In a significant development, the Delhi High Court has provided a stay on the reassessment proceedings initiated by the Income Tax Department against Flipkart Marketplace and its subsidiary, FK Myntra Holdings. The case revolves around the investment of approximately ₹3,500 crore made by the Singapore-based entities into an Indian company called Flipkart Internet Pvt. Ltd.
The Income Tax Department had initiated reassessment proceedings for the assessment year 2019-20, alleging that the foreign direct investment made by Flipkart Marketplace and FK Myntra Holdings constituted income escaping assessment. However, both entities presented their case before the court, claiming to hold a valid Tax Residency Certificate (TRC) of Singapore and asserting that they had not filed any income tax return in India.
Kumar Visalaksh, representing the petitioners, argued that the investment made by the entities in shares of Flipkart Internet should not be considered as income escaping assessment unless the Assessing Officer can form a prima facie view that it involves round-tripping.
The assessees relied on jurisdictional High Court rulings in Nestle and Blackstone Capital, asserting that the investment in shares should be treated as a capital account transaction and not as income escaping assessment unless the Revenue can establish a prima facie case of round-tripping based on available material.
The division bench of Justices Rajiv Shakkdher and Girish Kathpalia issued notices to the relevant parties and directed the submission of counter-affidavits within eight weeks. During this period, the reassessment proceedings will be stayed until further orders from the court. The next hearing is scheduled for December 6.
The case has drawn attention to recent concerns about the Income Tax Department's increased scrutiny of foreign direct investments by foreign investors. It has been observed that the department is initiating income escaping assessment proceedings even when the entities hold valid Tax Residency Certificates from their respective countries. Such actions may impact the investment climate in India, raising challenges for foreign investors.
Furthermore, the recent amendment in the Budget 2023, bringing foreign investors under the purview of Angel tax, is likely to create more challenges for such investors going forward. The stay granted by the Delhi High Court in the Flipkart reassessment case provides some relief to the company, given the potential tax demand that could have been a significant challenge to its operations.
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