Foreign investment in India through Mauritius route has been under tax scanner for quite some years now. The benefit obtained under India Mauritius Tax Treaties are looked through and only given if a genuine substance is established. Recently, Authority for Advance Rulings (‘AAR’) declined to give a ruling on taxability of a Mauritian resident in India, on the grounds that the transaction was prima facie designed for avoidance of tax. Details of such rulings are as under:
Facts of the case:
Tiger Global International II Holdings, Tiger Global International III Holdings and Tiger Global International IV Holdings (‘the Applicants’), were companies incorporated in Mauritius. The prime object of Applicants was to undertake investment activities and earn investment income. The Applicants had transferred shares in Flipkart Private Limited (‘Flipkart’), a company incorporated and listed in Singapore, to a Luxembourg-based buyer. Flipkart had in turn invested in multiple Indian companies and its shares derived substantial value from assets situated in India.
Thus, under the Income-tax Act, 1961 (‘the ITA’), the gains arising to the Applicants on sale of shares of Flipkart would be taxable in India under the provisions of indirect transfer tax. However, considering beneficial rates under India Mauritius Tax Treaty would apply, such capital gains would be chargeable at nil rate of taxes under such tax treaty.
Accordingly, application was made to tax authorities to obtain nil withholding tax certificate, prior to consummation of the transaction, considering benefit available under the India Mauritius Tax Treaty. However, tax authority denied the benefit of India Mauritius Tax Treaty on the ground that control and management in relation to decision of selling the shareholding in Flipkart did not vest with the Applicants. Subsequently, the Applicants approached AAR for seeking clarification in relation to tax treatment on the sale of shares of Flipkart by the Applicant and whether benefit under India Mauritius Tax Treaties would be available or not?
Submission made by tax authority and Applicants, to AAR:
The tax department had submitted that the control and management of the Applicants were handled by their parent company situated in USA and that the transaction was merely designed to avoid taxes. The supporting documents in relation to same were submitted which included summary of meetings which showcased that all important decisions were made by directors of USA entity and directors of the Applicants merely took advise from them. Further, it was also established that the financial control and signing authority in respect of the Applicants vested with another individual who was not a part of the board of directors of the Applicants, but was a signatory to the bank accounts of the US parent entity. Thus, tax department claimed that the control and management of the Applicants, in substance, vested with their parent holding entity.
Accordingly, the tax department sought to invoke section 245R(2)(iii) of the ITA, under which the AAR is prevented from entertaining an application, if the application pertains to a transaction which is prima facie for tax avoidance.
The Applicants merely argued that the impugned transaction was a sale of share simpliciter between two unrelated parties and cannot be considered a transaction for tax avoidance.
Rulings of AAR:
The AAR rejected the application on the grounds that it is related to a transaction or issue which was prima facie undertaken for avoidance of income-tax. Observations made by AAR are as under:
- While computing capital gains, not only the sale of shares but also the purchase of shares is relevant and therefore, the entire transaction of acquisition as well as sale of shares as a whole has to be looked into and a dissecting approach of examining only the sale of shares cannot be adopted;
- The holding structure of the applicant companies coupled with control and management are the relevant factors for determining the design for tax avoidance and therefore the Applicant Companies were only a ‘see through’ entities set up to avail benefits of the India Mauritius Tax Treaty;
- ‘Notes to Financial Statement’ of the Applicant Companies states that the principal objective of the Applicant Companies was to act as an investment holding company for a portfolio investment domiciled outside Mauritius. The AAR further noted that the Applicant Companies had not made any investment other than investment in the Singapore Company. Although the holding-subsidiary structure might not be conclusive proof of tax avoidance, the purpose for which the subsidiaries were set up does indicate the real intention behind the structure and AAR therefore concluded that the real intention of the Applicant Companies was to avail the benefit of the India Mauritius Tax Treaty;
- ‘Control and management’ do not mean day to day affairs of the business but would mean the ‘head and brain’ of the Applicant Companies. In the given case, AAR referred to the minutes of the board meetings and observed that the key decisions were taken by the non-resident Director. Further, AAR noted that authority to operate the principal bank account was with US-based director who was also authorized signatory for sellers’ immediate parent entity, a director of the ultimate holding companies of the seller companies and was also declared as the beneficial owner of the seller companies. Accordingly, AAR concluded that the ‘head and brain’ of the Applicant Companies was not situated in Mauritius but was situated in USA.
- Further, on the technical interpretation of the India Mauritius Tax Treaty, AAR also applied the ratio laid down by Apex Court in case of Vodafone International Holding BV[2] and concluded that in the absence of any direct investment in India nor any taxable revenue generated in India, the said arrangement was a pre-ordained transaction which was created for tax avoidance purpose. Lastly, AAR also held that since the sale involved shares of a Singapore company, the benefit provided under Article 13(4) of the Treaty will not be available to the Applicant Companies by concluding that the objective of India-Mauritius Tax Treaty was to allow exemption of capital gains on transfer of shares of Indian company only and any such exemption on transfer of shares of the company not resident in India, was never intended by the legislator.
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[1] Tiger Global International II Holdings (116 taxmann.com 878) [2020]
[2] Vodafone International Holdings B.V. v. UOI (2012) 341 ITR 1/204 Taxman 408/247 CTR 1/66 DTR 265/6 SCC 613/Vol. 42 Tax L R 305 (SC)
