The Foreign Investment Promotion Board has taken a stand against treaty shopping in rejecting

RELATED ARTICLES Goldman Sachs to lease 1.6m sq ft office in Bangalore

a proposal by the US financial services group, Goldman Sachs.

The group had sought a composite approval for any new investment in India for offering services as a non-banking financial company. The rejection came on the ground that there was no such precedent or provision for giving a blanket approval.

Such an approval, the revenue department said, would amount to giving the green light to treaty shopping, according to the minutes of FIPB meet on August 28.

The term treaty shopping is used for investments routed by companies through countries with which India has a double taxation avoidance treaty, and which impose very low rates of taxation. Mauritius is the prime example of such countries from where more than 40 per cent of India’s foreign direct investment has come since 2000.

The finance ministry has been talking about exploring the possibility of plugging this route, but has not succeeded because of the international treaty. In the new direct tax code proposed by the ministry, it has sought to stop routing of FDI through Mauritius and few other nations by providing that the code would take precedence over any treaty signed earlier. The code is to come into effect in 2011.

In its application before FIPB, Goldman Sachs sought exemption from the requirement of a no-objection certificate (NOC) from its earlier joint venture partners for every future investment. In the rejection order, FIPB also said it would not be possible to waive the NOC condition.

Goldman Sachs had sought approval for NBFC activities under the automatic route, under Press Note 1 of 2005 under which an NOC from a joint venture partner is required. This pertains to two former joint venture partners of Goldman Sachs in India, Kotak Securities and Kotak Mahindra Capital Company.

The joint venture with these companies was terminated in May 2006, with Goldman Sachs disposing its entire equity interest. Following this, the two Indian companies provided irrevocable no-objection certificates and letters which expressly gave consent to Goldman Sachs operating any business in the same field or related ones.

FDI up to 100 per cent is allowed under the automatic route in NBFC activities, including asset management, subject to fulfilment of capitalisation norms.