The department, while clearing a proposal by Mauritius-based Ganesha Ltd for investing in a 50:50 joint venture in India in the textiles sector, has added a rider that the department will be at liberty to examine whether the company is availing of the benefits of the Double Tax Avoidance Agreement after it has started business.

The move comes in the wake of questions being raised in Parliament on the legality of channeling foreign direct investment through this route. While a joint parliamentary committee had recommended that such investments be scrutinised, a public interest litigation on this issue is pending in the Supreme Court.

Accordingly, the revenue department has said: "Approval by the Foreign Investment Promotion board will in no way finally determine the residential status of the company as being Mauritian."

Government sources said the FIPB incorporated the rider at the insistence of the revenue department.

The FIPB approval has, therefore, put on record that the decision of the revenue department will be binding in matters relating to taxation.

It said it was approving Ganesha's case because the company had furnished details about beneficial ownership.

The company stated that it was incorporated in Mauritius in 1993 and had been controlled by the Murjani Group since 1994. The entire legal and beneficial shareholding of Ganesha is owned by Gunni Murjani, a resident of the UK.

Ganesha Ltd also gave an undertaking that it would not make any claim or seek permission with respect to the Double Tax Avoidance Agreement between India and Mauritius.

Earlier, the Central Bureau of Direct Taxes had raised objections to the proposal since it found that the Mauritius-based firm was a 100 per cent subsidiary of the US-based Murjani group.

Since 50 per cent of the proposed Indian joint venture would be owned by the Mauritian firm, there would only be a 5 per cent withholding tax on dividends as per the terms of the tax treaty, it said.

The board also said in case the shares of the joint venture company were sold by the Mauritian company, there would not be any capital gains tax on it.

However, if the company had entered into a joint venture with the Indian company from the US, it would have been subject to a 15 per cent withholding tax on dividend as well as a capital gains tax on income or gains from sale of shares.

"This is a clear case of treaty shopping," the CBDT said.

Stricter norms

• The revenue department, while clearing a proposal by Mauritius-based Ganesha Ltd for investing in a 50:50 joint venture in India in the textiles sector, has added a rider that the department will be at liberty to examine whether the company is availing of the benefits of the Double Tax Avoidance Agreement after it has started business
• While a joint parliamentary committee has recommended that such investments be scrutinised, a public interest litigation on this issue is pending in the Supreme Court
• Government sources said the FIPB incorporated the rider at the insistence of the revenue department
• The FIPB approval has put on record that the decision of the revenue department will be binding in matters relating to taxation