Delhi High Court Overturns AAR Ruling: Tiger Global International Holdings and India-Mauritius DTAA Capital Gains Exemption

Tiger Global International II, III, IV Holdings (TGI), hereafter referred to as the “taxpayer” or “applicant,” are private companies incorporated in Mauritius, primarily established for investment activities on behalf of Tiger Global Management LLC (“TGM LLC”), a Delaware-based company. TGM LLC is the investment manager for the applicants, which are owned by a private equity fund with around 500 investors from 30 countries.

The applicants were granted a Category 1 Global Business License and hold a Tax Residence Certificate (TRC) issued by the Mauritius Revenue Authorities, certifying their tax residency in Mauritius. Between October 2011 and April 2015, TGI acquired shares in Flipkart Singapore, a company whose value was primarily derived from assets located in India.

On 18 August 2018, the three applicants transferred a portion of their shares in Flipkart Singapore to Fit Holdings S.A.R.L., a Luxembourg-based buyer. This transaction was part of a broader acquisition by Walmart of Flipkart, which involved the sale of shares from various shareholders, including the applicants.

Tax Filings and Dispute: The applicants filed applications with Indian tax authorities on 2 August 2018, seeking a ‘Nil’ withholding tax certificate under Section 197 of the Income Tax Act, 1961 (ITA). However, on 17 August 2018, the tax authorities rejected the application, determining that the applicants were ineligible to claim benefits under the India-Mauritius tax treaty (Article 13), as the decision-making regarding the purchase and sale of shares did not lie independently with the applicants, but was controlled by TGM LLC in the U.S.

Subsequently, the tax authorities issued an order on 17 August 2018, prescribing a 10% tax withholding rate on the sale of shares. The applicants transferred their shareholding in Flipkart Singapore to Walmart on 18 August 2018, and on 19 February 2019, they filed an application before the Authority for Advance Rulings (AAR) to determine if the gains from the sale of shares were taxable in India under the ITA in light of the India-Mauritius DTAA.

Sequence of Events:

• October 2011-April 2015: Tiger Global International Holdings – TGI acquired shares in Flipkart Singapore.
• May 2016: India-Mauritius DTAA was amended, introducing Article 13(3A) and a grandfathering clause.
• April 1, 2017: The effective date for Article 13(3A) of the DTAA, which protected shares acquired before this date.
• May 9, 2018: Walmart executed a share purchase agreement with Flipkart Singapore shareholders.
• August 2, 2018: Tiger Global International Holdings applied for a ‘Nil’ withholding tax certificate.
• August 17, 2018: The tax authorities rejected the application and imposed a 10% withholding tax.
• August 18, 2018: The applicants transferred their shareholding in Flipkart Singapore to Fit Holdings.
• February 19, 2019: Tiger Global International Holdings filed an application before the AAR for tax exemption confirmation.
• March 26, 2020: AAR rejected Tiger Global International Holding’s application, ruling the transaction was designed for tax avoidance.
• May 16, 2024: Delhi High Court (HC) reserved judgment on TGI’s petitions challenging the AAR ruling.
• August 28, 2024: Delhi HC delivered its judgment, overturning the AAR ruling and upholding the benefits under the India-Mauritius DTAA.

Findings by AAR: The AAR rejected the applicants’ claim for tax exemption under Article 13 of the India-Mauritius DTAA on several grounds:

• Investment Holding Structure: The AAR noted that the principal objective of the applicants was to act as investment holding companies without any substantial commercial activity in Mauritius.
• Control and Management: The AAR held that “control and management” did not refer to day-to-day affairs but the overall direction or the “head and brain” of the company. Despite the board of directors being based in Mauritius, the real control was found outside Mauritius, particularly in the U.S. via TGM LLC.
• Decision-Making: The AAR emphasized that key financial decisions, including the authorization of transactions above $250,000, were handled by two personnel not on the board, with approval processes in place that were controlled by individuals based outside Mauritius. The AAR concluded that these individuals, particularly Mr. Charles P. Coleman, controlled the overall structure.
• Treaty Interpretation: The AAR interpreted the India-Mauritius DTAA in light of Circular No. 682 (March 1994), which clarifies that only capital gains from the sale of Indian company shares were exempt from Indian tax. Since the shares in question were those of a Singaporean company, the AAR ruled that the petitioners were not entitled to tax exemption.

Revenue Contention:

• The Revenue argued that the applicants were conduits for TGM LLC, with no real independence in decision-making. The ultimate control was exercised by TGM LLC, based in the U.S. The Revenue contended that the tax exemption claim was an abuse of the DTAA.
• Conduit Company Allegation: The Revenue alleged that the Mauritius entities were set up as conduit companies designed only to exploit the tax treaty, without substantial operations in Mauritius.
• Control and Fund Management: The Revenue further argued that the real management of the applicants was in the U.S., as evidenced by the control over significant transactions by Mr. Coleman and Mr. Castro, who were not on the Board of Directors.
• Chapter X-A & GAAR: The Revenue invoked General Anti-Avoidance Rules (GAAR) to argue that the applicants’ structure had insufficient economic substance to claim DTAA benefits.

Taxpayer’s Contention:

• TRC as Primary Evidence: The taxpayer emphasized that the Tax Residency Certificate (TRC) issued by the Mauritius authorities should be considered the primary and sufficient proof for claiming DTAA benefits, and the motives for establishing the Mauritius entities should not be questioned.
• DTAA Interpretation: The taxpayer argued that the amendments made to the DTAA in 2016 did not alter the fundamental right to claim treaty benefits. They asserted that no provisions had been added to the treaty to preclude the claim for exemption from capital gains tax.
• Beneficial Ownership: The taxpayer contended that the concept of beneficial ownership should not apply to Article 13, as the capital gains provisions of the treaty do not require beneficial ownership.
• Management Control: The taxpayer insisted that their entities were independently managed by the board of directors in Mauritius, countering the Revenue’s claim that they were mere conduits.

High Court’s Key Observations:

• Economic Substance: The HC noted that the Mauritius entities had significant economic substance, pooling investments from over 500 global investors and engaging in legitimate business operations.
• Board Decision-Making: The HC emphasized that the board of directors made collective decisions, and the power of Mr. Coleman, although significant, was granted by the board itself, ensuring independence in decision-making.
• TRC Sanctity: The HC reinforced the sanctity of the TRC, holding that its validity could only be questioned in cases of fraud or sham transactions.
• Grandfathering Clause: The HC upheld the applicability of the grandfathering provisions in Article 13(3A) of the DTAA, which exempted gains arising from shares acquired before 01 April 2017. The court ruled that the transaction was protected under this clause and not subject to capital gains tax.
• Primacy of Treaty Provisions: The HC concluded that the DTAA provisions take precedence over domestic tax law, rejecting the Revenue’s attempt to impose additional conditions outside the scope of the treaty.

Conclusion: The Delhi High Court ruled in favor of the petitioners, quashing the AAR’s ruling. It held that the applicants were entitled to the tax benefits under the India-Mauritius DTAA, particularly under the grandfathering clause of Article 13(3A), and that the transaction was not designed for tax avoidance. This decision provides significant clarity on the interpretation of treaty benefits, the role of TRCs, and the application of the Limitation of Benefits (LOB) clause in the context of Mauritius-based entities.