No DTAA Relief to Tiger Holdings on Sale of Shares of Flipkart to Walmart: Supreme Court says ‘Transaction designed for Tax Avoidance’ [Read Judgment]

In a very important ruling, the Supreme Court held that Tiger Global’s Mauritius-based investment entities are not entitled to claim DTAA protection for capital gains arising from the sale of Flipkart shares.

Justice R. Mahadevan and J.B. Pardiwala observed that the “In the case at hand, there is clear and convincing prima facie evidence to demonstrate that the arrangement was designed with the sole intent of evading tax, and the assessees have failed to furnish sufficient material to rebut this presumption.”

The background is that, Tiger Global International II Holdings, Tiger Global International III Holdings, and Tiger Global International IV Holdings, incorporated in Mauritius, sold their shares held in Flipkart Private Limited (Singapore) as part of the broader acquisition of Flipkart by Walmart Inc.

The shares were transferred to Fit Holdings S.A.R.L., Luxembourg, and the assessees received sale consideration of thousands of crores.

The Revenue alleged that since Flipkart Singapore derived huge value from Indian assets, the transaction amounted to an indirect transfer taxable in India, and treaty relief under the India-Mauritius DTAA could not be claimed.

Before the transaction was consummated, the assessees approached the Income Tax Department seeking nil withholding certificates under Section 197.

However, the Department declined to grant DTAA benefit and issued certificates prescribing withholding tax at varying rates.

Aggrieved by the action of the department, the assessees moved the Authority for Advance Rulings (AAR)under Section 245Q, seeking a ruling on whether the capital gains from the sale of Flipkart Singapore shares would be taxable in India under the Income Tax Act read with the India-Mauritius DTAA.

The AAR rejected the applications at the threshold, holding that the transaction was prima facie designed for avoidance of income tax. Therefore it attracts the jurisdictional bar under proviso (iii) to Section 245R(2).

The AAR noticed that, contrary to the assessees' assertions that their Board in Mauritius managed and controlled the entities, the control over important decisions and high-value transactions was actually exercised outside of Mauritius.

It further held that the treaty benefit was never intended to cover gains arising from sale of shares of a non-Indian company (Singapore entity), and that the Mauritius entities were effectively “see-through” vehicles created to obtain treaty benefits.

Tiger Holdings challenged the AAR decision before the Delhi High Court, which ruled in their favour and quashed the AAR order, holding that the entities had valid TRCs and that the transaction was grandfathered under the treaty.

The Revenue then approached the Supreme Court.

After hearing the submissions, the Supreme Court completely overturned the High Court’s view and upheld the AAR’s approach.

The court noted that the case involved a transaction structured as a tax avoidance device. It stated “the business intent behind a transaction serves as strong evidence of whether the transaction is deceptive or an artificial arrangement. The commercial motive behind a transaction often reveals its true nature.”

“In the present case, the respondents seek exemption from the Indian Income tax while, at the same time, contending that the transaction is also exempt under Mauritian law, which runs contrary to the spirit of the DTAA and presents a strong case for the Revenue to deny the benefit as such an arrangement is impermissible” said the court.

With regard to the cut off date, Article 13 (3A), which was inserted in 2016, applies to cases involving the sale of shares of a company in a Contracting State acquired on or after 01.04.2017, and provides for taxation in the source State.

The court noted that the transfer of investment commenced only on 09.05.2018. As per the Share Purchase Agreement, the sale of shares held by the assessees was approved by the Board in its meeting held on 04.05.2018. The subject appears to have arisen for discussion in the meeting held on 12.06.2018.

Accordingly, the appeal was allowed. The high court order was set aside.

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