The benefit of India – Mauritius treaty won’t be available for Singapore based company deriving its value from an Indian company or where the mauritius company is being managed by USA citizens.
Facts of the Case:
Tiger Global International II, III, IV held shares of Flipkart Private Limited, a private company limited by shares incorporated under the laws of Singapore (for short “Singapore Co”).
The value of the shares of Singapore Co was derived substantially from assets located in India. Therefore the Singapore company can be considered as a capital asset situated in India as per Explanation 5 of Section 9(1)(i).
On 18.08.2018 all three applicants transferred certain shares of Singapore Co. to Fit Holdings S.A.R.L. (Buyer), a company incorporated under the laws of Luxembourg. These transfers were undertaken as part of a broader transaction involving the majority acquisition of Singapore Co. by Walmart Inc., a company incorporated in the United States of America.
The Applicants had approached the Indian tax authorities under section 197 of the Act on 02.08.2018 seeking certification of Nil withholding prior to consummation of the transfer.
According to the assessee gains arising to the Applicants from the sale of Singapore Co. to Fit Holdings S.A.R.L. (a company incorporated in Luxembourg) is an Indian Capital Asset. As per Article 13 of the India-Mauritius Treaty, such capital assets would only be taxable in Mauritius. As valid TRC is available of Mauritius Cos., the shareholding structure of these companies will not be relevant for the purpose of taxation of transactions.
However, department contended that the benefit of the India-Mauritius treaty can only be given to either country shares. However, as the shares which have been sold are shares of Singapore Co, India-Mauritius Treaty will not be applicable.
Treaty has to be applied in “good faith” and therefore when as per the documents available on record it can be proven that the sole benefit to enter the transaction through Mauritius is to gain treaty benefit, corporate veil needs to be pierced and treaty benefit to be denied. Tiger global USA is the ultimate beneficiary and therefore as per India-USA DTAA (Article xx), such transactions will be taxed in India as per domestic tax provisions.
The Supreme Court in Vodafone case had held that the treaty and furnishing of tax residency certificate (TRC), as read with Circular no 789 dated 13 April 2000 would not put off the Revenue Authorities from denying treaty benefits in suitable cases.
Though the taxpayers 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 taxpayers but their overall control. The control and management of taxpayers does not mean the day-to-day affairs of their business but would mean the head and brain of the Companies, which seems to be with Tiger Global USA.
Authorized signatories for applicants, though being not on the Board of Directors of the taxpayers, were the key personnel of the Group and were managing and controlling the affairs of the entire organization structure. The funds of the taxpayers were ultimately controlled representative of parent co. and the taxpayer had only limited control over their fund.
Hence, taxpayers head and brain and consequently their control and management were situated in the USA and not Mauritius.
The entire arrangement made by the taxpayers was with an intention to claim benefit under India – Mauritius DTAA, which was not intended by the lawmakers, and such an arrangement was nothing but an arrangement for avoidance of tax in India.
Even if the Singapore Company derived its value from the assets located in India, the fact remains that what the taxpayers had transferred was shares of Singapore Company and not that of an Indian company. The objective of India-Mauritius DTAA was to allow exemption of capital gains on transfer of shares of Indian company only and any such exemption on transfer of shares of the company not resident in India, was never intended by the legislator.
Thus, same shall be taxable in India and no benefit of India-mauritius treaty shall be available.