TIGER Global - 2024-TII-56-HC-DEL-INTL Management LLC is a US based investment firm founded by Chase Coleman III reputed for spotting and investing in promising start-ups across the globe and exiting at an appropriate time with huge profits. Some of the investments it made were in Alibaba, ByteDance, Coinbase, Facebook, LinkedIn, Spotify, amongst others. In India, its investments include Flipkart, Just Dial, Make My Trip, Zomato, to name just a few. The present case concerns its investment and exit in Flipkart.

In 2018, the Competition Commission having greenlighted the move, 77% of the shares of Flipkart were acquired by the American Retail Giant Walmart thereby making an entry into the profitable Indian retail sector. Since the acquisition by Walmart triggered disposition of shares of Flipkart by the founders and other early-stage investors, it is natural that question of capital gains was at the front and centre of the deal. It was reported that Walmart had deposited INR 7539 crores as TDS on the deal but did not deduct tax from 34 shareholders. (ET, September 16, 2018). The matter was therefore under the scanner of the Income Tax Department.

Flipkart was formed in 2007 by Sachin and Binny Bansal but was registered in Singapore, apparently with the aim of funding the capital requirements of early start-ups. All its operations however were in India and there are numerous Indian group companies involved. Tiger Global started to invest in Flipkart between 2011-2015 in the name of three investment companies registered in Mauritius. In 2018, as part of the takeover of the controlling interests by Walmart, the Tiger Global Companies, sold their holdings of Singapore registered Flipkart to a Luxembourg based company- Fit Holdings S.A.R.L

The ostensible holding companies in Mauritius asked for a certificate of nil deduction of tax at source in the light of the India- Mauritius tax treaty that everybody knows used to give taxation rights in respect of capital gains from transfer of shares in Indian companies to Mauritius that did not exercise such taxation rights, thereby resulting in double non-taxation. The tax department refused to grant such a certificate under section 197 of the ITA on the ground that the Mauritius companies were not independent in their decision making and the control over the decision making of the purchase and sale of the shares did not lie with them and therefore asked for deduction of tax at varying rates. Following such refusal, the parties applied to the erstwhile Authority of Advance Ruling for a ruling regarding this issue. At the relevant time, the AAR was going through an existential crisis with the government unable to appoint a Chairman and cases were piling up. At the intervention of the Court, the case was heard and based on the evidence produced by the parties, the AAR ultimately refused to give a ruling on the ground that there was prima-facie material to show that the companies in Mauritius were not in control of their affairs that were, in effect manged from the USA, the head and brain of such companies was in the USA and not in Mauritius. It also held that the shares transferred were shares of a Singapore based entity and not shares of an Indian company and hence the benefits of India-Mauritius tax treaty would be of no avail.

The taxpayer thereafter filed a writ petition against the order of the AAR and by its order dated 28th August, 2024, the Delhi High Court passed its 224-page order wherein it finally concluded that the order of the AAR suffered from patent illegalities and that the impugned transaction was kosher and hence it quashed the AAR's order and allowed the writ petition. In coming to its conclusion, the High Court made an independent assessment of facts and recapitulated the development of the Mauritius route and the judicial response of the courts in Azadi and Vodafone, the permissibility of treaty shopping, the importance of Mauritius in attracting foreign investments and the like.

Between 2011 and 2018, however, a sea change has occurred particularly in the taxation framework in India. Following the Vodafone judgement of the Supreme Court, in 2012, the indirect transfer of Indian assets through transfer of shares was brought within the ambit of deemed accrual in India. In the same year, a statutory GAAR was also put in place although the original legislation underwent a number of transformations because of pulls and pressures before being operative from 2017. It is necessary to take note of these changes to appreciate the changing reality of international tax and not to rely on doctrines or judgements that were delivered in a different context.

In 2013, the OECD officially launched its BEPS project and several action points were finalised over time including the signing of a Multilateral Agreement (MLI) that had some minimum commitments by the signatories- one of the most prominent ones being the prevention of treaty abuse by multinationals including through treaty shopping. The legitimisation of treaty shopping by the Indian Supreme Court in Azadi Bachao and Vodafone was clearly not acceptable to the international community including the Government of India. Various action points including action point 6 of BEPS (1.0) were put in place and adopted in India as well.

Since multinationals exploit the gaps in the domestic legislations and the tax treaties, often times with the setting up of artificial structures in permissive jurisdictions for tax and other regulatory reasons, one of the enduring outcomes of the BEPS project was the incorporation of a Principal Purpose test to be introduced in all existing treaties stating that treaty benefits of tax treaties will not be given if one of the purposes (and not merely the principal purpose) of an arrangement or transaction is avoidance of tax.

In India also, the rather permissive approach to tax treaties and their interaction with the domestic tax law started changing more or less during the same time. Section 90 that allows the government of India to enter into tax treaties also underwent several changes. Section 90(2) has been interpreted by Courts in a manner that allows the taxpayer to choose between a tax treaty provision and the domestic law provision whichever is beneficial to the taxpayer. However, with the introduction of GAAR in Chapter-XA of the Income Tax Act, section 90(2A) was introduced with effect from 1-4-2016. Since, this provision has an important bearing on this case, it is reproduced here-

S.90(2A)- "Notwithstanding anything contained in sub-section 92), the provisions of Chapter-X-A of the Act shall apply even if such provisions are not beneficial to him" In other words, GAAR provisions in the domestic tax law override the treaty provisions. As we shall see subsequently, this provision and its interpretation has an important bearing on this case.

Section 90(4) was introduced in 2012, that made the availability of treaty benefits contingent upon the production of a tax residency certificate from the jurisdiction of which the taxpayer claims to be resident. The explanatory memorandum to the 2012 Finance Bill mentioned that in many instances taxpayers who were not residents of a State claimed benefits of the treaty and hence submission of TRC containing prescribed particulars was a necessary but not sufficient condition for availing treaty benefits. In 2013, this was originally proposed to be incorporated in section 90(5) but was given up due to opposition in certain quarters. Nevertheless, production of a TRC is necessary before claiming treaty benefits.

We should also note that an Explanation 4, was also introduced in section 90 in 2017 to state that where a term used in the DTC is not defined therein but defined in the Act, then the definition as given in the Act shall prevail.

The cumulative effect of these amendments is that the pedestal to which tax treaties were raised by the courts in India came down substantially. Incidentally, we may mention that the Azadi case itself mention that normally treaties in India would have to be ratified by the Parliament but for section 90 that minimised the cumbersome process. This becomes important considering that supremacy of domestic legislation viz, GAAR over tax treaties is one of the issues in the present case.

As for the existing tax treaties themselves, many were renegotiated particularly in respect of taxation of capital gains and through incorporation of a limitation of benefits clause in some form or the other. India's treaties with Mauritius and Singapore, amongst others, were also renegotiated. In the context of the present case, the important changes in the India-Mauritius tax treaty were as follows-

In 2016, there were changes in articles relating to permanent establishment, interest, FTS, other income, exchange of information, assistance in collection of taxes and, for the purpose of the present discussion, changes in the capital gains and introduction of an LOB clause.

The amended article 13 on capital gains now states as follows:

1. Gains from the alienation of immovable property, as defined in paragraph 2 of Article 6, may be taxed in the Contracting State in which such property is situated.

2. Gains from the alienation of movable property forming part of the business' property of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State or of movable property pertaining to a fixed base available to a resident of a Contracting State in the other Contracting State for the purpose of performing independent personal services, including such gains from the alienation of such a permanent establishment (alone or together with the whole enterprise) or of such a fixed base, may be taxed in that other State.

3. Notwithstanding the provisions of paragraph 2 of this Article, gains from the alienation of ships and aircraft operated in international traffic and movable property pertaining to the operation of such ships and aircraft shall be taxable only in the Contracting State in which the place of effective management of the enterprise is situated.

3A. Gains from the alienation of shares acquired on or after 1st April 2017 in a company which is resident of a Contracting State may be taxed in that State.

3B. However, the tax rate on the gains referred to in paragraph 3A of this Article and arising during the period beginning on 1st April, 2017 and ending on 31st March, 2019 shall not exceed 50% of the tax rate applicable on such gains in the State of residence of the company whose shares are being alienated"

4. Gains from the alienation of any property other than that referred to in paragraphs 1, 2, 3 and 3A shall be taxable only in the Contracting State of which the alienator is a resident.

5. For the purpose of this Article, the term "alienation" means the sale exchange, transfer or relinquishment of the property or the extinguishments of any rights therein or the compulsory acquisition thereof under any law in force in the respective Contracting States.

We should also note the LOB provision that was introduced in Article 27A

"1. A resident of a Contracting State shall not be entitled to the benefits of Article 13(3B) of this Convention if its affairs were arranged with the primary purpose to take advantage of the benefits in Article 13(3B) of this Convention.

2. A shell/conduit company that claims it is a resident of a Contracting State shall not be entitled to the benefits of Article 13(3B) of this Convention. A shell/ conduit company is any legal entity falling within the definition of resident with negligible or nil business operations or with no real and continuous business activities carried out in that Contracting State.

3. A resident of a Contracting State is deemed to be a shell/conduit company if its expenditure on operations in that Contracting State is less than Mauritian Rs.1,500,000 or Indian Rs. 2,700,000 in the respective Contracting State as the case may be, in the immediately preceding period of 12 months from the date the gains arise.

4. A resident of a Contracting State is deemed not to be a shell/conduit company if:

(a) it is listed on a recognized stock exchange of the Contracting State; or

(b) its expenditure on operations in that Contracting State is equal to or more than Mauritian Rs. 1,500,000 or Indian Rs.2,700,000 in the respective Contracting State as the case may be, in the immediately preceding period of 12 months from the date the gains arise."

A conjoint reading of the two provisions will show that the LOB provision applies only to Article 13(3B) and not to Article 13(3A). In other words, the benefits of the reduced rate for a period of two years from 2017 will not be available unless the conditions of Article 27A are satisfied.

Although not relevant for the present article, we should also note that the Mauritius tax treaty has a been amended recently through a Protocol signed in April 2024. The Preamble to the treaty has now been changed as follows:

"The Government of the Republic of India and the Government of Mauritius, intending to eliminate double taxation with respect to the taxes covered by this Convention without creating opportunities for nontaxation or reduced taxation through tax evasion or avoidance (including through treaty-shopping arrangements aimed at obtaining reliefs provided in this Convention for the indirect benefit of residents of third jurisdictions have agreed as follows:

Article 27B

"Notwithstanding the other provisions of this Convention, a benefit under this Convention shall not be granted in respect of an item if it is reasonable to conclude, having regard to all the relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of this Convention."

Article 3 of the new Protocol states:

1.Each of the Contracting States shall notify to the other the completion of the procedures required by its law for bringing into force this Protocol. This Protocol shall enter into force on the date of the later of these notifications.

2.The provisions of this Protocol shall have effect from the date of entry into force of the Protocol, without regard to the date on which the taxes are levied or the taxable years to which the taxes relate.

Although the Protocol has been signed on the 7th of March, 2024, it has not yet been notified and accordingly, has not come into force as yet.

The discussions above will demonstrate that there has been a sea change in the attitude of nations towards tax treaties and their interpretation since 2000 when the Azadi decision was pronounced.

The facts in the present case as appear from the judgement of the High Court were that Tiger Global International Holding was a tax resident of Mauritius holding a category-1 Global Business License and a valid TRC. Its immediate share holders were other Mauritius based companies whose shareholders were Cayman based Private Equity firms who, in turn had collected funds from investors across the globe. Tiger Global Management LLC was an investment management firm that offered advisory services to the Mauritius based firms and no funding came from it. But even the basic facts relating to control and management in this case seem to be hotly contested.

In such circumstances, overruling the AAR, the High Court allowed the India-Mauritius treaty benefits to the disputed transactions holding that the same were grandfathered by Article 13(3A) of the India-Mauritius tax treaty. The court discussed the rationale of the hackneyed Mauritius Route and also held that the requisite expenditures for establishment of commercial substance in Mauritius LOB clause was met. The High Court also elaborated that exercise of shareholder control over a company does not mean that directors were mere puppets. Besides, relying on circular 789, it held that the TRC was sacrosanct, considering that the 2013 amendment relating to TRC not being a sufficient condition was not finally enacted. The Court also discussed the concept of Beneficial ownership and held that the same was also not attracted since it was not proved that the holder of income was under a contractual obligation to pass the same on to someone else. The Court also held that domestic GAAR provisions will not apply in view of Article 13(3A) of the DTAA that grandfathers acquisitions before 1.4.2017. According to the Court, this was also evidenced in to language of rule 10U(1)(d), besides making a controversial observation that domestic legislation cannot overrule a treaty provision.

It is not possible to discuss all the arguments and counterarguments of the contesting parties and the various authorities and the correctness of the reliance paid on one or the other. Nevertheless, some aspects of the judgement are rather troubling and we try to discuss a few here.

At the outset, it is strange to observe that the exact prayer of the taxpayer in the writ petition is not stated anywhere although some of the arguments of the taxpayer's counsel and of the Special counsel are mentioned. Anyone going through the ruling of the AAR and of the High Court can easily discern that even some of the basic facts of the case are hotly contested. Part of the reason for the same was due to the fact that the AAR declined to give a definitive finding on the questions raised before it on the ground that prima-facie the transactions were designed for tax avoidance. In such circumstances, It is rather strange that the Court went into finding of facts based on affidavits and pleadings before it. Many of the factual narratives were seriously disputed by the parties and these constituted in law as "disputed facts." In writ proceedings, normally findings are not rendered on the basis of disputed facts.

Under the heading conclusions and takeaways, under points A and B, the High Court criticized the AAR for holding that Tiger Global Management LLC (TGM LLC) that the taxpayer claimed to have been engaged as investment advisor GM LLC was the ultimate holding company of the Mauritius companies. To quote:

B-

"(…) [T]he AAR erred when it concluded that TGM LLC is the parent or holding company and has incorrectly observed that the said contention was uncontroverted by the petitioners. This incorrect and misconceived finding of fact by the AAR has thus sullied the impugned order and rendered it riddled with manifest and patent errors."

However, going through the AAR's order, one does not find any such observation. The AAR has merely quoted some of the submissions of the revenue. In Paragraph 36 of the AAR's order, the AAR states:

"36. The Revenue has pointed out, by citing evidences from the Minutes of the Meeting of Board of Directors of the applicants, that the key decisions were taken by Mr. Steven Boyd, the non-resident Director, who was also General Counsel of Tiger Global Management LLC and that the other Directors were not independent but mere puppets. It is found that Mr. Steven Boyd was the non-resident Director of the applicant companies. Under the circumstance no adverse inference can be drawn if he was privy to the crucial decisions taken in the Board meetings. Further, the Supreme Court has held in the case of Vodafone (supra) that there was nothing wrong if the funds for making FDI by Mauritius companies/individuals had not originated from Mauritius but had come from investors of third countries. In view of this judgement, the Revenue's submission that funds had come not from the applicants but from the promoters in USA, so as to treat the arrangement as tax avoidance, has to be rejected."

In paragraph 37, the AAR lays down its approach as follows:

"37. What is relevant to consider here is the control and management of the applicant companies. Though the applicants have submitted that their control and management was with the Board of Directors in Mauritius, what is material is not the routine control of the affairs of the applicants but their overall control. The control and management of applicants does not mean the day-to-day affairs of their business but would mean the head and brain of the Companies. Therefore, it will be relevant to examine whether the head and brain of the applicants was in Mauritius."

One of the important parameters was the authority to operate bank accounts. In this regard, the AAR held that Mr. Charles P. Coleman and another authorized signatory Mr. Anil Castro, though being not on the Board of Directors of the applicants, were the key personnel of the Group and were managing and controlling the affairs of the entire organization structure. What the AAR concluded was- "head and brain of the companies and consequently their control and management was situated not in Mauritius but outside in USA."

Another misconception is found in Paragraph D of the order where the Court holds that the companies in Mauritius spent the requisite amounts as stipulated in Article 27A (LOB article) and hence the transactions cannot be questioned. However, the Article as reproduced earlier, gets attracted in situations mentioned in Article 13(3B) only, to capital gains from transactions in shares after 1.4.2017. In the present case, the shares were acquired before that date and disposed in 2018.

In Paragraph T- the Court observed- It is also apparent that the Contracting States did not intend for domestic taxation authorities to deploy their own subjective standards in view of the enactment of LOB provisions which had also adopted ascertainable standards to defenestrate presumptions of treaty abuse. It is the finding of this Court that taking any view to the contrary would amount to privileging domestic legislation over and above the enactments in the treaty provisions adopted by Contracting States and would amount to holding that jurisdiction inheres in taxing authorities to question the validity of transaction on parameters alien to the negotiated terms of the treaty.

The above finding is in direct conflict of the GAAR provisions and section 90(2A) as reproduced earlier.

Another important aspect of the case is the interpretation of Rule 10U (1) and 10U (2). The Special Counsel for the revenue had argued that in terms of Rule 10U (2), GAAR provisions will apply in case of an arrangement irrespective of the date on which the transaction has been entered into. While introducing GAAR, considering the brouhaha around it, the government had incorporated some safeguards. Section 101 of the Act gave the necessary authority to frame guidelines - "The provisions of this Chapter shall be applied in accordance with such guidelines and subject to such conditions, as may be prescribed."

Rule 10U(1)(d) says that GAAR provisions will not apply to - "any income accruing or relating to, or deemed to accrue or arise to, or received or deemed to be received by, any person from the transfer of investments made before the 1st day of April, 2017 by such person."

However, Rule 10U (2) then says- "Without prejudice to the provisions of clause (d) of sub-rule (1), the provisions of Chapter-X shall apply to any arrangement, irrespective of the date on which it has been entered into, in respect of the tax benefits obtained from the arrangement on or after the 1st day of April, 2017."

Revenue had argued that this being a case of an arrangement, GAAR provisions should apply. However, the Court held that domestic tax legislation cannot be interpreted in a manner which brings it in direct conflict with a treaty provision or with an overriding effect over the provisions contained in a DTAA since the same would in effect amount to accepting the right of the Legislature of one of the Contracting States to unilaterally amend or override the provisions of a treaty and would result in the elevation of a domestic subordinate legislation over that of the provisions embodied in a treaty entered into between sovereign nations.

Accordingly, the argument that the transaction undertaken by the petitioners would not be grandfathered in light of Rule 10U is sans merit, as is the claim that sub-rule (2) takes away from the preceding provision of clause (d) of sub rule (1), since the term - without prejudice is intended to mean that sub-rule (2) would operate in contingencies not contemplated by sub-rule (1)(d) of Rule 10U

This finding is also obviously problematic as it calls into question the sovereign powers of a State to legislate and the explicit mandate of section 90(2A). Besides, such an interpretation will render Rule 10U (2) nugatory.

That apart, there are other aspects like lifting of corporate veil of a subsidiary when the actions of the holding companies themselves indicate that the separate corporate existence was not respected. One more troubling aspect is the status given to the TRC as a conclusive proof of both beneficial ownerships as also of entitlement to treaty benefits. The matter is already before the Supreme Court in another case. It is very likely that this case will also end up in the Supreme Court since important questions of law indeed arise.