25/09/24

India: Delhi High Court upholds Mauritius tax treaty benefits for offshore funds

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.

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.

Financialexpress.com reports today that 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

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.