Govt treads with caution as it plans to reopen tax case against Tiger Global

The government will revive proceedings in the tax assessment case against three Mauritius-based entities of Tiger Global, said an official of the Central Board of Direct Taxes (CBDT), one of the people quoted earlier.

But if the assessees file an appeal against the two-member bench’s decision, resumed tax proceedings will automatically get stayed till the outcome of the judicial process, said the second government official. Both officials spoke on the condition of anonymity as the information is not public yet.

The move signals the Narendra Modi administration’s patient approach in complex and sensitive tax matters, restraining field officers from knee-jerk action at a time India faces global trade headwinds. More so when tax experts have flagged concerns that the top court’s decision may prompt the tax department to examine other transactions of the Tiger Global group and other companies with similar arrangements.

The Modi government seeks to make the economy more competitive and efficient with an improved business climate that could appeal to investors. It has taken multiple steps to provide tax certainty to global investors, including deals with multinational corporations, to avoid rigorous audits of their cross-border transactions among group companies, subject to riders.

Queries emailed to CBDT and Tiger Global on Friday seeking comments remained unanswered at the time of publishing.

“Litigation cannot be wished away. The right to appeal is a statutory right available to the taxpayers. Taxpayers have the right to challenge an order and exhaust the available appellate channels for adjudication of the issue," said the first official quoted above. “The (Income Tax) Department respects this right and therefore has to await the final outcome of the judicial process. This is a function of the legal process, not overreach or delay on the part of the department."

The official stressed that all tax disputes cannot be labelled as overreach or ‘tax terrorism’.

“Many arise from genuine differences of interpretation in evolving areas of law. Final certainty emerges only when the highest court settles the issue. Until then, both the taxpayer and the tax administration remain bound by the process," said the official.

However, experts have cautioned that Tiger Global’s path ahead appears to be primarily procedural.

“Its only immediate remedy under Indian law seems to file a review petition before the Supreme Court. As for international arbitration, India’s position has become significantly more restrictive in recent years," said Amit Maheshwari, managing partner, AKM Global, a tax and consulting firm. “Given that this ruling concerns India’s sovereign taxing powers and involves the interpretation of domestic tax law and the India-Mauritius treaty, the scope for any international arbitration also seems extremely limited."

Tiger Global’s stake sale in Flipkart–set up in Singapore, but which derived value from investments in India–has been the subject of intense tax litigation and is an important case in India’s efforts to check alleged tax avoidance.

At the heart of it is the now-renegotiated Double Tax Avoidance Agreement (DTAA) with Singapore. Prior to its amendment effective 1 April 2017, Mauritius had the right to levy capital gains tax on the sale of companies with assets in India, but this led to a situation in which such transactions were not taxed in either country. Holding that it was not the intent of the treaty, India amended the rules, giving itself the right to tax while grandfathering earlier investments. subject to riders.

Tiger Global’s contention was that its sale of a controlling stake in Flipkart to Walmart Inc. in 2018 for $16 billion was not subject to tax as per treaty provisions. The exit of three Tiger Global Mauritius entities from Flipkart resulted in significant capital gains, with the aggregate consideration received exceeding ₹14,500 crore, the official explained.

As a consequence of the SC’s judgment, the assessment proceedings for assessment year 2019-20, which had remained stayed in substance, will now revive, said the first official quoted above.

“The assessing officer will now proceed to complete the assessments in line with the Supreme Court’s ruling. The refund claimed of approximately ₹967.52 crore, already withheld, will now be dealt with as part of the assessment and consequential demand proceedings, the official said. This would be subject to the appeal process.

Out of this total sale consideration, Tiger Global International II Holdings (Mauritius) received approximately ₹13,122 crore, while TGI III Holdings (Mauritius) received about ₹1,259 crore, and TGI IV Holdings (Mauritius) received around ₹58 crore. These receipts formed the basis of the capital gains sought to be taxed by the Indian tax authorities.

An official handling the matter had disallowed ‘nil withholding’ tax, but had allowed a reduced rate. Based on that, the companies deducted tax at source of about ₹967.52 crore.

Tax withholding was not a final determination of tax liability, the official said. “It was an interim measure, taken in a situation where taxability itself was disputed and could not be conclusively decided at the remittance stage. The refund claimed of approximately ₹967.52 crore, already withheld under section 241A of the Income Tax Act, will now be dealt with as part of the assessment and consequential demand proceedings," the official said.