Wednesday, October 8, 2003, Chandigarh, India

National Capital Region--Delhi


M A I N   N E W S

SC upholds circular on foreign investors
S.S. Negi
Legal Correspondent

New Delhi, October 7
In a judgement which might give a big boost to foreign investment in India, the Supreme Court today upheld the validity of Centre’s circular restraining the Income Tax Department from proceeding against the foreign institutional investors (FIIs) registered in Mauritius for being protected under the Double Taxation Avoidance Treaty (DTAT) with that country.

Setting aside the Delhi High Court order striking down the Central Board of Direct Taxes (CBDT) circular issued on April 13, 2000, a Bench comprising Ms Justice Ruma Pal and Mr Justice B.N. Srikrishna said it was issued by the Union Government in pursuance to its economic policy and did not require any interference by the court.

“There are many principles in fiscal economy which though at first blush might appear to be evil, are tolerated in developing economy in the interest of long term development,” the court said.

The circular provided that the tax authorities would not proceed against an FII for claiming tax on capital gains earned in India, if it produced a certificate by the Mauritius authorities that the company had a registered office in that country and was paying tax there.

Holding that the High Court had “erred on all counts in quashing the impugned circular,” the apex court said the allegations by those, who had challenged it on the ground that it had resulted in huge tax losses to the government, were only “supposed and perceived” by them.

An NGO — Azadi Bachao Andolan (ABA) — and a former Income Tax Commissioner had challenged the CBDT circular in the High Court on the ground that hundreds of FIIs had been taking “undue advantage” of the DTAT with Mauritius by opening “post box” type offices in that country to get huge tax benefits on their investments in India.

Rejecting their arguments the Bench said “We are unable to agree with the submissions that the Act which is otherwise valid in law can be treated as non-existent merely on the basis of some underlined motive supposedly resulting in some economic detriment or prejudice to the national interest as perceived by them.”

Under the DTAT, signed by the government with Mauritius in 1982, any company having registered office either in that country or in India, would have to pay tax only in one of the two countries.

The ABA had alleged that the government had provided tax “sops” to the foreign companies, resulting in the loss of several hundred crore rupees as taxes which otherwise would have been due from the FIIs on capital gains earned by them annually on the investments made in the Indian share market.

The Union Government and Global Business Institute (GBI), a consortium of Mauritius-based companies had filed appeals against the High Court order in the Supreme Court contending that the Centre’s decision was based on its new economic policy to attract more foreign investment.

Attorney General Soli Sorabjee, representing the government and GBI counsel P.H. Parikh had informed the court that after the circular was struck down by the High Court, the investment by Mauritius-based FIIs in India had fallen drastically to blow 10 per cent from 35 per cent.

The GBI had also challenged the Income Tax Department’s power to question those FIIs which had been paying tax in Mauritius claiming that they were protected under the DTAT and the government of that country had the “soverign right” to determine the residential status of a company.

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