The Supreme Court of India has ruled that a Mauritius-based structure used by US investor Tiger Global to sell its USD1.6 billion stake in Flipkart to Walmart in 2018 has been a “conduit” arrangement and the transaction must be taxed in India.
The ruling in has strengthened the authority’s call for closer scrutiny of international transactions designed specifically for tax avoidance under the India-Mauritius Double Taxation Avoidance Agreement (DTAA) signed in 1982.
The agreement essentially established the “Mauritius route” for investments in India. However, it was also being misused for non-taxation, especially for capital gains.
In the present case, Tiger Global International II Holdings, Tiger Global International III Holdings, and Tiger Global International IV Holdings (collectively Tiger Global) are Mauritius-based companies. Their three-member board of directors has two Mauritius nationals, their principal bank account, and their financial statements are prepared and audited in Mauritius. They maintain office premises in Mauritius with two employees and hold valid Mauritius tax residency certificates (TRC).
Tiger Global engaged the services of Tiger Global Management (TGM), a US company for investment activities.
Tiger Global acquired shares of Singapore-incorporated Flipkart, an Indian e-commerce company headquartered in Bengaluru. Flipkart then invested in multiple companies in India. The value of Flipkart’s shares was substantially from assets in India. Tiger Global transferred their shares in Flipkart to a Luxembourg company, Fit Holdings.
This transfer was part of Flipkart’s acquisition by US company Walmart. The value of the shares Tiger Global received as part of the acquisition stood at USD2.08 billion.
Tiger Global then approached the Indian tax authorities seeking certification of nil withholding before finalising the transfer and to benefit from the DTAA. However, the authorities denied the request, citing that the decision to purchase and sell the shares was not Tiger Global’s alone and prescribed a withholding rate on the stock.
Tiger Global filed an appeal to the tax appellate authority, which was rejected and found the transaction to have been specifically designed for income tax avoidance.
In an appeal before Delhi High Court, it held that Tiger Global was entitled to tax benefits under the treaty. The tax authorities then appealed the high court’s decision before the Supreme Court of India.
The tax authorities argued that since the transaction involved the sale of shares of Flipkart that derive substantial value from assets in India, it made India the source state. The transaction included an indirect transfer, which is taxable under the law. Once taxability is established under domestic law, the question of benefitting from the treaty does not remain relevant.
Authorities also argued that the Mauritius Income Tax Act requires a company to have control and management based in the country. This similar requirement is also present in the Indian Income Tax Act and Financial Services Act, 2007.
The tax authorities also argued that a TRC did not foreclose inquiry into actual control and management of the company. Reliance was placed on and for a TRC to be relevant but not conclusive, and discretion to examine the real nature of a transaction remains with the authorities.
Tax Global argued that its operations and management were consistent with those prevalent in foreign investors and under the treaty the residency of the other state is to be determined by that state alone. They also argued that if the intention of the treaty or subsequent revision was to limit the benefits to residents of any third countries, the same would have been added to the text.
The court observed that, “the person claiming treaty protection must not only qualify as a ‘resident’ of the other state ie, Mauritius, but also establish that the movable property or shares forming the subject matter of the transaction are directly held by such resident entity. In all other cases, the transaction is taxable in India”.
The court finally ruled that the treaty’s limitation of benefit clause provides “that a resident will be barred from receiving concessional tax benefits if its arrangements were meant primarily to obtain such benefits. In this regard, the protocol defines a shell or conduit company as an entity which has nil or negligible business operations or has no real or continuous business activities being carried out in Mauritius”.
The Supreme Court set aside the high court’s order and held that Tiger Global was liable under the tax laws of India as assessed by the authorities. The Supreme Court concluded that simply holding a Mauritius TRC was not enough to prove genuine commercial presence and Indian authorities could deny treaty benefits by showing funds were routed mainly to avoid tax.
