- Triplet 14 - OECD on misuse of Indo-Mauritius tax haven route

Triplet 14

OECD on misuse of Indo-Mauritius tax haven route

By Shiva Kant Jha

May 15, 2009

THE Financial Express of April 13, 2009 has reported something of interest to us under a comprehensively suggestive heading “Round-tripped FDI from tax havens under OECD review”. The Organisation of Economic Cooperation and Development (OECD) has begun a review of India's foreign direct investment (FDI) policy. “The first-of-its-kind review OECD Investment Policy Review of India is expected to propose measures to make the FDI policy more open and transparent….. Round tripping is a common system of tax evasion where an investor using the tax holiday advantage in Mauritius or some other country with which India has a double taxation avoidance agreement to take money out of India only to bring it back disguised as foreign investment.” We shall have to await the review by the OECD before any evaluation is made of this effort by the OECD. But it is remarkable and heartening that such a study has been undertaken by an expert body of proven competence.

We all knew over years what went wrong with us, and we have tried to understand its etiology in various ways. But our efforts have not borne much fruits. We have had such persons in plenty who appreciated such efforts but did precious little to rid us from what ailed us. This news, that even OECD has thought it fit to devote its time to study the problems above-mentioned,makes me reflect on certain situations and events which deserve to be comprehended for worthwhile actions. The constraints of this leaf of the Legal Potpourri do not permit a detailed account even if only a few milestones are recounted. A short saga of efforts is thus synoptically set forth for public awareness and understanding. This would bring to light the way our governments responded to the challenge posed.

(1) In fact the story of misuse of the foreign routes began on massive scale in the 1980s with an onset of neo-liberal paradigm. The lobbyists left no stone unturned in pleading that on relaxation of the rules under the Foreign Exchange of Regulations Act, 1973 a lot of foreign investments would be made, manly by the non-residence of Indian origin. Sri Pranab Mukharjee, the Finance Minister, promoted this approach with an adroitness. In his Budget 1982 the share market investment rules were relaxed in favour of the non-residents Indians or companies and trusts which they owned at least sixty percent. The rules provided that they could invest directly and could repatriate their funds from India. How this scheme was misused is clear from the account which Hamish McDonald gives in his book The Polyester Prince. A careful reading of the book would show that all the features of the legal evasion and the structure of deception which bedevil our nation were endemic right from the early 1980s: viz. banking secrecy, money laundering, bogus companies set up in tax havens, directors under mask, the sharp plays by the facilitators, phony capital structure with meager capital only stage-managed, and a band of non-transparent fund managers.

Swraj Paul, himself a close observer and also participant in the process of economic management, points out in his, Beyond Boundaries , that there existed an unholy nexus between the culture of economic management and the public administration in the early eighties. He referred to “supporting journalist” and called some well known financial writers “purchasable commodities”.

(2) After 1991, the treaty-shopping grew and round tripping became frequent and massive. Our Central Government took no notice of these. It had developed a delirious lust for foreign exchange and FDI. In the early 1980s some bright officers of the Income tax Department took steps to prevent treaty shopping. . Their legitimate reference of the issue to the CBDT was quenched by issuing Circular No. 682 of March 30 of 1994. Yet some remarkable officers did their duty well. About twenty four assessment orders were passed by March 2000. A hue and cry was raised by the lobbyists. The share market was manipulated to stress their point that such orders would jolt our economy and would create immediate and obvious road blocks to the economic development. The CBDT was made to issue the Circular No. 789 of April 30 of 2000 having the effect of preventing the tax authorities from doing their legal duties, It mandated that ‘incorporation, per se, is determinative of a company's residence; and a Certificate of Residence issued by the Mauritian Authorities is a sufficient evidence and a conclusive proof of the ‘ownership' for applying the DTAC. The Delhi High Court in Shiva Kant Jha &Anr. Vs. Union [2003-TIOL-04-HC-DEL-IT ] quashed the said circular holding inter alia:

(a) “An abuse of the treaty or Treaty Shopping is illegal and thus necessarily forbidden.” And

(b) “No law encourages opaque system to prevail.”

The High Court found that our government lost ‘ crores and crores of rupees by allowing opaque system to operate.' But our Government filed an appeal against the said judgment in the Supreme Court, and had no compunction in sailing together with a silhouette Mauritian tax haven company. The Supreme Court sustained the Circular [vide 2003-TIOL-13-SC-IT] without differing from the High Court's findings of facts. But the Court recognized the misuse but suggested remedies only through legislative and/or administrative channels to deter misuse of the bilateral tax treaties (vide my article on ‘What Azadi Bachao syas about Treaty-Shopping or RoundTripping ?' at ]. But our Government has shown over all the years total indifference to this evil thus becoming a participis criminis !

(3) A study of the Assessment Orders passed in 24 cases or more by the statutory authorities in Mumbai in 2000 are enough to drum into our ears the extent and gravity of evil. e. The High Court had before it the full text of the Assessment Order for1997-98 in the case of M/s Cox & Kings Overseas Funds (Mauritius)Ltd . It pertained to an investment company incorporated in Luxembourg, a tax haven having no tax treaty with India. Hence it masqueraded as a Mauritian resident having only a paper presence in Mauritius in order not to pay capital gains on more than 3 crores of rupees! Yet our government maintained its studied indifference. How could it act as the Delhi High had suggested in its judgment in its aforementioned judgment:

“We would however like to make an observation that the Central Govt. will be well advised to consider the question raised by Shri Shiva Kant Jha who has done a noble job in bring into focus as to how the Govt. of India had been losing crores and crores of rupees by allowing opaque system to operate.”

Reader may find something of interest in the Writ Petition (c) NO.334 of 2005 , and the description of the relvant events.

(4) The causes of the securities scam were investigated by the “Joint Parliamentary Committee” (JPC). It did recognize that the Indo-Mauritius route had been misused, but failed to provide any remedy. The Report just became words full of sound and fury signifying hardly anything. It failed to appreciate that ‘no question is ever settled until it is settled right. The Hindu made the following apt comment:

“A number of Indian companies are believed to have laundered money through the Mauritius route; they avoided Indian taxes and flouted exchange control laws. This experience has been well documented, notably by the Joint Parliamentary Committee that looked into the recent stock market scam.”

(5) The Report No. 13 of 2005 framed by the Comptroller and Auditor General of India constitutes a serious indictment of our Government. It relates to System Appraisals in the segment of Direct Taxes. It reviews ‘ some aspects of non-resident taxation with reference to double taxation avoidance agreements' The CAG exposed how pressure groups and persuaders bend the government to their will to pick up favours not due to them. But neither the JPC Report nor the Report of CAG bore any fruit. The first turned futile in the political quagmire of our country, and the second ceased to carry sense as the CAG has become now the Executive's lapdog rather than our Constitutional watch dog.

(6) Over the years a lot of articles have come out discussing the misuse of the tax haven routes ( vide scores of articles published in media, those available on and , and the paper by my friend Dr. Sol Picciotto at ). The Paris-based Financial Action Task Force on Money Laundering . in its Report on the Laundering Typologies 2003-2004 examined the unwholesome role of many professionals and the ‘politically exposed persons' ( in the procreation and perpetuation of the disease. Our governments have hardly evinced any political will to find out salutary solutions. Our Parliament did not listen even to the Supreme Court's cri de Coeur to provide a remedy against the abuse of tax-treaties. Will our government act now with verve and wisdom? Lord Bryce had aptly said: “So may it be said that Democracy will never perish till after Hope has expired.”

(7) In our countries tax treaties are done under an opaque system, and are not subject to transparency or parliamentary control. In all other major countries world over tax treaties are only after Parliamentary approval/scrutiny/ resolution. India claims to follow the British practice,, but in Britain, right from the days of the World War I, public agitation has remained afoot for parliamentary sanction of treaties. Much headway was made in the matter with the framing of the Ponsonby Rule (1924) for placing treaties before Parliament.. Now the British government is in the process subjecting treaty-making to an effective Parliamentary control (vide leaf II in Legal Potpourri – 007 of Feb. 6, 2009 ). Our Government never thought to make good the ‘democratic deficit' in treaty-making, and to make the process transparent and accountable to people.

(8) The Shah Commission of Inquiry which, had examined what went wrong during the infamous Emergency, was worried at the growing nexus pf the politicians and the bureaucrats. Now we are facing the sinister problems of a nexus of evils between the wielders of political power and the economic crooks passing for ‘the economic wizards'. The CBDT Circular 789, which ensured a subversion of the statutory gaze and creation of an opaque system as far back as 2000, is still going strong in our country despite the brave words we are supposed to believe in. Our Government's approach continues to be what it was earlier. It is said that the Foreign Investment Promotion Board (FIPB) have recently rejected Revenue Department's argument against treaty shopping and round tripping (vide Business Standard of December 01, 2008). Just one more instance in the ongoing scam.

(9) Over years we hear that certain tax treaties are being renegotiated. I wish if I could believe in what is being said. When a country with which we had concluded a tax treaty in 1983, materially altered its legal regime by turning itself into a tax haven, the tax treaty could have been simply declared non est on account of a change in the material circumstances ( by invoking the recognized the doctrine of rebus sick stantibus ) which destroyed the consensus ad idem (the meeting of mind) achieved when the treaty had been made.

It is heartening to hear that the OECD has undertaken a study of this misuse of tax haven routes to the prejudice of India's public interest. It matters not if India is yet to become a member of the said organization. India has enjoyed its role as an observer, and has been a participant with distinction in many matters, and has frequently relied on the OECD Commentary whenever it helped others. I hope that this good work thus begun would not get lost in sand. Didn't Lord Krishna say in the Gita: “A noble work is never lost even if it precedes only a few steps towards its goal”.


Hierarchy at the Supreme Court: Problem of judicial decorum

On January 6, 2009 the CIT Vs Vatika Towenship P Ltd [2009-TIOL-03-SC-IT] (coram:S B Sinha And Mukundakam Sharma JJ.) decided a simple question: whether the insertion of proviso to Sec 113 by the Finance Act 2002 is prospective or retrospective? The view taken by the Court in CIT vs. Suresh N. Gupta, [(2008) 4 SCC 362] deserved a revaluation and restatement. The Hon'ble Court ordered:

“As the said proviso was introduced with effect from 1.6.2002, i.e. with prospective effect and by reason thereof, tax chargeable under Section 135 of the Income Tax Act is to be increased by surcharge levied by a Central Act, we are of the opinion that keeping in view the principles of law that the taxing statute should be construed strictly and a statute, ordinarily, should not be held to have any retrospective effect, it is necessary that the matter be considered by a larger Bench. We, while issuing notice, direct the Registry to place the matter before Hon'ble the Chief Justice for constitution of a larger Bench.”

The Hon'ble Division Bench of two judges adopted what was really a right course permissible under our Constitution. The Court did recognise a hierarchy at the Supreme Court. Long back in A . R. Antulay v. R. S. Nayak [AIR 1988 SC 1531] Sabyasachi Mukharji,J , speaking for the majority, said:

“The principle in England that the size of the Bench does not matter is clearly brought out in the decision of Evershed M.R. in the case of Morelle v. Wakeling , (1955 (1) All ER 708 ) (supra). The law laid down by this Court is somewhat different. There is a hierarchy within the Court itself here, where larger Benches overrule smaller Benches…”.

This view was felicitously reiterated by Shetty J. in Triveniben v. State of Gujarat [AIR 1989 SC 465]: :

“The practice over the years has been that a larger bench straightway considers the correctness of and if necessary overrules the view of a smaller bench. This practice has been held to be a crystallized rule of law in a recent decision by a Special Bench of seven learned Judges.”

Under this hierarchic structure a smaller Bench is bound by the decision of the larger Bench. The situation is governed by a rule analogous to the law of limitation about which our Supreme Court had observed in Manindra Land and Building Corporation Ltd. v. Bhutnath Banerjee (AIR 1964 SC 1336) thus:

“It is the duty of the Court not to proceed with the application if it is made beyond the period of limitation prescribed.”

But the aforementioned salutary rule is often breached rendering acts without jurisdiction. I would mention only two decisions to underscore the point I intend to make. In Javed Ahmad Abdul Hamid Pawala vs. Maharashtra (AIR 1985 SC 231) Chinnappa Reddy J. refused to follow a judgment by Judges ‘which had overruled his earlier decision'. He propounded an unsustainable proposition that it was not in order for a D.B. of 3 judges to “purport to overrule the decision of a D.B. of 2 judges”. H. M. Seervai was dubbed this act as an act of “gross indiscipline”. In 2003 a D.B of 2 judges in Union Of India & Anr. V. Azadi Bachao Andolan & Anr (2003-TIOL-13-SC-IT), committed, it is submitted, a constitutional solecism. The treatment to which the D.B. subjects a Constitution Bench decision in McDowell & Co v. CTO ( 2002-TIOL-40-SC-CT) is open to criticism. To be more precise, it was the judgment of Justice Chinnappa Reddy J. which got an undeserved short shrift in Azadi : (perhaps, it was a deserved poetic justice). This D.B couldn't have refused to be bound by the decision of a larger Bench as it destroys the integrity of our judicial delivery system. If the Division Bench of two judges departs from the decision of the Constitution Bench by dubbing it a “temporary turbulence” and “hiccups”, there would be good reason to believe that justice has not been done. Azadi considered the judgment of Reddy McDowell a ‘hiccup' and ‘a temporary turbulence'. The comments were pejorative and unfair. “A hiccup” is a small problem or difficulty, usually one which can be fairly easily put right” ( Collins Cobuild English Language Dictionary ) “Turbulence” is “a state of confusion and constant, disorganized change”. In doing so the Court committed in Azadi an error going to jurisdiction. More so when Justice Reddy's judgment was wholly approved by the other 4 judges. These two decisions are merely illustrative what occasionally goes wrong. But even such infrequent lapses deserve to be remedied.


Someone should undertake a juristic study of Valmikiya Ramayanm

I do not know if anyone has studied the juristic ideas expressed in the Valmikiya Ramayanm . Over years I have felt that someone should undertake this study. Such a study can enrich the juristic perspective of our lawyers and judges who are reluctant to broaden their horizon believing that the best solutions to problems can be had only in the precincts of the Anglo-American jurisprudence. Reasons for getting into such blinkers are many but I must put off this inquiry as the constraints of this leaf of the Triplet do not permit that. I would mention only a few of the obvious situations of the Ramayana which provides us insight much deeper than that shown by the courts in our times.

(i) Apropos of the rule of Fair play, and the control of the executive power.

Hanuman was put on trial before King Ravana for devastating parts of his Lanka and for killing several of his kinsmen. In the initial wrathful moments the King expressed his desire to kill the culprit, but, on better counseling, realized that any execution of punishment would be ex facie wrong if done in breach of the rule of Audi alteram partem (hear the other side). Besides, the constitution of polity ( dharma ) does not recognize the exercise of arbitrary power even when the governments pass through gravest crisis.

Neither the House of Lords in Liversidge v. Anderson [ (1942) A.C. 206] , nor our Supreme Court in Additional District Magistrate of Jabalpur v. Shiv Kant Shukla (often called as the Habeas Corpus case) could approximate the juristic prudence shown by Ravana. Liversidge was decided when Britain was passing through the worst crisis; and the pragmatics of the World War II demanded more and more executive powers to be exercised on the subjective satisfaction of the wielders of public power. The threatening crisis clouded the judgment of the House of Lords which saw nothing wrong in enabling the executive government to ride roughshod over people's human rights. It was so gruesome that even a moderate jurist like C.K. Allen was driven to say [ Allen, Law and Orders 3 rd ed. p. 297]:

“ In Liversidge v. Anderson the majority of the Lords felt the same confidence in the wisdom and moderation of executive officials; there is, apparently, something in the tranquil atmosphere of the House of Lords which stimulates faith in human nature. The fact, is, however, that nobody on earth can be trusted with power without restraint. It is ‘of an encroaching nature', and its encroachments, more often than not, are for the sake of what are sincerely believed to be good, and indeed necessary, objects.” .

In Shukla the Supreme Court delivered a judgment which is bound to be remembered in infamy. The majority decision of the Court denied the writ of habeas corpus or any other remedy as such remedies stood excluded on account of the declaration of emergency by the Presidential Order. It was the height of stupidity for our government to plead that even if right to life was taken away, the courts of land could provide no succour, Justice Khanna in his dissenting judgment appealed to the “the brooding spirit of the law” as Lord Atkin had done in Liversidge.

(ii)  Apropos the Law of Diplomatic Immunity.

A core principle of the law pertaining to Diplomatic Immunity was succinctly by Vibhishan when he heard Ravana's desire to kill Hanuman who had acted as Sri Rama's representative with a specific diplomatic brief. The Valmikiya Ramayan ( Sunderkandam canto 52) mentions that on hearing this verdict, Vivishan reflected to deternine his (and also Ravana') appropriate duty. In measured and courteous tone he submitted to Ravana (my translation from the original text in Sanskrit):

“O mighty king, please give up your anger, and be happy to listen to this humble self. The kings, who have right sense of discrimination, never kill diplomatic representatives. Killing the accused would not only be against dharma, it will also be condemned in the public opinion. But to do so is all the more unworthy if it is done by a king so valiant as yourself. You are learned the Shastras, and are well proficient in dharma. If you commit such a dereliction as this, then all the learning that you acquired would be nothing more than mere labour [that brings neither sweetness nor light].”

The doctrine of diplomatic immunity had been recognized in various societies world over, but the enunciation of doctrine, as done in the Court of Ravana, is most succinct and suggestive. This doctrine is established in our modern international law, and has been erected as a binding norm in the Vienna Convention on Diplomatic Relations (1961).

(iii) Apropos the general duty to give reasons so that justice is seen to have been done.

The Court dismissed the Writ Petition [ (C) No 334 of 2005] by an Order dated Nov. 28, 2007 holding that a decision of the S.C "which has attained finality" couldn't "be subjected to Judicial Review under Art. 32 of the Constitution of India “at the instance of one of the parties to the decision." . There is no logic to deny this remedy in appropriate cases even if it is sought by one of the parties to the decision. To hold otherwise is to turn indifferent to what is the very ‘conscience of the Constitution'. The view of Lord Denman in Rex.v. Boltan (1841) 1 Q B 66 at 74, which is the conventional justification for this proposition, does not survive to the extent it goes counter to our constitutional provisions and values. In fact it has been rejected in the U.K itself.

The above view goes counter to our ancient juristic tradition. Not to say of questioning Kings, we have even questioned God who without demur accepted His duty to explain His conduct whether it conformed to Dharma. In the Valmikya Ramayana, Bali made the severest criticism of Lord Rama's conduct in striking him with an arrow from a hide. The Lord took it in the right spirit. He answered Bali comprehensively without slightest resentment. He explained his conduct with clarity, comprehensiveness quoting the high precedents by which even HE too was bound he said:

You might have done what I have done;
Manu in the Smritis has said two slokas
Which the great ones have accepted and followed;
I have acted the way they counseled.

His answer covers a whole Canto of the Valmikya Ramayana . Shri Rama considered Himself bound by the fundamental norms of Rights and Duties as set forth in Manusmriti . He made it clear that even He was working under constitutional limitations.

(iv) The Ramayana has coherent ideas about the ‘basic structure' of the state's constitution. I would come to this in the next column. - Links on Shivakantjha - Links on Shivakantjha

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