'Transaction Designed For Tax Avoidance' : Supreme Court Denies Income Tax Relief To Tiger Global In Flipkart-Walmart Deal

The Supreme Court today ruled on a tax dispute arising from the 2018 sale of Flipkart's Singapore holding company to Walmart, in which Mauritius-based Tiger Global entities had earned substantial capital gains from the transaction. The Court held that the Authority for Advance Rulings was justified in rejecting, at the threshold, Tiger Global's applications seeking a ruling on the taxability of those gains, after finding that the transaction was prima facie designed for tax avoidance. The Supreme Court set aside the Delhi High Court's judgment which had set aside the AAR decision. “The applications preferred by the assessees relate to a transaction designed prima facie for tax avoidance and were rightly rejected as being hit by the threshold jurisdictional bar to maintainability, as enshrined in proviso (iii) to Section 245R(2). Accordingly, capital gains arising from the transfers effected after the cut-off date, i.e., 01.04.2017, are taxable in India under the Income Tax Act read with the applicable provisions of the DTAA”, a bench of Justice JB Pardiwala and Justice R Mahadevan held. The appeals before the Supreme Court were filed by the Authority for Advance Rulings against Tiger Global International II Holdings, Tiger Global International III Holdings and Tiger Global International IV Holdings - private companies incorporated under the laws of Mauritius. Between 2011 and 2015, the assessees had invested in shares of Flipkart Private Limited, a company incorporated in Singapore, which held investments in Indian companies. The value of the Singapore company's shares was derived substantially from assets located in India. The shares were sold in 2018 to Fit Holdings S.A.R.L., a Luxembourg-incorporated entity, as part of Walmart Inc.'s acquisition of Flipkart. The total consideration received by the three Tiger Global entities aggregated to approximately USD 2.083 billion from the 2018 Flipkart transaction. Before the transaction was completed, the assessees approached the Indian tax authorities under Section 197 of the Income Tax Act, 1961, seeking certificates for nil withholding of tax. On August 17, 2018, the tax authorities rejected the request and prescribed withholding tax on the sale of shares. Following this, the assessees approached the Authority for Advance Rulings under Section 245Q of the Act, seeking a ruling on whether the capital gains were chargeable to tax in India under the Act read with the India-Mauritius Double Taxation Avoidance Agreement. The AAR rejected the applications at the threshold by invoking clause (iii) of the proviso to Section 245R(2) of the Act, holding that the transaction was prima facie designed for avoidance of income tax. The AAR found that the real control and management of the assessees was not in Mauritius but outside the jurisdiction. The AAR also held that the assessees were conduit entities created to avail treaty benefits. Challenging the AAR's order dated March 26, 2020, the assessees approached the Delhi High Court by filing writ petitions. The Delhi High Court allowed the writ petitions and quashed the AAR's order. Aggrieved by the High Court's judgment, the Revenue filed the present appeals before the Supreme Court. Allowing the appeals, the Supreme Court held that Section 245R(2) requires only a prima facie satisfaction and not a final determination on merits. The Court observed that the AAR was not required to conclusively determine the taxability of the transaction before rejecting the applications. “The use of the term 'prima facie' implies that it is sufficient if the AAR, on an initial examination of the documents, is satisfied that the transaction is for avoidance of income tax and can reject the application”, the Court observed. The Supreme Court further held that the Revenue had prima facie established that the transaction was an impermissible tax avoidance arrangement, and held that Chapter X-A of the Income Tax Act, which contains the General Anti-Avoidance Rules, became applicable. “In our view, once it is factually found that the unlisted equity shares, on the sale of which the assessees derived capital gains, were transferred pursuant to an arrangement impermissible under law, the assessees are not entitled to claim exemption under Article 13(4) of the DTAA. The Revenue has proved that the transactions in the instant case are impermissible tax-avoidance arrangements, and the evidence prima facie establishes that they do not qualify as lawful. Consequently, Chapter X-A becomes applicable”, the judgment authored by Justice Mahadevan held. On the role of tax residency certificates, the Court reiterated that a TRC is only an eligibility condition and not conclusive proof of residence. The Court further observed that treaty provisions cannot be used to shield impermissible tax avoidance arrangements. “The object of a DTAA is to prevent...

'Transaction Designed For Tax Avoidance' : Supreme Court Denies Income Tax Relief To Tiger Global In Flipkart-Walmart Deal

Amisha Shrivastava

The Court observed that the benefit of the India-Mauritius Double Taxation Avoidance Agreement cannot be given to Tiger Global.

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