In a recent ruling in the case of Ardex Investments Mauritius Ltd.1 (‘the . the case of Azadi Bachao Andolan (above), no further enquiry on the. Reliance was placed on the Supreme Court rulings in the cases of Azadi Bachao. Andolan and Vodafone6. • The majority of the judges in the. The HC has followed the ruling of the Apex Court in the landmark case of Union of India v. Azadi Bachao Andolan [ Taxman
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The High Court by its judgment impugned in these appeals quashed and set aside the circular No. The High Court accepted the contention before it that the said circular is ultra vires the provisions of Section 90 and Section of the Income-tax Act, hereinafter referred to as ‘the Act’ and andollan otherwise bad and illegal.
It would be necessary to recount some salient facts in order to appreciate the plethora of legal contentions urged. The Agreement The Government of India has entered into various Agreements also called Conventions or Szadi with Governments of different countries for the avoidance of double taxation and for prevention of fiscal evasion.
One such Agreement between the Government of India and the Government of Mauritius dated April 1,is the subject matter of the present controversy. Aadi purpose of this Agreement, as specified in the preamble, is “avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains and for aandolan encouragement of mutual trade and investment”.
After completing the formalities prescribed in Azsdi 28 this agreement was brought into force by a Notification dated 6. As stated in the Agreement, its purpose is to avoid double taxation and to encourage mutual trade and investment between the two countries, as also to bring an environment of certainty in the matters of tax affairs in both countries.
Some of the salient provisions of the Agreement need to be noticed at this juncture. The Agreement defines a number of terms used therein and also contains a residuary clause.
In the application of the provisions of the Agreement by the contracting States any term not defined therein shall, unless the context otherwise requires, have the meaning which it czse under the laws in force in that contracting State, relating to the words which are the subject of the convention. Article 1 e defines ‘person’ so as to include an individual, a company and any other entity, corporate or non-corporate “which is treated as a taxable unit under the taxation laws in force in the respective contracting States”.
Article 4 provides the scope of application of the Agreement. The applicability of the Agreement is determined azari Article 4 which reads as under. For the purposes of the Convention, the casee “resident of a Contracting State” means any person who under the laws of bafhao State, is liable to taxation therein by reason of his domicile, residence, place aneolan management or any other criterion of similar nature.
The terms “resident of India” and “resident of Mauritius” shall be construed accordingly. Where by reason of the provisions of paragraph 1, an individual is a resident of both Contracting States, then his residential status for the purposes of this Convention shall be determined in accordance with the following rules:.
Where by reason of the provision of paragraph 1, a person other than an individual is a resident of both the Contracting States, then it shall be deemed to be a resident of the Contracting State in which its place of effective management is situated.
International Tax Avoidance Issues: An Analysis of the Indian Law and Policy
The Agreement provides for allocation of taxing jurisdiction to different contracting parties in respect of different heads of income. Article 13 deals with the manner of taxation of capital gains. It provides that gains from the alienation of immovable property may be taxed in the Contracting State in which such property is situated.
Gains derived by a resident of a Contracting State from the alienation of movable property, forming part of the business property of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State, or of movable property pertaining to a fixed base available to a resident of a Contracting State in the other Contracting State for the purpose of performing independent personal services, including such gains from the alienation of such a permanent establishment, may be taxed in that other State.
Gains from the alienation of ships and aircraft operated in international traffic and movable property pertaining to the operation of such ships and aircraft, shall be taxable only in the Contracting State in which the place of effective management is situated. With respect to capital gain derived by a resident in the Contracting State from the alienation of any property other than the aforesaid is concerned, it is taxable only in the State in which such a person is a ‘resident’.
Azafi 25 lays down the Mutual Agreement Procedure. It provides that where a resident of a Contracting State considers that the actions of one or both of the Contracting State result or will result for casw in taxation not in accordance with this Dase, he may, notwithstanding the remedies provided by the national laws of those States, present his case to the competent authority of the Contracting State of which he is a resident.
This case must be presented within three years of the date of receipt of notice of the action which gives rise to taxation not in accordance with the Convention. Thereupon, if the objection appears to be justified, the competent authority shall attempt to resolve the case by mutual agreement with the competent authority of the other Contracting State so as to avoid a situation of taxation not in accordance with the convention.
This Article also provides for endeavour by the competent authorities of the Contracting States to resolve by mutual agreement any difficulties or doubts arising as the interpretation or application of the convention. For this purpose, the convention contemplates continuous or periodical communication between the competent authorities of the Contracting States and exchange of views and opinions.
The Circulars By a Circular No. Relying on this, a large number of Foreign Institutional Investors s hereinafter referred to as “the FIIs”which were resident azwdi Mauritius, invested large amounts of capital in shares of Indian companies with expectations of making profits by sale of such shares without being subjected to tax in India. Sometime in the yearsome of the income tax authorities issued show cause notices to some FIIs functioning in India calling upon them to show cause as to why they should not be taxed for profits and for dividends accrued to them in India.
The basis on which the show csae notice was issued was that the recipients of the show cause notice were mostly ‘shell companies’ incorporated in Mauritius, operating through Mauritius, whose main purpose was investment of funds in India. It was alleged that these companies were controlled and managed from countries other than India or Anodlan and as such they were not “residents” of Mauritius so as to derive the benefits of the DTAC.
These show cause notices resulted in panic and consequent hasty withdrawal of funds by the FIIs. The Indian Finance Minister issued a Press note dated April 4, clarifying that the views taken by some of the income-tax officers pertained to specific cases of assessment and did not represent or reflect the policy of the Government of India with regard to denial of tax benefits to such FIIs. Since this is the crucial Circular, it would be worthwhile reproducing its full text.
The Circular reads as under:. Article 4 of azaei DTAC defines a resident of one State to mean any person who, under the laws of that State is liable to taxation therein by reason of his domicile, residence, aazadi of management or any other criterion of a similar nature. Foreign Institutional Investors and other investment funds etc. These entities are ‘liable to tax’ under the Mauritius Tax law and are therefore to be considered as residents of Mauritius in accordance with the DTAC.
Prior to 1st June,dividends distributed by domestic companies were taxable in the hands of the shareholder and tax was deductible at source under the Income-tax Act Under the Income-tax Act, tax was deductible at source at the rates specified under section A etc. Doubts have been raised regarding the taxation of dividends in the hands of investors from Mauritius.
It is hereby clarified that wherever a Certificate of Residence bachak issued by the Mauritian Authorities, such Certificate will constitute sufficient evidence for accepting the status of residence as well as beneficial ownership for applying the DTAC accordingly. The test of residence mentioned above would also apply in respect of income from capital gains on sale of shares. The aforesaid clarification shall apply to all proceedings which are pending at various levels.
The Writ Petitions Circular No. High Court’s findings The High Court has quashed the circular on the following broad grounds:. A Prima facie, by reason of the impugned circular no direction has been issued.
The circular does not show that it has been issued under section of the Income-tax Act, and as such it would not be legally binding on the Revenue; B The Central Board of Direct Taxes cannot issue any instruction, which would be ultra vires the provisions of the Income-tax Act Inasmuch as the impugned circular directs the income-tax authorities to accept a certificate of residence issued by the authorities of Mauritius as sufficient evidence as regards status of resident and beneficial ownership, it is ultra vires the powers of the CBDT.
C The Income-tax Officer is entitled to lift the corporate veil in bacho to see whether a company is actually a resident of Andolah or not and whether the company is paying income-tax in Mauritius or not and this function of the Income-tax Officer is quasi-judicial. Any attempt by the CBDT to interfere with the exercise of this quasi-judicial power is contrary to intendment of the Income-tax Act. D Conclusiveness of a certificate of residence issued by the Mauritius Tax Authorities is neither contemplated under the DTAC, nor under the Income-tax Act ; whether a statement is conclusive or not, must be provided under a legislative enactment such as the Indian Evidence Act and cannot be determined by a mere circular issued by the CBDT.
E “Treaty Shopping”, by which the resident of a third country takes advantage of the provisions of the Agreement, is illegal and thus necessarily forbidden. F Section of the Income-tax Act, enables the issuance of a circular for a strictly limited purpose. By a circular issued thereunder, neither can the essential legislative function be delegated, nor arbitrary, uncanalized or naked power be conferred; G Political expediency cannot be a ground for not fulfilling the constitutional obligations inherent in the Constitution of India and reflected in section 90 of the Act.
The circular confers power to lay down a law which is not contemplated under the Act on the ground of political expediency, which cannot but be ultra vires. H Any purpose other than the purpose contemplated by section 90 of the Act, however bona fide it be, would be ultra vires the provisions of section 90 of the Income tax Act. I While political expediency will have a role to play in terms of Article 73 of the Constitution, the same is not true when a Treaty is entered into under the statutory provision like section 90 of the Act.
J Avoidance of double taxation is a term of art and means that a person has to pay tax at least in one country; avoidance of double taxation would not mean that a person does not have to pay tax in any country whatsoever.
“azadi bachao andolan” | India Judgments | Law | CaseMine
Oit is open to the Income-tax Officer in a given case to lift the corporate veil for finding out whether the purpose of the corporate veil is avoidance of tax or not. It is one of the functions of the assessing officer to ensure that there is no conscious avoidance of tax by an assessee, and such function being quasi-judicial in nature, cannot be interfered with or prohibited.
The impugned circular is ultra vires as it interferes with this quasi judicial function of the assessing officer. L By reason of the impugned andoan the power of the assessing authority to pass appropriate orders in this connection casf show that the assessee is a resident of a third country having only paper existence in Mauritius, without any economic impact, only with a view to take advantage of the double taxation avoidance agreement, has been taken away.
Salve, for the appellants, have assailed the judgment of the Delhi High Court on a number of grounds, while the respondents through Mr. Bhushan, and in person, reiterated their submissions made before the High Court and prayed for dismissal of these appeals.
Purpose and consequence of Double Taxation Avoidance Convention To appreciate the contentions urged, it would be necessary to understand the purpose and necessity of a Double Taxation Treaty, Convention or Agreement, as diversely called.
Section 90with which we are primarily concerned, bacbao as under:. Explanation omitted as not relevant Section 4 provides for Charge of Income-tax. Section 5 provides that the total income of a resident includes all income which: In the case of a non-resident, the total income includes “all income from whatever source derived” which a is received or is deemed to be received or, b accrues or is deemed to accrue in India, during such year.
A person ‘resident’ in India would be liable to income-tax on the basis of his global income unless he is a person who is ‘not ordinarily’ resident within the meaning of section 6 b.
The concept of residence in India is indicated in section 6. Speaking broadly, and with reference to a company, which is of concern here, a company is said bxchao be ‘resident’ in India in any previous year, if it is an Indian company or if during that year the control and management of its affairs is situated wholly casd India.
Every country seeks to tax asadi income generated within its territory on the basis of one or more connecting factors such as location of the source, residence of the taxable entity, bachal of a permanent establishment, and so on.
A country might choose to emphasise one or the other of the aforesaid factors for exercising fiscal jurisdiction to tax the entity. Depending caze which of the factors is considered to be the connecting factor in different countries, the same income of the same entity might become liable to taxation in different countries. This would give rise to harsh consequences and impair economic development.
In order to avoid such an anomalous and incongruous situation, the Governments of different countries enter into bilateral treaties, Conventions or agreements for granting relief against double taxation. Such treaties, conventions or agreements are called double taxation avoidance treaties, conventions or agreements. The power of entering into a treaty is an inherent part of the sovereign power of the State. By article 73subject to the provisions of the Constitution, the executive power of the Union extends to the matters with respect to which the Parliament has power to bcahao laws.
Our Constitution makes no provision making legislation a condition for the entry into an international treaty in time either of war or peace. The executive power of the Union is vested in the President and is exercisable in accordance with the Constitution.
The Executive is qua the State competent to bachal the State in all matters international and may by agreement, convention or treaty incur obligations which in international law are binding upon the State. But the obligations arising under the agreement or treaties are not by their own force binding upon Indian nationals. The power to legislate in respect of treaties lies with the Parliament under entries 10 and 14 of List Abchao of the Seventh Schedule.
But making of law under that authority is necessary when the treaty or agreement operates to restrict the rights of citizens or others or modifies the law of the State. If the rights of the citizens or others which are justiciable are not affected, no legislative measure is needed to give effect to the agreement or treaty.
When it comes to fiscal treaties dealing with double taxation avoidance, different countries have varying procedures. In the United Andokan such a treaty becomes a part of municipal law upon ratification by the Senate. In the United Kingdom such a treaty would have to be endorsed by an order made by the Queen in Council.
Since in India such a treaty would have to be translated into an Act of Parliament, a procedure which would be time consuming and cumbersome, a special procedure was evolved by enacting section 90 of the Act. The purpose of section 90 becomes clear by reference to its legislative history.
Section 49A of the Income-tax Act, enabled the Central Government to enter into an agreement with cas government of any country outside India for the granting of azaddi in respect of income on which, both income-tax including super-tax under casee Act and income-tax in that country, under the Income-tax Act and the corresponding law in force in that country, had been paid.
The Central Government could make such provisions as necessary for implementing the agreement by notification in the Official Gazette.