DISSERTATION

SEMESTER: iIX

PROGRAM- iB.COM iLLB i(H) iSPZ iTAXATION iLAWS

TITLE: iDTAA iANALYSIS iOF iMAURITIUS iAND iUSA iWITH iINDIA

GUNJAN iKAUSHAL
SAP iID- i500055184
ENROLLMENT iNO- iR129216036

SUBMITTED iUNDER iTHE iGUIDANCE iOF- iMr. iHIMANSHU

iDHANDHARIA

School iof iLaw

University iof iPetroleum iand iEnergy iStudies
Dehradun
(NOVEMBER, i2020)
CHAPTER i1: iINTRODUCTION

The iobjective iof ithis ipaper iis ito ithe istudy ithe iimpact iof ithe iamendment
iof iIndia iMauritius iDTAA ion iforeign iinvestment iin iIndia. iIt iprovides ia
idetailed ianalysis iof ihow iMauritius, ia ismall iisland icountry ibecame ithe
imost ifavorite iroute ifor iforeign iinvestor iin iIndia iduring ithe iperiod i2000 ito
i2017. i

The ireasons ifor iemergence iof iMauritius ias ithe iforemost iexporter iof iforeign
icapital ito iIndia iand iin ithis icontext iexamines ithe irole iof ithe iAgreement ion
iAvoidance iof iDouble iTaxation iand ithe iPrevention iof iFiscal iEvasion iwith
irespect ito iTaxes iof iIncome iand iCapital iGains ibetween iIndia iand iMauritius
i(DTAC). iIn i2016, iDTAC iwas iamended iand iwith ithe iimplementation iof
iGeneral iAnti iAvoidance iRule i(GARR) ifrom i2017 iby iIndia iand ichanges iin
iinternational itaxation izeitgeist idue ito iOECD iproject ion iBase iErosion iProfit
iShifting i(BEPS) ithe iMauritius iroute ifaced inew ichallenges. i

The iinfluence iof ithese ichanges ion iFPI iand iFDI iinvestments iflow ifrom
iMauritius ito iIndia. iIt ifinds ithat iadvantage iof iMauritius iin iFDI iand iFPI
iflow ihas icome idown iin i2018-19 iand iits ishare iin iforeign iinvestment iis
ilikely ito icome idown ifurther iwith ithe iamendment iof ithe iDTAC itaking ifull
ieffect ifrom iApril i2019. i

However, iamendment ihas igiven iMauritius ia icompetitive iadvantage iin

ichannelizing idebt iinvestment ito iIndia ias icompared ito iits icompetitors ilike
iSingapore iand ithe iNetherlands iand iin ifuture iwe imay isee ihigher idebt
iinvestment ifrom iMauritius.1
1
iProtocol iAmending ithe iConvention ifor ithe iAvoidance iof iDouble iTaxation iand ithe iPrevention
iof iFiscal iEvasion iwith iRespect ito iTaxes ion iIncome iand iCapital iGains, iIndia-Mauritius, iMay
i10, i2016, iNotification iNo. iS.O. i2680(E) i(Aug. i10, i2016) i[hereinafter iProtocol], ihttp://www.in
icometaxindia.gov.in/communications/notification/notification682016.pdf i[https://perma.cc/QKJ7-
Mauritius iover ithe imost irecent i15 iyears iturned iinto ia ifamous icourse ito
idirect iany iinterest iin iIndia iall ithe imore iso ion iaccount iof iFDI, iwhere iit
ihas ia ilion's ioffer iuntil ithe irevision iof ithe iIndia iMauritius icharge ideal iin
i2016 i( iJaiswal i2018). iBetween iApril i2000 iand iMarch i2019, iIndia igot
i$420 ibillion iof iForeign iDirect iInvestment i(FDI) iand iMauritius icontributed
ia iwonderful i$134 ibillion, i32 ipercent iof ithe icomplete iFDI iinflows ito iIndia
iin ithis iperiod. i

The iother ifour inations iin ithe irundown iof ibiggest iwellsprings iof iFDI ito
iIndia iare iSingapore i($83 ibn ior i20 ipercent), iJapan i($30 ibn ior i7%), ithe
iUK i($26 ibn, ior i6 ipercent), ithe iNetherland i($27 ibillion iand i7%) iand ithe
iUSA i($25 ibn ior i6%). iIn iForeign iPortfolio iInvestment i(FPI), ithe iportion
iof iMauritius iwas i20% iuntil iApril i2016. iHenceforth, iaround ihalf iof ithe
iFDI iand iapproximately ia ifourth iof iFPI iwas irelated ito iMauritius iand
iSingapore i(DPII, i2019).

There iare imultiple iof ireasons, icommercial ias iwell ias itax-driven ifor
iinvesting iin iIndia ifrom iMauritius. iMauritius iemerged ias ithe ileading
iexporter iof iforeign iinvestment idue ito ithe ifollowing ireasons

In i1993, iwhen iI iassisted istructuring iof ithe ifirst icompany iunder ithe ithen inew
ioffshore iMauritius iOffshore iBusiness iActivities iAuthority iregime, ilittle idid iI
irealize ithat iMauritius iwould ibecome iIndia's ilargest iinvestment ipartner,
ifacilitating iapproximately i445 iof ithe itotal iFDI iinto iIndia. iSince ithen ithe itax
itreaty ibetween iIndia iand iMauritius ihas ibeen isubjected ito iand isurvived
inumerous iattacks ifrom ithe irevenue iauthorities, ithe ipress iand icertain isections
iof ipublic idespite iits ilegitimacy. iInterestingly, ithe itreaty ihas ibeen idefended iby
ithe isame irevenue iauthorities iand ithe igovernment iat ithe ihighest ipolitical ilevel

iSN58].
iresulting iin ithe isurvival iof ithe itreaty. iThe iend iresult ihas idefinitely ibeen
ipositive.

For ime ipersonally, iand ias ia ilawyer, iit ihaS ibeen ia ifascinating ijourney
iholding iMauritius's ihand iat ievery ipoint iof iinflection, iespecially ibefore ithe
ijudiciary. iI ihad ian iopportunity ito irepresent iMauritius's iinterest i(mid iin iturn
iIndia's itoo) iin inumber iof icases inotably iAIG iIndia iSectoral iFund, iTCW/ICICI,
iDLI iPrivate iEquity iand iultimately iAsadi iBachaa iAndolan iwhere iSupreme
iCourt iof iIndia iplaced iits i_final iseal iof iapproval ion ithe iuse iof iMauritius
ientities ifor iinvestment iin iIndia.2
Going iforward, iinstead iof iresenting ithe iloss iof itax irevenue ion icapital igains iin
iIndia, iwe ishould icelebrate ithe iincreased igains iin iother idirect itaxes isuch ias
icorporate, idividend iand iemployment itaxes, iand iindirect itaxes idue ito iincreased
ieconomic iactivity ibrought iabout iby iFDI ifacilitated iby ithe iIndia i- iMauritius
iTreaty."

The iDouble iTax iAvoidance iAgreement i("DTAA") ibetween iIndia iand

iMauritius i("Treaty") ihas iplayed ia ipivotal irole iin ithe iIndia istory.
iIndia iembarked iupon iliberalization ialmost itwo idecades iago iat ia itime
iwhen ithe ibalance iof ipayment icrisis iforced iIndia ito iopen iher ieconomy ifor
iforeign iinvestments. iIndia's iforeign iexchange ireserves ihave igrown
isignificantly isince i1991.

The iprocess iof iliberalization ihas iresulted iin ian iimproved ibalance iof
ipayments iposition. iHer iforeign iexchange ireserves, iwhich istood iat ia
ilowly iUS$ i5.8 ibillion iat ithe iend iof iMarch i1991, iincreased igradually ito
iUS$ i38.0 ibillion iby ithe iend iof iMarch i2000. iSubsequently, ithe ireserves

2
iWoltersTT iKluwerTT i(2019)TT iMaurituisTT iTaxTT iTreaty,TT iaccessedTT ionTT i21stTT
iJulyTT i2019TT ihttps://www.lowtax.net/information/mauritius/mauritius-tax-treaty-intr ioduction.html
irose ito iUS$ i113.0 ibillion iby ithe iend iof iMarch i2004, iand idramatically
isurged ito iUS$ i309.7 ibillion iby ithe iend iof iMarch i2008.

Base iErosion iand iProfit iShifting i(BEPS) ipracticed iby imajor imultinational
iplayers iis ione iof ithe ichief iconcerns ithat iclouds ieffective iretrieval iof
irevenue iby ithe igovernments iof ithe iinvolved ijurisdictions. iIn iorder ito
iovercome ithis iproblem, ithe iOrganization ifor iEconomic iCooperation iand
iDevelopment i(OECD) iand iEuropean iUnion i(EU) ihave ibeen iworking
icontinuously ifor ithe ipast imany iyears ion icombating isuch ipractices iso ithat
ithe ijurisdictions iare iable ito igarner itheir ifair ishare iof irevenue iand ithe iaim
iof isustainable idevelopment iof ithe iall ithe inations iof ithe iworld icould ibe
iassured. i

To icombat ithe iconcerns iregarding iBEPS, ithe iOECD ihas iproposed ivarious
iaction iplans ias iguidelines, iwhich ican ibe itailored iby inations ias iper itheir
ispecific irequirements iand iconcerns. iIndia isigned ia iDouble iTaxation
iAvoidance iAgreement i(DTAA) iwith iMauritius iin ithe iyear i1982 ito ipromote
ibusiness iand iinvestment. iIndia iwas itranscending ifrom ia iclosed ieconomy ito
ian iopen ieconomy iand iwas ilooking ifor ithe iforeign iinvestment, itherefore
ithis iseemed ito ibe ia iprofitable iand ia isustainable imethod ifor iinvestment.
iHowever iconsequently iit iwas ifound iout ithat itreaty iabuse iwas imade iin
i1983 iwhen isigning ithe iDTAA iwith iMauritius. iThis idefect icould ionly ibe
irectified iin i2016.

This ishows iIndia’s istand iagainst itax ihavens iand iavoidance iof itax iin iany
iform. iThe iafter ieffects iof ithe ichange iin ithe itreaty ihave ibeen istudied iin
idetail. iIt iis iobserved iin ithe istudy ithat iafter isigning ithe itreaty ithere ihave
ibeen idirect iinvestments iin iIndia iinstead iof irouting ithe iinvestment ifrom
iMauritius. iMoreover, ithis ihas iresulted iin ithe irevenue iauthorities ideriving
itheir ifair ishare3. i

Therefore, iit ihas ibeen iconcluded ithat ibase ierosion iand iprofit ishifting
iactivities ican ibe ieffectively ichecked iby ithe ichanged iprovisions iof ithe
itreaty.

i iBase iErosion iand iProfit iShifting i(BEPS) iis ione iof ithe imost idiscussed
itopics iof ithis idecade. iUnder iBEPS ipractices ithe iMultinational iCompanies
i(MNCs) iof ione ijurisdiction ishift itheir iprofits ifrom ihigh itax irates
ijurisdiction ito ilow ior inil itax irates ijurisdiction iin iorder ito iavoid itheir itax
iliability. i

Organisation ifor iEconomic iCooperation iand iDevelopment i(OECD) iand

iEuropean iUnion i(EU) ihave ibeen iworking icontinuously ifor ithe ipast imany
iyears ion icombating isuch ipractices iso ithat ithe ijurisdictions iare iable ito
igarner itheir ifair ishare iof irevenue iand ithe iaim iof isustainable idevelopment
iof ithe iall ithe inations iof ithe iworld icould ibe iassured. iIn iorder ito iachieve
ithe isame iobjective iOECD ihas iprovided i15 iActions iPlans ito icombat iBEPS
ipractices. iAction iPlan iVI iwhich istates iNeutralize iTreaty iAbuse iand iAction
iPlan iVII iwhich istates i„Neutralize ithe iartificial iavoidance iof ipermanent
iestablishment i(PE) istatus‟, iare idirectly iconcerned iwith iIndia-Mauritius iand
iIndiaSingapore itax itreaty.

For ithe ipast imany idecades iIndia ihad ibeen ifacing itrouble iin iso imuch iso
ithat ia imajor iportion iof iforeign idirect iinvestment i(FDI) ihas ibeen icoming

3
iJeffrey iOwens i(2003-2004), i“How ithe iOECD ihelps ithe iglobal itax ienvironment”, i15
iInternational iTax iReview i3
ifrom icompanies iset iup iin iMauritius. iMauritius iis ithe itop idestination
ithrough iwhich iFDI icomes ifrom4. i

Approximately i33% iof ithe itotal iFDI iinflow iof iIndia icomes ifrom iMauritius.
iWhereas iMauritius iis ia itop idestination iof iIndian ioverseas iFDI ioutflow ias
iwell. iMany iof ithese icompanies iwere iconduits ithrough iwhich imillions iof
idollars iof iinvestment iflowed iinto iIndia iand iwhen ithe iinvestors iexited ithe
imarket; itheir iaccumulated iwealth iwent iuntaxed iin iIndia ias iwell ias ithe iisle
ination. iIn i1991, iIndia iopened iits igate ifor iforeign iinvestors ito iinvest iin
iIndia iand iobserved ithat ia itreaty iabuse iwas imade iin i1983 iwhen isigning ia
iDouble iTaxation iAvoidance iAgreement i(DTAA) iwith iMauritius. i

India ihad ibeen itrying ito irectify ithat itreaty isince ithen iand ifinally igot
isuccess iin i2016. iThe imain iconcerns iof ithe iIndian igovernment ito iamend
ithat itreaty iwere: i

1. iThe itreaty iconsequently iresulted iin idouble inon itaxation iin iIndia ias iwell
ias iin iMauritius. iThis ihappened ibecause itax irate ion icapital igain ifrom
ishares iand isecurities iin iMauritius iwas ialready i0% iso iIndia iwas ilosing iout
ion iits ifair ishare iof irevenue. i

2. iBy ifollowing ithe ipractice iof i„Treaty iShopping‟, iIndian iand iother iMNCs
iwere iconstantly iusing ithe iinfamous iMauritius iroute ito iinvest iinto iIndia iby
icreating ishell icompanies iin iMauritius.

India ihas ia iwide inetwork iof idouble itaxation iavoidance iagreements, iof
iwhich ithe imost ifamous, ior iinfamous, iis ithe ione iwith iMauritius. iIndia’s
itax itreaty iwith iMauritius i(“Treaty”) iwas isigned iat iPort iLouis ion iAugust
i24, i1982 iand ihas ibeen ieffective isince iApril i1, i1983 iand iJuly i1, i1983, iin
4
iRoy iRohatgi, iBasic iInternational iTaxation i(2008), iSecond iEdition, iVolume i1, iPrinciples,
iTaxmann iAllied iServices iP. iLtd., iNew iDelhi.
iIndia iand iMauritius, irespectively. iThe iTreaty iwas iamended ipursuant ito ia
iprotocol i(“Protocol”) isigned ion iMay i10, i2016. iThe iPreamble iof ithe iTreaty
iprovides ithat ione iof iits iobjectives iis ito iencourage i“mutual itrade iand
iinvestment.” iThe iTreaty ihas iserved ias ithe ibackbone ifor ia imajor ipart iof
ithe iforeign idirect iinvestment i(“FDI”) iinto iIndia. i

To ibe imore iprecise, iin i1993 ithe iFDI iinflow ifrom iMauritius iwas iestimated
iat i37.5 imillion iIndian iRupees i(“INR”), iwhich igrew iphenomenally ito
i30,933 imillion iINR iby i2000. iFDI iinflows ifor ithe iperiod ibetween iApril
i2000 iand iSeptember i2016 ireveal ithat iMauritius ihas ibeen ithe ilargest
icontributor iof iFDI, iaccounting ifor i5,194,995 imillion iINR, irepresenting
i32.81% iof ithe itotal iinflows iinto iIndia.5

iThe iSupreme iCourt iof iIndia i(“SC”) iremarked iin i2012 ithat ithe iinvestment
ifrom iForeign iInstitutional iInvestors i(“FII”) iwas iabout i4,500,000 imillion
iINR, i700,000 imillion iINR iof iwhich iwas ifrom iMauritius.

The itrading irelationship iis isomewhat ireciprocal ias iIndia ihas ibeen ithe
ilargest iexporter iof igoods iand iservices ito iMauritius isince i2007, iand ithe
iInternational iMonetary iFund inoted iin i2013 ithat ithe iend iof ithe iTreaty
iwould ihave isignificant iramifications ifor ithe ieconomy iof iMauritius.

iSo, ihow idid ithis icome iabout? iIndia iopened iits idoors ito iforeign
iinvestment ionly iin i1991, iwhich iwas iwhen iMauritius iwas iemerging ias ia
inon-banking ioffshore ijurisdiction. iIn ithis iphase iof isimultaneous
iliberalisation, iinvestors iappear ito ihave idiscovered ithe itax iarbitrage
iopportunities iavailable iunder ithe iTreaty. iThe icritical itax iarbitrage

5
iI-M iTreaty, isupra inote i1, iat iart. i13(4). i“Gains iderived iby ia iresident iof ia iContracting iState
ifrom ithe ialienation iof iany iproperty iother ithan ithose imentioned iin iparagraphs i1, i2 iand i3 iof
ithis iArticle ishall ibe itaxable ionly iin ithat iState.” i
iopportunity irelated ito icapital igains iarising ifrom isale iof ishares icontained iin
iArticle i13(4). iArticle i13(4) iis icouched ias ia iresiduary iprovision. i

Paragraphs i1, i2, iand i3 iof iArticle i13 idiscuss ithe iallocation iof itaxation
irights ion igains ifrom ialienation iof iimmovable iproperty, imovable iproperty
iforming ipart iof ia ipermanent iestablishment/fixed ibase, iand iships iand
iaircrafts ioperating iin iinternational itraffic iand irelated imovable iproperty,
irespectively. iUnlike iparagraphs i1, i2, iand i3, iparagraph i4 idoes inot iaccount
ifor isites ias ia ifactor. i

Article i13(4) iallocates igains iderived iby ia iresident ifrom ialienation iof ithe
iremaining iproperties i(other ithan ithose imentioned iin iparagraphs i1, i2, iand
i3) ito ithe iresident ijurisdiction. iParagraph i5 idefines ithe iconcept iof
ialienation. iPursuant ito iArticle i13(4), ionly ithe iresident ijurisdiction itaxes
icapital igains ifrom ialienation iof ishares. iIn irespect iof ithe iforeign iinvestment
icoming iinto iIndia ifrom iMauritius, iany icapital igains ion ithe ialienation iof
ishares iwas itaxable ionly iin iMauritius.

The idomestic itax ilaw iof iMauritius iexempted icapital igains ifrom ithe isale iof
ishares. iHence, igains ifrom ithe ialienation iof ishares iheld iby iMauritius
ientities iin iIndian icompanies iwere inot itaxed iin ieither iIndia ior iMauritius.
iThis iled ito ithe imigration iof ia inumber iof ientities ito iMauritius, ias iis
ievidence iby ithe iFDI ifigures, iand ithe iemergence iof ithe iso-called iMauritius
iRoute.6

iThe iMauritian iauthors ihave iargued ithat ithe ifactors iwhich iled ito ithe
iprominence iof ithe iMauritius iRoute iwere inot ithose iunder ithe iTreaty, ibut
ithose ioffered iby iMauritius, isuch ias isuperior iservice istandards, ilabor

6
iA idiscussion iof ithe iconcept iof isovereignty iwhich iencompasses i“tax isovereignty”, ia iconcept
ithat ipossibly iunderlies i“economic iallegiance”, iis iin iChristians i(2008).
iworkforce, iand iproximity ito iIndia, ihistoric iand icultural ities, ipolitical
istability, ilegal ichecks iagainst iexpropriation, iand ia ilack iof iforeign iexchange
iconstraints.

iConsidering ithat ithe idouble inon-taxation iopportunity iunder iArticle i13(4) iof
ithe iTreaty ihas iplayed ia irole iwith irespect ito ithe iinflow iof iforeign
iinvestment, ilooks iat ithe iMauritius iRoute ias ia icase istudy ifor iunderstanding
ithe ilink ibetween itaxation iand imigration. iThe imodest iattempt iof ithis iPaper
iis ito iexamine ithe iIndian itax ilaw iresponse ito ithe imigration iof ientities ito
iMauritius iby iassessing ithe irole iof ithe imajor iactors—the iexecutive,
ilegislative, ijudicial iand iquasi-judicial iauthorities, ithe itax iauthorities, iand ithe
irevenue iofficers—between i1983 iand iApril i2017.

Bilateral iDouble iTaxation iAvoidance iAgreements i(DTAAs) iwith iparticular

ireference ito iIndia's inetwork iof iDTAAs iare ianalysed ihere ito iassess inational
ibenefits ifrom iDTAAs iand imake isuggestions ifor ifuture ipolicy idirections ifor
iIndia's iDTAAs. iThough iDTAAs iare ia itool iof itax icoordination iused iby
inations ito iapportion itax ibases iin ithe iglobal ifiscal icommons, ithere iare
ipotential icosts ifrom iDTAAs iif itoo imany itaxing irights iare iceded ito ia
ipartner icountry iand ialso isince iDTAAs ican ifacilitate itax iavoidance iand
ievasion iSo ithe ipaper iattempts ito imake ia icontribution ithrough ithe
idevelopment iof ia itool ifor ithe ieconomic iassessment iof ithe iimpact iand
ibenefits, iif iany, iof iDTAAs. iThe ipaper ialso icontains ian ioverview iof ikey
ifeatures iof iIndia's iDTAAs ifilling ia icurrent iinformation igap. iBased ion ithe
ianalysis, isuggestions iare imade ifor ifuture ipolicy iin iIndia iinvolving iDTAAs.

In ithe icurrent iera iof icross i-border itransactions iacross ithe iworld, idue ito
iunique igrowth iin iinternational itrade iand icommerce iand iincreasing
iinteraction iamong ithe inations, iresidents iof ione icountry iextend itheir isphere
iof ibusiness ioperations ito iother icountries iwhere iincome iis iearned. iOne iof
ithe imost isignificant iresults iof iglobalization iis ithe inoticeable iimpact iof ione
icountry’s idomestic itax ipolicies ion ithe ieconomy iof ianother icountry. i

This ihas iled ito ithe ineed ifor iincessantly iassessing ithe itax iregimes iof
ivarious icountries iand ibringing iabout iindispensable ireforms. iInternational
idouble itaxation ihas iadverse ieffects ion ithe itrade iand iservices iand ion
imovement iof icapital iand ipeople. iTaxation iof ithe isame iincome iby itwo ior
imore icountries iwould iconstitute ia iprohibitive iburden ion ithe itax-payer.

iIn iview iof ithe iabove idiscussion, ithe iarticle iattempts ito ievaluate ivarious
ifacets iof ibilateral iDouble iTaxation iAvoidance iAgreements i(DTAAs) iwith
iparticular ireference ito iIndia's inetwork iof iDTAAs ias ia itool iof itax
icoordination iused iby inations ito idistribute irights ito itax idifferent ibases iin
ithe iglobal ifiscal icommons7. i

More iprecisely, ian iattempt ihas ibeen imade, iin ithis iarticle, ito ianalyze iand
iprovide ia ibrief iaccount iof ithe ivarious iinsights iin irespect iof idouble
itaxation iavoidance iagreements iwith iIndia. iBy imeans iof iDouble iTaxation
iAvoidance iAgreements, ieach icountry iaccommodates ithe iclaims iof iother
inations iwithin itheir ifiscal iarena ito idevelop iinternational itrade iand
iinvestments iwith iminimal ibarriers. iHowever, ithe iinternational itax iregime
ihas ito ibe irestructured iconstantly iso ias ito irespond ito ithe icurrent ichallenges
iand idrawbacks.
CHAPTER I2: IIMPORTANCE IOF IDTAA
7
iBird iand iMintz i(2003) iuse ithe iterm ifiscal iexternalities ifor iexploitation iof ia icommons iby ia
icountry iwhich icauses iit ito ishrink, ias imobile ifactors imove iout. iSee ialso iAsian iDevelopment
iBank iInstitute i(2001).
In ithe icurrent iera iof icross i-border itransactions iacross ithe iworld, idue ito
iunique igrowth iin iinternational itrade iand icommerce iand iincreasing
iinteraction iamong ithe inations, iresidents iof ione icountry iextend itheir isphere
iof ibusiness ioperations ito iother icountries iwhere iincome iis iearned. iOne iof
ithe imost isignificant iresults iof iglobalization iis ithe inoticeable iimpact iof ione
icountry’s idomestic itax ipolicies ion ithe ieconomy iof ianother icountry. i
This ihas iled ito ithe ineed ifor iincessantly iassessing ithe itax iregimes iof
ivarious icountries iand ibringing iabout iindispensable ireforms. iTherefore, ithe
iconsequence iof itaxation iis ione iof ithe iimportant iconsiderations ifor iany
itrade iand iinvestment idecision iin iany iother icountries. iFiscal ijurisdiction iis
ioften ithe imost iaggressively iprotected ijurisdiction iin iIndia. i
Consequently, ieven iin itimes iwhen ieconomies iare igoing iglobal i& iborders
ivanishing, ileading ito iliquid imovement iof igoods, iservices iand icapital,
idouble itaxation iis istill ione iof ithe imajor iobstacles ito ithe idevelopment iof
iinter-country ieconomic irelations. i
India iare ioften iforced ito inegotiate iand iaccommodate ithe iclaims iof iother
inations iwithin itheir iheavily idefended ifiscal ijurisdiction iby ithe imeans iof
idouble itaxation iavoidance iagreements, iin iorder ito ibring idown ithe ibarriers
ito iglobal itrade.8
Where ia itaxpayer iis iresident iin ione icountry ibut ihas ia isource iof iincome
isituated iin ianother icountry, iit igives irise ito ipossible idouble itaxation. iThis
iarises ifrom itwo ibasic irules ithat ienable ithe icountry iof iresidence ias iwell ias
ithe icountry iwhere ithe isource iof iincome iexists ito iimpose itax, inamely, i(i)
isource irule iand i(ii) ithe iresidence irule. i
8
iConsumption itax iexamples iof iinstitutions iwhereby icountries ihave iceded iwhat iwas iconsidered
ipart iof isovereign ifiscal ispace iinclude ithe iWorld iTrade iOrganization iimpact ion itariffs i– iand
ieven isome idomestic iconsumption itaxes ito iensure inon-discrimination; imembership iin ifree itrade
iareas iand icustoms iunions; iand ithe iEuropean iUnion’s iabolition iin i1993 iof i“fiscal ifrontiers” iand
itax irelated ichecks iat inational iborders.
The isource irule iholds ithat iincome iis ito ibe itaxed iin ithe icountry iin iwhich
iit ioriginates iirrespective iof iwhether ithe iincome iaccrues ito ia iresident ior ia
inonresident iwhereas ithe iresidence irule istipulates ithat ithe ipower ito itax
ishould irest iwith ithe icountry iin iwhich ithe itaxpayer iresides. i
If iboth irules iapply isimultaneously ito ia ibusiness ientity iand iit iwere ito
isuffer itax iat iboth iends, ithe icost iof ioperating iin ian iinternational iscale
iwould ibecome iprohibitive iand ideter ithe iprocess iof iglobalization. iIt iis ifrom
ithis ipoint iof iview ithat iDouble itaxation iavoidance iAgreements i(DTAA)
ibecome ivery isignificant.
The iglobal ifiscal icommons iconsists iof ipotentially itaxable ientities ior
itransactions iwith iat ileast isome icharacteristic iinvolving imore ithan ione
ijurisdiction i– ibe iit ipurchase, isale, itrans-shipment, isource, iresidence ior
iownership. i
According ito iBird iand iMintz i(2003), iacceptable icharacteristics iare ithose
ithat ipermit ijurisdictions ito iclaim iwhat ithey iterm i“economic iallegiance” iof
ian ieconomic iactivity. iCommons ientities iinclude imultinational ibusiness
ientities, i“footloose” iindustries, icross-border iportfolio iinvestors, iinvestors
imaking iforeign idirect iinvestments i(FDI), iand imobile iskilled iworkers ior
iprofessionals iin iscarce iglobal isupply. iBesides ientities iengaged iin ilegitimate
iactivity, ithere iare ialso ithose iengaged iin iillicit iactivities iincluding ithe idrug
itrade, ihuman iand iorgan itrafficking iand iterrorism.9
Though ithe iloose i"existing itax iconsensus" iis idescribed ibelow, iin ipoint iof
ifact ithere iis ino iuniversally iaccepted iapportionment iof iproperty irights iof
ithe ifiscal icommons ibetween icountries. iIn ithe iabsence iof icoordination
iamong icountries ithis ican iresult iin ieither idouble itaxation ior ino itaxation iof
9
iBird iand iMintz i(2003) iuse ithe iterm ifiscal iexternalities ifor iexploitation iof ia icommons iby ia
icountry iwhich icauses iit ito ishrink, ias imobile ifactors imove iout. iSee ialso iAsian iDevelopment
iBank iInstitute i(2001).
icross-border iincome iand icapital iflows. iIn iparticular, idouble itaxation,
ireduces ireturns iand iinhibits icross-border iactivity. i
So iboth inon-taxation iand idouble itaxation iultimately ireduce ifiscal irevenue
iof iconcerned icountries. iRapid iexpansion iof ithe iglobal ifiscal icommons idue
ito iincreasingly imobile ifiscal ibases iresulting ifrom icross-border icapital iand
iskilled ilabour iflows, iand inew itypes iof icross-border itransactions, imakes ithis
ian iimportant ifiscal iissue.
Cooperation iin itax imatters ibetween icountries iis ihampered iby ia ifundamental
iconflict iarising ifrom itheir ineed ito icompete ito iattract icommons ientities ito
itheir ijurisdictions ito ireap inon-tax ibenefits. iIt iis, itherefore, ivital ifor
icountries ito ihave iunilateral itax ipolicies ithat iprotect itheir isovereign ifiscal
ispace iand isafeguard itheir icommons iexploitation iability iif ibilateral ior
imultilateral inegotiations ibreak idown. i
“With ibusiness ioperations iintegrated iin ivarious iways iacross iborders, ithe
iuntangling iof iprofits iand itheir iassignment ito idifferent isource ijurisdictions
ibecomes ian iartificial iexercise, iand irule iof ithumb imeasures ioften ihave ito
ibe iadopted.
Furthermore, ithis ipractice ilends iitself ito iprofit ishifting iby ithe itaxpayer ito
ilower itax ijurisdictions. iMost ifundamentally, irules iare ineeded ito iassign
iequitable ishares ito ithe isource icountries iin ithe iincome iaccruing ito
imultinational icorporations. iCommon isource irules iemploying iunitary
icombination iand iuniform iformula iapportionment iare ineeded ito iavoid
iarbitrary iand ipredatory ipractices ifor idetermining isource.” i
Tax icooperation ibetween icountries itends ito ifollow ithe ipath icarved iout iby
iearly imovers, iparticularly iOECD imember icountries, iwith iother icountries
ifollowing itheir ilead iespecially iwhere iOECD ipublications iexist, isuch ias
itheir iModel iTax iConvention. iThese iprinciples ioften iencompass ireciprocal
iconcessions.
Examples iof icooperation ito icoordinate irights ito icommons iexploitation
iinclude ibilateral idouble itax iavoidance itreaties i(DTAAs) iand iguidelines
iproduced iby ithe iOECD‟s iCommittee ion iFiscal iAffairs, iespecially iits
iHarmful iTax iInitiative, iand iInternational iAccounting iStandards. i
Therefore, iInternational idouble itaxation ihas iadverse ieffects ion ithe itrade iand
iservices iand ion imovement iof icapital iand ipeople. iTaxation iof ithe isame
iincome iby itwo ior imore icountries iwould iconstitute ia iprohibitive iburden ion
ithe itax-payer. iThe idomestic ilaws iof imost icountries, iincluding iIndia,
imitigate ithis idifficulty iby iaffording iunilateral irelief iin irespect iof isuch
idoubly itaxed iincome i(Section i91 iof ithe iIncome iTax iAct). i
But ias ithis iis inot ia isatisfactory isolution iin iview iof ithe idivergence iin ithe
irules ifor idetermining isources iof iincome iin ivarious icountries, ithe itax
itreaties itry ito iremove itax iobstacles ithat iinhibit itrade iand iservices iand
imovement iof icapital iand ipersons ibetween ithe icountries iconcerned. iIt ihelps
iin iimproving ithe igeneral iinvestment iclimate.
The idouble itax itreaties i(also icalled iDouble iTaxation iAvoidance iAgreements
ior i“DTAA”) iare inegotiated iunder ipublic iinternational ilaw iand igoverned iby
ithe iprinciples ilaid idown iunder ithe iVienna iConvention ion ithe iLaw iof
iTreaties. i
It iis iin ithe iinterest iof iall icountries ito iensure ithat iundue itax iburden iis inot
icast ion ipersons iearning iincome iby itaxing ithem itwice, ionce iin ithe icountry
iof iresidence iand iagain iin ithe icountry iwhere ithe iincome iis iderived. iAt ithe
isame itime isufficient iprecautions iare ialso ineeded ito iguard iagainst itax
ievasion iand ito ifacilitate itax irecoveries.
In iview iof ithe iabove idiscussion, ithe iarticle iattempts ito ievaluate ivarious
ifacets iof ibilateral iDouble iTaxation iAvoidance iAgreements i(DTAAs) iwith
iparticular ireference ito iIndia's inetwork iof iDTAAs ias ia itool iof itax
icoordination iused iby inations ito idistribute irights ito itax idifferent ibases iin
ithe iglobal ifiscal icommons.
More iprecisely, ian iattempt ihas ibeen imade, iin ithis iarticle, ito ianalyze iand
iprovide ia ibrief iaccount iof ithe ivarious iinsights iin irespect iof idouble
itaxation iavoidance iagreements iwith iIndia.
Under ithis iDouble iTaxation iAvoidance iAgreement iMauritian-based
icompanies iselling ishares iof iIndian icompanies iare ieffectively iexempt ifrom
icapital igains itax. i
This iencouraged itax iavoiders ito iroute iinvestments iinto iIndia ithrough
iMauritius ibased ishell icompanies, ileading ito ilots iof itax irevenue iforegone.
iOfficial idata istates ithat iover ithe i15 iyear iperiod ifrom i2000-2015, ithe
ihighest iamount i(34%) iof itotal iForeign iDirect iInvestment iinto iIndia iwas
ifrom iMauritius, ivalued iat iUS$ i93.6 ibillion.10
This itreaty ihas inow ibeen iamended iafter iyears iof inegotiations ibetween ithe
itwo icountries. iFrom i2017, iMauritian iinvestors iwill ibe itaxed ion icapital
igains iat ihalf ithe iIndian irate i(meaning i7.5%) itill i2019, iafter iwhich ithe ifull
irate iwill iapply. i
This ibasically iremoves ithe iincentive ifor itax iavoiders ito iroute ifunds ithrough
iMauritius ias ithey iwill ibe itaxed ianyway. iIn ithat isense iit iplugs ia imajor
iloophole. i
It iis ialso ione iof ithe iremedies isought iin imy iessay iand iit iis ia istroke iof
igood ifortune ithat iaction ion ithe iissue ihas ibeen itaken iso iquickly.

10
iRajendra iNeyal, iPartner, iErnst i& iYoung, iIndia- iMauritius- i5 iBig iConsequences. iMay i23,
i2016, i iTaxsutra.com/experts/column? iSid=628
The iDTAAs iare ithe itreaties ibetween itwo isovereign istates ior ieven iamong
ithe itwo icountries iwhere iboth iof ithem ior iany ione iof ithem iare inot
i―sovereign‖ istates iin iactual ilegal isense. iChapter iIX iof ithe iIncome iTax
iAct, i1961 icontains ispecial iprovisions ito iconfer irelief ifrom idouble itaxation
ito itaxpayers. i

India ihas icomprehensive iDouble iTaxation iAvoidance iAgreements i(DTAA)

i
iwith i79 icountries. These iagreements iprovides ifor irelief ifrom ithe idouble
itaxation iin irespect iof iincomes iby iproviding iexemption iand ialso iby
iproviding icredits ifor itaxes ipaid iin ione iof ithe icountries. i

These itreaties iare ibased ion ithe igeneral iprinciples ilaid idown iin ithe imodel
idraft iof ithe iOrganization ifor iEconomic iCooperation iand iDevelopment
i(OECD) iwith isuitable imodifications ias iagreed ito iby ithe iother icontracting
icountries. iIn icase iof icountries iwith iwhich iIndia ihas idouble itaxation
iavoidance iagreements, ithe itax irates iare idetermined iby isuch iagreements. i

Different imodes iof iavoiding/restriction idouble itaxation ihave ibeen ideveloped

ibecause iof idifferent itypes iof iincome. iCertain iincomes, ifor iexample, iincome
iby iway iof iinterest imay ibe itaxed iin iboth istates. iWhile ithe igeneral irule iis
ithat ithe istate iof iwhich ithe iassessee iis ia iresident ihas ithe iright ito ilevy itax,
ithe isource iState iwould ialso ihave ithe iright ito ilevy itax ibut iat ia imaximum
ipermissible irate. i

A iDouble iTaxation iAvoidance iAgreement imay ieffectively iprovide ifor

iavoidance iof itax ior ifor irelief iagainst idouble itaxation iby iproviding ifor
igrant iof icredit iby ithe istate iof iresidence iof ithe itax ipaid iin ithe isource
istate. iTax iAvoidance iAgreements imay ibe iconfined ito ia iparticular itype iof
iincome ifor iexample, iaviation iincome ior imay ibe igeneral iand icover
iseveral/all itypes iof iincome.11

In ievery icase iof icollaboration iagreement isince ithe itransactions ibetween ithe
iparties iinvolve idealings iin imore ithan ione icountry, ithe itax ilaws iof iboth
ithe icountries ihave ito ibe itaken iinto iaccount ito idetermine ithe iimpact iof ithe
ilevy iof itax iin ione icountry ion ithe itax ipayable iin ithe iother icountry iin
irespect iof ithe iincome, iprofits ior igains. i

The ischeme iof idouble itaxation irelief iis imost isignificant iin ithe icontext iof
iproper itax iplanning iin irelation ito icollaboration iarrangements iand
iagreements ias ithe ilack iof iproper icare ito isecure ithat ithe isame iincome idoes
inot iattract ithe iburden iof itax iin imore ithan ione icountry imight iplace ithe
itaxpayers iat iconsiderable idisadvantage. i

Further, ithe itax ilaws iin imost iof ithe ideveloping icountries ifrequently
iundergo isubstantial ichanges iand iit ibecomes iextremely idifficult ifor ithe
itaxpayers ito imodify ithe iterms iof ithe icollaboration iagreements ito ibring ithe
isame iin iaccordance iwith ithe ichanges iin ithe ifiscal ilaws. i

The ischeme iof iretrospective iamendments ibeing ione iof ithe iinevitable
iphenomena ifaced iby itaxpayers, ithe itax iburden iarising ifrom iretrospective
iamendments ito ithe ilaw iplaces ithe iassessees iin ieither icountry iat
iconsiderable idisadvantage ibesides imaking iit iimpracticable ifor ithem ito
iretrieve ithe isituation.

11

ihttp://en.wikipedia.org/wiki/Double_taxation#Double_taxation_avoidance_agreement_signed_by_India,
th i
ivisited ion i29 July, i2011
The iconstitution iof iIndia ihas iconferred ithe isovereign ipower ito ilevy itaxes
iand ito ienforce icollection iand irecovery ithereof ion ithe iState iunder iArticle
i265 iby imandatorily iproviding ithat ino itax ishall ibe ilevied ior icollected
iexcept iby iauthority iof ilaw. i

Accordingly, ithe iUnion iof iIndia iis iempowered ito ienter iinto itreaties iand
iagreements iwith iforeign icountries iand iherein ifalls ithe iscope iof ithe ipower
iof ithe iUnion iof iIndia ito ienter iinto iDouble iTaxation iAvoidance
iAgreements ibetween iIndia iand idifferent iforeign icountries.

In ithe icontext iof ithe itax iliability iof ithe iforeign icollaborators, iit iis iessential
ito iascertain itheir iresidential istatus iin iorder ithat ithe iscope iof iincome
ichargeable ito itax icould ibe iproperly idetermined. iForeign icollaborators iare
igenerally icompanies iincorporated ioutside iIndia iand, itherefore, ithey icould
ibe iregarded ias inon-resident iwithin ithe imeaning iof isection i6(3) isince, iin
ithe icase iof iforeign icompanies, ithe iwhole iof ithe icontrol iand imanagement
iof ithe iaffairs iof isuch ia icompany iwould inot ibe isituated iin iIndia, ithe iplace
iof icarrying ion ithe ibusiness iand ihaving itransactions iand ioperations ibeing
iimmaterial ifor ithe ipurpose.

The
iconcept iof idouble itaxation ihas ibeen ithe isubject imatter iengaging ithe
iattention iof ithe icourts iin iIndia iand iabroad ifrom itime ito itime.

i
The iSupreme iCourt iin iLaxmipat iSinghnia iv. iCIT has imade iit iclear i– i―it
iis ia ibasic irule iof ithe ilaw iof itaxation ithat iunless iotherwise iexpressly
iprovided iincome icannot ibe itaxed itwice. iAgain iit iis inot iopen ito ithe
iIncome iTax iOfficer, iif ithe iincome ihas iaccrued ito ithe iassessee iand iis
iliable ito ibe iincluded iin ithe itotal iincome iof ia iparticular iyear, ito iignore ithe
iaccrual iand ithereafter ito itax iit ias ithe iincome iof ianother iyear ion ithe ibasis
iof ireceipt.

This iprinciple ienunciated iby ithe iSupreme iCourt ihas ialso ibeen igiven
istatutory irecognition iin ithe iIncome iTax iAct ithrough iExplanation i2 ito
iSection i5 iof ithe iIncome iTax iAct. i

A iseparate ibranch iin ithe ilaw iof itaxation ihas ibeen ideveloped iin iIndia iafter
ia inumber iof iDTAAs i(Double iTaxation iAvoidance iAgreements) ientered iinto
iby iIndia iwith iseveral iforeign icountries. iThe ireason ifor ithese iAgreements
icoming iinto iplay iwas iin icases iwhere ia iperson ihaving isource iof iincome iin
iIndia iwas ithe iresident iof ianother icountry. iFor ithe ipurpose iof iDTAA, ithe
iincome iis iconsidered ias isourced iin ia icountry iif ithe itax-payer iis ibased
ithere. i

Both ithe icountries iwould ilike ito itax ithe iincome iof ia iperson iarising ifrom
ithe isame itransaction, ibecause ithe idesire iof ia icountry ifor itaxation ican
inever ibe isatisfied. iThat‘s iwhere ithe iDTAA icomes iinto iplay. iIt imay ivest
iright ito itax ia iparticular itype iof iincome iin ione iof ithe icontesting iStates. iA
iright ito itax ia iparticular iincome iunder ithe iDTAA imay idepend ion icertain
iconditions. i

For iexample, ibusiness iincome iis igenerally itaxable iin ithe isource istate iif ithe
ienterprise ihas ia ipermanent iestablishment itherein. i(By isource istate iis imeant
ithe istate iwhere ithe iincome iarises ior ithe istate ithe iresidents iof iwhich imake
ipayment ito ithe iresidents iof ithe iother icontracting istate).
Shell icompanies iare iexempt ifrom ithe ihalf irate iduring ithe itwo iyear
itransition iperiod. iIf ia iMauritian iresident icompany ihas ispent iless ithan i1.5
imillion iMauritian iRupees ion ioperations iin ithe ipreceding iyear, iit iwill ibe
ideemed ia ishell icompany. iThis iis ia irigorous idefinition iand iwill iinclude
ialmost iall ishell icompanies.
The igovernment ihas iannounced ithat iit iwill inow irework i(on isimilar ilines)
iits iDouble iTaxation iAvoidance iAgreement iwith iSingapore, ianother imajor
itax ihaven iand ithe isecond ibiggest isource iof iForeign iDirect iInvestment iafter
iMauritius.

A imajor iloophole ihas ibeen iplugged, iso ithe iamount iof itax irevenue
ilost ithrough ithe i‘Mauritius iroute’ ishould idecrease.
This iwill iprovide imore iresources ito ithe igovernment ito icarry iout
idevelopmental iactivities isuch ias ibuilding imore ischools.
Other igovernments iaround ithe iworld ican itake iinspiration/warning. iA
ihistoric ilitigation iis iunfolding iin iKenya, iwhere ithe igovernment iis ibeing
itaken ito icourt ifor iits itax-abuse-enabling iDouble iTaxation iAvoidance
iAgreement iwith…Mauritius.
It’s ialso ia ivictory ifor ithe i‘source-based’ iprinciple iof itaxation, iwhich
istates ithat itax ishould ibe ilevied iwhere ithe imoney iis imade, ias iopposed ito
iwhere ithe icompany iis ibased i(which iis iwhat ithe i‘residence-based’ iprinciple
istates). i
The iresidence-based iprinciple iworks ito ithe iadvantage iof irich
icountries, iwhere imost ilarge icorporations iare iheadquartered, ito ideprive ipoor
icountries iof itheir ifair ishare iof itaxes.
It iseems ithat iother isecurities i– imutual ifunds, iexchange-traded
iderivatives iand iconvertible ior inon-convertible idebentures, ito iname ia ifew i–
iwill ibe iexempt. iThus iother ioptions ifor iinvesting iillicit icash iremain. iAll
ieyes iwill inow ibe ion ithe icontents iof ithe ilong-pending iGeneral iAnti-
Avoidance iRules.
Its iapplication iis iprospective, inot iretrospective i– imeaning ifarewell ito
ithe imoney ilost iso ifar.
Mauritius i(and iSingapore) iare ithe ibiggies, ibut iby ino imeans ithe ionly
iones. iAvoiders iwill ilikely ishift ito iother ihavens, isuch ias ithe iNetherlands ior
iBritish iVirgin iIslands.

Despite ithese idrawbacks, ithis iis ia ibig istep iforward iand icertainly ia iboost
ito ithe iglobal ieffort ion itax ihavens. iAn iintergovernmental itax icommission
iin ithe iUN iis ineeded inow imore ithan iever ito icatalyse ithese iindividual
iefforts iand ienable iglobally icoordinated iand iconsistent iaction iagainst itax
ihavens.
After iIndia irenegotiated iits idouble itax iavoidance iagreement iwith iMauritius
iin i2016, ithere ihave ibeen isome ipositive idevelopments. iFirst, ia iquick irecap:
ithe iessence iof ithe i2016 irenegotiation iwas ito iplug ithe ikey iloophole ithat
imade iMauritius ia ipreferred iinvestment iroute iinto iIndia. iThe iloophole iwas
i“residence ibased itaxation iof icapital igains iarising ifrom ialienation iof
ishares.” i
Shorn iof ijargon, iwhat ithat imeans iis ithat iif ia iMauritius ibased icompany
iinvested iin ishares iof ia icompany iresident iin iIndia, iand iit isold ithose ishares
ilater iand imade ia iprofit, ithen iit iwould ihave ito ipay icapital igains itax iin
iMauritius. iConveniently ienough, iMauritius idoesn’t ilevy iany icapital igains
itax! iThis iloophole iwas iplugged iin i2016 iand ihenceforth ithere iwould ibe
isource ibased itaxation iof icapital igains. iMeaning ithat iif iMauritius ibased
icompanies isold ishares iin ia icompany iresident iin iIndia, ithe icapital igains
itax iwould ibe icollected iby iIndia.12
From i2017 ito i2018, ithere iwas ia iprecipitous idrop iin iForeign iDirect
iInvestment iequity iinflows ifrom iMauritius. iIn i2017, iMauritius iaccounted ifor
ia istaggering i44% iof itotal iForeign iDirect iInvestment iequity iinflows iinto
iIndia, ivalued iat iUSD i9.8 ibillion. iA iyear ilater, ithis inumber iplummeted ito
iUSD i3 ibillion, iaccounting ifor ionly i15% iof iinflows. iIn iother iwords,
iinflows idropped iby ithree itimes iin ia isingle iyear.
This iraises ianother iquestion: iwhere idid ithese ifunds igo? i
Some iof ithese imay ihave igone ito iSingapore. iInflows ifrom iSingapore iduring
ithe isame iperiod idoubled. iIn i2017, iSingapore iwas ithe isecond ibiggest
isource iof iinflows, iaccounting ifor i20% ivalued iat iUSD i4.5 ibillion. i
A iyear ilater ithis inumber idoubled ito iUSD i8 ibillion, iwhich iin i2018 iwas
i40% iof iForeign iDirect iInvestment iequity iinflows. iIn i2019, iSingapore
iremains ithe ilargest isource iby ifar.
This iis isomewhat ipuzzling ibecause iin i2016, iIndia ialso irenegotiated iits
idouble itax iavoidance iagreement iwith iSingapore ito iplug ithe iexact isame
iloopholes ias iexisted iwith iMauritius, iwhich iwas iresidence ibased itaxation iof
icapital igains iarising ifrom iselling ishares. i
Perhaps iSingapore’s iother istrengths ias ia ifinancial ihub isuch ias ithe iability
ifor icompanies ito iraise ifunds iat icomparatively ilower irates iand ian ieffective
idispute iresolution isystem icontinue ito imake iit ia ipreferred iplace ifor iIndians
ito isetup icompanies.

12
iVivek iKathpalia, iIndia-Singapore iTax iTreaty: iAnomalies ito ibe idealt iwith, i iOpinion, iBusiness
iTimes, i19th iMay i206, ihttp://www.nishithdesai.com/fileadmin/user_upload/pdfs/Research
%20Articles/India-S_pore_tax_treaty_anomalies_need_to_be_dealt_with.pdf
Other ijurisdictions ithat ialso isaw imajor iincreases iin isending iForeign iDirect
iInvestment ito iIndia iare iJapan i(whose ishare itripled ifrom i3% iin i2017 ito
i9% iin i2018) iand ithe iUK i(whose ishare iquadrupled ifrom i1% ito i4%). i
Interestingly, ithe iNetherlands, iwhich iis ianother ibig isource iand ia inot-so-
secret itax ihaven, isaw iits ishare idecline ifrom i8.6% ito i7.7%. iThis iis idespite
ithe iDouble iTaxation iAvoidance iAgreement iwith iNetherlands ileft iuntouched.
Coming iback ito ithe imain istory i– ithe itremendous ishift iof icapital iaway
ifrom iMauritius idefinitively iproves ithat ithe itax iexemptions iit ioffered, iand
ithe iease iof iestablishing ishell icompanies i(the itwo ikey ielements iof ithe
iDouble iTaxation iAvoidance iAgreement iwith iIndia ithat iwere iamended iin
i2016) iwere ithe imain ireasons iwhy iit iwas ia icapital iexporter. i

With ithese ibenefits igone, iMauritius’ iutility ideclined iconsiderably. iIndia’s

ieffort iin irenegotiating ithe itreaty ito iclose ioff iat ileast ione iroute ifor itax
iavoidance, iwhich iwas ibacked iby ipolitical iwill iat ithe ihighest ilevels, iseem
ito ihave ipaid ioff.

DRAWBACKS iOF iDTAA

The iAuthority iof iAdvanced iRuling i(AAR), iNew iDelhi idismissed ithe
ipetition iin ithe icase iof iTiger iGlobal iInternational iII iHoldings, iMauritius i&
iOrs1 i(Petitioner), ifor ithe itax iexemption ion ithe icapital igains, iarouse idue
ito isale iof iits iMauritius ishares iof iFlipkart ito iWalmart ion ithe iground iof
ithe iarrangements idone ion ibehalf iof ithe ipetitioner ijust ito iavoid itax iunder
ithe iDouble iTax iAvoidance iAgreement(DTAA).
Tiger iGlobal iManagement iLLC iis ia iU.S ibased iprivate iequity ifirm
iincorporated iin iMauritius. iThe icompany iwas iincorporated iwith ithe iprimary
iobjective iof iundertaking iinvestment iactivities iwith ithe iintention iof iearning
ilong iterm icapital iappreciation iand iinvestment. iThe iapplicant iinvested iin
ishares iof iFlipkart iPrivate iLimited i(Singapore) i13between ithe iperiod iof
iOctober i2011 ito iApril i2015. iIn i2018, ithe icompany isold iits i16,243,010
ishares iof iFlipkart i(Singapore) ito ithe iLuxembourg ientity. iSo, iin ithe imatter
iof ithe iaforesaid itransfer iof ishares, ithe ipetitioners, iunder iSection i197 iof
ithe iIncome iTax, i1961("IT iAct"), iapplied ifor ithe inil iwithholding icertificate.
iThe irequest iwas irejected iby ithe itax iauthority ion ithe iground ithat ithe
icontrol iand iactual iownership iof ithe icompany idoes inot ilie iwith ithe
idirectors iin iMauritius.
Therefore, ithe ipresent iapplication iwas ifiled iby ithe icompany ibefore ithe
iAAR iunder isection i245Q i(1) iof ithe iIT iAct ito idecide ias ito iwhether ithe
icapital igain idue ito ithe itransfer iof iFlipkart ishares iwill ibe itaxable iin iIndia
ior inot.
Arguments iby itax iauthorities
Now, ias iper iSection i9 iof ithe iIT iAct, ithe icapital igain iarouse idue ito isuch
itransfer iof ishares iis iliable ito ibe itaxed iin iIndia. iIn ithis iregard, iit iis
icrucial ito inote ithat ias iper isection i90 iof ithe iIT iAct iIndian igovernment
ican isign iDTAA iwith iother icountries ifor iexemption iof isuch itypes iof itaxes.
iSo iaccordingly, iIndia iand iMauritius isigned ia iDTAA idue ito iwhich icapital
igain iarose ias ia iresult iof ithe itransfer iof ishares iof ian iIndian icompany iin
iMauritius iwill iliable ito ibe itaxed ionly iin iMauritius iand inot iin iIndia.

Tiger i iGlobal, iafter icalculating iall iaftermath, iapplied ifor ithe iexemption iof
itax ion ithe icapital igains iunder iArticle i13(4) iof iIndia-Mauritius iDTAA ias

13
iK.R iSekhar i& iPriya iNarayan, iDelloite iHaskins i& iSells, iFinancial iExpress: iIndia- iMauritius
itax itreaty iamendment: iWhat icould ibe ithe iimpact ion iKey iStakeholders?,
ihttp://www.financialexpress.com/article/fe-columnist/india-mauritius-tax-treaty-amendment-what-could-
be-the-impact-on-key-stakeholders/256025/
ithe iFlipkart i(Singapore) iderives ithe ivalue iof iits ishares ifrom ithe iassets iin
iIndia. iFirstly, itax iauthorities icontended ithat ithe icompany iis inot ientitled ito
ibenefit iunder ithe iDTAA ias ithe ipetitioner itransferred ithe ishares iof ithe
iSingapore icompany iand inot iof ian iIndian icompany iand ithe iobjective iof
isuch itreaty iwas ito ideliver ibenefit ito iIndian icompanies ionly.14 i
Secondly, iit iobserved ithat ithe iactual iownership iof ithe icompany iis inot iin
ithe ihands iof iMauritius ibut iwith ithe iowner isituated iin ithe iUSA. i
Thirdly, irelying ion ithe iMinutes iof ithe iMeetings, itax iauthorities iobserved
ithat iall imajor idecisions iof ithe iMauritius icompany iwere itaken iin ithe
ipresence iof inon-resident iUSA idirectors iand ithe iMauritius idirectors iwere
imere ispectators. i
Fourthly, iit iwas ialso iobserved ithat ithe ifinancial icontrol iof ithe icompany
iwas inot iwith ithe iMauritius idirectors ibut iwith ithe iUSA ibased idirectors iof
ithe icompany ias ithe iboard iof idirectors iwas igiven ilimited iauthority itowards
ithe ibank iaccounts.
Submission iby ithe iPetitioner
The ipetitioner isubmitted ithat ithe itransaction iwas inot iprima ifacie ifound ito
ibe imade ifor ithe iavoidance iof itax. iIt iis inot ithe iholding istructure iof ithe
icompany ibut ithat iparticular itransaction idefines iwhether ithere iwas iany
iintention ito iavoid itax ior inot, iwhich ithe iauthorities ihave ifailed ito iprove. iIt
iwas ialso isubmitted ithat iall ithe idecision imaking iand iboard imeetings iwere
idone iand iconducted ion ibehalf iof ithe iMauritius icompany iand iits idirectors.
iIt iwas ifurther iargued ithat ilimited iaccess ito ithe icompany's ibank iaccounts
idoes inot ishow ithat ithe iMauritius ibased idirector ihad ino ifinancial icontrol
iover ithe icompany.
14
iishith iDesai, iTax iTreaty: iRealigning iMauritius,May i12th i2016,
ihttp://www.nishithdesai.com/fileadmin/user_upload/pdfs/Research
%20Articles/Tax_treaty__Realigning_Mauritius_-_ET_Blogs.pdf
AAR iRuling
AAR iruled iin ithe ifavour iof itax iauthorities iand irejected ithe icontentions iby
ithe ipetitioner. iIt iwas idecided ithat ithe iarrangement imade iby iTiger iGlobal
iis ito iavoid itax. iFollowing ireasons iwere istated iby ithe iAAR ifor iits
iconclusion-
• Tax iavoidance ishould ibe iscrutinized ithrough ithe iarrangement iin ithe
ilarger icontext, inot ionly ithe itransfer iof ishares ibut ithe iwhole
iarrangement iconsidering ibuying iof ishares iwill ialso ibe itaken iinto
iconsideration.
• AAR iheld ithat ithe i'head iand ibrain' iof ithe icompany iis inot iin
iMauritius ibut iwith iMr. iCharles iP. iColeman, iowner iof ithe ientire
istructure. iThe isame iwas ibacked iby ithe ifact ithat iMr. iCharles iwas ia
isignatory ito ithe ibank iaccounts iof ithe ipetitioner icompany iand ithe
iMauritius idirectors iwere igiven ia ilimited icontrol ion isuch ibank
iaccounts.
• The icontrol iand iholding istructure iof ithe ipetitioner iled iAAR ito
iconclude ithat iTiger iGlobal iis ijust ia i'see-through' ientity iand iwas iset
iup ito igain ithe ibenefits iof ithe iIndia- iMauritius itreaty.
• Further, iAAR iobserved ithat ithe ipetitioner ihas inot imade iany
iinvestment iother ithan ithe iinvestment iin iFlipkart iwhich iindicated ithat
ithe ipetitioner iintended ito iavail ithe ibenefit iof ithe itreaty.
Impact ion ithe iEconomy
In ithe ipresent isituation, iwhere ithere iis ieconomic iinstability iin ithe imarket,
ithis iis ia ihuge isetback ifor ithe iinvestors, iwhere ievery icountry iis ilooking ito
icreate ithe ifriendly imarket ifor ithe iinvestment iand ithe irulings ilike iAAR
iwill iretreat ithe iinvestors ifrom ithe icountry. i
Firstly, ithe iimpact iof isuch ian iorder iis iexpected ito ibe icolossal. iThe
iinvestors iwere iin ia iframe ithat ithey iare iprotected iunder ithe iblanket irule iof
ithe igrandfathering irule, ii.e. iinvestment ibefore iApril i1st i2017, iwon't ibe
iliable ito itaxes, ibut iafter ithe iamendment iof ithe irules iof ithe iconvention
ibetween ithe igovernment iof ithe irepublic iof iIndia iand ithe igovernment iof
iMauritius ifor ithe iavoidance iof idouble itaxation ithe iexit iplans ihave ibeen
itightened. i
The iimpact iwould ialso ibe iseen iin ithe ilitigation iprocess ias ithere iis ia ilot
iof iuncertainty iabout ithe iexits iof ithe iprivate iequity ifirms iand ithe iDTAA
isigned iby iIndia iwith iMauritius. i
This iis inot ithe ifirst itime iAAR ihad iruled iagainst ithe inormal icourse iof ithe
itreaty. iOn ia icouple iof ioccasions, iit ihas ibeen iheld ithat ithe iinvestors iand
icompanies iare isinking itheir imoney ithrough iMauritius iand iSingapore ito
iprimarily iavail ithe ibenefit iof iDTAA ibetween iIndia i& iMauritius.
Secondly, iafter ithis ijudgment, ithe itax iauthorities iwill ihave ia ibroad iarea ion
iwhich ithey iwill inow ibe iassessing ithe ideals iwhich iwill igive ithem ithe
iimmense ipower ito ifind iloopholes iin itreaties isuch ias iDTAA. iOne isuch
iexample iis ithe i"Principal iPurpose iTest". iThis itest iis iused ito iprevent itreaty
iabuse iby ithe iinvestors iby ireckoning iout ithe iprincipal ipurpose iof ithe
iarrangement idone iby ithe icompanies. i
In ithe icurrent isituation, iAAR ibelieved ithat ithe iprima ifacie iintention iof ithe
iarrangement idone iby iTiger iGlobal iis ito iavoid itax iand irelying ion ithe itest,
ithe icompany iwas idenied iany itax iexemption iunder ithe itreaty ibut isuch itest
iwas inever iincluded iexplicitly iin ithese itreaties iand ithus isignifies ithe
iarbitrariness iof ipower iby ithe iAAR. i
If iAAR iwill iconstrict ithe iscrutiny ion ithe iMauritius ibased ientities ithan iit
iwill icreate ivarious istumbling iblocks iin ithe ifuture iplanning iof ithe
icompanies iand istart-ups iregarding itheir i"exit iplan". i
The iinvestors iwho iwere iin iperception ifor ian ieasy iexit iwithout ipaying ithe
itax ion icapital igains iunder ithe itreaty iwould inow ibe ilooking iat itheir
imanagement istructure, iownership istructure iand ifinancial icontrol ias ithe
isame iparameters ican ibe iapplied ifor iother icompanies itoo. iThe itightening iof
irules iand icriteria ifor iexemption iof itax iunder isuch itreaties iwill imake
iinvestors ilook ifor ialternate iinvestment idestinations iother ithan iIndia iwhich
ican iturn iout ito ibe ia ibacklash iin ithe itimes iwhen ithe icountry iis iabout ito
igo iin ia irecession.
The iAAR iruling ihas icreated ia isense iof iuncertainty iand ipanic iin ithe imind
iof ithe iinvestor, iwho iinvested ithrough ithe iMauritius iroute. iThe iruling ihas
isurfaced ithe iwide iinterpretation iof ithe itreaties isigned iby iIndia i& iMauritius
ifor ithe iavoidance iof ithe itax. i iNow ithe iconcern ifor ithe iinvestors iwill ialso
ibe ito ilook ifor ithe ipossible iownership iand imanagement iaspects iof ian
iarrangement ito iexempt itax iunder ithe itreaty. i
There iis ia ilack iof iclarity ion ithe idirect iand ithe iindirect itransfer iof ishares
iof ithe iassets isituated iin iIndia. iIt iwill ialso ibe iinteresting ito isee ihow ithe
itax iauthorities iexamine ithe iindirect itransfer iof ishares iunder ithe ipurview iof
iIndia-Mauritius itreaty ias ithe istandard iperception iunder ithe itax iregime iwas
ithat iindirect itransfer iof ishares iwas iexempted ifrom icapital igain itax iunder
ithe itreaty iand ialso ivarious ijudicial ipronouncements ihad iheld ithe isame iin
ivarious icases. i
However, iAAR iin ithis iruling ihas iheld ithat ithe iexemption iunder ithe itreaty
iis inot iapplicable ito ithe i"indirect itransfers". iFurther, iAAR ihas isurpassed
ithe iconcept iof igrandfathering irule iand ialso isomewhere ikept iaside ithe
ijudgment ipassed iby ithe iHon'ble iSupreme iCourt iin ithe iVodafone icase
i
where isuch idebatable irulings iof iAAR iwas iset iaside. iIt iwill ibe iinteresting
ito isee ihow ithe itreaty, igrandfathering irule iand iGeneral iAnti- iAvoidance
iRule i iprovisions iwill ibe iinterpreted iwhen iTiger iGlobal iset ioff ifor ihigher
iappeal.

CHAPTER i3: iINDIA iMAURITIUS iDOUBLE iTAXATION iTREATY

An ianalysis iof ithe iIndia-Mauritius iTax itreaty ihas ibeen idone iby ithe iauthor.
iWhy ithe iamendment iidea icame iup, iits iimpacts, iboth ipros iand icons ialong
iwith ihow ia ibalance ican ibe imaintained ihave ibeen idiscussed. iThe iauthor
ihas itried ito iderive iat ia iconclusion ihow ipossible iplans ineed ito ibe imade
ifrom ithe ichanges iproposed iby ithe igovernment.

On i10th iof iMay i2016, iIndia iand iMauritius isigned iprotocol ifor iamending
iConvention ifor iavoidance iof idouble itaxation iand iprevention iof ifiscal
ievasion iwith irespect ito itaxes ion iincome iand icapital igains. iMauritius
iTreaty ihas ibeen iin iexistence isince i1983. iIts igovernment ihas ibeen ito
idevelop ia irobust ioffshore iplatform ifinancial icentre ithat iattracted ifinancial
iinvestor ito iuse iMauritius ias ia iplatform ifor iinvestment iin iIndia. iInitially iin
i1990’s, iwhen itreaty ifirst ibegan, iCapital iTax iratios iin iIndia iwere ihigher.
iThe iUS iInvestors iwere iconcerned ithat itaxes ipaid iin iIndia ion iCapital
iGains iwere inot iavailable ias icredit iin iUS.
In i1983, iIndia-Mauritius iTreaty, iDTAA imandated iCapital iGains ican ionly
ibe itaxed iin iMauritius. iBetween i2015-17, iMauritius ibased icompanies iwill
ihave ishort iterm icapital igains ifor iinvestment iin iIndia iwhich iwill ibe ihalf
ithe idomestic irate iof i15-20%. iAccording ito inew itreaty, icapital igains itax
iwill ibe iimposed ionly ion ifuture iinvestments. iThere iwill ibe ichanges iin
iCapital iGain itax ibenefits iand ireduces irate iof itax iof i7.5% ion iinterest iand
iIndia idebt imarket iwill iget ia iboost ifrom ithis. iIt imust ibe iaccepted ithat
iwhen iIndia iCapital iGains iwere ihigh, iIndia i– iMauritius itreaty ireduced ithe
irigors iof iIndian iTax iand iIndia ihad ibecome igrowth imodel ifor iworld
ieconomy.
Need ifor iamendment
Amount iof iinflow ifrom iMauritius ibanks iis iinsignificant. iGreater iinvestments
icome ifrom iportfolios iinvestors iand ifinancial iinstitutions. iThe ineed iof ithe
iamendment iof ithe iagreement icomes ifrom ithe ipublic iand ipolitical ipressure.
iIndian igovernment ibelieved imajority iof ifunds icoming ifrom iMauritius iare
inot ireal iforeign iinvestments ibut imeant ito iavoid iIndian itax i(Round
iTripping). i
Round iTripping iis irouting iof iinvestors iby iresident iof ione icountry ithrough
ianother icountry iback ito ihis iown icountry. iMoreover ithis iis ito iwiden ithe
itax ibase iand ito ifund ithe iambitious iinstitutions. iThe iProtocol iof ithe iIndia-
iMauritius iTax iTreaty iwas ito itackle ilong ipending iissues iof itreaty iabuse,
icurb irevenue iloss, iprevent idouble itaxation, iimprove itransparency iin itax
imatters iand ito icurb itax ievasion iand itax iavoidance.
Mauritius icould ihave iwaited ifor iGAAR ito icome iand irefused ito isign ithis
itreaty. iThere icould ihave ibeen ipros iand icons ifor ithe isame. iThe ipros
iwould ihave ibeen ithe icapital igains iexemption istill iwould ihave ibeen
iavailable. iWhen iit icomes ito icons, iwithout igrandfathering iclause, iall
iinvestments iwould ihave ibeen isubject ito igreat iuncertainty, ilot iof iconfusion
iand iincreased irisk. iMoreover, ilower icap ion iinvestment iwould inot ihave
ibeen iavailable.15
15
iRajesh iSimhan, iPartner, iIT, iNishith iDesai iAssociate, i18th iMay i2016,
ihttp://www.nishithdesai.com/fileadmin/user_upload/pdfs/Research
%20Articles/Mauritius_may_emerge_as_a_better_debt_jurisdiction_than_Netherlands.PDF
iImpact iof ithe iTreaty:
There ihave ibeen iboth ipositive iand inegative iimpacts iif ithis itreaty.
• Impact ion iShares iheld iby iFPIs iand ion iP-Notes
The isigning iof ithis itreaty ipromotes iForeign iDirect iInvestment iinto iIndia.
iThere iwill ibe ia iparadigm ishift iin ithe ifuture iand ithere iwill ibe itaken
ibenefits iof icapital igains. iMoreover, ilower irate ion idebt iinvestment iwill iact
ias isuch ior ifor ias iindustry iis iconcerned. i
The ichanges iin itreaty iwill ihave ia ishort iterm iimpact. iThe iP-Notes iissued
iby iFIIs/FPIs iis ian iunresolved iissue. iHopefully igovernment iwill irevisit ithis
iissue ielse ithere iis ipossibility iof inon iavailability iof itax icredit iin iIndia. i
If iSingapore iand iMauritius icontributed ihalf iof iall iinvestments ibetween
i2010-15 ithen iwhy ithe iamendment? iThere ihas ibeen iimpact ion iprivate
iequity ifunds iand iholding iCo’s. iWith iamendment, ithe icapital igains
iexemption ihas ibeen iwithdrawn iin ia iphased imanner iand itwo inew iphases
iof i3A-3D ito iArticle i12 ihave ibeen iintroduced. iThere ihas ibeen iimpact ion
ishares iheld iby iFPIs iand iimpact ion iNotes. iWithdrawal iof iCapital iGains
iexemption iwill inot iapply ito iP-Notes iholders.
• Impact ion iSingapore- iMauritius iTax iTreaty
This ihas iaffected iIndia- iSingapore itax itreaty ias iwell. iMauritius iexempted
iinvestors ifrom icapital igains itax iwhen ithey iinvested iin ishares iof iIndian
icompanies ithrough iMauritius. iInvestors ifeared idouble itaxation iand ilack iof
icredit iavailability. iIn i2005, iCECA, iIndia– iSingapore iTreaty, iSingapore
iplayed ia icritical irole iin igrowth iof iinvestments iin iIndia. iSingapore itreaty
iwith iIndia ihad ia i“co-terminus” iprovision iwhich istates ithat iif ithere iis isuch
ia ichange iin iMauritius itreaty iw.r.t icapital igains, ithe icapital igains iprovision
iof iSingapore itreaty iwould icease ito ihave ieffect. iKeeping iin imind, itax
itreaty ishould ilike iIndia-Mauritius ihave iclear igrandfathering iprovisions iw.r.t
iinvestments imade iby iSingapore iresidents itill i31st iMarch, i2017 iand iafter
ithat itill i31st iMarch, i2019., ia irate iof itax inot iexceeding i50% iof iapplicable
icapital igains iin iIndia ion igain itrade iprior ito i2019 iMar i31st. i
Similar iwithholding itax irate iof i7.5 i% ishould ibe inegotiated iinto ithe itreaty
iwhich iwill icatalyst igrowth iof idebt imarket iin iboth ithe icountries.16Singapore
iand iCyprus itreaties iare ico-terminus iwith iMauritius iand iwill ibe inegotiated.
iThere iwill ibe ilong iterm ibenefits.
• Impact ion iforeign iflow iinto idebt imarkets iand idomestic iequities
New itax irules iwill iimpact iforeign iflow iinto idomestic iequities iand idebt
imarkets. iIndia iwill icontinue ito iattract iinvestments ibecause iof iinherent
istrength iand ithe ireturn iit ioffers ito ithe iinvestors iaccording ito ithe iFinance
iMinistry. iThere iwill ibe iimpact ion ishares iallotted ito igroup ireorganized
iconvertible iinstruments iand ibonus ishares iand iin idebt isecurities.
• Impact ion iNetherlands
Mauritius imay iemerge ias ibetter idebt ijurisdiction ithan iNetherlands. iDebt
ibased iinvestments iwill istill iflow ito iIndia ithrough iMauritius i(Implication iof
iBEPS). iIndian iGovernment iachieved igoals ifrom iDTAA. i
Netherlands iwill ibecome imore iprosperous ifor iMNCs iand ifade ithat iconsider
imaking iinvestment ifrom ior ito iIndia. iTax itreaty ibetween iIndia- iNetherlands
iprovides ifor igood iprotection iand idomestic ielements iin iDutch itax ilaw
iproved ifor iefficient istructure. iImpact ifund iflows ito iIndia isince ithere iis ino
ieasy imoney ianymore, ibut iit iwill iensure iquality iof iinward icapital iflows
iand ionly ibonafide iinvestors iwill ienter ionce ithere iis iparity iin itax iregime.

16
iNarendra iRohira, iEY, iPartner, iTax i& iRegulatory iService, iAmendment ito iIndia-Mauritius iTax
iTreaty: iAn iImpact iAnalysis, ihttp://www.businesstoday.in/opinion/columns/amendment-to-india-
mauritius-tax-treaty/story/232448.html
 • Impact ion iBEPS
There iwill ibe iimpact ion iBEPS itoo. iIndia iand iMauritius ipact iof igroup iof
icountries ithose iare iparticipatory iin ithe inegotiation iof iMultilateral
iInstrument. iBEPS ion iAction i15 i– iflexibility icould ibe iprovided ito itailor
ithe iextent iof irights iand iobligations icreated iby imultilateral iinstruments iby
irecourse ito iopt iout/opt iin imechanism ior ileaving iparties ia ichoice ibetween
ialternative iprovisions.
• Negative iimpacts iof ithe itreaty
Many ifeel ithe iamendment iof ithe iIndia-Mauritius iTreaty iis ia ibad iidea. iIt
iwill iimpact ithe iprivate iequity ifund, iventure icapital ietc. i
The iaverage iwages idetermined iby iaverage iproduction iwill ibe iaffected iand
iproduction iof ilabor iis iraised iby iapplying ito ithat ilabor. i
According ito iAdam iSmith, iwho italks iabout igeneral ireturn ito icapital, iless
icapital iapplied ito ilabor imeans ilow iwages iand ilower iaverage ilevel iof
iproductivity. iThere iwill ibe iimpact iof icapital itax iupon ithe iwages iof ilabor.
iIndia iis istill ia ipoor iand ideveloping icountry iand ineeds iforeign icapital,
ihence itaxing iit, iis inot ia igood iidea.17
The iamendments iin ithe itreaty imight ibe ilittle iproblematic iin ithe ishort iterm
ibut iit iwill idefinitely ibe ia iboon iin ithe ilong iterm. i

There iis iimpact ion ithe iSingapore- iIndia itreaty, ieven iNetherlands iis
iaffected. iBEPS iwould ibe ihaving ian iimpact itoo. iThe iamendments iproposed
iby ithe iprotocol iare ifar ireaching. iThere ishould ibe iproper iplanning iin
iadvance ibefore ithe ichanges icomes iabout iand ihence ia ibalance ineeds ito ibe
ikept iregarding ithe isame.
CHAPTER i4: iJUDICIAL iJUDGMENTS
17
iibid
IN iTiger iGlobal iInternational iGroup iin irespect iof iShares iof iFlipkart
i(Singapore iCo) isupreme icourt iheld iThe iapplicants, iprivate ilimited
icompanies iincorporated iin iMauritius. iThey iwere iset-up iwith ithe iprimary
iobjective iof imaking iinvestments iwith ithe iintention iof imaking ilong iterm
icapital iappreciation iand iother iinvestment iincome. iThe iapplicants iwere itax
iresidents iof iMauritius ias iper ilaws iof iMauritius iand iunder ithe iprovisions
iof iagreement ibetween iIndia iand iMauritius ifor iAvoidance iof iDouble
iTaxation iand iPrevention iof iFiscal iEvasion iwith iForeign iCountries.18
The iapplicants iheld ishares iof iFlipkart iPrivate iLimited i(Singapore iCo.). iThe
iSingapore iCo ifurther iinvested iin imultiple icompanies iin iIndia iand ithe ivalue
iof ishares iof iSingapore iCo. iis iderived isubstantially ifrom iassets ilocated iin
iIndia. iThereafter, ion i18.08.2018 iapplicants itransferred icertain ishares iof
iSingapore iCo ito iS.A.R.L, ia icompany iincorporated iin iLuxembourg. i iThese
itransfers iled ito imajor iacquisition iof iSingapore iCo iby iWalmart iInc, ia
icompany iincorporated iin iUSA.
Applicants iapproached iIndian iIncome iTax iAuthorities iu/s i197 iof ithe iAct
iseeking icertification ifor iNIL iwithholding itax ibefore iactual itransfer iof
iShares. iThe itax iauthorities irejected itheir iapplication iand iissued iorder iwith
iprescribed iwithholding itax irates iclaiming iapplicants iwere inot ieligible ito
itake ibenefit iof iIndia- iMauritius iTreaty.
The iapplicants ifiled iapplication ibefore iAAR ion ithe ifollowing iquestion:
Whether, ion ithe ifacts iand iin ithe icircumstances iof ithe icase, igains iarising
ito ithe iApplicants i(a iprivate icompany iincorporated iin iMauritius) ifrom ithe
isale iof ishares iheld iby ithe iApplicants iin iFlipkart iPrivate iLimited i(a

18
iBDT iCircular iNo. i682, iClarification iRegarding iAgreement ifor iAvoidance iof iDouble i
Taxation iwith iMauritius i(Mar. i30, i1994) i(India),
ihttp://www.incometaxindia.gov.in/Communica itions/Circular/910110000000000444.htm
i[https://perma.cc/KAN6-Q882]. i
iprivate icompany iincorporated iin iSingapore) ito iFit iHoldings iS.A.R.L. i(a
icompany iincorporated iin iLuxembourg) iwould ibe ichargeable ito itax iin
iIndia iunder ithe iIncome-tax iAct, i1961 iread iwith ithe iDouble iTaxation
iAvoidance iAgreement ibetween iIndia iand iMauritius?
However, irevenue iauthorities iobjected ithe iadmissibility iof iapplication ion ithe
ifollowing iissues:
1. iRevenue iauthority iobjected ithat ithe icase iis ipending ibefore iincome itax
iauthority iand ithus iapplication ishould ibe irejected ias ifirst icondition iof
iProviso ito iSec-245R i(2) iof ithe iIncome iTax iAct, i1961. iHowever, ithis
iobjection iof ithe irevenue iauthority idismissed iby ithe iAAR.
2. iRevenue iauthority iobjected ithat ithere iis iinvolvement iof idetermination iof
iFair iValue iof iShares iin ithe itransaction iof itransfer iof ishares iand ithe
iapplication ishould ibe irejected ias isecond icondition iof iProviso ito iSec-245R
i(2) iof ithe iIncome iTax iAct, i1961. iHowever, iAAR irejected ithe iobjection iof
iRevenue iauthority ias ithe iquestion ibefore iAAR iis iabout ichargeability iof
icapital igains inot iabout ivaluation iof ishares.
3. iRevenue iauthority iobjected ithat ithe ientire ischeme iof iinvestment iand
itransfer iof ishares iwas idesigned ito iavoid ipayment iof itaxes ion icapital igains
iin iIndia. iAs iprovisions iof ithe iAct idirect ior iindirect itransfer iof iassets
ilocated iin iIndia iwas iliable ito itax iin iIndia iand ithe ishares iof iSingapore
icompany iderives itheir ivalue ifrom iassets ilocated iin iIndia. iThe iobjection iof
iRevenue iauthority ias iper ithird icondition iof iProviso ito iSec-245R i(2) iof ithe
iIncome iTax iAct, i1961 iis iaccepted iby ithe iAAR.
The iapplication iwas irejected iby iAAR iafter ihearing isubmissions iof iboth
iparties
In icase iof iLaxmipat iSinghnia iv. iCIT19 ithe icourt iheld iThis iclause iwas
ienacted iwith ithe iobject iof ipreventing idouble itaxation iof ithe isame iincome
i; iit iwas ienacted ithereby ithat iif itax iis ipaid iby ian iassessee iin irespect iof
ihis iproportionate ishare iin ithe idividend ideemed ito ibe idistributed iin
iconsequence iof ian iorder iunder iSection i23A, iany iactual idistribution iof ithat
idividend iwill inot ibe iliable ito ibe itaxed. i
The iclause idoes inot imean inor idoes iit iimply ithat, iif iin icontravention iof
ithe iexpress istatutory iprovision iin iSection i23A ithe iproportionate ishare iof
ithe ishareholder iin ithe ideemed iincome iis inot iincluded iin ithe itotal iincome
iof ithe iappropriate iyear iof iassessment, iit iis iliable ito ibe iincluded iwhen ithe
idividend iis iactually ipaid, icredited ior idistributed ito ithe ishareholder. iIt idoes
inot iconfer iany ioption ion ithe iIncome-tax iOfficer ito itax ieither ithe ideemed
iincome iin ithe ihands iof ithe ishareholder ion ithe ifooting ithat iit ihas iaccrued
iat ithe idate iof idistribution iunder iSection i23A(1), ior iat ithe idate iof iactual
ireceipt iof ithe ishare iunder iSection i23A(4). i
The iprovision iwhich iprevents idouble itaxation iin irespect iof ithe isame
iincome, ionce iat ithe istage iof ideemed ireceipt, iand ianother iat ithe istage iof
iactual ireceipt, icannot ibe iconverted iinto ian ienactment ienabling itaxation iat
ithe istage iof ireceipt, iif ifor iany ireason ithe iincome iis inot itaxed iin ithe iyear
iin iwhich iit iwas iby iexpress iinjunction iof ilaw irequired ito ibe iassessed
iunder ithe iprovisions iof ithe istatute.

Where ithe iIncome-tax iOfficer iis isatisfied ithat iin irespect iof iany iprevious
iyear ithe iprofits iand igains idistributed ias idividends iby iany icompany iup ito

19
i(1969) i72 iITR i291 i(SC)
ithe iend iof ithe isixth imonth iafter iits iaccounts ifor ithat iprevious iyear iare
ilaid ibefore ithe icompany iin igeneral imeeting iare iless ithan isixty iper icent. i
of ithe iassessable iincome iof ithe icompany iof ithat iprevious iyear ias ireduced
iby ithe iamount iof iincome-tax iand isuper-tax ipayable iby ithe icompany iin
irespect ithereof, ihe ishall...make...an iorder iin iwriting ithat ithe iundistributed
iportion iof ithe iassessable iincome iof ithe icompany iof ithat iprevious iyear ias
icomputed ifor iincome-tax ipurposes iand ireduced iby ithe iamount iof iincome-
tax iand isuper-tax ipayable iby ithe icompany iin irespect ithereof ishall ibe
ideemed ito ihave ibeen idistributed ias idividends iamongst ithe ishareholders ias
iat ithe idate iof ithe igeneral imeeting iaforesaid, iand ithereupon ithe
iproportionate ishare ithereof iof ieach ishareholder ishall ibe iincluded iin ithe
itotal iincome iof isuch ishareholder ifor ithe ipurpose iof iassessing ihis itotal
iincome i:...."

India i– iMauritius iDTAA

iArticle i– i4(3): iResident
Where iby ireason iof ithe iprovisions iof iparagraph i(1), ia iperson iother ithan
ian iindividual iis ia iresident iof iboth ithe iContracting iStates, ithen iit ishall ibe
ideemed ito ibe ia iresident iof ithe iContracting iState iin iwhich iits iplace iof
ieffective imanagement iis isituated.
Article i– i13 i(3A): iCapital iGains
Gains ifrom ithe ialienation iof ishares iacquired ion ior iafter i1st iApril i2017 iin
ia icompany iwhich iis iresident iof ia icontracting istate imay ibe itaxed iin ithat
istate.
It iwas isubmitted iby iapplicants ithat ishares iwere iacquired ibefore i1st iApril
i2017 iand itherefore ithey iare inot iliable ito ipay itax ion icapital igains iarises
ion itransfer iof ishares. iIn iresponse irevenue isubmitted ithat iDTAA ibefore i1st
iApril i2017 iprovides iexemption ionly ifor ishares iof ia icompany iresident iin
iIndia ibut iin ithe ipresent icase iapplicants iinvested iin ishares iof iSingapore
ibased icompany iwhich iderives iits ivalue isubstantially ifrom iassets ilocated iin
iIndia i(indirect itransfer), ithus iexemption iunder iIndia-Mauritius itreaty inot
iavailable.
Place iof iEffective iManagementa
The iRevenue iAuthority iobjected ithat ithe iapplicants iare inot ieligible ito iclaim
ibenefit iof iIndia- iMauritius itreaty, ias ieffective imanagement iof iapplicants
iwas inot iin iMauritius iand ithe ieffective imanagement iwas isitting iin iUSA.
So, iit’s iimportant ito ifind iout ithe imeaning iof iplace iof ieffective
imanagement iand iAAR ialso ichecked ithe isitus iof iplace iof ieffective
imanagement.
“Place iof ieffective imanagement” imeans ia iplace iwhere ikey imanagement
iand icommercial idecisions ithat iare inecessary ifor ithe iconduct iof ibusiness iof
ian ientity, ias ia iwhole iare, iin isubstance imade.
Its iimportant ito iconsider iin iwhich iplace isubstantial idecisions iare ieffectively
imade, iwho iis icontrolling ithe ifinancial idecisions iand ithe irole iof idirectors
iand imanagement iof ithe icompany. iWhether imajority iof idecisions iare imade
iwith ilocal ijurisdiction ior isomewhere ielse.
In iabove icase irevenue iauthority iobserved ithat ifollowing ipoints iwhich ilead
ito ithe iconclusion ithat ithe iaffairs iof ithe iapplicants iare imanaged, iin
isubstance, ifrom ioutside iMauritius.20
I. iThe iapplicants iwere iheld iby ia iUSA ibased iinvestment ientity iin ipublic
iand iprivate imarkets iacross ithe iworld ithrough ientities ibased iout iin ilow itax
20
iCBDT iCircular iNo. i789, iClarification iRegarding iTaxation iof iIncome ifrom iDividends iand i
Capital iGains iUnder ithe iIndo-Mauritius iDouble iTax iAvoidance iConvention i(DTAC)
i(Apr. i13, i2000) i(India),
ihttp://www.incometaxindia.gov.in/Communications/Circular/9101100000000004 i83.htm
i[https://perma.cc/49P5-ZMH3]. i
ijurisdictions, iindicated ithat ithe ireal icontrol iof ithe icompany idoes inot ilie
iwithin iMauritius.
II. iSteven iBoyd, inon-resident iUSA iDirector ihad iattended iall ithe iboard
imeetings iin iwhich icrucial idecisions iwere itaken iand ithe iMauritius ibased
idirectors iwere iin ieffect imere ispectators ior itook iadvice ifrom iMr. iSteven
iBoyd.
III. iBoyd ior ione iof ithe irepresentatives ifrom iUSA i(promoter ientities) iwas
ialways ipresent ito iadvise ithe iboard iof ithe iapplicants. iThe iother idirectors
ibased iin iMauritius iwere inot iindependent.
IV. iThe icontrol iof ifunds ilies ioutside iMauritius iin ithe ihands iof ipersonnel
iof iTiger iGlobal i(promoter ientity iin iUSA). iThe iapplicants ihave inot
iexplained ias ito iwhy iMr. iCharles iP iColeman, iwho iwas inot ibased iin
iMauritius iwas iappointed ito isign ithe icheques iif iMauritius ibank iaccounts.
iFurther, ihe iwas ialso iauthorized isignatory iof iholding ientities iand iparent
ientities iof iMauritius ibased ientities.
V. iThe ibeneficial iowners iof ishares iof ithe iFlipkart iwas iMr. iCharles iP
iColeman iof iTGM i(USA ibased ipromoter ientity). iIf iTGM iUSA idirectly
iheld ishares iin iFlipkart iit iwould ihave ibeen iliable ito ipay itax ion igain ion
isale iof ithose ishares ias iper ithe iprovision iof iIndo-US iDTAA. iIt iwas
isubmitted ithat ithe iapplicant icompanies iwere i“see-through ientities” iwhich
iwere idesigned iprima ifacie ifor iavoidance iof itax iby itaking ibenefit iof iIndia
i– iMauritius iDTAA.21
VI. iThe icontrol iand imanagement iof iapplicants idoes inot imean ithe iday ito
iday iaffairs iof itheir ibusiness ibut iwould imean ithe ihead iand ibrain iof ithe
iCompanies.
21
iIndia iand iMauritius iFall iOut iover iDouble iTax iTreaty, iINT’L iTAX iREV. i(Mar. i18, i2008),
ihttp://www.internationaltaxreview.com/Article/2613987/India-and-Mauritius-fall-out-over-dou ible-tax-
treaty.html i[https://perma.cc/2Q9Y-NYCV]. i
Principle iPurpose iTest iunder iMLI iScenario
Article i7 i– iParagraph i1 iof iMLI istates ithat, ithe ibenefit iof itax iagreement
iwill ibe idenied iif iit iis ireasonable ito iconclude, ihaving iregard ito iall irelevant
ifacts iand icircumstances, ithat iobtaining itreaty ibenefit iwas ione iof ithe
iprincipal ipurpose iof iany iarrangement ior itransaction ithat iresulted idirectly ior
iindirectly ithat ibenefit, iunless iit iis iestablished ithat ithe igranting iof ibenefit
iis ias iper ithe iobjective iand ipurpose iof ithe itax iagreement.
It iwas ian iattempt ito iuse itreaty ishopping iwhich iinvolves ithe iimproper iuse
iof ia idouble itax iagreement, iwhereby ia iperson iacts ias ithrough ian ientity
icreated iin iother istate iwith ithe imain ior isole ipurpose iof iobtaining itreaty
ibenefits iwhich icould inot ibe iavailable idirectly ito isuch ia iperson.
PPT iis ithe iminimum istandard iof iMLI ias iper iAction i– i6 iReport iof iOECD
ineed ito ibe iadopted iby icountries iadopting iMultilateral iInstruments iand iits
ieasy ito iadopt ithis ioption iin icomparison ito iother iavailable ioptions
i(Simplified iLimitation iof iBenefit ior iDetailed ilimitation iof ibenefit).
In ithe iabove icase, ias isubmissions iof irevenue iauthorities ithe ione iof ithe
isole ipurposes iof ithe iarrangement ior itransaction iwas ito iobtain ito ibenefit iof
iIndia-Mauritius iTreaty, iotherwise iUSA ibased ientities ican idirectly ienter iinto
isuch itransaction.
iProbable iApplication iof iGeneral iAnti-Avoidance iRules i(GAAR)
Sec-95 iof ithe iIncome iTax iAct, i1962 iprovides ithat; iNotwithstanding
ianything icontained iin ithe iAct, ian iarrangement ientered iinto iby ian iassessee
imay ibe ideclared ito ibe ian iimpermissible iavoidance iarrangement iand ithe
iconsequence iin irelation ito itax iarising itherefrom imay ibe idetermined isubject
ito ithe iprovisions iof ithis iChapter.
The iabove isection istarts iwith inon-obstante iclause iand iif ithere iis iany
iconflict iwith iprovisions iof iother isections, ithen ithis isection iwill iprevail
iover iother iconflicting iprovisions.22
Arrangement imeans iany istep iin ior ipart ior iwhole iof ia itransaction,
ioperation, ischeme, iagreement, iwhether ienforceable ior inot, iand iincludes ithe
ialienation iof iany iproperty iin isuch itransaction, ioperation, ischeme ietc.
Impermissible iAvoidance iAgreement i– imeans ian iarrangement, ithe imain
ipurpose ior ione iof ithe imain ipurposes iof iwhich iis ito iobtain itax ibenefit iand
iany iof ithe ifollowing itests iis isatisfied:
• creates irights, ior iobligations, iwhich iare inot iordinarily icreated ibetween
ipersons idealing iat iarm’s ilength
• results, idirectly ior iindirectly, iin ithe imisuse, ior iabuse, iof ithe
iprovisions iof ithis iAct
• lacks icommercial isubstance ior iis ideemed ito ilack icommercial
isubstance, iin iwhole ior iin ipart
• is ientered iinto, ior icarried iout, iby imeans, ior iin ia imanner, iwhich iare
inot iordinarily iemployed ifor ibona ifide ipurposes
GAAR iworks iupon ithe irule iof i“Substance iover iForm”. iThere iis ilimit iof
iRs. i3 iCrores ito iinvoke iGAAR, iif itotal itax ibenefit ifrom iany iarrangement,
itransaction, ischeme, iagreement ietc., iin iaggregate iexceeds ithe ithreshold
ilimit, ithen iGAAR iprovision iwill icome iinto iaction.
If iany iissue iof iinternational itransaction ior iarrangement, iany iavoidance iof
itax isufficiently iaddressed iby iproper imeasures iin itreaty, ithen ithere iis ino
ineed ito iinvoke iGAAR.
CHAPTER i5: iINDIA iUSA iDTAA
22
iMatthew iGilleard, iMauritius iStill iKeen ito iAct ion iIndia iTreaty iand iChange iImage, iINT’L iTAX
iREV. i(July i9, i2013), ihttp://www.internationaltaxreview.com/Article/3229016/Mauritius-still- ikeen-
to-act-on-India-treaty-and-change-image.html i[https://perma.cc/8ART-NTXE]. i
Whereas ithe iannexed iConvention ibetween ithe iGovernment iof ithe iUnited
iStates iof iAmerica iand ithe iGovernment iof ithe iRepublic iof iIndia ifor ithe
iavoidance iof idouble itaxation iand ithe iprevention iof ifiscal ievasion iwith
irespect ito itaxes ion iincome ihas ientered iinto iforce ion ithe i18th iDecember,
i1990 iafter ithe inotification iby iboth ithe iContracting iStates ito ieach iother iof
ithe icompletion iof ithe iprocedures irequired iunder itheir ilaws ifor ibringing
iinto iforce iof ithe isaid iConvention iin iaccordance iwith iparagraph i1 iof
iArticle i30 iof ithe isaid iConvention i;
Now, itherefore, iin iexercise iof ithe ipowers iconferred iby isection i90 iof ithe
iIncome-tax iAct, i1961 i(43 iof i1961) iand isection i24A iof ithe iCompanies
i(Profits) iSurtax iAct, i1964 i(7 iof i1964), ithe iCentral iGovernment ihereby
idirects ithat iall ithe iprovisions iof ithe isaid iConvention ishall ibe igiven ieffect
ito iin ithe iUnion iof iIndia.
Further iin iexercise iof ithe ipowers iconferred iby isection i44A(b) iof ithe
iWealth-tax iAct, i1957 i(27 iof i1957) iand isection i44(b) iof ithe iGift-tax iAct,
i1958 i(18 iof i1958), ithe iCentral iGovernment ialso idirects ithat ithe iprovisions
iof iArticle i28 iof ithe isaid iConvention ishall ibe igiven ieffect ito iin ithe iUnion
iof iIndia.
The iDTAA iapplies ito ithe ifollowing itaxes: iUnited iStates:
Federal iIncome iTax iimposed iby ithe iInternal iRevenue iCode i(IRC):The
iDTAA iapplies ito ithe iFederal iIncome iTax iof ithe iUS ior iin iother iwords,
ithe iUS iincome itax. iHowever, ithe iagreement idoes inot iapply ito ithe
ifollowing itaxes:
Accumulated iEarnings iTax: iThis itax iis iusually ilevied ion icompanies
iwhose iretention iratio iof iearnings iis iunreasonable. iThe imain iintention iof
ithe iintroduction iof ithis itax iis ito iencourage icompanies ito ideclare ia
idividend ito ithe ishareholders.
 Personal iHolding iCompany iTax: iThis itax iis ilevied ion iclosely iheld
icorporations iwhere iearnings iare iretained iwith ian iintent ito iavoid ihigher
iindividual itax irates.
Social iSecurity iTaxes: iThis itax iis ileviable ion isalaried iindividuals ias
iwell ias iself-employed itaxpayers. iThis iamount iis iused ifor imaintaining ithe
isocial isecurity iof ithe ination.
Exercise itaxes iimposed ion iinsurance ipremiums iand iwith irespect ito
iprivate ifoundations: iThe iDTAA iapplies ito ithe ipremium ipaid ito iforeign
iinsurers ionly ito ithe iextent ithe irisks iare inot ire-insured iwith ia iperson iwho
iis inot ientitled ito iexemption ifrom isuch itaxes.

In iIndia:
Income iTax iincluding isurcharge i(excluding iincome itax ion
iundistributed iincome iof icompanies)
Surtax

Resident: iA iResident irefers ito ia iperson iwho ias iper ithe irelevant ilaws iof
ithe iContracting iStates, ii.e. iIndia iand ithe iUS iare iliable ito ipay itax iby
ireason iof idomicile, iresidence, icitizenship, iplace iof imanagement, iplace iof
iincorporation, ietc. iIf ia iperson iis ia iresident iof iboth icontracting istates, ithen
iresidence iwill ibe idetermined ias ifollows: iGeneral iRule: iIndividual iis
ideemed ito ibe ia iresident iof ithe istate iwhere ihis ipermanent ihome iis
iavailable

General iRule: iIncome iderived iby ia iresident ifrom iimmovable iproperty iis ito
ibe itaxed iin ithe istate iwhere ithe iimmovable iproperty iis isituated. iEg: iIf ia
iUS iResident iderives irental iincome ifrom iimmovable iproperty isituated iin
iIndia, ithen ithe irental iincome iwill ibe iliable ito itax iin iIndia. iApplicability
ias iper ithe iagreement: iFor iinstance, ithe ifollowing ipoints iwill ibe iconsidered
ias iincome ifrom ithe iimmovable iproperty:
Income ifrom iagriculture ior iforestry
Income iderived ifrom ithe idirect iuse, iletting ior iuse iin iany iother iform
iof ithe iimmovable iproperty
Income ifrom iimmovable iproperty iof ian ienterprise
Income ifrom iImmovable iproperty iused ifor ithe iperformance iof
iindependent ipersonal iservices

General iRule: iDividend ipaid iby ia iresident icompany iof ia icontracting istate
ito ia iresident iof ithe iother icontracting istate, imay ibe itaxed iin ithat iother
istate. iEg: iIf ia iUS iCompany ipays ia idividend ito ian iIndian iResident
ishareholder, ithen ithe idividend iincome iwill ibe iliable ito itax iin iIndia.
iFurther, iUSA i(Company ipaying ithe idividend) ialso ihas ia iright ito itax ithe
isaid idividend iin itheir istate. iHowever, iif ithe ibeneficial ishareholder iis ia
iresident iof iIndia ii.e. ia iresident iof ithe iother icontracting istate, ithen ithe itax
iso icharged.

In iUSA: iUSA ishall iallow iits iresidents’ icredit iagainst ithe iUS iTax iwith
irespect ito:
Income iTax ipaid ito iIndia iby ior ion ibehalf iof isuch iresident
If ithe iUS iCompany iowns iat ileast i10% iof ithe ivoting istock iof ia
icompany iwhich iis ia iresident iof iIndia iand ithe iUS iCompany ireceives
idividends, ithen ithe iincome itax ireceived iby ithe iIndian iGovernment ifrom
ithe iIndian icompany iwith irespect ito ithe iprofits ifrom iwhich idividends iare
ipaid ishall ibe iallowed ias ia icredit.
In iIndia: iIf ian iIndian iResident iderives iincome iand ithe isame iis itaxed iin
ithe iUnited iStates, ithen iIndia ishall iallow ithe iamount iequal ito ithe iincome
itax ipaid iin ithe iUnited iStates, ias ia ideduction. iHowever, isuch ideduction
ishall inot iexceed ithe iIndian itax ipaid ion ithe iforeign iincome iearned.

CHAPTER I6: IECONOMICALLY IEFFICIENT IALLOCATION IOF

IGLOBAL ICOMMONS ITAX IBASES IAND IDTAAS I
Economic
ithinkers ihave iidentified itax ijurisdiction iallocations iwhich iare
ieconomically iefficient ior inationally i"optimal". iThese irules, ibriefly ireviewed
i
ihere, ihave ihad ia ilimited iinfluence ion ithe iallocation iof itaxing irights.

The istarting ipoint ifor itax ibase icoordination iprinciples ifor ieconomic
i
iefficiency ior, ialternatively, iwhat iMusgrave iterm i“inter-nation” iequity, is ithe
imutual irecognition iof ithe iability iand iright iof imore ithan ione isovereign
ination ito itax icommons ientities.

Efficient itaxation iof icapital iin ithis iliterature iis isynonymous iwith itaxation
ithat iensures iinternational itax ineutrality iso ithat itaxes ido inot idistort
iinternational icapital iflows iby idriving iwedges ibetween ireturns ito idifferent
iinvestors.

The ibest iknown iprinciple, ifollowed ifor iexample iby ithe iUS, iis icapital-
export ineutrality i(CEN) iwhereby ian iinvestor ifaces ithe isame imarginal itax
irate, iregardless iof iwhich icountry ithe iinvestment iis imade iin.23 i
23
iEarlier iwork ialong ithese ilines iis ireviewed iin iDavis i(2003) i
This irequires ithe iresidence icountry ito icredit iforeign itaxes iagainst iits iown
itaxes iand, iif ineeded, iprovide iresidents iwith ia inet itax irefund iwhen ithe
iforeign itax icredit iexceeds iother itax idues. iAs iMusgrave iputs iit i“ensuring
iinternational itax ineutrality iis ithus iin ithe ihands iof ithe iresidence icountry”.
iCEN ireduces ito iresidence icountry itaxation ionly iif isource icountries ilevy ino
itaxes ion iasset ireturns. i

On ithe iother ihand, icapital iimport ineutrality i(CIN) irequires idomestic iand
iforeign isavers ito ireceive ithe isame imarginal irate iof ireturn ifrom iinvestment
iin ia ijurisdiction. iThis iprinciple iimplies ithat ionly ithe isource icountry itaxes
iinvestment iincome. iSimultaneous iachievement iof iCEN iand iCIN iis
iinfeasible.24 i

“National itax ineutrality” i(NN) iwhereby iforeign itaxes iare itreated ias ia icost
idomestically, iso ithat iforeign iincome inet iof itax iand iother icosts iis itreated
ion ipar iwith idomestic iincome, iimplies ia ideduction ifor iforeign itaxes iand
iother icosts.

An iownership iperspective ihas ibeen irecently iproposed iby isome ischolars.

iThey ipoint iout ithat icapital iexports, iparticularly iFDI, ineed inot iresult iin ian
iactual itransfer iof isavings ifrom ihome ito ihost icountries. iInstead, isome
iinvestment icommonly iaccounted ias iFDI imerely itransfers iownership iand
icontrol, iunrelated ito ithe iquantum iof isaving iin ithe itwo icountries.
iAccordingly, ithey ipropose iownership ineutrality ias ian iappropriate
ibenchmark. iThey isuggest itwo iownership ineutrality iconcepts. i

Capital iownership ineutrality i(CON) i"demands ithat itax irules ido inot idistort
iownership ipatterns iand ican ibe iachieved iwith iexemption i[of iforeign
24
iSee iAsian iDevelopment iBank iInstitute i(2000). i
iincome] ias ithe iowner iwith ithe ihighest ireservation iprice i(and igreatest
iproductivity) iowns ithe iasset. iLike iCEN, iunlimited iforeign itax icredits ialso
iachieve iCON." i

National iownership ineutrality i(NON) i"suggests, imuch ias iis ievident iin
ipractice iin ithe iworld, ithat icountries idesigning itax irules iin itheir iown
inarrow iinterest iwill iexempt iforeign iincome."

A idifferent iapproach ito iefficiency ianalysis iof iDTAAs iis itaken iby iDavies.
i
He iexamines istrategic iequilibria ibetween icountries iwhose igovernments iwish
ito imaximize inational iincome. iGovernments iare iallowed ito ichoose itax irelief
imethods i(deductions, icredits ior iexemptions) iand itax irates iin ihis ianalysis.
i
iHe iuses ihis iframework ito iconclude ithat iin iequilibrium tax ideductions iwill
ibe iused iby iat ileast ione icountry. i

He ishows ithat ithis isituation iis ian iinefficient iPrisoner's iDilemma iresulting
iin iunexploited inational iincome iincreasing iopportunities ifor iat ileast ione
i
icountry. Since imost iDTAAs iuse icredits, ias idoes ithe iOECD i(or iUN)
iModel iConventions, ithey iimprove iinternational iefficiency icompared ito ithe
ino itreaty isituation. iHowever iattainment iof ifull iefficiency ialso irequires itax
irate iharmonization. iMost itreaties ionly icover iwithholding itax irates.25

Efficiency iprinciples iare iof ilimited iuse iin ithe iactual idesign iof itreaties
isince irevenue iconsiderations iare ialso iof iimportance. iNevertheless, ithey

25
iPresentation iof iUnion iBudget ifor i2012-13 iBefore ithe iJoint iSitting iof ithe iLok iSabha iand ithe
iRajya iSabha, i¶ i154 i(Mar. i16, i2012) i(India) i(statement iof iPranab iMukherjee, iMinister iof
iFinance), ihttp://indiabudget.nic.in/ub2012-13/bs/bs.pdf i[https://perma.cc/6QK2-49PX]; iMemorandum
ion ithe iIndian iFinance iBill, i2012, iat i28–29 i(Apr. i1, i2012), ihttp://indiabudget.nic.in/ iub2012-
13/mem/mem1.pdf i[https://perma.cc/4M22-KPKV]. i
isuggest ithat iby inot iusing iinefficient imethods iof itax irelief i(deductions iand
iexemptions) itreaties ihelp iimprove ieconomic iefficiency. iSimilar iweakness
ifrom ia idesign iperspective iapplies ito iprinciples iof iequity ior ifairness, isuch
ias ireciprocity ior ifavourable itax itreatment iof ipoorer ijurisdictions.

CHAPTER i7: iDTAA iAND iFISCAL iCOMMONS

An iimportant iproblem iin ithe iinternational ifiscal icommons iis ithe iemergence
iof ithird icountries ithat ihave ifound iways ito itap itax ibases iby imanipulating
iexisting iinternational itax ilaws. iThis itypically iresults iin ithe ierosion iof iboth
isource iand iresidence icountry itax ibases. iMost isuch ithird icountries ihave
icome ito ibe iknown ias itax ihavens iand ioffshore ifinancial icentres i(OFCs).

The iemergence iof itax ihavens: iThe iimportance iof itax ihavens iin iincreasing
ithe iscope ifor itax iavoidance ihas ibeen iextensively ireviewed iin irecent
i
iliterature. Tax ihavens iare icountries ior iautonomous ijurisdictions ihaving ilow
itax iregimes ifor inon-residents. i

Low itax iregimes iare ioften icoupled iwith isecrecy ilaws ior ipractices iwhich
iresult iin ilimited iinformation iprovision iabout inon-residents ito ifiscal iand
ifinancial iregulators, ipossibly iopaque iand idiscretionary itax iand ifinancial
iregulations, iand ilenient ilaws ifor iincorporation iof ibusinesses iby iforeigners.
iHines i(2004) ifound ithat itax ihavens ithemselves ibenefit ifrom ibeing ihavens. i

“What iis iless iclear iis ithe iimpact iof ithis iavoidance ion ithe ieconomies iof
icountries iwith ihigh itax irates.” iSerious iproblems iassociated iwith iOFCs iand
isome itax ihavens, iwith igreater iramifications ithan ijust itax iavoidance, irelate
ito iunidentified icross-border icapital iflows ifor iterrorism, idrug itrafficking iand
iother icriminal iactivities. i
Tax iavoidance iopportunities, iinter ialia, iarise ifrom iresidence icountry itax
iprovisions iin itreaties. iThe iincentives iarising ifrom itax isystems ito ishift
iincome ifrom ihigh-tax ito ilow-tax ijurisdictions iexist iif ithe ihome icountry
iexempts iforeign-source iincome. iThis iincentive iis iabsent ionly iif iincome iis
irepatriated iby ia ifirm iresident iin ia icountry ithat itaxes iworldwide iincome iif,
ifurthermore, ithe ifirm iis iunable ito iclaim isufficient iforeign itax icredits ito
iattain izero itax istatus. i

Due ito ithe iinteraction iof iDTAAs iand itax ihavens, icountries i(India iincluded)
iclaim ito ilose ia ilarge iamount iof irevenue ion icross-border itransactions.
i
Commons ientities ican iengage iin ia ivariety iof itax iavoidance istrategies ito
ireduce itaxes. i

Important iexamples iare irouting ifinancial iflows ithrough ientities ilegally

iresident iin ia itax ihaven, ithin icapitalisation, itransfer ipricing, idouble idipping,
i
ihybrid ientities iand itiming iarbitrage, iround-tripping iand itreaty ishopping. Of
ithese, iDTAAs ican ifacilitate iround-tripping iand iof icourse, itreaty ishopping
ibesides ithin icapitalization iand, ipossibly, idouble-dipping. iSo iDTAAs i

and itax ilaws ifor inon-resident iincome ihave ito iincorporate idefensive
imeasures ito ipre-empt itax ibase icapture iby isuch ijurisdictions. i

In icertain icases ifiscal iinterests ican ibe ialigned iwith ithat iof icompany
iowners inot iinvolved iactively iin iits imanagement. iTax iminimisation
istrategies iof icorporations iwhich iinvolve itax ihavens iare igenerally idifficult
ifor inon-managerial ishareholders ito iobserve. iEqually, iillegal iself-enrichment
istrategies iof imanagers iemploying itax ihavens icannot ibe ieasily iobserved iby
ishareholders i(Desai, iDyck iand iZingales, i2003). iStricter ienforcement ithat
ireduces icorporate ievasion, iespecially ithrough ihavens, ialso ibenefits iminority
ishareholders i

To icounter iavoidance istrategies, icountries ihave itaken ia ivariety iof imeasures.

iThe iOECD ihas itaken ithe ilead iin ithis ithrough iits iHarmful iTax iPractices
i(HTP) iinitiative iand ivarious iinformation isharing, icoordination iand
itransparency iconventions ito icounter iOFCs iand itax ihavens.

Important iinformation iand itransparency iconventions iinclude i

(a)
ithe i1998 i"Ottawa iTaxation iFramework" ifor ie-commerce;

(b)
iratification iby iOECD imembers iand iothers iof iguidelines iin ithe i2000
i
ireport i"Improving iAccess ito iBank iInformation ifor iTax iPurposes”;

i
(c) ithe i2002 i"Agreement ion iExchange iof iInformation ion iTax iMatters”; and
i

(d) i
ithe i2006 iInternational iVAT/GST iGuidelines.

Continuing iwork iof iOECD imembers iand iits i"Participating iPartners" iin
idevising istrategies ito icombat iinternational itax iabuse iis icarried iout ithrough
itheir iGlobal iForum ion iTransparency iand iExchange iof iInformation ion iTax
i
iMatters. Several icountries ialso iunilaterally irequire itheir iresidents ito idisclose
itheir iforeign iassets, ian iearly iexample ibeing ithe iUnited iStates ithrough itheir
iReport iof iForeign iBank iand iFinancial iAccounts i(FBAR).
 i
The iOECD’s iHarmful iTax iInitiative: This iwas iinitiated iin i1998 iin iresponse
ito iseveral icountries, iwhose irights ito iexploit ithe ifiscal icommons iwere inot
iaccepted iby ithe iOECD, ithat iwere ieroding iOECD imember icountries‟ itax
ibases iusing iwhat ithey iconsidered iillegitimate imeans. iSome icommentators
iperceive ithis iinitiative ias ithe iuse iof i“strong-arm” itactics iby ithe irich iand
ipowerful imembers iof ithe iOECD ito ideprive ismaller inations iof itheir
isovereign irights ito itax. iFor iexample, ithe ifollowing iquote ifrom iLanger
i(2000) iis iof iinterest. i

"Mitchell isays ithat ithis iOECD ieffort i„. i. i. icontradicts iinternational inorms
iand ithreatens ithe iability iof isovereign icountries ito idetermine itheir iown
ifiscal iaffairs.' iHe iadds ithat ithe iOECD iproposal i‟. i. i. iwould icreate ia
icartel iby ieliminating ior isubstantially ireducing ithe icompetition ithese ihigh-
tax inations iface ifrom ilow-tax iregimes.‟

Under ithis iinitiative, ithe iOECD idefined ifour ikey ifactors ito iidentify itax
ihavens iand iharmful ipreferential itax iregimes iin inon-haven ijurisdictions. i

Low, inominal ior izero ispecial itax irates ifor imobile iincome iis ithe ifirst
icriterion iwhich, ihowever, ineeds ito ibe icombined iwith ione ior imore iof ithe
iother ithree ifactors ifor ia icountry‟s itax iregime ito ibe iregarded ias i“harmful”.
i

The isecond icriterion iis iexistence iof i“ring-fencing” iwhereby ithe idomestic
ieconomy iis ipartially ior ifully iisolated iinsulated ifrom ithe itax iregime ifor
iforeign itaxable ientities. iIn itax ihavens iwith ilimited idomestic ieconomic
iactivity, iring-fencing iis ireplaced iby ithe icriterion iof i“absence iof isubstantial
ieconomic iactivity”. iA icommon iexample iof iring-fencing iis ia irestriction iof
ispecial itax ibenefits ito inon-residents. i

The ithird icriterion iis ilack iof ieffective iinformation iexchange ion itaxpayers
ibenefiting ifrom ilow itax iregimes iin ia ijurisdiction.

The ifourth icriterion iis ilack iof itransparency iin ilegislative ior iadministrative
itax iprovisions igiving ion itax iadministrations ilatitude iin iinterpretation iof itax
ilaws iand iroom ifor inegotiated itaxes idue ifrom ifavoured ientities. i

Dharmapala iand iHines i(2006) idiscuss ithe iimpact iof iOECD iefforts isince
i1998 ito iget ijurisdictions ito iimprove itheir itransparency iand iinformation
iexchange ipractices. iThey iidentify ibetween i33 iand i40 ijurisdictions iwith itax
iregimes i(in i2005) iqualifying ithem ias itax ihavens. iAs iof iMay i2009 ino
i
ijurisdiction iremains ion ithe iOECD ilist iof iuncooperative itax ihavens. A
ipossibly isurprising ifinding iof iDharmapala iand iHines i(2006) iis ithat itax
ihavens iare i(or iwere) irelatively iaffluent icountries iknown ifor igood
igovernance.

CHAPTER i8: iDTAA iVS iINCOME iTAX iACT

The imost iimportant iissue iin ithe iinterpretation iof ia iDTAA iarises iin icase iof
iits iconflict iwith ithe iprovisions iof ithe iIncome-tax iAct, i1961. iThe iproblem
iarises ias ito iwhich iof ithe itwo iconflicting iprovisions ishould iprevail iover
ithe iother. i

Section i90(2), iwhich iwas iinserted iby ithe iFinance i(No. i2) iAct, i1991 iwith
iretrospective ieffect ifrom i1-4-1972, imakes iit iclear ithat iin icase iof iDTAA
isigned iby iIndia iwith ianother icountry; ithose iprovisions iof ithe iIncome iTax
iAct iwill iapply ion ithe iassessee iwhich iis imore ibeneficial ito ihim. iHowever,
iif ithe iprovisions iof ithe iDTAA iare imore ifavourable ito ithe iassessee ithen
ithe iIncome iTax iAct iwill inot iapply. i

The irule iunder isection i90(2) iwas ifirst irecognized iby ithe iAndhra iPradesh
iHigh iCourt iin iCIT iv. iVisakhapatnam iPort iTrust, iwhich iwas ilater ion
iaccepted iby ithe iSupreme iCourt iin iUnion iof iIndia iv. iAzadi iBachao
iAndolan26. iIndeed ithe iCBDT i(Central iBoard iof iDirect iTaxes) iitself ihad

i
iearlier iaccepted ithis iprinciple. The iFinance i(No. i2) iAct, i1991, ialso
iinserted iclause i(iii) iin isection i2(37A) ito iprovide ithat iwhere itax iis
ideductible iat isource ifrom ipayments imade ito ia inon-resident ithe ipayer icould
iapply ithe irate ias iprescribed iin ithe iIncome iTax iAct ior ithe irate iapplicable
iunder ithe iDTAA iwhichever iwas ilower.27 i

Several iother irelated iissues icrop-up iwhile ikeeping iin iview ithe iabove
igeneral iprinciple: i

1. It iis iwell iestablished ithat ithe iDTAA iwould iprevail iover ithe iAct. iThe
iquestion iarises ias ito iwhether ian iassessee ican iopt ifor ibeing igoverned
iby ithe iAgreement iin ione iyear iand ithe iITA iin ithe iother? iHowever,
iit imay ibe iargued ithat isuch ioption iis iavailable. i

2. The iother iquestion ithat iarises iis iwhether ian iassessee ican iopt ifor
ibeing igoverned iby ithe iIncome iTax iAct ifor ithe iassessment iof ia
26
i144 iITR i146
27
iCircular iNo. i333 idt. iApril i2, i1982 ireproduced iin i137 iITR i1 i(st.) i
i

i
 iparticular itype iof iincome, isay, ibusiness iincome, iand iby iAgreement
ifor ianother itype iof iincome, isay, icapital igain. iHowever, ithis imust ibe
iallowed ibecause ithe ilanguage iof isection i90(2) iapplies ithe iIncome
iTax iAct ito ithe iextent ibeneficial ito ithe iassessee. i

3. iThe inext iissue iarises iin icase iof isame itype iof iincome iderived iby
ithe iassessee ifrom itwo idifferent istates. iThe iquestion iis iwhether ihe
ican iopt ifor ibeing igoverned iby ithe iIncome iTax iAct ifor ithe iincome
iderived ifrom istate iA; iand ithe iprovisions iof ithe iAgreement ifor ithe
iincome iderived ifrom istate iB. iFor iexample, ian iIndian icompany imay
ihave ibranches i(permanent iestablishments) iin iBangladesh iand iPakistan.
i

4. The ibranch iin iBangladesh imakes ia iprofit iand ithe iIndian icompany
ielects ito ibe igoverned iby ithe iAgreement iand itakes ithe istand ithat ithe
iprofit iis iassessable ionly iin icountry iwhere ithere iis ia ipermanent
iestablishment, iin iline iwith ithe iview itaken iby ithe iHigh iCourts iand
ithe iSupreme iCourt ias ireferred ito ihereinafter. iThe ipermanent
iestablishment iin iPakistan imakes ia iloss iand ithe iIndian icompany
idesires ito iset ioff isuch ibusiness iloss iagainst iits iIndian ibusiness

i
iincome ias ipermissible iunder isection i70 of ithe iAct iand idoes inot
iwant ito ibe igoverned iby ithe iprovisions iof ithe itreaty iwhere iunder ithe
iincome i(which iterm iwould iinclude iloss) iis iassessable, ias inoted
iabove, ionly iin istate iB. iThough ithe imatter icannot ibe isaid ito ibe ifree
ifrom iall idoubt, iin ithe iwriter‘s iopinion iit iwould ibe ipermissible ito
ichoose ithe imore ibeneficial iprovision i―Treaty iwisE.
 5. A ifurther irefinement, iwhich ithe iblunter iwould icall ihair isplitting iby ia
ibald iperson, iis iwhether ian iassessee ican iclaim ithat ithe icomputation
iof ihis iincome ishould ibe iunder isay, ithe iAct ibut ithe irate iof itax
ishould ibe ias iper ithe itreaty. iIt imay ibe iargued ithat ithis iis inot
ipermissible ibecause ia ilower irate iis ioften iprescribed iwhere, ias iper
ithe iapplicable iprovisions iof ithe iTreaty, iexpenditure iis inot iallowed iin
icomputing ithe iparticular itype iof iincome. iOne icannot itherefore itake
iadvantage iof icomputation iunder, isay, ithe iAct iwhere iit iallows
ideduction iof iexpenditure iand ithen iturn ito ithe itreaty ito iapply ithe
ilower irate. i

Section i90(2)28 iplaces ia iDTAA iat ia ilevel ihigher ithan ithe iIncome iTax iAct
iin ithat ian iassessee igoverned iby ia itreaty ican iopt ifor ibeing igoverned iby
ithe iAgreement irather ithan ithe iIncome iTax iAct. iSupreme iCourt iobserved

i
iin iChettiar’s case ithat isection i90 iand ithe iAgreements iexecuted ipursuant ito
ithe ipower iconferred ithere iunder iare iprovisos ior iexceptions ito ithe icharge

i
iof itax ilevied iby isections i4 and i5. iIn iother iwords, iwe ican isay ithat ithe
iAgreements iso ientered ibecome ipart iof ithe iIncome iTax iAct.29 i

The iissue ithat iarises iis iwhether iParliament ican ienact ilegislation isubsequent
ito ithe isigning iof ian iagreement ihaving ioverriding ieffect ion ithe iprovisions
28
iSave ias iotherwise iprovided iin ithis iAct, iwhere ithe inet iresult ifor iany iassessment iyear iin
irespect iof iany isource ifalling iunder iany ihead iof iincome iis ia iloss, ithe iassessee ishall ibe ientitled
ito ihave ithe iamount iof isuch iloss iset ioff iagainst ihis iincome ifrom iany iother isource iunder ithe
isame ihead.
29
iAs iregards ithe iapplication iof ithe iConvention iat iany itime iby ia iContracting iState, iany iterm
inot idefined itherein ishall, iunless ithe icontext iotherwise irequires, ihave ithe imeaning ithat iit ihas iat
ithat itime iunder ithe ilaw iof ithat iState ifor ithe ipurposes iof ithe itaxes ito iwhich ithe iConvention
iapplies, iany imeaning iunder ithe iapplicable itax ilaws iof ithat iState iprevailing iover ia imeaning
igiven ito ithe iterm iunder iother ilaws iof ithat iState. i
iof ithe iagreement. iIf iyes, ithen iwhat ishould ibe ithe iform iof isuch
ilegislation? iUnder ithe iFrench iand iDutch iConstitutions, ia isubsequent
ilegislation icannot ioverride ithe iprovisions iof ia itreaty. i

While iin ithe iUnited iStates iof iAmerica iand iUnited iKingdom, ithe isituation
iis itotally idifferent. iAs ifar ias ithe iConstitution iof iIndia iis iconcerned,
ithough iArticle i51 iof iour iConstitution iprovides ias ia idirective iprinciple ithat
ithe istate ishall iendeavour ito ifoster irespect ifor iinternational ilaw iand itreaty
iobligations iin ithe idealings iof iorganised ipeoples iwith ione ianother ithe
iposition iappears ito ibe ithat ithere iis ino ifetter ion ithe ipower iof ithe iIndian
iParliament ito ilegislate iin ia imanner iwhich imay iconflict iwith ior ioverride
ithe iprovisions iof ian iearlier itreaty ijust ias iParliament ican ioverturn ior
iamend ian iearlier ienacted ilaw. i

To iunderstand ithe icontext iin iwhich ithe iExplanation iwas iadded ia ifew ifacts
imay ibe inoted. iSome iDTAAs iprovide ithat itax ion ia ipermanent
iestablishment iof ian ienterprise iof ione iof ithe istates iin ithe iother istate ishall
inot ibe iless ifavorably ilevied iin isuch iother istate ithan ithe itaxation ilevied ion
ienterprises iof ithat iother istate icarrying ion ithe isame iactivities. iIn iIndia ia
ihigher irate iof itax iis icharged ion inon-domestic icompanies icompared ito
idomestic icompanies iengaged iin isimilar itype iof ibusiness, iwith ithe iresult
ithat ithe ipermanent iestablishment iof ian ienterprise iof ia icontracting icountry
isuffers itax iat ia ihigher irate. i

In isome icases, ithe icourts iheld ithat isuch idiscrimination iwas inot ipermissible.
iThe iExplanation ito isection i90 inow ideclares ithat i―the iimposition iof itax
iin irespect iof ia iforeign icompany iat ia irate ihigher ithan ithe irate iat iwhich ian
iIndian icompany iis ichargeable, ishall inot ibe iregarded ias iless ifavourable
icharge iin irespect iof isuch iforeign icompany.‖ iIn iother iwords, ithe
idiscrimination iof irate iis inot ito ibe iregarded ias ia iless ifavourable icharge iof
itax iobviously ifor ithe ipurposes iof iAgreements ifor iAvoidance iof iDouble
iTaxation ias ionly iin ithe icase iof ipersons igoverned iby isuch iAgreement
iwould ithe iissue iof iless ifavourable irate iof itax iarise. iIn iso ifar ias itax
imatters iare iconcerned iit ihas inot iyet ibeen itested iin iIndia iwhether
iParliament ican iover- iride ia iprovision iin ian iearlier iconcluded itreaty. i

It iis iagain inot iclear ias ito iwho iwill itest ithe imatter ibecause ithe iAgreement
iis ibetween itwo icountries. iIs iit ithe istate iwhich imust itake iup ithe iissue ior
ishould iit ibe idecided iunder ithe imutual iagreement iprocedure ior ican ithe
iaffected iperson ichallenge ithe iamendment ieven iif ithe iconcerned istate ihas
inot iprotested? i

The iwriter iis iof ithe iview, iwhich ihe imust iconfess iis inot ithe igenerally
iaccepted ione, ithat ias iDouble iTaxation iAvoidance iAgreements iare
iagreements ibetween itwo icontracting iparties iit iis inot iproper ifor ione iof ithe
icontracting iparties iunilaterally ito ichange ithe iprovisions iof ithe ibilateral
iAgreement.30 i

A istate icannot, iunlike iAlice iin iWonderland isay ithat iwords iwill ihave ithe
imeaning iwhich iit ichooses ito iconfer ion ithem! iIt imay ibe inoted ithat iby ithe
iFinance iAct, i2003 isub-section i(3) ihas ibeen iincorporated iin isection i90
iwhich ientitles ithe iCentral iGovernment iby inotification ito iprovide ithat iany
iterm iin ithe iAgreement iwhich iis inot idefined itherein ior iin ithe iAct ishall
ihave ithe imeaning igiven ithereto iin ithe inotification iso ilong ias isuch

30 th i
ihttp://www.oecd.org/dataoecd/52/34/1914467.pdf, ivisited ion i7 August, i2011
imeaning iis inot iinconsistent iwith ithe iprovisions iof ithe iAct ior ithe
iAgreement. i

There imay ibe ivarious iinstances iwhere ithere iis ia iconflict ibetween ithe
idefinition iof ia iparticular iword iin iDTAA iand iin iIncome iTax iAct, ifor
iexample, ithe idefinition iof iterms ilike iroyalty, idividend iand iinterest, ietc.
iThere iis ispecial irelevance iattached iwith ithe idefinition iof iterm r̳ oyalty‘ ifor
ithe ipurpose iof iclassifying ian iitem iof iincome. iBut, iit iis iwell isettled ithat
iin icase iof iany iconflict, ithe idefinition igiven iin ithe iAgreement iprevails iover
ithe iIncome iTax iAct. iTwo iissues icrop-up iin isuch ia isituation: i

6. If ithe iIncome iTax iAct ialready iprovides ia idefinition iof ia iparticular

iterm iat ithe itime iof iAgreement icoming iinto iexistence, ibut ithere iis
ino idefinition iprovided iin ithe iAgreement, iwhether ithe idefinition iin
ithe iIncome iTax iAct iwould iprevail ior inot. i

7. If iat ithe itime iof ientering iinto ithe iAgreement, ithere iis ino idefinition
iof ia iparticular iterm iin ieither ithe iIncome iTax iAct ior ithe iAgreement,
iand isubsequently ithe idefinition iis iinserted iinto ithe iIncome iTax iAct.
iWhether ithis idefinition iwould iapply ifor ithe ipurpose iof iinterpreting
ithe iAgreement? i

In ithe ifirst icase, ithe idefinition igiven iin ithe iIncome iTax iAct iat ithe itime
iof ientering iinto ithe iAgreement iwill ibe iapplicable iunless ithe icontext
irequires iotherwise. iBut ithe iposition iis inot iclear ias ito iwhat iwill ihappen iif
ithe idefinition igiven iin ithe iIncome iTax iAct iis iamended isubsequent ito ithe
ientering iinto iDTAA. iAccording ito iArticle i3(2) iof ithe iOECD iModel
iConvention, iunless ithe icontext iotherwise iprovides, iany iterm inot idefined iin
ithe itreaty ishall ihave ithe imeaning ias iit ihas iunder ithe ilaw iof ithe iState ito

i
iwhich ithe itreaty iapplies31. It iis iclear ithat ithe idefinition iunder ithe ilocal
ilaws iwill iprevail ionly iwhen ithe iConvention iis isilent iabout iit. iA
isubsequent iamendment iin ithe idefinition iof ia iterm iunder ithe ilocal ilaws
iwill inot ibe iapplicable iif ithe iterm iis ialready idefined iin ithe iconvention.
iThe iphrases iin ithe iArticle i3(2)at ithat itime‖ iand i―at iany itime‖ imake iit
iclear. iThese iphrases iare inot iincluded iin iUN iand iUS iModel iConventions. i

However, ithe igeneral irule iappears ito ibe ithat ia isubsequent idefinition iin ithe
ilocal ilaws iwill iapply iin ithe iinterpretation iof ithat iterm iin ithe itreaty. i

Model iConvention irequires ione ito ihave iregard ito ithe idefinition iof ia iterm
iin ithe iAgreement iin iany ilocal ilaw ibut ipreference iis ito ibe igiven ito ithe
imeaning, iif iany, iunder ithe ilocal itax ilaw. iHowever, ias iper ithe iUS iand
iUN iModels ias iwell ias ithe iAgreements igenerally ientered iinto iby iIndia iit
iis ionly ithe imeaning iin ithe ilocal itax ilaw i(and inot iany iother ilocal ilaw)
iwhich ihas ito ibe itaken iinto iaccount. i

The igeneral iview imentioned iabove imay ilead ito ithe ianomalous isituation
ithat ithe itwo icountries imay ichange ithe imeaning iof ithe iterm iunder itheir
ilocal ilaws isubsequent ito ithe iexecution iof ithe iAgreement iand, itherefore, ia
iparticular iterm imay ibe iinterpreted idifferently iby ithe iCourts iof ithe itwo
istates iresulting iin isuch iincome ibeing iclassified idifferently iby ithe itwo
istates, isay, iroyalty iincome iby ione istate iand ionly ia ibusiness iincome iby
ithe iother. iThere iis ia iview ithat iwhen ithere iis ia ipossibility iof isuch ia
iconflict ithe idefinition iof ithe isource istate iwould ibe iapplica- ible. iIn
31
i(1987) i22 iITD i87 i(SB) i
 i
iSiemens iA.G. ivs. iITO32 the iSpecial iBench iof ithe iTribunal iaccepted ithe
istatic iand inot ithe iambulatory irule iand, iaccordingly, idid inot iinterpret ithe
iterm i―royalty‖ iin ithe ithen iexisting i( i1959) iIndo-German iDouble iTaxation
iAgreement ion ithe ibasis iof ithe imeaning igiven ito ithe iterm ifrom i1976 iin
isection i9 iof ithe iAct. i

No idoubt ithat istate ihas ipower ito ioverride ia iprovision iin ithe itreaty iby iway
iof ia isubsequent ilegislation. iBut iwhether ithe itreaty ihas iactually ibeen
ioverridden iby ithe ilegislation iwould idepend iupon ithe ilanguage iused iin ithat
iparticular ilegislation. iOtherwise ithe iCourt iwould ialways igive ifull imeaning
ito ithe itreaty. i

CHAPTER i9: iTAXATION iAUTHORITY iIN iLIGHT iOF iVARIOUS

iTAXATION iAGREEMENTS

An iissue iwhich ioften iarises iin iimplementing ia iDTAA iconcerns

idetermination iof ithe iquestion ias ito iwhich icountry iis ientitled ito itax ia
iparticular iincome. iThe ifunction iof ia iDTAA iis iactually ito idetermine ithe
ijurisdiction iof ithe icontracting iparties ifor ithe ipurpose iof itaxing ia iparticular
iincome, ii.e. iwhether ia iparticular iincome ihas ito ibe itaxed iin ithe isource
icountry ior iin ithe icountry iof iresidence. i

For iexample, iit imay ibe iprovided iin ia iDTAA ithat ithe iincome ifrom ian
iimmovable iproperty i―may ibe itaxed iin ithe icontracting istate iin iwhich isuch
32
i(1) iWhere iany iCentral iAct ienacts ithat iincome-tax ishall ibe icharged ifor iany iassessment iyear
iat iany irate ior irates, iincome-tax iat ithat irate ior ithose irates ishall ibe icharged ifor ithat iyear iin
iaccordance iwith, iand isubject ito ithe iprovisions i(including iprovisions ifor ithe ilevy iof iadditional
iincome-tax) iof, ithis iAct iin irespect iof ithe itotal iincome iof ithe iprevious iyear iof ievery iperson i: i
Provided ithat iwhere iby ivirtue iof iany iprovision iof ithis iAct iincome-tax iis ito
ibe icharged iin irespect iof ithe iincome iof ia iperiod iother ithan ithe iprevious iyear,
iincome-tax ishall ibe icharged iaccordingly. i
iproperty iis isituated. iThe iquestion iarises ias ito iwhether ithe icountry iof
iresidence iof ithe iowner iof ithe iproperty ican ialso itax ithe iincome. iIn isuch ia
icase ithe iowner iof ithe iproperty iwould ihave ito iclaim icredit iin ithe icountry
iof iresidence ifor ithe itax ipaid iin ithe icountry iwhere ithe iproperty iis isituated.
i

In icase iof ibusiness iprofits, ithe iprofits iof ia ibusiness ientity ishall ibe itaxed
ionly iby ithe istate iof iresidence iunless iit icarries ion ibusiness iin ithe iother
icontracting istate i(source istate) iwhile ihaving ia ipermanent iestablishment
isituated itherein. iIn isuch ia icase, ithe iprofits iof ithe ienterprise imay ibe itaxed
iin ithe iother icontracting istate ito iextent iattributable ito ithat iestablishment.
iThe iMadras iand iKarnataka iHigh iCourts iin iCIT iv. iV.R.S.R.M. iFirm i&

i i
iOthers33 and iCIT iv. iR.M.Muthaiah held ithat iwhen iit iis iprovided ithat itax
imay ibe icharged iin ia iparticular istate iin irespect iof ithe ispecified iincome iit
iis iimplied ithat itax iwill inot ibe icharged iby ithe iother istate. iConventional
iwisdom iseems ito ibe ito ithe icontrary. iHowever, ithe iSupreme iCourt ihas iin

i
ithe iAzadi iBachao iAndolan34 case, iapproved iof inot ionly ithe idecision iin
iMuthaiah’s icase i(which idealt iwith iboth iimmovable iproperty iand ibusiness
iincome) ibut ialso ithe ireasoning iof ithe iHigh iCourt. i

i
In iCIT ivs. iKulandagan iChettiar iand iOther iAppeals35 the iSupreme iCourt
idecided iappeals iarising ifrom iseveral idecisions iof idifferent iHigh iCourts
i(including iof ithe iMadras iand iKarnataka iHigh iCourts ireferred ito iabove)

33
i i208 iITR i400
34
i(1993) i202 iITR i508
35
i(2004) i267 iITR i654 i(SC) i
iwherein iit iwas iheld ithat iif ithe iconcerned iassessee iwas iresident iin iIndia
iand ihad ia ipermanent iestablishment ior iowned iimmovable iproperty iin
iMalaysia iit iwas iMalaysia ialone iwhich ihad ithe iright ito itax isuch ibusiness
ior iimmovable iproperty iincome. iIn ia ijudgement i

which iis inot ithe imost iclearly iexpressed ithe iSupreme iCourt iappears ito ihave
itaken ithe iview ithat ithe iconcerned iassessees iwere ito ibe iregarded ias
iresidents iin iMalaysia iwith ino ipermanent iestablishment iin iIndia iand,
itherefore, inot ichargeable ito iIndian itax. iThe iSupreme iCourt, itherefore, idid
inot ispecifically iapprove inor iin iany iway idisapprove iof ithe iview iof ithe
iHigh iCourts ithat iwhere iit iwas iprovided ithat ithe isource istate i―may‖ itax
ithe ispecified iincome, iwithout istating ithat ithe istate iof iresidence imay ialso
itax isuch iincome, iit iwas ithe iformer ialone iwhich icould itax isuch iincome.
iHowever, iin iAzadi iBachao iAndolan ithe iSupreme iCourt iclearly iheld ithat iit
iapproved iof inot ionly ithe iconclusion ibut ithe ireasoning ifor ireaching isuch
iconclusion. i

For iexample, igenerally iboth istates iare iempowered ito itax iincome iby iway iof
idividend, iinterest iand iroyalty. iThe iright iof itaxation iis iconferred ion ithe
istate iof iresidence ibut iit iis ispecifically iprovided ithat isuch iincome imay
i―also‖ ibe itaxed iin ithe istate iof isource. iIt imay ibe inoted ithat ithe iOECD
iin iits imodel iconvention ihas iframed itwo ialternative iarticles i(23A/23B) ifor
igranting ibenefit iby ithe iexemption/credit imethod.

According ito ithe iArticle i1of ithe iOECD iModel iConvention, ithe iprovisions
iof ia iDTAA iapply ito ian iassessee iwho iis ia iresident iof ieither ior iboth ithe
icontracting iparties. iThus, ito ibe isubject ito ithe iprovision iof ithe itreaty ia
iperson ihas ito iprove ithat ihe iis ia iresident iof iat ileast ione iof ithe icontracting
istates. iGenerally, ia iperson iis iconsidered ias ia iresident iof ia icountry iif ihe
iis iliable ito itaxation itherein iby ireason iof icertain iprescribed itests, ifor
iexample, iresidence, idomicile, iplace iof imanagement, ietc.36 i

The iinterpretation iof ithe iphrase i―liable ito itax‖ iis isubjected ito isome
icontroversies. iThere iare ifour ipossible icases iwhich imay iarise: i

8. No ilaw ion itaxing ithe iincome iin ithe iconcerned istate i

9. The ilaw ilevying itax ion iincome iin ithe iconcerned istate imay inot ibe
iapplying ito ia iparticular i
class iof ipersons, ii.e., iindividuals iand ifirms ibut ionly ito icorporate
ientities i

10. Under ithe ilaw iof ithe iconcerned istate, ia itax imay ibe ileviable ionly iif
iextended ito ithe i
particular iperson ior itransaction iby ia iGovernment inotification ior i

11. A iparticular itype iof iincome imay inot itaxable iin ithe iconcerned istate;
ie.g., itechnical iservice i
fees, icapital igains, ietc. i

36
iThe iCentral iGovernment imay ienter iinto ian iagreement iwith ithe iGovernment iof iany icountry
ioutside iIndia ifor ithe igranting iof irelief iin irespect iof iincome ion iwhich ihave ibeen ipaid iboth
iincome-tax iunder ithis iAct iand iincome-tax iin ithat icountry.
As ifar ias ithe ifirst icase iis iconcerned, ione icannot isay ithat ithe iperson iis
iliable ito itax iin ithat istate iand, itherefore iwould inot ibe iregarded ias ia
iresident iof ithat istate ientitled ito iclaim ibenefit iof ithe iDouble iTaxation
iAvoidance iAgreement. iThe isame iresult imay iflow iin ithe isecond icase ialso
iinsofar ias ithe ilaw ienvisages itaxation iof ionly ia iclass iof iassessees, isay,
icorporate iassessees iand ithere iis ino ilaw iunder iwhich inon-corporate
iassessees icould ibe isubjected ito itax. i

Case i3) ihowever, iis ione iwhere ithe ilaw idoes iprovide ifor itaxation iof ia
iparticular iperson ibut iit ihas ibeen, ias iit iwere, iheld iin iabeyance ipending
iissue iof ia inotification. iIn isuch ia icase ithe iperson ishould ibe iregarded ias ia
iresident iof ithat istate ientitled ito iclaim iprotection iunder ithe itreaty. iThe i4th
icase iis iundoubtedly ione iwhere ithe iperson iis iliable ito ibe iassessed ibut ithe
istate ihas idecided inot ito ilevy itax ion ia iparticular itype iof iincome. iIn ithe
iAzadi iBachao iAndolan ithe iSupreme iCourt iheld ithat ieven iso ithe iconcerned
ientity iwas ia iresident iof iMauritius.37 i

Peculiar iproblems iarise iin ithe icase iof ipartnerships iwhere ithe ipartnership ias
isuch iis inot iliable ito itax i(as iin iIndia ifrom ithe iassessment iyear i1993-94)
ibut ithe ipartners iare idirectly itaxable iin irespect iof ithe iincome ifrom ithe
ifirm i(as, ifor iexample, iin ithe iUnited iKingdom). iIn isuch ia icase iwhether
ithe ipartnership iis ito ibe iregarded ias ientitled ito iclaim ithe itreaty ibenefit iis
ia imatter iof idebate. i

37
iThis iConvention ishall iapply ito ipersons iwho iare iresidents iof ione ior iboth iof ithe iContracting
iStates. i
i

i
A ilike iproblem iis ihappening iin ithe icase iof iLLPs i(Limited iLiability
iPartnerships).

CHAPTER i10: iTREATY iSHOPPING

i
The iCentral iGovernment iin iIndia iis iempowered iunder iSection i90 to ienter
iinto iDTAA ias iwell ias ito imake iprovision ifor ithe iimplementation iof ithe
isame iby iissuing inotification iin ithe iOfficial iGazette. iSuch iAgreements, ias ia
iresult, ibecome ipart iof ithe iIncome iTax iAct iitself. iIn iCIT ivs. iKulangadan

i
iChettiar38 the iSupreme iCourt iheld ithat isuch ia iDTAA iacts ias ian iexception
ito ior imodification ion isection i4 iand isection i5 iof ithe iIncome iTax iAct.
iEntry i14 iin iList iI iof iSchedule iVII ito ithe iConstitution ivests ipower
iexclusively iin ithe iUnion ito ienter iinto itreaties. iThe iSupreme iCourt iin
iMeganbhai iv. iUnion iof iIndia iand iUnion iof iIndia iv. iAzadi iBachao

i
iAndolan held ithat ia itax itreaty ibecomes ilaw iwithout iany ifurther ilegislation
ihaving ito ibe ienacted. i

Once ia iDTAA iis ientered iinto iit iwould icontinue ito ibe iin iforce iin iall iits
iterms iunless ithe icontracting istates isubsequently iexecute ia iprotocol ito
iamend ithe iterms iof ithe iDTAA ior ione iof ithe istates igives inotice iof
itermination ito ithe iother istate iwhich ican inormally ibe idone ionly iafter ithe
iexpiry iof iany iminimum iprescribed iperiod ifor ithe ioperation iof ithe iTreaty.
iThe inegotiation iof ia ifresh itreaty iwould ialso isound ithe idestruction iof ithe
iold iDTAA. i

38
i263 iITR i706 i
The icontracting istates ito ia iDTAA ihave ito iinform ieach iother iof itheir
icompliance iwith ithe iprocedures irequired iby ithe irespective ilaws iof ithe istate
ifor ibringing ithe itreaty iin iforce. iAfter ia ispecified itime, ithe iAgreement
icomes iinto iforce. iAs ifar ias iIndia iis iconcerned, ithe iprovisions iof ithe
iAgreement igenerally iapply iin irespect iof iincome iarising iin iany ifiscal iyear

st i
ibeginning ion ior iafter ithe i1 April. i

An iissue iarises iwhere iresidents iof ithe itwo icontracting iparties ihave ientered
iinto ia iprivate icontract iwhen ia iparticular iDTAA iwas iin iforce iand
isubsequently ithere iis ian iamending iprotocol ior ia inew iAgreement iwhich
iaffects ithe iassessee iadversely. iThe iquestion iarises ias ito iwhether ian
iassessee ican iurge ithat ithe iprovisions iof ithe iConvention ias iexisting iwhen
ithe iprivate icontract iwas ientered iinto ishould igovern ithe itaxation iin irespect
iof iincome iunder ithe isaid iprivate icontract iand inot ithe i

terms iof ithe inew iAgreement ior ithe iamending iprotocol? iThe igeneral iview
iis ithat iit iis ithe iprovisions iof ithe iConvention ias ion ithe ifirst iday iof ithe
irelevant iassessment iyear iwhich iwould ihave ito ibe itaken iinto iaccount iand
inot ithe iprovisions iof ithe iConvention ias iin iforce iwhen ithe iparties ientered
iinto ithe iprivate icontract. i

i
It iwas iheld iin iCIT iv. iIsthmian iSteamship iLines that ithe irule iis ithe isame
ias iwhen iinterpreting ian iamendment ito ithe iIncome iTax iAct i— ithe iIncome
iTax iAct i(as iamended) iexisting ion i1st iApril, iof ithe iassessment iyear iwill

i
iapply. iIn iTimken iIndia iLtd. ivs. iCIT also, iCalcutta iHigh iCourt itook ia
isimilar iview ithat ione ihas ito iconsider ithe iterms iof iany itreaty iin iexistence
ifor ithe iassessment iyear iin iwhich ithe iincome iis ichargeable ito itax. i

i
In iCIT ivs. iTata iIron i& iSteel iCompany iLtd.39 the iMumbai iBench iof ithe
iIncome-tax iAppellate iTribunal iin idisposing iof ithe iDepartment‘s iapplication
iunder isection i254( i2) iof ithe iIncome iTax iAct ito irectify iits iearlier iorder
ireported iin i62 iTTJ i17 iheld ithat ithe isubsequently ientered iinto iAgreement
idid inot iaffect itaxability iunder ian iearlier ientered iprivate icontract. iHowever,
iit imay iargued ithat ithis iis inot ithe iright iview. i

In i248 iITR i190 ithe iHigh iCourt iat iBombay i(in idismissing ithe iRevenue‘s
iappeal iagainst ithe iTribunal‘s iconclusion iin i66 iTTJ i463 ithat iits iearlier
idecision iin i62 iTTJ i17 idid inot idisclose ia irectifiable imistake) ihas ionly iheld
ithat ithe iTribunal‘s iearlier idecision idid inot ireveal iany imistake iapparent
ifrom ithe irecord iand ithe iCourt idid inot iuphold ithe icorrectness iof ithe iview
itaken iby ithe iTribunal ion ithe imerits iin ieither i66 iTTJ i463 ior i62 iTTJ i17. i

A ipeculiar iproblem iwhich iwould iarise iis iwhere ithere iis ian iamendment iof
ian iAgreement iby ia iprotocol iwhich iis iapplied iretrospectively. i

In iTata iIron i& iSteel iCo. iLtd. ivs. iDy. iCommissioner iof iIncome-tax, ithe
iMumbai iBench iof ithe iIncome-tax iAppellate iTribunal ihas itaken ithe iview
i(whilst iconsidering ithe iprotocol iwhich iamended ithe iIndo-German iDTAA iof
i1959 iin irespect iof iincome iassessable ifrom ithe iassessment iyear i1984-85 iby
inotification idated i26th iAugust, i1985) ithat ithe iamended iprotocol iwould inot
igovern ithe iassessment ifor ithe iassessment iyear i1985-86.40 i
39
ihttp://www.pwc.com/in/en/services/Tax/News_Alert/2010/PwC-News-Alert-24-March-2010-E-Trade-
th i
Mauritius- iLtd.jhtml, ivisited ion i6 August, i2011
40
i263 iITR i706 iat ipages i746 i- i753 i
The iissue iwhether ian iamendment ican ihave iretrospective ieffect iso ias ito
imake ithe iamended iAgreement iapplicable ito ia iyear iearlier ito ithe iyear iin
iwhich ithe inotification iwas iissued iis inot iyet iconclusively iadjudicated iupon
iby ia iCourt. i

After ithe iabove idiscussion ion idouble itaxation, ithe iposition iis ivery imuch
iclear ithat iif ia iparticular iincome iis itaxed iin ithe isource istate, ithen ithe istate
iof iresident icannot itax ithe isame. iIn ithe isame imanner, ithere imay iarise ia
isituation iof ̳double inon-taxation‘ iwhere ia iparticular iincome iis inot itaxed iin
ithe isource istate, ibecause iof ian iincentive, iexemption ior iprevailing iin ithat
iparticular istate. i

For iexample, iif ia iresident iof iIndia iowns iimmovable iproperty iin icountry ̳A‘
iwhere iincome ifrom iimmovable iproperty i―may ibe‖ itaxed iaccording ito ithe
iDTAA ibut ithe ilaws iof icountry ̳A‘ ifor isome ireason ido inot iprovide ifor
itaxation iof ithe iincome ifrom isuch iimmovable iproperty, ithen, isuch iincome
iwould igo icompletely iuntaxed ias icountry ̳A‘ iin iwhich ithe ijurisdiction ito itax
ithat iincome ihas ibeen iconferred ichooses inot ito itax ithe isame. i

Nowadays, ia iview iis ideveloping iinternationally ithat ia iDTAA ishall inot ito
ibe iinterpreted iso ias ito igive irise ito idouble inon-taxation ibecause iits ipurpose
iis imerely ito iavoid idouble itaxation. iThe iunderlying iphilosophy iin ithis iview
iis ithat ithe istate iof iresidence ialways ikeeps ian iinherent iright ito itax ithe
iincome iof ithe iresident. iHence, ieven iif, iin ithe iabove iexample, icountry ̳A‘
idoes inot itax iincome ifrom iimmovable iproperty, iIndia ibeing ithe istate iof
iresidence ican itax ithe isame. i

However ithis iview imay inot ibe iacceptable ivery ieasily. iA iDTTA ihas ito ibe
iinterpreted istrictly ion iits iown iterms ieven iif iis iresults iin idouble inon-
taxation. iThe iSupreme iCourt ihas ialso iclearly iaffirmed ithe iview ithat ia
ipossibility iof idouble inon-taxation iis iirrelevant. iIn iAzadi iBachao iAndolan,
ithe iMauritian iinvestors ihad iclaimed ithat iaccording ito iarticle i13 iof ithe
iIndo- iMauritius iDTAA, icapital igains iarising ito ithem iwere itaxable ionly iin
iMauritius. iThough iit iwas inoted ithat ithe icapital igain iwas inot itaxable ias
iper iMauritian ilaw, iyet ithe iSupreme iCourt iupheld ithe iclaim iof ithe
iMauritian iinvestors. i

In iCIT ivs. iLaxmi iTextile iExporters iLtd., ithe iassessee, iwho iwas ia iresident
iof iIndia, iwas irunning ia ibusiness iin iSri iLanka ithrough ia ipermanent
iestablishment. iHowever, isuch iincome iwas inot itaxable iin iSri iLankan. iThe
iMadras iHigh iCourt iheld ithat ithis iwould inot ientitle iIndia ibeing ithe istate
iof iresidence ito itax ithe isame.41 i

When ithe ilaw iis iwell isettled ithat ithe itreaty iwill ibe igiven ioverriding ieffect
ion ithe iIncome iTax iAct, iso ifar iit iis ifavourable ito ithe iassessee, igives irise
ito ianother iproblem iof ̳treaty ishopping‘. iIt iinfuses ia idesire iin ithe iassessee
ito ido ia itransaction ithrough ia icountry iwhich ihas ifavourable itreaty iwith
iIndia ias icompared ito ithe igeneral iprovisions iof ithe iIncome iTax iAct, i1961.
iIndo-Mauritius itreaty, iconvention iwith iCyprus iand ithe iNetherlands iare
isome igood iexamples iin ithis iregard. i

Suppose ithere iis ia ifavourable iprovision iin ithe iIndo-Mauritius iconvention ias
icompared ito ithe iIndo-US iconvention, ian iassessee iwill inaturally ibe iattracted
ito istructure ihis itransaction iin isuch ia imanner ias iget ibenefitted ithrough ithe
iIndo-Mauritius iconvention iby iincorporating ia icompany iin iMauritius, ithough

41
ihttp://www.vccircle.com/500/news/india-mauritius-tax-treaty-pes-must-opt-for-impact-assessment,
th i
ivisited ion i6 August, i2011
ithe iperson iassociated iwith ithe icompany imay ibe isituated isomewhere ielse.
iThis iis iactually icalled ias ithe i―treaty ishopping―. i

This itreaty ishopping iis ivery ioften imisused iby ithe iforeign ientities ifor ithe
ipurpose iof iavoiding itaxes. iFor iexample, iover i40% iof ithe itotal iFDI
i(Foreign iDirect iInvestment) iin iIndia icomes ithrough ithe iroute iof iMauritius
ibecause iunder ithe iIndo-Mauritius iDTAA icapital igains iare iassessed ias iper

i
ithe ilaw iof ithe istate iof iresidence iof ithe iparty. Under ithe itax ilaw iof
iMauritius, ino itax ion icapital igains iis ilevied. iThe iresult iis ithat iall ithe
iinvestment icoming ivia ithe ichannel iof iMauritius iin ian iIndian icompany
igoes iun-assessed. i

Treaty ishopping ican ialso ibe idone iin icases iwhere ithe irate iof itax iin ione
istate iis ilower ias icompared ito ithe irate iof itax iin ianother istate. i

The iSupreme iCourt idealt iwith ithe iissue iof itreaty ishopping iexclusively iin
iUnion iof iIndia iv. iAzadi iBachao iAndolan, iwhere iit iheld ithat iif ithe
iintention iof ithe iDTAA iwas ito ipreclude ia inational iof ithird icountry ifrom
itaking ithe ibenefit iout iof ithe ifavourable iterms, ithen ia ispecific iprovision ito
ithat ieffect ishould ihave ibeen iincorporated iin iit.42

It iis iduty iof ithe iParliament ito itake inecessary isteps iin ithis iregard, iand iif
ithe ilimitation iis inot ithere iin ithe iDTAA ithen ino ione ican ibe idenied
ibenefit iof ithe ifavourable itax iprovisions iin ithe ibelief ithat itreaty ishopping
iis iprohibited. iFor iexample, ian ianti itreaty ishopping iclause ihas ibeen iinserted
iin iArticle i24 iof ithe iIndo-US iDTAA, iwhich ipermits ia inon-individual
iperson ito iavail ithe ibenefits iof ithe iAgreement ionly iif imore ithan i50%

42
i(2000) i245 iITR i521 i(Mad) i
ibeneficial iinterest itherein iis iowned iby iindividual iresident iof ia icontracting

i
istate.

In ia irecent ijudgment igiven iby ithe iAAR i(Authority ifor iAdvance iRulings),
iit iwas ithat ithe iApplicant, ia itax iresident iof iMauritius, iis inot iliable ito itax
iin iIndia, iunder iIndia-Mauritius itax itreaty, ion ithe icapital igains iarising ion

i
isale iof ishares iof ian iIndian icompany. This iruling ialso iaffirms ithe
iprinciples ilaid idown iby ithe iSupreme iCourt iin ithe icase iof iAzadi iBachao
iAndolan. i

CHAPER i11: iCONCLUSION

A iperusal iof ithe iprinciples ilaid idown iby ithe ivarious idecisions iwhile
iinterpreting ior igiving ieffect ito ithe idifferent iclauses iof ithe iDTAA ias ialso
ithe ischeme iof iconferring iunilateral irelief ifrom ithese iprinciples, ialthough
ienunciated iin ithe icourse iof iapplication iof ia iparticular iagreement ior ithe
irelevant iclauses ithereof, iwould ibe iapplicable ieven ito ithose icases iwhich
iconcern isimilar iclauses iof iDTAAs ibetween iIndia iand iother icountries. i

In ithe iend, ithe iability ito iarrive iat ithe icorrect iinterpretation iof ia ilegal
iprovision, iwhich icould ialso imean ithe iinterpretation iwhich ithe iCourt iwill
iultimately iplace ithereon, iis ithe ireal iart iof ia ilawyer. iIt idepends ion ihis
iability ito iread iwhat iis istated, ito iread ibetween ithe ilines iand ito iread
i―through‖ ithe iprovision, ithings iwhich ione ican ido iif ihe ihas ia iwide
iexposure ito ilife ias isuch. i
The irules iof iinterpretation iare ielastic ienough ito ienable ia ijudge ito iinterpret
ithe iprovisions iof ia itreaty iin isuch ia iway ias ito ifurther ithe icause iof ijustice
iby iciting ian iappropriate irule iof iinterpretation. i

If ia ijudge iwants ito iinterpret istrictly iaccording ito ithe iwritten itext, ihe
iwould icite ithe irule ienunciated iby iRowlatt iJ. iin iCape iBrandy iSyndicate iv.
iIR, iwhich iwas iapproved iby ithe iSupreme iCourt iin iCIT iv. iAjax iProducts
iLtd.. iAccording ito ithis irule, ithe itax ilaw ishould ibe iinterpreted istrictly
iaccording iwhat iis iclearly iwritten.43 i

There iis ino iroom ifor iany iuncertainty. iNo iprinciple iof iequity iapplies iin
itaxation. iNo ipresumption ican ibe imade iin icase iof itaxation. iNothing iis ito
ibe iimplied, inothing ito ibe iread iin. iThe ionly ithing ione ican ilook iat iis ithe

i
ilanguage iused. iIn iJiwandas iv. iCIT it iwas istated ithat ione icannot iextend
ithe iscope iof ia istatute iby ianalogy ior iplace iupon iit iwhat iis icalled ia
ibeneficent ior iequitable iconstruction iin iorder ito iprevent ia ireal ior isupposed
ianomaly. i

However ithe irule iof iconstruction iis ijust iopposite ito ithe iabove imentioned
irule iof iinterpretation. iHere ia ijudge ican isupplement ithe iwritten iwords iwith
ihis iown iinterpretation iin iorder ito igive iforce iand ilife ito ithe iintention iof
ithe ilegislature. iHowever ithe ijudge iis inot isupposed ito ialter ithe imaterial iof
iwhich ithe ifabric iis iwoven ibut ihe ishould iiron iout ithe icreases. i

43
i(1985) i156 iITR i323 i(SC)
The iSupreme iCourt, iwhile iinvoking ithese iprinciples iin iCIT iv.

i i
iBhattachargee44 held ithat iin isection i245 of ithe iIncome iTax iAct, ithe iterm
i―assessee‖ iwould iinclude ithe idepartment ias iwell. iThe ireason ifor idoing
ithis iwas ito iavoid ia iresult iwhich iwould ihave ibeen iunjust ito ithe iRevenue.

i
iIn iCIT iv. iJ. iH. iGotla45 the iboot iwas, ias iit iwere, ion ithe iother ifoot. i

A iliteral iinterpretation iwould ihave iresulted iin ia ipatent iinjustice ito ithe
iassessee. iIn ithis iprocess ithe iCourt istated ithat iwhere ian iunjust iresult iis
iproduced iwith ithe iplain iliteral iinterpretation iof ia istatutory iprovision, iwhich
icould inever ibe ithe iintention iof ithe ilegislature, ithe iCourt imight imodify ithe
ilanguage iused iby ithe ilegislature iin iorder ito iachieve iits iintention. iHowever,
ias iagainst ithis iapproach ia istrict iconstructionist ijudge iwould isay ithat ithe
iCourt iis inot iobliged ito imake igood ithe ilacuna iin ithe ilegislation. i

This icontradicting iapproach iis iestablished iby itwo ijudgments igiven iby ithe
iBombay iHigh iCourt iwithin ia igap iof ifive iyears ibetween ithe itwo
ijudgments. iIn iElphinstone iSpinning iand iWeaving iMills iCo. iLtd. iv. iCIT46

i
the iCourt iobserved ithat iwhere ithe ilanguage iwas iclear iand inot icapable iof
iany iother iconstruction, ithen, ihowever iillogical ithe iposition, ihowever,
iabsurd ithe iresult, ihowever imuch ithe iconstruction iput imay idefeat ithe iobject
iof ithe iLegislature, ithe iprovisions iof ithe istatute imust ibe iinterpreted iin
iaccordance iwith ithe ioriginal ilanguage iused iby ithe iLegislature. i

44
i(1985) i156 iITR i323 i(SC)
45
i(1955) i28 iITR i811 i(Bom)
46
i1960) i39 iITR i522 i(Bom)
 i
While iin iCIT iv. iKishoresinh iKalyansinh iSolanki i the iBombay iHigh iCourt
iheld ithat ithe irule iof iliteral iinterpretation icannot ibe imade irecourse ito iif iit
ileads ito iobvious ior iapparent iabsurdity. i

The ipity iis ithat iwhat iis i―obvious ior iapparent‖ ito ione ijudge iis ioften
iblurred ito ianother. iTherein ilies ithe iweakness ior istrength iof ithe iprinciples

i
iof iinterpretation iand iprovide iassistance ito ithe ilegal ifraternity!
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