The India–Mauritius Double Tax Avoidance Agreement (“DTAA”), entered into in 1983, has since been the subject matter of contentious litigations. The well-drafted and reasoned ruling of the Delhi High Court (“Delhi HC”), which explains the availability of benefits to a Mauritius-based investor, the significance of the tax residency certificate (“TRC”), the limitation of benefits (“LoB”) clause, and the grandfathering provision in the treaty, has provided much-anticipated relief and certainty to the taxpayers.
Facts
Tiger Global International (“Assessee”) is a private company incorporated in Mauritius. It was established primarily for investment activities to be conducted on behalf of Tiger Global Management LLC (“TGM LLC”), a company based in Delaware, United States. TGM LLC is the Assessee’s investment manager. The Assessee is owned by a private equity fund that has approximately 500 investors across 30 sovereign jurisdictions.
The Assessee holds a Category 1 Global Business License and is a tax resident of Mauritius holding TRC issued by the Mauritius revenue authorities. Between October 2011 and April 2015, it acquired the shares of Flipkart Singapore and subsequently transferred its shareholding in the company to Fit Holdings SARL, a Luxembourg entity. The Assessee approached the Income Tax Department (“ITD”) in February 2019 for Advance Authority Ruling (“AAR”) to adjudicate on the same matter. The AAR ruled that the organisational structure of the Tiger Global Group demonstrated that the Assessee and the companies that owned it were mere intermediaries in a tax-avoidance scheme. It held that the actual control and management of the Assesse and the other companies lay with TGM LLC, which was situated in the United States and not in Mauritius.
Assessee’s contentions
The Assessee relied on Article 13(3A) of the DTAA, which exempts Mauritian residents from Indian capital gains tax for shares acquired prior to April 1, 2017. It argued that a TRC from Mauritius is sufficient evidence of residence as per CBDT Circular No. 789. It relied on the landmark decision of Azadi Bachao Andolan[1] to substantiate that DTAA benefits must be granted based on treaty terms, irrespective of the motives behind Mauritius-based entities.
Further, the Assessee contended that the LoB clause would not apply to the transaction, because all shares were acquired before 2017. It contended that the AAR erred in questioning the motive behind the incorporation of the petitioner in Mauritius, its control, management, and beneficial ownership, as these were irrelevant to the petitioners’ eligibility to DTAA benefits.
It also contended that even if the ITD’s queries were to be considered relevant, the Assessee was independently managed by a board of directors based in Mauritius. It submitted that TGM LLC is merely an entity engaged by the Assessee to provide investment related services and it had no right to bind the Assessee or take any decisions on behalf of Assessee, without the approval of its own board of directors.
ITD’s contentions
The ITD, on the other hand, contended that the Mauritius entities were created without substantial commercial rationale, solely to avoid the tax implications associated with capital gains in India. Further, they asserted that on a factual analysis, ultimate control and decision-making lay with TGM LLC. It relied on the Vodafone case[2] to state that the corporate veil could be pierced when the holding structure of an entity has no commercial or business substance and has only been interposed to avoid tax. Based on this, the ITD contended that the AAR was correct in ruling that the Assessee had no commercial substance, lacked independent management, and that the transaction was aimed at tax avoidance, hence making it ineligible for treaty benefit.
Observations of the Delhi HC
The Delhi HC categorically held that TGM LLC served only as an investment manager and could not be considered the parent or holding company. It also observed that the Assessee was a fairly significant entity with considerable economic activity, having been set up as pooling vehicles for investments. It held a Category 1 Global Business License and a TRC issued by the Mauritius authorities and managed the funds of more than 500 investors across 30 jurisdictions.
The Delhi HC concluded that the Assessees’ board of directors, despite the presence of board members connected with the Tiger Global Group, exercised genuine decision-making authority, and made decisions collectively. The presence of Tiger Global Group members did not imply that the Assessee’s board of directors were mere puppets or lacked independence. Regarding beneficial ownership, the Court relied on its factual finding that TGM LLC was not the Assessee’s parent company and no evidence suggested that the Assessee was obligated to transfer the revenue to TGM LLC or that the transactions were carried out at their behest.
The Delhi HC also observed that the establishment of investment vehicles in tax-friendly jurisdictions cannot ipso facto lead to a presumption of tax evasion or treaty abuse. It acknowledged that multinational corporations often create subsidiaries and holding structures in different jurisdictions to facilitate cross-border investments and optimise their global tax strategy. The Court further held that the issuance of a TRC should be considered conclusive proof of an entity’s bona fide status and that piercing the corporate veil is justified only in cases of tax fraud or sham transactions. However, these must be supported by compelling evidence, and it is the onus of the ITD to establish the same. The Court upheld the grandfathering provision under Article 13(3) of the DTAA, which clearly stated that the LoB clause would not apply to the acquisition of shares prior to April 1, 2017 and that such transactions would be eligible for treaty benefits. The Court also highlighted that domestic tax legislations could not and should not override treaty provisions. The Indian GAAR provisions were held to be inapplicable due to grandfathering, and since the DTAA has already incorporated its own anti-avoidance measures.
Take aways
It is worthwhile to highlight that the taxpayers are eagerly waiting for the Blackstone Capital Partners case[3] hearing before the Supreme Court in September 2024, which is expected to settle the dispute on the eligibility of tax treaty benefits with respect to investment companies set up in tax-friendly jurisdictions such as Singapore and Mauritius.
Preceding the upcoming hearing before the Supreme Court, this Delhi HC decision reiterates the Court’s views about the entitlement of DTAA benefits for investment companies set up in tax-friendly jurisdictions like Mauritius. The India–Mauritius DTAA specifically provides that LoB-related provisions would not be applicable to the investments made prior to April 1, 2017, but the India–Singapore DTAA makes the LoB-related provisions applicable to such investments as well. While this Delhi HC decision can be distinguished on facts from the case before the Supreme Court, its broad observations with respect to the setting-up of an entity in tax-friendly jurisdictions should have an impact on the ultimate outcome.
The judgment underscores the fundamental principle that certainty is the bedrock of tax law, affirming that the corporate veil may be pierced, and treaty benefits denied only in cases with proven sham, fraudulent, or colourable transactions. This decision imposes a stringent evidentiary burden on the ITD to demonstrate clear and convincing evidence of such abuse. Furthermore, the decision clarifies that since treaties provide their own anti-abuse measures, treaty provisions should not be interpreted through the lens of domestic legislation.
This judgement not only affirms India’s position as a tax- and investment-friendly jurisdiction and reassures foreign investors, but it also reiterates India’s stance as an independent democracy that upholds legislative certainty and the rule of law.
For further information, please contact:
S.R. Patnaik, Partner, Cyril Amarchand Mangaldas
sr.patnaik@cyrilshroff.com
[1] Union of India v. Azadi Bachao Andolan (2004) 10 SCC 1
[2] Vodafone International Holdings B.V. v. Union of India & Anr. (2012) 6 SCC 613
[3] ACIT v. Blackstone Capital Partners VI FDI Three Pte. Ltd Civil Appeal No 505/2024
