Ek tha Tiger, then it filed Application for Advance Ruling By Amit Kaushik (FCA, LLB)

1. Background
In a recent Tiger Global Ruling1, the Authority Advance Ruling (“the AAR”) denied benefit of the India-Mauritius Double Taxation Avoidance Agreement (“India-Mauritius DTAA”) on the capital gains arose on the transfer of shares held by Tiger Global, a Mauritius Company in Flipkart India through Flipkart Singapore.

Section 245S of the Income Tax Act, 1961 (“the IT Act”) makes the rulings of the AAR merely binding in respect of the transaction in relation to which the ruling had been sought and on the applicant who had sought it, nevertheless, the AAR’s rulings do have persuasive value and in case the facts are identical, they create precedence as far as the AAR is concerned. The AAR is body acting in judicial capacity and therefore, the authority is a body exercising judicial power conferred on it by Chapter XIX-B and is a Tribunal within the meaning of the expression in articles 136 and 227 of the Constitution2.

The Article examines whether this ruling can be said to be per-incuriam.
The Latin expression per incuriam means through inadvertence. A decision can be said generally to be given per incuriam when a court or tribunal has acted in ignorance of a pervious decision of its own or has acted in ignorance of a decision of superior courts. A judgment can also be said to be per incuriam if it is rendered in ignorance or forgetfulness of the provisions of a statute or a rule having statutory force or a binding authority3.

In paragraph 578 at page 297 of Halsbury's Laws of England, Fourth Edition, the rule of per incuriam is stated as follows:

"A decision is given per incuriam when the court has acted in ignorance of a previous decision of its own or of a court of co-ordinate jurisdiction which covered the case before it, in which case it must decided which case to follow; or when it has acted in ignorance of a House of Lords decision, in which case it must follow that decision; or when the decision is given in ignorance of the terms of a statute or rule having statutory force.”

In the succeeding paras, it is examined that whether the Ruling has been rendered in ignorance of any judgment, or the terms of a statute or rule having statutory force.

2. Facts and the Judgment
Tiger Global International II Holdings, Tiger Global International III Holdings and Tiger Global International IV Holdings ("the applicants before the AAR"), are private company limited by shares incorporated under the laws of Mauritius. The applicants were held by the Tiger Global Management LLC, a USA based investment entity that invests in public and private markets across the world through a web of entities. The Applicants were set up with the  primary objective of undertaking investment activities with the intention of earning long term capital appreciation and investment income. The applicants are tax resident of Mauritius under the laws of Mauritius and under the provisions of the India-Mauritius DTAA.

The applicants held shares of Flipkart Private Limited, a private company limited by shares incorporated under the laws of Singapore ("Flipkart Singapore"), which were acquired during the period from 2011 to 2015., which in turn, had invested in multiple companies in India (“Flipkart India”) and the value of the shares of Flipkart Singapore was derived substantially from assets located in India.

On 18-8-2018 all the three applicants transferred certain shares of Flipkart Singapore to Fit Holdings S.A.R.L. (Buyer), a company incorporated under the laws of Luxembourg.

The applicant did not contest the taxability of the transfer of the shares under the Indirect Transfer provisions of the IT Act; however, the issue was whether the gain arising on the transfer of shares of the Singaporean Company is entitled to the beneficial provisions of the India- Mauritius DTAA.

The AAR denied the benefit of the India-Mauritius DTAA on two counts.
First, it was held that the objective of India-Mauritius DTAA was to allow exemption of capital gains on transfer of shares of Indian company only and any such exemption on transfer of shares of the company not resident in India, was never intended by the legislator. Since the shares transferred were not the shares of any Indian Company and therefore, India-Mauritius DTAA is not applicable.

Secondly, it was held that the actual control and management of the applicants was not in Mauritius but in USA with Mr. Charles P. Coleman, the beneficial owner of the entire group structure. The real control of the Applicants lies in the U.S.A and the Applicants were merely see-through entities and were created to avail the benefit under the India-Mauritius DTAA.

3. Indirect Transfer Provisions
Indirect transfer provisions creates a deeming fiction charging the capital gains arising on the transfer of capital asset being shares or interest outside India by a non-resident, provided such shares or interest substantially derives their value from Assets situated in India.

The dispute in this case is not in sensu-stricto a dispute regarding the interpretation of the Indirect Transfer provisions, however, these provisions have significant bearing on the conclusion arrived by the AAR.

The Indirect Transfer provisions were inserted in the IT Act4 retrospectively from 1-4-1962 by the Finance Act, 2012. These provisions were inserted to nullify the impact of the Vodafone judgment5 and have been marred with controversies ever since their inception.

In relation to the chargeability of the indirect transfer, the Hon’ble Supreme Court in the Vodafone judgment held as under:

“What is contended on behalf of the Revenue is that under section 9(1)(i) it can "look through" the transfer of shares of a foreign company holding shares in an Indian company and treat the transfer of shares of the foreign company as equivalent to the transfer of the shares of an Indian company on the premise that section 9(1)(i) covers direct and indirect transfers of capital assets. For the above reasons, section 9(1)(i) cannot by a process of interpretation be extended to cover indirect transfers of capital assets/property situate in India. To do so, would amount to changing the content and ambit of section 9(1)(i). One cannot re-write section 9(1)(i). The Legislature has not used the words indirect transfer in section 9(1)(i). If the word 'indirect' is read into section 9(1)(i), it would render the express statutory requirement of the 4th sub-clause in section 9(1)(i) nugatory. This is because section 9(1)(i) applies to transfers of a capital asset situate in India. This is one of the elements in the 4th sub-clause of section 9(1)(i) and if indirect transfer of a capital asset is read into section 9(1)(i) then the words 'capital asset' situate in India would be rendered nugatory. Similarly, the words underlying asset do not find place in section 9(1)(i).”
The indirect transfer was held to be non- taxable as such transfer does not involve transfer of any capital asset or underlying asset situated in India. The Amendment by the Finance 2012 has created a deeming fiction in this regard. The purpose for insertion of the Indirect Transfer Provisions has been explained by the Memorandum explaining the Provisions of the Finance Bill, 2012. It provides as under:

Section 9 of the Income Tax provides cases of income, which are deemed to accrue or arise in India. This is a legal fiction created to tax income, which may or may not arise in India and would not have been taxable but for the deeming provision created by this section. Sub-section (1)(i) provides a set of circumstances in which income accruing or arising, directly or indirectly, is taxable in India. One of the limbs of clause (i) is income accruing or arising directly or indirectly through the transfer of a capital asset situate in India. The legislative intent of this clause is to widen the application as it covers incomes, which are accruing or arising directly or indirectly. The section codifies source rule of taxation wherein the state where the actual economic nexus of income is situated has a right to tax the income irrespective of the place of residence of the entity deriving the income. Where corporate structure is created to route funds, the actual gain or income arises only in consequence of the investment made in the activity to which such gains are attributable and not the mode through which such gains are realized. Internationally this principle is recognized by several countries, which provide that the source country has taxation right on the gains derived of offshore transactions where the value is attributable to the underlying assets.

A deeming fiction creates existence of fact which otherwise do not exist. The transfer has been made taxable by specifying that an asset or a capital asset being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be and shall always be deemed to have been situated in India, if the share or interest derives, directly or indirectly, its value substantially from the assets located in India.

In the Tiger Global Ruling, the indirect transfer of shares of Flipkart Singapore by the Applicants was chargeable to tax in India as such shares were deemed to be situated in India. However, while denying the benefit of the India-Mauritius DTAA, it was held that the Applicants were see- through entities and shares transferred were not of any Indian Company.

4. Is the transfer of shares of Indian Company necessary for Applicability of the India- Mauritius DTAA?

The Indirect Transfer Provisions taxes any indirect transfer of a capital asset in India. When shares of foreign company are transferred, this section creates a fiction that the shares transferred has indirectly transferred a capital asset in India (which may or may not be shares) and hence taxable in India.

It can be seen that under an Indirect Transfer, there will never be a direct transfer of shares of Indian Company and hence the interpretation arrived by the AAR may led to the conclusion that under such transfers, the benefit of DTAA would never be available.

It is important to note that under the un-amended Article 136 (Capital gains) of the India- Mauritius DTAA, which is applicable on the Tiger Ruling, there not even a whisper of the word shares and let alone the shares of the Indian Company and hence there is no requirement of transfer of the shares of Indian Company for the applicability of India-Mauritius DTAA.

It is respectfully submitted that the issue of the applicability of DTAA on indirect transfers is no longer res-integra. A similar issue arose before the AP High Court in the Sanofi Pasteur’s case7, wherein French Company (FC-1) sold the entire shares of French Company (FC-2) to French Company (FC-3). The shares of FC-2 derive substantial value from the shares of an Indian Company. A transfer of more than 10% shares in Indian Company by a French Company is taxable under Article 14 (5) of the India-France DTAA, however, any property not covered under the aforesaid Article is only taxable in France even if the same is located in India. In this case, the revenue’s arguments were diametrically opposite to the present ruling and it was argued that the shares transferred were of Indian Company and not of FC-2 and hence the transfer may be taxable under Article 14 (5) of the India-France DTAA. However, it was held that, what was transferred in India was not shares of Indian Company but the shares of FC-2, which derive their value from Indian Company and hence Article 14(5) may not be applicable and rather the residual article providing for the exclusive taxability to the resident (Article 14(6)) was applicable and the entire gains would be taxable in France. Similar conclusions were arrived by the Mumbai ITAT in a recent case in Sofina S.A. v. ACIT8 involving interpretation of India Belgium DTAA.

5. Applicants were see-through entities?
It is important to note that the Vodafone Judgment in January, 2012 held that an indirect transfer of Capital Asset situated in India is not taxable. Article 141 of the Constitution of India stipulates that the law declared by the Supreme Court shall be binding on all Courts within the territory of India. The aforesaid Article empowers the Supreme Court to declare the law. Therefore, as of January 2012, the indirect transfers were not taxable. As can be seen from the fact of the ruling that the Applicants had made investments as back as in 2011 and therefore, it is difficult to understand that the entities were formed to take the benefit of India-Mauritius DTAA on a transaction which otherwise is not taxable under the IT Act.

6. Conclusions
It can be seen that the Tiger Ruling has not considered the Article 13 of the India-Mauritius DTAA and further not discussed the earlier judgments on the availability of benefit of DTAA under indirect transfers and may be said to be per-incuriam9. Therefore, it seems that TIGER ABHI ZINDA HAI!
1 Tiger Global International II Holdings, In re [2020] 116 taxmann.com 878 (AAR - New Delhi)
2 Columbia Sportswear Company v. DIT [2012] 346 ITR 161 (SC)
3 Punjab Land Development and Reclamation Corporation Ltd. v. Presiding Officer 1990 SCC (3) 682
4 Explanation 9 to section 9 of the IT Act
5 Vodafone International Holdings B.V. v. Union of India [2012] 341 ITR 1 (SC)

  1. Gains from the alienation of immovable property, as defined in paragraph (2) of article 6, may be taxed in the Contracting State in which such property is
  2. Gains from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State or of movable property pertaining to a fixed base available to a resident of a Contracting State in the other Contracting State for the purpose of performing independent personal services, including such gains from the alienation of such a permanent establishment (alone or together with the whole enterprise) or of such a fixed base, may be taxed in that other
  3. Notwithstanding the provisions of paragraph (2) of this article, gains from the alienation of ships and aircraft operated in international traffic and movable property pertaining to the operation of such ships and aircraft, shall be taxable only in the Contracting State in which the place of effective management of the enterprise is
  4. Gains derived by a resident of a Contracting State from the alienation of any property other than those mentioned in paragraphs (1), (2) and (3 ) of this article shall be taxable only in that
  5. For the purposes of this article, the term "alienation" means the sale, exchange, transfer, or relinquishment of the property or the extinguishment of any rights therein or the compulsory acquisition thereof under any law in force in the respective Contracting
7 Sanofi Pasteur Holding SA v. Department of Revenue, Ministry of Finance [2013] 354 ITR 316 (AP)
8 [2020] 116 taxmann.com 706 (Mumbai - Trib.)
9 A decisions can only be declared as per-incuriam by higher courts and until such a decision, it may have precedence value

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