Supreme Court: Tiger Global liable to pay tax for Flipkart stake sale

They then sought a “nil” withholding tax certificate from Indian tax authorities. Among others, they contended that their gains were exempt from Indian capital gains tax in terms of the “grandfathering” clause of the DTAA as the shares were acquired before April 1, 2017.

The tax authorities rejected this saying “they were not independent in their decision-making and that control over the decision-making relating to the purchase and sale of shares did not lie with them.” The Tiger Global entities then approached the Authority for Advance Rulings (AAR) which, too, by order dated March 26, 2020, rejected their claim.

The AAR held that “exemption granted to a resident of Mauritius applied only to capital gains arising from the alienation of shares of an Indian company. In the present case, however, the capital gains arose from the sale of shares of a Singapore Co., and hence, the transaction did not qualify for exemption under the Mauritius Treaty”. It also “concluded that the transaction was a preordained arrangement created for the purpose of tax avoidance.”

The Authority said that “the investment made by the assesses in the Singapore Co., with an Indian subsidiary, was with a prime objective of obtaining benefits under the DTAA between Mauritius and India, and between Mauritius and Singapore. The AAR further noted that the assessees were part of Tiger Global Management LLC, USA, and were held through its affiliates via a web of entities based in the Cayman Islands and Mauritius…Therefore…the head and brain of the companies and, consequently, their control and management were situated not in Mauritius but outside, particularly in the USA.”

On appeal, the Delhi High Court quashed the AAR order saying it “suffered from manifest and patent illegalities.” It said the AAR’s view with respect to the transaction in question was “wholly untenable and unsustainable. Consequently, its conclusion that the impugned transaction was designed for tax avoidance was held to be arbitrary and incapable of being sustained. In the opinion of the High Court, the transaction stood duly grandfathered by virtue of Article 13(3A) of the DTAA.” This was challenged before the Supreme Court which set aside the HC order.