The recent decision of the Bombay High Court in E*Trade Mauritius Limited v. ADIT & Ors. has generated much anxiety and apprehension within the tax community and the investing world. We now provide our perspective on whether it really impacts the well-known Mauritius route.
Briefly put, E*Trade Mauritius Ltd. (“E*Trade”), a wholly owned subsidiary of US-based, E*Trade Financial Corporation (“E*Trade US”) sold its stake in IL&FS Investmart, an Indian company to HSBC Violet Investments (“HSBC”), also based in Mauritius. The transaction essentially involved the sale of shares in an Indian company from one Mauritian company to another.
In connection with the sale, E*Trade Mauritius sought to obtain a certificate from the tax authorities under section 197 of the Income Tax Act, 1961 (“ITA”) authorizing payment of consideration by HSBC sans any withholding of tax. The tax authorities however, refused to grant the certificate, in response to which E*Trade filed a writ petition before the Bombay High Court challenging the decision of the Additional Director of Income Tax (“ADIT”) in this regard.
The High Court in its order dated September 26, 2008, on the basis of the consent of the parties directed E*Trade to file a revision application before the Director of Income Tax (“DIT”) and accordingly disposed the writ petition. Pending the decision of the DIT, HSBC was also directed to deposit a sum of INR 245 million which would be withheld from the consideration paid to E*Trade. The High Court further stated that the DIT shall also issue an appropriate order regarding the disposal of the amount deposited.
Pursuant to the High Court’s order, the DIT, in its revisional decision had confirmed the position taken by the ADIT regarding withholding of tax by HSBC. Accordingly, the Bombay High Court, in its order, dated March 23, 2009 directed for the release of INR 243.1 million from the deposited amount to the government and the refund of the balance amount to E*Trade.
Is there a reason to panic?
The High Court has clearly not gone into the merits of the case and its order giving effect to the decision of the revisional authority is based on the consent of the parties. There is hence no ruling on the issue of chargeability of the capital gains to tax in India.
News paper reports had indicated that the DIT’s decision was based on the premise that E*Trade held the shares of the Indian company on behalf of E*Trade US and as such, would not be entitled to the benefits of the India-Mauritius tax treaty. Nevertheless, E*Trade should be entitled to challenge the revisional order of the DIT before the High Court in writ. Further, the said order is solely in relation to the issue of withholding tax and formal assessment proceedings have not yet commenced in respect of the capital gains in question. Even at this level, there cannot be said to have been any concrete determination of taxability of the consideration received by E*Trade in India.
At the same time, it is strange that the tax authorities have completely ignored the decision of the Supreme Court of India in Union of India v. Azadi Bacho Andolan which had upheld the validity of Circular No. 789, dated 13-4-2000 permitting Mauritian companies having tax residency certificates to benefit from the India-Mauritius tax treaty. The Supreme Court, in defence of the Mauritius route, had in fact highlighted the role of the treaty in fostering much needed inflows of foreign exchange and capital into India, and that questions of treaty abuse have to be addressed at a policy level by making necessary amendments to the treaty itself.
True, in the face of uncertainty advance rulings may be an option. However, while it may seem that the aggressiveness of the Indian tax authorities knows no bounds, one cannot deny that the jurisprudence laid down by the Supreme Court on the Mauritius route continues to remain the law of the land.