2026 (1) TMI 890 - SC - Income Tax

Capital gains taxability on post-cutoff share transfers tied to POEM/effective management; treaty benefits denied under GAAR; AAR applications rejected

Dominant issue 1 - Taxability and residence/POEM: The Court held that under Section 9(1)(i) and the DTAA framework, prima facie evidence indicated ... Taxation of capital gains from the sale of shares of a Singapore-based entity deriving substantial value from its Indian operations - Income deemed to accrue or arise in India - Place of Effective Management [“POEM”] as determinative of residence - fulcrum of the DTAA with respect to capital gains taxation - Transactional involvement of the relevant investment entities based in Mauritius - relationship between treaty provisions and domestic tax law - India-Mauritius DTAA - provisions relating to General Anti-Avoidance Rules (GAAR) - scope of Amendment to Section 90 – GAAR override and TRC requirements - Limitation of Benefits (LOB) clause Assessees approached the Authority for Advance Rulings [“AAR”] seeking an advance ruling on question on gains arising to the assessees (private companies incorporated in Mauritius) from the sale of shares held by them in Flipkart Pvt. Ltd (a private company incorporated in Singapore) to Fit Holdings S.A.R.L. (a company incorporated in Luxembourg) would be chargeable to tax in India under the Act read with the DTAA between India and Mauritius as answered that the applications preferred by the assessees relate to a transaction or issue which is prima facie designed for the avoidance of income tax and therefore, rejected the same as being hit by the threshold jurisdictional bar to maintainability, as enshrined in proviso (iii) to Section 245R(2). High Court [2024 (9) TMI 26 - DELHI HIGH COURT] allowed the writ petitions and quashed the AAR’s order after holding that the assessees were entitled to treaty benefits and that their income would not be chargeable to tax in India. HELD THAT:- Though it prima facie appears as if the assessees acquired the capital gains before the cut-off date, i.e., 01.04.2017, it is to be noted that the proposal for transfer of investments commenced only on 09.05.2018. A Share Purchase Agreement was executed between Walmart International Holdings Inc., a Delaware Corporation described as the “purchaser”; the shareholders of Flipkart Singapore identified in Schedule I thereto and collectively described as the “sellers”; and Fortis Advisors LLC, a Delaware limited liability company described as the “sellers' representative”. As per the Share Purchase Agreement, the sale of shares held by the assessees was approved by the Board in its meeting held on 04.05.2018. The subject appears to have arisen for discussion in the meeting held on 12.06.2018, when the Board took note of Walmart’s offer to purchase a controlling stake in Flipkart Singapore for USD 16 billion, and the assessees considered selling 74% of their stake therein and closing the transaction, which occurred after the cut-off date prescribed under Rule 10U(1)(d). In the alternative, even if GAAR is held to be inapplicable, the Revenue invoked the JAAR, grounded in the doctrine of substance over form, consistently recognised in Indian jurisprudence, including McDowell and Vodafone. As contended that JAAR continues to operate in parallel with GAAR and empowers Indian authorities to deny treaty benefits in cases involving treaty abuse or conduit structures. The Revenue further contended that the respondents themselves acknowledged the applicability of this doctrine by safeguarding against such scrutiny in the Share Purchase Agreement and by furnishing detailed documentation regarding control and management, thereby conceding that mere possession of a TRC is not sufficient. Thus, the Revenue’s position proceeds in a logical sequence. We find force in these contentions and agree with them for the following reasons: First, taxability is established under Section 9(1)(i); second, the availability of treaty relief is contested by challenging the residency claim in view of the prima facie finding that effective management and control were not in Mauritius, the scope of Article 13, and the applicability of Circular No. 789 and Azadi Bachao Andolan [2003 (10) TMI 5 - SUPREME COURT] in the current factual context; third, GAAR and, in the alternative, JAAR are invoked to pierce the structure and deny treaty benefits where the transaction lacks genuine commercial substance. Though several specific questions were raised by the Revenue, including interpretation of the Mauritius Financial Services Act, the nature of GBLs, and the role of the LOB clause, these issues merely reinforce the three-tier framework for determining taxability in the present case. The Vodafone judgment [2012 (1) TMI 52 - SUPREME COURT] provides crucial insight into this issue. It implies that business intent behind a transaction serves as strong evidence of whether the transaction is deceptive or an artificial arrangement. The commercial motive behind a transaction often reveals its true nature. In the present case, the respondents seek exemption from the Indian Income tax while, at the same time, contending that the transaction is also exempt under Mauritian law, which runs contrary to the spirit of the DTAA and presents a strong case for the Revenue to deny the benefit as such an arrangement is impermissible. Here again, it may be stated that this stand would again strengthen the reasoning that whether the sale is of shares of an Indian company then, will not be germane for consideration because only if the assessee is liable to pay tax in Mauritius, he can derive benefit under the provision under Article 13(c) of the DTAA as amended. Section 96(2) places the onus on the taxpayer to disprove the presumption of tax avoidance. This represents a significant shift in the burden of proof. In the case at hand, there is clear and convincing prima facie evidence to demonstrate that the arrangement was designed with the sole intent of evading tax, and the assessees have failed to furnish sufficient material to rebut this presumption. Though it is permissible in law for an assessee to plan his transaction so as to avoid the levy of tax, the mechanism must be permissible and in conformity with the parameters contemplated under the provisions of the Act, rules, or notifications. Once the mechanism is found to be illegal or sham, it ceases to be “a permissible avoidance” and becomes “an impermissible avoidance” or “evasion”. The Revenue is, therefore, entitled to enquire into the transaction to determine whether the claim of the assessees for exemption is lawful. CONCLUSION - In our view, once it is factually found that the unlisted equity shares, on the sale of which the assessees derived capital gains, were transferred pursuant to an arrangement impermissible under law, the assessees are not entitled to claim exemption under Article 13(4) of the DTAA. Revenue has proved that the transactions in the instant case are impermissible tax-avoidance arrangements, and the evidence prima facie establishes that they do not qualify as lawful. Consequently, Chapter X-A becomes applicable. The applications preferred by the assessees relate to a transaction designed prima facie for tax avoidance and were rightly rejected as being hit by the threshold jurisdictional bar to maintainability, as enshrined in proviso (iii) to Section 245R(2). Accordingly, capital gains arising from the transfers effected after the cut-off date, i.e., 01.04.2017, are taxable in India under the Income Tax Act read with the applicable provisions of the DTAA. The judgment of the High Court therefore deserves to be set aside. Issues: Whether the Authority for Advance Rulings (AAR) was correct in rejecting the applicants' requests for advance rulings as not maintainable under proviso (iii) to Section 245R(2) of the Income-tax Act, 1961 on the ground that the transaction (sale of shares of a Singapore company by Mauritian-resident companies) was prima facie designed for avoidance of income tax, and whether, consequently, capital gains arising from the transfers are taxable in India under the Income-tax Act read with the IndiaMauritius DTAA.Analysis: The Court examined the statutory and treaty framework governing treaty eligibility and domestic taxability, including Section 9(1)(i) and its Explanations 4 and 5 (indirect transfer/look-through), Sections 90(4), 90(5) and 90(2A) (TRC and treaty override), Chapter X-A (Sections 95102) and Rule 10U (GAAR and grandfathering), and relevant provisions of the IndiaMauritius DTAA (Article 4; Article 13 including paras 3A, 3B and 4; Article 27A LOB). The AARs jurisdiction to screen applications at the prima facie stage under proviso (iii) to Section 245R(2) was analysed alongside principles from Vodafone and Azadi Bachao Andolan concerning TRCs, beneficial ownership and the circumstances permitting inquiry into substance over form. The Court noted that statutory amendments (including GAAR, Section 90 amendments and Rule 10U) altered the pre-amendment regime and limited the conclusiveness of administrative circulars; the TRC alone is not inevitably decisive post-amendment. Applying the statutory prima facie standard, the Court considered timing of the arrangement and transfer, the scope of Rule 10U(2) (which permits GAAR scrutiny where tax benefits are obtained on or after the cut-off), and the factual materials supporting a prima facie finding of an impermissible avoidance arrangement such that AAR could decline to entertain the advance ruling.Conclusion: The AAR was justified in rejecting the applications as they related to transactions prima facie designed for avoidance of income tax within the meaning of proviso (iii) to Section 245R(2); Chapter X-A (GAAR) is applicable and the High Courts order quashing the AAR was set aside. The appeals are allowed, and capital gains arising from the transfers (post the applicable cut-off) are taxable in India.