In a welcome move, the Foreign Investment Promotion Board (“FIPB”) has pulled up the Department of Revenue (the “Department”)for rejecting Foreign Direct Investment (‘FDI’) proposals routed through Mauritius on the apprehension that such investments are so routed for “treaty shopping” and communicated that there was a “conscious policy decision” to override such objections from the Department.

In the past few months, the Department has held a generic objection to proposals routed through Mauritius, arguing that such investment proposals were structured for tax avoidance and involved “treaty shopping” under the India-Mauritius Tax Treaty to obtain beneficial treatment for capital gains income and thus, cost the exchequer valuable tax revenue.  To such argument, the FIPB replied that the India-Mauritius Tax Treaty is still valid and operational and thus the Department’s objection on such grounds is unacceptable.

As a consequence of holding such objection to investments routed through Mauritius, a variety of FDI proposals, have been opposed by the Department on such grounds and in some cases even rejected or deferred by the FIPB, causing unwarranted trouble for foreign investors.

A recent example being the application by Goldman Sachs, the US financial services group sought a composite approval for any new investment in India for rendering services as a non-banking financial company, however the Department opposed the application stating that ‘such an approval would amount to giving the green light to treaty shopping’. Another example being the deferral of the application made by Analjit Singh and Asim Ghosh to part-sell their minority stake in Vodafone Essar.

The stand taken by the FIPB is consistent with the stand taken on the same issue about a year back, when the Department made repeated objections to FDI proposals routed through Mauritius and other jurisdictions for fear of “treaty shopping”. Please refer to our hotline dated November 11, 2008 on the same.

The ‘treaty shopping’ line of argument adopted by the Department is difficult to understand especially when even the judiciary has time and again upheld the validity of the India-Mauritius Tax Treaty and the capital gains exemption there-under. The exemption under the India-Mauritius Treaty was upheld by the Supreme Court in Azadi Bachaco Andolan case3 and has been reiterated recently in the Tribunal ruling in Saraswati Holding Corporation case.   

It is pertinent to note the increasing aggressiveness of the Department and the tax authorities in India. In an unprecedented move, the tax authorities have filed an objection at the Delhi High Court, which is considering a demerger scheme involving Vodafone Essar for fears of potential loss of tax on account of the demerger of the towers owned by Vodafone Essar into Indus Towers5. These reports go a long way to show that the tax authorities are treading a dangerous path which could adversely affect FDI inflows into India.

However, the stand of the FIPB is surely going to be welcomed and supported by foreign investors keen on participating in the Indian economy.

Source: News report in Business Standard dated November 7, 2009 [Stop ‘treaty shopping’ denials for FDI: FIPB tells revenue dept]

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