Sourc:3 Apr 2010, 0224 hrs IST,M Padmakshan & Ram N Sahgal,ET Bureau
MUMBAI: More than a dozen foreign entities, which invest in shares of Indian companies using the Mauritius route, are planning to move the
Authority for Advance Rulings (AAR) for clarity on the issue of tax liability in India. AAR is a quasi judicial body on tax disputes that involve overseas companies.
The foreign investors’ move comes close on the heels of AAR ruling in favour of E*Trade Mauritius (ETM), which sold its entire stake in IL&FS Investmart to HSBC Violet Investments. AAR ruled emphatically that ETM was not liable to pay capital gains tax in India simply because it held a certificate from the authorities in Mauritius stating that it had a business establishment in that country. The AAR ruling is largely in tune with a the Supreme Court ruling in what is called the Azadi Bachao Andolan case, which says that a Mauritius residence certificate is sufficient ground for providing capital gains tax relief under the Indo-Mauritius tax treaty.
This is important in several ways because despite the Supreme Court ruling, the revenue department levied tax on capital gains of Mauritius resident companies on the ground that transactions had been structured only for the purpose of avoiding tax in India, or that the non-resident entity was a shell company, which did not have any other business except holding the shares being transacted.
The AAR’s latest ruling that a resident certificate from Mauritian authorities was a ground for claiming treaty protection has encouraged companies with similar tax structures to approach AAR.
However, the ruling, according to tax experts, is unlikely to have any bearing on the Vodafone case, in which the tax authorities are seeking $2 billion as capital gains tax from the telecom major for an $11-billion transaction that took place outside the country between two overseas parties. They say that the sale of shares took place between companies registered in offshore tax havens with which India does not have any tax treaty. I-T authorities maintain that Vodafone should have deducted tax while paying Hutchison International for the latter’s stake in Indian telecom company Hutch-Essar. It is true that the AAR ruling is binding only on the party that approached it.
But the significance of the AAR ruling arises from the “persuasive value” it has over the assessing officers who deal with similar cases. In other words, the tax authorities and taxpayers can cite this ruling as a precedent guiding tax authorities and tax professionals.
TP Ostwal, senior chartered accountant, told ET, “Following AAR’s decision on ETM, several investors are planning to test the AAR route.” Sanjay Sanghvi, tax partner, Khaitan & Co, the law firm, which handled the ETM case, said: “After the AAR ruling on the ETM’s application, a host of companies with a Mauritius connection have evinced interest in moving AAR.”
“Most assessees are approaching AAR to get certainty over the issue that treaty shopping cannot be the basis of denial of treaty protection,” said Rohit Jain, partner, Economics Law Practice. “The AAR ruling would benefit in building investor confidence in countries which have entered into double taxation avoidance agreement treaties.”
Earlier, the Indian tax authorities held that since ETM had received the funds for buying the stake in IL&FS
Investmart from its parent CAI, itself a wholly-owned subsidiary of E*Trade Financial Corp USA (ETFC), the real beneficiary of the capital gains was the US-based ETFC and not ETM, the Mauritius-based company.
Therefore, ETM had been formed as a shell company to avoid paying tax and was not entitled to beneficial treatment under the Indo-Mauritius DTAA and was liable to pay tax on gains made by selling its stake, according to the revenue department. AAR did not accept this view
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