In a pivotal judgment, the Delhi High Court has come out with tax treaty benefits for Tiger Global in its exit from Flipkart, greatly assuaging the fears of the taxpayers. The issue in this case is one of interpretation of a provision under the India–Mauritius Double Tax Avoidance Agreement (DTAA), which has been widely debated over the years, especially in the context of its abuse for tax avoidance. The ruling delves into important issues such as the tax residency certificate (TRC), limitation of benefits (LoB) clause, and grandfathering provisions under the treaty.
The Case Background
The case involves Tiger Global International (the Assessee), a Mauritius-based private company primarily set up for investment activities on behalf of its Delaware-based investment manager, Tiger Global Management LLC (TGM LLC). The Assessee bought shares of Flipkart Singapore between October 2011 and April 2015, later, it transferred its shareholding to Fit Holdings SARL, a Luxembourg entity. In 2019, the Assessee approached the AAR for clarification as to its tax obligations on exit from Flipkart. This raised the ITD’s concern regarding the legitimacy of the structure in questioning whether the Mauritius-based entity was genuinely operated from Mauritius or was merely an intermediary set up for tax avoidance.
The AAR concluded that the Assessee and its holding entities were created with the sole purpose of avoiding taxes, citing TGM LLC as the real entity exercising control and management. This conclusion was based on the assumption that the Mauritius-based Assessee lacked substantial commercial substance, with most decision-making taking place in the United States.
The Assessee’s Arguments
The Assessee countered these findings by pointing to Article 13(3A) of the India–Mauritius DTAA, which provides an exemption from Indian capital gains tax for shares acquired before April 1, 2017. It also highlighted the importance of the TRC issued by Mauritius authorities as proof of its residency, in line with CBDT Circular No. 789. The Assessee emphasized the Azadi Bachao Andolan case, which established that treaty benefits must be granted based on the treaty’s terms, irrespective of the underlying motives.
Furthermore, the Assessee argued that the Limitation of Benefits (LoB) clause should not apply to this transaction, as the shares were acquired before 2017. The Assessee’s independent management structure was also disputed by the AAR’s view that the structure was set up solely for tax avoidance. The actual decision-making activities were undertaken by the Assessee’s board of directors located in Mauritius. The role of TGM LLC was to provide investment management services; it did not control or make decisions on behalf of the company.
ITD’s Position
The ITD, however, contended that the Mauritius-based entities were established with no substantial business rationale, solely for the purpose of tax avoidance. The department argued that TGM LLC had ultimate control over the Assessee and that the structure lacked commercial substance. Relying on the Vodafone case, where the corporate veil was pierced to expose the underlying tax avoidance structure, the ITD argued that the Assessee’s Mauritius registration was a sham. According to the ITD, the structure was devised to evade Indian tax obligations and, therefore, the Assessee was ineligible for the tax treaty benefits.
Delhi High Court’s Observations
The Delhi HC offered a well-reasoned response, rejecting the ITD’s assertions. It held that TGM LLC acted only as an investment manager, not as a parent or holding company. The Court found that the Assessee was a significant entity with a substantial economic presence, managing funds from over 500 investors across 30 jurisdictions. It was granted a Category 1 Global Business License and held a TRC issued by Mauritius authorities, confirming its legitimate residency.
The Court also made an important distinction between the presence of board members affiliated with Tiger Global Group and the actual decision-making processes. Despite these connections, the Assessee’s board, based in Mauritius, exercised real decision-making authority. The Court emphasized that just because some directors were affiliated with TGM LLC did not mean the board lacked independence or was controlled by external parties.
Regarding beneficial ownership, the Court found no evidence suggesting that TGM LLC had control over the Assessee’s assets or that the transactions were carried out on its behalf. Importantly, the Court ruled that the mere use of a tax-friendly jurisdiction like Mauritius could not automatically lead to a presumption of tax avoidance. The establishment of investment vehicles in such jurisdictions is common practice for multinational corporations seeking to optimize their tax strategies, and the Court recognized this as a legitimate business practice.
The Delhi HC also took a firm stance on the TRC, declaring it to be conclusive proof of an entity’s bona fide residency status. The Court ruled that the corporate veil could only be pierced if there was clear evidence of tax fraud or sham transactions. Since the ITD failed to provide compelling evidence of such abuse, the Court sided with the Assessee, asserting that treaty benefits should not be denied without strong proof of misconduct.
The Court finally upheld the grandfathering provision that finds its place in Article 13(3) of the DTAA, the clause clearly stating that the LoB clause is not applicable for shares acquired before April 1, 2017. According to the Court, this provision is binding irrespective of contrary domestic tax legislation, and it went on to emphasize that the GAARs prescribed in Indian tax law do not override the provisions of the DTAA in the instant case.
Key Takeaways
This decision is of great importance to the investor using the avenues of supple tax jurisdictions such as Mauritius to structure cross-border investments. This serves to strengthen the clear standing that tax treaties are meant to provide certainty and clarity while withholding benefits under such treaties only where there is specific evidence to show fraud or abuse.
The judgment also has wider ramifications for the extant legal debates surrounding treaties, especially in respect of Blackstone Capital Partners case, which is to be heard by the Supreme Court in September 2024. A case much taking in common in that it will revolve around tax treaty benefits to investment companies in jurisdictions such as Mauritius and Singapore, this case would further fortify India’s stance in tax treaties and anti-avoidance measures.
This decision by the Delhi HC stresses the need to respect tax treaty terms and clarifies that invocation of tax-avoidance-related arguments cannot be cavalierly done without firm evidence. The comfort rendered to taxpayers and foreign investors by this decision is by emphasizing that the Indian tax system sticks to the principle of legislative certainty, the rule of law, and fairness and justice in dealing with cross-border investments.
