There is something rather odd about the stir on black money. The odd element is the Supreme Court order to set up a special investigation team (SIT) to track the generation of black money.
Since one assumes the order is not meant to take over the role of the tax department within the country, it leaves two areas for the SIT to track. Of these, one is to track Indians who have accounts in tax havens, the other is the demand to abrogate tax treaties that give advantage to investors who come in using the provisions of the treaties. Forget what the first involves. The second one is the more puzzling line of argument. It says the India Mauritius Double Taxation Agreement is a nice cache for tax avoidance, which means black money. So, the treaty needs to be abrogated or at least nullified as illegal. The problem is, in 2003, a two-judge bench of the Supreme Court overturned a Delhi High Court judgment in the Union of India vs Azadi Bachao Andolan case to hold the treaty as valid. The Supreme Court held that it is not for the court to create laws but to apply it. The court was deciding if a Circular No 789 issued by the CBDT in April 2000 was valid. That circular had stated that a certificate issued by the Mauritius government would be a sufficient proof of a residency and beneficial ownership by any investor who wanted to make use of the treaty provisions. It is worth recounting some of the details of the case, but the court passed the order after discussing the subject of treaty shopping too. In the current debate, this term has cropped up repeatedly as the equivalent of tax abuse. So that, it would seem, closes the door on this line of discussions. The only way one can change it would be for a larger bench of the Court to overrule the judgment. An SIT will not be able to help here and, therefore, possibly diverts the issue.
The other possible option is for the government to terminate the agreement. There are two issues here. One is, of course, the Supreme Court?s own order holding the treaty as valid. The second line of complexity is the rights of the Mauritius government. It will claim this is an unilateral undermining of a treaty between two sovereign parties and seek relief. Since India has never gone back on an international commitment as a responsible nation, this will be a huge embarrassment.
As an intermediate step, India can ask the island to jointly amend the act. That request has already been made and Mauritius has refused to do so. So, the only change that is possible is to alter the rules that govern the act. This is what India has been seeking and where Mauritius too has cooperated. The terms of seeking a residency certificate have been made tighter.
At this point, it is worth recounting how the 2003 judgment went. The background is the Delhi High Court order in the Shiva Kant Jha case, where it considered Treaty Shopping as the core point. As the court said the core issue is ?what should be done when upon an investigation it is found that the assessee is a resident of a third country having only paper existence in Mauritius ? to take advantage of the double taxation avoidance scheme?. The Court said this was illegal and an abuse of the treaty.
The revenue department filed a special leave petition before the Supreme Court to which a Mauritian company became a co-appellant. The company was incidentally represented by Arun Jaitley, while the government position was argued by Soli Sorabji, who was the Attorney General.
The division bench of the Supreme Court reversed the decision of the high court. The Court said, ?There is elaborate discussion in Baker?s treatise on the anti abuse provisions in the OECD model and the approach of different countries to the issue of treaty shopping. True that several countries like the USA, Germany, Netherlands, Switzerland and United Kingdom have taken suitable steps, either by way of incorporation of appropriate provisions in the international conventions as to double taxation avoidance, or by domestic legislation, to ensure that the benefits of a treaty/convention are not available to residents of a third State.?
But finally it held the duty of the court is to only decide what the law is but not to make it. ?It is to decide what the law is, and apply it; not to make it.?
subhomoy.bhattacharjee@expressindia.com