Tax Treaty Tussle: Mauritius at Center of India’s Battle Against Treaty Abuse

In a significant development, the Supreme Court of India has stayed a Delhi High Court ruling that granted tax treaty benefits to private equity firm Tiger Global, leaving foreign investors uncertain about their tax liabilities. The court’s decision has major implications for businesses operating in India, particularly those with investments in Mauritius.

Background

Tiger Global International III Holdings, a Mauritius-based entity, had approached the Income Tax Department in 2019 seeking exemption from capital gains tax on the sale of shares in Flipkart Singapore, which held substantial investments in Flipkart India.

The company relied on the India-Mauritius Double Taxation Avoidance Agreement (DTAA), which exempts ‘Mauritian residents’ from Indian capital gains tax for shares acquired prior to April 1, 2017.

However, the Advance Authority Ruling (AAR) tribunal rejected the company’s application, contending that the Mauritius entities were created without substantial commercial rationale, solely to avoid tax implications associated with capital gains in India.

The AAR argued that the ultimate control and decision-making lay with Tiger Global Management, US, and not with the Mauritius-based entity.

Delhi High Court Ruling

The Delhi High Court overturned the AAR’s decision, holding that Tiger Global International III Holdings was a fairly significant entity with considerable economic activity and served only as an investment manager to Tiger Global Management, US.

The court upheld the grandfathering provision under Article 13(3) of the DTAA, stating that domestic tax legislations could not override treaty provisions.

Supreme Court Stay

The Supreme Court has now stayed the Delhi High Court’s ruling, citing “pan Indian” implications and the need for “thorough consideration”.

The next hearing on the matter is scheduled for February 18.

Experts say the stay order may create tax-related uncertainty for foreign investors and force businesses to adopt measures to prevent potential treaty-abuse.

Impact on Foreign Investors

Rahul Charkha, partner at Economic Laws Practice, noted that taxpayers relying on the favorable decision in the Tiger Global case may need to reconsider their position.

“Setting up an entity in a tax-favorable jurisdiction should be supported by adequate business rationale to avail treaty benefits,” he said.

Rakesh Nangia, managing partner at Nangia & Co, added that the Delhi High Court verdict had endorsed the principle that rigorous thresholds of general anti-abuse provisions, such as the ‘principal purpose test’ (PPT), could not be invoked by authorities in the case of tax-treaties where sovereign commitments had been given to specific treaty-partners.

The Supreme Court’s stay order has significant implications for foreign investors and businesses operating in India.

Source: Financial Express