Delhi High Court: The petitions were filed challenging the order dated 26-03-2020 passed by the Authority for the Advanced Rulings (‘AAR’), wherein it was held that the transaction in respect of which the ruling was sought, was prima facie designed for the avoidance of tax and thus, fell within the scope of the proviso to Section 245-R(2)(iii) of the Income Tax Act, 1961 (‘the Act’). The Division Bench of Yashwant Varma* and Purushaindra Kumar Kaurav, JJ., concluded that the impugned order dated 26-03-2020 suffered from manifest and patent illegalities, as it took a wholly untenable and unsustainable view regarding the transaction in question. Therefore, the Court stated the AAR’s conclusion that the transaction was aimed at tax avoidance could not be sustained, as the transaction stood duly grandfathered by virtue of Article 13(3A) of the India-Mauritius Double Tax Avoidance Agreement (‘the DTAA’).
Background
Petitioner was a private company incorporated under the laws of the Mauritius with its principal office in that country. It had been set up with the primary objective of undertaking investment activities with the intention of earning long term capital appreciation and investment income. The immediate shareholders of the petitioners were also Mauritian companies whose shareholders were private equity funds, who had raised funds from several investors across the globe.
Tiger Global Management LLC (‘TGM LLC’), a company incorporated as per the laws of Delaware USA, was asserted to be the petitioner’s Investment Manager. The petitioner was granted a Category 1 Global Business License (‘GBL’) and was also a tax resident of Mauritius. The petitioners placed on the record the Tax Residence Certificate (‘TRC’) issued by the Mauritius revenue authorities and the activities of the petitioner were regulated by the Financial Services Commission of Mauritius.
Petitioner acquired 2,36,70,710 shares of Flipkart Singapore between October 2011 to April 2015. Petitioner asserted that its shareholding in Flipkart Singapore had been acquired between 04-10-2011 and 17-04-2015 and which was prior to 01-04-2017.
The DTAA was signed and executed on 06-12-1983 and the protocol for amendment of the DTAA was signed on 10-05-2016, which sought to introduce the taxation of capital gains arising in India. Thereafter, vide notification dated 10-08-2016, paragraphs 3A and 3B was inserted in Article 13(3) and were ordained to come into effect from 01-04-2017. Thus, by virtue of paragraph 3A, and its insertion in Article 13, the gains from the alienation of shares in a company that was a resident of a Contracting State became subject to a capital gains tax.
The Notes to the Financial Statement submitted for the period ending on 31-12-2017 declared that capital gains arising on sale of shares acquired in an Indian tax resident company between 01-04-2017 to 31-03-2019 would be subject to tax at the rate of 50% of the domestic tax rate, subject to the fulfilment of the Limitation of Benefits clause in the DTAA. Petitioner also stated in the said Notes that the capital gains on sale of shares acquired in an Indian tax resident company post 31-03-2019 would be taxed in India. Further, the capital gains arising out of sale of shares of a foreign company which though not a tax resident of India but whose shares derive their value substantially from assets situated in India might not be taxable under the DTAA.
On 09-05-2018, a Share Purchase Agreement (‘the Agreement’) was executed between Walmart International Holdings, Inc., (purchaser) and the shareholders of Flipkart Singapore, (sellers), and Fortis Advisors LLC, a Delaware limited liability company, (sellers’ representative). As per the Agreement, the sale of the shares held by the petitioner was approved by the Board in its meeting. During the meeting, the Board took note of the Walmart’s offer to purchase a controlling stake in Flipkart Singapore for USD 16 billion and the petitioners having considered to sell 74% of their stake in Flipkart Singapore and close that transaction.
Thereafter, the petitioner approached the tax authorities for grant of a ‘nil’ withholding tax certificate as per Section 197 of the Act. The petitioner asserted that although the shares held by it and constituting 13.48% of the share capital of Flipkart Singapore derived their value substantially from assets in India, but, since those shares were acquired prior to 01-04-2017, they would not be taxable or subjected to a capital gains tax considering the TRC along with Article 13 of the DTAA.
The application was disposed with the respondent holding that the petitioner would not be entitled to the benefits of the DTAA. Thereafter, the petitioners moved the AAR on 19-02-2019, seeking its opinion on the taxability of the transaction in question. It was held that the transaction was entered into with an intent to derive benefits from the DTAA in a manner which was never intended by the two contracting states and thus, proviso to Section 245-R(2)(iii) of the Act was attracted. Hence, the present appeal was filed.
Analysis, Law, and Decision
The Court stated that the finding in the impugned order that TGM LLC was the holding or parent company of the petitioner was wholly erroneous. The petitioners had consistently asserted regarding the shareholding position of the petitioners and of TGM LLC being the investment manager of the petitioner and not the holding or parent company. Further, none of the funds invested in the petitioner originated from TGM LLC, there had been no equity participation or investments made by TGM LLC in the petitioners or any evidence were put forth regarding any monies being repatriated to TGM LLC from the petitioners.
The Court stated that the petitioners were intended to operate as pooling vehicles for investments, held a Category 1 GBL, aggregated funds from more than 500 investors located across 30 jurisdictions worldwide and had TGM LLC as its investment manager. The entire stockholding in Flipkart Singapore was acquired between October 2011 to April 2015 and the share transfer in question was undertaken on 18-08-2018. The petitioner incurred expenditure of USD 1,063,709 and had its total liabilities and shareholders’ equity at USD 1,764,819,299. Therefore, the petitioner could not be said to be lacking in economic substance or that it was domiciled in Mauritius with a sole view of engaging in treaty abuse.
The Court stated that a parent or a holding company would have a legitimate right to exercise oversight and broad supervision over the affairs of its subsidiaries. Subsidiaries were also recognised in law to have a distinct and independent legal persona, which was liable to be ignored only in the event of apparent fraud, being interposed with a view to camouflage sham transactions or being created to perpetuate an illegality and being a mere puppet and lacking in economic substance. The Court stated that merely because a parent entity might exercise shareholder influence over its subsidiary, would not lead to an assumption that the subsidiary was operating as a mere puppet, or it was wholly subservient to the parent entity. Thus, merely because two of the members of the Board of the petitioner, related to the Tiger Global Group did not in itself render that the petitioners were mere puppets.
The Court stated that mere factum of an entity being situated in Mauritius and investments in Mauritius being routed through that nation, could not result in a default adverse inference or raise a presumption of illegality. An overall conspectus of the data and material revealed that Mauritius was one of the more favourable jurisdictions for Foreign Institutional Investors seeking to invest in India because of its proximity to India and the wide array of agreements that it had entered with various nations. Further, considering the observations laid down in Union of India v. Azadi Bachao Andolan, (2004) 10 SCC 1 and Vodafone International Holdings B.V. v. Union of India, (2012) 6 SCC 613 opined that it would be wholly erroneous to presume that investments originating from Mauritius were inherently suspect or fiscal residence of an entity in Mauritius would require viewing such entities through a tainted prism.
The Court stated that the issuance of a TRC by the competent authority must be sacrosanct and due weightage must be accorded to the same as it establishes certification of the TRC holding entity as a bona fide entity, having beneficial ownership domiciled in a Contracting State to pursue a legitimate business. Thus, the Revenue would not be justified in doubting the presumption of validity attached to the TRC, as it would inevitably result in an erosion of faith and trust reposed by Contracting States in each other.
The Court stated that there could not be an assumption of treaty abuse merely because a subsidiary or any related entity was established in a tax friendly jurisdiction. Action 6 of Base Erosion and Profit Shifting Action Plan, and the principles of the Organisation for Economic Cooperation and Development Commentary on Article 29 revealed that treaties incorporate disentitlement provisions to deprive persons who were not intended to fall under the ambit of the treaty availing those benefits in an indirect manner. Therefore, both Indian and International authorities had taken the consistent position that treaty benefits might be denied only in those cases where the transaction was a sham, where fraud was sought to be committed or where entities were incorporated as mere conduits and in a manner contrary to the schema of the treaty itself.
The Court stated that Article 13(3A) of the DTAA embodies the intent of the Contracting States to ring-fence all such transactions which had been consummated prior to 01-04-2017. Article 13(3B) of the DTAA restricted its scope to prescribing separate tax rates between 01-04-2017 till 31-03-2019. However, no such tax rate was prescribed for capital gains arising from sale of shares acquired prior to 01-04-2017 which demonstrated the intent of the parties was to exclude capital gains emanating from shares acquired prior to 01-04-2017 from the ambit of taxation. Therefore, the grandfathering clause in Article 13(3A) would exclude the transaction undertaken by the petitioners from the ambit of capital gains tax.
The Court stated that the domestic tax legislation could not be interpreted in a manner which was in direct conflict with a treaty or with an overriding effect over the provisions contained in the DTAA. Since, the same would amount to accepting the right of the Contracting States to unilaterally amend or override the provisions of a treaty. It would also result in the elevation of a domestic subordinate legislation over the provisions in a treaty.
Considering the principles governing attributability of beneficial ownership, the Court stated that imputation of beneficial ownership of TGM LLC over the petitioners was manifestly erroneous. TGM LLC could not be the beneficial owner of shares, since no evidence was rendered to suggest that the petitioners were under a contractual or legal obligation to transmit revenue to TGM LLC, or the revenue obtained from transfer of shareholding was a result of actions undertaken by the petitioners at the behest of TGM LLC.
Thus, the Court concluded that the impugned order dated 26-03-2020 suffered from manifest and patent illegalities, as it took a wholly untenable and unsustainable view regarding the transaction in question. Therefore, the conclusion that the transaction was aimed at tax avoidance was rendered arbitrary and could not be sustained and the transaction stood duly grandfathered by virtue of Article 13(3A) of the DTAA.
[Tiger Global International III Holdings v. Authority of Advance Rulings, 2024 SCC OnLine Del 5987, decided on 28-08-2024]
*Judgment authored by: Justice Yashwant Varma
Advocates who appeared in this case :
For the Petitioners: Porus Kaka, Senior Advocate with Manish Kanth, Parul Jain, Afaan Arshad, Arijit Ghosh, Anirudh Srinivasan and Brijesh Ujjainwal, Advocates;
For the Respondents: G. C. Srivastava, Spl. Counsel with Kalrav Mehrotra and Mayank Patawani, Advocates; Chetan Sharma, ASG with Asheesh Jain, CGSC along with Gaurav Kumar and Neha Narang, Advocates; Sunil Agarwal, Sr. SC with Shivansh Pandya, Jr. SC along with Utkarsh Tiwari, Advocate.