Tiger Global's Flipkart stake sale taxable: SC

NEW DELHI: In a setback to private equity player Tiger Global, the Supreme Court Thursday ruled that its $1.6-billion stake sale in Flipkart to Walmart is subject to taxes in India, setting a precedent for investors that use tax treaties.

Setting aside a Delhi high court order, a bench of Justices J B Pardiwala and R Mahadevan held that the unlisted shares were transferred through an arrangement that was impermissible under the law.

"The revenue has proved that the transactions in the instant case are impermissible tax-avoidance arrangements, and the evidence prima facie establishes that they do not qualify as lawful... The applications preferred by the assessees relate to a transaction designed prima facie for tax avoidance and were rightly rejected as being hit by the threshold jurisdictional bar to maintainability...," the 152-page order said.

The bench also upheld the revenue department's contention that the mere possession of a Tax Residency Certificate (TRC) does not by itself preclude scrutiny by authorities, where the entity is alleged to be a conduit for tax avoidance.

The case has its origins in Tiger Global acquiring shares in Flipkart Singapore between Oct 2011 and April 2015, which were subsequently transferred to Fit Holdings SARL, a Luxembourg entity. In 2018, Tiger Global exited Flipkart when Walmart acquired a controlling stake in the Indian e-commerce company.

When the investor sought Authority of Advance Ruling's guidance, it held the transaction was "prima facie for the avoidance of income tax" as the actual management and control of the assessee and the other companies was with TGM LLC, an entity based in the US and not Mauritius.

"A TRC, the court clarified, is not conclusive evidence of entitlement to treaty benefits when the surrounding facts indicate a lack of commercial substance. The judgment is also likely to have an overriding effect on investments which were grandfathered through India-Mauritius treaty amendment and the same may be questioned on the economic reality. This judgment has far-reaching consequences for private equity, venture capital, and offshore investment structures. It signals the end of mechanical treaty benefit claims based solely on TRCs and formal residency and reinforces India's alignment with global anti-abuse standards," added Amit Maheshwari, managing partner at AKM Global, a tax and consulting firm.

"One would need to carefully understand the implications arising from the judgment relating to applicability of General Anti Avoidance Rules under the I-T Act, including the observations regarding the grandfathering of capital gains arising on sale of investments made before 1 April 2017 under the provisions of amended DTAA between India and Mauritius. Also of great interest may be the observations in regard to the TRC, applicability of circulars issued under the Act, and indeed the observations of Justice Pardiwala in regard to principles of tax sovereignty," said Pranav Sayta, national leader for international tax at consulting firm EY India.