Tax Treaty Conundrum: Supreme Court Stays Ruling Favouring Tiger Global In Flipkart Deal

The Supreme Court on Friday stayed the Delhi High Court’s ruling in favour of Tiger Global, a leading private equity firm, in a case revolving around substantial capital gains tax from its 2018 sale of Flipkart shares to Walmart.

The apex court observed that the judgement in Tiger Global tax treaty case has "pan India" implications and requires "thorough" consideration. The order was passed by a bench of Justice JB Pardiwala and Justice R. Mahadevan. The copy of the order is awaited.

The Supreme Court’s stay on the ruling now raises questions about the future applicability of these tax benefits and could affect future cross-border investment strategies.

The Delhi High Court’s decision last year had been seen as a significant win for foreign investors who used Mauritius-based entities to acquire shares in Indian companies before April 2017.

The High Court gave its ruling following a petition that Tiger Global International Holding had filed challenging the Advance Authority Ruling or AAR, which had denied the private equity firm the treaty benefits.

Experts says that the Supre Court's stay has come amid the CBDT Circular categorically placing grandfathering-provisions under tax-treaties with specified treaty-partners beyond the ambit of PPT (deeper scrutiny).

"In a way, the Delhi High Court verdict endorsed the principle that rigorous thresholds of general anti-abuse provisions, such as, Principal Purpose Test (‘PPT’), beneficial ownership, etc., could not be invoked by Revenue in the case of tax-treaties where Sovereign Commitments had been given to specific treaty-partners (Singapore being one of them) so as to apply negotiated anti-abuse standards under the grandfathering provisions," said. Rakesh Nangia, Managing Partner, Nangia & Co LLP

“The stay could introduce ambiguity regarding the applicability of DTAA benefits, particularly for investments routed through Mauritius. Further, entities that have relied on the High Court’s ruling might need to reassess their tax positions and prepare for potential tax liabilities, pending the Supreme Court’s decision," said tax and constitutional expert, Abhishek A Rastogi, founder of Rastogi chamber.

"The government’s stance on tax treaties and the interpretation of their provisions could come under scrutiny, potentially leading to policy reviews or amendments to prevent treaty abuse while maintaining India’s attractiveness to foreign investors,” Rastogi added.

Tiger Global firms, which had tax residency certificates from Mauritius, bought Flipkart shares between 2011 and 2015.

The grandfathering provision under the India-Mauritius DTAA allowed these investors to avoid capital gains tax on the sale of shares acquired prior to that date.

Tiger Global, through its Mauritius-based entities, sold its stake in Flipkart to Walmart in 2018, generating substantial capital gains. The tax treatment of these gains became a contentious issue, with the Indian tax authorities questioning whether Tiger Global was eligible for the tax benefits under the India-Mauritius Double Taxation Avoidance Agreement.

AAR had ruled that Tiger Global’s Mauritius vehicles, which held Tax Residency Certificates from Mauritius, were not entitled to the benefits of the India-Mauritius DTAA. The AAR argued that these entities lacked substance and were merely "facades" of Tiger Global's parent company, TGM LLC (USA).

AAR was of view that these Mauritius entities designed such deals to exploit the tax treaty between India and Mauritius to avoid paying capital gains tax on the Flipkart sale.

Income-tax department echoed the AAR’s concerns, asserting that Tiger Global’s Mauritius entities lacked commercial substance and were structured solely to take advantage of the treaty’s tax benefits, rather than for legitimate business reasons.

Following the observation, Tiger Global International IV Holdings had filed an appeal in the high court seeking injunction against a Mumbai AAR’s order issued in March 2020.

Legal expert says that this case will be closely watched, as the final outcome could have broad implications for international investment in India, particularly concerning the tax treatment of Mauritius-based entities.