TIOL-DDT 128 · the untouched capture
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<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><b><font color="#663399" size="3">TIOL-DDT
128</font><br>
03 06 2005<br>
Friday </b></font></p>
<p align="center"><font color="#006633" size="2" face="Verdana, Arial, Helvetica, sans-serif"><b>NACEN
– Builder of the future Department?</b></font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">
In <b>ZUNJARRAO BHIKAJI NAGARKAR v UNION OF INDIA - </b></font><b><font size="1" face="Verdana, Arial, Helvetica, sans-serif"><a href="http://www.taxindiaonline.com/RC2/subCatDesc.php3?subCatDisp_Id=50&filename=legal/sc/2002/2002-TIOL-211-SC-CX.htm">2002-TIOL-211-SC-CX</a></font></b><font size="2" face="Verdana, Arial, Helvetica, sans-serif">,
the honourable Supreme Court of India observed,<br>
<br>
There is a charge of misconduct against the Collector (now Commissioner) of
Central Excise. While disciplinary proceedings are pending against him, he is
transferred to the National Academy of Custom, Excise and Narcotics to guide
the probationers. <b>It is certainly a paradoxical situation that a man who
is not fit to hold the post of Collector is fit enough to impart training to
the probationers entering the service. Best talent should be sent to the academy
to teach the probationers. Posting to the academy should be considered as an
honour and not punishment.</b> Our comment is no reflection on the appellant
herein as we have set aside the initiation of disciplinary proceedings against
him.<br>
<br>
But Supreme Court judgements do not carry much weight or respect with the Government
as any of our retrospective legislative missives or postings to NACEN show.
The premier academy that is acclaimed as a centre of excellence and that prepares
the future officers of the department is just another dumping ground for unwanted
officers. The National Academy of Customs Excise and Narcotics, headed by a
Chief Commissioner level officer at its headquarters in Faridabad has regional
centres at Delhi, Mumbai, Vadodara, Kolkotta, Chennai, Hazaribagh, Kanpur and
Hyderabad. Except for the metros, the other cities were added to the NACEN map
not with any idea of improving training, but with a view to find postings for
the large number of Commissioners and there is no specified qualification required
for heading any NACEN branch. In fact the only qualification is that you should
not have any qualification to head a premier teaching organisation. For officers
who want a particular city posting, NACEN is the last resort. There are officers
who would say, “Give me Chennai, even in NACEN!” and some of them
do get posted. Their capacity to teach or lead a teaching team is never a criterion.
<br>
<br>
In fact long ago, when they wanted to ease a member out of the Board, they elevated
the post of DG, NACEN to the rank of Member only during the period of that DG!
Some years later they promoted a Chief Commissioner as Member but they did not
want him in the Board; so they posted him to the NACEN as DG with the rank of
Member. <br>
<br>
<b>In Bhagavat Gita, Lord Krishna said, </b><br>
<br>
yad yad aacharati sreshtaha tat tat deve itarojanaha sayat pramanam kurute lokoh
tat anuvartate.<br>
<br>
<b><i>The way leaders behave, others follow</i></b><br>
<br>
The young officers, who join the academy for their initial years in the department,
initially find that the respected teachers in the academy are there not because
they are capable role models, but because they are rejects. In such a situation
what is the future of the department? <br>
<br>
A Commissioner notorious for his strict discipline once told me that his dream
was to head the NACEN for two years so that he could produce two batches of
dedicated disciplined officers and that will take care of the department for
the next thirty years. This great man got to the Board without ever reaching
the NACEN!<br>
<br>
The Regional Institutes of this great academy are worse than third grade elementary
schools. They have nice buildings (hired), air conditioned rooms, plenty of
computers, enough funds unlike the elementary schools. But they lack one basic
requirement of any academy. Qualified and competent staff! Officers are in the
academy, either because they are not wanted in the field, or because they want
that particular city. Nobody is there because, he or she is good for training.
Capacity to train is the last priority. I once saw three Assistant Commissioners
fixing a board in a NACEN branch. I don’t blame them; they were trying
to do some work – which they were capable of! <br>
<br>
The future of the department is made in NACEN and if you want a good department
ahead, you will have to post the best officers to NACEN – not the condemned
ones. Posting to the academy should be, as the Supreme Court of India says,
considered as an honour and not punishment. But why should good officers work
in NACEN unless they are given proper incentives? <br>
<br>
<b>If a Doctor fails, a patient may collapse, if an engineer fails, a bridge
may collapse, but if a teacher fails, a whole generation collapses.</b> We can’t
afford to take risks with NACEN!<br>
<br>
<font color="#006633"><b>DOUBLE TAX AVOIDANCE AGREEMENT WITH REPUBLIC OF SLOVENIA<br>
</b></font><br>
The Government has notified the convention between the government of the Republic
of India and the government of the Republic of Slovenia for the avoidance of
double taxation and the prevention of fiscal evasion with respect to taxes on
income. <a href="http://www.taxindiaonline.com/RC2/subCatDesc.php3?subCatDisp_Id=35&filename=notification/cbdt/2005/it05not157.htm">NOTIFICATION
NO. 157/2005, Dated : May 31, 2005</a><br>
<br>
<font color="#006633"><b>DTAA – a peep</b></font><br>
<br>
<b>These agreements were to fulfill the following objectives</b><br>
<br>
• Facilitate investment and trade flow<br>
• Prevent discrimination between taxpayers<br>
• Provide fiscal certainty to cross border transactions and<br>
• Contribute to attainment of national development goals.<br>
<br>
India has comprehensive DTAAs with more than 65 countries and limited DTAAs
covering income from airlines and merchant shipping business with more than
10 countries.<br>
<br>
In pursuance of Section 90 of the Income Tax Act, the Government of India has
entered into DTAAs with various countries for <br>
<br>
• granting relief in respect of income on which tax has been paid under
the Income Tax Act of both the countries; or<br>
<br>
• the avoidance of double taxation of income under the Act, and under
the corresponding law in force in that country; or<br>
<br>
• exchange of information for the prevention of evasion or avoidance of
income tax chargeable under this Act or under the corresponding law in force
in that country, <br>
<br>
• or investigation of cases of such evasion or avoidance; or<br>
<br>
• recovery of income tax under the Act, and under the corresponding law
in the other country in respect of the income, profits or gains; or<br>
<br>
• promoting mutual economic relations, trade and investment <br>
<br>
This had a strange result. Do you know which Country had topped in Foreign Direct
Investment in India in the last four years? It is not USA, it is not Japan,
It is not UK, it is not Korea, <b>but it is little Mauritius.</b><br>
<br>
<b>The Mauritius factor :</b><br>
<br>
A body corporate registered under the laws in Mauritius would be a resident
in Mauritius and thus "subject to taxation" as a resident. Income
Tax Act of Mauritius provided that offshore companies were liable to pay 'zero
percent' tax. Thus, by bringing an offshore company within the definition of
resident, not only was the benefit of offshore company extended to it but also
the benefits of residency allowable under DTAA bestowed on it. This led to establishment
of conduit companies in Mauritius. In effect, the whole exercise of avoidance
of double taxation turned out to be <b>avoidance of taxation altogether</b>.
<br>
<br>
Foreign institutional investors (FIIs), realizing the opportunity, also channelised
their investment into India through the Mauritius route. A few stockbrokers
were considered to have exploited the same and contributed to huge inflow of
monies to create undue fluctuations in the stock markets, which was identified
as one of the causes of the securities scam, which was investigated by the "Joint
Parliamentary Committee" (JPC). The JPC in its observation on the Indo-Mauritius
DTAA had noted that RBI did not have information on FII inflows country wise.
The External Affairs Ministry deposing before the JPC had brought out that there
were similar problems pertaining to taxation of long-term capital gains with
17 other countries, to which the Ministry of Finance also agreed. Based on the
deposition by various Ministries, the Committee had observed, “there could
be substantial revenue loss due to the ‘residency clause’ in the
Indo-Mauritius DTAA”. It, therefore, recommended that Companies investing
in India through Mauritius should be required to file a declaration of ownership
with RBI, to the effect that all the Directors and effective management was
in Mauritius.<br>
<br>
<b>Landmark Judgement of Supreme Court<br>
</b><br>
Income Tax authorities, recognizing the need to curtail the 'abuse' of the Indo-Mauritius
treaty denied the benefit of the treaty to some offshore business companies
(OBC) registered in Mauritius that had claimed exemption from tax by rejecting
the certificate of residence furnished by them. Such OBCs were claiming exemption
of capital gains from stock market operations, which gave the right of taxation
of such capital gains to Mauritius.<br>
<br>
Around the same time, there were fluctuations in the stock markets and general
perception that the action of the department denying the benefit of Mauritius
residency to some Mauritius based FIIs was the root cause for such fluctuations.
It was projected that this would have or had resulted in huge outflows of foreign
investment from India. To clear the doubts, and to clarify the intent of the
Indo-Mauritius DTAA, the Board issued Circular 789 dated 13 April 2000, requiring
the assessing officer to accept the certificate of residence granted under the
local legislation of Mauritius to OBCs operating from third countries including
India.<br>
<br>
Considering a 'public interest litigation' (PIL), Delhi High Court quashed the
above circular as bad in law on the grounds that the income tax officer was
entitled to lift the corporate veil in order to ascertain whether a company
was actually resident of Mauritius or not in exercise of his quasi-judicial
powers and any attempt by the Board to interfere with this would be contrary
to the Act. <br>
<br>
However, the Honourable Supreme Court in the case of Azadi Bachao Andolan in
2003, upholding the issue of circular by the Board and the Indo-Mauritius DTAA,
held that <br>
<br>
• Indo-Mauritius DTAC? (1983) is not 'ultra vires' of the powers of the
Central Government under section 90, on account of its susceptibility to “treaty
shopping*”.<br>
<br>
• Circular 789 of April 2000 issued by the Board falls within the parameters
of the powers exercisable by the Board under section 119.<br>
<br>
• The circular does not in any way crib, cabin or confine the powers of
the assessing officer with regard to any assessment. It merely formulates guidelines
to be applied in the matters of assessment of assessees covered by the provisions
of Indo-Mauritius DTAA.<br>
<br>
• Merely because, at a given time there may be an exemption from income
tax in respect of particular head of income, it is not correct to say that the
taxable entity is not liable to taxation.<br>
<br>
<b>The CAG in its report to Parliament in 2005 had on this subject observed
that</b><br>
<br>
• A well-directed and clear strategy was not in place to remove inconsistencies
and shortcomings in DTAAs especially those relating to definition of permanent
establishment, limitation of treaty benefits, disallowing or consciously allowing
‘treaty shopping’, amendment of DTAAs and enforcing exchange of
information clauses effectively. <br>
<br>
• Cost benefit analysis of DTAAs had not been conducted. <br>
<br>
<b>CAG recommended that</b><br>
<br>
• DTAAs may be examined critically through a phased and well monitored
programme so that interests of revenue are safeguarded and one sided concessions
are avoided. <br>
<br>
• the Board may assess the costs and benefits from each DTAA transparently
and objectively, especially <b>as DTAAs are not placed before Parliament. <br>
</b><br>
• MAP, EOI and recovery of tax be suitably codified and implementation
monitored so that there is consistency and clarity in action being taken by
assessing officers.{MAP- mutual agreement procedure; EOI- exchange of information}<br>
<br>
• database of FIIs and sub accounts relating to all entities operating
in India is prepared and their liability to tax examined critically so that
benefits of DTAA are availed only by assessees actually and rightfully entitled
to the same.<br>
<br>
• the Board may issue necessary clarification to ensure correct and proper
taxation of income arising to FIIs/sub accounts<br>
<br>
• the Board strengthen the mechanism of coordination with regulatory bodies
so that vital information relating to the income of FIIs/sub accounts is obtained
regularly and acted upon promptly by assessing officers with a view to bringing
the same to tax, if necessary by bringing in a suitable amendment to the Act<br>
<br>
• clear procedures be introduced and implementation monitored so that
regular assessments of income from maritime business are seriously made and
assessing officers do not treat issue of NOCs as an end in itself.<br>
<br>
• the Board unambiguously clarify issues such as incidence of surcharge
and the option of availing concession under DTAA and the Act simultaneously,
for the same assessment year for different sources of income, so as to ensure
consistency in assessments and prevent loss of revenue<br>
<br>
• Board may issue guidelines for regulating credit to taxes paid abroad
and specifying the manner of treatment of tax credit, so that assessments are
consistently made and interests of revenue are safeguarded<br>
<br>
Without doing all these adding one more country to the DTAA does not really
help the country. Is the Board listening?<br>
<br>
<font color="#FF6666"><b>Until Monday with more DDT<br>
<br>
Have a Nice Weekend. <br>
<br>
Mail your comments to</b></font> <b>vijaywrite@taxindiaonline.com</b> </font></p>
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