Delhi Court Upholds India-Mauritius Tax Treaty Benefits

The Delhi High Court has issued a significant ruling that affirms the legitimacy of tax benefits under the India-Mauritius tax treaty, particularly for foreign investors like Tiger Global. This decision overturns a previous judgment by the Authority for Advance Rulings (AAR) and the Income Tax (I-T) department, which had sought to impose capital gains tax on Tiger Global’s sale of its Flipkart stake to Walmart.

In this 2018 transaction, Tiger Global used Mauritius-based entities to sell its shares in Flipkart, which it had acquired between 2011 and 2015.

The tax authorities argued that these entities lacked genuine substance and were merely vehicles to avoid tax liabilities, characterizing them as the “mere facades” of TGM LLC in the USA.

However, the High Court dismissed these allegations, reinforcing the sanctity of tax residency certificates (TRCs) issued by Mauritius.

The ruling is particularly pertinent given the grandfathering provisions in the 2016 treaty revision, which exempted capital gains tax for investments made before April 2017.

Many foreign investors who accessed the Indian market through Mauritius entities during that timeframe will likely benefit from this decision.

The court clarified that tax authorities must provide substantial proof to challenge the legitimacy of an investment structure or transactions based on a lack of commercial substance.

It noted that the existence of a TRC is a robust indicator of the entity’s bona fide nature and that it should lead to Treaty benefits unless there is clear evidence to the contrary.

The judgment also carries broader implications for the perception of Mauritius as a financial hub.

The court highlighted the importance of Mauritius as a gateway for investments into the Asian and African markets and rejected any notion that investments from Mauritius should be viewed with suspicion.

Importantly, it urged the tax department to refrain from imposing unnecessary obstacles for investors and emphasized that legitimate investment pathways ought not to be obstructed by unwarranted skepticism.

This ruling not only supports Tiger Global’s position but also reinforces the legitimacy of Mauritius as a reputable jurisdiction for international investment, ultimately promoting a more favorable environment for foreign direct investment in India.

Source: A2Z TAX CORP LLC