The Authority for Advanced Ruling (AAR), on 26 March 2020, ruled that gains arising to the applicants (private companies incorporated in Mauritius) from sale of shares held by them in Flipkart Private Ltd (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. The reasons given by the Authority are that the real management and control of the applicants was not with their respective Board of Directors in Mauritius but with one US based person, who was the beneficial owner of entire group structure and the applicant companies were only a ‘see-through entity’ to avail benefits of India-Mauritius DTAA. The applicants had not made any other investment other than in shares of Flipkart; thus, the real intention of the applicants was to avail benefit of India-Mauritius treaty.
Since capital gains had not been derived by alienation of shares of any Indian company, rather capital gains arose on sale of shares of the Singapore Company, the entire arrangement was nothing but an arrangement for avoidance of tax in India. The Authority thus rejected the applications for advance ruling under section 245Q(1) and held in favour of the Revenue.
Tiger Global International II Holdings, Tiger Global International III Holdings and Tiger Global International IV Holdings (“the applicants”), are private companies limited by shares incorporated under the laws of Mauritius. They were set up with the primary objective of undertaking investment activities with the intention of earning long term capital appreciation and investment income. The applicants are regulated by the Financial Services Commission in Mauritius and have been granted a Category 1 Global Business License under section 72(6) of the Financial Services Act, 2007 and are tax resident of Mauritius under the laws of Mauritius and under the provisions of the Agreement between India and Mauritius for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Foreign Countries.
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.
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?
The Authority ruled as under:
“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 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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