Facts

CBDT issued Circular No. 789 dt. 13th April, 2000 (2000) 243 ITR (St) 57, clarifying that Certificate of Residence issued by the Mauritian Authorities will constitute sufficient evidence for accepting the status of residence as well as beneficial ownership for applying the India Mauritius DTAA. Accordingly, Foreign Institutional Investors who are resident in Mauritius would not be taxable  inIndia on income from capital gains arising in India on sale of shares as per Article 13(4) of the treaty. Public interest litigation was filed before Delhi High Court by Shivkant Jhah v. UOI and Azadi Bachoo andolan v. UOI (WP No. 2802 of 2000 challenging the aforesaid Circular.

Issue

Whether the provisions of the DTAA  override the provisions of the Act. What is  the meaning of the term ‘liable to tax’? Can a non-resident claim benefit of DTAA only if he ‘pays tax’ in a Contracting State?

Held

Supreme Court observed that section 90 of the Act enables and empowers the Central Government to issue a notification for implementation of the terms of a DTAA. Supreme Court held that a DTAA would operate even if inconsistent with the provisions of the Income Tax Act and would override the provisions of the Act  for determining the total income and the tax liability. Supreme Court further held that Circular no. 789 is a circular within the scope of section 90 and shall prevail even if it is inconsistent with the provisions of the Act. Supreme Court rejected   the argument of the respondents that FIIs cannot be considered to be ‘residents’     of Mauritius under the DTAA because they are  not  ‘liable to  tax’ in  Mauritius  on account of tax exemption on sale of shares under the Mauritius Income tax   Act. Supreme Court held that the term ‘liable to tax’ is not the same as  ‘pays  tax’. Therefore, FIIs incorporated in Mauritius are ‘liable to tax’ in Mauritius  and are also to be treated as resident of Mauritius under the DTAA. Supreme Court held that Circular no 789 clarifying that FIIs, etc. which are resident in Mauritius would not be taxable in India on income from capital gains arising on sale of shares is not ultra vires the provisions of the Act. From the Judgement in

Shivkant Jhah v.  UOI/Azadi Bachao Andolan v.  UOI (2002) 175 CTR 371/256  ITR 563 (Delhi)(HC) (CA Nos. 8161& 8162 of 2003 and 8163 & 8164 of 2003 dt.

7 -10-2003)

Editorial: With respect to tax planning, Supreme Court in Azadi Bachao Andolan Andolan observed that the decision of McDowell and Co. Ltd. v.  CTO (1985) 154 ITR 148 (SC) could not be read as laying down the ratio that every attempt      at tax planning is illegitimate and must be ignored or that every transaction or arrangement which is perfectly permissible under law which has the effect of reducing the tax burden of the assessee must be looked upon with disfavour. In Vodafone International Holdings BV v. UOI (2003) 341 ITR 1 (SC) held that there is no conflict between McDowell and Co. Ltd. v. CTO (1985) 154 ITR 148 (SC) and Azadi Bachao Andolan

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