The landmark exit of venture capital (VC) investors from online retailer Flipkart through its sale to US retail giant Walmart for $16 billion may now be in the crosshairs of the income tax (I-T) department for tax avoidance.
The Authority for Advance Ruling (AAR) has stated that the funds registered out of Mauritius but with decision-making teams in the US cannot avail of the benefits of the double taxation avoidance agreement (DTAA) between India and Mauritius. The ruling did not disclose the name of the investor, but said that “the funds of the applicants were ultimately controlled by Mr. X (US-based director) and the applicants had only limited control over their fund”.
This investor had sold shares worth Rs 14,500 crore through three entities. AAR concluded that “the head and brain of the companies and consequently their control and management was situated not in Mauritius but outside in the US”.
AAR has also observed that the key decisions were taken by the non-resident director after reviewing the minutes of the board meeting. The Mauritius-based shareholders in Flipkart had applied for nil withholding tax, given the DTAA agreement, but this was rejected by the I-T department. The shareholders then took the appeal to AAR, which has now ruled in favour of the tax department.
The ruling further states that the shareholders had set up a “see-through entity” to avail the benefits of India-Mauritius DTAA. AAR has also denied grandfathering benefits for capital gains tax under amended India-Mauritius DTAA as Flipkart was registered in Singapore.