In the landmark ruling of Supreme Court in case of Tiger Global Holdings, Supreme Court has held that Tiger Global Holdings is liable to pay tax in India on Sale of shares of Flipkart Private Ltd., a Singapore based Company where the Singapore Company has invested shares in Indian Company. Therefore, its value is derived from shares located in India.
Supreme Court has overturned the decision of High Court in this case & affirmed the ruling of Authority for Advance ruling (AAR) where the ruling has denied the benefit of India-Mauritius DTAA claiming that Mauritius Entity is a shell entity created specifically for claiming the benefit of DTAA. However, all the decision making has been done by a director from USA.
Background
Assessees viz., Tiger Global International II Holdings, Tiger Global International III Holdings, and Tiger Global International IV Holdings ( Collectively known as ‘Tiger Global’), are private companies limited by shares, incorporated under the laws of Mauritius. The primary objective of these Companies was Investment activity. The assessees had three Directors on the Board of Directors, of whom two are Mauritian residents and one is a resident of the United States. Further, the Company has employed 2 employees on their payroll. Tiger Global has obtained ‘Tax residency Certificates’ (TRC) from the Tax department of Mauritius.
Tiger Global held shares of Flipkart Private Limited (Flipkart), a private company limited by shares, a Singapore based Company. Thereafter, Flipkart invested in multiple companies in India, and the value of its shares was derived substantially from assets located in India Further, Tiger Global sold its shares held in Flipkart to Fit Holdings S.A.R.L , a Luxembourg based Company.
Since its value is derived from shares held in India, they are liable to tax under Section 9 of Income Tax Act, 1961.
Therefore, Tiger global filed application under Section 197 for NIL deduction of TDS claiming that since these companies are Mauritius based Companies & by taking the benefit of India-Mauritius DTAA, they are not liable to tax as per DTAA on Capital Gain of such shares.
However, Tax authorities in India denied lower deduction of TDS claiming that the Tiger Global would not be eligible to avail the benefits under the DTAA on the ground that they were not independent in their decision-making and that control over the decision- making relating to the purchase and sale of shares did not lie with them but with one sole director based in USA.
AAR Ruling
Aggrieved by the decision of Tax authorities, Tiger Global approached AAR seekin advance ruling on the question ‘Whether Tiger Global would be liable to Tax in India under the Act read with the DTAA between India and Mauritius?
During the courses of proceedings, AAR bserved that decision making of Tiger Global is in hands of one US based Director. He is responsible for all the decisions of the Company. Tiger Global has been formed in Mauritius just to take the advantage of India- Mauritius DTAA.
Transaction or issue which is prima facie designed for the avoidance of income tax and therefore, rejected the same as being hit by the threshold jurisdictional bar to maintainability, as enshrined in proviso (iii) to Section 245R(2).
High Court Ruling
High Court reversed the AAR Ruling & held that since Company possess legal document of TRC proving that Tiger Global is a Mauritius based Company. Company is eligible to claim the benefit of India-Mauritius DTAA & that their income would not be chargeable to tax in India.
Supreme Court Ruling
Key Observations of the SC are as under:
1) Mere obtaining TRC is not a "sufficient" evidence of residency. Place from where majority decisions have been made plays an important role in determining the residential status of the Company.
2) Since in the given case, decision making of the Tiger Global has been made by a US based director. Therefore, Tiger Global cannot be said a resident of Mauritius.
3) Further SC held that Tiger Global is a shell Company which has been formed in Mauritius just to take benefit of India Mauritius DTAA.
4) Further GAAR provisions will be applicable which declares that subject transaction to be an impermissible arrangement, which means “an arrangement, the main purpose of which is to obtain a tax benefit, and which, inter alia, is entered into or carried out by means or in a manner which is not ordinarily employed for bonafide purposes.
5) Even if GAAR is held to be inapplicable, JAAR provisions will be applicable, grounded in the doctrine of substance over form which deny the treaty benefits where the transaction lacks genuine commercial substance.
6) SC held that once it is factually found that the unlisted equity shares, on the sale of which the Tiger Global derived capital gains, were transferred pursuant to an arrangement mpermissible under law, Tiger Global would not be entitled to claim exemption under Article 13(4) of the DTAA.
Conclusion: Accordingly, Capital gains from transfer of shares, are taxable in India under Income Tax Act read with DTAA.
