The Madras High Court has ruled that the Union government need not provide any tax benefit to foreign companies investing in India if the objective of the investment is to dodge domestic tax laws or such attempts are made.

A Madras High Court bench comprising Justices TS Sivagnanam and V Bhavani Subbaroyan has also ruled that any transfer of shares by companies registered in India to a step-down subsidiary (a unit of the subsidiary) cannot be termed a valid gift.

Such transfer of shares will not be eligible for tax exemption.

The bench was ruling on an appeal by Chennai Principal Commissioner of Income Tax against a dispute resolution tribunal order striking out the department’s Rs 640 crore tax claims on Redington (India) Ltd.

The dispute arose after Redington transferred its entire holding in its subsidiary Redington Gulf ZFE to its Mauritius step-down subsidiary in Cayman Islands on 13 November 2008.

The company claimed the transfer share to be a 'gift' but the Income Tax Department raised suspicion after a private equity investment firm invested $65 million for 27.17 per cent stake in it. This happened within four days of the share transfer.

The income tax commissioner argued that given the fact that a private investment firm had bought stakes in the step-down subsidiary, the transfer of shares to the Cayman unit, which had a meagre $10,400 capital, was not a gift but part of the company’s restructuring efforts.

The commissioner also contended that the word “gift” did not figure either in the company’s board meeting or share of transfer deed.

The court agreed with the argument as also the objective of the share transfer — to avoid paying income tax.

The ruling will now allow Indian tax authorities to scrutinise investments in the country, including by portfolio investors, from origins such as Mauritius and Singapore with whom India has tax treaties.

Paras K Savla, partner of Mumbai-based tax advisory firm KPB and Associates, told Swarajya that the Madras High Court ruling makes it clear that transfer of shares by Indian companies to their step-down subsidiaries cannot be simply categorised as a valid gift and thus, they would not be eligible for tax exemption.

According to Savla, the Revenue Department can disallow benefits under Income Tax Act if the claim lacked substance. Though the court has not based its ruling on the General Anti-Avoidance Rule, its interpretations are similar.

The case was dealt with by the Madras High Court as Redington (India) Ltd has its headquarters in Chennai’s Guindy industrial estate.