21 Jun 2020 22:22 IST

Will ruling on Tiger Global’s sale of Flipkart shares impact future PE exits?

The Authority for Advance Ruling said the DTAA benefits would not be applicable in this case

Not many may be aware that e-commerce major Flipkart is not incorporated in India but under the laws of Singapore, making it a Singaporean corporate entity. But most of Flipkart’s assets and operations were held and carried out in India; so the value of shares of the Singapore company is derived substantially from its Indian assets.

Some shares of Flipkart are held by subsidiaries of US-based company Tiger Global. These subsidiaries are tax residents of Mauritius.

In 2018, as part of a much-talked about deal, Tiger Global sold a certain percentage of shares of Flipkart to Walmart Inc., a company incorporated in the US.

As per the provisions of the Income-Tax Act, whenever there is a direct or indirect transfer of assets located in India, the seller is charged capital gains tax. Thus, Tiger Global is liable to tax on selling shares of Flipkart, which derived income from assets in India.

But Tiger Global claimed tax benefit under the Double Tax Avoidance Agreement (DTAA) between India and Mauritius. For starters, the DTAA is an agreement between two countries, with the objective of avoiding taxation of the same income in both countries. As per Article 13 of the DTAA between India and Mauritius, the capital gains on the sale of shares in an Indian company will not be taxed in India, if investments were made before April 1, 2017.

But the Income Tax department denied the benefit under DTAA to Tiger Global, which then sought an advance ruling whether gains arising from sale of shares held by them in Flipkart would be chargeable to tax in India. Advance ruling is a tool for multinational corporations and for individual tax filers to request clarification on taxation arrangements.

Both Tiger Global and the Income-Tax Department filed their submissions before the advance ruling authority.

AAR judgement

The Authority for Advance Ruling (AAR) examined the facts of the case and found that the scheme was designed to avoid payment of tax on capital gains and ruled that the DTAA benefit will not be applicable in this case.

The AAR found that the real management and control of Tiger Global companies in Mauritius was not with their respective board of directors but with one US-based person, who was the beneficial owner of the entire group structure. The AAR concluded that the “head and brain” of the companies and consequently their control and management was situated not in Mauritius but outside — in the US.

The AAR also pointed out that the Mauritius companies, in this case, had not made any other investment other than in shares of Flipkart; thus, the real intention of applicants was to get the benefit of the India-Mauritius treaty.

The AAR concluded that the applicant companies were only ‘see-through entities’ created to reap the benefits of the India-Mauritius DTAA.

The AAR also backed its ruling based on a nuanced tax provision under the DTAA between India and Mauritius. It pointed out that, as per the DTAA, residents of Mauritius are exempted from capital gains derived on sale of shares of an Indian company. In the present case, capital gains have not been derived by sale of shares of any Indian company but by sale of shares of a Singapore company. The AAR concluded that the applicants’ case has no merits and fails on the ground of treaty eligibility as well.

Impact on future exits

Will this ruling impact future investments into India through Mauritius? This seems unlikely, as the benefit under the DTAA between India and Mauritius is anyway not available for investments made on or after April 1, 2017.

Though AAR rulings are applicable only to the specific cases in question, similar cases in the future may be evaluated based on the rationale used in the earlier verdict.

Future exits of investments made in India before April 2017 through Mauritius could be evaluated in detail, going ahead, to determine if the benefit under the tax treaty will be available.

Vaibhav Gupta, Partner, Dhruva Advisors, says, “Funds may now be mindful of the active control and management aspects when they make an exit and budget for such stands by the tax department.”

Also, the ruling has significance for indirect transfers where the AAR held that tax exemption under the DTAA is not available for non-Indian companies (not incorporated in India). On this point, Gupta says “The Andhra Pradesh High Court, in one such case, had ruled positively on the availability of the India-France treaty on indirect transfers.” He adds that it will be interesting to see how this gets determined judicially, given that Tiger Global is set to seek relief from a higher court.