Noting the enormous fiscal benefits of Double Taxation Avoidance Convention between India and Mauritius, the Supreme Court has said the recommendations of Joint Parliamentary Committee for incorporating built-in safeguards in the treaty to check tax evasion was for the Parliament to take note of.
Upholding the validity of DTAC, a bench comprising Justice R C Lahoti and Justice B N Srikrishna said in a recent judgment that "in our view recommendations of the working group of the JPC are intended for Parliament to take appropriate action."
Under the DTAC, any foreign company after obtaining a residency certificate from Mauritius could do business in India without being liable to pay tax on capital gains.
Petitioner Azadi Bachao Andolan had alleged that under DTAC, many foreign firms registered themselves in Mauritius to earn huge profits in India through their investments as they enjoyed complete exemption from tax liability.
While considering the causes which led to the stock market scam, the JPC had occasion to consider the working of the Indo-Mauritius DTAC. It noticed that area-wise foreign direct investment inflow from Mauritius increased from Rs 37.5 million in 1993 to Rs 61,672.8 million in 2001.
Taking note of the facts and the reluctance of the government of Mauritius in the matter to renegotiate the terms of treaty, the JPC had recommended that though the exact amount of revenue loss could not be quantified "it could be assumed to be substantial."
The JPC working group recommended that "companies investing in India through Mauritius, should be required to file details of ownership with Reserve Bank of India and declare that all the directors and effective management is in Mauritius."
"The committee suggests that all the contentious issues should be resolved by the government with the government of Mauritius urgently through dialogue," the JPC report said.
Taking note of the recommendations contained in the JPC report, the apex court said, "The JPC might have noticed certain consequences, intended or unintended, flowing from DTAC and has made appropriate recommendations."
"Based on them, it is not possible for us to say that the DTAC or the impugned circular are contrary to law, nor would it be possible to interfere with either of them on the basis of the report of the JPC," Justice Srikrishna, writing for the bench, said.
An important principle which needed to be kept in mind in the interpretation of the provisions of an international treaty, including one for double taxation relief, was that treaties were negotiated and entered into at a political level and have several considerations as their basis, he said.
Many developed countries tolerate and encourage treaty shopping, even if it was unintended, improper or unjustified, for other non-tax reasons, unless it lead to a significant loss of tax revenue, the apex court said.
Moreover, several of them allow the use of their treaty network to attract foreign enterprise and offshore activities, it said.
In developing countries, treaty shopping was often regarded as a tax incentive to attract scarce foreign capital or technology, the court said.
Justice Srikrishna said, "There are many principles in fiscal economy which, though at first blush might appear to be evil, are tolerated in a developing economy, in the interest of long term development."
Rejecting the plea of the respondents Azadi Bachao Andolan that DTAC had been much abused by foreign companies, the bench said, "Perhaps, it may have been intended at the time when Indo-Mauritius DTAC was entered into."
"Whether it should continue, and if so, for how long, is a matter which is best left to the discretion of the executive as it is dependent upon several economic and political considerations," the court said.
This court could not judge the legality of treaty shopping merely because one section of thought considered it improper, it said.
"A holistic view has to be taken to adjudge what is perhaps regarded in contemporary thinking as a necessary evil in a developing economy," Justice Srikrishna said.