IN the Indian governance system, the left hand often does not what right hand is doing. At times, left hand does not care what the right hand wants. An instance in point is Finance Ministry where two departments are operating at different wavelengths on the issue of misuse of India-Mauritius Double Taxation Avoidance Convention/agreement (DTAC/DTAA) by prospective foreign investors. The divergent stance of two departments comes to the fore at Foreign Investment Promotion Board (FIPB).

Authoritative sources told TII that Department of Economic Affairs (DEA) under which FIPB unit functions routinely records the concern voiced by Department of Revenue (DOR) over the misuse of India-Mauritius DTAC by prospective foreign investors. FIPB, which works under the chairmanship of DEA Secretary, clears investment proposals, overlooking DOR's observations. Later, the Finance Minister or the Cabinet Committee on Economic Affairs (CCEA) gives the Government's final nod, depending on the size of foreign direct investment (FDI).

Take the case of WestBridge Crossover Fund LLC, Mauritius. FIPB last month announced approval of WestBridge's proposal for subscribing warrants convertible into equity shares of Kajaria Ceramics Limited. This would result in FDI of Rs. one billion.

Sources quoted DOR's view on this case as: "Examination of Fund flow reveals that funds from other jurisdictions are being routed through Mauritius-based company to take advantage of India-Mauritius DTAA. This is a clear case of ‘treaty abuse' DOR does not support the proposal."

DOR made almost an identical observation in the case of Avija Investments Mauritius Pvt Ltd, which is a wholly owned subsidiary of Avija Investment Inc, a firm incorporated in Cayman Islands on March 2009.

Avija already holds 17.29% stake in Indian company named QuEST Global Manufacturing Private Limited, an aerospace-focused engineering firm. The company applied for FIPB approval not for additional investment by Avija but to secure permission to produce certain defence equipment.

FIPB has put the application on hold not because of DOR observations but for want of comments from Ministry of Home Affairs.

In the high-profile Vodafone case, FIPB, however, paid heed to certain other issues raised by DOR while recommending for approval the company's proposal to hike foreign equity to 100% from 64.38% at a meeting held on 30 th December 2013.

While recommending the application for clearance to Finance Minister, FIPB, among other conditions, recorded DOR's stance that "the present FIPB approval by itself will not amount to any recognition of eligibility for giving such relief under the Income-Tax Act or the relevant DTAA."

In its comments on Vodafone application, DOR had also observed: "DOR does not support routing of funds through Mauritius in order to take advantage of India-Mauritius in order to take advantage of India-Mauritius DTAA."