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以印度毛里求斯条约看条约购物的重要性的国际法类文章 纳税人多年来一直陷入泥沼中，因为税法的复杂性和其在印度的快速改变。印度-毛里求斯条约也已经一次又一次被仔细审阅。麦克道尔判词从最初实行到如今的现代设置已经执行很久了。Azadi Bachao Andolan案例表明了麦克道尔判词是混淆的，但是是否条约能够经受的住新的直接税代码的考验是值得商榷的。但是很有趣的是，提出修正案的规定承认了条约购物，逃税以及以个人身份避税。作者再次提出修正案，他认为这又明显的漏洞，与现有的国内法律和国际义务相违，且最终试图回答条约购物是福还是灾难，是否会对印度的外资和税收之间的对峙产生负面的影响。 绪论 条约购物这一术语，普遍来说是一个专业术语，但是税收业务的人知道其全球化商业时代的相关性和重要意义。 Treaty Shopping With Special Reference To Indo Mauritius Treaty International Law Essay Taxpayers have been in trouble waters for years owing to the complexities of the tax laws and the frequent changing political scenario in India. The Indo-Mauritian treaty also has been under the scanner time and again. The McDowell Dictum has come a long way from its initiation to today’s contemporary settings. The Azadi Bachao Andolan case has addressed the McDowell obfuscation, but will the treaty stand the test of the new Direct Tax Code is debatable. But interestingly the provisions of the proposed amendment recognise the treaty shopping, tax evasion as well as avoidance, in their individual capacities. The author revisits the proposed amendment that has glaring loopholes and also which are in contravention with the existing domestic laws and international obligations and finally attempts to answer whether treaty shopping is a boon or bane for India with respect to the face-off between foreign investment and taxation in India. Introduction The term Treaty shopping comes across as a jargon in common parlance, but those in the taxation business know the relevance and significance in the age of global-commercialization. This term is used in common parlance now, but it seems that it had originated in the US drawing an analogy with the term ‘forum-shopping’ [1] . But the definition evolved further and in 1994 an International Tax Counsel at US Treasury Department defined it as, borrowing’ a tax treaty by forming an entity (usually a corporation) in a country having a favourable tax treaty with the country of source – that is, the country where the investment is to be made and the income in question is to be earned. [2] Apart from this definition there has not been any other definition(s) but for the purposes of this paper the author shall rely on the definition of treaty-shopping that, when a national /resident of a third country for the purpose(s) of attaining benefits of a double tax avoidance agreement (hereinafter DTAA) between two other countries introduces a new company or other entity in one or the other of them. These introductions of a new entity in another country where the DTAA tax benefits are availed are only in furtherance of tax planning. The jurisprudence of the thin line between tax evasion and tax avoidance is substantial. The identification of the difference between tax evasion and avoidance has been debated for long, the Supreme Court of India relying on Common Law jurisprudence at different points in time of the debate. The line of division is too thin and some say that a successful tax evasion is tax avoidance while an unsuccessful one is tax evasion. [3] The advent of the jurisprudence was in McDowell & Co. Ltd. v. CTO [4] . Moreover, the tax evasion strategy adopted through the treaty-shopping route has been addressed recently in the case of Azadi Bachao Andolan v Union of India [5] (hereinafter Azadi Bachao Andolan). In the Indian context, the Double Taxation Avoidance Agreement is a concept nurtured under Section 90 of the Income Tax Act, 1961 (hereinafter the Act). [6] The philosophy behind such laws is that, if a resident, is being under the assessment by the taxing authorities two countries, and because of the business connection he has to pay taxes on any transaction in both countries, he may chose to pay the same in whichever jurisdiction he so wishes and not in both, so as to avoid the double taxation of the same transaction is different jurisdiction. The Indo-Mauritian Treaty In 1982 the Indo-Mauritian Double Taxation Avoidance Agreement was entered into by the respective countries. But the effect of this international agreement was not felt as India still had a rigid economic regime and did not allow foreign investment in certain sectors. Thus, after liberalization of the economic policies in 1991-92 coupled with the lowering of barriers for the foreign players to enter the Indian market and thus the said DTAA came into action. Following liberalization an acute expansion was seen in the foreign investment number of foreign investors could sniff an opportunity and started investing in various sectors, through various routes. One of such routes was the Mauritian route. The primary basis was the legislation of the Offshore Business Activities Act by Mauritius. Through this piece of legislation companies were authorized to setup in Mauritius for the purposes of investing in economies around the world. This practise of routing investments was frowned upon as being detrimental for the economies worldwide, but as far as Mauritius was concerned it was a boon. [7] The Route of Investments Thus, within Article 13(4) of the Indo-Mauritian Tax treaty, India was pumped in with foreign investments, through Mauritius. This was beneficial to them for the primary reason that, if they wanted to exit a company, in India, they would have to pay a large Capital Gains tax on profits it had made from the selling of such stake, but since Mauritius did not have a levy on the capital gains tax, as per Article 13 (4) the companies would avoid the payment on such tax. The Consequence of the Treaty As result the treaty was received with a lot of scepticism and criticism and the efficacy of the treaty was being questioned. The tax officers approached the Central Board of Direct Taxes (hereinafter CBDT) and questioned the capital gains of the companies which were routing their investments through the Mauritian route. The primary argument of the assessing officer was that these foreign institutional investors (FIIs) should be deemed to be resident of India and hence should be taxed on their capital gains from India. As an obvious repercussion, the FIIs began retreating from the Indian markets and efficacy of the process of liberalization was under the scanner. With a circular [8] in the armoury the CBDT clarified that on producing a legitimate certificate of residence from the Mauritian authorities, a company will be exempted from being taxed under the Article 13 (4). [9] The tryst between Indo-Mauritius Treaty and the Indian Judiciary The case of Azadi Bachao Andolan In pursuance of a DTAA signed with Mauritius, CBDT issued a circular (Circular No.789 dated 13-04-2000) stating that resident certificate issued by Mauritius would constitute sufficient evidence for accepting the status of residence (as well as beneficial ownership) for application of the treaty provisions. [10] Therefore in a transaction which involved capital gains, the FII producing a certificate would be sufficient for it to qualify to be taxed under the provisions of Mauritian law. These were negligible rates. Challenging such a writ petition was filed in the High Court contending inter-alia that: The circular was passed in excess of the authority vested with CBDT in relation to laying down guidelines for assessment authorities in that it impinges on the quasi-judicial power of the assessment authorities that allow them lift the corporate veil in order to see whether a company is actually a resident of Mauritius or not and whether the company is paying income tax in Mauritius. [11] The India-Mauritius Treaty be suitably amended or terminated such that it cannot be used by parties from non-contracting states for their advantage. The High Court allowed the writ petition and held inter-alia that: The circular is ultra-vires the provisions of the Act in that it directs the assessment authorities to accept the certificate of residence issued by Mauritius as conclusive proof of evidence as regards status of resident and beneficial ownership. This was held as ultra-vires the powers Section 119 and Section 90 of the Income Tax Act, 1961. Assessment authorities are entitled to life the corporate veil in order to determine a company is actually a resident of Mauritius or not. Such power is quasi-judicial and any attempt by CBDT to interfere with the exercise of this quasi-judicial power is against the scheme of the Act. Treaty shopping is illegal and necessarily forbidden. On appeal, Supreme Court overturned all the grounds on which High Court had upheld the petition. Treatment Of Treaty-Shopping The most important issue (and relevant in this essay) was that of treaty-shopping. Treaty shopping involves the re-routing the funds from non-contracting states or third-party states through one of the contracting states to benefit from the provisions of a tax treaty between the two contracting states. The word ‘shopping’ qualifies the entire transaction in that the entities scope out for a favourable treaty agreement and ‘shop’ into that treaty (otherwise unavailable to them) by structuring their financial arrangements through complicated structures. [12] The India-Mauritius treaty coupled with Mauritian treatment of Global Business Companies (GBC) and Offshore Business Company (OBC) by Mauritian tax laws provided for a perfect case of treaty shopping. For instance, an entity in USA wishing to invest in stock markets in India would incorporate an entity in Mauritius as a subsidiary of the company in USA to conduct such transactions in the Indian market such that any capital gains accruing from such transactions is taxable in Mauritius as per the provisions of the DTAA between India and Mauritius and such capital gains are exempted from tax under Mauritian law. Such profits may further be repatriated to the parent company in USA in the form of fictitious loan or dividends, as the case maybe. [13] The Court made a distinction unintended consequences and illegality, especially in case of a treaty between two sovereign nations. It sought to give full effect to the intentions of the contracting parties by refusing to read an implicit anti-treaty shopping clause in the treaty. It observed that: “It is urged by the learned counsel for the appellants, and rightly in our view, that if it was intended that a national of a third State should be precluded from the benefits of the DTAC, then a suitable term of limitation to that effect should have been incorporated therein. As a contrast, our attention was drawn to the Article 24 of the Indo US Treaty on Avoidance of Double Taxation which specifically provides the limitations subject to which the benefits under the Treaty can be availed of. One of the limitations is that more than 50% of the beneficial interest, or in the case of a company more than 50% of the number of shares of each class of the company, be owned directly or indirectly by one or more individual residents of one of the contracting States. Article 24 of the Indo-U.S. DTAC is in marked contrast with the Indo-Mauritius DTAC. The appellants rightly contend that in the absence of a limitation clause, such as the one contained in Article 24 of the Indo-U.S. Treaty, there are no disabling or disentitling conditions under the Indo-Mauritius Treaty prohibiting the resident of a third nation from deriving benefits there under. They also urge that motives with which the residents have been incorporated in Mauritius are wholly irrelevant and cannot in any way affect the legality of the transaction. They urge that there is nothing like equity in a fiscal statute. Either the statute applies proprio vigore or it does not. There is no question of applying a fiscal statute by intendment, if the expressed words do not apply. In our view, this contention of the appellants has merit and deserves acceptance.” [14] The LOB Loophole The court recognised that the unintended ramifications of an international treaty cannot be reason for the treaty to lose legality and the obligations that a signatory state has. The interpretative value of the word ‘legality’ is within the corners prescribed by the Vienna Convention of Law of Treaties, 1969. The absence of a Limitation of Benefit (LOB) clause was recognised by the Court that led to this inconsistency and sparked a furious debate of the dynamics of LOB and the countries adoption of it in their respective tax treaties. In spite of the leakage of revenue from the country, it was imperative for the Court to recognise the intention of the parties to not to include an LOB in a treaty. Hence, the Court decided to act in judicial self-restraint since the Government was aware of the loophole in the treaty and was expending efforts to address this issue through negotiations with Mauritius on re-working the treaty or at the least instituting a joint monitoring mechanism to oversee the situation. The court observed that :- “The Central Board of Direct Taxes had approached the Indian High Commissioner at Mauritius to take up the matter with the Mauritian authorities to ensure that benefit of the bilateral tax treaty were not allowed to be misused, by suitable amendment in Article 13 of the agreement. The Mauritian authorities, however, were of the view that, though the beneficiaries of such capital funds domiciled in Mauritius may be residing in third countries, these funds had been invested in the Indian stock market in accordance with SEBI norms and regulations and that the Finance Minister of India had himself encouraged such FIIs as a channel for promoting capital flow to India in a meeting between himself and the Finance Minister of Mauritius. The Ministry of finance was willing to have regular joint monitoring of the situation to avoid possible misuse of the tax treaty by unscrupulous elements. It was pointed out by the Mauritian authorities that DTAC between the two countries "had played a positive role in covering the higher cost of investing in what was then assessed as high risk security and being decisive in making possible public offerings in U.S.A. and Europe of funds investing in India". In the absence of such a facility, as afforded by the Indo-Mauritius DTAC, the cost of raising such investment would have been capital prohibitive. The JPC report points out that the negotiations between the Government of India and Government of Mauritius resulted in a situation in which the Mauritius Government felt that any change in the provisions of the DTAC would adversely affect the perception of potential investors and would prejudicially affect their financial interests.” [15] Attributing The Stature Of Illegality To Treaty-Shopping Is Not Always Justified Essentially all the treaties amongst sovereign states are a result of bargaining process to the extent that each country being a party to the treaty has an equitable share of tax for the purpose of generation of revenue by taxing transaction in both jurisdictions. [16] Therefore it is prudent to contemplate that the contracting states are generally at par with respect to flow of trade and investment. It could be a situation where countries of unequal stature, for example treaties between developed and developing nations that the benefits meted out eventually would tilt towards one country as compared to the other. In particular the Indo-Mauritian treaty seems to favour Mauritius more than India. But it is highly improbable that reciprocally, Mauritius too would have experienced substantial investment from India via the treaty. Hence, as is common in such cases, Mauritius in order to derive benefit from the treaty overhauled its legal structure such that it would enable the entities from other countries to take advantage of the treaty for investment into India. The Judiciary Has To Maintain Self-Restraint In R. K. Garg v. Union of India [17] , the court observed that in cases of tax and other economic activities, it is imperative for the court to maintain “judicial self-restraint if not judicial deference to legislative judgment”. [18] It is evident that in such matters, wherein the legislation is directed towards practical problems and where the economic mechanism is highly sensitive and complex that abstract propositions of law cannot be used to provide solutions to economic matters which are primarily empiric. [19] The court can rule on the treaty to the extent as to whether proper procedure has been followed and provisions have been heeded to make it applicable within India. Hence, it is respectfully submitted that court was spot-on when it upheld the legality of treaty-shopping. Treaty-Shopping Is An Incentive For Foreign Investment It is refreshing to notice that the Court also emphasised on the legitimate incentive of foreign investment through treaty shopping. [20] It is an erroneous understanding that treaty shopping is illegal as it results in revenue leakage. [21] There has to be empirical research to establish such a proposition. On the contrary the losses are insignificant in comparison to the benefits that result by treaty-shopping. [22] In furtherance of this argument the court observed “..countries need to take and do take, a holistic view. The developing countries allow treaty shopping to encourage capital and technology inflows which developed countries are keen to provide them.” [23] In the absence of substantial evidence detailing the exact quantum of losses or benefit that accrues from the treaty (if at all, they can be calculated), the court was right in leaving the discretion to the executive considering that the treaty, its renegotiation or termination has several implications, political or otherwise. Tax avoidance Vis-à-vis Tax Evasion The McDowell Dictum and its Relevance The Road to McDowell One of the earliest cases to recognise the right to avoid taxes is Inland Revenue Commissioner v. Duke of Westminster [24] , wherein the right of the tax payer not to pay increased tax if he manages his affairs accordingly was recognised provided he does so under the appropriate laws of the land. The Indian Courts also followed the English position and recognised the right to avoid tax availability by arrangement of affairs that would legally circumvent the taxing statutes. [25] But this was soon realised by the Courts (both in India and England) that there needs to be an interpretation different from that made in Westminster. Finally, it was the case of W.T. Ramsay Ltd. v. Inland Revenue Commissioner [26] which rendered this ‘right’ of avoidance of tax to be faulty. The House of Lords had to consider a scheme tax avoidance of a series of transactions. A novel feature of all these transactions was that despite being genuine in their individual capacity, the effect of all these transaction put together resulted in tax avoidance. This departure from the Wesminster Rule was also re-affirmed in Inland Revenue Commissioners v. Burmah Oil Co. Ltd. [27] but in the light of the increasingly changing commercial concepts which have to be taken into consideration. This case is conspicuous by an emphatic assertion by Lord Diplock, he stated the need of unambiguous understanding of the nature purpose of the transaction(s) not in separation but in unity. The shortcoming of the Ramsay Principle was exposed. Since then, several cases including the Macniven (HM Inspector of Taxes) v. Westmoreland Investments Ltd [28] have repeatedly confirmed that it is permissible to avail tax benefits. The Indian Position Following the law laid down in the English Courts, India also did not lag behind to formulate its understanding of the tax laws. The SC in the case of McDowell [29] has expanded the ambit of taxing statutes that suddenly an array of business of financial activities and transactions found themselves trapped in the taxing nets. In effect Justice Reddy has provided teeth to the taxman which is being used bite every dreg off the assessee’s plate. The judgement has provided for more confusion between the honest bloke who files his taxes on the first date every month against the conniving squirrel whose dishonest means lets his wife have that solitaire on their anniversary. Such a judgement calls for a thorough analysis.#p#分页标题#e# The Issue of Tax Avoidance in McDowell The law on this issue was in trouble waters for long and Justice Mishra sought the opportunity to take up a further contention [30] and lay down the Law on this sub-issue. Relying on a Gujarat High Court judgment in CIT v. Sakarlal Balabhai [31] , he observed that ‘colourable devices’ aimed at avoiding tax payments should be discouraged as it is illegal for every honest citizen is under an obligation to pay taxes. [32] The damage had still not been done until Justice Reddy’s judgment was delivered which was in concurrence of Justice Mishra’s judgement but the game was not over as yet. The maligned judgement of Justice Reddy Justice Reddy examined several English cases to demonstrate how the law relating to the controversy of tax avoidance was changed even in England. His first shot was the bullet of Westminster [33] wherein it was ruled that the tax payer had a legitimate reason for not paying higher tax if he had secured his financial affairs to his advantage and could not be held guilty if his steps were not encroaching beyond the law. Justice Reddy’s express displeasure with the use of the Westminster principle and the judgement of Justice Shah in Raman as tax avoidance has its own evils and should not be endorsed or encouraged. Inter alia, tax avoidance can result in substantial depletion of public revenue that can be detrimental to the functioning of a welfare state; it can result in inflation causing harm to the economy of the country in addition to being extremely unfair and unjustified. The practice of tax avoidance has also been described as unethical as placing a burden on the honest tax payers. Critique of Justice Reddy’s Judgement The cases of Raman [34] were not contrary in essence to the McDowell’s judgement. As mentioned before the difference of tax evasion and avoidance was a sub-issue which was blown beyond proportions to satisfy the judges’ unexplained urge to solve difference. In the opinion of the author more than solving the issue the judgement conveniently introduces an element of uncertainty and confusion. Later decisions of the SC has been decided which have expressed a contrary opinion to the McDowell’s judgement. [35] In Banyan and Berry v. CIT [36] it was observed that in McDowell case the court nowhere said that every action and inaction on the part of the tax payer which results in reduction of tax liability to which he may be subjected in future, is to be viewed with suspicion and be treated as a device for avoidance of tax irrespective of the legitimacy or genuineness of the act. This principle has not affected the freedom of the citizen to act in a manner of doing any trade, activity or planning his affairs with circumspection, within the framework of law, unless the same falls under the category of colourable device. [37] Further, in the opinion of the author, the McDowell case gives an unnecessary reason for the taxing authorities to believe that every transaction which results in reducing the tax burden was planned with the aspirations of evasion of tax. It is absolutely unjustified for the taxpayers who are aware of the taxation laws to derive as much benefit as possible by the sheer intellectual superiority of the payer. Also the judgement does not limit the newly bestowed powers on the taxing authorities. [38] The McDowell case conveniently places powers, almost as powerful as discretionary powers, which may be applied at the tax collector’s whims. The probability of abuse of such powers is nearly certain. This defeats the entire purpose of India being a Welfare State that internationally boasts of her Democracy and Equality policies. Justice Reddy’s judgement was that of a romantic and unnecessary which resulted in more uncertainty than not. The Contemporary Position in India The present day position has been defined by the case of Azadi Bachao Andolan [39] where the SC, in unequivocal terms have laid down that the McDowell dictum is not entirely dependable and that the Common Law principles are still applicable in the present day situation. Expressing agreement with the decision of M.V. Vallipapan & Ors. v. ITO [40] , the SC has laid down that every decision in McDowell cannot be read to mean to declare prudent tax planning as illegal or illegitimate. In the opinion of the author the Court seemed to be displeased with the decision of the McDowell case. Numerous cases [41] , apart from the ones discussed above, have tried to dilute the effect of the McDowell Dictum and therefore the applicability of the same has lost the strength it enjoyed previously. Nevertheless, it has not been overruled and continues to be the demon in the dreams of the taxpayers. Is there Tax Avoidance in the Garb of Treaty Shopping? The court in the case of Azadi Bachao Andolan recognises the obfuscation in tax avoidance and evasion. Upon inspection there is difference between the observations of Justice Ranganath Mishra and Justice Chinappa Reddy, although Justice Reddy endorses the opinion expressed by Justice Mishra. The majority approves tax avoidance and carves out an exception that it cannot be carried out by colourable or dubious methods. [42] The court further clarified the ratio of McDowell by pointing out the disconnect between the view expressed by majority and its endorsement of the concurring opinion that was “far cry” from the majority. The Court observed that: “If the court finds that notwithstanding a series of legal steps taken by an assessee, the intended legal result has not been achieved, the court might be justified in overlooking the intermediate steps, but it would not be permissible for the court to treat the intervening legal steps as non-est based upon some hypothetical assessment of the real motive of the assessee. In our view, the court must deal with what is tangible in an objective manner and cannot afford to chase a will-o-the-wisp.” [43] The curious case of Azadi Bachao Andolan did seek to throw light on the ratio of McDowell, but the assessing officers endorsed the view of McDowell and argued that McDowell being a constitutional bench (the majority view in consonance with the concurring opinion) and stands ground, against Azadi Bachao Andolan (being a three judge bench). However recent decisions of various High Courts appear to have foreclosed the Revenue from exploiting this precedent-based gap. In CIT v. Akshay Textiles [44] Justice Rebello of the Bombay High Court has observed that “…the ratio of McDowell as understood by the Supreme Court in Azadi Bachao Andolan is the law, considering that that is how the Supreme Court understood the ratio decidendi of the judgment in McDowell…” (Emphasis Supplied) Further in Porrits & Spencer Asia v. CIT [45] Justice M.M.Kumar observed that “ …judgment rendered therein by Justice Chinnappa Reddy has been explained in detail by the later judgment in Azadi Bachao Andolan. It is well settled that if a smaller Bench of the Supreme Court has later on explained its earlier Larger Bench then the later judgment is binding on the High Court. Accordingly, the view expressed in Azadi Bachao Andolan has to be accepted as binding..” [46] (Emphasis Supplied) Azadi Bachao Andolan case did manage to lay down the test of the Indo-Mauritian Treaty and in furtherance of the same the tax department’s perception of the test and application has been seen in E*Trade Mauritius . In this particular case the courts reiterates how the Azadi Bachao Andolan Principle will be applied in the cases that advent. [47] The primary issue that arose in this case was whether the transactions involved in a US company buying shares of an Indian Company through its Mauritian subsidiary comes under the ambit of the Indo- Mauritian treaty or will it be under the India-US treaty on the account of the beneficial ownership of shares by the USA company. The form over substance test was applied by the department and stated that in spite of the US Company being a beneficiary of the capital gains incurred on the selling of shares by the Mauritian subsidiary, such transactions shall attract the provisions of Article 13 of the India-Mauritius treaty. It was reinstated that there is no legal prohibition of treaty shopping. However, it went on to issue a qualification stating that the practice of treaty shopping cannot be regarded as a colourable device as much as the underlying objective was tax avoidance or mitigation. The department observed that: “if a resident of a third country, in order to take advantage of a tax treaty sets up a conduit entity, the legal transactions entered into by that conduit entity cannot be declared invalid. The motive behind setting up such conduit companies is not material to judge the legality or validity of the transactions” [48] Of the loophole in the India-Mauritius treaty, the department has recognised that business entities have been routing their investments or transactions to evade tax. In this light it was stated that “It looks odd that the Indian tax authorities are not in a position to levy capital gains tax on the transfer of shares in an Indian company. Whether the policy considerations underlying Article 13 (4) of the treaty and the spirit of the CBDT Circular would still be relevant in the present day fiscal scenario is a debatable point.” [49] (Emphasis Supplied) The above highlights the perception of the tax authorities towards India-Mauritius treaty. The absence of explicit anti-treaty shopping clause is regarded more as a loophole to be fixed.#p#分页标题#e# Tax Avoidance and General Anti-Avoidance Principles in Direct Tax Code (DTC) The DTC was introduced by the Government in 2009 aims simplify tax regime in India by way of amending the Income Tax Act (hereinafter Act). One of the notable aspects of the DTC is its approach to tax avoidance in the scheme of international taxation. The newly proposed amendment has introduced the General Anti-Avoidance Rule (Hereinafter GAAR) [50] The Primary Objective Of GAAR The GAAR may be understood as a set of rules that can pronounce an arrangement invalid entered by the taxpayer to obtain a tax benefit only. A thin line of distinction between the avoidance and evasion, a loophole the DTC seeks to erase. This is, perhaps, first time in the history of Indian tax legislation that the two terms, ie tax avoidance and tax evasion to be used almost interchangeably and on par in the context of their undesirability. The Discussion Paper , the preclude to the DTC, released by the Government, states that: “Tax avoidance, like tax evasion, seriously undermines the achievements of the public finance objective of collecting revenues…” [51] The Provisions Of GAAR It is intended that the GAAR should apply to any “arrangement” entered into by a person if the same can be regarded as an “impermissible avoidance arrangement.” Under the Code, the GAAR will be invoked if the following three conditions are satisfied [52] :- The taxpayer should have entered into an arrangement. The main purpose of the arrangement should be to obtain a tax benefit and the arrangement- Has been entered into, or carried out, in a manner not normally employed for bona fide business purposes; Has created rights and obligations which would not normally be created between persons dealing at arm’s length; Results, directly or indirectly, in the misuse or abuse of the provisions of this Code; or Lacks commercial substance, in whole or in part. Does The Provisions Of GAAR Extensively Speculate Unnecessary Harassment Of The Taxpayer The proposition of the GAAR provisions is to include well-known anti-avoidance principles of business proposal rule and economic substance (or the lack of it), the crux of these provisions lies in the business purpose test. The million dollar question of the taxman to trigger the GAAR provisions would be whether the principal purpose of any arrangement is for commercial purpose or tax evasion. If the answer to this query is the latter, then the arrangement would be invalidated. Does that indicate the taxman’s speculative intuition will be at play perpetually? On a step further the provisions puts the burden of proof on the tax payer to establish that the main purpose of the transaction was not to avoid taxes as a measure to prevent abuse of tax avoidance agreements. [53] This may lead to the unnecessary harassment of the taxpayer. Businesses need to be assured that the route they choose to conduct their business in India does not lead them to unexpected tax burdens. The proposed GAAR in the DTC may not give that certainty to businesses even if there are genuine commercial transactions. Definitional Ambit And Discretion Of The Taxman Is Left Wide Open The definitions of arrangement and impermissible avoidance arrangement are wide indeed, which has the potential of creating confusion and speculate bona fide commercial transactions. With respect to cross border acquisitions of Indian companies, the Code confers more powers to the tax authorities to scrutinize foreign deals involving acquiring of controlling interest in Indian companies and declare them to be impermissible avoidance agreement [54] . The DTC also has the effect of any provision in the domestic law overriding any DTAA if there has been any amendment to the domestic law subsequent to any DTAA entered between India and any other country. The DTC clearly delegates ultra discretion to the Commissioner. The DTC also causes the revenue authorities to unnecessarily suspect every transaction which results in tax benefit to the tax payer. In fact the DTC allows for even more power to label these arrangements as impermissible. DTC seeks to empower Commissioners to declare an arrangement as impermissible if the same has been entered into with the objective of obtaining tax benefit and which lacks commercial substance. The arrangements covered by GAAR include round trip financing, lifting of corporate veil, etc. Further, the Commissioner has been accorded wide discretion to determine the tax consequences by amending, disregarding or re-characterising the arrangement. This will lead to more litigation (not to mention confusion) as the taxpayers can only justify his arrangements in Court. It is hard to understand how these provisions, which look to override the tax treaties, would be appropriate for India’s foreign relations. They can only do more harm than less. It could also be also pointed out that there could be a possibility of the revenue authorities to be incorrect. In the event of such the taxpayers do not have any remedy as there are no compensation clauses for them. This blanket discretionary power without contemplation or cushioning may back-fire through a plethora of litigation. Conclusion The Indo-Mauritian treaty has been debated for long now. The sceptics argue that the treaty is huge source of revenue leakage. But there has not been concrete quantified evidence to support this argument. On the contrary there has been a proliferation of foreign investment in India, as a direct consequence of the treaty. There needs to be realization that the answer to this dilemma is the hands of the judiciary, as time and again the judiciary has help the treaty to be valid in the test of law. While judicial activism may play a big role in the civil rights jurisprudence, it is not prudent to expect the court to pass a verdict on the treaty based on vague propositions of law without exploring the issue fully in a scientific and an empiric manner. The DTC at the other end provides for even more ammunition to the taxing authorities. While the DTC may offer ways to the assessment authorities to catch unscrupulous transactions that abuse the treaty, it is necessary to understand that excessive allocation of discretion to the authorities will result in unnecessary litigation and harassment to the bonafide taxpayer and investor. It is belief of the author that evasion of tax through treaty-shopping should be curtailed, but the approach should not be to raise an eye-brow at every transaction. Therefore it is imperative to contemplate further before the DTAA is done away with citing revenue loss. This treaty contributes more than it takes away. If the mechanism of tax planning / savings ceases to exist then the incentive of FIIs will also cease simultaneously. Taxation is a mechanism of earning revenue, but lowering tax barriers for international trade is a boon, the treaty is one of them. Therefore the policy makers should take into account a holistic impact of the treaty before taking a call on it as lives of the citizens depend on foreign investment and it generates income. |
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