Today, on 15th January, Supreme Court upheld revenue authorities’ refusal to entertain Tiger Global entities’ advance ruling pleas on Flipkart share sales. The Bench held that transactions prima facie aimed at tax avoidance attract the statutory bar under Section 245R(2), negating any duty to examine taxability merits.
NEW DELHI: The Supreme Court upheld the decision of Indian revenue authorities to reject advance ruling applications from Tiger Global entities concerning the sale of shares they owned in Flipkart.
A Bench consisting of Justices JB Pardiwala and R. Mahadevan determined that when a transaction is deemed prima facie aimed at avoiding income tax, the statutory bar outlined in the proviso to Section 245R(2) of the Income Tax Act, 1961, is applicable. As a result, tax authorities are not obligated to evaluate the merits of taxability.
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The controversy arose from investments made by three Mauritius-based investment holding companies—Tiger Global International II, III, and IV Holdings into Flipkart Private Limited, a company based in Singapore. These entities acquired their shares between October 2011 and April 2015.
In May 2018, Walmart signed a share purchase agreement to acquire a controlling interest in Flipkart Singapore for around 16 billion dollars. In connection with this acquisition, the Tiger Global entities sold their shares and requested a “nil” withholding tax certificate from Indian authorities, arguing that their gains were exempt from Indian capital gains tax under the “grandfathering” provision of the India-Mauritius double taxation avoidance agreement (DTAA) since their shares were acquired before April 1, 2017.
The Indian Revenue Department and the Authority for Advance Ruling (AAR) rejected this claim in 2020. The AAR described the Mauritius companies as “conduit companies” and “puppets,” asserting that actual control resided with Tiger Global Management (TGM) LLC in the United States. It concluded that the structure was primarily aimed at tax avoidance.
The Delhi High Court annulled the AAR’s decision, leading to an appeal to the Supreme Court.
In allowing the revenue’s appeals, the Supreme Court disagreed with the High Court’s ruling and upheld the AAR’s refusal. The Court stated that the statutory framework explicitly prohibits advance rulings when a transaction appears designed to avoid taxes and affirmed that the AAR had not overstepped its authority by applying this threshold bar.
The Court dismissed the argument that eligibility for the treaty negates tax avoidance, asserting:
“Once taxability has been established on the basis that the shares sold derived their value from assets in India, the inquiry cannot be diverted merely because the shares transferred were not of an Indian company.”
The Court further emphasized that treaty interpretation must align with legislative intent and the statutory amendments aimed at preventing abuse.
It Stated,
“Undoubtedly, the mere holding of a TRC cannot by itself prevent an inquiry subsequent to the amendments brought into the statute, particularly by the introduction of Section 90(2A) and Chapter X-A…if it is established that the interposed entity was a device to avoid tax.”
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In a concurring opinion, Justice Pardiwala highlighted the importance of tax sovereignty, asserting that the ability to tax income generated within India is an intrinsic sovereign function.
He said,
“Taxing an income arising out of its own country is an inherent sovereign right of that country. Any dilution of this power through artificial arrangements is a direct threat to its sovereignty and long-term national interest.”
He also underscored the growing significance of economic sovereignty in a globalized context.
He said,
“In the present era of geo-economic uncertainty, prudence demands that tax sovereignty be retained rather than yielded.”
Justice Pardiwala noted that the ruling would attract international attention and marked a significant moment in India’s tax jurisprudence.
Determining that the revenue had demonstrated, at least prima facie, that the Tiger Global transactions constituted impermissible tax avoidance schemes, the Supreme Court accepted the appeals and overturned the Delhi High Court’s ruling. It established that capital gains from share transfers executed after April 1, 2017, are subject to tax in India under the Income Tax Act in conjunction with the relevant provisions of the DTAA.
The revenue was represented by Additional Solicitor General N Venkataraman, while Tiger Global was represented by Senior Advocates Porus Kaka and Harish Salve.
Case Title: Authority of Advanced Ruling v. Tiger Global