Sachin Drall, Jindal Global Law School
Introduction
A CBDT circular dated 03.03.1994 stated that capital gains earned by resident of Mauritius by selling shares of an Indian company will only be taxed in Mauritius and not in India. Relying on this circular number of FIIs resident in Mauritius invested in India with the hope of earning huge gains. However, in 2000, Income tax authorities issued notices to these FIIs as to why should they not be taxed in India for the capital gains made ? because, the authorities have by then figured that the gains are substantially made by the aid of ‘shell’ companies and not by the bona-fide residents as, the entities were only using the Mauritius route to earn tax free capital gains whereas, the actual jurisdiction of operation was not known. This circular was then challenged in the court of law and the apex court finally discussed the rationale and features of DTAAs while also providing the powers under Sec: 90 of the Income tax act, 1961. This is a landmark case Azadi Bachao Andolan1wherein, the respondents stated that as FIIs are incorporated in Mauritius as offshore companies and do not transact any business except for buying shares of foreign companies, they do not earn income in Mauritius hence, are not liable to pay any tax in Mauritius but, it was contended that although they are not liable to pay any tax in Mauritius they should pay tax in India in abeyance of the Indo-Mauritius DTAA. It has to understood that here, the court provided us with the understanding that first to claim benefit of DTAA, one needs to be a resident in either of the jurisdiction and the same is done to ensure that any corporate entity belonging to third state doesn’t take advantage of DTAA between the two states because if advantage taken it would amount to treaty shopping eventually terming such acts illegal. Second, if merely, because a resident is provided exemption to pay tax, it does not mean that the same is not liable to pay tax as, this liberty is only believed to be entertained until the taxpayer does not resort to a colourable device to reduce their tax liability. While considering the aforementioned case scenario and several instances in the contemporary times wherein, the corporate personalities have either made an attempt to systematically avoid or have constructed the suitable mechanism with the object to avoid the sovereign laws vis-à-vis taxation. It is here, that in response to such evolving practices the organisation for economic co-operation and development on February 12, 2013, published its report on Base Erosion and Profit Sharing along with a comprehensive plan to address the concerns surrounding BEPS. Although the complete analysis of BEPS action plans is outside the scope of this work, however, I would try and provide the reader with an extensive understanding vis-à-vis action plan 5 and 7 while having the evolving tax practices and laws in the epicentre. Action plan 5 and 7 intends to counter harmful tax practices more effectively, taking into account transparency and prevent the artificial avoidance of Permanent establishment status are in my opinion effective and core pillars to tackle the issue pertaining to harmful tax practices as, action plan 5 highly endorses the principles such as of transparency including compulsory spontaneous exchange on rulings related to preferential regimes, and on substantial activity for any preferential regime. Similarly, action plan 7 tries to obliterate the major pertaining issue of artificial avoidance of permanent establishment status in relation to BEPS achieved through the use of various commissionaire arrangements and the specific activity exemptions while also addressing another significant issue of transfer pricing and the enforcement of the arm’s length principle, in furtherance of achieving the overall goal i.e. to eradicate double non-taxation, end treaty abuse and ensure that profits are taxed at the place of value creation. Although, in general scenario, the existing transfer pricing rules based on arm’s length principle productively allocate the income of multinationals among the taxing jurisdictions but, in several circumstances corporations deliberately misapplied those rules to bifurcate income from the economic activities that produce income and shift the same either in intangibles or tangibles into low-tax jurisdictions.
