Taxmen wary of protocol to amend India-Mauritius DTAA; raise concern over enhanced litigation, confusion on new clauses

A section of the Income Tax administration is wary of the new changes in India-Mauritius Double Tax Avoidance Treaty. Some officials feel that while the goal of the new protocol is to block tax evasion, it leaves room for interpretation in favour of the original intent of the treaty which was for promoting investment. Another fear is that the protocol is likely to lead to enhanced litigation.

Experts hope that the Central Board of Direct Taxes (CBDT) will issue explicit guidelines to clear the doubts. India and Mauritius signed the new protocol on March 7 to amend the Double Taxation Avoidance Agreement (DTAA) between two countries.

Article 27B

According to sources in the Income Tax Department, a key concern is about the framing of the proposed Article 27B. The purpose of the amendment was to deny a benefit if an entity had entered into an arrangement or transaction solely for this purpose. However, this amendment leaves the room open for interpretation. It says that if an entity enters into a transaction or arrangement in line with the original object and purpose of the convention, which is to further investment, the benefit can be given. This means going back to the original treaty and subverting the entire meaning of the recent amendment, sources said.

Rahul Charkha, Partner, Economic Laws Practice, said as per the language of the India-Mauritius DTAA, one of the purposes is ‘Encouragement of Mutual Trade and Investment’. The Supreme Court, in a landmark decision in Azadi Bachao, noted the importance of this purpose while interpreting the India-Mauritius DTAA. The protocol retains the said language. But it simultaneously changes the intent of the original DTAA to focus on tax evasion and not investment. “But taxpayers may contend that such benefit cannot be denied by the tax authorities because granting of the benefit would be as per the object and purpose of India-Mauritius DTAA,” he said.

Bijal Ajinkya, Partner at Khaitan & Co, said it would be important for the interpretation and applicability of the provision to be in line with the object and purpose. “It would be useful for legislative guidance to be issued on the grandfather investment as well as the interplay between object and purpose on the one hand and the protocol on the other hand in order to avoid unnecessary litigation,” he said.

language of Article 3(2)

Another concern is about language of Article 3(2) which experts feel could lead to more litigation.

Ajinkya felt that the language in this article does raise many nuances on its interpretation.

Meanwhile, the Income Tax Department has officially said that some concerns have been raised on the India Mauritius DTAA amended recently. In this context, it is clarified that the concerns /queries are premature at the moment since the Protocol is yet to be ratified and notified. “As and when the Protocol comes into force, queries, if any, will be addressed, wherever necessary,” it said in a social media post

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