Tax Corner: Recent Ruling by Indian Authority of Advance Ruling (AAR) on Capital Gains

Published on August 05, 2020

In the year, 2018, the most talked-about E-commerce deal in India took place wherein Walmart acquired a majority stake in Indian e-commerce giant Flipkart. As a part of the transaction, the US-based fund Tiger Global sold some of its holdings in Flipkart Private Limited (a company incorporated in Singapore) which was the parent of Flipkart India Private Limited (a company incorporated in India) to Luxembourg based Fit Holdings S.A.R.L. The funds were incorporated in Mauritius and the stakes were acquired prior to 2017 i.e. the year when the India – Mauritius treaty was amended pursuant to which the gains made by Mauritius residents were also made taxable in India for sale of shares of Indian companies.

Notably, India has introduced Indirect transfer provisions in 2012 under its domestic tax laws pursuant to which the sale of shares of Flipkart Singapore attracted tax in India as its shares derived their value substantially from assets located in India and required the buyer to do withholding tax. Since, the fund was of the view that there should not be any taxability in India on sale of such shares under the provisions of India – Mauritius Double Taxation Avoidance Agreement (DTAA or treaty) through grandfathering allowed in the aforesaid amendment in the treaty, it applied for a certificate for nil withholding (hereinafter referred to as ‘the certificate’) from Indian tax authorities. The tax authorities denied the nil withholding with the view that the sale of shares is indeed taxable as the benefit of the subject treaty cannot be availed and calculated the withholding with the facts and documents at their disposal.

The Fund approached the Authority of Advance Ruling to ask if such benefit is allowed or not. The AAR instead of answering rejected the application itself of the Fund on the ground the arrangement was prima facie done for tax avoidance in India. Some of the relevant findings of the AAR which led to this conclusion are summarized herein:

1. The ultimate beneficial owner is in the USA (which anyways typically is the case in such funds that the beneficial owners would be based on foreign locations).

2. A non-resident director of the Fund is usually present in all the Board meetings and other directors are mere spectators. The non-resident director infact is reporting to the beneficial owner.

3. Cheques above a certain limit were signed by the beneficial owner who is in the US.

4. The Fund has no investment other than in Flipkart.

5. The actual control of the Fund is in the USA.

In effect, AAR was of the view since the Fund has no substance in Mauritius and the shares of Singapore company, even though derived their value from shares of Indian company, the benefit of the subject treaty still could not be allowed.

The AAR erred on several counts while rejecting this application. It ignored the grandfathering benefits available to these investments even though the investments were made well before 2017 when the treaty was amended. Second, AAR took a simplistic view that treaty benefit could be allowed only for shares of Indian companies even though residual category under Article 13(4) could have covered such gains as held in the matter of Sanofi Pasteur Holding SA in another forum (the Hon’ble Andhra Pradesh High Court).

The ruling can have several ramifications as the Indian tax authorities can use this in other similar cases and deals wherein either such certificates can be denied more frequently, or the AAR can view other deals on the same lines. As per the recent news, Tiger Global is looking to challenge this verdict at a higher forum. https://economictimes.indiatimes.com/industry/services/retail/tiger-global-to-move-courtover-denial-of-tax-relief-on-flipkart-stake-sale/articleshow/76291364.cms?

Our partner, Mr. Amit Maheshwari also shared his views on the subject, that was published in the media (mentioned below). He is of the view that: ”The AAR has the power to reject the application if the transaction is prima facie designed to evade tax. This clause results in the tax department challenging almost every application in AAR alleging tax evasion. AAR has denied the application of the India-Mauritius treaty. This will potentially result in the tax department invoking GAAR and denying treaty benefits even in the case of the Mauritius treaty. The treaty has a grandfathering clause for investments prior to April 1, 2017, and has not incorporated minimum standards to prevent treaty abuse in accordance with BEPS Action Plan."

Ashok Maheshwary & Associates LLP is an accounting firm in India with an International presence. Our core practice areas include Corporate Finance, Joint Ventures & Restructuring, International Tax, Dispute Resolution, Transaction Advisory, Mergers & Acquisitions, Entry Strategy for Foreign Investors, and Transfer Pricing study & documentation.

About us

1. Headquartered in Delhi NCR, Ashok Maheshwary & Associates LLP has the presence PAN India including offices in New Delhi, Mumbai, Pune, Bangalore, Hyderabad and Singapore.

2. Over 38 years of experience in serving Multi-Nationals clients, spread across 30 countries worldwide.

3. Industry experience and specialization in advising clients on complex transactions.

4. Growing network of local and international accounting and law firms to meet clients’ expansion needs.

5. Robust Audit practices with capabilities to conduct audit under IND-AS, IAS, IFRS, US-GAAP, standards.

6. Dedicated Japanese practice, headed by Mr. Abhipray Basu with Mr. Shojiro Koto and Mr. Yuu Kadono as key executives assisting Japanese clients.

7. Clients include Fortune 1000, Fortune 500 companies, Listed Multinationals, Listed Companies, exciting startups, and Large domestic corporate houses.

8. Ranked as a leading Tax firm and Transfer Pricing firm in World Tax Guide and World Transfer Pricing Guide respectively for 4 consecutive years from 2017 to 2020.

9. Nominated by International Tax Review for Asia Tax Awards 2020 in the categories of “Asia Global Executive Mobility Tax Firm of the Year” & “India Transfer Pricing Firm of theYear”.

10. Nominated by International Tax Review for Asia Tax Awards 2019 in several categories including “India Tax Firm of the Year”, “India Transfer Pricing Firm of the Year”, “India Tax Disputes & Litigation Firm of the Year” and “Asia Tax Transactions Firm of the Year”.

11. Nominated by International Tax Review for Asia Tax Awards 2018 in 7 categories including National Transfer Pricing firm and National Tax firm and Asia Tax Transactions firm of the year.

12. Amit Maheshwari (Tax Partner) nominated for the “Asia Transfer Pricing Practice Leader of the Year” award category in Asia Tax Awards, 2017.

13. Nominated by International Tax Review for Asia Tax Award, 2016 in “National Transfer Pricing Firm” and “Best Newcomer Asia” categories.

Initiatives

The partners of the firm contribute to media on the International Tax and Transfer Pricing matters (including latest developments) providing their views on the impact of any such development on the business environment in India. They also contribute stories/articles on the subject to both domestic and international media (such as Worldwide Tax by TaxAnalysts.com of the US, The Economic Times, Live Mint & The Wall Street Journal, The Financial Express, Press Trust of India, CCH, etc).

In addition to this, Amit Maheshwari, has written a book titled “Expatriate Taxation - Decoding the Complexity" that was published by Wolters Kluwer (CCH).

His second book, titled “India Transfer Pricing Manual”, published by Lexis Nexis aims to provide additional content and depth on the Indian transfer pricing landscape that shapes many large MNCs.

His latest book titled “NRI Regulations – Decoding the complexity” that focuses on Indian legislative requirements applicable to NRIs has been published again by Wolters Kluwer (CCH).

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