The matter regarding notifying Cyprus as a non-cooperative nation for failure to share adequate information with the Indian tax authorities under the India-Cyprus Double Taxation Avoidance Agreement (DTAA) has reached the Supreme Court.
A bench headed by Justice AR Dave on Friday sought a response from the government as to why its 2013 decision to suspend tax benefits under the bilateral treaty should not be quashed after three petitioners challenged the Madras High Court’s judgment that upheld the Centre’s decision to notify Cyprus as noticed jurisdictional area for taxation.
The counsel of T Raj Kumar, one of the petitioners, contended that the amended provision conferred sweeping powers upon the Central government to specify any country as a notified jurisdictional area in relation to transactions entered into by any assessee, irrespective of whether such country is one, with whom a bilateral treaty has already been entered into or not.
The petitioners also sought to quash CBDT notification No. 86/2013 of November 1, 2013, declaring Cyprus a notified jurisdictional area irrespective of having entered into an ‘Agreement for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital,’ with the Republic of Cyprus on December 21, 1994.
But India took the decision in 2013 to notify Cyprus as non-cooperative as there was no information flow on tax evasion. Section 94A(1) of the Income Tax Act, 1961, empowers the government to declare any country, with which it lacks effective exchange of information, a ‘notified jurisdictional area.’
The amended India-Mauritius DTAA removed the advantage that allowed investors to avoid paying capital gain taxes in India and is aimed at boosting the Centre’s efforts to prevent infusion of black money through shell companies in foreign tax havens.
Seeking a direction to the Centre to quash its decision, Kumar argued that the suspension of tax benefits has hurt investment inflow from Cyprus and the government has overridden the bilateral treaty’s provisions.
Upholding the Constitutional validity of Section 94A(1) as “the need of the hour”, the HC noted that “many countries suffered evasion or avoidance of tax, by unscrupulous persons exploiting noble theories of public international law”.
The HC said defensive measures such as insertion of Section 94A were aimed at enforcing transparency in cross-border remittances and preventing abuse of benefits conferred by treaties.