TMI Blog2002 (5) TMI 44X X X X Extracts X X X X X X X X Extracts X X X X ..... everal hundred foreign institutional investors (in short "FIIs") had been trading in the share market in India many of which are said to be post box companies based in Mauritius, although in effect and substance, they are managed and controlled from India or from their parent countries. The Income-tax Act, 1961 (hereinafter referred to as "the Act"), although postulates that all assessees, whether resident in India or not, are chargeable to income-tax in respect of income accrued, arisen or received; or deemed to accrue, arise or to be received in India, while residents alone are chargeable in respect of income, which accrues or arises or to be received in India or abroad. The scheme of the Act, however, is that if the FIIs are effectively managed and controlled from India, they are treated as residents of India, while if they are managed and controlled out of India, they are treated as non-residents. With a view to avoid double taxation of income, the Central Government is empowered to enter into agreements) in terms of section 90 of the Act; pursuant whereto the Government of the Republic of India and the Government of Mauritius entered into a Double Taxation Avoidance Conv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f a similar nature" Foreign institutional investors and other investment funds, etc., which are operating from Mauritius are invariably incorporated in that country. 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. 2. Prior to 1-6-1997, dividends distributed by domestic companies were taxable in the hands of the shareholder and tax was deductible at source under the Income-tax Act, 1961. Under the DTAC, tax was deductible at source on the gross dividend paid out at the rate of 5% or 15% depending upon the extent of shareholding of the Mauritius resident. Under the Income-tax Act, 1961, tax was deductible at source at the rates specified under section 115A, 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 is 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. 3. The test of residence mentioned above would also appl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s contended that by reason of the aforementioned circular, the Central Board of Direct Taxes effectively asked the Income-tax Officer to ignore the provisions of the Income-tax Act. In a case, learned counsel would contend even if the Income-tax Officer on the basis of the material on record come to the conclusion that a particular company was in fact not a resident of Mauritius, he has to accept him as such only on the ground that he has obtained a certificate from the authorities in this behalf. Observance of the provisions of the Indo-Mauritius treaty, it was submitted, is subject to the provisions of the Indian Income-tax Act and, thus, it may not be possible to take any certificate on its face value as the authorities in exercise of the statutory powers may be convinced that from the facts of the matter and other circumstances attending thereto the certificate of residence does not fulfil the requirements of the Indian Income-tax Act. In any event, in a given case, a company may be found to be a resident of India apart from being a resident of Mauritius and, thus, it would be contrary to article 4(3) of the treaty itself. The place of business of the company, the learned couns ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted in Mauritius it was to be treated as a resident of Mauritius. However, in a case where the company is also a resident of India by applying the test of place of business domiciles, etc., it was open to the Income-tax Officer to make necessary enquiries. In other words, the Solicitor General would contend that the said circular would not apply to a case where article 4 would be applicable. The counsel would urge that section 90 of the Income-tax Act, contemplates various kinds of treaties, including the treaty in respect of avoidance of double taxation including income-tax which is a tax in both the countries. He would urge that different heads of income are not relevant for the purpose of enforcing the treaty inasmuch as in one country income from one head may be exempted, whereas in another the income from another head may be so exempted but that does not mean that income-tax is not payable at all. Submissions have also been made to the effect that the legality of such a treaty is beyond the pale of judicial review as the said power is a sovereign function. The reason for entering into such a treaty may be for various reasons including political and economical and, thus, this c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revention of evasion or avoidance of income-tax chargeable under this Act or under the corresponding law in force in that country, or investigation of cases of such evasion or avoidance, or (d) for recovery of income-tax under this Act and under the corresponding law in force in that country, and may, by notification in the Official Gazette, make such provisions as may be necessary for implementing the agreement. (2) Where the Central Government has entered into an agreement with the Government of any country outside India under sub-section (1) for granting relief of tax, or, as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee. Explanation.--For the removal of doubts, it is hereby declared that the charge of tax in respect of a foreign company at a rate higher than the rate at which a domestic company is chargeable, shall not be regarded as less favourable charge or levy of tax in respect of such foreign company, where such foreign company has not made the prescribed arrangement for declaration and payment within Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th the same on merits in accordance with law; (c) the Board may, if it considers it desirable or expedient so to do for avoiding genuine hardship in any case or class of cases, by general or special order for reasons to be specified therein, relax any requirement contained in any of the provisions of Chapter IV or Chapter VI-A, where the assessee has failed to comply with any requirement specified in such provision for claiming deduction thereunder, subject to the following conditions, namely:-- (i) the default in complying with such requirement was due to circumstances beyond the control of the assessee; and (ii) the assessee has complied with such requirement before the completion of assessment in relation to the previous year in which such deduction is claimed: Provided that the Central Government shall cause every order issued under this clause to be laid before each House of Parliament." The impugned circular dated April 13, 2000, is in the following terms : "The provisions of the Indo-Mauritius DTAC of 1983 apply to 'residents' of both India and Mauritius. Article 4 of the DTAC defines a resident of one State to mean 'any person who, under the laws of that State i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions 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." The term competent authority is defined by article 3(1)(h) to mean "in the case of India, the Central Government in the Ministry of Finance (Department of Revenue) or their authorised representative, and in the case of Mauritius, the Commissioner of Income-tax or his authorised representative. Article 13 deals with capital gains. It reads thus : "(1) Gains from the alienation of immovable property, as defined in paragraph 2 of article 6, may be taxed in the Contracting State in which such property is situated. (2) Gains 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ention as it applies to persons who are residents of one or both the States. Further, as per the DTAC in relation to certain items of income, the country of source of the income completely forgoes the right to levy tax (e.g. article 8 and para. 4 of article 13). In respect of other items of income, the country of residence of the taxpayer waives the primary right to levy tax and gives a credit for the tax paid in the source country (e.g. articles 10, 11 and 12). It is for the Assessing Officer, on the facts of every case to determine whether the assessee is a resident of India or Mauritius. For determining the residence in India, the powers of the Assessing Officer are untrammelled since it would principally be for him to determine whether an assessee is resident in India. When an assessee claims to be resident of Mauritius the certificate to this effect issued by the authorities of that Government would be conclusive. However, this conclusiveness would be in relation to its residence in Mauritius. Where, however, an assessee, who is a resident of Mauritius, is also found to be resident of India in accordance with the paragraph 1 of article 4 the provisions of para. 3 of the DT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would be the sum which is received by him in India which arises or is deemed to accrue to him in India in a relevant year. Sub-section (3) of section 6 provides that a company is said to be a resident in India in any previous year, if (i) it is an Indian company, or (ii) during that year except in a case where the control and management of its affairs is situated wholly outside India. Section 9 of the Income-tax Act reads thus: "9. (1) The following incomes shall be deemed to accrue or arise in India- (i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India." The function of an Income-tax Officer is quasi-judicial in nature. It is for the purpose of finding out as to whether an assessee can take shelter under a double taxation avoidance treaty or not that he is entitled to make such enquiries which are permissible in law. For the said purpose he is not only entitled to lift the corporate veil but is also entitled to find out not only as to whether a company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r naked power can be conferred. Delegated authority, it is trite must act within four corners of delegated legislation. It is not only to act having regard to the purpose and object for which the power has been delegated, it must act having regard to the provisions of the statute as also the delegated legislation. It is now trite that by reason of any power conferred upon any statutory authority to issue any circular, the jurisdiction of a quasi-judicial authority in relation thereto cannot be taken away. In Orient Paper Mills Ltd. v. Union of India, AIR 1969 SC 48, it has been held as follows: "7. This leaves us with the question of the directions issued by the Board. The question whether 'M. G. Poster paper' is 'printing and writing paper' or 'packing and wrapping paper' is essentially a question of fact. That had to be decided by the authorities under the Act. It was not denied before us that the Collector and the Central Government while deciding the appeals and the revision applications respectively functioned as quasi-judicial authorities. So far as the nature of power exercised by the Central Government under section 36 of the Act (revisional powers) is concerned, the ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in its import. It enacts that no orders, instructions or directions shall be given by the Board so as to interfere with the discretion of the Appellate Assistant Commissioner of Wealth-tax in the exercise of his appellate functions. It does not, however, imply that the Board may give any directions or instructions to the Wealth-tax Officer or to the Commissioner in exercise of his quasi-judicial function. Such an interpretation would be plainly contrary to the scheme of the Act and the nature of the power conferred upon the authorities invested with quasi-judicial power." In Orient Paper Mills Ltd. v. Union of India, AIR 1970 SC 1498; [1970] 3 SCC 76, the apex court observed as follows: "Now it is common ground, it being admitted in the statement of case filed on behalf of the respondent that the paper was assessed to duty in accordance with the instructions from the Collector. The main question is whether an assessment made by a subordinate officer in accordance with the instructions issued by the Collector to whom an appeal lay against the order of that subordinate officer can be called a valid assessment in the eye of law. As has been pointed out in Orient Paper Mills Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... treaty a political arrangement has been made. The same, in our opinion, would run counter to the provisions of section 90 of the Income-tax Act. Political expediency cannot be a ground for fulfilling the constitutional obligation. In S. R. Chaudhuri v. State of Punjab, AIR 2001 SC 2707; [2001] 7 SCC 126, the apex court while interpreting the provisions of article 164 of the Constitution of India, stated the law thus: "Constitutional provisions are required to be understood and interpreted with an object oriented approach. A Constitution must not be construed in a narrow and pedantic sense. The words used may be general in terms but, their full import and true meaning, has to be appreciated considering the true context in which the same are used and the purpose which they seek to achieve. Debates in the Constituent Assembly referred to in an earlier part of this judgment clearly indicates that non-member's inclusion in the Cabinet was considered to be a 'privilege' that extends only for six months' during which period the member must get elected, otherwise he would cease to be a Minister. It is a settled position that debates in the Constituent Assembly may be relied upon as an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ards constitutional provisions. Constitutional restraints must not be ignored or by-passed if found inconvenient or bent to suit 'political expediency'. We should not allow erosion of principles of constitutionalism." Yet again in Kishan Prakash Sharma v. Union of India [2001] 99 FJR 63, 77 [2001] 5 SCC 212, Rajendra Babu J. speaking for the Constitutional Bench stated the law thus: "So far as the delegated legislation is concerned, the case-law will throw light as to the manner in which the same has to be understood and in each given case we have to understand the scope of the provisions and no uniform rule could be laid down. The Legislatures in India have been held to possess wide power of legislation subject, however, to certain limitations such as the Legislature cannot delegate essential legislative functions which consist in the determination or choosing of the legislative policy and of formally enacting that policy into a binding rule of conduct. The Legislature cannot delegate uncanalised and uncontrolled power. The Legislature must set the limits of the power delegated by declaring the policy of the law and by laying down standards for guidance of those on whom the po ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India and the Government of Mauritius in the said treaty is not known. The submission of the Solicitor-General that this treaty must have been entered into looking to the large population of Indians in the said country and also for future support of the said country might have been taken into consideration. Any other purpose would not only be ultra vires the same would be contrary to the purpose circular had been issued bona fide, the question which has to be posed and answered by this court is as to whether the same is in consonance with the provisions of section 90 of the Income-tax Act or is in public interest. The validity of the impugned -circular must be judged having regard to the limitations contained in section 90 of the Act and not otherwise. It would not be correct to contend that section 90 of the Income-tax Act confers a very wide power in terms whereof conferment of an unguided or unbridled power is not contemplated. The very purpose of entering into such a treaty is avoidance of double taxation. The power in terms of section 90 has to be considered having regard thereto. The expression "double taxation" has definite and precise meaning. In Black's Law Dictionary the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oidance scheme. In any event, taking undue advantage of a scheme only for the purpose of avoidance of tax cannot but be deprecated. Treaty shopping which amounts to abuse of the Indo-Mauritius Bilateral treaty, may amount to fraudulent practice and cannot be encouraged. Philip Baker on Double Taxation Convention and International law, comments: "General subject to provisions provides that treaty benefits in the State of source are granted only if the respective income is subject to tax in the State of residence. This corresponds basically to the aim of tax treaties, namely to avoid double taxation." There may not be any doubt that section 90 talks of income generally. However, income in fiscal legislative practice has a specific meaning and the avoidance of double taxation is a term of art. Avoidance of double taxation would mean 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. In Mauritius in terms of the statute a foreign company is not entitled to own any property, open any bank account, do any business. Several restrictions have been imposed in that country a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Accordingly, where a tax avoidance or tax deferment scheme consisted of a series of prearranged steps, some of which had no commercial purpose other than the avoidance or deferment of tax, liability to tax was to be determined according to the substance of the scheme as a whole and its end result, notwithstanding (a) that the arrangement was non-contractual or (b) that each particular step had commercial effect or enduring legal consequences, or (c) that the arrangement was not a self-cancelling scheme designed to produce neither a loss nor a gain. Applying those principles since the intervention of G. Ltd. had no commercial purpose other than deferment of the taxpayer's tax liability, the transactions concerning G. Ltd. were to be disregarded and the transaction treated simply as the sale of the taxpayer's shares in X Ltd. and Y Ltd. direct to the purchaser. On that basis the taxpayers were accordingly liable to capital gains tax." Furthermore having regard to the decision of the apex court in New Horizons Ltd. v. Union of India [1997] 89 Comp Cas 849; [1995] 1 SCC 478 and Life Insurance Corporation of India v. Escorts Ltd. [1986] 59 Comp Cas 548; AIR 1986 SC 1370, there canno ..... X X X X Extracts X X X X X X X X Extracts X X X X
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