Case Analysis of Tiger Global International III Holdings v. Authority for Advance Rulings (Income- Tax) & Ors.

Tiger Global International III Holdings Vs Authority for Advance Rulings (Income- Tax) & Ors. (Delhi High Court)

The Delhi High Court delivered a significant judgment in the case of Tiger Global International III Holdings v. The Authority for Advance Rulings (Income-Tax) & Ors., reaffirming the importance of the Tax Residency Certificate (TRC) in international tax law. This case, closely watched by multinational corporations and tax professionals alike, centered on the legitimacy of the TRC as sufficient evidence for claiming benefits under double taxation avoidance treaties.

The court’s decision not only upheld the validity of the TRC as a crucial document for establishing tax residency but also set a precedent that could influence future cross-border tax disputes. The ruling reinforces India’s commitment to honoring its treaty obligations and provides much-needed clarity for foreign investors operating in the country. By doing so, the judgment ensures that multinational entities can rely on their TRCs to avail themselves of tax benefits without facing unnecessary bureaucratic hurdles or potential litigation.

This ruling is poised to have far-reaching implications, particularly in how India is perceived as a destination for foreign investment. The affirmation of the TRC’s validity underscores the importance of treaty benefits in promoting cross-border trade and investment, offering reassurance to global investors who seek to navigate the complexities of India’s tax regime.

Facts

The case involves three writ petitions filed by Tiger Global International II Holdings (TG II), Tiger Global International III Holdings (TG III), and Tiger Global International IV Holdings (TG IV) (collectively referred as the petitioners) challenging an order dated March 26, 2020 passed by the Authority for Advance Rulings (AAR).

The petitioners, which are private companies incorporated in Mauritius and hold a Category 1 Global Business License, had acquired shares of Flipkart Private Limited, a Singapore company, between October 2011 and April 2015. On May 9, 2018, the petitioners agreed to sell a significant portion of their Flipkart Singapore shares to Walmart International Holdings, Inc. On August 2, 2018, the petitioners approached the tax authorities for a certificate of nil withholding tax under Section 197 of the Income Tax Act, 1961 in relation to the share sale transaction. However, on August 17, 2018, the tax authorities denied the petitioners the benefits of the India-Mauritius Double Taxation Avoidance Agreement (DTAA) and issued a certificate requiring Walmart to withhold tax at a rate of 10% plus surcharge and cess on the sale consideration.

Aggrieved, the petitioners filed applications before the AAR on February 19, 2019, seeking an advance ruling on the taxability of the capital gains from the share sale. The AAR dismissed the petitioners’ applications on March 26, 2020, holding that the transaction was prima facie designed for the avoidance of tax and thus fell within the scope of the proviso to Section 245R(2) of the Income Tax Act, 1961. The petitioners have now challenged the AAR’s order through the present writ petitions. The key legal issues in the case relate to the economic substance of the petitioners, the validity and conclusiveness of their Tax Residency Certificates, the applicability of the India-Mauritius DTAA, and the interplay between the DTAA and India’s domestic tax laws, including the General Anti-Avoidance Rules (GAAR).

Issues Involved

The issues addressed in the judgment are as follows:

• Whether the transactions entered into by the petitioners were prima facie designed for the avoidance of tax, thereby attracting the bar under clause (iii) of the proviso to Section 245R(2) of the Income Tax Act, 1961.
• Whether the petitioners were entitled to claim the benefits of the DTAA between India and Mauritius in respect of the sale of shares of Flipkart Private Limited, a Singapore company, and the taxability of the capital gains arising therefrom.
• Whether the AAR was justified in holding that the petitioners were mere conduit companies and not entitled to claim the benefits of the DTAA, on the ground that the transactions lacked commercial substance and the establishment of entities in Mauritius was primarily aimed at deriving undue benefits under the DTAA.
• Whether the AAR was correct in concluding that the head and brain of the petitioner companies was not situated in Mauritius, but in the United States, and that the real control over the decision-making and funds of the petitioners was exercised by persons connected to the US-based parent company, Tiger Global Management LLC (TGM LLC).
• Whether the AAR was justified in disregarding the TRCs issued by the Mauritian authorities and in denying the petitioners the benefits of the DTAA.
• Whether the amendments introduced in Section 9 of the Income Tax Act, 1961 by the Finance Act, 2012, relating to indirect transfers, can override the provisions of the DTAA.
• Whether the provisions of Chapter X-A of the Income Tax Act, 1961 (General Anti-Avoidance Rules) would apply to the transactions entered into by the petitioners, even though the investments were made prior to April 1, 2017.

Arguments by the Appellant(s):

• The DTAA between India and Mauritius clearly exempts capital gains derived by a Mauritius resident from the sale of shares of an Indian company from taxation in India. This is evident from CBDT Circular No. 682 dated 30 March 1994 and Circular No. 789 dated 13 April 2000, which clarify that a Mauritius resident deriving income from the alienation of shares of Indian companies will be liable to capital gains tax only in Mauritius as per Mauritius tax law and will not have any capital gains tax liability in India.
• The validity and conclusiveness of a TRC issued by the Mauritian authorities cannot be questioned by the Indian tax authorities. The Punjab and Haryana High Court in Serco BPO P. Ltd. v. Authority For Advance Ruling and Ors. held that once it is established that a TRC has been issued by the Mauritian authorities, the validity thereof cannot be questioned by the Indian authorities.
• The unilateral amendments introduced in Section 9 of the Income Tax Act, 1961 by the Finance Act, 2012 to bring indirect transfers within the tax net cannot override the existing tax treaties. This is evident from the speech of the Finance Minister during the debates surrounding the Finance Bill, 2012, wherein he clarified that the clarificatory amendments do not override the provisions of the DTAA.
• The concept of beneficial ownership is not even adopted in Article 13 of the DTAA, which deals with capital gains. Therefore, the AAR’s reliance on the concept of beneficial ownership to deny the petitioners the benefits of the DTAA is erroneous.
• The Limitation of Benefits clause in Article 27A of the DTAA clearly lays down the conditions for a resident of a Contracting State to be entitled to the benefits of Article 13(3B). The petitioners have satisfied the conditions prescribed in Paragraph 4 of Article 27A, and therefore, the AAR cannot treat them as shell or conduit companies.
• The AAR has erroneously proceeded on the premise that TGM LLC was the parent and holding company of the petitioners, despite the petitioners consistently asserting that TGM LLC was merely the investment manager and had neither equity participation nor had made any investments in the petitioners.
• The AAR has failed to bear in mind that the DTAA does not embody an enabling provision authorizing the Indian tax authorities to tax an indirect transfer of assets. Several other DTAAs to which India is a party specifically incorporate provisions levying a tax on capital gains arising from indirect transfer of assets, but the India-Mauritius DTAA does not contain any such provision.
• The finding in the impugned order that TGM LLC is the holding or parent company of the petitioner is wholly erroneous. The petitioners have consistently taken the unvacillating position with respect to the shareholding position of the writ petitioners and of TGM LLC being the investment manager of the petitioner and not the holding or parent company. Furthermore, none of the funds invested in the petitioner originated from TGM LLC, there has been no equity participation or investments made by TGM LLC in the writ petitioners or any evidence put forth with respect to any monies being repatriated to TGM LLC from the writ petitioners.
• The facts as they emanate from the record categorically establish that the petitioner cannot be said to be an entity lacking in economic substance. The petitioners were intended to operate as pooling vehicles for investments, held a Category 1 GBL, had aggregated funds from more than 500 investors located across 30 jurisdictions worldwide and had TGM LLC as its investment manager.
• Merely because a parent entity may exercise shareholder influence over its subsidiary that would not lead to an assumption that the subsidiary in question was operating as a mere puppet or that it was wholly subservient to the parent entity. In light of the aforesaid, it is clear that merely because two of the members of the Board of the petitioner, namely, Mr. Charles P. Coleman and Mr. Steven Boyd are connected with the TG Group does not in itself render credence to the argument that the writ petitioners are mere puppets. An overall conspectus of the board resolutions reveals that the decisions were undertaken by the Board of Directors of the petitioner collectively.
• The mere factum of an entity being situated in Mauritius and of investments in Mauritius being routed through that nation cannot result in a default adverse inference or raise a presumption of illegality or of such an entity being a colourable device, nor are Mauritian entities required to satisfy any separate standard of legitimacy or stricter standard of proof.
• The issuance of a TRC by the competent authority must be considered to be sacrosanct and due weightage must be accorded to the same as it constitutes certification of the TRC holding entity being a bona fide entity having beneficial ownership domiciled in a Contracting State to pursue a legitimate business purpose in a Contracting State. The Revenue would thus not be justified in doubting the presumption of validity attached to the TRC as it would inevitably result in an erosion of faith and trust reposed by Contracting States in each other.
• Domestic tax legislation cannot be interpreted in a manner which brings it in direct conflict with a treaty provision or with an overriding effect over the provisions contained in a DTAA since the same would in effect amount to accepting the right of the Legislature of one of the Contracting States to unilaterally amend or override the provisions of a treaty and would result in the elevation of a domestic subordinate legislation over that of the provisions embodied in a treaty entered into between sovereign nations.
• The imputation of beneficial ownership of TGM LLC over the writ petitioners is manifestly erroneous in light of the principles governing attributability of beneficial ownership. Notwithstanding that on facts it has been established that TGM LLC is not the parent or holding company of the petitioner, it is apparent in would be incorrect to ascribe beneficial ownership if a conduit was entitled to avail of income itself and was not contractually obligated to forward that income to any other entity.

Arguments by the Respondent(s):

• The jurisdiction of the AAR is circumscribed by the Proviso to Section 245R, and it was incumbent upon the AAR to evaluate whether the transaction is prima facie designed for the avoidance of tax. The AAR has essentially come to a prima facie opinion on the issue of avoidance of tax, which cannot be said to be manifestly erroneous or perverse.
• The order of the AAR is only a preliminary opinion formed with respect to avoidance of tax and does not rule on the issue of chargeability. Since the basic issue of chargeability has been left open, there is no justification for the Court to interfere with the order of the AAR.
• The transaction was prima facie designed for tax avoidance, as the petitioner, TG III and TG IV were mere facades of the “US based parent”, TGM LLC. TGM LLC was the parent and holding company, and the petitioners were interposed only to avoid the incidence of tax which would have arisen on capital gains arising in India at the time of their eventual exit.
• The fact that TGM LLC controlled all major decisions to be taken by the writ petitioners is evident from the fact that Mr. Coleman was disclosed as the beneficial owner of the shareholding in TG III, and Mr. Coleman and other senior employees of TGM LLC were also entrusted with control over the bank accounts of the petitioners and vested with signing powers.
• The petitioners have failed to show any administrative expenses that they may have borne in the course of any activity undertaken in Mauritius, and they also do not appear to have engaged any employees. This indicates that no substantial expenditure appears to have been incurred by the petitioners in Mauritius, and the Mauritian Directors were “mere puppets”.
• The amendments introduced by the Finance Act, 2012, including the introduction of Explanation 5 to Section 9(1) and the addition of sub-section (2-A) in Section 90, as well as the introduction of Chapter X-A, give the respondents the right to undertake a detailed assessment of the subject transaction, as the transaction would fail to satisfy the tests of commercial substance and bona fide purposes envisaged under Section 96.
• Rule 10U(2) of the Income Tax Rules 1962 provides that the provisions of Chapter X-A would apply to any arrangement, irrespective of the date on which it has been entered into, in respect of the tax benefit obtained from the arrangement on or after 1st April 2017. Therefore, even though the arrangement may have been entered into prior to 1st April 2017, any benefit obtained from that arrangement on or after 1st April 2017 would be subject to the provisions contained in Chapter X-A.
• The TRC produced by the petitioners does not prevent the respondents from inquiring into the transaction, as per the principles laid down in the Vodafone judgment. The respondents are entitled to look at the entire transaction and discard the device if it is established that the Mauritian company has been interposed as a device solely to avoid tax without any commercial substance.

Court’s Analysis:

Justice Yashwant Varma’s view.:

• The court first dealt with the preliminary objections raised by the respondents. The respondents argued that the AAR had only rendered a prima facie opinion on the issue of tax avoidance, and the final determination on chargeability was still open. The court rejected this argument, noting that the AAR’s findings had the trappings of finality and conclusiveness, and were not merely tentative or prima facie in nature.
• On the organizational structure of the petitioners, the court noted that the petitioners had consistently maintained that TGM LLC was the investment manager and not the parent/holding company. However, the AAR had erroneously proceeded on the premise that TGM LLC was the parent company, despite this not being borne out by the record. The court held this to be a manifest error that had tainted the impugned orders.
• The court then discussed the history of the India-Mauritius tax treaty and the CBDT circulars issued in this regard, which had recognized Mauritius as a favourable jurisdiction for foreign investments into India.
• Referring to the Supreme Court decisions in Azadi Bachao Andolan and Vodafone, the court noted that the Supreme Court had upheld the validity of the DTAA and the conclusiveness of the TRC issued by Mauritius authorities. The court also highlighted the Supreme Court’s observations that the motive behind incorporation of entities in Mauritius was irrelevant, and that the Revenue had the burden of establishing tax avoidance.
• The court then analyzed the AAR’s findings on the issues of control and management of the petitioners, beneficial ownership, and the applicability of the Limitation of Benefits clause in the DTAA. The court found several errors in the AAR’s reasoning and conclusions on these aspects.
• Ultimately, the court held that the AAR’s orders suffered from manifest errors and were fundamentally flawed. The court found that the AAR had erroneously proceeded on an incorrect factual premise regarding the organizational structure and role of TGM LLC, and had also failed to properly apply the principles laid down by the Supreme Court in its prior decisions.

Justice Radhakrishnan’s view (Concurring Opinion)

• Acknowledged that corporate structures created for genuine business purposes, including the use of tax neutral and investor-friendly jurisdictions like Mauritius, are generally accepted and legitimate.
• Emphasized that the burden is on the Revenue to establish that the incorporation of an entity was solely for a fraudulent or dishonest purpose, which was not the case here.
• Also recognized the important role played by offshore financial centers and holding company structures in facilitating foreign direct investment, and cautioned against drawing adverse presumptions merely based on the use of such structures.
• Highlighted the Supreme Court’s observations in Vodafone that the Revenue can pierce the corporate veil only in exceptional circumstances, such as where the subsidiary is a mere “puppet” of the parent company or where the transaction lacks commercial substance. In conclusion, the court found the AAR’s orders to be erroneous and unsustainable, and directed the AAR to reconsider the petitioners’ applications in light of the principles laid down in the judgment.

Ratio:

1. The court quashed the impugned order of the Authority for Advance Rulings (AAR) dated 2020-03-26, finding it to be manifestly illegal and unsustainable.

2. The court affirmed the view of the petitioners that the impugned transaction was not designed for the purpose of tax avoidance.

3. The court held that the transaction in question is grandfathered under Article 13(3A) of the India-Mauritius Double Taxation Avoidance Agreement (DTAA).

4. The petitioners are entitled to all consequential reliefs.

Comment:

1. Affirmation of TRC as Valid Proof: The judgment reaffirms the status of the TRC as a valid document to establish residency under the DTAA, aligning with the earlier directives issued by the Central Board of Direct Taxes (CBDT) through Circular No. 789. The court’s recognition of the TRC simplifies the compliance framework for foreign investors who rely on the Mauritius route for investments in Indian entities. This is particularly relevant for entities like TGM LLC, which structured their investments through Mauritius to avail of the capital gains tax exemptions.

2. Limitation of AAR’s Discretion: The court’s decision also places a limitation on the discretion of the Authority for Advance Rulings (AAR) in rejecting treaty benefits solely on the basis of perceived treaty shopping or tax avoidance motives. The judgment emphasizes that the AAR must adhere to the legal framework provided by the DTAA and should not override the treaty provisions based on subjective assessments. This aspect of the ruling reinforces the legal sanctity of international treaties and agreements, ensuring that entities that comply with the documented requirements are not unfairly penalized.

3. Impact on International Investments: This judgment is likely to have a profound impact on future international investments routed through jurisdictions like Mauritius. By upholding the TRC as sufficient proof, the Delhi High Court has provided much-needed certainty to foreign investors, thereby potentially boosting investor confidence in using Mauritius as a jurisdiction for routing investments into India.

4. Potential for Further Litigation: While the judgment offers clarity, it also leaves room for potential disputes where the substance over form argument might be revisited. The court has not entirely closed the door on examining the genuine nature of transactions, which means that future litigation might arise in cases where the tax authorities believe that a TRC is being used to mask the true intent of the transaction.

Therefore, this judgement marks a significant development in the interpretation and application of the India-Mauritius DTAA. By validating the TRC as proof for claiming treaty benefits, the court has reinforced the principle that international treaties must be honored as per their terms, providing a stable and predictable tax environment for foreign investors. However, the judgment also hints at the ongoing tension between the legal form of transactions and their underlying substance, which may continue to be a point of contention in tax litigation.

For legal and financial professionals advising clients on cross-border investments, this judgment underscores the importance of ensuring that all procedural and documentary requirements, particularly those concerning TRC, are meticulously observed to safeguard treaty benefits.