India Top Court Backs Taxman in Flipkart Walmart Deal Dispute

India’s Supreme Court has cleared the way for tax authorities to pursue capital gains tax claims linked to Walmart’s 2018 acquisition of Flipkart, ruling that Mauritius-based Tiger Global entities cannot automatically rely on treaty protection to shield gains from the transaction.

In a judgment dated Thursday, 15 January, the court overturned a 28 August 2024 ruling by the Delhi High Court and reinstated an adverse finding by the Authority for Advance Rulings (AAR), reopening a long-running dispute over the tax treatment of offshore investment structures used in the deal.

The case stems from the sale of shares in Flipkart’s Singapore holding company as part of Walmart’s roughly $16 billion purchase of the Indian e-commerce group.

Tiger Global affiliates, which held their investments through Mauritius entities, sought a “nil” withholding certificate, arguing that the gains were exempt under India’s tax treaty with Mauritius.

They also invoked grandfathering provisions that protect certain investments made before 1 April 2017 from India’s capital gains tax.

Tax authorities rejected that claim, contending that the transaction could not be viewed in isolation and that the offshore structure was designed primarily to avoid Indian taxes.

The AAR declined to rule on the merits, invoking Section 245R(2) of the Income Tax Act, which allows it to reject applications where a transaction appears to be aimed at tax avoidance.

The Supreme Court agreed with that approach, holding that the AAR was justified in examining the transaction “as a whole” rather than treating it as a simple share sale detached from the way the investment was routed.

The court said the threshold for rejection was met once there was a prima facie case of tax avoidance, without requiring a full trial on facts at that stage.

In its original order, the AAR had characterized the arrangement as “a preordained transaction created for the purpose of tax avoidance,” concluding that the Mauritius entities were “mere conduit companies, lacking commercial substance.”

The top court said such findings were sufficient to deny treaty benefits at the preliminary stage.

The ruling reinforces India’s tougher stance on treaty shopping and complex cross-border holding structures, an area of scrutiny since amendments to tax treaties and the introduction of anti avoidance rules over the past decade.

With Flipkart among the most high profile exits in India’s startup ecosystem, the decision is likely to be closely watched by foreign investors structuring exits from Indian assets.