HC asks for details on FIIs tax sops

The direction came on a second petition within two days of challenging the April 13 notification issued by CBDT providing for clarification from Foreign Institutional Investors (FIIs) regarding taxation on dividends and capital gains under the Indo-Mauritius Double Taxation Avoidance Convention (DTAC).

A petition filed by NGO, Aazadi Bachao Andolan (ABA), said that an FII on mere production of a certificate issued by Mauritius authorites stating that it was a resident in that country, would be exempted from paying tax in India.

With this provision nearly 490 FIIs would be free from tax liabilites worth over 3,000 crore even at the modest capital gains of 10 per cent, ABA counnsel Prashant Bhushan told the court. He said CBDT notification came immediately after Income Tax Department’s show cause notices to several FIIs registered in Mauritius and engaged in buying and selling shares in India, seeking explanation from them on non-payment of tax on capital gains and dividends.

Show-cause notices were issued to these companies by income tax department because they were "effectively" managed and controlled from India or a third country even though having registered themselves in Mauritius, Bhushan said.

But the companies had opened their front offices in Mauritius to evade taxes under the garb of DTAC, he said. As per the DTAC treaty with Mauritius, the FIIs with the registration in that country would pay taxes on capital gains and dividends there and a mere clarification given by them in this regard would "disentitle" Income Tax authorites to investigate cases against them in India.

"This virtually amends Section 6 of Income Tax Act and Article 4 of the DTAC and provides largesses to unscrupulous foreign businessmen and companies making investments in India through fake front companies incorporated in Mauritius for purpose of evading taxes," the petition said.

A document placed before the court by the peitioner to substantiate the allegation said that "Advantage Advisors Inc", a subsidry of "CIBC World Markets Corp", has been serving as its "fund investment manager" and had shown administrative expenses in Mauritius a little over $ 26,000 on $ 8.9 lakh fee earned by it.

"The fund investment manager had obtained a certificate from Mauritius authorites that it is a resident of Mauritis under the DTAC," the petition said. Bhushan said this one example showed that the FIIs were only opening "fake front" companies in Mauritius to avoid payment of taxes in India and the government notification in fact was to give "largesses" to them.