The Income tax (I-T) department is learnt to have invoked the ‘Multilateral Instrument-Principal Purposes Test’ (MLI-PPT) provision in the India-Singapore treaty, a person familiar with the matter told ET.
The draft assessment order pertains to financial year 2023-24, suspecting escaped income of about ₹8000 crore.
Under this expansive treaty clause, the department can deny treaty benefits if, after weighing the “facts and circumstances”, it concludes that “obtaining benefit was one of the principal purposes of any arrangement.”
According to the treaty, Singapore-based foreign portfolio investors (FPI) do not have to pay tax on derivative profits generated from trading of listed equity futures and options.
Jane’s Singapore firm, a high-frequency trader, is an FPI registered with the Securities Exchange Board of India (Sebi). Jane’s other offshore vehicle is an FPI in Hong Kong.
While India has a treaty with Hong Kong, the agreement, unlike the one with Singapore, requires Hong Kong FPIs to pay tax on derivative profits.
Besides these overseas entities, Jane owns two trading firms in India that are taxed like any local company. Jane, according to Sebi, had allegedly used its outfits in India to take positions in cash and stock futures markets while the Singapore and Hong Kong FPIs took large positions in equity options. Most of the earnings were booked in Jane’s Singapore FPI which paid no tax on the earnings from equity derivatives. Jane’s Indian entities allegedly took intra-day positions to influence prices, while the FPIs (taking opposite positions) raked in profits.
Earlier this year, the I-T investigation wing which had looked into Jane’s books and questioned its officials, recommended the invocation of General Anti-Avoidance Rules (GAAR) in denying tax benefits. The assessing officer, however, in chose the wider provision of MLI.
While GAAR, which also discourages aggressive tax planning, is used if the primary intention of an arrangement is to evade tax, MLI is invoked if one of the purposes was to escape tax.
“It’s possible that I-T could argue that while the option trades were booked by the Singapore FPI, it was directed by Hong Kong. Jane’s Singapore operations may be from a proper office space with full-time employees and a server, but the relevant persons may not be stationed in Singapore. If that’s the case, the department would say that Singapore was largely used to evade tax,” said a senior professional.
A non-resident party can either move the Dispute Resolution Panel to oppose a draft order, or confirm the order and approach the Commissioner of Income Tax (Appeals) — the first level of appeal against the department’s decisions. Most non-residents approach DRP.
According to chartered accountant Ashish Karundia, besides the possible argument that the interposition of Singapore entity was not supported by sufficient commercial substance, and that securing treaty benefits was one of the principal purposes of the arrangement, the tax department may also draw support from the ruling in Tiger Global to question whether the Singapore entity has real economic presence or is merely a conduit. “The invocation of PPT would require a detailed examination of the commercial rationale of the arrangement to determine whether the arrangement was entered into to obtain benefit under the Singapore treaty,” said Karundia.
MLI, or ‘multilateral convention to implement tax treaty related measures to prevent base erosion and profit shifting’, was developed by OECD and incorporated in several treaties, to plug tax loopholes, and prevent treaty abuse.
A Jane St. spokesperson did not comment on the matter.