Acquisition Of Flipkart Singapore Shares, Double Taxation Avoidance Treaty,No Invention To Evade Tax: Delhi High Court

Simultaneously, the High Court held that Tax Residency Certificate (TRC) issued by a jurisdiction is 'sacrosanct' unless any proof of tax fraud/sham transaction is substantiated by the Revenue Department.

The High Court held so while answering to the petition challenging the decision of the AAR, whereby it was held that the petitioners were mere conduit companies and disentitled to claim benefits of the DTAA since the transaction lacked commercial substance and the establishment of an entity in Mauritius was principally aimed at deriving undue benefits under the DTAA.

Negating the concept of 'conduit' under Article 27 of the DTAA, the High Court explained that a parent or holding company would legitimately claim the right to exercise oversight and retain a broad supervisory role over the affairs of its subsidiaries.

Referring to Apex Court decisions in Azadi Bachao Andolan and Vodafone, the Division Bench of Justice Yashwant Varma and Justice P.K. Kaurav observed that “treaty shopping in itself cannot be rendered abhorrent unless it were categorically established that the device was incorporated with a view to evade tax and in a manner contrary to the intent of the Contracting States to the treaty”. (Para 269)

Upholding the primacy of Treaty LOB provisions vis-a-vis treaty abuse, the Bench added that it would be impermissible for the Department to manufacture additional roadblocks or standards that parties would be required to meet in order to avail of DTAA benefits, subject to caveats of illegality & fraud.

Facts of the case:

The petitioner/ Assessee is a Mauritius based company set up with the primary objective of undertaking investment activities with the intention of earning long term capital appreciation and investment income. Tiger Global Management LLC, a company incorporated in terms of the laws of Delaware USA was asserted to be the petitioner's Investment Manager. The petitioner acquired 2,36,70,710 shares of Flipkart Singapore between October 2011 to April 2015. Regarding such acquisition, the petitioner stated that the capital gains on sale of shares acquired in an Indian tax resident company post 31 March 2019 would be taxed in India and the capital gains arising out of sale of shares of a foreign company which though not a tax resident of India but one whose shares derive their value substantially from assets situated in India may not be taxable under the DTAA.

On May 09, 2018, a Share Purchase Agreement was executed between Walmart International Holdings (purchaser) and the shareholders of Flipkart Singapore (sellers), as per which, the sale of shares held by the petitioner was approved by the Board. The petitioner thereafter approached the tax authorities for grant of Nil withholding tax certificate in terms of Section 197, and contended 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, since those shares were acquired prior to Apr 01, 2017, they would not be taxable or subjected to capital gains tax in light of the TRC held by the petitioner read along with Article 13 of the DTAA. The application was however dismissed holding that the petitioner was not independent in its decision making with regard to various capital assets held by it.

Later, the petitioners transferred their shareholding in Flipkart Singapore to Fit Holdings SARL, a Luxembourg entity, at a transaction value of around INR 131,22,02,50,194/-. Thereafter the petitioner along with Tiger Global moved the AAR seeking its opinion on the taxability of the transaction in question, which was not answered. Hence, the petitioner approached the High Court.

Observations of the High Court:

The Bench observed that the petitioner, incorporated to act as pooling investment vehicles, were domiciled in Mauritius principally on account of the investor friendly environment prevalent in that nation and the bouquet of bilateral trade agreements to which it was a party.

The extent and quantum of investments made by the petitioner, the period for which those investments were held, and the expenditure incurred in Mauritius when considered cumulatively clearly dispels any assumption of lacking in economic substance, added the Bench.

The Bench went on to observe that a parent or a holding company would have a legitimate right to exercise oversight and broad supervision over the affairs of its subsidiaries which could conceivably take the form of seats on the BoD, appointment of key managerial personnel, auditing of affairs of the subsidiary and so on.

Subsidiaries are also recognised in law to have a distinct and independent legal persona which is liable to be ignored only in the event of apparent fraud, being interposed with a view to camouflage sham transactions or of being created to perpetuate an illegality and of being a mere puppet and lacking in economic substance, added the Bench.

The Bench clarified that merely because a parent entity may exercise shareholder influence over its subsidiary, would not lead to an assumption that the subsidiary in question was operating as a mere puppet or that it was wholly subservient to the parent entity.

The Bench also pointed that mere factum of an entity being situated in Mauritius and of investments in Mauritius being routed through that nation cannot result in a default adverse inference or raise a presumption of illegality or of such an entity being a colourable device, nor are Mauritian entities required to satisfy any separate standard of legitimacy or stricter standard of proof.

The Bench also pointed that Mauritius is one of the more favourable jurisdictions for FII's seeking to invest in India as a result of its proximity to India, and thus it is erroneous to presume that investments originating from Mauritius are inherently suspect.

The Bench elaborated that establishment of investment vehicles in tax friendly jurisdictions cannot be considered to be an anomaly or give rise to a presumption of being situate in those destinations for the purpose of evading tax or engaging in treaty abuse.

The Bench therefore observed that legitimate business activities undertaken by entities cannot be characterised as constituting treaty shopping, merely because it was situated in a favourable tax jurisdiction.

The issuance of a TRC by the competent authority must be considered to be sacrosanct and due weightage must be accorded to the same as it constitutes certification of the TRC holding entity being a bona fide entity having beneficial ownership domiciled in a Contracting State to pursue a legitimate business purpose in a Contracting State, added the Bench.

The High Court therefore quashed the order of the AAR allowed the Assessee's petition while concluding that the transaction in question is duly grandfathered by virtue of Article 13(3A) of the Indo-Mauritius DTAA.

Counsel for Petitioner/ Assessee: Senior Advocate Porus Kaka along with Advocates Manish Kanth, Parul Jain, Afaan Arshad, Arijit Ghosh, Anirudh Srinivasan and Brijesh Ujjainwal

Counsel for Respondent/ Revenue: ASG Chetan Sharma along with Advocates G.C. Srivastava, Kalrav Mehrotra, Mayank Patawani, Asheesh Jain, Gaurav Kumar, Neha Narang, Sunil Agarwal, Shivansh Pandya, and Utkarsh Tiwari

Case Title: TIGER GLOBAL INTERNATIONAL III HOLDINGS Vs THE AUTHORITY FOR ADVANCE RULINGS (INCOMETAX) & ORS

Citation: 2024 LiveLaw (Del) 952

Case number: W.P.(C) 6764/2020 & CM APPL. 23479/2020

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