Taxability of FIIs in India: Part 1

The economic times has stated here that the Bombay High Court has ruled that FII earnings aren’t taxable in India. This view/analysis is erroneous because the Bombay High Court did not have an occasion to consider the question of the taxability of FII earnings in India. In the concerned case, Prudential Assurance Company Ltd. v. DIT the assesse had obtained a ruling from the AAR in its favour i.e. the AAR held that the earnings of the petitioner a FII was not taxable in India. Subsequently there was a ruling by the AAR in Fidelity Northstar fund which stated that the earnings of a FII from selling of shares are taxable in India. Based on the Fidelity ruling the DIT proceeded to tax the petitioner on the ground that there was a change in law. It is in light of this background that the assesse invoked the jurisdiction of the Bombay high court under section 263 of the IT Act. The question before the court was whether the DIT was correct to hold that the AAR ruling obtained by the petitioner was not binding on the revenue as a consequence of a change in law brought about by the fidelity ruling. It is in this regard the Bombay high court held that the ruling obtained by the petitioner was binding on the revenue. The following paragraph of the Bombay high court judgement is apposite:

“Evidently, the Commissioner has ignored the clear mandate of the statutory provision that a ruling would apply and be binding only on the Applicant and the Revenue in relation to the transaction for which it is sought. The ruling in Fidelity cannot possibly, as a matter of the plain intendment and meaning of Section 245S displace the binding character of the advance ruling rendered between the Petitioner and the Revenue.”

It is clear that the question of taxability of FII’s in India had never arisen before the Bombay High Court. The following observation of the court manifests this point:

“We would clarify, in conclusion, that we have had no occasion having regard to the nature of the jurisdiction that was invoked by the Commissioner to inquire into the correctness of the ruling of the AAR in the case of the petitioner and we leave it open to the Revenue to take recourse to such remedies in law in respect of the ruling of the AAR, if so advised.”

Concluding the Bombay High Court does not in any way settle the law on the taxability of FII’s in India. In my subsequent posts I will attempt to analyse the present law (which remains largely unsettled) on the taxability of FII’s in India in light of the existing precedents.