Madras HC: No Benefits If Tax Haven Route Not Justified

Mumbai: In a judgement that could impact several foreign companies investing in India through subsidiaries or investment arms registered in other countries, the Madras High Court has ruled that tax benefits can be withdrawn if the investment is merely done to circumvent domestic tax laws. The order would support the tax department’s claim that any investment coming from outside could be investigated based on its intent. And if the intent was to escape tax, benefits can be denied under tax treaties.

India has entered into tax treaties with many countries such as Mauritius and Singapore that broadly set the ground rules around tax rates and who has the first right to levy taxes. The judgment would mean that the tax department would scrutinise the intent of investors including foreign portfolio investors (FPI), industry trackers said. As per the ruling, a company had set up subsidiaries in Cayman Islands and Mauritius and transferred shares in those. The court observed that the purpose of creating subsidiaries in these jurisdictions was to escape tax.

The Madras High Court ruled that transfer of shares by a company to its step down subsidiary cannot be categorised as avalid gift and is not eligible for tax exemption. The court observed that the incorporation of the company in Mauritius and Cayman Island just before the transfer of shares is a means to avoid domestic tax. The court also said that the transaction was designed to avoid income tax.

“What this judgment shows is that the revenue department can strike down or disallow any benefits permitted under the Income Tax Act or tax treaties if the structures do not have substance. The crucial thing is that nowhere has the court used or based the ruling on GAAR (General Anti Avoidance Rule) but the interpretation seems to be similar. Tax benefit was denied based on the general law of transfer of properties act,” said Paras Savla, partner, KPB & Associates, a tax advisory.

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