INCOME TAX ACT, 1961

Section 245R(2)

Advance Ruling - Capital gains - Valuation of shares -

Applicants were private company limited by shares incorporated under the laws of Mauritius. They were set up with primary objective of undertaking investment activities with intention of earning long-term capital appreciation and investment income. Applicants held shares of Flipkart (P) Ltd. a private company limited by shares incorporated under the laws of Singapore (Singapore Co) and pleaded that Singapore Co., in turn, had invested in multiple companies in India and value of the shares of Singapore Co was derived substantially from assets located in India. All the assessees transferred certain shares of Singapore Co. to Fit Holdings SARL (Buyer), a company incorporated under the laws of Luxembourg. These transfers were undertaken as part of a broader transaction involving the majority acquisition of Singaproe Co. by Walmart Inc, a company incorporated in USA from several shareholders, including assessees. It was stated by assessees that they had approached Indian tax authorities under section 197 seeking a certifciation of nil withholding prior to consummation of transfer tax authorities informed that assessees were not eligible to avail of benefit under Indo-Maurititius Tax Treaty as assessees were not independent in their decision making and control over the decision making of purchase and sale of shares did not lie with them. Therefore, Applicant filed the application for advance ruling under section 245Q(1) on the following common question : Whether, on facts and in circumstances of case, gains arising to assessees from sale of shares held by them in Flipkart (P) Ltd. to Fit Holdings SARL would be chargeable to tax in India under IT Act, 1961 read with DTAA between India and Mauritius.Held: There was no foreign direct investment made by applicant companies in India and, hence there could not be any question of participation in investment. The applicants had made investment in shares of Flipkart which was a Singapore company and thus immediate investment destination was in Singapore, and not in India. In view of this, applicants also failed on other yardsticks, viz. the period of business operation in India, generation of tax revenue in India, timing of exit and continuity of business on such exit. In the absence of any strategic foreign direct investment in India there was neither any business operation in India nor they ever generated any taxable revenue in India. In the absence of any direct investment in India one could only conclude that arrangement was a pre-ordained transaction which was created for tax avoidance purpose. In view of this, issue involved in the question raised in the present applications was designed prima facie for avoidance of tax. The applicants had contended that shares of Singapore Company derived their value substantially from assets located in India and, therefore, it was eligible to take benefit of Article 13 (4) of India-Mauritius Treaty. Even if Singapore Company derived its value from the assets located in India, the fact remains that what applicants had transferred was shares of Singapore Company and not that of an Indian company. The objective of India-Mauritius DTAA was to allow exemption of capital gains on transfer of shares of Indian company only and any such exemption on transfer of shares of the company not resident in India, was never intended by the legislator. Further, actual control and management of applicants was not in Mauritius but in USA with Mr. Charles P. Coleman, the beneficial owner of entire group structure. Therefore, to conclude that entire arrangement made by applicants was with an intention to claim benefit under India-Mauritius DTAA, which was not intended by lawmakers, and such an arrangement was nothing but an arrangement for avoidance of tax in India. Therefore, bar under clause (iii) to proviso to section 245R(2) squarely applicable to the instant cases and accordingly, applications were rejected.

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