Tax Treaty Tussle: Tiger Global’s Grandfathering Saga

[Eshaan Singal]

The Tiger Global case [TIGER GLOBAL INTERNATIONAL III, II, IV, HOLDINGS VERSUS THE AUTHORITY FOR ADVANCE RULINGS (INCOME- TAX) & ORS. - 2024 (9) TMI 26 - DELHI HIGH COURT] has evolved into a legal saga that has captured the attention of international tax circles. At the heart of the dispute are Tiger Global entities, private companies based in Mauritius, and the Indian tax authorities, clashing over the taxation of capital gains. The case is marked by complex legal arguments, treaty interpretations, and the fine line between tax planning and regulatory compliance.

Backdrop: Flipkart, Walmart, and the Mauritius Connection

Tiger Global International (“Assessee”) is a private company incorporated in Mauritius, established primarily to carry out investment activities on behalf of Tiger Global Management LLC (“TGM LLC”), a Delaware-based company in the United States. TGM LLC acts as the Assessee’s investment manager. The Assessee is owned by a private equity fund with around 500 investors spanning 30 different jurisdictions.

As a tax resident of Mauritius, the Assessee holds a Category 1 Global Business License and possesses a Tax Residency Certificate (TRC) issued by the Mauritian revenue authorities. Between October 2011 and April 2015, it acquired shares in Flipkart Singapore. In 2018, as part of a broader acquisition orchestrated by Walmart Inc., Tiger Global transferred these shares to Fit Holdings S.A.R.L., a Luxembourg entity. In February 2019, the Assessee approached the Indian Income Tax Department (“ITD”) seeking an Advance Authority Ruling (“AAR”) on the matter. The AAR ruled that the Tiger Global Group’s organizational structure revealed that the Assessee and its owning entities were mere intermediaries in a tax avoidance scheme. It concluded that the actual control and management of the Assessee and the related companies rested with TGM LLC, located in the United States, rather than in Mauritius.

The Tax Treaty Tussle

Assessee’s Contentions:

The Assessee relied on Article 13(3A) of the Double Taxation Avoidance Agreement (“DTAA”), which exempts Mauritian residents from Indian capital gains tax on shares acquired before April 1, 2017. It argued that a TRC from Mauritius is sufficient proof of residence under CBDT Circular No. 789. Citing the landmark Azadi Bachao Andolan[1] decision, the Assessee contended that DTAA benefits must be granted based on treaty terms, regardless of the underlying motives of Mauritius-based entities.

The Assessee further argued that the Limitation of Benefits (“LoB”) clause was inapplicable, as all shares were acquired before 2017. It claimed that the AAR had erred in scrutinizing the motives behind its incorporation in Mauritius, as well as questioning its control, management, and beneficial ownership—factors irrelevant to its eligibility for DTAA benefits.

The Assessee also asserted that, even if the ITD queries were deemed relevant, it was independently managed by a board of directors based in Mauritius. It emphasized that TGM LLC was merely engaged to provide investment services and had no authority to bind or make decisions on behalf of the Assessee without approval from its board.

ITD’s Contentions:

The ITD argued that the Mauritian entities were established without substantial commercial rationale and existed solely to avoid Indian capital gains tax. They claimed that factual analysis revealed that ultimate control and decision-making rested with TGM LLC. Drawing from the Vodafone[2] case, the ITD argued that the corporate veil could be pierced when an entity’s holding structure lacked commercial or business substance and was designed only to avoid taxes. The ITD contended that the AAR was correct in ruling that the Assessee lacked commercial substance, was not independently managed, and that the transaction aimed at tax avoidance, making it ineligible for treaty benefits.

Delhi High Court Observations:

The Delhi High Court held that TGM LLC was merely an investment manager and not the parent or holding company of the Assessee. It noted that the Assessee was a significant entity with considerable economic activity, operating as a pooling vehicle for investments. The Assessee held a Category 1 Global Business License and a TRC from the Mauritian authorities, managing funds from over 500 investors across 30 jurisdictions.

The Court found that the Assessee’s board of directors, despite including members connected to the Tiger Global Group, exercised genuine decision-making authority and acted collectively. The presence of these members did not imply that the board was merely a puppet or lacked independence. Regarding beneficial ownership, the Court noted that TGM LLC was not the Assessee’s parent company, and there was no evidence to suggest that the Assessee was obligated to transfer revenue to TGM LLC or that transactions were carried out at its behest.

The Court further observed that the establishment of investment vehicles in tax-friendly jurisdictions does not automatically imply tax evasion or treaty abuse. It recognized that multinational corporations frequently set up subsidiaries and holding structures in different jurisdictions to facilitate cross-border investments and optimize global tax strategies. The Court held that the issuance of a TRC should be treated as conclusive proof of an entity’s bona fide status, and that piercing the corporate veil is only justified in cases of tax fraud or sham transactions, which must be supported by compelling evidence. The burden of proof lies with the ITD.

Finally, the Delhi HC upheld the grandfathering provision under Article 13(3A) of the DTAA, confirming that the LoB clause does not apply to shares acquired before April 1, 2017, and that such transactions are eligible for treaty benefits. The Court emphasized that domestic tax laws should not override treaty provisions, and that Indian GAAR provisions were inapplicable due to the grandfathering provision, as the DTAA already contained its own anti-avoidance measures.

Key Takeaways:

The Tiger Global case has several key takeaways, especially concerning the LOB provisions and the broader implications for international tax law:

Economic Substance: The AAR initially denied the Tiger Global Funds the exemption on capital gains under the India-Mauritius DTAA, arguing that the funds lacked economic substance in Mauritius and were mere conduits for their U.S.-based parent.

Delhi High Court Ruling: The Delhi High Court overturned the AAR’s decision, emphasizing that the TRC issued by Mauritius should be respected as conclusive evidence of residency unless there is demonstrable fraud or misuse. This ruling reinforced the legitimacy of Mauritius as an international financial center.

Substance Over Form: The court highlighted the importance of the “substance over form” principle but clarified that legal entities fulfilling their obligations under a valid DTAA should not be dismissed without concrete evidence of abuse.

TRC and LOB Provisions: The court noted that the TRC and LOB provisions comprehensively address concerns about treaty abuse. However, these provisions must be complemented with robust documentation of actual business activity to withstand anti-avoidance scrutiny under GAAR.

Corporate Structuring: The judgment acknowledged that establishing investment vehicles in tax-friendly jurisdictions is a global norm and does not automatically imply tax evasion or treaty abuse.

[1] UNION OF INDIA AND ANOTHER VERSUS AZADI BACHAO ANDOLAN AND ANOTHER - 2003 (10) TMI 5 - SUPREME COURT

[2] VODAFONE INTERNATIONAL HOLDINGS BV. VERSUS UNION OF INDIA & ANR. - 2012 (1) TMI 52 - SUPREME COURT