prpri Ruling on Benefit of India–Mauritius Treaty on Capital Gains (POEM/PPT/GAAR) Ruling on Benefit of India–Mauritius Treaty on Capital Gains (POEM/PPT/GAAR)

AAR – Ruling on Benefit of India–Mauritius Treaty on Capital Gains taken by Tiger Global International Group in respect of Shares of Flipkart (Singapore Co) sold by Mauritius based Co to a Company in Luxembourg (which is controlled by Walmart) and the value of shares is derived from assets located in India

Summary of Case

The applicants, private limited companies incorporated in Mauritius. They were set-up with the primary objective of making investments with the intention of making long term capital appreciation and other investment income. The applicants were tax residents of Mauritius as per laws of Mauritius and under the provisions of agreement between India and Mauritius for Avoidance of Double Taxation and Prevention of Fiscal Evasion with Foreign Countries.

The applicants held shares of Flipkart Private Limited (Singapore Co.). The Singapore Co further invested in multiple companies in India and the value of shares of Singapore Co. is derived substantially from assets located in India. Thereafter, on 18.08.2018 applicants transferred certain shares of Singapore Co to S.A.R.L, a company incorporated in Luxembourg.  These transfers led to major acquisition of Singapore Co by Walmart Inc, a company incorporated in USA.

Applicants approached Indian Income Tax Authorities u/s 197 of the Act seeking certification for NIL withholding tax before actual transfer of Shares. The tax authorities rejected their application and issued order with prescribed withholding tax rates claiming applicants were not eligible to take benefit of India- Mauritius Treaty.

The applicants filed application before AAR on the following question:

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.R.L. (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?

However, revenue authorities objected the admissibility of application on the following issues:

1. Revenue authority objected that the case is pending before income tax authority and thus application should be rejected as first condition of Proviso to Sec-245R (2) of the Income Tax Act, 1961. However, this objection of the revenue authority dismissed by the AAR.

2. Revenue authority objected that there is involvement of determination of Fair Value of Shares in the transaction of transfer of shares and the application should be rejected as second condition of Proviso to Sec-245R (2) of the Income Tax Act, 1961. However, AAR rejected the objection of Revenue authority as the question before AAR is about chargeability of capital gains not about valuation of shares.

3. Revenue authority objected that the entire scheme of investment and transfer of shares was designed to avoid payment of taxes on capital gains in India. As provisions of the Act direct or indirect transfer of assets located in India was liable to tax in India and the shares of Singapore company derives their value from assets located in India. The objection of Revenue authority as per third condition of Proviso to Sec-245R (2) of the Income Tax Act, 1961 is accepted by the AAR.

The application was rejected by AAR after hearing submissions of both parties (applicant and revenue authority).

India – Mauritius DTAA

 Article – 4(3): Resident

Where by reason of the provisions of paragraph (1), a person other than an individual is a resident of both the Contracting States, then it shall be deemed to be a resident of the Contracting State in which its place of effective management is situated.

Article – 13 (3A): Capital Gains

Gains from the alienation of shares acquired on or after 1st April 2017 in a company which is resident of a contracting state may be taxed in that state.

It was submitted by applicants that shares were acquired before 1st April 2017 and therefore they are not liable to pay tax on capital gains arises on transfer of shares. In response revenue submitted that DTAA before 1st April 2017 provides exemption only for shares of a company resident in India but in the present case applicants invested in shares of Singapore based company which derives its value substantially from assets located in India (indirect transfer), thus exemption under India-Mauritius treaty not available.

Place of Effective Management

The Revenue Authority objected that the applicants are not eligible to claim benefit of India- Mauritius treaty, as effective management of applicants was not in Mauritius and the effective management was sitting in USA.

So, it’s important to find out the meaning of place of effective management and AAR also checked the situs of place of effective management.

“Place of effective management” means a place where key management and commercial decisions that are necessary for the conduct of business of an entity, as a whole are, in substance made.

Its important to consider in which place substantial decisions are effectively made, who is controlling the financial decisions and the role of directors and management of the company. Whether majority of decisions are made with local jurisdiction or somewhere else.

In above case revenue authority observed that following points which lead to the conclusion that the affairs of the applicants are managed, in substance, from outside Mauritius.

I. The applicants were held by a USA based investment entity in public and private markets across the world through entities based out in low tax jurisdictions, indicated that the real control of the company does not lie within Mauritius.

II. Steven Boyd, non-resident USA Director had attended all the board meetings in which crucial decisions were taken and the Mauritius based directors were in effect mere spectators or took advice from Mr. Steven Boyd.

III. Boyd or one of the representatives from USA (promoter entities) was always present to advise the board of the applicants. The other directors based in Mauritius were not independent.

IV. The control of funds lies outside Mauritius in the hands of personnel of Tiger Global (promoter entity in USA). The applicants have not explained as to why Mr. Charles P Coleman, who was not based in Mauritius was appointed to sign the cheques if Mauritius bank accounts. Further, he was also authorized signatory of holding entities and parent entities of Mauritius based entities.

V. The beneficial owners of shares of the Flipkart was Mr. Charles P Coleman of TGM (USA based promoter entity). If TGM USA directly held shares in Flipkart it would have been liable to pay tax on gain on sale of those shares as per the provision of Indo-US DTAA. It was submitted that the applicant companies were “see-through entities” which were designed prima facie for avoidance of tax by taking benefit of India – Mauritius DTAA.

VI. The control and management of applicants does not mean the day to day affairs of their business but would mean the head and brain of the Companies.

Principle Purpose Test under MLI Scenario

Article 7 – Paragraph 1 of MLI states that, the benefit of tax agreement will be denied if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining treaty benefit was one of the principal purpose of any arrangement or transaction that resulted directly or indirectly that benefit, unless it is established that the granting of benefit is as per the objective and purpose of the tax agreement.

It was an attempt to use treaty shopping which involves the improper use of a double tax agreement, whereby a person acts as through an entity created in other state with the main or sole purpose of obtaining treaty benefits which could not be available directly to such a person.

PPT is the minimum standard of MLI as per Action – 6 Report of OECD need to be adopted by countries adopting Multilateral Instruments and its easy to adopt this option in comparison to other available options (Simplified Limitation of Benefit or Detailed limitation of benefit).

In the above case, as submissions of revenue authorities the one of the sole purposes of the arrangement or transaction was to obtain to benefit of India-Mauritius Treaty, otherwise USA based entities can directly enter into such transaction.

 Probable Application of General Anti-Avoidance Rules (GAAR)

Sec-95 of the Income Tax Act, 1962 provides that; Notwithstanding anything contained in the Act, an arrangement entered into by an assessee may be declared to be an impermissible avoidance arrangement and the consequence in relation to tax arising therefrom may be determined subject to the provisions of this Chapter.

The above section starts with non-obstante clause and if there is any conflict with provisions of other sections, then this section will prevail over other conflicting provisions.

Arrangement means any step in or part or whole of a transaction, operation, scheme, agreement, whether enforceable or not, and includes the alienation of any property in such transaction, operation, scheme etc.

Impermissible Avoidance Agreement – means an arrangement, the main purpose or one of the main purposes of which is to obtain tax benefit and any of the following tests is satisfied:

  • creates rights, or obligations, which are not ordinarily created between persons dealing at arm’s length
  • results, directly or indirectly, in the misuse, or abuse, of the provisions of this Act
  • lacks commercial substance or is deemed to lack commercial substance, in whole or in part
  • is entered into, or carried out, by means, or in a manner, which are not ordinarily employed for bona fide purposes

GAAR works upon the rule of Substance over Form”. There is limit of Rs. 3 Crores to invoke GAAR, if total tax benefit from any arrangement, transaction, scheme, agreement etc., in aggregate exceeds the threshold limit, then GAAR provision will come into action.

If any issue of international transaction or arrangement, any avoidance of tax sufficiently addressed by proper measures in treaty, then there is no need to invoke GAAR.

In above case, GAAR could be used by Revenue authority if there is no option in treaties to avoid arrangement for avoidance of taxes in India.

# Relevant Cases Discussed during proceedings

1. Vodafone International Holding BV 341 ITR 1

2. Moody’s Analytics Inc USA 24 41

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July 2021