The applicants held shares of Flipkart Private Limited, a private company limited by shares incorporated under the laws of Singapore. The Singapore Co, in turn, had invested in multiple companies in India and the value of the shares of Singapore Co was derived substantially from assets located in India. On 18-8-2018 all the three applicants transferred certain shares of Singapore Co. to Fit Holdings S.A.R.L.(Buyer), a company incorporated under the laws of Luxembourg. These transfers were undertaken as part of a broader transaction involving the majority acquisition of Singapore Co. by Walmart Inc., a company incorporated in the United States of America, from several shareholders, including the applicants.

The applicants had approached the Indian tax authorities under section 197 of the Act on 2-8-2018 seeking a certification of nil withholding prior to consummation of the transfer. The tax authorities had informed that the applicants were not eligible to avail benefit under the Indo-Mauritius Tax Treaty as the applicants were not independent in their decision making and the control over the decision making of the purchase and sale of the shares did not lie with them. The tax authorities had passed an order under section 197 of the Act on 17-8-2018 prescribing a withholding rate of 6% in respect of sale of shares by the applicants. The applicants, thereafter, filed the applications for advance ruling under section 245Q(1) of the Act.

Issue

Whether, on the facts and in the circumstances of the case, gains arising to the Applicants (a private company incorporated in Mauritius) from the sale of shares held by the Applicants in Flipkart Private Limited (a private company incorporated in Singapore) to Fit Holdings S.A.RL. (a company incorporated in Luxembourg) would be chargeable to tax in India under the Income-tax Act, 1961 read with the Double Taxation Avoidance Agreement between India and Mauritius?

Held

The Authority ruled as under:

• There is nothing wrong if funds for making FDI by Mauritius companies/individuals had not originated from Mauritius but had come from investors of third countries. This could not be a basis to treat arrangement as tax avoidance. As per clause (iii) of proviso to section 245R(2) of the Act, the Authority shall not allow the application where the question raised in the application relates to a transaction or issue which is prima facie for avoidance of income-tax.

• Tax avoidance itself is not illegal perse. In the scheme of tax avoidance, the taxpayer discloses all the relevant facts to tax authorities and claims benefit as provided under the law. The tax avoidance may be considered as legal as the transactions are so planned that relief is obtained; even though it was not as per the intent of the lawmakers. What is to be examines is whether the transaction or the issue raised by the applicants was designed prima facie for availing the benefit which may appear to be correct but was not intended by the lawmakers.

• At the stage of admission the requirement is not to conclusively establish that there was tax avoidance rather it has to be demonstrated that prime facie the transaction or the issue was designed for avoidance of tax. Therefore, the probability of avoidance of tax has to be decided on the basis of evidences and materials brought on record and by drawing inferences therefrom.

• The contention of the applicants that the transaction involved in the present application was sale of shares simpliciter undertaken between two unrelated independent parties is too simplistic to be accepted. The capital gain is not dependent on mere sale of shares. As per the mechanism of computation of capital gains, the cost of acquisition of shares is to be reduced from the sale price of shares. Therefore, what is relevant is not only the sale of shares but also the purchase of shares.

• It is found from the Notes to Financial Statement that the principal objective of the applicant companies was to act as an investment holding company for a portfolio investment domiciled outside Mauritius. The investment made by the applicants in the Singapore Company, with Indian subsidiary, was with a prime objective to obtain benefits under the double taxation treaty between Mauritius and India and between Mauritius and Singapore. The applicants are part of Tiger Global Management LLC USA and have been held through its affiliates through a web of entities based in Cayman Islands and Mauritius. Though the holding-subsidiary structure might not be a conclusive proof for tax avoidance, the purpose for which the subsidiaries were set up does indicate the real intention behind the structure. The fact that the applicants were set up for making investment in order to derive benefit under the DTAA between Mauritius and India is an inescapable conclusion.

• As is evidenced from the Minutes of the Meeting of Board of Directors of the applicants, the key decisions were taken by Mr. Steven Boyd, the non-resident Director, who was also General Counsel of Tiger Global Management LLC and that the other Directors were not independent but mere puppets. It is found that Mr. Steven Boyd was the non-resident Director of the applicant companies. Under the circumstance no adverse inference can be drawn if he was privy to the crucial decisions taken in the Board meetings. Therefore, relying on Vodafone, the Revenue’s submission that funds had come not from the applicants but from the promoters in USA, so as to treat the arrangement as tax avoidance, has to be rejected.

• What is relevant to consider is the control and management of the applicant companies. Though the applicants have submitted that their control and management was with the Board of Directors in Mauritius, what is material is not the routine control of the affairs of the applicants but their overall control. The control and management of applicants does not mean the day-to-day affairs of their business but would mean the head and brain of the Companies. Therefore, it will be relevant to examine whether the head and brain of the applicants was in Mauritius. The fact that the authority to operate the bank accounts for transaction above US$ 2,50,000 was with Mr. Charles P. Coleman, countersigned by one of the Mauritius based Directors, has not been disputed by the applicants. As per clause 31 of the Constitution document of the applicant companies, the principal bank account of the companies had to be maintained in Mauritius. Further clause 30.2 of the said document stipulated that all cheques or orders for payment shall be signed by any two directors or by such other person or persons as the directors may from time to time appoint. The applicants have submitted that there was nothing wrong with Mr. Charles P. Coleman being appointed by the Board of Directors as signatory of cheques above a particular limit. Although apparently, the argument of the applicants may seem logical, however, as the principal bank account of the applicants was maintained in Mauritius, it would have made sense if a local person based in Mauritius was appointed to sign the cheques on behalf of the Directors. The applicants have not explained as to why Mr. Charles P. Coleman, who was not based in Mauritius was appointed to sign the cheques of Mauritius bank account. In this regard it is relevant to consider that Mr. Charles P. Coleman was the beneficial owner as disclosed by the applicants in the application form for Category “I” Global Business Licence filed with Mauritius Financial Services Commission. Mr. Coleman was also the authorized signatory for the immediate parent company of the applicants viz. Tiger Global Five Percent Holdings and Tiger Global Six Percent Holdings and was also the sole Director of ultimate holding company Tiger Global PIP Management V Limited and Tiger Global PIP Management VI Limited. In view of these facts, the appointment of Mr. Charles P. Coleman as authorized signatory of bank cheques above a limit can’t be considered as a mere coincidence.

• The applicants have contended that authorization to certain person to operate its bank account doesn’t ipso facto mean that the applicants had no control over its funds. It must be considered that authorization given by the applicants to operate its bank account was not to certain person but to Mr. Charles P.Coleman, whose influence over the group has been described in the preceding para. Mr. Charles P.Coleman and another authorized signatory Mr. Anil Castro, though being not on the Board of Directors of the applicants, were the key personnel of the Group and were managing and controlling the affairs of the entire organization structure. It is evident that the funds of the applicants were ultimately controlled by Mr. Charles P. Coleman and the applicants had only a limited control over their fund. Apparently, the decision for investment or sale was taken by the Board of Directors of the applicants but the real control over the decision of any transaction over USD 2,50,000 was exercised by Mr. Charles P. Coleman only. Obviously, he was controlling the decision of the Board of Directors of the applicants through the non-resident Director Mr. Steven Boyd who was accountable to him. Therefore, the head and brain of the companies and consequently their control and management was situated not in Mauritius but outside in USA.

• The applicants have contended that the holding structure of the applicants has no relevance to determine whether the transaction was prima facie designed for avoidance of tax. In our opinion it is not the holding structure only that would be relevant. The holding structure coupled with prima facie management and control of the holding structure, including the management and control of the applicants, would be relevant factors for determining the design for avoidance of tax. As discussed earlier, the real management and control of the applicants was not with their respective Board of Directors but with Mr.Charles P. Coleman, the beneficial owner of the entire group structure. The applicant companies were only a “see-through entity” to avail the benefits of India-Mauritius DTAA.

• The applicants have submitted that a claim for treaty eligibility does not tantamount to tax avoidance. The applicants’ claim for exemption of capital gains was in accordance with the provisions of Article-13 of India-Mauritius treaty. It is a settled principle that a treaty is to be interpreted in good faith. The context and purpose of the treaty must be determined on the basis of preamble and annexure including agreement, subsequent agreement regarding interpretation of terms of the treaties, relevant international rules applicable to the agreement etc. The Circular No. 682 dated 30-3-1994 issued by the CBDT had clarified that any resident of Mauritius deriving income from alienation of shares of Indian companies will be liable to capital gains tax only in Mauritius as per the Mauritius tax law and will not have any capital gains tax liability in India. It was imperative from this Circular that what was exempted for a resident of Mauritius was the capital gains derived on alienation of shares of Indian company. In the present case capital gains has not been derived by alienation of shares of any Indian company rather the applicants have come before us in respect to capital gains arising on sale of shares of Singapore Company. The Protocol for Amendment of Convention for Avoidance of Double Taxation between India and Mauritius was signed on 10-5-2016 which provided that taxation of capital gains arising from alienation of shares acquired on or after 1st April, 2017 in a company resident in India will be taxed on source basis with effect from financial year 2017-18. At the same time investment made before 1st April, 2017 was grandfathered and not subject to capital gains tax in India. Thus as per the amended DTAA between India & Mauritius as well, what was not taxable was capital gains arising on sale of shares of a company resident in India. It is thus crystal clear that exemption from capital gains tax on sale of shares of company not resident in India was never intended under the original or the amended DTAA between India and Mauritius. In view of this clear stipulation in the India-Mauritius DTAA, the applicants were not entitled to claim benefit of exemption of capital gains on the sale of shares of Singapore Company. Thus, the applicants have no case on merits and fail on the ground of treaty eligibility as well.

• It had been held by the Hon’ble Supreme Court in the case of Vodafone (supra) that DTAA and Circular No. 789 dated 13-4-2000 would not preclude the Income Tax Department from denying the tax treaty benefits in suitable cases. It was further held that the Department is entitled to look at the entire transaction of sale as a whole and if it is established that the Mauritian company was interposed as a device, it was open to the Tax Department to discard the device and take into consideration the real transaction between the parties, and the transaction may be subjected to tax. It is relevant to consider here that though the tax residency is stated to be established to take benefit of Mauritius tax treaty network with various countries and not just India, in effect the entire investment made by the applicants was with Singapore company only, in respect of which the benefit of India-Mauritius DTAA is being claimed. As is evident from their financial statements filed with the application, all the three applicants had not made any other investment other than in the shares of Flipkart. Thus, the real intention of the applicants was to avail the benefit of India-Mauritius treaty, whatever be the stated objective.

• Both, Revenue as well as the applicants have relied upon the decision of the Hon’ble Supreme Court in the case of Vodafone (supra) by selectively quoting from the said judgement. The Court had held in that case that the Revenue should apply ‘look at’ test to ascertain its true legal nature in order to distinguish between pre-ordained transaction created for tax avoidance and a transaction which evidenced investment participation in India. The relevant observation of the Court is reproduced below:

“73. …There is a conceptual difference between preordained transaction which is created for tax avoidance purposes, on the one hand, and a transaction which evidences investment to participate in India. In order to find out whether a given transaction evidences a preordained transaction in the sense indicated above or investment to participate, one has to take into account the factors enumerated hereinabove, namely, duration of time during which the holding structure existed, the period of business operations in India, generation of taxable revenue in India during the period of business operations in India, the timing of the exit, the continuity of business on such exit, etc…”

Applying the abovementioned yardsticks, the applicants fail miserably. There was no foreign direct investment made by the applicant companies in India and, therefore, there cannot be any question of participation in investment. The applicants had made investment in shares of Flipkart which was a Singapore company and thus the immediate investment destination was in Singapore and not in India. In view of this fact the applicants also fail on other yardsticks viz. the period of business operation in India, the generation of tax revenue in India, timing of exit and continuity of business on such exit. In the absence of any strategic foreign direct investment in India there was neither any business operation in India nor they ever generated any taxable revenue in India. In the absence of any direct investment in India one can only conclude that the arrangement was a pre-ordained transaction which was created for tax avoidance purpose.

• The applicants have contended that shares of the Singapore Company derived their value substantially from assets located in India and therefore, it was eligible to take benefit of Article 13 (4) of India – Mauritius Treaty. Even if the Singapore Company derived its value from the assets located in India, the fact remains that what the applicants had transferred was shares of Singapore Company and not that of an Indian company. The objective of India-Mauritius DTAA was to allow exemption of capital gains on transfer of shares of Indian company only and any such exemption on transfer of shares of the company not resident in India, was never intended by the legislator.

The Authority thus concluded that the entire arrangement made by the applicants was with an intention to claim benefit under India – Mauritius DTAA, which was not intended by the lawmakers, and such an arrangement was nothing but an arrangement for avoidance of tax in India. Therefore, the bar under clause (iii) to proviso to section 245R(2) of the Act was found to be squarely applicable to the present cases. Accordingly, the applications were rejected.

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