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The Supreme Court on Friday upheld a Delhi High Court ruling in favor of private equity firm Tiger Global on the applicability of the India-Mauritius Double Taxation Avoidance Agreement to capital gains from the sale of Flipkart shares to Walmart. Experts believe the ruling could lead to uncertainty for foreign investors.
The order by a division bench of Justices JB Pardiwala and R Mahadevan noted that the issue has pan-India implications and requires “thorough consideration”.
In its ruling, the Supreme Court has upheld the order of the Delhi High Court that had granted tax benefits under the India – Mauritius DTAA to Tiger Global. Prior to that, the Advance Ruling Authority (AAR) had denied treaty benefits to Tiger Global for the transaction.
The case relates to Tiger Global, which holds a Category 1 global business license and a Mauritius Tax Residency Certificate (TRC), and had acquired shares in a Singapore-based Flipkart between 2011 and 2015. The company held substantial investments in Indian entities. In 2018, Tiger Global sold its shares in the company, resulting in capital gains. The grandfather provision under the India-Mauritius DTAA provides for grandfathering of investments and exemption from capital gains tax in India for shares acquired before April 1, 2017.
Tax experts noted that several implications could arise from the Supreme Court’s ruling.
Abhishek, Rastogi Chamber founder, Tax and Constitutional Expert, said a stay would introduce ambiguity regarding the applicability of DTAA benefits, particularly for investments routed through Mauritius. This could affect investor confidence and influence decisions on structuring investments in India. “The government’s stance on tax treaties and interpretation of their provisions could come under scrutiny, which could lead to policy reviews or amendments to prevent treaty abuse while maintaining India’s attractiveness to foreign investors,” said.
Rakesh Nangia, managing partner, Nangia & Co said the Supreme Court’s stay raises a brand of questions about the Delhi High Court judgement, and it seems the stage is set for a fierce round of debate on steps to be taken to prevent possible abuse of the treaty.
In its verdict delivered last year, the Delhi High Court had upheld the taxpayers’ ascendancy plea that the grandfather provisions contained in the India-Singapore tax treatment were self-sufficient in addressing potential allegations related to abuse of the treaty and, therefore, “… … … it would be impermissible for the revenue to create additional obstacles or standards that the parties would have to meet in order to take advantage of the benefits of DTAA, …… “.
Amit Maheshwari, Tax Partner, AKM Global, said there are several key areas that could possibly need extensive attention ranging from interpretation of tax treaties in cases of indirect pass-through cases, clarity on what constitutes a conduit company and which It is the economic substance, as well as the economic substance, as well as. How relevant are the people at that entity to test the substance, since investment entities don’t necessarily need employees to sit there in that jurisdiction? “These issues need a clear and consistent approach to be followed by the authorities and judgment would be expected and welcomed in this regard,” he noted.
