Our article has been published by Taxsutra at Tiger Roars, Tax Uncertainty Soars! – The Ultimate “Upside Down” Of International Tax Jurisprudence in India – Part 3 | Taxsutra

(Part – 3)

In the first two parts of this series of articles, the authors critically examined the decision in Tiger Global (Supra), including the key findings of all the relevant authorities; implications; and the way forward.  In particular, the authors directed the attention of the readers to the various obiter, which, in their opinion, may open the pandora’s box of unintended consequences, even though the same may not, strictly speaking, be binding.  One such obiter is that for the DTAA to apply, “a taxpayer must prove that the transaction in question is taxable in the resident State”.  In their foregoing article, the authors opined that the said obiter is against the intent and purpose of the applicable law, for the reasons that:

1. Since residency and the applicability of the India – Mauritius DTAA itself were being questioned, therefore, there was no requirement to observe the above.
2. The benefit of a DTAA is granted only to a resident of a Contracting State. Resident, as defined under Article 4(1) of the India – Mauritius DTAA, means “any person who, under the laws of that State, is liable to taxation therein by reason of his domicile, residence, place of management or any other criterion of similar nature”.  Therefore, for establishing residency in Mauritius as well as the entitlement to the benefits under the India – Mauritius DTAA, a person should be “liable to taxation” (emphasis supplied) in Mauritius, based on the Mauritian law.  To this end, the observation that the transaction in question is taxable in the resident State does not emanate out of the plain reading of the India – Mauritius DTAA.
3. In any event, whether or not a transaction is actually taxed in the resident State (e., Mauritius herein) is an entirely irrelevant consideration.
4. Even otherwise, if the phrase “liable to taxation” is interpreted strictly, it would mean that a resident of Mauritius may have different sources of income and if such resident is taxed in respect of any source of income based on the criterion contained in Article 4(1), e., domicile, residence, place of management or any other criterion of similar nature, then, such resident would qualify the term “liable to taxation”.

A related obiter is that, if a taxpayer seeks an exemption from tax, both in the resident and the source States, then, such a position runs contrary to the spirit of DTAAs, providing a strong basis for the Tax Authorities to question the availability of benefits under DTAAs in Source states.  The authors opined that the said obiter is also against the intent and purpose of the applicable law, since:

1. It contravenes the principle that an exemption from taxation presupposes a charge to taxation, e., the right to taxation. This principle was the basis for the Supreme Court to hold the Mauritian entities to be eligible for the benefit under the India – Mauritius DTAA, notwithstanding the exemption under the Mauritian law, in Azadi Bachao (Supra).
2. The object and purpose of a DTAA is to allocate taxing rights between Contracting States, and once such rights have been duly allocated, the other jurisdiction’s right to taxation (and resulting consequences) stands completely ousted. Consequently, once having allocated taxing rights, a grant of exemption by a State in respect of a specific item of income, would not compromise the phrase “liable to taxation” under Article 4(1) of a DTAA.

The above position stands fortified by the subsequent amendments in the IT Act (which were either not brought to the attention of or have otherwise escaped the attention of the Supreme Court).

Being conscious of this controversy, the Legislature defined the term “liable to tax”, by inserting Section 2(29A) of the IT Act^[1], vide the Finance Act, 2021, with effect from 01 April, 2021, or AY 2021-22.  In view thereof, “liable to tax in relation to a person and with reference to a country, means that there is an income-tax liability on such person under the law of that country for the time being in force and shall include a person who has subsequently been exempted from such liability under the law of that country”.

As per the Memorandum to the Finance Bill, 2021, since the term “liable to tax” under DTAAs entered into under Sections 90 or 90A of the IT Act^[2] was not defined, hence, it was proposed to insert Clause (29A) to Section 2 of the IT Act^[3], defining the term “liable to tax” to mean that “there is a tax liability on that person under the law of any country and will include a case where subsequent to imposition of such tax liability, an exemption has been provided”.

Therefore, “liable to tax” means an affirmative right to tax, irrespective of whether such right is actually exercised.  Further, having regard to the contents of the Memorandum to the Finance Bill, 2021, there is no iota of doubt, that the “liable to tax” definition applies in the context of DTAAs, including the India – Mauritius DTAA, which was under consideration before the Supreme Court in Tiger Global (Supra).

The authors notice that the definition of “liable to tax” has been made applicable prospectively by the Legislature (with effect from 01 April, 2021 or AY 2021-22).  To harmonise the interplay between the IT Act and the DTAAs, the Legislature consciously inserted Explanation 4 to Section 90(5) of the IT Act^[4], way back in 2018.  Needless to state, this critical aspect was also not examined by the Supreme Court in Tiger Global (Supra).

Strength in regard to the above is drawn from the established principle of law, that a provision (including a definition), which cures an obvious anomaly or clarifies the Legislative intent, without in any manner, altering any substantive or vested right (i.e., imposing a new burden or impairing an existing obligation), may be made applicable retrospectively, it being clarificatory in nature.  In this regard, the mere fact that a provision is made applicable prospectively by the Legislature, does not ipso facto take away the judicial authority of the concerned Court to indicate that the provision is in fact, applicable retrospectively.^[5]  Further, strength in regard to the above is drawn from the fact that the available jurisprudence, including Azadi Bachao (Supra), which held the field prior to the amendment vide the Finance Act, 2021, as well as Section 2(29A) of the IT Act^[6], introduced with effect from 01 April, 2021 or AY 2021-22, defined “liable to tax” in an identical manner.

In view of the above, respectfully, the obiters identified above deserve to be ignored.  This is because:

1. Even in the absence of the said obiters, the conclusion of the Supreme Court would have been the same. Therefore, the said obiters lack the requisite precedential force.
2. Even otherwise, the above articulated obiters are in complete contradiction of the binding precedent(s) and the Legislative mandate, explicit from the language of Section 2(29A) of the IT Act^[7].

<end of Part – 3>

Endnotes:

[1]               Section 2(66) of the Income-tax Act, 2025.

[2]               Section 159 of the Income-tax Act, 2025.

[3]               Supra Note 1.

[4]               Section 159(7)(a) of the Income-tax Act, 2025.

[5]               Allied Motors (P) Ltd. vs. CIT, [1997] 3 SCC 472 (Supreme Court); CIT vs. Alom Extrusions Ltd., [2010] 1 SCC 489 (Supreme Court); and Snowtex Investment Ltd. vs. PCIT, [2020] 13 SCC 762 (Supreme Court).

[6]               Supra Note 1.

[7]               Supra Note 1.