The Supreme Court on Friday stayed a Delhi High Court ruling in favor of private equity firm Tiger Global on the applicability of the India-Mauritius double tax avoidance agreement to capital gains from sale shares from Flipkart to Walmart. Experts believe the decision 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 “careful consideration”.
In its ruling, the Supreme Court prompted the Delhi High Court’s order that had granted tax benefits under the India-Mauritius DTAA to Tiger Global. Previously, the Advance Rulings Authority (AAR) had denied treaty benefits to Tiger Global for the transaction.
The case involves Tiger Global, which holds a Category 1 global trading license and a Tax Residency Certificate (TRC) from Mauritius, and had acquired shares of 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 vesting provision under the India-Mauritius DTAA provides for investment law rights 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 decision.
Abhishek a Rastogi, founder of the Rastogi Chamber of Tax and Constitutional Experts, 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 position on tax treaties and interpretation of their provisions could be scrutinized, which could lead to policy reviews or changes to prevent treaty abuses while maintaining India’s attractiveness to investors foreigners,” he added.
Rakesh Nangia, Managing Partner, Nangia & Co to prevent potential treaty abuse.
In its verdict released last year, the Delhi High Court had upheld the taxpayer-assessment’s plea that the fast-track provisions contained in the India-Singapore tax treatment were self-sufficient to combat potential allegations relating to the abuse of the treaties, and as a result, “……..It would be impermissible for revenue to fabricate roadblocks or additional standards that parties would be required to meet in order to benefit from the benefits of the DTAA, ……. “.
Amit Maheshwari, Tax Partner, AKM Global said that there are several key areas that could possibly require in-depth attention ranging from interpretation of tax treaties in case of indirect transfer cases, clarity on what constitutes a conduit business and what is the economic substance as well as for What is the relevance that the people sitting in this entity to prove the substance, because investment entities do not necessarily need employees in this jurisdiction. “These issues require a clear and consistent approach to be followed by the authorities and a judgment would be awaited and welcome in this regard,” he stressed.
