By Rahul Jain and Anuraag Bukkapatnam
Foreign investors and offshore funds often face scrutiny when claiming tax treaty benefits in India. A recent Delhi High Court ruling in the case of Tiger Global International II Holding provided significant relief by upholding tax treaty benefits under the India-Mauritius Tax Treaty.
Setting the scene
The India-Mauritius tax treaty offers beneficial tax treatment with respect to various streams of income including capital gains tax exemption for Mauritius-based investors on sale of shares in a foreign company. However, Indian tax authorities regularly assess whether these investments genuinely qualify for tax exemptions, scrutinising issues like beneficial ownership and control. In 2018, Tiger Global sold shares of Flipkart Singapore to Walmart International Holdings Inc. As a tax resident of Mauritius with a tax residency certificate (TRC) issued by the Mauritian tax authorities, Tiger Global claimed an exemption from capital gains tax in India on the sale of shares of Flipkart.
However, Indian tax authorities and the Authority of Advance Ruling (AAR) denied the benefits to Tiger Global, alleging that Tiger Global was merely a sham or conduit entity, and that it was controlled by Tiger Global Management LLC (TGM LLC), based in the United States.
The Indian tax authorities argued that Tiger Global was set up in Mauritius solely to benefit from the India-Mauritius tax treaty, which would not have been available under the India-US tax treaty. The tax authorities placed considerable emphasis on the fact that Tiger Global and TGM LLC shared a common director, who also was an authorised bank signatory of Tiger Global. Consequently, the AAR viewed this structure as a tax avoidance arrangement.
High Court to the rescue
On appeal by Tiger Global, the Delhi High Court noted that Tiger Global was granted a TRC by the Mauritian government, which was considered adequate evidence for establishing its tax residency in Mauritius. The High Court emphasised that it has always been the Indian Government’s intention (as evidenced by various circulars and press releases) to treat TRCs as adequate evidence of tax residency.
Furthermore, the High Court recognised the commercial realities of corporate structures, acknowledging the corporate veil principle. Every company is naturally expected to be controlled and guided by its shareholders. This is all the more so when a parent company owns 100% of a subsidiary. The High Court went on to state that merely because a company is held entirely by one entity does not automatically mean that it is a ‘sham’ entity that lacks independence, unless the company’s board of directors have completely abdicated their responsibilities in favour of the parent company.
Notably, the Delhi High Court recognised the volume of foreign direct investment coming from Mauritius into India and cautioned against the practice of tax authorities viewing all such investments with suspicion.
Takeaways
This ruling reaffirms the validity of TRCs for claiming treaty benefits, offering a positive outcome for foreign investors. The ruling is in line with the Supreme Court decision in the case of Azadi Bachao Andolan and several judgments wherein the tribunals and courts have granted tax treaty benefits to Singapore and Mauritius based investment funds in the past 2 years. Aside from being a stamp of approval to the commercial practice of setting up Special Purpose Vehicles for making investments, the judgement is likely to assist taxpayers in ongoing tax litigations (especially involving India-Mauritius tax treaty) on similar issues pertaining to beneficial ownership, control and management, etc.
However, if a foreign taxpayer furnishes a TRC, can their tax treaty benefits never be challenged? Not entirely.
The Delhi High Court clarified that in cases of ‘fraud’ or ‘illegal activities’, a TRC may be disregarded by Indian tax authorities. The anti-avoidance rules under Indian tax law or respective tax treaties could also be invoked to challenge tax treaty benefits if the main or principal purpose of an arrangement was to obtain such tax benefits. Notably, India and Mauritius have recently signed a protocol to introduce a ‘principal purpose test’ in the tax treaty, which enables tax authorities to deny tax treaty benefit if it can be demonstrated that obtaining such a benefit was one of the principal purposes of an arrangement.
However, the burden of proving that a fraud has taken place, or that the taxpayer has entered into arrangements primarily for obtaining tax benefits is on the tax authorities. Mere conjectures or allegations would not be sufficient to challenge tax treaty benefits in the absence of tangible evidence. Investors, meanwhile, must ensure their documentation is robust to defend the commercial purpose of their structures.
About the authors
Rahul Jain is Partner and Anuraag Bukkapatnam is Associate at Khaitan & Co. The views expressed are personal.
Disclaimer: Views expressed are personal and do not reflect the official position or policy of Financial Express Online. Reproducing this content without permission is prohibited.
From: financialexpress
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