Delhi HC Overrules AAR Ruling | Allows Capital Gain Exemption to ‘Tiger Global’ on Sale of Its Stake in Flipkart

Case Details: Tiger Global International III Holdings v. Authority For Advance Rulings - [2024] 165 taxmann.com 850 (Delhi)

Judiciary and Counsel Details

• Yashwant Varma & Purushaindra Kumar, JJ.
• Porus Kaka, Sr. Adv. Manish Kanth, Ms Parul Jain, Afaan Arshad, Anirudh Srinivasan and Brijesh Ujjainwal, Advs. for the Petitioner. & Others.
• G.C. Srivastava, Kalrav Mehrotra, Mayank Patawani, Chetan Sharma, Asheesh Jain, Gaurav Kumar, Ms Neha Narang, Sunil Agarwal, Shivansh Pandya & Utkarsh Tiwari, Advs. for the Respondent.& Others.

Facts of the Case

The Delhi Authority for Advance Ruling (AAR), in [2020] 116 taxmann.com 878 (AAR—New Delhi), denied Tiger Global the exemption on the capital gains arising from the sale of its stake in Flipkart. The AAR ruled that Tiger Global’s real management and control were not with the respective Board of Directors in Mauritius but with one US-based person, who was the beneficial owner of the entire group structure. Tiger Global was only a ‘see-through entity’ to avail itself of the benefits of the India-Mauritius DTAA.

High Court Held

Now, the Delhi High Court has overruled the AAR ruling and held that tax exemption under the ‘grandfathering clause’ [Article 13(3A)] cannot be denied to ‘Tiger Global’ for capital gains arising from ‘indirect transfers’ of Flipkart Singapore shares acquired by it before 01.04.2017. The High Court held that the transaction was legitimate and not intended for tax avoidance, reaffirming the company’s right to the treaty benefits under the India-Mauritius DTAA.

The Key takeaways from the ruling are as follows:

(1) Economic Substance
The Delhi High Court held that Tiger Global had genuine economic activities and was not just a shell entity for tax avoidance. The company managed substantial investments and met the necessary economic substance criteria. It acquired Flipkart Singapore shares between October 2011 and April 2015, with the transfer occurring on August 18, 2018. They incurred USD 1,063,709 in expenses, far exceeding the required threshold (prescribed in Article 27A), and had total liabilities and equity of USD 1.76 billion.`

(2) TRC
The issuance of a TRC by the competent authority must be considered to be sacrosanct, and due weightage must be accorded to the same as it constitutes certification of the TRC holding entity being a bona fide entity having beneficial ownership domiciled in a Contracting State to pursue a legitimate business purpose in a Contracting State.

It was emphasised that being based in Mauritius should not automatically cast doubt on a company’s activities. The company’s Tax Residency Certificate (TRC) was deemed valid, affirming that the DTAA between India and Mauritius should take precedence over Indian domestic tax laws.

(3) Legal Precedents
The judgment referenced key cases like Azadi Bachao Andolan [2003] 132 Taxman 373 (SC) and Vodafone International Holdings [2012] 17 taxmann.com 202 (SC), indicating that treaty shopping in itself cannot be rendered abhorrent unless it was categorically established that the device was incorporated to evade tax and in a manner contrary to the intent of the Contracting States to the treaty.

(4) AAR’s Order
The court found the AAR’s determination that the transaction was aimed at tax avoidance to be unfounded and arbitrary. The AAR’s order was overturned, and the court ruled in favour of Tiger Global, granting them the benefits of the DTAA.