Taxman moves High Court against Authority for Advance Ruling's order on E*Trade Mauritius

By: M Padmakshan

MUMBAI: The income-tax department (I-T) last week moved the Bombay High Court, challenging the Authority for Advance Ruling's (AAR) order against an income-tax demand raised on E*Trade Mauritius.

The case assumes significance as it has wider ramifications on the cross-border tax issue, and is being tracked closely by international tax regimes. AAR, a quasi-judicial body for tax disputes involving overseas entities, had held that E*Trade Mauritius, the wholly-owned subsidiary of the US-based E*Trade Financial Corporation, was not liable to pay tax in India on capital gains arising from the sale of its shares held in Indian company IL&FS Investment to HSBC in September 2008.

Khaitan & Co's lawyer Sanjay Sanghvi, advising E*Trade in this case, declined to comment on the developments.

The tax department moved the Bombay High Court on the basis of the Supreme Court order directing it to appeal before the high court if it disagrees with the AAR order.

The I-T department had asked E*Trade to pay tax in India after E*Trade Financial Corporation sold its stake in IL&FS Investmart, an Indian company, to HSBC Violet Investments, also based in Mauritius.

The company moved the Bombay High Court, claiming that it could not be taxed in India under the India-Mauritius double taxation avoidance agreement (DTAA). The high court had directed the company to go back to the tax department and clarify the issue, and subsequently E*Trade moved AAR. The case has generated considerable traction since any order would give an indication of the Indian judiciary's stand on taxation of similar cross-border deals.

In the issue of the $2-billion tax notice on the UK-based telecom major Vodafone which had acquired Hutch-Essar for $11 billion, the Supreme Court had reversed a high court order that justified the tax notice.