The Authority for Advance Rulings (AAR) has squarely rejected the application by private equity firm Tiger Global for nil withholding tax on capital gains from its stake sale in e-commerce company Flipkart during its 2018 buyout by US retail giant Walmart. Stakes of Mauritius-based Tiger Global International II, III, and IV Holdings (parts of the US-based Tiger Global) in Flipkart Singapore (the parent company of Flipkart) was sold to Luxembourg-based Fit Holdings for more than Rs 14,500 crore in 2018. The investor had then sought an AAR ruling after the rejection of its nil withholding application under section 197 by the income tax department for capital gains tax exemption.
According to the details of the ruling sourced from Taxsutra, AAR noted that the “transaction was designed prima facie for the avoidance of tax” and hence there is an “inescapable conclusion” that the Tiger Global entities in Mauritius were set up to derive benefit under India-Mauritius Double Taxation Avoidance Agreement (DTAA). Therefore, AAR concluded that “head and brain” of these companies were based in the US and not in Mauritius.
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Tiger Global was among the leading investors in Flipkart and had sold 17 per cent of its 22 per cent stake in the company to Walmart. However, last year in September, Flipkart’s co-founder Binny Bansal had sold his shares in the company worth $14 million to two Tiger Global funds – Internet Fund III Pte Ltd and Tiger Global Eight Holdings.
“The funds of the applicants were ultimately controlled by Mr X [US-based director] and the applicants had only a limited control over their fund,” AAR said adding that the decision for stake sale was taken by the Board of Directors of the applicants (Tiger Global) but the real control over the decision of any transaction over $2,50,000 was exercised by Mr X only.
Based on the financial statements filed with the application, the three entities didn’t make any other investment other than selling shares in Flipkart and hence the real intention of the applicants was to avail the benefit of India-Mauritius treaty, AAR added.
In its application, as per the details of the ruling, Tiger Global maintained in its application 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. However, AAR stated that the shares transferred were not of an Indian company and hence the applicant is not eligible for the benefits. “The objective of India-Mauritius DTAA was to allow exemption of capital gains on transfer of shares of Indian company only and any such exemption on the transfer of shares of the company not resident in India, was never intended by the legislator.”
