Taxman hunts for clues on 'control' of Jane St India

As the taxman cobbles together a case against the US investor Jane Street, it has summoned EY, the auditor of Jane's Indian arm. The tax office has also taken sworn statements from two employees and a director of the Jane local entity.

The income tax (I-T) department, it is believed, is trying to fish out details from the auditor and Jane's employees here following a six-day survey which did not result in accessing adequate information locked in offshore servers.

Details Sought
The tax office wants to figure out the location of traders of Jane's Indian firm and who called the shots, according to the information sought by the department in its communications to Jane that followed the survey, sources told ET. "From the line of questioning so far, it appears that the department's focus is to know where Jane Street's Indian subsidiary received its instructions from," said a person familiar with the matter. "In this context, they could question EY on the details of its letter of engagement, who all it deals with, and from where it received data. This could indicate where the people taking decisions on behalf of Jane India are based, even though this may not be enough," said the person.


An EY spokesperson declined to comment on the matter.

If tax officials can establish that the Jane's proprietary trading arm in India was only a shadow of the foreign entity, and was simply carrying on the business of the parent group which was giving all the instructions, then it can disallow the losses of the local company. This would mean Jane India can't carry forward the losses and would have to pay tax on its future profits.

"However, for the tax office this would be a comparatively smaller scoring point. In claiming tax on Jane's profits, it must weave this point to raise the larger issue-i.e, putting a question mark on the treaty benefits enjoyed by Jane Singapore and Hong Kong," said another person.

In building a bigger case, the regular must convince that the different Jane outfits, located in India, Singapore, and Hong Kong, were all acting in collusion to escape tax and this posed an 'impermissible avoidance arrangement'-a plan whose main purpose is to obtain tax benefit. Treaty benefits can be claimed only for bona-fide transactions.

According to the allegations by the regulator, Jane used its Indian outfits to take positions in cash and stock futures while the Singapore and Hong Kong entities, which are Sebi-registered foreign portfolio investors (FPIs), took large bets in equity options. The trades in India influenced the prices, enabling FPIs to make huge profits-the bulk of which was booked by the Singapore FPI that paid no tax on the derivative profits, thanks to the India-Singapore tax treaty.

"Establishing that Jane's India operations were an extension of its overseas business may be comparatively easier than denying treaty benefits and imposing tax on Jane Singapore. However, proving Jane India was a sham would certainly help Sebi," said a senior lawyer.

Tax Angle
It is widely believed that the probe into possible tax violations by Jane Street may have been partly at the instance of Sebi which has senior IRS officer Kamlesh Varshney as a whole-time member.

Sources said that the New York law firm Sullivan & Cromwell is understood to be advising Jane Street. "When it comes to information and data sharing with other governments, foreign investors hire top legal help to choose what to share.

If it decides not to part with some data, maybe on grounds of the privacy law of that country, it must give a proper justification," said a legal expert. Only at a later stage, the tax department could consider approaching Singapore and Hong Kong authorities to seek data on Jane's operations there under the information sharing agreements.