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Analysis of AAR Ruling in Tiger Global International Holdings’ Transfer of Flipkart’s Shares

It appears that unsettling the already settled legal position has become the new normal in legal jurisprudence now a days. The case in point is the recent ruling pronounced by AAR in the Group Cases of Tiger Global International Holdings, Mauritius in Re (AAR/04/05/07 of 2019).

In the said ruling, AAR has adjudicated upon the question of whether capital gains arising to the Mauritius based Group Companies of Tiger Global International Holdings, Mauritius, (the applicants), from the sale of shares held by them in M/s Flipkart Pvt Ltd, a Singapore based company (deriving its value substantially from assets located in India) would be chargeable to tax in India under the Income-tax Act read with India-Mauritius tax treaty and has pronounced the undermentioned findings and conclusion:

“In view of the foregoing, we are of the considered opinion that the issue involved in the question raised in the present applications was designed prima facie for avoidance of tax. 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. Further, as discussed earlier the actual control and management of the applicants was not in Mauritius but in USA with Mr. Charles P. Coleman, the beneficial owner of the entire group structure. Therefore, we have no hesitation to conclude 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 is found to be squarely applicable to the present cases. Accordingly, the applications are rejected.

Thus, AAR has denied the Indo-Mauritius Treaty benefit (article 13(4)) of exemption of capital gains arising to the applicants from the transfer of shares held by them in Flipkart Pvt Ltd, primarily on two grounds viz.

a.  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 applicants have transferred shares of a Singapore based company and not that of an Indian company, and as such the applicants are not entitled for the treaty benefit.

b. The actual control and management of the applicants was not in Mauritius but in USA with Mr. Charles P. Coleman, the beneficial owner of the entire group structure. So, 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.

Author’s Humble Observations & Analysis of AAR Ruling:

Interestingly, if one goes by AAR’s categorical conclusion that the applicants have transferred shares of a Singapore based company and not that of an Indian company, irrespective of the fact that the said shares derived their value substantially from the assets located in India, and as such the applicants were not eligible for Indo-Mauritius Tax Treaty benefits, then the very question of taxing such capital gains in India, on sale of shares of a Singapore based company should not arise at all at the first instance, and the consequential requirement of availing Indo-Mauritius Tax Treaty benefit by the applicants will not arise at all,  as the entire edifice of the Revenue Authorities in this case was based upon the retrospective amendment brought in by the Legislature in section 9 of the Income Tax Act, providing for taxability of capital gains in India, arising on transfer of shares of a foreign company, if such shares derive their value substantially from the assets located in India, subsequent to the Hon’ble Supreme Court judgement in Vodafone International Holding BV (341 ITR 1), and which edifice has been disregarded by AAR.

Further, the above two reasonings and observations of AAR appear to be contradictory to each other.

On one hand, AAR has given primacy to the theory of legal ownership of shares over beneficial ownership in coming to the conclusion that the applicants have transferred shares of a Singapore based company Flipkart Pvt Ltd, and not that of an Indian company, even though shares of the Singapore company derived their value substantially from assets located in India.

However, on the other hand, in coming to the conclusion that the actual control and management of the applicants was not in Mauritius but in USA with Mr. Charles P. Coleman, AAR has disregarded the sanctity of legal ownership of shares and have given overriding consideration to the beneficial ownership.

So, AAR, has considered the sale of shares of Flipkart Pvt Ltd as sale of shares of a foreign company, giving cognizance to legal ownership of such shares and completely disregarding the fact of such shares deriving their value substantially from assets located in India.

However, while adjudicating upon the issue of residential status of the applicants, AAR has completely disregarded the legal form and structure of the applicants, evidencing their Mauritius resident ship, and have instead given primacy to the fact of beneficial ownership of the applicants in USA.

Clearly, these two approaches and the consequential conclusions being arrived at by AAR are diametrically opposite to each other.

Further, it is pertinent to mention here that the issue of availability of treaty benefits in the case of indirect transfer of shares was more or less settled and various appellate forums and quasi-judicial authorities have time and again upheld the availability of treaty benefits even in cases of indirect transfer of shares.

The Andhra Pradesh High Court in the case of Sanofi Pasteur Holding SA 354 ITR 316 (AP), Mumbai Tribunal in the case of Sofina S.A. ITA No. 7241/MUM/2018, AAR in the case of GEA Refrigeration Technologies GmBH in AAR No. 1232 of 2012, have allowed benefit of tax treaty in case of indirect transfer of shares in context of India-France, India-Belgium, India-Germany tax treaties respectively.    

Further, surprisingly and interestingly AAR has rejected the reliance placed by the applicants on the earlier AAR ruling in the case of Moody’s Analytics Inc. USA (2012) 24 taxmann.com 41, and upheld by Delhi High Court in WP (C) 2033/2013, by observing that the issue involved in that case was capital gain on transfer of shares of Indian company and as such the facts of that case were different from the present case, where capital gains have arisen on sale of shares of Singapore based company.

However, it seems that in coming to such a conclusion, AAR has considered just one aspect of the said AAR Ruling in the case of Moody’s Analytics Inc. USA, i.e. the issue of gains arising on sale of Copal Research India Pvt Ltd (an Indian company), by Copal Research Ltd (a Mauritius based company) to Moody’s Analytics Inc.

Whereas as a matter of fact, in the said AAR Ruling in the case of Moody’s Analytics Inc. USA, AAR has also allowed the availability of Treaty benefits of exemption of capital gains on the indirect transfer of shares of Exevo India by its wholly owned holding company Exevo-USA via CMRL Mauritius to Moody USA, exactly in the similar manner as the indirect transfer of shares of Flipkart India by Flipkart Singapore to Walmart in the present case.

Lastly but not the least AAR has observed that,

“Therefore, we have no hesitation to conclude 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.”

However, in coming to such conclusion AAR has again disregarded and deviated from the well-settled and well-established legal proposition that “treaty shopping doesn’t tanta-amounts to avoidance of tax”, meaning thereby that any arrangement done within the framework of law, to take tax benefits of tax treaties doesn’t mean avoidance of tax, as has been upheld by the Hon’ble Supreme Court in Union of India and Anr. vs Azadi Bachao Andolan and Anr. (2004) 10 SCC 1 (SC).

No doubt, this present AAR Ruling in the Group Cases of Tiger Global International Holdings, Mauritius in Re (AAR/04/05/07 of 2019), has caused widespread tremors and ripples in the Tax Circles and has unsettled and disturbed the already settled legal propositions of:

(i) availability of treaty benefits in case of indirect transfer of shares;

(ii) treaty shopping doesn’t tanta-amounts to avoidance of tax;

and as such is naturally amenable to be contested in the High Court.