Tiger Global and the Perplexing Complexity of India’s Advance Rulings System for International Tax Issues
India has a system for providing advance rulings for international tax queries by investors. The idea behind this mechanism is to help international investors obtain some clarity on their tax liabilities outside of and prior to their resolution in formal tax disputes. In practice, this system, much like other judicial and quasi-judicial processes in India, has been beset with delays. However, the recent decision by the Authority for Advance Rulings (AAR) in the Tiger Global case demonstrates another issue with advance rulings in India: the unnecessary complexity in the legal mechanism for advance rulings that ends up prejudicing the interests of the investors.
The legislation on advance rulings has a provision that entitles the AAR to reject any application that prima facie involves an issue of tax avoidance. Presumably, issues of tax avoidance are outside the purview of advance rulings because of the complex questions of law and facts involved in the inquiry. Advance rulings are meant for speedy and certain determinations. However, in practice, once a case goes to the AAR, the revenue will raise the bogey of tax avoidance and ask the AAR to reject the application. As a consequence, the AAR decides whether there is a prima facie case of tax avoidance in order to prevent itself from ruling on tax avoidance! In this topsy-turvy world, the applicant is prejudiced by the issue of tax avoidance being considered in a somewhat peremptory fashion by the AAR, as demonstrated in the Tiger Global case.
Tiger Global invested in Flipkart, an Indian company, by routing its funds through a Mauritius holding entity. Mauritius has entered into tax treaties with several countries (including India) that enable Mauritius resident companies to sell their investments in treaty countries without paying capital gains tax. In commercial jargon, the Mauritius route is a good example of tax efficient exit plans for investments. No one, least of all the governments that entered into tax treaties, believes that Mauritius resident companies source all of their capital from Mauritius. At the time Tiger Global made its Indian investment, using Mauritius holding structures to invest in India was routine. Even the Indian Supreme Court in the famous Azadi Bachao Andolan case gave its blessing to such structures. It was only in 2017 that the India Mauritius tax treaty was amended to fix the problem of tax-free investments in India, and it was made clear by the Indian government at that time that investment structures put in place before April 1, 2017 would not be affected.
Yet, in 2018, when Tiger Global sold its Flipkart investment to Walmart and asked for a nil withholding tax certificate from the Indian tax authorities, the application was rejected. Tiger Global then applied to the AAR for an advance ruling on whether it was entitled to tax-free treatment under the India-Mauritius tax treaty. The revenue objected to the application stating that the Tiger Global disinvestment was a case of tax avoidance as the Mauritius entity was merely a front for money coming in from elsewhere. The AAR held that Tiger Global participated in a tax avoidance arrangement by utilising a Mauritius company which did not have either managerial or financial control over its own affairs; the control was in American hands.
There are at least three reasons why the AAR’s decision is troubling and unfair to the applicants. First, the AAR decided to disregard the Mauritius holding entity because its beneficial owner was American, the board of directors were influenced in its decision making by the American beneficial owner and his confidantes, and the Mauritius entity had to seek the American beneficial owner’s permission for expenditures above a certain amount. These are reasons that indicate that the Mauritius entity was part of a global investment structure with its source in America, but there are a vast number of precedents, none of which the judgment refers to, that lay down specific and stringent factors before one can conclude that a company’s central management and control has been usurped by a third party. If one were to be satisfied with the factors mentioned by the AAR, most Mauritius structures prior to April 2017 will be considered as rubber stamping entities, being strung along by their puppet masters from elsewhere. Whatever might be the merits of this conclusion, the treaties entered into by Mauritius did not envisage such a conclusion.
Second, the facts of Tiger Global are not that dissimilar to the Vodafone case where the Indian Supreme Court adopted a liberal attitude towards foreign holding structures that were in place for tax reasons. The AAR mentioned Vodafone but did not consider the detailed discussion on tax avoidance in Vodafone. If there is no substantial difference between the tax planning adopted in the two cases, one fails to see why the AAR thought Tiger Global requires a different treatment.
Finally, the AAR dealt quickly with one aspect of the holding structure. Tiger Global’s holding entity in Mauritius invested in Flipkart through a Singapore entity. As a result, the AAR ruled that the Mauritius entity will lose any tax-free capital gains treatment accorded to Mauritius investments into Indian companies since the treaty benefits apply only to direct Mauritius investments. At the very least, reaching this conclusion would have required a deeper analysis. A plausible interpretation of the capital gains provisions in the Indian Mauritius tax treaty leads to the conclusion that indirect investments into Indian companies are also covered by the capital gains provisions.
The Tiger Global decision shows that a preliminary determination of tax avoidance does not do justice to the complexity of the inquiry and only results in more uncertainty for taxpayers. Once the AAR rejects a case on the basis that there is a prima facie issue of tax avoidance, the revenue takes this as a vindication of its argument that there is indeed a case of avoidance, whereas that is not what the AAR mechanism was supposed to accomplish. One wonders why the AAR mechanism filters out issues of tax avoidance in any case, particularly when the more difficult issues of statutory interpretation in tax law will also inevitably implicate questions of tax avoidance. Further, the advance ruling legislation has, in fact, been amended to allow the AAR to determine issues relating to the application of the General Anti Avoidance Rules (GAAR). If the AAR can look into GAAR issues, there is no reason why it should be prevented from deciding all issues of tax avoidance.
Nigam Nuggehalli is a Professor of Law and Dean at the School of Law of the BML Munjal University, India.
 For example, De Beers Consolidated Mines v Howe  AC 445, Unit Construction Co Ltd v Bullock (1960) 38 TC 712, Untelrab Ltd v McGregor  STC (SCD) 1 and Wood v Holden  STC 443 (CA).
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