The PE investor had claimed nil withholding tax on the capital gains made from the 2018 sale of its Flipkart stake to Walmart
Mumbai: New York-based private equity (PE) investor Tiger Global on Monday moved the Delhi High Court against the quasi-judicial body ruling. The ruling in June by Authority of Advance Ruling (AAR) had denied the PE firm benefits of grandfathering provisions under the India-Mauritius Double Tax Avoidance Agreement when it exited Flipkart in 2018.
“There is enough substance and decision making in the deal structure to get India-Mauritius treaty benefits. The AAR has not gone into all the aspects of the deal before it denied treaty benefits to Tiger Global," said a person with direct knowledge of the matter.
The Authority for Advance Rulings (AAR) had rejected a petition by Tiger Global claiming an exemption from tax on capital gains resulting from the 2018 sale of its Flipkart stake to Walmart. Tiger Global had claimed nil withholding tax on the capital gains, since its investment firms, which made the Flipkart investment, were based in Mauritius and were set up before 2017. AAR ruled that they suspect the tax treaty is being abused to avoid tax.
The matter pertains to exit by, Mauritius-based entities, which were part of Tiger Global. These entities had sold their stakes in Flipkart Singapore to a Luxembourg-based company for over ₹14,500 crore, and, subsequently, had sought an advance ruling for zero withholding tax. The taxman objected that the transaction purely for tax evasion, and AAR accepted its view.
AAR held that the Mauritius companies were only “see-through entities" created to avail the tax treaty and the real beneficiary was the US firm.
“Tiger Global and its Mauritius entities have enough protection in the tax treaty to dispute the AAR ruling," the person quoted earlier in the story said.
The new India-Mauritius tax treaty protects investments from Mauritius before 2017 and continues to grant them treaty benefits.
The ruling of the Delhi high court would be relevant for the startups which were worried about ramifications on future exits if the deal involved Mauritius.
At least four rulings by AAR, including the one against Tiger Global, have labelled investments through Mauritius as a tax avoidance route and thus not eligible for treaty benefits.
While investments through the Mauritius route and tax litigation have always been a grey area in taxation matters, these recent cases are being viewed by investors as setting a precedent, which will make them pay 21% tax on exits.