Giving its ruling on an application by a British bank which invested in an Indian bank through two wholly owned subsidiaries set up in Mauritius, the authority said the investment route had been chosen by the British bank to defraud the Indian revenue authorities.
The judgment has serious implications for multinationals, especially NRI promoters, who want to come to India through their Mauritian subsidiaries to minimise the tax burden on repatriable profits. The ruling notes that the subsidiaries were created in Mauritius after the double taxation avoidance treaty with the UK came into effect. In the opinion of the authority, headed by retired Supreme Court Chief Justice S Ranganathan, this was done to take advantage of the more favourable tax avoidance agreement India has with Mauritius.
According to the terms of the Indo-Mauritian treaty, a resident of Mauritius investing in Indian shares is allowed 100 per cent capital gains exemption and has to pay only 5 per cent tax on earnings.
On the other hand, under the Indo-UK double taxation avoidance treaty, a British company has to pay 15 per cent income-tax in India, besides being subject to capital gains tax in both countries.
The ruling noted that the agreement between India and the UK was notified in early 1994, the applicant companies were incorporated in November 1994, investments in the shares of the Indian bank were made in early 1995 and the applicants put up its claims before the authority soon after.
The chronological sequence of events, the authority says in its ruling, "prima facie supports the inference that the purpose of investments in the shares of the Indian bank in the names of the applicant companies was to avoid tax liabilities" that would have to be borne by the British bank had it invested directly in the Indian shares.
Both the Mauritius-based subsidiaries had been allotted 20 million equity shares of Rs 10 each of the Indian bank.
The Indo-Mauritius treaty allows taxation of dividend in the contracting state of which the company paying dividend is a resident not exceeding 5 per cent of the gross dividend if the "beneficial owner" directly holds at least 10 per cent of the capital of the company making dividend payments. In all other cases, the tax liability is restricted to 15 per cent.
