Walmart-Flipkart deal: AAR rejects Tiger Global plea on withholding tax

The Authority for Advance Rulings (AAR) has rejected an application of three Mauritius-based companies, part of US-based hedge fund Tiger Global Management, to avail of nil withholding tax on capital gains arising out of the $16-billion Walmart-Flipkart deal, struck in May 2018. 

Tiger Global was one of the prominent shareholders in e-commerce major Flipkart, founded by Sachin Bansal and Binny Bansal in 2007. 

Mauritius-based Tiger Global International (II, III, IV) Holdings had sold their stake in Flipkart Singapore in 2018 to Luxembourg-based Fit Holdings for over Rs 14,500 crore. They sought an AAR ruling after the tax authorities rejected their demand for nil withholding tax under Section 197. The stake sale was undertaken as part of the multi-billion-dollar transaction to offload stake in Flipkart to US retail giant Walmart. 

The AAR refused the plea on the ground that prima facie the share sale transactions by the applicants were designed for avoidance of tax and to avail of the benefits of the India-Mauritius double taxation avoidance agreement (DTAA). The judicial body observed that “the head and brain of the companies and consequently their control and management was situated not in Mauritius but outside in US”.

Under the Income-tax Act, a foreign company or the Indian taxpayer can approach the AAR and obtain a ruling on the taxability of the proposed transaction in India.

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The AAR ruling said there was no foreign direct investment (FDI) made by the applicant companies in India and, therefore, there could not be any question of participation in investment. Since the applicants had made investment in shares of Flipkart, a Singapore company, the immediate investment destination was Singapore and not India, it added.  

The AAR further said the applicants failed on other yardsticks, viz. the period of business operation in India, the generation of tax revenue in India, timing of exit, and continuity of business on such exit. "In the absence of any strategic FDI in India, there was neither any business operation in India nor they ever generated any taxable revenue in India. So one can only conclude that the arrangement was a pre-ordained transaction which was created for tax avoidance purpose,” it noted. 

Even if the Singapore company derived its value from the assets located in India, the fact remains that what the applicants had transferred was shares of a Singapore company and not that of an Indian company, it said. 

The actual control and management of the applicants was not in Mauritius but in USA, with Charles P Coleman as the beneficial owner of the entire group structure. The applicant companies were only a “see-through entity” to avail of the benefits of the DTAA, it said. 

Explaining the transaction, the ruling cited the tax department’s findings, which say the Mauritius entities of Tiger Global had acquired 26 million shares of Flipkart between 2012 and 2015 through SingaporeCo. Of which, it had transferred 16.2 million shares to a Luxembourg-based firm. Prior to this transaction, the hedge funds approached the tax department, seeking a certification of nil withholding, which was not accepted by the department. The same month, the tax department passed the order under Section 197, and charged the withholding tax to the tune of Rs 886 crore. 

Tiger Global funds were not acting independently but only as a conduit for the real beneficial owners based out of USA, tax sleuths found. 

The applicants are part of Tiger Global Management LLC USA and have been held through its affiliates through a web of entities based in Cayman Islands and Mauritius. Though the holding-subsidiary structure might not be a conclusive proof for tax avoidance, the purpose for which the subsidiaries were set up does indicate the real intention behind the structure, the AAR observed. 

Amit Maheshwari, tax partner, AKM Global, a consulting firm, stated, “This is yet another instance of the AAR rejecting the application of the taxpayer by coming to the conclusion that the transaction was designed to avoid tax. The government should do away with the proviso under section 245R(2), which allows the AAR to reject applications if it’s prima facie found that the transaction or issue was designed to avoid tax. This leads to undue delays as the tax department opposes every application, especially these Mauritius structures,” he said.