Do not underestimate the Taxman
In today's newsletter we talk about Tiger Global, the Flipkart sale and how a quasi-judicial body is trying to get the billion-dollar hedge fund to pay its taxes.
The Story
Tiger Global was one of the earliest investors in Flipkart. They held 22% of the company until 2018 when they offloaded about 17% to Walmart’s Luxembourg entity FIT Holdings- a transaction that was valued at over INR 14,500 Cr. But Tiger Global made its investments through funds based out of Mauritius.
And for good reason.
Mauritius and India have a tax treaty of sorts. So if you are an investment company based out of Mauritius and you made a ton of money selling shares of an Indian company, Indian authorities won’t tax the gains you made via the transaction. Instead, you’ll be taxed in Mauritius. But since Mauritius does not tax capital gains, you get away scot-free.
Obviously, foreign corporations lapped up this opportunity until 2016 — when the government finally decided to plug the gaps. They made amendments to the treaty.
But since Tiger Global had made most its investments during the first half of the decade, it wasn’t really applicable to them. So when they made all that money selling their stake in Flipkart, they figured they wouldn’t have to pay any tax. And at first sight, this argument seems legit.
The funds were operating out of Mauritius. The directors were discharging their duties in Mauritius. All in all, everything was firmly placed in Mauritius.
But if you peel back the layers, you’ll see that these funds are ultimately owned by Tiger Global Management LLC, USA — albeit through a maze of holding companies. So, the tax authorities argued that Tiger Global had in fact set up the Mauritius based entity for the sole purpose of avoiding taxes. And therefore contested that they shouldn’t be exempt from paying tax on gains they made through the Flipkart Transaction. Tiger Global, miffed with the taxmen, took the matter to a quasi-judicial body — The Authority for Advance Rulings (AAR).
And the case begins.
The counsel arguing for Tiger Global has one major contention.
I will quote them as is
“It must be proven that the transaction [the final sale] itself and not the structure of the entity undertaking the transaction was designed for the avoidance of income-tax and that the Revenue (the Income Tax Department) had failed to discharge its burden of proof”
This is a wonderful technical argument.
But AAR did not agree with this assessment. Instead, their claim was different.
You don’t just compute taxes by looking at the final transaction. Instead, you look at the transaction as a whole —When were the shares bought? What was the purchase price? What happened in between? Who's the primary executioner? What's the appreciation in value? You look at everything.
More importantly, the “head and brains” executing the transaction resided elsewhere. Tax authorities had shown rather conclusively that a certain Mr. Charles P. Coleman (operating out of a U.S based entity) was the beneficial owner of the fund and that “he” was primarily responsible for most management decisions. So the AAR hit back with this
The applicants [Tiger Global funds from Mauritius] have contended that the holding structure of the applicants has no relevance to determine whether the transaction was prima facie designed for avoidance of tax. In our opinion, it is not the holding structure only that would be relevant. The holding structure coupled with prima facie management and control of the holding structure, including the management and control of the applicants, would be relevant factors for determining the design for avoidance of tax. The applicant companies were only a “see-through entity” to avail the benefits of India-Mauritius DTAA [Double Taxation Avoidance Agreements]
But Tiger Global had another weapon in its arsenal — Past judgements on the matter. Specifically, a particular ruling in the case of Moody’s Analytics Inc.
Now, you don’t need to know what went down with Moody’s and why Tiger Global was referring to this particular judgement. However, what’s interesting to note is how AAR quashed this argument.
AAR first concedes that capital gains accruing to a Mauritius based entity from the transfer of shares of an Indian company shouldn’t ideally be taxed. But then they drop the bomb — “In this particular case, gains were made by transferring shares of a Singaporean company. Not an Indian company.”
That’s right. Flipkart is based out of Singapore. Let me break it down to you.
Flipkart Singapore is the strategic shareholder of Flipkart India. Flipkart India is the entity that owns most of the capital assets. The shares that were sold to Walmart — that’s Flipkart Singapore, not Flipkart India. But the India-Mauritius tax treaty agreement is only applicable to the transfer of shares of Indian companies.
As AAR notes
As the issue involved there [in the case of Moody’s] was capital gain on transfer of shares of Indian company, the facts are found to be distinct as the applicant has not transferred the shares of Indian Company but that of a Singapore company
And that was that.
AAR concluded that there was no doubt that Tiger Global had set up the Mauritius based entity to avoid paying taxes and therefore should be liable to pay what the Income Tax authorities deem fit.
Until next time…
Also if you are wondering how India can tax gains made by selling shares of a Singaporean company. Here’s a snippet from an article in TaxSutra explaining this bit — “According to Section 9(1)(i), (popularly known as the Vodafone tax), any income accruing or arising, whether directly or indirectly (through multiple layers), inter-alia, through the transfer of a capital asset situated in India, shall be deemed to accrue or arise in India.” So Indian tax laws are pretty clear about where the gains ought to be taxed. But the India-Mauritius treaty doesn’t say anything about this matter. That’s why the AAR ruled the way it did.