FIIs floated by Indian firms face scrutiny

 The tie-breaker clause, introduced by the Central Board of Direct Taxes (CBDT) in its February 2003 circular, stated that even if they were registered in Mauritius and claimed resident status there, they would be assessable for possible capital gains tax if their effective management control was proven to be in India.

 According to finance ministry sources, there are many Indian companies incorporated such outfits in Mauritius to claim resident status there.

 Market regulator Securities and Exchange Board of India would have a record of the number of such offshore companies, they said. All these companies would, however, be open to scrutiny, they added.

 The sources said that FIIs floated by European and American investment and fund houses in Mauritius generally had only research teams in India.

 The decisions were largely taken in the country of their origin. Such FIIs can genuinely claim capital gains tax exemption in accordance with the Double Tax Avoidance Treaty, they said.

 Market sources said that offshore companies and overseas corporate bodies (OCBs) floated by Indian companies were partly responsible for the Ketan Parekh-led stock market scam last year.

 The Reserve Bank of India has now barred OCBs from operating in primary as well as secondary markets.

 The tie-breaker clause will ensure that Mauritius-based offshore units floated by Indian companies did not evade tax since in most of the cases the effective management control was in India.