Recently , a ruling by AAR against Tiger Global’s claim of exemption on capital gain in the Flipkart –Walmart deal has once again brought forth the issues of treaty shopping and GAAR .

Background of the ruling is narrated as follows. Investors of Flipkart included Tiger Global Management, Accel, Naspers , Softbank , Vision Fund etc. Tiger Global Management was one of the largest stakeholder with 22% stake at the time of sale of shares to Walmart  . Most of these shares were held through Tiger Global’s Mauritius based entity. Now, Tiger Global has claimed exemption under Article 13(4) of India-Mauritius DTAA. This exemption was however denied by the Income Tax Department. Subsequently Tiger Global appealed to AAR which ruled that Tiger Global cannot avail benefits under India –Mauritius DTAA . The reason being that “head and brains” or what we call as “Place of Effective Management” of Tiger Global lies not in Mauritius but in USA. However, India-USA DTAA does not have the kind of benefits that India –Mauritius DTAA has which explains why Tiger Global is insisting on Mauritius based DTAA.

Now there are several moot points for consideration here. Section 9(1) of Income Tax  Act 1961 says that all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India shall be deemed to accrue or arise in India. So under this provision, capital gains which arise out of sale of shares by Tiger Global to Walmart is liable to be taxed in India.

However section 90 of Income Tax Act 1961 specifically deals with government entering into treaties with other tax jurisdictions. So if India enters into DTAA with any country,  such agreement takes precedence over general provisions contained in IT Act 1961. Central Government may also by notification in official gazette make such provisions as may be necessary for implementing the agreement. Now many judicial pronouncements have clarified that when such a notification is brought out towards implementation of terms of DTAAs then it would override provisions of Income Tax act.

In this regard it is pertinent to mention about circular 789 issued by CBDT dated 13th April 2000 regarding taxation of capital gains under India Mauritius DTAA. Similarly circular no. 682 was issued by CBDT in which it was clarified that an income arising to the resident of Mauritius from sale of shares of an Indian company would be liable to be taxed only in Mauritius and not in India . This would have an overriding effect on section 4 and section 5 of Income Tax Act 1961 by virtue of section 90 of the Act .

Tiger Global in its application to AAR has insisted that since the shares of the Singapore Company derived their value substantially from assets located in India, it is entitled to benefits under Article 13 (4) of India – Mauritius Treaty.  AAR however does not agree and instead has ruled that  that the shares transferred  are not of an Indian Company hence no benefits can be claimed under the aforementioned article of the India-Mauritius DTAA. In fact the applicability of India Mauritius DTAA itself is questionable in this scenario because of the POEM rule.

Place of Effective Management (POEM) of an enterprise is one where key business and commercial decisions in substance are taken. If POEM not situated in one of the contracting states but is situated in the third state, benefit of Article 13(4) of the India-Mauritius tax treaty cannot be granted to the taxpayer Tiger Global Mauritius.  So Tiger Global funds were no doubt registered in Mauritius but ultimate control and decision making was situated in US and not in Mauritius. Authority of Advanced Ruling has therefore rightly observed that  the minutes of board meeting and  place of key decisions both indicate that   that Mauritius based Tiger Global is nothing but a see through entity of Tiger Global USA to avail benefits of India Mauritius DTAA.

In this regard it becomes imperative to mention about the case of Ms Dowell & Co. 154 ITR 148 wherein Hon’ble Supreme Court has held that “So far as the contention that it is open to everyone to so arrange his affairs as to reduce the brunt of taxation to the minimum, was concerned, the tax planning may be legitimate provided it is within the framework of law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by restoring to dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges. Courts are now concerning themselves not merely with the genuineness of a transaction, but with the intended effect of it for fiscal purposes. No one can now get away with a tax avoidance project with the mere statement that there is nothing illegal about it.”

Given the background of the aforementioned Supreme Court decision , it becomes  imperative  to apply  the statutory interpretation of Contemporanea expositio est optima et fortissinia in lege . This ensures that the legisltive intent behind such provisions are thoroughly taken into account before any decision is arrived at .

Another factor to be looked into is the interplay between General Anti Avoidance Rule and benefits under the treaty. India Mauritius Treaty does not have Treaty abuse prevention provisions per se. Therefore it is only logical that tax authorities take recourse to GAAR (General Anti-Avoidance Rule) in order to  emphasize  on the substance over form,  for example in the case   of holding structure of an entity.

If Tiger Global now chooses to file writ petition , it would be interesting to see how the various provisions of Income Tax Act 1961 , GAAR , DTAAs etc are taken into account to arrive at a balanced  judgment  .

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March 2021