AAR's Ruling in case of Tiger Global - Whether the sword would lacerate Private Equity investors?
- TransEdge
- Jun 11, 2020
- 2 min read
Updated: Apr 25, 2021
Recently, Authority for Advance Ruling (AAR), in case of Tiger Global (a leading Private Equity Investor based out of USA) ruled that Tiger Global, Mauritius (group of indirect subsidiaries of Tiger Global Management LLC, USA) cannot access India-Mauritius DTAA on indirect transfer of shares of Flipkart, India
The Deal
In a breakthrough deal, Indian e-commerce "Flipkart" was acquired by Walmart for approx. $16 billion. Pursuant to this deal, existing shareholders transferred their shareholding in Flipkart, India to Walmart or Walmart's affiliate companies registered overseas. One of such shareholders was Tiger Global Management LLC, USA, which held such shares through Tiger Global, Mauritius
Background
Pursuant to the Deal, Tiger Global, Mauritius transferred their shares in Flipkart, Singapore, which held shares of Flipkart, India. In course of consummation of such transfer, it applied to Indian Income-tax Authorities for "Nil Deduction Certificate" since the transaction was not taxable as per India-Mauritius Double Taxation Avoidance Agreement (DTAA). However, the authorities passed an order holding that benefits of India-Mauritius DTAA shall not be available to Tiger Global, Mauritius.
Aggrieved by this order, Tiger Global, Mauritius applied to Authority for Advance Ruling (AAR). AAR concluded that the entire arrangement made by the Applicant was with an intention to claim benefit under India – Mauritius DTAA, which was not intended by the lawmakers, and such an arrangement was nothing but an arrangement for avoidance of tax in India
The Impact
As per statistics published by one of the Government Departments, nearly, 30% of Foreign Direct Investment (FDI) in India, amounting to approx. $142,710 million, flows through Mauritius. Considering this, the ruling would have significant far-reaching impact, specifically to PE investors, since many of these investors have chosen Mauritius as their holding company jurisdiction for various reasons
Besides, the Deals in recent times may now see "tax discounting" in view of potential denial of treaty benefits
Considering that anti-avoidance measures such as General Anti-Avoidance Rules (GAAR) & Principal Purpose Test (PPT) are being adopted through domestic tax & treaty, this could work as a benchmark for future rulings, although this ruling may render "Grandfathering Provisions" ineffective
In the coming times, we may see more of these types of rulings, considering the rapid adoption of anti-avoidance measures by various countries
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