GAAR applied to a transaction of sale of shares by a Mauritian entity

Tiger Global International II Holdings and two others were incorporated under the laws of Mauritius. They were set up with the primary objective of undertaking investment activities with the intention of earning long-term capital appreciation and investment income. The assessees were regulated by the Financial Services Commission in Mauritius and had been granted a Category I Global Business License under Section 72(6) of the Financial Services Act, 2007, enacted by the Parliament of Mauritius.

The assessee’s position was that they were wholly controlled and managed by their Board of Directors in Mauritius. They claimed to have satisfied all the requirements laid down by the FSC in Section 3 of Chapter 4 of the Guide to Global Business, thereby establishing commercial substance in Mauritius. They had three Directors on the Board of Directors, of whom two were Mauritian residents and one was a resident of the United States. They maintained their principal bank account and accounting records in Mauritius. Their financial statements had been prepared and audited in Mauritius. They held office premises in Mauritius since incorporation and had two employees at those premises.

Further, they held valid Tax Residency Certificates issued by the Mauritius Revenue Authority, that certified them to be tax residents in Mauritius for income tax purposes. On the basis of the same, they claimed to be tax residents of Mauritius under the laws of Mauritius and under the DTAA between India and Mauritius for the avoidance of double taxation and the prevention of fiscal evasion.

The assessees engaged Tiger Global Management, LLC (TGM), a company incorporated in the United States of America, to provide services in relation to their investment activities. All services provided by TGM, including but not limited to investment sourcing, portfolio stewardship, and observership services, were subject to review and final approval by the Board of Directors of the assessees. TGM did not have the right to contract on behalf of, or bind, the assesses, or take any decisions on their behalf without the approval of the Board of Directors. The assessees also held valid Permanent Account Numbers issued by the Indian income tax authorities.

The assessees held shares of Flipkart Private Limited, a private company limited by shares, incorporated under the laws of Singapore. Thereafter, Singapore Co. invested in multiple companies in India, and the value of its shares was derived substantially from assets located in India. The assessees transferred shares of Singapore Co. ("Sale Shares") held by them to Fit Holdings S.A.R.L ("Buyer"), a company incorporated under the laws of Luxembourg. These transfers were undertaken as part of a broader transaction involving the majority acquisition of Singapore Co. by Walmart Inc., a company incorporated in the United States of America, from several shareholders, including the assessees. Thereafter, the assessees approached the Indian tax authorities by filing applications under Section 197 of the Income Tax Act, 19619, seeking certification of nil withholding prior to consummation of the transfer. By notices dated 17.08.2018, the tax authorities informed that the assessees would not be eligible to avail the benefits under the DTAA on the ground that they were not independent in their decision-making and that control over the decision- making relating to the purchase and sale of shares did not lie with them. The tax authorities, accordingly, issued certificates dated 17.08.2018, prescribing a withholding rate in respect of the sale of shares by the assesses.

The assessees then approached the Authority for Advance Rulings by filing applications under Section 245Q(1) of the Act, seeking an advance ruling on the common question that “Whether, on the facts and circumstances of the case, gains arising to the assessees (private companies incorporated in Mauritius) from the sale of shares held by them in Flipkart Pvt. Ltd (a private company incorporated in Singapore) to Fit Holdings S.A.R.L. (a company incorporated in Luxembourg) would be chargeable to tax in India under the Act read with the DTAA between India and Mauritius?”

The AAR, after providing opportunities to the assessees and upon considering the materials gathered by the Assessing Officer, came to the conclusion that the applications preferred by the assessees relate to a transaction or issue which is prima facie designed for the avoidance of income tax and therefore, rejected the same as being hit by the threshold jurisdictional bar to maintainability, as enshrined in proviso (iii) to Section 245R(2).

Challenging the order dated 26.03.2020 passed by the AAR, the assesses filed W.P.(C) Nos. 6764, 6765 and 6766 of 2020 before the High Court. The High Court, vide the final judgment and common order dated 28.08.2024, allowed the writ petitions and quashed the AAR’s order dated 26.03.2020, after holding that the assessees were entitled to treaty benefits and that their income would not be chargeable to tax in India. Aggrieved by the same, the Revenue appealed before the Supreme Court.

After considering the facts of the case, the changes effected in the DTAA between India and Mauritius and the introduction of GAAR, the Supreme Court allowed Revenue’s appeal. The investments made by the assessee were nothing but arrangements to which GAAR applied.

In view of this judgment, investors should now review their investment structures. This judgment upholds the “look through” principle, as opposed to the “look at” principle. The conclusions reached are not limited to the Indo-Mauritius DTAA and will apply to all structures where the evidence prima facie establishes that the arrangements are impermissible and do not qualify as lawful.