Round Tripping in India

Definition of Round tripping:

In lay man terms round tripping in respect of monetary terms, is the process whereby funds exit the country and subsequently re-enter at a later date. It is generally done in order to avoid taxation, duty or any kind of government surcharge upon them especially if they are earned through questionable means.

Round tripping is undertaken by companies by agreeing to sell unused assets, which are at a later date purchased back at a similar rate and shown as investments. It provides no real economic benefit, it merely enhances the financial statements of a company to seem more lucrative. The Wall Street Slang for Round Tripping is “Lazy Susan”.

Blacks Law Dictionary, defines round tripping as,

“The strategy where a business will sell an asset and then want it back at a time in the future”[1]

Law Lexicon defines Round Tripping as[2],

“On a futures market, the practice of buying and then selling the same investment, or vice versa. The term is also used to describe the practise of a credit worthy company that borrows money using a bank overdraft and then lends it on the money market at a profit.”

Definition of Money Laundering:

Interpol defines Money Laundering as[3],

“Any act or attempted act to conceal or disguise the identity of illegally obtained proceeds so that they appear to have originated from legitimate sources”

Blacks Law Dictionary defines Money Laundering as[4],

“Term applied to taking money gotten illegally and washing or laundering it so it appears to have been gotten legally”

Law Lexicon defines Money Laundering as[5],

“Whosoever directly or indirectly attempts to indulge or knowingly assists or knowingly is a party or is actually involved in any process or actively connected with the proceeds of crime and projecting it as untainted property shall be guilty of offence of Money Laundering”

In India, money laundering is a criminal offence and governed by the Prevention of Money Laundering Act, 2002. Money Laundering as an act is executed in consonance with theft, embezzlement, tax evasion and the like. It involves transactions in the black market.

When does Round Tripping become Money Laundering?

Round Tripping is considered a vessel for Money Laundering, i.e. Round Tripping is a form of money laundering. As of today Round Tripping as a concept is not illegal, however RBI and SEBI are undertaking various measures to regulate and diminish it.

Law governing Round Tripping in India:

SEBI regulates transactions involving Round Tripping.

In India, Round Tripping is often executed through Participatory Notes (P-Notes), Global Depository Receipts (GDR), Money coming in NGOs and Charitable Institutions, Transfer pricing, Foreign Venture Capital Funds etc.

Activities undertaken to curb Round Tripping:

1.      Tax deduction at source (TDS)

2.      Voluntary compliance/Amnesty schemes

3.      Prevention of Money Laundering Act, 2002 (POMA)

4.      General Anti Avoidance Rules (GAAR)

5.      Stringent KYC Norms

6.      Special Investigation team

7.      'Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Bill, to be enforced

8.      Double Tax Avoidance Agreement (DTAA)

9.      Establishment of the Financial Intelligence unit in 2004

In the White Paper on Black Money published by the MoF, in May 2012[6], round tripping as a process of transferring illicit capital was recognised. The paper suggested deducting such return of flight capital from the net outflows to arrive at the real estimate value of outflow in the country, the same is impractical to implement.

The paper recognised that majority of round tripping was routed through Mauritius and Singapore, and called for stringent agreements with these countries to curb such transactions. The paper highlighted the need for, “proper investigations by the International Taxation Division, strengthening of the legislative framework consisting of double taxation avoidance agreements (DTAAs) and tax information exchange agreements (TIEAs), and streamlining of exchange of information from various jurisdictions, including OFCs.”

Case laws on Round Tripping:

Vodafone International Holdings B.V. Vs. Union of India (UOI) and Anr.[7]

It was stated that only when it is established that an investment has hidden capital or is utilising black money can such a transaction be considered Round Tripping of funds, and in such a case TRC as a defence will not hold. PARA 197[8]

Recent incidents of Round tripping:

As of February 2015, the Aam Admi Party (AAP), has been accused of obtaining funds through Round Tripping. Union Finance Minister Arun Jaitley has stated that the party has been receiving funds through dubious offshore companies.

In 2014[9], SEBI sent notices to 12 firms for Round tripping, and sought details of their accounts. Entities included United Spirits, GMR, Essar Group, Unitech, Sterlite and DLF among others.

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[1] 2^nd Edition, http://thelawdictionary.org/round-tripping/. Last visited 01/07/2015

[2] 3^rd Edition, 2005, Page 4166

[3] http://www.interpol.int/Crime-areas/Financial-crime/Money-laundering, official Interpol site, last visited 01/07/2015

[4] http://thelawdictionary.org/money-laundering/, Last visited 01/07/2015

[5] Law lexicon, 3^rd Edition, 2005, Pg 3056

[6] http://dor.gov.in/sites/upload_files/revenue/files/FinalBlackMoney.pdf, last visited 01/07/2015

[7] (2012)6SCC613

[8] Round Tripping can take many formats like under-invoicing and over-invoicing of exports and imports. Round Tripping involves getting the money out of India, say Mauritius, and then come to India like FDI or FII. Article 4 of the Indo-Mauritius DTAA defines a 'resident' to mean any person, who under the laws of the contracting State is liable to taxation therein by reason of his domicile, residence, place of business or any other similar criteria. An Indian Company, with the idea of tax evasion can also incorporate a company off-shore, say in a Tax Haven, and then create a WOS in Mauritius and after obtaining a TRC may invest in India. Large amounts, therefore, can be routed back to India using TRC as a defense, but once it is established that such an investment is black money or capital that is hidden, it is nothing but circular movement of capital known as Round Tripping; then TRC can be ignored, since the transaction is fraudulent and against national interest.

[9] http://indianexpress.com/article/business/business-others/sebi-sends-notices-to-12-firms-over-roundtripping/#sthash.XPtrcOoI.dpuf