The Supreme Court on Monday ruled that private equity firm Tiger Global is required to pay capital gains tax in India for its 2018 stake sale in Indian e-commerce firm Flipkart to American retailer Walmart, setting aside an August, 2024 Delhi High Court verdict to the contrary.
While holding that the transfer of the unlisted equity shares by the PE firm occurred under an impermissible arrangement that lacked real commercial substance, the apex court held that benefit under Article 13(4) of the India-Mauritius Double Taxation Avoidance Agreement (DTAA) would not be available to the firm and its subsidiaries involved in the transaction.
Importantly, the ruling dilutes the grandfathering provisions with April 1, 2017 as the cut-off date under the 2016 amendments to India’s key tax treaties with Mauritius and Singapore. It could also potentially take away the leniencey available under the General Anti-Avoidance Rules, introduced simultaneously.
The 2016 amendments chiefly removed the tax exemption for capital gains made from investment in equities for prospective cases, under the two treaties.
Essentially, a two-member SC Bench comprising Justices JB Pardiwala and R Mahadevan ruled that once a transaction is found to be prima facie designed for tax avoidance, the tax authorities are not required to examine the merits of taxability.
The ruling will help the tax department to lay its hands on around Rs 15,000 crore in the Tiger Global case itself, and could set a benchmark for a large number of other cases in the listed and unlisted equity space, potentially allowing the taxman to raise far higher amounts in the aggregate.
Tax experts said while the ruling may be technically sound and rightly affirmed India’s legitimate tax sovereignty, it could send wrong signals to foreign investors at a time India is facing large-scale net outflow of foreign portfolio investments.
Beyond the Certificate
In its ruling, the SC bench underscored the “doctrine of substance over form,” which had been well-recognised in previous court rulings including McDowell and the landmark indirect share transfer case that involved Vodafone. The “form” in the instant case pertains to tax residency certificates (TRC) issued by Mauritius authorities.
Tightening Noose
Tax experts have expressed concern over the way the SC interpreted the grandfathering provisions, by stating that the provision of the cut-off date of investments (April 1, 2017) under Rule 10 U(1) (d) stood diluted by Rule 10U (2). This means that the anti-abuse provisions (GAAR) shall apply to any arrangement, irrespective of the date on which it was entered into. The duration of the arrangements is irrelevant, the court held.
The judges said: In our view, once it is factually found that the unlisted equity shares, on the sale of which the assessees derived capital gains, were transferred pursuant to an arrangement impermissible under law, the assessees are not entitled to claim exemption under Article 13(4) of the DTAA. The Revenue has proved that the transactions in the instant case are impermissible tax-avoidance arrangements, and the evidence prima facie establishes that they do not qualify as lawful. Consequently, Chapter X-A (GAAR) becomes applicable.”
Dinesh Kanabar, Chairman & CEO, Dhruva Advisors said: “technically, It is impossible to fault the SC on the proposition that on tax matters, India cannot cede its sovereignty. Tax treaty is meant for genuine residents and not for those using a jurisdiction as a conduit. As such, to expect Indian tax authorities to blindly follow the TRC issued by an overseas country seems far fetched.”
He, however, added that in the light of existing background and precedents, the SC ruling sends “a totally confusing message to overseas investors” at a time that the foreign investment is waning and the government is trying hard to revive it. Kanabar noted that a circular, which is yet to be withdrawn, stated the TRC is sufficient (for tax exemption). Relying on it, large investments were made in India. Grandfathering was also provided for under the DTAA, he noted.
“The principles laid down in the Judgment are likely to impact taxpayers from various jurisdictions including for instance those seeking relief under the India Singapore Treaty,” Pranav Sayta, National Leader, International Tax and Transaction Services, EY India, said.
Tiger Global first invested in Flipkart in 2009 starting with an initial amount of $9 million. Over the following years, it steadily increased its exposure to about $1 billion, building a stake of roughly 20% in the e-commerce company. In 2017, Tiger began monetising the investment by selling part of its holding to SoftBank Group Corp., and a year later it exited most of the remainder, selling around three-quarters of its stake to Walmart.
The Delhi HC had, in August 2024, overturned a 2020 order by the Authority for Advance Rulings (AAR), which deprived Tiger Global the benefits of DTAA. The AAR was of the view that the transaction was, prima facie, structured to avoid tax.
While the capital gains waiver in respect of investments in listed and unlisted equity under India-Mauritius DTAA was revoked in 2016, the treaty still accords tax reliefs to investors based out of the island country on income from interest and dividend,and also capital gains from investments in corporate and government bonds etc.
(With agency inputs)