguingly does not discuss the critical provision of Article 13(4) of the DTAA, which typically would cover indirect transfer transactions. There are many other HC decisions that have adopted a view that transfer of foreign company shares (which attracts indirect transfer capital gains), would be covered under the residuary category of capital gain article {in this case Article 13(4)} and may not be taxable in source country. This aspect is not discussed in the judgment. Interestingly, LOB provisions under Article 27A do not apply to Article 13(3A) or 13(4); hence, meeting those expense thresholds and other conditions might not have been necessary.
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