The Authority of Advanced Rulings (AAR) has adjourned the Income Tax (I-T) department versus E*Trade Mauritius Limited, a wholly owned subsidiary of the US-based E*Trade Financial Corporation, case to February 24.
In 2008, E*Trade Mauritius sold its holding in a listed Indian company, IL&FS Investsmart, to HSBC Violet Investments also based in Mauritius. However, it has been learnt that the I-T department is now seeking capital gains tax on HSBC-IL&FS Investsmart deal. According to Article 13(4) of the India-Mauritius Tax Treaty, the transaction was taxable only in Mauritius. Hence, E*Trade approached the Indian Tax Department for a nil withholding tax order. However, the Indian Tax Department didn’t quite agree with it then.
E*Trade then approached the Bombay High Court, but the court refused to get involved. It referred the case back to the IT department and also ordered HSBC Mauritius to deposit the entire capital tax considerations of Rs 24.5 crore with the court.
However, later, the taxman had concluded that the transaction was taxable, because in its view E*Trade Mauritius was a façade or a shell company and could not avail of treaty benefits. The shell company inclusion was based on the fact that E*Trade Mauritius had acquired funds from E*Trade USA for the purchase of shares of IL&FS in 2004. The shares were thereby owned by E*Trade US.
Post this order, the tax department asked the High Court for the entire tax amount to be released to the department. The High Court released the amount without ruling on merits of the case or determining whether the transaction is indeed taxable in India.
READ MORE ON E*Trade, E*Trade Mauritius Limited, IT dept vs E*Trade, E*Trade Financial Corporation, HSBC Violet Investments, IL&FS Investsmart, HSBC-IL&FS Investsmart
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