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2024 Supreme(Online)(DEL) 8349
HIGH COURT OF DELHI
Yashwant Varma, Purushaindra Kumar Kaurav, JJ
TIGER GLOBAL INTERNATIONAL III HOLDINGS – Appellant
Versus
THE AUTHORITY FOR ADVANCE RULINGS (INCOME- TAX) & ORS. – Respondent
W.P.(C)-6764/2020
Mr. Porus Kaka, Sr. Adv. with Mr. Manish Kanth, Ms. Parul Jain, Mr. Afaan Arshad, Mr. Arijit Ghosh, Mr. Anirudh Srinivasan and Mr. Brijesh Ujjainwal, Advs.; Mr. G. C. Srivastava, Spl. Counsel with Mr. Kalrav Mehrotra and Mr. Mayank Patawani, Advs.; Mr. Chetan Sharma, ASG with Mr. Asheesh Jain, CGSC along with Mr. Gaurav Kumar and Ms. Neha Narang, Advs. for R-2; Mr. Sunil Agarwal, Sr.SC with Mr. Shivansh Pandya, Jr.SC along with Mr. Utkarsh Tiwari, Adv.
Tax treaties must be interpreted in good faith, considering their object and purpose. The mere establishment of an entity in a tax-favorable jurisdiction does not constitute treaty abuse unless the transaction lacks commercial substance and was primarily designed for tax avoidance. Applicable Limitation of Benefits (LOB) clauses in a tax treaty govern the determination of treaty abuse.
Headnote:(A) Income Tax Act, 1961 - Section 245R(2) - Double Tax Avoidance Agreement (DTAA) between India and Mauritius - Article 13(3A), Article 13(4), Article 27A - Capital gains tax - Tax avoidance - Treaty abuse - Conduit company.
(B) Tax treaties are to be interpreted in good faith, considering their object and purpose. (Paras 121, 177)
(C) A Tax Residency Certificate (TRC) is generally sufficient evidence of residence and beneficial ownership for treaty purposes, unless there is evidence of fraud or illegal activity. (Paras 38, 153, 195)
(D) The mere establishment of an entity in a tax-favorable jurisdiction does not, in itself, constitute treaty abuse or tax avoidance. The revenue authorities must demonstrate that the transaction lacks commercial substance and was primarily designed for tax avoidance. (Paras 158, 170, 179, 206) (E) A Limitation of Benefits (LOB) clause in a tax treaty, if applicable, governs the determination of treaty abuse. Additional grounds for disqualification cannot be created by domestic tax authorities. (Paras 206, 207)
Facts of the case:
Three writ petitions challenged the dismissal of applications for advance rulings on the taxability of capital gains from the sale of shares in a Singapore company. The petitioners, Mauritian companies, argued that the shares were acquired before a key date specified in the DTAA, thus exempting the gains from Indian tax. The Authority for Advanced Rulings (AAR) found the transaction prima facie designed for tax avoidance, concluding the petitioners were conduit companies lacking commercial substance.
Findings of Court:
The court found the AAR's conclusion that the petitioners were conduit companies to be based on factual errors and misinterpretations of the DTAA. The court held that the petitioners met the requirements of the LOB clause and that the transaction was grandfathered under the DTAA.
Issues: The main issues were whether the transaction was prima facie designed for tax avoidance and whether the petitioners were entitled to the benefits of the DTAA.
Ratio Decidendi: The court held that the AAR erred in its factual findings and legal interpretation. The court emphasized the importance of good faith interpretation of tax treaties, the limited circumstances under which a TRC can be disregarded, and the primacy of the LOB clause in the DTAA. The court found no evidence of tax avoidance or treaty abuse.
Result: Appeals allowed. Impugned order quashed.
J U D G M E N T
YASHWANT VARMA, J.
| S. NO. | SUB-HEADING | PARAGRAPH NOS. |
| A. | INTRODUCTION | 1 to 3 |
| B. | THE FACTUAL NARRATIVE | 4 to 23 |
| C. | IMPUGNED ORDER- SALIENT FINDINGS | 24 to 33 |
| D. | SUBMISSIONS OF THE PETITIONERS | 34 to 60 |
| E. ARGUMENTS OF THE RESPONDENTS | 61 to 92 | |
| F. | THE PRELIMINARY OBJECTIONS | 93 to 106 |
| G. ORGANISATIONAL | STRUCTURE OF THE PETITIONERS | 107 to 115 |
| H. | THE MAURITIUS ROUTE | 116 to 119 |
| I. | DECISIONS RENDERED BY THE SUPREME COURT | 120 to 143 |
| J. | THE HIGH COURT DECISIONS | 144 to 155 |
| K. | TAX AVOIDANCE AND TREATY | 156 to 182 |
| ABUSE | ||
| L. | FAVOURABLE TAX JURISDICTIONS | 183 to 193 |
| M. | TAX RESIDENCY CERTIFICATES | 194 to 200 |
| N. | INTERNATIONAL PERSPECTIVES ON TREATY SHOPPING | 201 to 204 |
| O. | LOB PROVISIONS IN THE DTAA | 205 to 209 |
| P. | THE ECONOMIC SUBSTANCE QUESTION | 210 to 211 |
| Q. | CHAPTER X-A AND GAAR | 212 to 231 |
| R. | BENEFICIAL OWNERSHIP | 232 to 246 |
| S. OUR SUMMATION | 247 to 268 | |
| T. | CONCLUSIONS AND TAKEAWAYS | 269 |
| U. OPERATIVE DIRECTIONS | 270-271 |
A. INTRODUCTION
1. These three writ petitions impugn the order dated 26 March 2020 of the Authority for Advanced Rulings1 pursuant to which three applications numbered as AAR Nos. 04/2019, 05/2019 and 07/2019 have come to be dismissed with the AAR holding that the transaction in respect of which the ruling was sought was prima facie designed for the avoidance of tax and thus falling within the scope of clause (iii) of the Proviso to Section 245R(2) of the Income Tax Act, 19612. In view of the aforesaid, the AAR held that it was not obliged to render any findings on the merits of the question which stood posited, namely of whether the petitioner was entitled to avail the
1 AAR
2 Act benefits of the Double Tax Avoidance Agreement3 between India and Mauritius in respect of the sale of shares of Flipkart Private Limited, a private company limited by shares and incorporated under the laws of Singapore [hereinafter to be referred to as ―Flipkart Singapore‖] and the question of taxability of capital gains connected therewith.
2. It would appear that the petitioner had essentially sought to derive benefit from Article 13(3A) of the India-Mauritius DTAA and which had subjected to tax capital gains arising from an alienation of shares acquired on or after 01 April 2017. The petitioner had principally urged that Paragraph 3A of Article 13 had thus grandfathered all acquisition of shares prior to 01 April 2017 and the gains arising from their transfer would thus be exempt from taxation. The petitioner had sought exemption from the levy of capital gains tax by virtue of it having admittedly acquired the shares of Flipkart Singapore prior to 01 April 2017. The AAR has essentially held that the petitioners were mere conduit companies and disentitled to claim benefits of the DTAA since the transaction lacked commercial substance and the establishment of an entity in Mauritius was principally aimed at deriving undue benefits under the DTAA.
3. For the sake of brevity, we propose to take note of the salient facts as they emanate from W.P.(C) 6765/2020 confining them to those necessary for answering the challenge which stands laid.
B. THE FACTUAL NARRATIVE
4. The petitioner is stated to be a private company limited by shares incorporated under the laws of the Mauritius and having its
3 DTAA principal office in that country. As per the petitioner, it had been set up with the primary objective of undertaking investment activities with the intention of earning long term capital appreciation and investment income. As per the disclosures made in the writ petition, the immediate shareholders of the petitioner are also Mauritian companies whose shareholders in turn are private equity funds who had raised funds from several investors across the globe. According to the petitioner, the indirect shareholders of the petitioner consisted of almost 500 investors residing in an as many as 30 jurisdictions spread across the globe. Tiger Global Management LLC4, a company incorporated in terms of the laws of Delaware USA was asserted to be the petitioner‘s Investment Manager and has thus at various places of these proceedings also
