India: Treaty Protection Not Available To Mauritian Company For Indirect Transfer Of Indian Assets

Background

In a recent Ruling¹, Authority for Advance Ruling (AAR) denied DTAA² benefit in respect of indirect transfer of shares. While denying the benefit, it had an occasion to not only delve upon whether the proceedings are pending or not but also on whether the transaction is designed prima facie for the avoidance of income-tax. Further, it went on to analyse whether the head and brain of the applicant is in Mauritius or not.

We, at BDO India, have summarised the AAR ruling and provided our comments on the impact of this decision.

Facts of the case

Three Taxpayers, part of Tiger Global Group, are private companies incorporated under the laws of Mauritius and are tax resident 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. They held shares of Flipkart Private Limited ('Singapore Company') in different proportion. The Singapore Company had invested in multiple companies in India and the value of shares of Singapore Company was derived substantially from assets located in India. All three taxpayers sold certain portion of their holding in Singapore Company to a Luxembourg Company – Fit Holdings S.A.R.L. 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 (USA), from several shareholders, including the taxpayers. The taxpayers approached the Revenue Authorities in August 2018 seeking certificate for NIL tax withholding, prior to consummation of the transfer. However, the Revenue Authorities denied the benefit of India-Mauritius DTAA on the ground that the taxpayers were not independent in their decision making and the control over the decision making of the purchase and sale of shares did not lie with them. Accordingly, the Revenue Authorities granted lower withholding rates. Subsequently, in February 2019, the taxpayers filed an application before the AAR seeking ruling on whether the sale of Singapore Company shall be chargeable to tax in India in light of the DTAA.

Ruling of AAR

After hearing the contentions of the Revenue Authorities as well as Taxpayers, the AAR held that:

• Re. Pending proceedings:
• The bar is only in respect of pending proceeding and that there is no bar that an applicant can't approach AAR after the matter has been examined in the proceeding under section 195 or section 197 of the Act.
• Re. Whether transaction / issue designed prima facie for avoidance of tax?
• • The tax avoidance itself is not illegal per se. In the scheme of tax avoidance, the taxpayer discloses all the relevant facts to Revenue Authorities and claims benefit as provided under the law. The tax avoidance may be considered as legal as the transactions are so planned that relief is obtained; even though it was not as per the intent of the lawmakers.
  • As per Notes to Financial Statement, the principal objective of the taxpayers was to act as an investment holding company for a portfolio investment domiciled outside Mauritius.
  • Though the holding-subsidiary structure might not be a conclusive proof for tax avoidance, the purpose for which the subsidiaries were set up does indicate the real intention behind the structure.
  • In view of Supreme Court's (SC) decision in case of Vodafone International Holding BV³, Revenue Authorities' contention that funds had come not from the taxpayers but from the promoters in USA, so as to treat the arrangement as tax avoidance, had to be rejected.
  • The Supreme Court in Vodafone case had held that the treaty and furnishing of tax residency certificate(TRC), as read with Circular no 789 dated 13 April 2000 would not deter the Revenue Authorities from denying treaty benefits in suitable cases.
  • Though the taxpayers have submitted that their control and management was with the Board of Directors in Mauritius, what is material is not the routine control of the affairs of the taxpayers but their overall control. The control and management of taxpayers does not mean the day-to-day affairs of their business but would mean the head and brain of the Companies.
  • Mr. Charles P. Coleman was the beneficial owner as disclosed by the taxpayers in the application form for Category "I" Global Business License filed with Mauritius Financial Services Commission. Mr. Coleman was also the authorised signatory for the immediate parent company of the taxpayers.
  • Mr. Charles P. Coleman and another authorised signatory, though being not on the Board of Directors of the taxpayers, were the key personnel of the Group and were managing and controlling the affairs of the entire organisation structure. The funds of the taxpayers were ultimately controlled by Mr. Charles P. Coleman and the taxpayer had only a limited control over their fund.
  • Hence, taxpayers' head and brain and consequently their control and management were situated in USA and not Mauritius
  • The taxpayers were only a "see-through entity" to avail the benefits of India-Mauritius DTAA.
  • Further, the exemption from capital gains tax on sale of shares of company not resident in India was never intended under the original or the amended DTAA between India and Mauritius. In view of this clear stipulation in the India-Mauritius DTAA, the taxpayers were not entitled to claim benefit of exemption of capital gains on the sale of shares of the Singapore Company.
  • Even if the Singapore Company derived its value from the assets located in India, the fact remains that what the taxpayers had transferred was shares of Singapore Company and not that of an Indian company. The objective of India-Mauritius DTAA was to allow exemption of capital gains on transfer of shares of Indian company only and any such exemption on transfer of shares of the company not resident in India, was never intended by the legislator.
  • The entire arrangement made by the taxpayers was with an intention to claim benefit under India – Mauritius DTAA, which was not intended by the lawmakers, and such an arrangement was nothing but an arrangement for avoidance of tax in India

BDO Comments

While the AAR has rejected the application on the ground that the arrangement was for avoidance of tax in India, it has made an important observation. It has observed that the India-Mauritius DTAA is not applicable when the shares are not that of an Indian Company. This is a significant observation in light of the fact that indirect transfers have been brought within the tax net under the IT Act. Thus, it could open up a pandora box wherein for all the indirect transfers, the Tax Officers could deny the benefit of respective DTAA.

It is important to note how the observations in Azadi Bachao Andolan⁴ (SC) holding that where the TRC is issued, the taxpayer should be regarded as resident of the TRC issuing country, will play out. Furthermore, in case of Sanofi Pasteur Holding SA⁵, Hon'ble Andhra Pradesh High Court have held that the benefit of India-France DTAA is available in case of indirect transfer (i.e. where the shares of France Company which derived its value from Indian Company were sold, the DTAA benefit would be available to the owner of the French Company).

Considering various judicial pronouncements in the past which have shaped the interpretation and development of applicability of treaty provisions, it would be pertinent to see how others examine these aspects going forward.

Footnotes

1. Tiger Global International II Holdings, Mauritius, in Re (AAR / 04 / 2019)
Tiger Global International III Holdings, Mauritius, in Re (AAR / 04 / 2019)
Tiger Global International IV Holdings, Mauritius, in Re (AAR / 04 / 2019)

2. India-Mauritius Double Tax Avoidance Agreement

3. 341 ITR 1 (SC)

4. UOI v. Azadi Bachao Andolan [2003] 263 ITR 706 (SC)

5. Sanofi Pasteur Holding SA v. The Department of Revenue [TS-57-HC-2013 (AP)]

Originally published 11 June 2020

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.