Flipkart Capital Gains Case: SC Stays Delhi HC Order Exempting Tiger Global

Flipkart Capital Gains Case: SC Stays Delhi HC Order Exempting Tiger Global

SUMMARY

A SC bench, led by Justice JB Pardiwala, issued a notice to Tiger Global on a petition filed by Authority for AAR (Income Tax) against the HC order

In August 2024, Delhi HC overturned an order of the AAR that denied Tiger Global’s request for tax exemption in 2018 stake sale in Flipkart to Walmart under the DTAA

Tiger Global and its related entities had picked up 2.36 Cr shares of Flipkart Singapore between October 2011 and April 2015

In a major blow for Tiger Global, the Supreme Court on Friday (January 24) reportedly stayed a Delhi High Court (HC) order that exempted certain entities of the venture capital (VC) giant from paying capital gains tax on its stake sale in Flipkart to Walmart in 2018.

As per Economic Times, a bench, led by Justice JB Pardiwala, also issued a notice to Tiger Global on a petition filed by the Authority for Advanced Ruling (Income Tax) (AAR) against the HC order. 

The SC will next hear the matter on February 18.

This follows the Delhi HC, in August last year, overturning an order of the AAR that denied Tiger Global’s request for tax exemption under the India-Mauritius Double Tax Avoidance Agreement (DTAA) when it exited Flipkart in 2018. 

Tiger Global’s Mauritius entities had claimed that gains from the transfer of shareholding were exempt from taxation. The HC ruling also upheld the “grandfathering” provision, which exempted these investors from capital gains tax on the sale of shares acquired before April 2017. 

Notably, Tiger Global and its related entities had picked up 2.36 Cr (2,36,70,710 to be precise) shares of Flipkart Singapore between October 2011 and April 2015. Subsequently in 2018, the VC major sold a 77% stake in Flipkart Singapore to Walmart for about $16 Bn, which resulted in the capital gains.

In 2020, the AAR rejected the VC major’s application seeking an advance ruling to determine the tax implications of this sale in India. The tribunal noted that the entities of Tiger Global were only “see-through entities” designed to take advantage of the tax treaty and the real beneficiary was the US-based parent Tiger Global Management LLC. 

The AAR also observed that setting up Mauritius-based entities was principally aimed at deriving undue benefits under the agreement. 

Subsequently, the VC juggernaut appealed the case before the Delhi HC in August 2024, which rejected the AAR’s view and observed that the tribunal’s order suffered from “manifest and patent illegalities”. 

“TGM LLC (Tiger Global Management LLC) cannot be said to be the beneficial owner of shares since no evidence has been rendered to suggest that the writ petitioners are under a contractual or legal obligation to transmit revenue to TGM LLC or that the revenue obtained from transfer of shareholding was as a result of actions undertaken by the writ petitioners at the behest of TGM LLC,” opined the Delhi HC in its order. 

The latest SC ruling has yet again brought under scanner numerous foreign investors who utilised Mauritius-based entities to buy shares in Indian companies prior to April 2017. 

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