Supreme Court Holds Tiger Global's $1.6 Billion Flipkart Stake Sale Taxable In India

On 15 January, the Supreme Court held that capital gains arising from Tiger Global's 1.6 billion USD stake sale in Flipkart to Walmart are taxable in India.

The Bench of Justice J.B. Pardiwala and Justice R. Mahadevan set aside the Delhi High Court's judgment, which had quashed the tax demand based on an order of the Authority for Advance Rulings (AAR). The top court held that on preliminary assessment, the transaction was designed to avoid the payment of income tax in India.

The dispute concerns the taxation of capital gains arising from the sale of shares of Flipkart Private Limited, Singapore, a company that derived substantial value from assets located in India.

Tiger Global entities, incorporated under Mauritius laws, transferred their shares in the Singapore company to Fit Holdings S.A.R.L., Luxembourg, as part of Walmart Inc.'s acquisition of a majority stake in Flipkart. The Tiger Global entities approached the AAR seeking a ruling on whether the gains were taxable in India under the Income Tax Act, 1961, read with the India–Mauritius Double Taxation Avoidance Agreement (DTAA). A DTAA is a tax treaty that prevents the same income from being taxed twice and may grant tax benefits to residents of the contracting countries.

The AAR had rejected the applications by invoking proviso (iii) to Section 245R(2) of the Income Tax Act, 1961, which bars the AAR from giving a ruling where a transaction appears to be designed mainly to avoid tax. The AAR found that although the Tiger Global entities were incorporated in Mauritius, their “head and brain” were located in the United States. It noted that Mr. Charles P. Coleman, who was not based in Mauritius, was the beneficial owner and authorised signatory of the bank accounts, and that the Mauritius entities were merely “see-through entities” created to claim treaty benefits. Aggrieved, Tiger Global moved the Delhi High Court.

The Delhi High Court allowed the writ petitions, holding that the entities were entitled to treaty benefits and that the income was not taxable in India. It observed that pooling investments through Mauritius was a legitimate commercial strategy and that Tax Residency Certificates (TRCs) issued by the Mauritius Revenue Authority should be respected. A TRC is a certificate issued by a tax authority confirming that an entity is a tax resident of that country.

The Supreme Court disagreed and held that treating the transaction as a simple sale of shares was “too simplistic”. It observed that the Revenue had placed sufficient material to show that the transaction was an impermissible tax avoidance arrangement, meaning a structure created primarily to avoid tax without real commercial substance.

Reinstating the AAR's view, the Supreme Court noted that there was no real business operation in India or Mauritius and no taxable revenue generated there. It held that the transaction was a pre-planned arrangement aimed at avoiding tax and therefore attracted the bar under proviso (iii) to Section 245R(2). The Bench wrote:

“As there was neither any business operation in India nor any taxable revenue generated, the AAR concluded that the transaction was a preordained arrangement created for the purpose of tax avoidance. It was therefore held that the transaction was prima facie designed for avoidance of tax and qualified as an “arrangement” under the law. Accordingly, the bar under clause (iii) of the proviso to Section 245R(2) of the Act was found to be applicable.”

The Bench clarified that capital gains taxation does not depend only on the act of selling shares. Under the capital gains computation mechanism, the cost of acquiring shares is deducted from the sale price, which means that both the purchase and sale of shares must be examined together.

“Capital gain is not dependent on the mere sale of shares,” the Court observed, adding that the entire transaction of acquisition and sale must be examined as a whole. A narrow focus only on the sale, as suggested by the taxpayers, could not be accepted:

“Thus, the entire transaction of acquisition as well as sale 14 of shares, as a whole, is required to be examined, and a dissecting approach by examining only the sale of shares, as suggested by the assesses, cannot be adopted…”.

The Court concluded that the AAR was correct in rejecting the applications at the threshold due to the tax avoidance bar. It held that the capital gains arising from the transfers are taxable in India. Accordingly, it allowed the appeals filed by the Revenue and set aside the judgment of the Delhi High Court.

Case Title: The Authority For Advance Rulings (Income Tax) & Ors. v. Tiger Global International II Holdings

Click here to read Judgment