Offshore deals under I-T lens: Tiger Global vs government battle intensifies

Foreign investors who had struck deals abroad with other offshore investors to buy into Indian companies have caught the attention of the income tax (I-T) department.

More than a dozen foreign funds, companies as well partnerships, have received notices from the Indian tax office over the past fortnight for allegedly escaping tax on large transactions between 2018 and 2021.

In such deals foreign portfolio and strategic investors had either directly bought stocks in India or indirectly acquired interest in Indian companies by taking over Mauritius, Singapore and Luxembourg entities owning shares of the Indian companies.


The notices assume significance amid the high-profile court battle between Tiger Global, a foreign investor, and the revenue department. The IT office has questioned Tiger Global's stand of not paying tax when it sold shares of Flipkart Singapore (holding shares of an Indian company) to another foreign investor (linked to Walmart) on the grounds that Tiger's Mauritius arm (the actual seller owning the Singapore entity) was only a vehicle used to avoid tax by taking advantage of the tax treaty between India and Mauritius. Sections feel the recent flurry of notices could be acted upon by the department if the Supreme Court's final verdict goes in favour of the government.

Since the landmark Vodafone case, regulations unambiguously require the buyer to deduct the capital gains tax from the sale proceeds before remitting the balance to the seller. Tax on indirect transfers-where a foreign entity holding Indian stocks changes hands (like the Tiger Global deal)-is triggered when the overseas entity has at least half of its assets in India.

But, even if this threshold is breached, such indirect transfers are not taxable if the seller is based in jurisdictions like Mauritius or Singapore, thanks to the provisions of India's treaties with these countries. A buyer (in an indirect transfer deal) often refrains from deducting tax on this ground. Similarly, in the amended treaties with Mauritius and Singapore, capital gains tax is not deducted in case of direct sale of shares that were purchased by the foreign investor before April 2017.

Shadow over 'substance'
Under the circumstances, the tax department sent notices relating to transactions where it felt the foreign seller was not eligible to claim treaty benefits and avoid tax. This is primarily because the I-T office believes that the seller lacks adequate substance-only a paper company set up in a centre like Mauritius to take advantage of tax benefits under the treaty.

"One of the underlying purposes of issuing such notices to non-resident buyers could be to examine the basis on which the share transfer transactions are treated as non-taxable for withholding tax purposes while making payments to the non-resident seller.

In offshore transactions involving Indian assets, obtaining a tax residency certificate (TRC) (from a foreign government) is equally important. Apart from obtaining TRC, the buyer should also satisfy itself that the non-resident sellers meet the substance test while applying treaty benefits for no tax withholding.

Considering the greater scrutiny faced nowadays, it is essential to understand that the degree of reliability assigned to TRC is that of sufficient evidence rather than an irrebuttable evidence," said Ashish Karundia, founder of the CA firm, Ashish Karundia & Co. "The non-resident buyer," says Karundia, "could also be treated as an agent of the non-resident seller, and the requisite income tax may be recovered from such non-resident buyers if the transaction becomes taxable due to the denial of treaty benefits or for other reasons."

According to Rahul Garg, managing partner of Asire Consulting, "The tax authorities would be picking up such cases faster now for verifications, and to keep them alive considering the positions to be taken by the apex court in matters like Tiger Global and Blackstone. Further, the possibility of such notices on corporates may in fact increase considering the significant long-pending tax benefits passed on by the government to individuals in the latest budget. Hence, it would be a consistent task for the I-T department to look for ways to enhance the tax base and recoveries." The IT department stepped in after scanning the information shared by the buyers in Form 15CA which they are required to file with the I-T department for remitting the money to foreign sellers. Notices were sent to cases which were shortlisted from the deals where no tax was paid-mostly due to treaty provisions.